<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d) of
The Securities Exchange Act of 1934
For the fiscal year ended Commission file number 1-9828
December 31, 1995
GAINSCO, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1617013
(State of Incorporation) (I.R.S. Employer
Identification No.)
500 Commerce Street
Fort Worth, Texas 76102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (817) 336-2500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock ($.10 par value) The American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
--- ---
The aggregate market value of the voting stock held by non-affiliates of the
registrant (18,197,590 shares) as of the close of the business on February 29,
1996 was $197,898,791 (based on the closing sale price of $10.875 per share).
As of February 29, 1996, there were 21,525,221 shares of the registrant's $.10
Par Value Common Stock outstanding.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Documents incorporated by reference:
<TABLE>
<CAPTION>
Document Form 10-K Part
-------- --------------
<S> <C>
Proxy Statement for the 1996 Annual Meeting to be held May 10, 1996 III
Exhibits to Form 10-K Annual Reports filed with the SEC for fiscal years ended
December 31, 1988, 1990, 1991, 1992, 1993 and 1994 IV
Exhibits to Form S-1's filed with the SEC and effective November 6,
1986 (No. 33-7846) and November 14, 1988 (No. 33-25226) IV
</TABLE>
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION
GAINSCO, INC. is a holding company, the only operations of which are to
provide administrative and financial services for its wholly-owned subsidiaries.
The term "Company" as used in this document includes GAINSCO, INC. and its
subsidiaries, unless the context otherwise requires. The Company was
incorporated in Texas on October 11, 1978. It completed its initial public
offering on November 14, 1986.
The Company is a property and casualty insurance company concentrating its
efforts on certain specialty excess and surplus markets within the commercial
auto, auto garage and general liability insurance lines. The Company's insurance
operations are conducted through three insurance companies, General Agents
Insurance Company of America, Inc., an Oklahoma corporation, MGA Insurance
Company, Inc., a Texas corporation, and GAINSCO County Mutual Insurance Company,
a Texas chartered company. The Company is approved to write insurance in 49
states and the District of Columbia on a non-admitted basis and in 43 states on
an admitted basis. The Company markets its lines of insurance through 180
non-affiliated general agents' offices. Approximately 76% of the Company's gross
premiums written during 1995 resulted from risks located in Arkansas,
California, Florida, Georgia, Kentucky, Louisiana, Pennsylvania, Tennessee,
Texas and West Virginia.
Excess and surplus lines of insurance are generally written on classes of
risks which admitted insurers will not write; many of which are too small in
premium size for larger companies to handle efficiently. For a description of
the product lines presently written by the Company, see "Business-Product
Lines." Because of the lack of availability of coverage from admitted insurers,
premium levels for excess and surplus policies are generally higher than for
standard coverages provided by admitted insurers. State insurance authorities
permit excess and surplus lines companies greater rate and policy form
flexibility than admitted companies. The Company, therefore, sets its policy
premiums by applying its own judgment after consideration of the risks involved.
Part of its analysis includes the review of historical premium rate and loss
cost information as compiled and reported by independent rating bureaus. The
Company's current premiums typically range from 160% to 275% of the loss costs
published by the rating organizations. These loss cost multipliers approximate a
range of 100% to 170% of manual rates.
The strategy of the Company is to identify various types of risks where it
can price its coverages favorably and maximize the potential for underwriting
profit. This strategy has resulted in changes in product mix and product design
from time to time.
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<PAGE> 3
The Company is currently writing 20 classes of general liability on a
claims-made basis. The remaining classes of general liability are written on an
occurrence basis. At December 31, 1995, approximately 4% of the Company's
general liability policies in force were on a claims-made basis. The claims-made
form of policy provides that coverage applies only to claims which occur and
claims that are made during the term of the policy. Once the policy period is
over in claims-made policies, the approximate extent of the insurer's liability
is known. The occurrence form of policy provides coverage for losses from claims
which occurred during the policy period, regardless of when the claims are
asserted. Under the claims-made basis the insurer has greater certainty in
predicting the extent of its liability for claims. The Company has had no legal
challenges on the enforceability of its claims-made policies where denial of
coverage was made by the Company under the limited reporting period provision.
The Company does have a 60 day grace period provision for reporting claims after
the policy expiration date on its claims-made form of policy. The Company feels
this provision remedies it against issues of enforceability in recent court
decisions. In the reserving process, claims-made coverages are reserved
separately from occurrence coverages. By examining the separate payout patterns,
the average outstanding claims, and the distribution of claims by age of claim,
IBNR reserves are set to reflect the coverage differences.
The Company, through a wholly-owned subsidiary, has developed and is
marketing a computer software package related to general agency operations.
Through another wholly-owned subsidiary, the Company is engaged in the premium
finance business. Through MGA Insurance Company, Inc., a wholly-owned
subsidiary, the Company earns fee revenues by acting as a servicing carrier for
the Commercial Automobile Insurance Procedures of Arkansas, California,
Louisiana, and Mississippi and the Commercial Assignment Procedure of
Pennsylvania. Through GAINSCO County Mutual Insurance Company, the Company
entered into fronting agreements with two non-affiliated insurance companies.
The business written under these agreements is ceded 100% to reinsurers rated
"A- (Excellent)" or better by A. M. Best and 100% of the liabilities are fully
collateralized with pledged investment grade securities or letters of credit.
PRODUCT LINES
The Company's principal products serve certain specialty markets within the
commercial auto, auto garage and general liability insurance lines. The
following table sets forth, for each product line, gross premiums written
(before ceding any amounts to reinsurers), percentage of gross premiums written
for the periods indicated and the number of policies in force at the end of each
period.
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------------------------------------
1995 1994 1993
-------------------- ----------------- -----------------
Gross Premiums Written: (Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial Auto $ 62,517 58% 58,117 59% 51,599 60%
Auto Garage 25,270 23% 20,073 20% 16,114 19%
General Liability 19,052 18% 18,564 19% 16,323 19%
Other Lines 1,233 1% 1,410 2% 1,337 2%
-------- --- ------ --- ------ ---
Total $108,072 100% 98,164 100% 85,373 100%
======== === ====== === ====== ===
Policies in Force (End of Period) 34,309 30,691 25,441
</TABLE>
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Commercial Auto The commercial auto coverage underwritten by the
Company includes risks associated with local haulers of specialized freight
(e.g. sand and gravel), tradespersons' vehicles and trucking companies (other
than long haulers). Policies are written only for vehicles primarily operated
within the state of garaging and one state beyond or 1,000 miles, whichever is
the greater distance. Liability and physical damage coverages for these risks
are currently limited to $1,000,000 per accident and $100,000 per unit,
respectively.
Auto Garage The Company's auto garage program includes garage
liability, garage keepers' legal liability and dealers' open lot coverages. The
maximum limit on these coverages is $1,000,000. The Company targets its coverage
to used car dealers, recreational vehicle dealers, automobile repair shops and
wrecker/towing risks.
General Liability The Company underwrites general liability
insurance with liability limits up to $1,000,000 for small businesses such as
car washes, janitorial services, small contractors, apartment buildings, rental
dwellings and retail stores. The Company does not underwrite professional
liability, manufacturers' products liability, liquor liability, heavy
contracting liability, oil well drilling liability, marine liability or
municipality risks.
Other Lines The Company also issues a variety of other property and
casualty insurance coverages including monoline property insurance. The
Company's restricted commercial property policy covers fire, extended coverage,
vandalism and malicious mischief for commercial establishments. This policy
covers property damage up to $200,000.
REINSURANCE
The Company purchases reinsurance in order to reduce its liability on
individual risks and to protect against catastrophe claims. A reinsurance
transaction takes place when an insurance company transfers, or "cedes", to
another insurer a portion or all of its exposure. The reinsurer assumes the
exposure in return for a portion or all of the premium. The ceding of insurance
does not legally discharge the insurer from its primary liability for the full
amount of the policies, and the ceding company is required to pay the claim if
the reinsurer fails to meet its obligations under the reinsurance agreement.
During 1993 and 1994, the Company reinsured its business under a 5%
quota-share reinsurance treaty which was not renewed in 1995. Under the
quota-share reinsurance treaties, the Company and its reinsurers share the
premium and claims proportionately and the reinsurers pay the Company a ceding
commission for their share of acquisition and operating expenses. In 1995 the
Company commuted its 1993 and 1994 quota-share treaties thereby reassuming all
risks and relieving the reinsurers of any further liability under those
treaties.
In 1991 the Company wrote casualty policy limits of $1,000,000. For
policies having effective dates of January 1 through September 30, 1991, the
Company has excess reinsurance for 80% of casualty claims in excess of $200,000
but not exceeding $500,000 and 95% of casualty claims in excess of $500,000 up
to the $1,000,000 policy limits. For policies with an effective date of October
1, 1991 through December 31, 1994, the Company has excess reinsurance for 100%
of casualty claims exceeding $300,000 up to the $1,000,000 policy limits. For
policies with an effective date of January 1, 1995 or
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<PAGE> 5
after, the Company has excess reinsurance for 100% of casualty claims exceeding
$500,000 up to the $1,000,000 policy limits which results in a maximum net claim
retention per risk of $500,000. The Company's maximum net claim retention per
risk is $285,000 for policies with an effective date of January 1, 1991 through
September 30, 1991 and $300,000 for policies with an effective date of October
1, 1991 through December 31, 1994.
Excess casualty reinsurance carried by the Company includes
"extra-contractual obligations" coverage. This coverage protects the Company
against claims arising out of certain legal liability theories not directly
based on the terms and conditions of the Company's policies of insurance.
Extra-contractual obligation claims are covered 90% under the excess casualty
reinsurance treaty up to its respective limits.
The Company carries catastrophe property reinsurance to protect it against
catastrophe occurrences for 95% of the property claims which exceed $500,000 but
do not exceed $8,000,000. From time to time the Company makes use of facultative
reinsurance to cede unusual risks on a negotiated basis.
The Company has signed contracts in force for its reinsurance treaties for
all years through 1995. The Company has written confirmations from reinsurers
for 1996 from its reinsurance intermediaries regarding the basic terms and
provisions under which they will cede the Company's risks, but, as of the date
hereof, formal reinsurance treaty contracts with these reinsurers have not been
executed. It is customary in the industry for insurance companies and reinsurers
to operate under such commitments pending the execution of formal reinsurance
treaties. No assurance can be given that such reinsurance treaties will be
executed or, if executed, that the terms and provisions thereof will not be
modified.
The Company is operating under excess casualty reinsurance treaties with
two reinsurance companies, each of which reinsures a given percentage of ceded
risks. The Company's excess reinsurance is provided in varying amounts by
reinsurers rated "A (Excellent)" or better by A.M. Best Company (Best's). See
"Business--Rating." The following table identifies each such reinsurer and sets
forth the percentage of the coverage assumed by each of them:
<TABLE>
<CAPTION>
Percentage of Risk Reinsured
-----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Excess Reinsurer
PMA Reinsurance Corporation 50% 50% 75%
Dorinco Reinsurance Company 50% 50% 25%
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
MARKETING AND DISTRIBUTION
The Company markets its insurance products through 180 non-affiliated
general agents' offices, commonly referred to as wholesale agents. These general
agents each represent several insurance companies, some of which may compete
with the Company. The general agents solicit business from
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<PAGE> 6
independent local agents or brokers, commonly referred to as retail agents, who
are in direct contact with insurance buyers.
The Company has elected to utilize general agents to market its insurance
products in order to avoid the fixed costs of a branch office system. These
general agents have experience in the specialty lines of coverages in which the
Company concentrates and, in many instances, a long business history with
members of the Company's management. The Company requires that its general
agents have a specified level of errors and omissions insurance coverage, which
indirectly protects the Company against certain negligence on the part of
general agents. The Company performs annual financial reviews and does limited
quarterly reviews on each of its agent entities. The Company has errors and
omissions insurance coverage to protect against negligence on the part of its
employees.
The Company has developed underwriting manuals to be used by its general
agents. The general agents are authorized to commit the Company to provide
insurance if the risks and terms involved in the particular coverage are within
the underwriting guidelines set forth in the Company's underwriting manuals. The
Company has devoted extensive resources to the development of detailed
underwriting manuals so that its general agents can consistently price and
select risks, and the Company believes its manuals have been a significant
factor in consistently producing superior underwriting results. All manuals
stipulate minimum rates to be charged for the various classes of coverage
offered.
The general agents are compensated on a commission basis which varies by
line of business. In addition, the general agency contracts between the Company
and its general agents contain significant profit contingency inducements
designed to reward those general agents with superior claim ratios who write
certain minimum levels of premium with the Company. The general agents also
retain a portion of the payment made by the insured as policy fee in connection
with the issuance of most of the Company's non- admitted policies.
Certain coverages, such as auto liability, may only be written in some
states by companies with the authority to write insurance on an admitted basis
in such states. The Company currently is approved to write insurance on an
admitted basis in 41 states and plans to seek authority to write insurance on an
admitted basis in virtually all of the remaining states, but no assurance can be
given of when or if this goal will be reached.
UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
The Company maintains reserves for the payment of claims and claim
adjustment expenses for both reported and unreported claims. Claim reserves are
estimates, at a given point in time, of amounts that the Company expects to pay
on incurred claims based on facts and circumstances then known. The amount of
claim reserves for reported claims is primarily based upon a case-by-case
evaluation of the type of claim involved, the circumstances surrounding the
claim, and the policy provisions relating to the type of claim. The amount of
claim reserves for unreported claims and case reserve development is determined
on the basis of historical information and anticipated future conditions by
lines of insurance and actuarial review. Reserves for claim adjustment expenses
are intended to cover the ultimate costs of settling claims, including
investigation and defense of lawsuits resulting from such claims. Inflation is
implicitly reflected in the reserving process through analysis of cost trends
and review of historical
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<PAGE> 7
reserve results.
Ultimate liability may be greater or lower than current reserves. Reserves
are continually monitored by the Company using new information on reported
claims and a variety of statistical techniques. The Company does not discount to
present value that portion of its claim reserves expected to be paid in future
periods.
The following table sets forth the changes in unpaid claims and claim
adjustment expenses, net of reinsurance cessions, as shown in the Company's
consolidated financial statements for the periods indicated:
<TABLE>
<CAPTION>
As of and for the
years ended December 31
--------------------------------------
1995 1994 1993
-------- -------- --------
(Amounts in thousands)
<S> <C> <C> <C>
Unpaid claims and claim adjustment expenses,
beginning of period $ 80,729 72,656 66,517
Less: Ceded unpaid claims and claim adjustment
expenses, beginning of period 19,972 16,701 16,594
Net unpaid claims and claim adjustment expenses,
beginning of period 60,757 55,955 49,923
-------- -------- --------
Net claims and claim adjustment expenses
incurred related to:
Current period 48,064 37,571 35,012
Prior periods 401 3,618 4,227
-------- -------- --------
Total net claims and claim adjustment
expenses incurred 48,465 41,189 39,239
-------- -------- --------
Net claim and claim adjustment expenses paid
related to:
Current period 14,131 12,297 10,737
Prior periods 26,953(1) 24,090 22,470
-------- -------- --------
Total net claim and claim adjustment expenses
paid 41,084 36,387 33,207
-------- -------- --------
Commutation of quota-share reinsurance treaties (2,223)(1) -- --
-------- -------- --------
Net unpaid claims and claim adjustment expenses,
end of period 70,361 60,757 55,955
Plus: Ceded unpaid claims and claim adjustment
expenses, end of period 24,650(1) 19,972 16,701
-------- -------- --------
Unpaid claims and claim adjustment expenses, end
of period $ 95,011 80,729 72,656
======== ======== ========
</TABLE>
(1) The Company commuted its 1993 and 1994 quota-share reinsurance treaties in
1995, respectively, and thereby reassumed all risks and the related unpaid
claims and claim adjustment expenses of $2,223,000 (see note 4 to the
consolidated financial statements). This was accounted for using the paid claim
method, whereby unpaid claims and claim adjustment expenses were increased
$2,223,000 and paid claims and claim adjustment expenses were decreased
$2,223,000, thus preventing distortion of claims and claim adjustment expenses
incurred.
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<PAGE> 8
The following table sets forth, as of December 31, 1995, 1994, and 1993,
differences between the amount of net unpaid claims and claim adjustment
expenses reported in the Company's statements, prepared in accordance with
statutory accounting principles ("SAP"), and filed with the various state
insurance departments, and those reported in the consolidated financial
statements prepared in accordance with generally accepted accounting principles
("GAAP"):
<TABLE>
<CAPTION>
As of December 31
------------------------------------
1995 1994 1993
-------- -------- --------
(Amounts in thousands)
<S> <C> <C> <C>
Net reserves reported on a SAP basis $ 71,169 61,364 56,547
Adjustments:
Estimated recovery for salvage and subrogation (808) (607) (592)
-------- -------- --------
Net reserves reported on a GAAP basis $ 70,361 60,757 55,955
======== ======== ========
</TABLE>
The following table represents the development of GAAP balance sheet
reserves for the period 1985 through 1995. The top line of the table shows the
reserves for unpaid claims and claim adjustment expenses for all current and
prior years as recorded at the balance sheet date for each of the indicated
years. The reserves represent the estimated amount of claims and claim
adjustment expenses for claims arising in the current and all prior years that
are unpaid at the balance sheet date, including claims that have been incurred
but not yet reported to the Company.
The upper portion of the following table shows the net cumulative amount
paid with respect to the previously recorded liability as of the end of each
succeeding year. The lower portion of the table shows the reestimated amount of
the previously recorded net reserves based on experience as of the end of each
succeeding year, including net cumulative payments made since the end of the
respective year. For example, the 1990 liability for net claims and claim
adjustment expenses reestimated five years later (as of December 31, 1995) was
$29,022,000 of which $26,970,000 has been paid, leaving a net reserve of
$2,052,000 for claims and claim adjustment expenses in 1990 and prior years
remaining unpaid as of December 31, 1995.
"Net cumulative redundancy (deficiency)" represents the change in the
estimate from the original balance sheet date to the date of the current
estimate. For example, the 1990 net reserve for unpaid claims and claim
adjustment expenses indicates a $116,000 net deficiency from December 31, 1990
to December 31, 1995 (five years later). Conditions and trends that have
affected development of liability in the past may not necessarily occur in the
future. Accordingly, it may not be appropriate to extrapolate future
redundancies or deficiencies based on this table.
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<PAGE> 9
<TABLE>
<CAPTION>
As of and for the years ended December 31
---------------------------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unpaid claims & claim
adjustment expenses:
Gross 17,705 16,335 27,352 29,538 35,744 45,214 53,148 66,517 72,656 80,729 95,011
Ceded 8,889 8,863 18,865 15,005 15,695 16,308 15,105 16,594 16,701 19,972 24,650
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net 8,816 7,472 8,487 14,533 20,049 28,906 38,043 49,923 55,955 60,757 70,361
Net cumulative paid as
of:
One year later 3,413 2,356 3,766 4,902 7,545 10,251 15,037 22,470 24,090 24,730
Two years later 5,336 4,741 5,895 8,660 12,340 18,145 26,819 37,032 39,182
Three years later 6,953 6,061 7,332 10,642 16,413 23,255 33,879 45,884
Four years later 7,905 6,947 8,069 12,606 19,085 26,171 37,292
Five years later 8,579 7,300 8,721 13,815 20,633 26,970
Six years later 8,842 7,647 9,064 14,249 21,020
Seven years later 9,111 7,854 9,312 14,140
Eight years later 9,133 7,999 9,329
Nine years later 9,262 7,997
Ten years later 9,257
Net reserves
reestimated as of:
One year later 8,273 7,239 8,869 13,645 20,060 28,354 38,528 54,150 59,573 61,157
Two years later 8,275 7,512 9,166 13,694 20,566 28,479 42,235 57,223 59,922
Three years later 8,587 8,055 9,154 14,024 21,214 30,035 43,217 57,459
Four years later 9,264 8,057 9,355 14,675 22,431 30,129 42,493
Five years later 9,253 8,214 9,543 15,248 22,332 29,022
Six years later 9,394 8,186 9,672 15,174 22,034
Seven years later 9,345 8,206 9,606 14,572
Eight years later 9,275 8,237 9,509
Nine years later 9,360 8,220
Ten years later 9,281
Net cumulative
redundancy
(deficiency) (464) (748) (1,022) (39) (1,985) (116) (4,450) (7,536) (3,967) (401)
</TABLE>
The Company has an indicated deficiency of approximately 1% of initial reserves
for the 1994 year. Net reserves at December 31, 1995 were approximately
$70,361,000, which the Company believes are adequate.
OPERATING RATIOS
CLAIMS, EXPENSE AND COMBINED RATIOS: Claims and expense ratios are
traditionally used to interpret the underwriting experience of property and
casualty insurance companies.
Statutory Accounting Principles (SAP) Basis - Claims and claim
adjustment expenses are stated as a percentage of premiums earned because claims
may occur over the life of a particular insurance policy. Underwriting expenses
on a SAP basis are stated as a percentage of net premiums written rather than
premiums earned because most underwriting expenses are incurred when policies
are written and are not spread over the policy period. Underwriting profit
margin is achieved when the combined ratio is less than 100%. The Company's
claims, expense and combined ratios and the property and casualty industry's
claims, expense and combined ratios, both on a SAP basis, are shown in the
following table:
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<TABLE>
<CAPTION>
Years ended December 31
-----------------------------------------------------
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
COMPANY RATIOS
Claims Ratio 48.7% 47.9% 51.4% 47.7% 49.4%
Expense Ratio 34.2% 34.4% 33.9% 33.8% 33.3%
----- ----- ----- ----- -----
Combined Ratio 82.9% 82.3% 85.3% 81.5% 82.7%
===== ===== ===== ===== =====
INDUSTRY RATIOS (1)
Claims Ratio 80.0% 81.1% 79.5% 88.1% 81.1%
Expense Ratio 26.1% 26.0% 26.2% 26.5% 26.4%
----- ----- ----- ----- -----
Combined Ratio 106.1% 107.1% 105.7% 114.6% 107.5%
===== ===== ===== ===== =====
</TABLE>
- ----------
(1) The property and casualty industry as a whole, not companies with
comparable lines of coverage, was used in the calculation of these ratios
by A.M. Best Company. 1995 is estimated.
The Company has continued to produce favorable claims ratios when compared
to the industry. This has resulted from the Company maintaining its high
underwriting standards and closely monitoring its pricing structure and
adjusting it when needed. Since 1988 the Company has targeted, through its
pricing decisions, a claims ratio range of 50-55% and a combined ratio range of
85-90%. The Company has been very successful in attaining these goals and when
results have fallen outside of the range, it has been on the favorable side. The
unfavorable variance to the industry with regard to the expense ratios is
because of the specific lines that the Company writes and the profit contingency
inducements. The Company's commission expense ratio is higher than the average
of the overall industry on a net premiums written basis. Its higher expense
ratios are more than offset by significantly lower claims ratios (favorable by
an estimated 31.3 percentage points in 1995 and 33.2 percentage points in 1994,
when compared to the industry) which results in the highly favorable combined
ratio variances of an estimated 23.2 and 24.8 percentage points in 1995 and
1994, respectively. It should be noted that the Company ratios relate only to
insurance operations. The holding company provides administrative and financial
services for its wholly-owned subsidiaries. The allocation of the holding
company's expenses solely to its insurance companies would have an impact on
their results of operations and would also affect the ratios presented.
Generally Accepted Accounting Principles (GAAP) Basis - Claims and
claim adjustment expenses are stated as a percentage of premiums earned as they
are on a SAP basis. However, earned premiums include net policy fees earned
whereas on a SAP basis policy fees earned are recorded on a gross basis. The
GAAP expense ratio is based on premiums earned and includes the change in policy
acquisition costs and underwriting expenses. Other differences include the
treatment of the allowance for doubtful accounts. The following table presents
the Company's claims, expense and combined ratios on a GAAP basis:
10
<PAGE> 11
<TABLE>
<CAPTION>
Years ended December 31
-------------------------------------------------
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Claims Ratio 49.8% 48.8% 51.7% 48.2% 50.4%
Expense Ratio 33.1% 34.4% 33.0% 33.6% 34.9%
---- ---- ---- ---- ----
Combined Ratio 82.9% 83.2% 84.7% 81.8% 85.3%
==== ==== ==== ==== ====
</TABLE>
PREMIUM TO SURPLUS RATIO: The following table shows, for the periods
indicated, the Company's statutory ratios of statutory net premiums written to
statutory policyholders' surplus. While there is no statutory requirement which
establishes a permissible net premiums written to surplus ratio, guidelines
established by the National Association of Insurance Commissioners (NAIC)
provide that this ratio should be no greater than 3 to 1.
<TABLE>
<CAPTION>
As of and for the yeard ended December 31
-------------------------------------------------------------
1995 1994 1993 1992 1991
---------- --------- --------- --------- ------
(Amounts in thousands, except ratios)
<S> <C> <C> <C> <C> <C>
Net premiums written $ 108,689 91,170 79,278 81,250 64,524
Policyholders' surplus $ 50,140 42,350 35,906 27,291 22,742
Ratio 2.17 to 1 2.15 to 1 2.21 to 1 2.98 to 1 2.84 to 1
</TABLE>
INVESTMENTS
The Company's investment portfolio is under the direction of the Board of
Directors acting through the Investment Committee. The Investment Committee
establishes the Company's investment policy, which is to maximize after-tax
yield while maintaining safety of capital together with adequate liquidity for
insurance operations. The investment portfolio consists primarily of fixed
maturity tax-exempt municipal bonds and United States Government securities. The
Company does not invest in high yield ("junk") securities. As of December 31,
1995 and 1994, the Company had no high-yield fixed maturity securities nor
non-performing fixed maturity securities. Furthermore, the Company has never
bought nor sold either high-yield fixed maturity securities or derivatives. The
Company does not actively trade its bonds, however, it does classify certain
bond securities as available for sale. The Company holds no equity securities in
issuers of high-yield debt securities.
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<PAGE> 12
The following table sets forth, for the periods indicated, the Company's
investment results, before income tax effects:
<TABLE>
<CAPTION>
As of and for the years ended December 31
-------------------------------------------------------------
1995 1994 1993 1992 1991
-------- ------- ------- ------- ------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
Average investments (1) $170,881 148,688 128,632 102,254 74,194
Investment Income 8,157 6,868 6,159 5,472 4,515
Return on average investments (2) 4.8% 4.6% 4.8% 5.4% 6.1%
Taxable equivalent return on
average investments 6.6% 6.4% 6.6% 7.3% 8.4%
Net realized gains 108 135 4 172 68
Net unrealized gains (losses) $ 2,772 (1,829) 2,395 2,270 3,609
</TABLE>
- ----------
(1) Average investments is the average of beginning and ending investments at
amortized cost, computed on an annual basis.
(2) Includes taxable and tax-exempt securities.
The following table sets forth the composition of the investment portfolio
of the Company.
<TABLE>
<CAPTION>
As of December 31
---------------------------------------------------------------------
1995 1994 1993
--------------------- --------------------- ---------------------
(Dollar amounts in thousands)
Amortized Fair Amortized Fair Amortized Fair
Type of Investment Cost Value Cost Value Cost Value
- ------------------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Bonds:
U.S. government securities $ 9,606 9,733 10,555 10,213 13,485 13,938
Tax-exempt state and
municipal bonds 87,696 88,689 113,088 111,687 99,387 101,047
Certificates of deposit 620 620 570 570 570 570
Bonds available for sale:
Tax-exempt state and
municipal bonds 77,478 79,130 25,779 25,693 20,422 20,704
-------- -------- -------- -------- -------- --------
Total fixed maturities 175,400 178,172 149,992 148,163 133,864 136,259
-------- -------- -------- -------- -------- --------
Short-term investments 5,975 5,975 10,394 10,394 3,125 3,125
-------- -------- -------- -------- -------- --------
Total investments $181,375 184,147 160,386 158,557 136,989 139,384
======== ======== ======== ======== ======== ========
</TABLE>
12
<PAGE> 13
The maturity distribution of the Company's investments in fixed maturities
at December 31, 1995 and 1994, is as follows:
<TABLE>
<CAPTION>
As of December 31
-------------------------------------------------------
1995 1994
--------------------- ----------------------
(Amounts in thousands)
Amortized Amortized
Cost Percent Cost Percent
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Within 1 year $ 17,781 10.1% $ 48,232 32.2%
Beyond 1 year but within 5 years 133,947 76.4% 66,755 44.5%
Beyond 5 years but within 10 years 16,572 9.5% 33,580 22.4%
Beyond 10 years but within 20
years 6,553 3.7% 1,425 .9%
Beyond 20 years 547 .3% - -
--------- ----- --------- -----
$ 175,400 100.0% $ 149,992 100.0%
========= ===== ========= =====
</TABLE>
RATING
A.M. Best Company ("Best's"), publisher of Best's insurance reports,
property-casualty, has currently assigned an "A+ (Superior)" pooled rating to
the Company. Best's ratings are based on an analysis of the financial condition
and operation of an insurance company as they relate to the industry in general.
Best's generally reviews its ratings on a quarterly basis.
GOVERNMENT REGULATION
The Company's insurance companies are subject to varied governmental
regulation in the states in which they conduct business. Such regulation is
vested in state agencies having broad administrative power dealing with all
aspects of the Company's business and is concerned primarily with the protection
of policyholders rather than shareholders. It is the Company's position that
Proposition 103, which was enacted by the State of California and imposes a
roll-back of property and casualty insurance rates, does not apply to the
premium writings of the Company since the Company only writes in the surplus
lines market in California.
The Company is also subject to statutes governing insurance holding company
systems in the states of Oklahoma and Texas. These statutes require the Company
to file periodic information with the state regulatory authorities, including
information concerning its capital structure, ownership, financial condition and
general business operation. These statutes also limit certain transactions
between the Company and its insurance companies, including the amount of
dividends which may be declared and paid by the insurance companies (see note 6
to the consolidated financial statements). Additionally, the Texas statutes
restrict the ability of any one person to acquire 10% or more of the Company's
voting securities without prior regulatory approval while the Oklahoma statute
restricts the ability of any one person to acquire 15% or more of the Company's
voting securities without prior regulatory approval.
COMPETITION
The property and casualty insurance industry is highly competitive, with
over 2,500 insurance companies transacting business in the United States. The
Company underwrites specialty lines of
13
<PAGE> 14
insurance on risks not generally insured by many of the large standard property
and casualty insurers. However, few barriers exist to prevent property and
casualty insurance companies from entering into the Company's segments of the
industry. In such event, the Company would be at a competitive disadvantage
because many of these companies have substantially greater financial and other
resources and could offer a broader variety of specialty risk coverages. The
Company's competitive advantages are 1) specialized expertise in its product
lines which enables it to price with a great deal of accuracy and 2) superior
service in underwriting and claims handling which provides its agents with a
competitive advantage and a stable market.
EMPLOYEES
As of December 31, 1995, the Company employed 184 persons, of which 11 were
officers, 138 were staff and administrative personnel, and 35 were part-time
employees.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the executive officers of the Company as of February
29, 1996 is set forth below:
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Joseph D. Macchia 60 Chairman of the Board, President and Chief Executive Officer
Jack L. Johnson 62 Senior Vice President and Assistant Secretary
Daniel J. Coots 44 Senior Vice President, Treasurer and Chief Financial Officer
Norman Alberigo 53 Vice President
Mark D. Brissman 40 Vice President
J. Landis Graham 41 Vice President
Carolyn E. Ray 43 Vice President
Sam Rosen 60 Secretary
</TABLE>
Mr. Joseph D. Macchia is the founder of the Company and has served as
Chairman of the Board, President and Chief Executive Officer since its formation
in 1978. Mr. Macchia has been engaged in the property and casualty insurance
business since 1961.
Mr. Jack L. Johnson has served as Senior Vice President of the Company
since 1984. From 1979 to 1984, Mr. Johnson served as a Vice President of the
Company. Mr. Johnson has been engaged in the property and casualty insurance
business since 1962.
Mr. Daniel J. Coots has served as Vice President, Treasurer and Chief
Financial Officer of the Company since 1987. In 1991 Mr. Coots was promoted to
Senior Vice President. Mr. Coots has been engaged in the property and casualty
insurance business since 1983.
14
<PAGE> 15
Mr. Norman Alberigo has served as Vice President of the Company since 1988.
From 1986 to 1988, Mr. Alberigo served as Assistant Vice President of the
Company. Mr. Alberigo has been engaged in the property and casualty insurance
business since 1970.
Mr. Mark D. Brissman has served as Vice President of the Company since
October of 1994. From 1989 to 1994, Mr. Brissman was with State Farm Insurance
Company in the position of Senior Associate Actuary. Mr. Brissman has been
engaged in the property and casualty insurance business since 1978.
Mr. J. Landis Graham has served as Vice President of the Company since
September of 1993. From 1988 to 1993, Mr. Graham was with Maryland Casualty
Company in the position of Claim Manager. Mr. Graham has been engaged in the
property and casualty insurance business since 1976.
Ms. Carolyn E. Ray has served as Vice President of the Company since 1986.
From 1984 to 1985, Ms. Ray served as Assistant Vice President of the Company.
Ms. Ray has been engaged in the property and casualty insurance business since
1976.
Mr. Sam Rosen has served as the Secretary of the Company since 1983. Mr.
Rosen is a partner with the law firm of Shannon, Gracey, Ratliff & Miller,
L.L.P. He has been a partner in that firm or its predecessors since 1966.
ITEM 2. PROPERTY
The Company owns its Corporate offices which provide approximately 25,000
square feet of office space, and additionally provides parking. Future expansion
will be possible by converting the parking area into office space.
The Company owns a 3.28 acre tract of land in Fort Worth, Texas and all
improvements located thereon, including a 10,000 square foot office building,
which previously served as its corporate offices. The Company currently has this
property under lease.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of its operations, the Company has been named as
defendant in various legal actions seeking payments for claims denied by the
Company and other monetary damages. In the opinion of the Company's management
the ultimate liability, if any, resulting from the disposition of these claims
will not have a material adverse effect on the Company's consolidated financial
position. The Company's management believes that unpaid claims and claim
adjustment expenses are adequate to cover liabilities from claims which arise in
the normal course of its insurance business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS.
The Company's Common Stock is listed on the American Stock Exchange
(Symbol: GNA). The following table sets forth for the fiscal periods indicated
the high and low closing sales prices per share of the Common Stock as reported
by the American Stock Exchange, as adjusted for stock dividends. The prices
reported reflect actual sales transactions on the American Stock Exchange.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1993 First Quarter 14 1/16 9 7/8
1993 Second Quarter 13 1/2 9 3/16
1993 Third Quarter 11 1/8 8 3/16
1993 Fourth Quarter 10 1/16 6 15/16
1994 First Quarter 8 3/8 7 1/8
1994 Second Quarter 8 3/16 7 1/8
1994 Third Quarter 8 1/16 7
1994 Fourth Quarter 8 3/8 7 1/8
1995 First Quarter 10 7
1995 Second Quarter 10 1/2 9 5/16
1995 Third Quarter 9 1/2 8 7/16
1995 Fourth Quarter 11 7/8 8 5/16
</TABLE>
In 1991 the Company adopted a policy to declare quarterly cash dividends of
$.01 per share until further action by the Board of Directors. In November of
1995, the Board of Directors increased the quarterly cash dividend to $.0125 per
share. Cash dividends of $.01 per share were granted to shareholders of record
on March 31, June 30, September 30 and December 31, 1993 and 1994 and March 31,
June 30 and September 30, 1995. Cash dividends of $.0125 per share were granted
to shareholders of record on December 31, 1995. On February 20, 1996, the
Company declared a $.0125 per share cash dividend payable to shareholders of
record on March 29, 1996. The Company depends on cash flow from cash dividends
paid by its subsidiaries.
Stock dividends of 5% were granted to shareholders of record on March 31
and September 30, 1993, 1994 and 1995. In November, 1995, the Board of Directors
discontinued the semi-annual stock dividends.
As of February 29, 1996, there were 633 shareholders of record of the
Company's Common Stock.
16
<PAGE> 17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for, and as of the
end of each of the years ended December 31, have been derived from the
consolidated financial statements of the Company which have been audited by KPMG
Peat Marwick LLP, independent certified public accountants. The consolidated
balance sheets as of December 31, 1995 and 1994, and the consolidated statements
of operations, shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1995, and the report thereon are included
elsewhere in this document. The information presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," consolidated financial statements and the notes
thereto, and the other financial information included herein.
<TABLE>
<CAPTION>
Years ended December 31
---------------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Data:
Gross premiums written (1) $ 108,072 98,164 85,373 83,475 68,083
Ceded premiums written 1,968 8,710 7,412 3,418 4,473
--------- --------- --------- --------- ---------
Net premiums written 106,104 89,454 77,961 80,057 63,610
Increase in unearned premiums (8,849) (5,059) (2,099) (2,874) (9,975)
--------- --------- --------- --------- ---------
Net premiums earned 97,255 84,395 75,862 77,183 53,635
Net investment income 8,157 6,868 6,159 5,472 4,515
Net realized gains 108 135 4 172 68
Insurance services 2,183 2,056 2,388 2,876 2,241
--------- --------- --------- --------- ---------
Total revenues 107,703 93,454 84,413 85,703 60,459
--------- --------- --------- --------- ---------
Claims and claim adjustment expenses 48,465 41,189 39,239 37,220 27,020
Policy acquisition costs 19,679 17,392 16,183 17,592 12,336
Underwriting and operating expenses 15,579 14,505 12,604 13,036 10,295
--------- --------- --------- --------- ---------
Total expenses 83,723 73,086 68,026 67,848 49,651
--------- --------- --------- --------- ---------
Income before income taxes 23,980 20,368 16,387 17,855 10,808
Income tax expense 6,352 5,199 3,147 4,676 2,292
--------- --------- --------- --------- ---------
Net income (2) $ 17,628 15,169 13,240 13,179 8,516
========= ========= ========= ========= =========
Per Share Data (3):
Net income $ .81 .70 .61 .60 .39
========= ========= ========= ========= =========
GAAP Operating Ratios:
Claims ratio 49.8% 48.8% 51.7% 48.2% 50.4%
Expense ratio 33.1% 34.4% 33.0% 33.6% 34.9%
--------- --------- --------- --------- ---------
Combined ratio 82.9% 83.2% 84.7% 81.8% 85.3%
========= ========= ========= ========= =========
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
As of December 31
---------------------------------------------------------------------
1995 1994 1993 1992 1991
--------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (4):
Investments $ 183,027 160,300 136,989 120,275 84,232
Premiums receivable 15,914 12,262 10,888 9,140 13,579
Ceded unpaid claims and claim
adjustment expenses 24,650 19,972 16,701 16,594 15,105
Ceded unearned premiums 6,008 5,977 5,536 4,692 4,319
Deferred policy acquisition costs 12,115 9,831 8,509 8,203 7,306
Property and equipment 6,562 6,336 6,274 5,508 5,812
Total assets 264,156 230,576 199,187 173,839 136,574
Unpaid claims and claim
adjustment expenses 95,011 80,729 72,656 66,517 53,148
Unearned premiums 53,525 44,645 39,145 36,202 33,005
Note payable 1,750 3,500 4,500 4,500 -
Total liabilities 164,714 149,029 132,369 118,958 94,634
Shareholders' equity 99,442 81,547 66,818 54,881 41,940
Shareholders' equity per share (5) $ 4.62 3.79 3.14 2.59 2.00
Return on beginning equity 22% 23% 24% 31% 25%
== == == == ==
</TABLE>
- ----------
(1) Excludes premiums of $5,626,000 in 1995, $5,056,000 in 1994, $5,418,000 in
1993, $6,942,000 in 1992 and $4,452,000 in 1991 from the commercial
automobile plans of Arkansas, California, Louisiana, Mississippi, and
Pennsylvania under which a subsidiary of the Company is a servicing
carrier.
(2) Includes after tax net realized gains of $70,000, $87,000, $3,000, $114,000
and $45,000 for 1995, 1994, 1993, 1992 and 1991, respectively.
(3) All years retroactively adjusted for stock dividends and stock splits
effected as stock dividends as follows: two 5% in 1995, two 5% in 1994, two
5% in 1993, one 5% and one 50% in 1992 and one 50% in 1991.
(4) Certain reclassifications have been made to years prior to 1993 to comply
with Statement of Financial Accounting Standards No. 113 "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts"
which the Company implemented in the first quarter of 1993.
(5) Based on number of shares outstanding at the end of each year,
retroactively adjusted for stock dividends and stock splits effected as
stock dividends.
18
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BUSINESS OPERATIONS
Net income in 1995 increased 16% to $17,627,855, or $.81 per share compared
to 1994 net income of $15,168,800, or $.70 per share and 1993 net income of
$13,240,254, or $.61 per share. The Company recorded a 22% return on beginning
equity and a GAAP combined ratio of 82.9% in 1995.
The discussion below primarily relates to the Company's insurance
operations, although the selected consolidated financial data appearing
elsewhere is on a consolidated basis. The revenue item "Insurance services"
includes net revenues from the computer software operation, the plan servicing
operation and the premium finance operation. The expense item "Underwriting and
operating expenses" includes the operating expenses of these operations.
RESULTS OF OPERATIONS
Gross premiums written in 1995 of $108,071,871 were 10% above the
$98,163,684 recorded in 1994. In 1994, gross premiums written increased 15% over
the 1993 level. The following table compares the product line mix between the
years for gross premiums written:
<TABLE>
<CAPTION>
1995 1994 1993
-------------------- ------------------ ------------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial Auto $ 62,517 58% 58,117 59% 51,599 60%
Auto Garage 25,270 23% 20,073 20% 16,114 19%
General Liability 19,052 18% 18,564 19% 16,323 19%
Other Lines 1,233 1% 1,410 2% 1,337 2%
-------- --- ------ --- ------ ---
Total $108,072 100% 98,164 100% 85,373 100%
======== === ====== === ====== ===
</TABLE>
COMMERCIAL AUTO increased 8% in 1995 from 1994 after recording a 13%
increase in 1994 from 1993. Significant growth continued for this product in
Kentucky and Pennsylvania in 1995, as it had in 1994, with New Jersey
contributing in 1995. The AUTO GARAGE product line produced a 26% increase in
1995 after a 25% increase in 1994. Florida and Pennsylvania continued to provide
significant growth in 1995, as was the case in 1994. Entry into the Connecticut
market and significant growth in Kentucky in 1995 also contributed. The GENERAL
LIABILITY line continues to record increases with 3% in 1995 after an increase
of 14% in 1994. For 1995, gross written percentages by significant state/product
line are as follows: Texas commercial auto (23%), Pennsylvania commercial auto
(7%), Texas general liability (7%), and Kentucky commercial auto (5%) with no
other individual state/product line comprising 5% or more. The persistency rate
increased for all major product lines, overall the rate went from 44% in 1994 to
47% in 1995. Premiums earned increased 15% in 1995 to $97,254,816 and increased
11% in 1994 to $84,394,874 as a direct result of the continued increase in
writings.
Net investment income increased 19% in 1995 over 1994 and increased 12% in
1994 over 1993.
19
<PAGE> 20
These increases are the result of growth in the portfolio due to continued
positive cash flows from operations. The return on average investments for 1995
is 4.8% versus 4.6% in 1994 and 4.8% in 1993. The increase from 1994 to 1995 is
attributable to the reinvestment of maturing securities at higher yields. The
decrease from 1993 to 1994 is related to the Company maintaining larger than
usual balances in short-term funds (which have lower yields than bonds), during
the third quarter of 1994 in anticipation of an increase in interest rates.
Inflation can cause interest rates to increase, which would cause the Company's
interest income to increase. Because of the Company's profitability in the
underwriting operations, the Company achieves the highest after tax net income
by investing predominantly in tax-exempt securities. At December 31, 1995, 89%
of the Company's investments were in investment grade tax-exempt bonds with an
average maturity of approximately 3.5 years. Since the majority of the Company's
investments are tax-exempt, the yields appear lower than those of the industry;
however, the industry as a whole has a significantly larger percentage of
investments in taxable securities with substantially longer maturities. On a
taxable equivalent basis the return on average investments was 6.6% in 1995,
6.4% in 1994 and 6.6% in 1993. The Company has the ability to hold its fixed
maturity securities until their maturity date. The Company does not actively
trade its bonds, however, it does classify certain bond securities as available
for sale. At December 31, 1995, approximately 5% of the Company's investments
were in U.S. Treasury securities and 5% were in short-term money market funds.
The Company has not and does not intend to invest in derivatives or high-yield
("junk") securities, nor equity securities in issuers of "junk" debt securities.
The Company does not have any non-performing fixed maturity securities.
Insurance services revenue increased $126,152 from 1994 to 1995 following a
decrease of $331,175 in 1994 from 1993. The table below presents the components.
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Computer software $ 475,317 559,554 515,149
Premium finance 281,383 153,736 157,705
Plan servicing 1,335,852 1,311,011 1,665,017
Other 89,957 32,056 49,661
---------- ---------- ----------
Total $2,182,509 2,056,357 2,387,532
========== ========== ==========
</TABLE>
Revenues in the computer software operation were 15% below 1994 following
an increase in revenues of 9% in 1994 over 1993. New management was brought in
during the third quarter of 1995 to improve this operation.
Revenues from the premium finance operation are up 83% in 1995 over the
1994 level which was 3% below the 1993 level. Intensified marketing efforts
implemented in 1995 account for the increase in 1995. The decrease in 1994 was
the result of the run- off of a book of business produced in 1993. Amounts
financed in 1995 were 84% above 1994 which had increased 48% over 1993. Premium
finance notes receivable were approximately $2,015,000 at December 31, 1995
versus $977,000 at December 31, 1994 and the average return was 19% for 1995
versus 18% in 1994 and 13% in 1993.
Plan servicing revenues from commercial automobile plans increased 2% in
1995 over 1994 following a 21% decrease in 1994. The Louisiana plan continued to
depopulate in 1995, but its decrease was more
20
<PAGE> 21
than offset by the addition of the California plan in the second quarter of
1995. The decrease in 1994 was largely due to a decrease in premium writings in
the Louisiana plan. In 1994, the Pennsylvania and Mississippi plans recorded
significant increases in premium writings but fell short of the decrease in the
Louisiana plan. The Company continues to pursue management contracts with other
states to administer their commercial automobile plans.
Claims and claim adjustment expenses (C & CAE) increased $7,276,443 in 1995
over 1994 and $1,949,774 in 1994 over 1993. The increase in both years was
largely due to the Company's increased levels of writings. The C & CAE ratio was
49.8% in 1995, 48.8% in 1994 and 51.7% in 1993. While the Company writes a
material amount of business in areas where catastrophes have recently occurred,
the gross and net claims incurred from these events were immaterial because the
Company primarily writes liability coverages. Five separate hailstorms, which
occurred during the second quarter of 1995, accounted for approximately .9
points of the 1995 C & CAE ratio. With regard to environmental and product
liability claims, the Company has an immaterial amount of exposure. The Company
does not provide environmental impairment coverage and excludes pollution and
asbestos related coverages in its policies. Less than .1% of the Company's
premium writings are for product liability coverages and this is limited to
non-manufacturing risks only. Inflation impacts the Company by causing higher
claim settlements than may have originally been estimated. Inflation is
implicitly reflected in the reserving process through analysis of cost trends
and review of historical reserve results.
Commissions increased in 1995 over 1994 as a result of the increase in
written premiums between these years and as a result of commission income from
the 1994 5% quota share treaty (which was not renewed in 1995) only reducing
commission expense approximately $200,000 in 1995, whereas it decreased
commission expense in 1994 by approximately $2,364,000. The increase in
commissions from 1993 to 1994 is directly related to the increase in gross
premiums written. The ratio of commissions to gross premiums written increased
to 20% in 1995 from the 19% level in 1994 and 1993 as a result of the decrease
in commission income in 1995 discussed previously. The ratio of commissions to
premiums earned was 23% for 1995 as compared to 22% for the 1994 and 1993 years.
The increase in 1995 was related to the decrease in commission income in 1995.
The change in deferred policy acquisition costs and deferred ceding
commission income (DAC) resulted in a net increase to income of $2,284,138,
$1,321,946 and $305,495 for 1995, 1994 and 1993, respectively. The change in the
amount of the increase in DAC between the comparable periods is directly related
to the rate at which unearned premiums are growing as a result of the growth
rate of premium writings. Since DAC (asset) is a function of unearned premiums
(liability), an increase in the growth rate of unearned premiums would
correspondingly result in an increase in the growth rate of DAC and vice versa.
The ratio of DAC to net unearned premiums was 25.5%, 25.4% and 25.3% at December
31, 1995, 1994 and 1993, respectively.
Underwriting and operating expenses increased for each of the years, but
remain in a 16-17% range (as a percent of premiums earned and insurance services
revenues) as they have been for the previous two years.
The effective tax rate of the Company was 26% in 1995, 26% in 1994 and 21%
in 1993. The 21% rate in 1993 is primarily due to a tax benefit generated from
the exercise of stock options by insiders during the first quarter of 1993. This
was a permanent tax difference which was deducted for tax but not for book
purposes. For the Company, the fresh start adjustment (tax benefit) was
immaterial for all years presented. A reconciliation between income taxes
computed at the Federal statutory rates and the
21
<PAGE> 22
provision for income taxes is included in Note 5 of Notes to Consolidated
Financial Statements.
The cumulative effect of change in accounting principle is the result of
the Company implementing Financial Accounting Standards Board Statement 109
"Accounting for Income Taxes" on a cumulative basis during the first quarter of
1993. The major portion of the $216,278 deferred tax benefit is attributable to
the increase in the tax discount of unpaid claim and claim adjustment expenses.
The Company has, for the 11th consecutive year, achieved a return on
beginning equity of at least 22% and for the tenth consecutive year recorded a
GAAP combined ratio at 86% or below. For 1996 the Company is targeting premiums
written to be within a $110-120 million range with a GAAP combined ratio of
82-85% and a return on beginning equity of 20-22%. While the Company is
optimistic these forward-looking goals can be attained no assurances can be
given they will occur.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of the Company's liquidity are funds generated from
insurance premiums, net investment income and maturing investments. The
short-term investments and cash are intended to provide adequate funds to pay
claims without selling fixed maturity investments. At December 31, 1995, the
Company held short-term investments and cash of $7,750,020 which the Company
believes is adequate liquidity for the payment of claims and other short-term
commitments.
With regard to long term liquidity, the average duration of the investment
portfolio is approximately 2.8 years. The fair value of the fixed maturity
portfolio at December 31, 1995 was $2,772,216 above amortized cost. With regard
to the availability of funds to the holding company, see Note 6 of Notes to
Consolidated Financial Statements for restrictions on the payment of dividends
by the insurance companies.
The Company's fronting arrangements require that it maintain escrow
accounts to assure payment of the unearned premiums and unpaid claims and claim
adjustment expenses relating to risks insured through such fronting arrangements
and assumed by the Company. At December 31, 1995 and 1994, the balance in such
escrow accounts totalled approximately $1,100,000. In addition, various
insurance departments of states in which the Company operates require the
deposit of funds to protect policyholders within those states. At December 31,
1995 and 1994, the balance on deposit for the benefit of such policyholders
totalled approximately $11,860,000 and $11,010,000, respectively.
The increase in investments is primarily attributable to continued positive
cash flows from operating activities which are the result of continued and
substantial underwriting profits. Premiums receivable increased as a result of
the large increase in premium writings late in the fourth quarter of 1995 over
the amounts written in the comparable 1994 period. Also contributing to this
increase was the large increase in premium finance notes receivable mentioned
previously. Deferred policy acquisition costs (DAC) increased primarily as a
result of the increase in premium writings. DAC is 25.5% and 25.4% of unearned
premiums at December 31, 1995 and 1994, respectively.
Unpaid claims and claim adjustment expenses have increased as a result of
an increase in incurred but not reported reserves under the excess casualty
treaty and because of the increase in writings. Unearned premiums increased
because of the increase in writings. Reinsurance balances payable decreased
largely due to the commutation in 1995 of the 5% quota share treaty that was in
effect for the 1993 and 1994 years. Under the terms of the treaty, the Company
held the funds due to the reinsurers and recorded them as reinsurance balances
payable. When the Company commuted this treaty the liability was released.
Drafts payable decreased because drafts were issued late in the fourth quarter
of
22
<PAGE> 23
1994 to pay several large claims, there were no exceptionally large claim
settlements made late in 1995. The note payable decreased as a result of
principal repayment during the second quarter (see Note 3 of Notes to
Consolidated Financial Statements). The Company's liquidity position remains
strong as a result of cash flows from underwriting and investment activities.
The increase in common stock is largely the result of the 5% stock
dividends paid on April 14 and October 16, 1995. This also accounts for the
increase in additional paid-in capital and the decrease in retained earnings.
Financial Accounting Standards Board Statement 115, "Accounting for Certain
Investments in Debt and Equity Securities" was adopted by the Company in the
first quarter of 1994. This Statement specifies the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. Under this statement, the Company
classifies certain debt securities as "available for sale" and records them at
fair value. As a result of the "Implementation Guide" for Statement 115, in
December, 1995, the Company transferred certain fixed maturity securities from
the held to maturity classification to the available for sale classification.
The amortized cost of these transfers was $18,519,856 with unrealized gains of
$93,803, net of tax.
The unrealized gains or losses on fixed maturities available for sale are
presented, net of tax, as a separate component of shareholders' equity (see Note
2 of Notes to Consolidated Financial Statements). The net unrealized gain on the
fixed maturities classified as held to maturity was $1,120,527 at December 31,
1995.
In October 1994, the FASB issued Statement 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments." The
Statement was effective for years ending after December 15, 1994 and did not
have any impact on the financial statements.
In March 1995, the FASB issued Statement 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Statement was effective for years ending after December 15, 1995, and did
not have any impact on the financial statements.
In October 1995, the FASB issued Statement 123, "Accounting for Stock-Based
Compensation." The Statement is effective for years beginning after December 15,
1994, if awards are granted in the fiscal year. The Company did not grant any
awards during 1995.
The Company is not aware of any current recommendations by the regulatory
authorities, which if implemented, would have a material effect on the Company's
liquidity, capital resources or results of operations. The Company's statutory
capital significantly exceeds the benchmark capital level under the Risk Based
Capital formula.
23
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated Financial Statements are on pages 33 through 56:
Page
----
Report of Management 33
Independent Auditors' Report 34
Consolidated Balance Sheets as of December 31, 1995 and 1994 35-36
Consolidated Statements of Operations for the Years Ended December
31, 1995, 1994, and 1993 37
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1995, 1994, and 1993 38-39
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994, and 1993 40-41
Notes to Consolidated Financial Statements December 31,
1995, 1994, and 1993 42-56
The following Consolidated Financial Statements Schedules are on pages 57
through 68:
Schedule Page
-------- ----
Independent Auditors' Report on
Supplementary Information 57
I Summary of Investments 58
II Condensed Financial Information of the Registrant 59-65
III Supplementary Insurance Information 66
IV Reinsurance 67
VI Supplemental Information 68
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
24
<PAGE> 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with regard to Executive Officers is
included in Part 1 of this report under the heading "Executive Officers of the
Registrant".
The other information required by this item is hereby incorporated by
reference from the Registrant's definitive 1996 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference
from the Registrant's definitive 1996 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is hereby incorporated by reference
from the Registrant's definitive 1996 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by reference
from the Registrant's definitive 1996 Proxy Statement.
25
<PAGE> 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents filed as part of the report:
1. The following financial statements filed under Part II, Item
8:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements, December 31, 1995,
1994 and 1993
2. The following Consolidated Financial Statement Schedules are
filed Under Part II, Item 8:
Schedule Description
-------- -----------
I Summary of Investments
II Condensed Financial Information of
the Registrant
III Supplementary Insurance Information
IV Reinsurance
VI Supplemental Information
3. The following Exhibits:
Exhibit No.
3.1 Restated Articles of Incorporation of
Registrant (Exhibit 3.1)(1)
26
<PAGE> 27
3.2 Articles of Amendment to the Articles of
Incorporation dated June 9, 1988 (Exhibit
3.2)(2)
3.3 Restated Bylaws of Registrant (Exhibit 3.2)(1)
3.4 Amendment to the Bylaws dated June 10, 1988
(Exhibit 3.4)(2)
3.5 Sections 2.06 and 2.07 of the Bylaws as
Amended on May 25, 1993 (Exhibit 3.5)(7)
3.6 Articles of Amendment to Articles of
Incorporation effective August 13, 1993
(Exhibit 3.6)(7)
4.2 Rights Agreement, dated as of March 3, 1988,
between the Registrant and Team Bank/Fort
Worth, N.A. (incorporated by reference to
Exhibit 1 to the Registrant's Current Report
on Form 8-K filed with the Securities and
Exchange Commission on March 15, 1988)
(Exhibit 4.2)(3)
4.3 Amendment No. 1 dated as of March 5, 1990 to
Rights Agreement dated as of March 3, 1988
between GAINSCO, INC. and Team Bank as Rights
Agent (Exhibit 4.2)(5)
4.4 Amendment No. 2 dated as of May 25, 1993 to
Rights Agreement between GAINSCO, INC. and
Society National Bank (successor to Team Bank
(formerly Texas American Bank/Fort Worth,
N.A.)), as Rights Agent (Exhibit 4.4)(7)
4.5 Stock certificate as amended to give notice
of Amendment No. 2 to Rights Agreement
(Exhibit 4.5)(7)
10.2 (Restated) Incentive Compensation Plan of the
Registrant (Exhibit 10.2)(2)
10.14 Profit Sharing Plan and Trust of GAINSCO, INC.
effective January 1, 1985, as amended, and
Adoption Agreement (Exhibit 10.14)(4)
10.16 1990 Stock Option Plan of the Registrant
(Exhibit 10.16)(4)
10.17 Loan Agreement and Amendment No. 1 to Loan
Agreement between GAINSCO Service Corp.,
GAINSCO, INC. and BankOne Texas, N.A.
(Exhibit 10.17)(6)
10.18 Promissory Note made by GAINSCO Service Corp.
payable to BankOne, Texas, N.A. (Exhibit
10.18)(6)
10.19 Guaranty Agreement executed by GAINSCO, INC.,
in favor of BankOne Texas, N.A. (Exhibit
10.19)(6)
27
<PAGE> 28
10.20 Negative Pledge Agreement executed by GAINSCO,
INC. (Exhibit 10.20)(6)
10.21 Negative Pledge Agreement executed by GAINSCO
Service Corp. (Exhibit 10.21)(6)
10.23 Surplus Debenture issued by GAINSCO County
Mutual Insurance Company. (Exhibit 10.23)(6)
10.24 Management Contract between GAINSCO County
Mutual Insurance Company and GAINSCO Service
Corp. (Exhibit 10.24)(6)
10.25 Certificate of Authority and accompanying
Commissioner's Order granting Certificate of
Authority, allowing for charter amendments
and extension of charter (Exhibit 10.25)(6)
10.26 Contract between GAINSCO, INC. and
International Business Machines Corporation
covering the Company's acquisition and
installation of the WINS software package and
of the AS/400 hardware and systems software
required to support it for use by the Company
(Exhibit 10.26)(7)
10.27 Amendment to Surplus Debenture issued by
GAINSCO County Mutual Insurance Company
(Exhibit 10.27)(7)
10.28 Agreement dated August 26, 1994 appointing
Continental Stock Transfer & Trust Company
transfer agent and registrar (Exhibit
10.28)(8).
10.29 Amendment No. 3 to Rights Agreement and
appointment of Continental Stock Transfer &
Trust Company as Successor Rights Agent, made
September 30, 1994 (Exhibit 10.29)(8).
10.30 Second Amendment to Loan Agreement among
GAINSCO Service Corp., GAINSCO, INC. and
BankOne Texas, N.A. made on July 26, 1990
(Exhibit 10.30)(8)
10.31 1995 Stock Option Plan of the Registrant (9)
10.32 Clarification to the GAINSCO, INC. Executive
Incentive Compensation Plan (9)
11 (Not required to be filed as an Exhibit. See
footnote (1)(j) on page 47 of this 10-K
Report for information called for by number
11 of the Exhibit Table to Item 601 of S-K)
22.2 Subsidiaries of Registrant (9)
24.2 Consent of KPMG Peat Marwick LLP to
incorporation by reference (9)
28
<PAGE> 29
25.1 Powers of Attorney (9)
27 Financial Data Schedule (9)
28.8 Schedule P from the 1995 Annual Statement of
General Agents Insurance Company of America,
Inc. (10)
28.9 Schedule P from the 1995 Annual Statement of
MGA Insurance Company, Inc. (10)
28.10 Schedule P from the 1995 Annual Statement of
GAINSCO County Mutual Insurance Company (10)
(1) Incorporated by reference to the Exhibit
shown in parenthesis filed in Registration
Statement No. 33-7846 on Form S-1, and
amendments thereto, filed by the Company with
the Securities and Exchange Commission and
effective November 6, 1986.
(2) Incorporated by reference to the Exhibit
shown in parenthesis filed in Registration
33-25226 on Form S-1, and amendments thereto,
filed by the Company with the Securities and
Exchange Commission and effective November
14, 1988.
(3) Incorporated by reference to the Exhibit
shown in parenthesis filed in the
Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1988.
(4) Incorporated by reference to the Exhibit
shown in parenthesis filed in the
Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1990.
(5) Incorporated by reference to the Exhibit
shown in parenthesis filed in the
Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991.
(6) Incorporated by reference to the Exhibit
shown in parenthesis filed in the
Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992.
(7) Incorporated by reference to the Exhibit
shown in parenthesis filed in the
Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993.
(8) Incorporated by reference to the Exhibit
shown in parenthesis filed in the
Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994.
(9) Filed herewith, See Exhibit Index.
29
<PAGE> 30
(10) Filed under Form SE.
(b) Reports on Form 8-K
During the last quarter of the fiscal year ended December 31, 1995, no
reports on Form 8-K have been filed by the Company.
(c) Exhibits required by Item 601 of Regulation SK
The exhibits listed in Item 14(a) 3 of this Report, and not
incorporated by reference to a separate file are filed herewith.
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
GAINSCO, INC.
(Registrant)
/s/ Joseph D. Macchia
- ---------------------------------
By: Joseph D. Macchia, President
Date: 3/28/96
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Joseph D. Macchia Chairman of the Board, 3/28/96
- ----------------------- President and Chief -------------------------
Joseph D. Macchia Executive Officer
/s/ Jack L. Johnson Senior Vice President and 3/28/96
- ------------------------- Director -------------------------
Jack L. Johnson
/s/ Daniel J. Coots Senior Vice President and 3/28/96
- -------------------------- Chief Financial Officer -------------------------
Daniel J. Coots
/s/ Sam Rosen Secretary and Director 3/28/96
- -------------------------- -------------------------
Sam Rosen
Joel C. Puckett* Director 3/28/96
- -------------------------- -------------------------
Joel C. Puckett
Norman J. E. Roe* Director 3/28/96
- ------------------------ -------------------------
Norman J. E. Roe
Harden H. Wiedemann* Director 3/28/96
- --------------------- -------------------------
Harden H. Wiedemann
John H. Williams* Director 3/28/96
- ------------------------ -------------------------
John H. Williams
</TABLE>
31
<PAGE> 32
*By: /s/ Joseph D. Macchia
-------------------------------------
Joseph D. Macchia,
Attorney in-fact
Under Power of Attorney
Subsequent to the filing of the Annual Report on this Form, an Annual
Report to Security Holders covering the Registrant's last fiscal year and a
Proxy Statement and Form of Proxy will be sent to more than ten of the
Registrant's security holders with respect to the Annual Meeting.
32
<PAGE> 33
REPORT OF MANAGEMENT
The accompanying consolidated financial statements were prepared by
the Company, which is responsible for their integrity and objectivity. The
statements have been prepared in conformity with generally accepted accounting
principles and include some amounts that are based upon the Company's best
estimates and judgement. Financial information presented elsewhere in this
report is consistent with the accompanying consolidated financial statements.
The accounting systems and controls of the Company are designed to
provide reasonable assurance that transactions are executed in accordance with
management's criteria, that the financial records are reliable for preparing
financial statements and maintaining accountability for assets, and that assets
are safeguarded against claims from unauthorized use or disposition.
The Company's consolidated financial statements have been audited by
KPMG Peat Marwick LLP, independent auditors. The
auditors have full access to each member of management in conducting their
audits.
The Audit Committee of the Board of Directors, comprised solely of
directors from outside of the Company, meets regularly with management and the
independent auditors to review the work and procedures of each. The auditors
have free access to the Audit Committee, without management being present, to
discuss the results of their work as well as the adequacy of the Company's
accounting controls and the quality of the Company's financial reporting. The
Board of Directors, upon recommendation of the Audit Committee, appoints the
independent auditors, subject to shareholder approval.
/s/ Joseph D. Macchia
------------------------------------
Joseph D. Macchia
Chairman of the Board, President
and Chief Executive Officer
/s/ Daniel J. Coots
------------------------------------
Daniel J. Coots
Senior Vice President and
Chief Financial Officer
33
<PAGE> 34
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
GAINSCO, INC.:
We have audited the consolidated balance sheets of GAINSCO, INC. and
subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GAINSCO, INC. and
subsidiaries at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1995, in conformity with generally accepted accounting principles.
We have also previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets of GAINSCO, INC. and subsidiaries as
of December 31, 1993, 1992, and 1991, and the related consolidated statements
of operations, shareholders' equity and cash flows for the years ended December
31, 1992, and 1991, and we expressed unqualified opinions on those consolidated
financial statements.
In our opinion, the information set forth in the selected consolidated
financial data for each of the years in the five-year period ended December 31,
1995, appearing on pages 17 and 18, is fairly presented, in all material
respects, in relation to the consolidated financial statements from which it
has been derived.
KPMG Peat Marwick LLP
Dallas, Texas
February 26, 1996
34
<PAGE> 35
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1994
<TABLE>
<CAPTION>
Assets 1995 1994
------ -------------- -------------
<S> <C> <C>
Investments (note 2):
Fixed maturities:
Bonds held to maturity, at amortized cost (fair value:
$98,421,877 - 1995, $121,900,391 - 1994) $ 97,301,350 123,643,375
Bonds available for sale, at fair value (amortized cost:
$77,478,359 - 1995, $25,778,732 - 1994) 79,130,048 25,693,061
Certificates of deposit, at cost (which approximates
fair value) 620,000 570,000
Short-term investments, at cost (which approximates
fair value) 5,975,412 10,394,022
------------ ------------
Total investments 183,026,810 160,300,458
Cash 1,774,608 520,515
Accrued investment income 4,539,236 4,287,824
Premiums receivable (net of allowance for doubtful
accounts: $101,000 - 1995, $107,000 - 1994) (note 1) 15,913,734 12,262,357
Reinsurance balances receivable 3,505,818 4,133,557
Ceded unpaid claims and claim adjustment expenses 24,650,606 19,972,288
Ceded unearned premiums 6,008,187 5,976,969
Deferred policy acquisition costs (note 1) 12,114,681 9,830,543
Property and equipment (net of accumulated depreciation
and amortization: $3,812,976 - 1995, $3,202,644 -
1994) (note 1) 6,561,792 6,336,010
Deferred Federal income taxes (note 1) 2,578,714 3,126,787
Management contract 1,837,570 1,887,570
Other assets 1,643,853 1,941,069
------------ ------------
Total assets $ 264,155,609 230,575,947
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE> 36
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1994
<TABLE>
<CAPTION>
Liabilities and Shareholders' Equity
------------------------------------
1995 1994
------------ ------------
<S> <C> <C>
Liabilities:
Unpaid claims and claim adjustment expenses (note 4) $ 95,011,463 80,728,799
Unearned premiums (note 4) 53,525,323 44,645,013
Commissions payable 2,207,353 2,191,619
Accounts payable (note 1) 4,635,715 5,262,071
Reinsurance balances payable 1,817,056 6,003,867
Deferred revenue 492,393 420,408
Drafts payable 2,569,265 4,604,358
Note payable (note 3) 1,750,000 3,500,000
Dividends payable (note 6) 269,066 195,095
Other liabilities 1,388,098 1,428,690
Current Federal income taxes 1,047,981 49,460
----------- ------------
Total liabilities 164,713,713 149,029,380
----------- ------------
Shareholders' Equity (note 6):
Preferred stock ($100 par value, 10,000,000 shares
authorized, none issued) - -
Common stock ($.10 par value, 250,000,000 shares
authorized, 21,637,481 issued at December 31, 1995 and
19,611,368 issued at December 31, 1994) 2,163,748 1,961,137
Additional paid-in capital 87,543,175 69,671,214
Net unrealized gains (losses) on fixed maturities 1,073,597 (55,686)
Retained earnings 9,673,968 10,982,494
Treasury stock (112,260 shares in 1995, 101,824 shares
in 1994) (1,012,592) (1,012,592)
----------- -----------
Total shareholders' equity 99,441,896 81,546,567
----------- -----------
Commitments and contingencies (notes 4, 7, and 8)
Total liabilities and shareholders' equity $ 264,155,609 230,575,947
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE> 37
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ -----------
<S> <C> <C> <C>
Revenues:
Net premiums earned (note 4) $ 97,254,816 84,394,874 75,862,396
Net investment income (note 2) 8,157,484 6,867,693 6,158,890
Net realized gains (note 1) 108,024 134,641 3,841
Insurance services 2,182,509 2,056,357 2,387,532
------------ ---------- ----------
107,702,833 93,453,565 84,412,659
----------- ---------- ----------
Expenses:
Claims and claim adjustment expenses
(note 4) 48,465,013 41,188,570 39,238,796
Commissions 21,962,839 18,714,356 16,488,455
Change in deferred policy
acquisition costs and deferred
ceding commission income (note 1) (2,284,138) (1,321,946) (305,495)
Underwriting and operating expenses 15,579,260 14,505,108 12,603,154
----------- ---------- ----------
83,722,974 73,086,088 68,024,910
----------- ---------- ----------
Income before Federal income
taxes 23,979,859 20,367,477 16,387,749
Federal income taxes (note 5):
Current expense 6,412,007 5,554,864 3,650,038
Deferred benefit (60,003) (356,187) (286,265)
------------ ---------- ----------
6,352,004 5,198,677 3,363,773
----------- ---------- ----------
Net income before cumulative effect of
change in accounting principle 17,627,855 15,168,800 13,023,976
Cumulative effect of change in
accounting principle (note 5) - - 216,278
--------------- -------------- ----------
Net income $ 17,627,855 15,168,800 13,240,254
=========== ========== ==========
Net income per share (note 6) $ .81 .70 .61
=== === ===
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE> 38
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- ------------
<S> <C> <C> <C>
Common stock:
Balance at beginning of year $ 1,961,137 1,765,082 1,586,266
Issue of shares as stock dividends
(2,009,797 in 1995, 1,814,941 in
1994 and 1,638,664 in 1993) (note 6) 200,980 181,495 163,866
Exercise of options to purchase shares
(16,316 in 1995, 145,604 in 1994 and
149,501 in 1993) 1,631 14,560 14,950
------------ ----------- -----------
Balance at end of year 2,163,748 1,961,137 1,765,082
----------- ---------- ----------
Additional paid-in capital:
Balance at beginning of year 69,671,214 53,495,511 28,596,655
Issue of shares as stock dividends
(2,009,797 in 1995, 1,814,941 in
1994 and 1,638,664 in 1993) (note 6) 17,835,103 15,809,524 24,510,939
Exercise of options to purchase shares
(16,316 in 1995, 145,604 in 1994 and
149,501 in 1993) 36,858 366,179 387,917
----------- ----------- -----------
Balance at end of year $ 87,543,175 69,671,214 53,495,511
---------- ---------- ----------
</TABLE>
(continued)
38
<PAGE> 39
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Net unrealized gains (losses) on
fixed maturities:
Balance at beginning of year $ (55,686) - -
Cumulative effect of change in
accounting principle - 186,303 -
Change during year 1,129,283 (241,989) -
----------- ------------ ---------------
Balance at end of year 1,073,597 (55,686) -
----------- ------------- ---------------
Retained earnings:
Balance at beginning of year 10,982,494 12,569,862 24,698,393
Net income for year 17,627,855 15,168,800 13,240,254
Cash dividends (note 6) (893,943) (759,938) (687,269)
Stock dividends (note 6) (18,042,438) (15,996,230) (24,681,516)
---------- ---------- ----------
Balance at end of year 9,673,968 10,982,494 12,569,862
---------- ---------- ----------
Treasury stock:
Balance at beginning of year (1,012,592) (1,012,362) -
Change during year - (230) (1,012,362)
-------------- ------------ ----------
Balance at end of year (1,012,592) (1,012,592) (1,012,362)
---------- ---------- ----------
Total shareholders' equity at end
of year $ 99,441,896 81,546,567 66,818,093
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE> 40
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 17,627,855 15,168,800 13,240,254
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 4,092,621 4,899,241 4,098,450
Change in deferred Federal income taxes (60,003) (356,187) (502,543)
Change in accrued investment income (251,412) (395,598) (584,349)
Change in premiums receivable (3,651,377) (1,374,079) (1,748,647)
Change in reinsurance balances receivable 627,739 (881,513) (2,623,162)
Change in ceded unpaid claims and claim
adjustment expenses (4,678,318) (3,271,033) (107,648)
Change in ceded unearned premiums (31,218) (441,304) (844,213)
Change in deferred policy acquisition costs
and deferred ceding commission income (2,284,138) (1,321,946) (305,495)
Change in management contract 50,000 50,000 49,930
Change in other assets 297,216 (83,216) (756,006)
Change in unpaid claims and claim
adjustment expenses 14,282,664 8,072,613 6,139,808
Change in unearned premiums 8,880,310 5,500,057 2,943,088
Change in commissions payable 15,734 691,830 (382,130)
Change in accounts payable (626,356) 861,075 (216,963)
Change in reinsurance balances payable (4,186,811) 2,086,036 3,754,904
Change in deferred revenue 71,985 (29,929) (125,571)
Change in drafts payable (2,035,093) 494,979 1,750,866
Change in other liabilities (40,592) (84,666) (264,475)
Change in current Federal income taxes 998,521 54,076 (209,961)
----------- ----------- -----------
Net cash provided by operating activities $ 29,099,327 29,639,236 23,306,137
---------- ---------- ----------
</TABLE>
(continued)
40
<PAGE> 41
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from investing activities:
Bonds held to maturity:
Matured $ 45,123,950 11,133,500 355,000
Purchased (41,967,879) (25,834,928) (12,870,605)
Bonds available for sale:
Sold 10,741,080 6,378,737 4,869,622
Matured 3,506,400 13,810,800 9,275,000
Purchased (46,243,440) (25,838,064) (21,942,337)
Certificates of deposit matured 395,000 570,000 395,000
Certificates of deposit purchased (445,000) (570,000) (395,000)
Property and equipment purchased (836,114) (739,987) (1,165,447)
Net change in short-term investments 4,418,610 (7,269,095) (99,472)
----------- ----------- ------------
Net cash used for investing activities (25,307,393) (28,359,037) (21,578,239)
---------- ---------- ----------
Cash flows from financing activities:
Payments on note payable (1,750,000) (1,000,000) -
Cash dividends paid (819,972) (740,428) (670,312)
Payment for fractional shares resulting
from stock dividends (6,358) (5,215) (6,708)
Proceeds from exercise of common stock
options 38,489 380,739 402,867
Treasury stock acquired - (230) (1,012,362)
-------------- -------- -----------
Net cash used for financing activities (2,537,841) (1,365,134) (1,286,515)
----------- ----------- -----------
Net increase (decrease) in cash 1,254,093 (84,935) 441,383
Cash at beginning of year 520,515 605,450 164,067
----------- ------------ ------------
Cash at end of year $ 1,774,608 520,515 605,450
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 42
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(1) SUMMARY OF ACCOUNTING POLICIES
(a) Basis of Consolidation
The accompanying consolidated financial statements include the
accounts of GAINSCO, INC. (the Company) and its wholly-owned
subsidiaries, General Agents Insurance Company of America,
Inc. (General Agents), General Agents Premium Finance Company
(GAPFCO), Agents Processing Systems, Inc., Risk Retention
Administrators, Inc. and GAINSCO Service Corp. (GSC). General
Agents has one wholly-owned subsidiary, MGA Insurance Company,
Inc. (MGAI) which, in turn, owns 100% of MGA Agency, Inc. GSC
has one wholly-owned subsidiary, MGA Premium Finance Company.
GSC also owns the management contract and charter of GAINSCO
County Mutual Insurance Company (GCM) and its accounts have
been included in the accompanying consolidated financial
statements. All significant intercompany accounts have been
eliminated in consolidation.
The accompanying consolidated financial statements are
prepared in conformity with generally accepted accounting
principles. The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
(b) Nature of Operations
The Company is predominantly a property and casualty insurance
company concentrating its efforts on certain specialty excess
and surplus markets within the commercial auto, auto garage
and general liability insurance lines. The Company is
approved to write insurance in 49 states and the District of
Columbia on a non-admitted basis and in 41 states on an
admitted basis. The Company markets its lines of insurance
through 180 non-affiliated general agents' offices.
Approximately 76% of the Company's gross premiums written
during 1995 resulted from risks located in Arkansas,
California, Florida, Georgia, Kentucky, Louisiana,
Pennsylvania, Tennessee, Texas and West Virginia.
42
<PAGE> 43
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(c) Investments
Bonds held to maturity are stated at amortized cost, bonds
available for sale are stated at fair value. Short-term
investments are stated at cost. The "specific identification"
method is used to determine costs of investments sold. Since
investments not available for sale are generally held until
maturity or recovery of fair value, provisions for possible
losses are recorded only when the values have experienced
impairment considered "other than temporary". Proceeds from
the sale of debt securities totalled $10,741,080, $6,378,737
and $4,869,622 in 1995, 1994 and 1993, respectively. The
realized gains were $108,024, $134,641 and $3,841 in 1995,
1994 and 1993, respectively. There were no realized losses in
any of the years presented.
(d) Financial Instruments
For premiums receivable, which include premium finance notes
receivable, and all other accounts (except investments)
defined as financial instruments in Financial Accounting
Standards Board (FASB) Statement 107, "Disclosures About Fair
Values of Financial Instruments," the carrying amount
approximates fair value due to the short-term nature of these
instruments. These balances are disclosed on the face of the
balance sheet.
Fair values for investments, disclosed in note 2, were
obtained from independent brokers and published valuation
guides.
(e) Deferred Policy Acquisition Costs and Deferred Ceding
Commission Income
Policy acquisition costs, principally commissions, marketing
and underwriting expenses, are deferred and charged to
operations over periods in which the related premiums are
earned. Ceding commission income, which is realized on a
written basis, is deferred and recognized over periods in
which the premiums are earned. Deferred ceding commission
income is netted against deferred policy acquisition costs.
The marketing expenses are predominately salaries, salary
related expenses and travel expenses of the Company's
marketing representatives who actively solicit business from
the independent general agents.
43
<PAGE> 44
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
The change in the resulting deferred asset or liability is
charged (credited) to operations. Information relating to
these net deferred amounts, as of and for the years ended
December 31, 1995, 1994 and 1993 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Asset balance, beginning of
period $ 9,830,543 8,508,597 8,203,102
---------- ----------- -----------
Deferred commissions 21,394,072 19,345,305 16,644,934
Deferred marketing and
underwriting expenses 5,506,882 4,953,694 4,403,820
Deferred ceding
commission income (71,227) (1,675,640) (1,385,157)
Amortization (24,545,589) (21,301,413) (19,358,102)
---------- ---------- ----------
Net change 2,284,138 1,321,946 305,495
---------- ----------- -----------
Asset balance, end of period $ 12,114,681 9,830,543 8,508,597
========== =========== ===========
</TABLE>
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated useful lives of
the respective assets (30 years for buildings and primarily 5 years for
furniture, equipment and software).
The following schedule summarizes the components of property
and equipment:
<TABLE>
<CAPTION>
As of December 31
---------------------------------------
1995 1994
----------- -----------
<S> <C> <C>
Land $ 865,383 865,383
Buildings 4,987,397 4,735,340
Furniture and equipment 2,665,766 2,384,203
Software 1,856,222 1,553,728
Accumulated depreciation and
amortization (3,812,976) (3,202,644)
--------- ---------
$ 6,561,792 6,336,010
========= =========
</TABLE>
There are no material capital leases.
44
<PAGE> 45
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(g) Software Costs
The Company capitalizes certain costs of developing computer
software intended for resale. Costs relating to programs for
internal use are recorded in property and equipment and are
amortized using the straight-line method over five years or
the estimated useful life, whichever is shorter. The deferred
cost is also reduced by incidental sales of programs developed
for internal use.
(h) Premium Revenues
Premiums are recognized as earned on a pro rata basis over the
period the Company is at risk under the related policy.
Unearned premiums represent the portion of premiums written
which are applicable to the unexpired terms of policies in
force.
(i) Claims and Claim Adjustment Expenses
Claims and claim adjustment expenses, less related
reinsurance, are provided for as claims are incurred. The
provision for unpaid claims and claim adjustment expenses
includes: (1) the accumulation of individual case estimates
for claims and claim adjustment expenses reported prior to the
close of the accounting period; (2) estimates for unreported
claims based on past experience modified for current trends;
and (3) estimates of expenses for investigating and adjusting
claims based on past experience.
Liabilities for unpaid claims and claim adjustment expenses
are based on estimates of ultimate cost of settlement.
Changes in claim estimates resulting from the continuous
review process and differences between estimates and ultimate
payments are reflected in expense for the year in which the
revision of these estimates first became known.
45
<PAGE> 46
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
The following table sets forth the changes in unpaid claims
and claim adjustment expenses, net of reinsurance cessions, as
shown in the Company's consolidated financial statements for
the periods indicated:
<TABLE>
<CAPTION>
As of and for the
years ended December 31
--------------------------------------------
1995 1994 1993
------ ------ ------
(Amounts in thousands)
<S> <C> <C> <C>
Unpaid claims and claim adjustment expenses,
beginning of period $ 80,729 72,656 66,517
Less: Ceded unpaid claims and claim adjustment
expenses, beginning of period 19,972 16,701 16,594
------ ------ ------
Net unpaid claims and claim adjustment expenses,
beginning of period 60,757 55,955 49,923
------ ------ ------
Net claims and claim adjustment expenses
incurred related to:
Current period 48,064 37,571 35,012
Prior periods 401 3,618 4,227
------ ------ ------
Total net claims and claim adjustment
expenses incurred 48,465 41,189 39,239
------ ------ ------
Net claim and claim adjustment expenses paid
related to:
Current period 14,131 12,297 10,737
Prior periods 26,953(1) 24,090 22,470
------ ------ ------
Total net claim and claim adjustment expenses
paid 41,084 36,387 33,207
------ ------ ------
Commutation of quota-share reinsurance treaties (2,223)(1) - -
------ --------- ---------
Net unpaid claims and claim adjustment expenses,
end of period 70,361 60,757 55,955
Plus: Ceded unpaid claims and claim adjustment
expenses, end of period 24,650(1) 19,972 16,701
------ ------ ------
Unpaid claims and claim adjustment expenses, end
of period $ 95,011 80,729 72,656
====== ====== ======
</TABLE>
(1) The Company commuted its 1993 and 1994 quota-share reinsurance treaties in
1995 and thereby reassumed all risks and the related unpaid claims and claim
adjustment expenses of $2,223,000 (see note 4 to the consolidated financial
statements). This was accounted for using the paid claim method, whereby
unpaid claims and claim adjustment expenses were increased $2,223,000 and paid
claims and claim adjustment expenses were decreased $2,223,000, thus preventing
distortion of claims and claim adjustment expenses incurred.
46
<PAGE> 47
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(j) Income Taxes
The Company and its subsidiaries file a consolidated Federal
income tax return. Deferred income tax items are accounted
for under the deferred method which provides for timing
differences between the reporting of earnings for financial
statement purposes and for tax purposes, primarily deferred
policy acquisition costs, the discount on unpaid claims and
claim adjustment expenses and the nondeductible portion of the
change in unearned premiums. The Company paid income taxes of
$5,413,486, $5,500,787 and $3,860,000 during 1995, 1994 and
1993, respectively.
(k) Earnings Per Share
The weighted average number of shares outstanding for the
years ending December 31, 1995, 1994 and 1993 were 21,512,741,
21,437,031 and 21,379,098, respectively. Primary earnings per
share were $.81, $.70 and $.61 based on the weighted average
number of shares outstanding and common stock equivalents
(which consist of stock options), when dilutive, of 309,549,
278,490, and 438,963 for the years ending December 31, 1995,
1994, and 1993, respectively. The calculations were made
after giving retroactive effect to the stock dividends and
stock splits granted to shareholders (note 6).
(l) Accounting Pronouncements
In October 1994, the FASB issued Statement 119, "Disclosure
about Derivative Financial Instruments and Fair Value of
Financial Instruments." The Statement was effective for years
ending after December 15, 1994 and did not have any impact on
the financial statements.
In March 1995, the FASB issued Statement 121, "Accounting for
the Impairment of Long-Lived Assets and for Long- Lived Assets
to Be Disposed Of." The Statement was effective for years
ending after December 15, 1995, and did not have any impact on
the financial statements.
(2) INVESTMENTS
The following schedule summarizes the components of net investment
income:
<TABLE>
<CAPTION>
Years ended December 31
-----------------------------------------------------------
Investment income on: 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Fixed maturities $ 7,481,087 6,414,168 5,884,274
Short-term 870,210 513,771 305,318
---------- ---------- ----------
investments 8,351,297 6,927,939 6,189,592
Investment expenses (193,813) (60,246) (30,702)
---------- ---------- ----------
Net investment income $ 8,157,484 6,867,693 6,158,890
========= ========= =========
</TABLE>
47
<PAGE> 48
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
The following schedule summarizes the amortized cost and estimated
fair values of investments in debt securities:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Fixed Maturities:
Bonds held to maturity:
US Government Securities-1995 9,606 157 (30) 9,733
US Government Securities-1994 10,555 23 (365) 10,213
Tax-exempt state & municipal bonds-1995 87,696 1,071 (78) 88,689
Tax-exempt state & municipal bonds-1994 113,088 161 (1,562) 111,687
Other taxable fixed maturities-1995 620 - - 620
Other taxable fixed maturities-1994 570 - - 570
Bonds available for sale:
Tax-exempt state & municipal bonds-1995 77,478 1,658 (6) 79,130
Tax-exempt state & municipal bonds-1994 25,779 93 (179) 25,693
Total Fixed Maturities-1995 175,400 2,886 (114) 178,172
Total Fixed Maturities-1994 149,992 277 (2,106) 148,163
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1995 and 1994, by maturity, are shown below.
<TABLE>
<CAPTION>
1995 1994
------------------------- ----------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ---------- ----------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 17,781 17,872 48,232 48,325
Due after one year but within five years 133,947 135,898 66,755 65,811
Due after five years but within ten years 16,572 17,280 33,580 32,628
Due after ten years but within twenty
years 6,553 6,578 1,425 1,399
Beyond twenty years 544 - -
---- -------- ---------- ----------
547
---
$ 175,400 178,172 149,992 148,163
======= ======= ======= =======
</TABLE>
48
<PAGE> 49
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
Investments of $1,100,000 were maintained in escrow at December 31,
1995 and 1994 on behalf of certain insurance companies under the terms
of their reinsurance agreements with General Agents. In addition,
investments of $11,860,000 and $11,010,000, at December 31, 1995 and
1994, respectively, were on deposit with various regulatory bodies as
required by law.
The Financial Accounting Standards Board has issued Statement 115
"Accounting for Certain Investments in Debt and Equity Securities"
(Statement 115). Under this statement, the Company carries certain
debt securities classified as "available for sale" at fair value. The
unrealized gain or loss, net of tax, is presented as a separate
component of shareholders' equity.
During 1995, as a result of the Statement 115 "Implementation Guide,"
the Company transferred certain fixed maturities from the held to
maturity portfolio to the available for sale portfolio. The amortized
cost of securities transferred was $18,519,856 and the unrealized gain
on the date of transfer was $93,803, net of taxes. There were no
transfers during 1994.
(3) NOTE PAYABLE TO BANK
The Company made principal payments of $1,750,000 and $1,000,000 in
June, 1995 and May, 1994, respectively. The note payable balance of
$1,750,000 is due in one installment on June 1, 1996. Interest is
paid monthly at a rate that approximates the prime lending rate. The
Company recorded interest expense (which approximates interest paid)
of $221,934, $273,552 and $275,250 in 1995, 1994 and 1993,
respectively. The note payable is stated at book value which
approximates fair value.
(4) REINSURANCE
In 1995, 1994 and 1993, General Agents and MGAI (the Insurers) wrote
casualty policy limits of $1,000,000. For policies with an effective
date of January 1, 1992 through December 31, 1994, the Insurers have
excess reinsurance for 100% of casualty claims exceeding $300,000 up
to the $1,000,000 policy limits. For policies with an effective date
of January 1, 1995 or after, the Insurers have excess reinsurance for
100% of casualty claims exceeding $500,000 up to the $1,000,000 policy
limits.
In 1995, the Insurers terminated the quota-share reinsurance treaties
that were in effect for 1994 and 1993. Under the terms of the
termination agreement, the reinsurer returned assets to the Insurers
equal to the remaining unpaid claims and claim adjustment expenses of
$2,223,000. The Insurers reassumed all risks and the reinsurer was
relieved of any further liability with respect to risks previously
covered by the contract.
During 1995, GCM entered into fronting arrangements with two
non-affiliated insurance companies. GCM retains no liability as the
business written under these agreements is 100% ceded. Although these
cessions are made to authorized reinsurers rated "A- (Excellent)" or
better by A. M. Best Company, the agreements require that collateral
accounts be maintained to assure
49
<PAGE> 50
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
payment of the unearned premiums and unpaid claims and claim
adjustment expenses relating to the risks insured under these fronting
arrangements. At December 31, 1995, the balance in such accounts
totalled approximately $3,527,000.
The amounts deducted in the consolidated financial statements for
reinsurance ceded as of and for the years ended December 31, 1995,
1994, and 1993 respectively, are set forth in the following table.
Premiums and claims ceded to the commercial automobile plans of
Arkansas, California, Louisiana, Mississippi and Pennsylvania are
designated as "plan servicing".
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Premiums earned $ 3,809,853 8,223,984 5,570,586
Premiums earned - plan
servicing $ 5,307,038 5,101,098 6,416,692
Premiums earned - fronting
arrangements $ 721,752 - -
Claims and claim adjustment
expenses $ 13,188,258 6,425,030 5,708,218
Claims and claim adjustment
expenses - plan servicing $ 5,055,997 5,728,201 4,380,911
Claim and claim adjustment
expenses - fronting
arrangements $ 418,573 - -
</TABLE>
50
<PAGE> 51
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
The amounts included in the Consolidated Balance Sheets for
reinsurance ceded under fronting arrangements and reinsurance ceded to
the commercial automobile plans of Arkansas, California, Louisiana,
Mississippi, and Pennsylvania were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------ -----------
<S> <C> <C> <C>
Unearned premiums $ 2,836,492 2,517,709 2,562,565
Unearned premiums - fronting
arrangements $ 2,544,837 - -
Unpaid claims and claim
adjustment expenses $ 9,842,815 9,829,640 8,610,152
Unpaid claims and claim
adjustment expenses -
fronting arrangements $ 266,720 - -
</TABLE>
The Insurers remain directly liable to their policyholders for all
policy obligations and the reinsuring companies are obligated to the
Insurers to the extent of the reinsured portion of the risks.
The Insurers, for years prior to 1993, utilized reinsurance
arrangements with various non-affiliated admitted insurance companies,
whereby the Insurers underwrote the coverage and assumed the policies
100% from the companies. During 1993, 1994 and 1995, the business
generated from these arrangements was in a run-off position. These
arrangements require that the Insurers maintain escrow accounts to
assure payment of the unearned premiums and unpaid claims and claim
adjustment expenses relating to risks insured through such
arrangements and assumed by the Insurers. For each of the years ended
December 31, 1995, 1994, and 1993, the balance in such escrow accounts
totalled $1,100,000. For 1995, 1994 and 1993, the premiums earned by
assumption were $(2,496), $0, and $11,233,000, respectively and the
assumed unpaid claims and claim adjustment expenses were $4,427,000,
$6,804,000 and $20,850,000, respectively.
The Company has not and does not intend to utilize retrospectively
rated reinsurance contracts with indefinite renewal terms. This form
of reinsurance is commonly known as a "funded cover". Under a funded
cover reinsurance arrangement, an insurance company essentially
deposits money with a reinsurer to help cover future losses and
records the "deposit" as an expense instead of as an asset; or, the
insurance company can borrow from a reinsurer recording the "loan" as
income instead of as a liability with the future "loan" payments
recorded as expense when the payments are made.
51
<PAGE> 52
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(5) FEDERAL INCOME TAXES
In the accompanying consolidated statements of operations, the
provisions for Federal income tax as a percent of related pretax
income differ from the Federal statutory income tax rate. A
reconciliation of income tax expense using the Federal statutory rates
to actual income tax expense follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Income tax expense at 35% $ 8,392,950 7,128,617 5,735,712
Tax-exempt interest income (2,039,995) (1,690,901) (1,595,850)
Fresh start adjustment 1,151 15,397 (9,501)
Stock option exercise - (92,373) (515,489)
Building rehabilitation tax
credit - (30,614) -
Other, net (2,102) (131,449) (251,099)
---------- --------- ---------
Income tax expense $ 6,352,004 5,198,677 3,363,773
========= ========= =========
</TABLE>
The fresh start adjustment represents the tax effect of the discount
on the portion of the 1986 unpaid claims and claim adjustment expenses
that changed in 1995, 1994 and 1993, respectively.
The Financial Accounting Standards Board issued Statement 109
"Accounting for Income Taxes" which changed the Company's method of
accounting for income taxes. Under Accounting Principles Board (APB)
Opinion 11, the primary objective was to match the tax expense with
pre-tax operating income on the statement of operations. Under
Statement 109, the primary objective is to establish deferred tax
assets and liabilities for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets
and liabilities at enacted tax rates expected to be in effect when
such amounts are realized or settled. As a consequence, the portion
of the tax expense which is a result of the change in the deferred tax
asset or liability may not always be consistent with the income
reported on the statement of operations. The Company implemented
Statement 109 in 1993, the cumulative effect of which resulted in a
$216,278 tax benefit ($.01 per share) which has been reported in the
consolidated Statement of Operations as a "cumulative effect of a
change in accounting principle". In the Company's opinion, there will
be adequate earnings in future years to recover its deferred tax asset
and as such, the Company has not established a valuation allowance.
52
<PAGE> 53
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
The following table represents the tax effect of temporary differences
giving rise to the net deferred tax asset established under Statement
109.
<TABLE>
<CAPTION>
As of December 31
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Deferred tax assets:
Discounting of unpaid claims and claim adjustment expenses $ 4,307,059 3,883,091
Discounting of unearned premiums 3,316,746 2,697,946
Accruals not currently deductible 124,667 247,975
Deferred service fee income 171,652 147,143
Unrealized losses on investments - 29,985
Other 48,419 59,480
---------- ----------
Total deferred tax assets 7,968,543 7,065,620
--------- ---------
Deferred tax liabilities:
Deferred policy acquisition costs and deferred ceding commission income 4,259,000 3,458,843
Unrealized gains on investments 578,091 -
Depreciation and amortization 495,840 441,274
Other 56,898 38,716
---------- ----------
Total deferred tax liabilities 5,389,829 3,938,833
--------- ---------
Net deferred tax asset $ 2,578,714 3,126,787
========= =========
</TABLE>
(6) SHAREHOLDERS' EQUITY
In May, 1993, the shareholders approved an amendment to the Company's
Articles of Incorporation to increase the number of shares of
authorized $.10 par value common stock from 50,000,000 shares to
250,000,000 shares. Of the authorized shares, 21,637,481 and
19,611,368 were issued as of December 31, 1995 and 1994, respectively
and 21,525,221 and 19,509,544 were outstanding as of December 31, 1995
and 1994, respectively. The Company also has 10,000,000 shares of
preferred stock with $100 par value authorized of which no shares have
been issued. The Board of Directors can designate the relative rights
and preferences of the authorized preferred stock to be issued.
In 1991, the Company adopted a policy to pay a quarterly cash dividend
of $.01 per share on its common stock every quarter until further
action by the Board of Directors. In November of 1995, the Board of
Directors increased the cash dividend to $.0125 per share and
announced the discontinuance of the semi-annual stock dividends. The
Board of Directors granted 5% stock dividends to shareholders of
record on March 31, 1995, September 30, 1995, March 31, 1994,
September 30, 1994, March 31, 1993 and September 30, 1993. The market
value of the stock dividends was charged to retained earnings, common
stock was credited for the par value, the excess of market value over
par value was credited to additional paid-in capital and cash was paid
in lieu of fractional shares for the stock dividends and the shares
were cancelled. The earnings per share computation and the number of
stock options and their exercise price have been
53
<PAGE> 54
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
retroactively adjusted for the effect of the stock dividends.
The amount of consolidated statutory shareholder's equity or
policyholders' surplus of General Agents and MGAI was $47,880,301,
$40,100,250, and $33,777,209 at December 31, 1995, 1994 and 1993,
respectively, and the amount of consolidated statutory net income was
$15,167,151, $13,909,896, and $12,107,933 for the years ended 1995,
1994, and 1993, respectively. The amount of policyholders' surplus of
GCM was $2,260,001, $2,250,001 and $2,128,748 at December 31, 1995,
1994 and 1993, respectively, and the amount of statutory net income
was $369,356, $644,257 and $50,782 for the years ended December 31,
1995, 1994 and 1993, respectively. The Company's statutory capital
significantly exceeds the benchmark capital level under the Risk Based
Capital formula.
Statutes in Texas and Oklahoma restrict the payment of dividends by
the insurance company subsidiaries to the available surplus funds
derived from their realized net profits. The maximum amount of cash
dividends that each subsidiary may declare without regulatory approval
in any 12-month period is the lesser of net income for the 12-month
period ended the previous December 31 or ten percent (10%) of
policyholders' surplus as of the previous December 31. At December
31, 1995, General Agents, the Oklahoma subsidiary, had net income of
$10,425,054 and policyholders' surplus of $47,880,301 and MGAI, the
Texas subsidiary, had net income of $4,742,096 and policyholders'
surplus of $15,545,587.
In 1988, the Board of Directors declared, pursuant to a Rights Plan, a
dividend distribution of one common share purchase right on each
outstanding share of $.10 par value common stock. The dividend
distribution was made on March 18, 1988, payable to shareholders of
record on that date. In 1993, the Board of Directors amended the
Rights Plan and extended the expiration date of these rights from
March 18, 1998 to May 25, 2003. Each right, as amended during 1993,
has an exercise price of $70. The rights are not exercisable until
the Distribution Date (as defined in the Rights Plan). The Rights
Plan provides, among other things, that if any person or group (other
than the Company, one of its subsidiaries or an employee benefit plan
of the Company or a subsidiary) acquires 20% or more of the Company's
common stock (except pursuant to an offer for all outstanding common
stock which the Continuing Directors (as defined in the Rights Plan)
have determined to be in the best interests of the Company and its
shareholders), if a 20% holder engages in certain self-dealing
transactions or if a holder of 15% or more of the Company's common
stock is declared an Adverse Person (as defined in the Rights Plan) by
the Board of Directors, each holder of a right (other than the 20%
holder or the Adverse Person, whose rights would become null and void)
would have the right to receive, upon exercise of the right, common
stock having a market value of two times the exercise price of the
right. The Company is able to redeem rights under certain conditions
set forth in the Rights Plan. If, following a public announcement
that a person has acquired 20% or more of the common stock, the
Company is acquired in a merger (other than a merger which follows an
offer approved by the Continuing Directors as described above) or
other business combination transaction or if 50% of the assets or
earning power of the Company is sold, each right (except rights which
have previously become null and void as described above), will entitle
its holder to purchase, at the right's then-current
54
<PAGE> 55
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
exercise price, shares of the acquiring Company's common stock having
a market value of two times the exercise price of the right.
(7) BENEFIT PLANS
On May 16, 1995, the Board of Directors adopted the GAINSCO, INC. 1995
Stock Option Plan (the "Plan") subject to approval by the shareholders
no later than May 15, 1996. Under the Plan, 1,020,000 shares were
reserved for issuance upon the exercise of these nonqualified stock
options.
Under the 1990 Stock Option Plan of the Company, no options were
granted in 1995, 6,784 options were granted in 1994, and 20,508
options were granted in 1993. These options were granted at fair
market value on the date of grant. During 1995, options for 16,316
shares of common stock were exercised at a price of $38,489 and the
shares were issued. Options outstanding (after adjusting for stock
dividends) at December 31, 1995, 1994 and 1993 were 401,277, 427,863
and 612,810, respectively. The options outstanding at December 31,
1995 are exercisable at an average price of $2.60.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). SFAS 123 defines a fair value based method of accounting for an
employee stock option or similar equity instrument. Under SFAS 123,
the Company will elect to measure compensation costs using the
intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25. SFAS is effective for financial
statements for fiscal years beginning after December 15, 1995.
The Company has a profit sharing and trust plan for the benefit of its
eligible employees. Contributions are made in such amounts as the
Company elects. The annual contributions amounted to $605,935,
$536,124, and $494,727 for 1995, 1994 and 1993, respectively.
The Company has an incentive compensation plan in which certain key
officers of the Company participate and earn bonuses. The fund from
which bonuses are paid is comprised of net income for the current year
that is in excess of ten percent (10%) of beginning shareholders'
equity for the current year, with the fund not to exceed ten percent
(10%) of net income for the current year.
(8) CONTINGENCIES
In the normal course of its operations, the Company has been named as
defendant in various legal actions seeking payments for claims denied
by the Company and other monetary damages. The Company's management
believes that unpaid claims and claim adjustment expenses are adequate
to cover possible liability from lawsuits which arise in the normal
course of its insurance business. In the opinion of the Company's
management the ultimate liability, if any, resulting from the
disposition of all claims will not have a material adverse effect on
the Company's
55
<PAGE> 56
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
consolidated financial position. The Company does not have any
financial instruments where there is off-balance-sheet-risk of
accounting loss due to credit or market risk. There is credit risk in
the premiums receivable and reinsurance balances receivable of the
Company. At December 31, 1995 and 1994 the Company did not have a
premiums receivable balance nor a reinsurance balance receivable from
any one entity that was material with regard to shareholders' equity.
(9) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table contains selected unaudited consolidated financial
data for each quarter (in thousands, except per share data):
<TABLE>
<CAPTION>
1995 Quarter 1994 Quarter
--------------------------------------- ------------------------------------
Fourth Third Second First Fourth Third Second First
-------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross premiums
written $ 30,013 27,772 25,762 24,525 24,941 24,252 26,675 22,295
Total revenues 29,237 27,736 25,920 24,810 24,675 23,812 22,755 22,211
Total expenses 21,134 22,251 20,766 19,573 19,004 18,662 17,717 17,703
Net income 5,772 4,083 3,878 3,893 4,152 3,904 3,588 3,525
Net income per $ .26 .19 .18 .18 .19 .18 .16 .16
share (a)
Common share
prices (a) (b)
High 11 7/8 9 1/2 10 1/2 10 8 3/8 8 1/16 8 3/16 8 3/8
Low 8 5/16 8 7/16 9 5/16 7 7 1/8 7 7 1/8 7 1/8
</TABLE>
(a) Adjusted for stock dividends and stock splits effected as stock
dividends.
(b) As reported by the American Stock Exchange.
56
<PAGE> 57
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION
The Board of Directors and Shareholders
GAINSCO, INC:
Under date of February 26, 1996, we reported on the consolidated balance sheets
of GAINSCO, INC. and subsidiaries as of December 31, 1995 and 1994 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1995.
In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedules as listed
in the accompanying index. These financial statement schedules are the
responsibility of the company's management. Our responsibility is to express
an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Dallas, Texas
February 26, 1996
57
<PAGE> 58
Schedule I
GAINSCO, INC. AND SUBSIDIARIES
Summary of Investments - Other
Than Investments in Related Parties
(Amounts in thousands)
<TABLE>
<CAPTION>
As of December 31
--------------------------------------------------------------------------
1995 1994 1993
----------------------- ----------------------- ----------------------
-
Amortized Fair Amortized Fair Amortized Fair
Type of Investment Cost Value Cost Value Cost Value
------------------ ------------ ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Bonds held to maturity:
U.S. government
securities $ 9,606 9,733 10,555 10,213 13,485 13,938
Tax exempt state and
municipal bonds 87,696 88,689 113,088 111,687 99,387 101,047
Certificates of deposit 620 620 570 570 570 570
Bonds available for sale:
Tax exempt state and
municipal bonds 77,478 79,130 25,779 25,693 20,422 20,704
------- ------- ------- ------- ------- -------
Total fixed maturities 175,400 178,172 149,992 148,163 133,864 136,259
------- ------- ------- ------- ------- -------
Short-term investments 5,975 5,975 10,394 10,394 3,125 3,125
------- ------- ------- ------- ------- -------
Total investments $ 181,375 184,147 160,386 158,557 136,989 139,384
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying independent auditors' report on supplementary information.
58
<PAGE> 59
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Balance Sheets
December 31, 1995 and 1994
<TABLE>
<CAPTION>
Assets 1995 1994
------------ ------------
<S> <C> <C>
Investments in subsidiaries $ 95,951,627 79,583,732
Cash 776 4
Net receivable from subsidiaries 3,695,959 2,120,874
Other assets 63,500 56,750
----------- ------------
Total assets $ 99,711,862 81,761,360
========== ==========
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable $ - 18,789
Dividends payable 269,066 195,095
Other liabilities 900 900
------------- ------------
Total liabilities 269,966 214,793
----------- -----------
Shareholders' equity:
Preferred stock ($100 par value, 10,000,000
shares authorized, none issued) - -
Common stock ($.10 par value, 250,000,000
shares authorized, 21,637,481 issued at
December 31, 1995, 19,611,368 issued at
December 31, 1994) 2,163,748 1,961,137
Additional paid-in capital 87,543,175 69,671,214
Net unrealized gains (losses) on fixed maturities 1,073,597 (55,686)
Retained earnings 9,673,968 10,982,494
Treasury stock (112,260 shares in 1995, 101,824
shares in 1994) (1,012,592) (1,012,592)
---------- ----------
Total shareholders' equity 99,441,896 81,546,567
---------- ----------
Total liabilities and shareholders' equity $ 99,711,862 81,761,360
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
See accompanying independent auditors' report on supplementary information.
59
<PAGE> 60
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Statements of Operations
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Revenues - dividend income $ 3,115,000 800,000 2,729,000
Expenses - operating expenses (1,092,470) (1,024,949) 996,874
---------- ---------- -----------
Operating income before
Federal income tax benefit 2,022,530 (224,949) 1,732,126
Federal income tax benefit (366,716) (429,324) (838,047)
----------- ---------- -----------
Income before equity in undistributed
income of subsidiaries 2,389,246 204,375 2,570,173
Equity in undistributed income of subsidiaries 15,238,609 14,964,425 10,670,081
---------- ---------- ----------
Net income $ 17,627,855 15,168,800 13,240,254
========== ========== ==========
Net income per share $ .81 .70 .61
=== === ===
</TABLE>
See accompanying notes to condensed financial statements.
See accompanying independent auditors' report on supplementary information.
60
<PAGE> 61
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Statements of Shareholders' Equity
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Common Stock:
Balance at beginning of year $ 1,961,137 1,765,082 1,586,266
Issue of shares as stock dividends
(2,009,797 in 1995, 1,814,941 in
1994 and 1,638,664 in 1993) 200,980 181,495 164,866
Exercise of options to purchase
shares (16,316 in 1995,
145,604 in 1994 and 149,501
in 1993) 1,631 14,560 14,950
------------ ----------- -----------
Balance at end of year 2,163,748 1,961,137 1,765,082
---------- ---------- ----------
Additional paid-in capital:
Balance at beginning of year 69,671,214 53,495,511 28,596,655
Issue of shares as stock dividends
(2,009,797 in 1995, 1,814,941
in 1994 and 1,638,664 in 1993) 17,835,103 15,809,524 24,510,939
Exercise of options to purchase
shares (16,316 in 1995,
145,604 in 1994 and 149,501
in 1993) 36,858 366,179 387,917
----------- ----------- -----------
Balance at end of year $ 87,543,175 69,671,214 53,495,511
---------- ---------- ----------
</TABLE>
(continued)
61
<PAGE> 62
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Statements of Shareholders' Equity
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ -----------
<S> <C> <C> <C>
Net unrealized gains (losses) on
fixed maturities:
Balance at beginning of year $ (55,686) - -
Cumulative effect of change in
accounting principle - 186,303 -
Change during year 1,129,283 (241,989) -
----------- ----------- --------------
Balance at end of year 1,073,597 (55,686) -
----------- ----------- --------------
Retained earnings:
Balance at beginning of year 10,982,494 12,569,862 24,698,393
Net income for year 17,627,855 15,168,800 13,240,254
Cash dividends (893,943) (759,938) (687,269)
Stock dividends (18,042,438) (15,996,230) (24,681,516)
---------- ---------- ----------
Balance at end of year 9,673,968 10,982,494 12,569,862
---------- ---------- ----------
Treasury stock:
Balance at beginning of year (1,012,592) (1,012,362) -
Change during year - (230) (1,012,362)
------------- ------------ ----------
Balance at end of year (1,012,592) (1,012,592) (1,012,362)
---------- ---------- ----------
Total shareholders' equity at end
of year $ 99,441,896 81,546,567 66,818,093
========== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
See accompanying independent auditors' report on supplementary information.
62
<PAGE> 63
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------------- ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 17,627,855 15,168,800 13,240,254
Adjustments to reconcile net income to
cash provided by operating activities:
Change in investments in subsidiaries - (100,000) -
Change in net receivable from subsidiaries (1,575,085) 241,178 (469,137)
Change in other assets (6,750) (4,473) (145)
Change in accounts payable (18,798) 18,798 (115)
Change in other liabilities - 900 (9,001)
Equity in income of subsidiaries (15,238,609) (14,964,425) (10,670,081)
---------- ---------- ----------
Net cash provided by operating
activities 788,613 360,778 2,091,775
----------- ----------- -----------
Cash flows from investing activities:
Cash contribution to subsidiaries - (900) (800,000)
-------------- ------------ ----------
Net cash used for investing
activities $ - (900) (800,000)
-------------- ------------ ----------
</TABLE>
(continued)
63
<PAGE> 64
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Cash dividends paid $ (819,972) (740,428) (670,312)
Payments for fractional shares
resulting from stock dividends (6,358) (5,215) (6,708)
Proceeds from exercise of common
stock options 38,489 380,739 402,867
Treasury stock acquired - (230) (1,012,362)
---------- ----------- ---------
Net cash used for financing
activities (787,841) (365,134) (1,286,515)
-------- -------- ---------
Net increase in cash 772 5,256 5,260
Cash at beginning of year 4 5,260 -
---------- ---------- -------------
Cash at end of year $ 776 4 5,260
========= =========== ============
</TABLE>
See accompanying notes to condensed financial statements.
See accompanying independent auditors' report on supplementary information.
64
<PAGE> 65
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Notes to Condensed Financial Statements
December 31, 1995, 1994 and 1993
(1) GENERAL
The accompanying condensed financial statements should be read
in conjunction with the notes to the consolidated financial
statements for the years ended December 31, 1995, 1994 and
1993 included elsewhere in this Annual Report.
(2) RELATED PARTIES
During 1994, the Company made a cash capital contribution to
Risk Retention Administrators, Inc. in the amount of $900 and
a capital contribution to General Agents Premium Finance
Company in the amount of $100,000.
<TABLE>
<CAPTION>
Name of Subsidiary 1995 1994
------------------ ----------- ----------
<S> <C> <C>
Agents Processing Systems, Inc. $ 551,211 661,711
GAINSCO Service Corp. 2,688,908 622,121
General Agents Insurance
Company of America, Inc. 455,840 837,042
--------- ---------
Net receivable from subsidiaries $ 3,695,959 2,120,874
========= =========
</TABLE>
See accompanying independent auditors' report on supplementary information.
65
<PAGE> 66
Schedule III
GAINSCO, INC. AND SUBSIDIARIES
Supplementary Insurance Information
Years ended December, 1995, 1994 and 1993
(Amounts in thousands)
<TABLE>
<CAPTION>
Other
Deferred Reserves policy
policy for claims claims and Net
acquisition and claim Unearned benefits premiums
Segment costs expenses premiums payable earned
------- ----------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Property and casualty insurance $ 12,115 95,011 53,525 2,569 97,255
------ ------ ------ ----- ------
Total $ 12,115 95,011 53,525 2,569 97,255
====== ====== ====== ===== ======
Year ended December 31, 1994:
Property and casualty insurance $ 9,831 80,729 44,645 4,604 84,395
------ ------ ------ ----- ------
Total $ 9,831 80,729 44,645 4,604 84,395
====== ====== ====== ===== ======
Year ended December 31, 1993:
Property and casualty insurance $ 8,509 72,656 39,145 4,109 75,862
------ ------ ------ ----- ------
Total $ 8,509 72,656 39,145 4,109 75,862
====== ====== ====== ===== ======
<CAPTION>
Amortization
of deferred Other
Net Claims policy operating Net
investment & claim acquisition costs and premiums
Segment income expenses costs (1) expenses written
------- ---------- -------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Property and casualty insurance 8,157 48,465 (24,546) 37,542 106,104
----- ------ ------ ------ -------
Total 8,157 48,465 (24,546) 37,542 106,104
===== ====== ====== ====== =======
Year ended December 31, 1994:
Property and casualty insurance 6,868 41,189 (21,301) 33,219 89,454
----- ------ ------ ------ -------
Total 6,868 41,189 (21,301) 33,219 89,454
===== ====== ====== ====== =======
Year ended December 31, 1993:
Property and casualty insurance 6,159 39,239 (19,358) 29,092 77,961
----- ------ ------ ------ -------
Total 6,159 39,239 (19,358) 29,092 77,961
===== ====== ====== ====== =======
</TABLE>
(1) Net of the amortization of deferred ceding commission income.
See accompanying independent auditors' report on supplementary information.
66
<PAGE> 67
Schedule IV
GAINSCO, INC. AND SUBSIDIARIES
Reinsurance
Years ended December 31, 1995, 1994 and 1993
(Amounts in thousands, except percentages)
<TABLE>
<CAPTION>
Percentage of
Ceded to Assumed from amount
Direct other other Net assumed
amount companies companies amount to net
------ --------- ------------- ------ ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Premiums earned:
Property and casualty $ 102,779 - - 102,779
Reinsurance - (5,522) (2) (5,524)
---------- ----- -------- ------
Total $ 102,779 (5,522) (2) 97,255 - %
======= ===== ======== ====== ====
Year ended December 31, 1994:
Premiums earned:
Property and casualty $ 92,619 - - 92,619
Reinsurance - (8,224) - (8,224)
---------- ----- --------- ------
Total $ 92,619 (8,224) - 84,395 - %
======= ===== ========= ====== ====
Year ended December 31, 1993:
Premiums earned:
Property and casualty $ 70,200 - - 70,200
Reinsurance - (5,571) 11,233 5,662
---------- ----- ------ ------
Total $ 70,200 (5,571) 11,233 75,862 14.8%
======= ===== ====== ====== ====
</TABLE>
See accompanying independent auditors' report on supplementary information.
67
<PAGE> 68
Schedule VI
GAINSCO, INC. AND SUBSIDIARIES
Supplemental Information
Years ended December 31, 1995, 1994 and 1993
(Amounts in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
Reserves
for unpaid Discount
Deferred claims if any,
Affiliation policy and claim deducted Net
with acquisition adjustment in Unearned earned
registrant costs expenses Column C premiums premiums
---------- ----------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
Property and casualty insurance $ - 12,115 95,011 - 53,525 97,255
------- ------ ------ ------- ------ ------
Total $ - 12,115 95,011 - 53,525 97,255
======= ====== ====== ======= ====== ======
Year ended December 31,
1994:
Property and casualty insurance $ - 9,831 80,729 - 44,645 84,395
------- ------ ------ ------- ------ ------
Total $ - 9,831 80,729 - 44,645 84,395
======= ====== ====== ======= ====== ======
Year ended December 31,
1993:
Property and casualty insurance $ - 8,509 72,656 - 39,145 75,862
------- ------ ------ ------- ------ ------
Total $ - 8,509 72,656 - 39,145 75,862
======= ====== ====== ======= ====== ======
<CAPTION>
Column H Column I Column J Column K Column L
-------- -------- -------- -------- --------
Claim
and claim
adjustment
expenses Amortization Paid
incurred of deferred claims
Net related to: policy and claim Net
investment Current Prior acquisition adjustment premiums
income year years costs (1) expenses written
---------- ---- ----- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
Property and casualty insurance 8,157 48,064 401 (24,546) 38,861 106,104
----- ------ ----- ------ ------ -------
Total 8,157 48,064 401 (24,546) 38,861 106,104
===== ====== ===== ====== ====== =======
Year ended December 31,
1994:
Property and casualty insurance 6,868 37,571 3,618 (21,301) 36,387 89,454
----- ------ ----- ------ ------ -------
Total 6,868 37,571 3,618 (21,301) 36,387 89,454
===== ====== ===== ====== ====== =======
Year ended December 31,
1993:
Property and casualty insurance 6,159 35,012 4,227 (19,358) 33,207 77,961
----- ------ ----- ------ ------ -------
Total 6,159 35,012 4,227 (19,358) 33,207 77,961
===== ====== ===== ====== ====== =======
</TABLE>
(1) Net of the amortization of deferred ceding commission income.
See accompanying independent auditors' report on supplementary information.
68
<PAGE> 69
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description No. Page
----------- ----------- --------
<S> <C> <C>
3.1 Restated Articles of Incorporation of Registrant (Exhibit 3.1)(1)
3.2 Articles of Amendment to the Articles of Incorporation dated
June 9, 1988 (Exhibit 3.2)(2)
3.3 Restated Bylaws of Registrant (Exhibit 3.2)(1)
3.4 Amendment to the Bylaws dated June 10, 1988 (Exhibit 3.4)(2)
3.5 Sections 2.06 and 2.07 of the Bylaws as Amended on May 25, 1993
(Exhibit 3.5)(7)
3.6 Articles of Amendment to Articles of Incorporation effective
August 13, 1993 (Exhibit 3.6)(7)
4.2 Rights Agreement, dated as of March 3, 1988, between the Registrant
and Team Bank/Fort Worth, N.A. (incorporated by reference to Exhibit
1 to the Registrant's Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 15, 1988)(Exhibit 4.2)(3)
4.3 Amendment No. 1 dated as of March 5, 1990 to Rights Agreement dated as
of March 3, 1988 between GAINSCO, INC. and Team Bank as
Rights Agent (Exhibit 4.2)(5)
4.4 Amendment No. 2 dated as of May 25, 1993 to Rights Agreement between
GAINSCO, INC. and Society National Bank (successor to Team Bank
(formerly Texas American Bank/Fort Worth, N.A.)), as Rights Agent
(Exhibit 4.4)(7)
4.5 Stock certificate as amended to give notice of Amendment No. 2
to Rights Agreement (Exhibit 4.5)(7)
10.2 (Restated) Incentive Compensation Plan of the Registrant (Exhibit 10.2)(2)
10.14 Profit Sharing Plan and Trust of GAINSCO, INC. effective January 1, 1985,
as amended, and Adoption Agreement (Exhibit 10.14)(4)
10.16 1990 Stock Option Plan of the Registrant (Exhibit 10.16)(4)
10.17 Loan Agreement and Amendment No. 1 to Loan Agreement between GAINSCO Service
Corp., GAINSCO, INC. and BankOne Texas, N.A. (Exhibit 10.17)(6)
10.18 Promissory Note made by GAINSCO Service Corp. payable to BankOne, Texas, N.A.
(Exhibit 10.18)(6)
</TABLE>
69
<PAGE> 70
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description No. Page
----------- ----------- --------
<S> <C> <C>
10.19 Guaranty Agreement executed by GAINSCO, INC., in favor of BankOne Texas, N.A.
(Exhibit 10.19)(6)
10.20 Negative Pledge Agreement executed by GAINSCO, INC. (Exhibit 10.20)(6)
10.21 Negative Pledge Agreement executed by GAINSCO Service Corp. (Exhibit 10.21)(6)
10.23 Surplus Debenture issued by GAINSCO County Mutual Insurance Company. (Exhibit 10.23)(6)
10.24 Management Contract between GAINSCO County Mutual Insurance Company and GAINSCO Service
Corp. (Exhibit 10.24)(6)
10.25 Certificate of Authority and accompanying Commissioner's Order granting Certificate of
Authority, allowing for charter amendments and extension of charter (Exhibit 10.25)(6)
10.26 Contract between GAINSCO, INC. and International Business Machines Corporation covering
the Company's acquisition and installation of the WINS software package and of the AS/400
hardware and systems software required to support it for use by the Company (Exhibit
10.26)(7)
10.27 Amendment to Surplus Debenture issued by GAINSCO County Mutual Insurance Company
(Exhibit 10.27)(7)
10.28 Agreement dated August 26, 1994 appointing Continental Stock Transfer & Trust Company
transfer agent and registrar (Exhibit 10.28)(8).
10.29 Amendment No. 3 to Rights Agreement and appointment of Continental Stock Transfer & Trust
Company as Successor Rights Agent, made September 30, 1994 (Exhibit 10.29)(8).
10.30 Second Amendment to Loan Agreement among GAINSCO Service Corp., GAINSCO, INC. and
BankOne Texas, N.A. made on July 26, 1990 (Exhibit 10.30)(8)
10.31 1995 Stock Option Plan of the Registrant (9)
10.32 Clarification to the GAINSCO, INC. Executive Incentive Compensation Plan (9)
11 (Not required to be filed as an Exhibit. See footnote (1)(j) on page 47 of this 10-K
Report for information called for by number 11 of the Exhibit Table to Item 601 of S-K)
</TABLE>
70
<PAGE> 71
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description No. Page
----------- ----------- --------
<S> <C> <C>
22.2 Subsidiaries of Registrant (9)
24.2 Consent of KPMG Peat Marwick to incorporation by reference (9)
25.1 Powers of Attorney (9)
27 Financial Data Schedule
28.8 Schedule P from the 1995 Annual Statement of General Agents Insurance Company of America,
Inc. (10)
28.9 Schedule P from the 1995 Annual Statement of MGA Insurance Company, Inc. (10)
28.10 Schedule P from the 1995 Annual Statement of GAINSCO County Mutual Insurance Company (10)
(1) Incorporated by reference to the Exhibit shown in parenthesis filed in Registration
Statement No. 33-7846 on Form S-1, and amendments thereto, filed by the Company with the
Securities and Exchange Commission and effective November 6, 1986.
(2) Incorporated by reference to the Exhibit shown in parenthesis filed in Registration
33-25226 on Form S-1, and amendments thereto, filed by the Company with the Securities and
Exchange Commission and effective November 14, 1988.
(3) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1988.
(4) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1990.
(5) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1991.
(6) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1992.
(7) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1993.
(8) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994.
(9) Filed herewith.
(10) Filed under Form SE.
</TABLE>
71
<PAGE> 1
EXHIBIT 10.31
GAINSCO, INC.
1995 STOCK OPTION PLAN
<PAGE> 2
GAINSCO, INC. 1995
STOCK OPTION PLAN
1. PURPOSE. The purpose of this Stock Option Plan ("Plan") is to
provide an incentive to employees and members of the Board of Directors who are
not full time employees (sometimes hereinafter referred to as the "Optionees")
to enter into or remain in the employ of or to become or remain a director of
GAINSCO, INC., a Texas corporation or one of its subsidiary companies
(collectively referred to herein as the "Company"), and to devote themselves to
the Company's success by providing an opportunity to acquire or increase their
proprietary interest in GAINSCO, INC. through receipt of rights (the "Options")
to acquire GAINSCO, INC. Common Stock, par value $.10 per share (the "Common
Stock"). It is intended that no options granted under the Plan shall qualify
as incentive stock options as defined in Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code") and the regulations promulgated
thereunder, and that all stock options under this Plan shall, therefore, be
nonqualified stock options.
2. ADMINISTRATION. The Plan shall be administered by the Stock
Option Plan Committee of the Board of Directors (the "Committee"). The
Committee shall consist of not less than two directors. No person shall be
eligible to continue to serve as a member of such Committee unless such person
is a "disinterested person" within the meaning of Rule 16b-3 of the General
Rules and Regulations under the Securities Exchange Act of 1934, as amended
(the "Act"), and an "outside director" within the meaning of Section 162(m) of
the Code. The Committee shall have the power to select Optionees for
discretionary grants, to establish the number of shares and other terms
applicable to each such Option, to construe the provisions of the Plan, and to
adopt rules and regulations governing the administration of the Plan, all with
regard to Options granted to full time employees of the Company pursuant to
Section 3(a) below. Members of the Committee may receive Options under the
Plan only pursuant to the formula provisions of Section 3(b). The Committee
shall not administer the Plan insofar as it affects Optionees under Section
3(b), all such power being reserved to the Board of Directors.
No member of the Committee shall be liable for any action
taken or determination made in good faith with respect to the Plan or any
Options granted under it. No member of the Committee shall be liable for any
act or omission of any other member of the Committee or for any act or omission
on his own part, including, but not limited to, the exercise of any power and
discretion given to him under the Plan, except those resulting from his own
gross negligence or willful misconduct.
In addition to such other rights of indemnification as he may
have as a member of the Board of Directors or the Committee, and with respect
to administration of the Plan and
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<PAGE> 3
the granting of Options under it, each member of the Committee shall be
entitled without further act on his part to indemnity from the Company for all
expenses (including the amount of judgment and the amount of approved
settlements made with a view to the curtailment of costs of litigation, other
than amounts paid to the Company itself) reasonably incurred by him in
connection with or arising out of any action, suit or proceeding with respect
to the administration of the Plan or the granting of Options under it in which
he may be involved by reason of his being or having been a member of the
Committee, whether or not he continues to be such member of the Committee at
the time of the incurring of such expenses; provided, however, that such
indemnity shall not include any expenses incurred by such member of the
Committee (i) in respect of matters as to which he shall be finally adjudged in
such action, suit or proceeding to have been guilty of gross negligence or
willful misconduct in the performance of his duties as a member of the
Committee; or (ii) in respect of any matter in which any settlement is effected
for an amount in excess of the amount approved by the Company on the advice of
its legal counsel; and provided further that no right of indemnification under
the provisions set forth herein shall be available to or accessible by any such
member of the Committee unless within five (5) days after institution of any
such action, suit or proceeding he shall have offered the Company in writing
the opportunity to handle and defend such action, suit or proceeding at its own
expense. The foregoing right of indemnification shall inure to the benefit of
the heirs, executors or administrators of each such member of the Committee and
shall be in addition to all other rights to which such member of the Committee
would be entitled to as a matter of law, contract or otherwise.
3. GRANT OF OPTIONS.
(A) Key Employees. The Committee, subject to the
provisions of this Plan may, from time to time, grant such number of Options to
employees of the Company presently or hereafter holding the office of Assistant
Vice President or higher, as it may deem appropriate in order to carry out the
purpose of the Plan and with such terms and conditions, consistent with this
Plan as it may deem appropriate, subject to the availability of Options under
the Plan.
(B) Directors Who Are Not Full Time Employees. Current
directors who are not full time employees of the Company shall be granted,
subject to the provisions of this Plan, Options to purchase 8,000 shares of
common stock for each year of past service as a director (up to a maximum of
ten (10) years). New directors who are not full time employees of the Company
elected to serve on the board in the future shall be granted, subject to the
provisions of this Plan and the availability under the Plan of such Options,
Options to purchase 40,000 shares of Common Stock upon their election as such
(whether by the Board of Directors to fill an unexpired term or by the
shareholders). One-fifth of the Options initially granted under this Section
3(b) to Optionees who are directors on the date of the Plan's adoption by the
Board of Directors shall be exercisable immediately and a like number shall
become exercisable on each of the first four anniversaries of such date, if the
Optionee continues to be a director on that anniversary date. Options granted
to new directors after the date of the initial grants shall, in
-2-
<PAGE> 4
each case, be exercisable twenty (20%) percent immediately and a like number
shall become exercisable on each of the first four anniversaries of the date on
which they are granted if the Optionee continues to be a director on that
anniversary date. If an Optionee is no longer a director on an anniversary of
the grant of Options to that Optionee, all Options granted to that Optionee
which have not become exercisable shall terminate, shall be of no further force
or effect and shall be available for subsequent grant under the Plan.
4. EXERCISE PRICE . All Options granted under this Plan shall be
exercisable at a price (the "Option Price") which shall be the fair market
value of the Common Stock on the date the Option is granted.
5. OPTION SHARES. The number of shares of the Common Stock for
which Options may be issued under the Plan, (the "Option Shares") is 1,020,000
shares of Common Stock. All such Option Shares shall be subject to adjustment
as provided in Section 9. Option Shares shall be issued from authorized and
unissued Common Stock or Common Stock held in or hereafter acquired for the
treasury of the Company. If any outstanding Option granted under the Plan
expires, lapses or is terminated for any reason, the Option Shares allocable to
the unexercised portion of such Option may again be the subject of an Option
granted pursuant to the Plan.
6. TERM OF PLAN. This Plan is effective on the date of its
adoption by the Board of Directors. It shall terminate in accordance with
Section 7(j) below or, if shareholders approval is obtained, on the tenth
anniversary of its effective date or such earlier date as the Board of
Directors may determine. Any Option outstanding under the Plan at the time of
its termination shall remain in effect in accordance with its terms and
conditions and those of the Plan.
7. TERMS AND CONDITIONS OF OPTIONS. Options granted pursuant to
the Plan shall be evidenced by written documents (the "Option Agreements"),
which Option Agreements shall comply with and be subject to the following terms
and conditions and, for Options granted under Section 3(a), such other terms
and conditions which the Committee shall from time to time provide which are
not inconsistent with the terms of this Plan:
(A) NUMBER OF OPTIONS SHARES. Each Option Agreement
shall state the number of Option Shares to which it pertains.
(B) OPTION PRICE. Each Option Agreement shall state the
Option Price which shall be established in accordance with Section 4
above.
-3-
<PAGE> 5
(C) MEDIUM OF PAYMENT. An Optionee shall pay for Option
Shares (i) in cash, (ii) by check payable to the order of the Company,
or (iii) by a combination of the foregoing. Alternatively, payment
may be made all or in part in shares of the Common Stock held by the
Optionee for more than one year. If payment is made in whole or in
part in shares of the Common Stock, then the Optionee shall deliver to
the Company certificates registered in the name of such Optionee
representing shares of Common Stock legally and beneficially owned by
such Optionee, free of all liens, claims and encumbrances of every
kind, accompanied by stock powers duly endorsed in blank by the record
holder of the shares represented by such certificates.
(D) RESTRICTION ON RESALE. Upon each exercise of
Options, two certificates shall be issued to the Optionee representing
the total number of Option Shares underlying the exercised Options,
(i) one such certificate to be for that number of shares which would
yield at the average of the high and low price on the day of exercise
a number of dollars equal to (X) the exercise price per share times
the number of Options exercised plus (Y) the highest federal income
tax rate applicable on the date of exercise to ordinary income,
multiplied by the difference between the market value of the Options
exercised and (X) (the "Clean Certificate") and (ii) a second stock
certificate (the "Legended Certificate") representing the remaining
shares to be issued pursuant to the exercise. The Legended
Certificate shall bear a restrictive legend precluding resale of the
shares represented by it for eighteen months following its date of
issuance.
(E) TERMINATION OF OPTIONS. No Options shall be
exercisable after the first to occur of the following:
(I) Expiration of the Option term specified in
the Option Agreement, which for Options granted under Section
3(a) above shall be for such period not exceeding ten years
from the date of grant as shall be determined by the Committee
and for Options issued under Section 3(b) above shall be ten
years from the date of grant.
(II) The date, if any, set by the Committee for
Options issued under Section 3(a) above and by the Board of
Directors for Options issued under Section 3(b) above, under
terms specified in an Option Agreement, to be an accelerated
expiration date in the event of dissolution or liquidation of
the Company or consummation of any corporate combination
transaction in which the Company is not the surviving or
acquiring company or in which the Company becomes a
wholly-owned subsidiary of another company, provided an
Optionee who holds an Option is given written notice at least
thirty (30) days before the date so fixed;
-4-
<PAGE> 6
(III) Expiration of three (3) months from the date
the Optionee's employment by (if the Options are granted under
Section 3(a) of the Plan) or service as a director of (if the
Options are granted under Section 3(b) of the Plan) the
Company terminates for any reason other than the circumstances
described in (iv), (v) or (vi) below;
(IV) Expiration of one (1) year from the date the
Optionee's employment by (if the Options are granted under
Section 3(a) of the Plan) or service as a director of (if the
Options are granted under Section 3(b) of the Plan) the
Company terminates by reason of the Optionee's disability
(within the meaning of section 22(e)(3) of the Code) or death;
(V) Expiration of ten (10) days (which period may
be extended for Options issued under Section 3(a) above on a
case by case basis in the sole discretion of the Committee)
from the date the Optionee voluntarily terminates employment
by (if the Options are granted under Section 3(a) of the Plan)
or service as a director of (if the Options are granted under
Section 3(b) of the Plan) the Company (not including any
termination due to the death or disability of the Optionee);
or
(VI) A finding by the Committee in the case of
Options issued under Section 3(a) above or by the Board of
Directors (without participation by the director in question)
in the case of a director who received Options under Section
3(b) above, after full consideration of the facts presented on
behalf of both the Company and the Optionee, that an employee
Optionee has been discharged from employment by, or a director
has been removed from service as a director of, the Company
for Cause. For purposes of this paragraph "Cause" shall mean:
(A) a pattern of gross negligence or an act of willful
misconduct by Optionee in the performance of his duties to the
Company which has a material adverse effect on the Company's
reputation, business, properties or business relationships, or
(B) Optionee's conviction of a felony or misdemeanor (other
than a traffic violation) or of misappropriation of funds of
the Company, or (C) Optionee's appropriation to himself of a
corporate opportunity of the Company which Optionee fails to
make available to the Company within thirty (30) days after
notice thereof to Optionee from the Company, or (D) the
material breach by Optionee of his obligations under any
provision of any employment agreement he or she might have
with the Company, and the failure by Optionee to remedy such
breach within thirty (30) days after notice thereof to
Optionee. In the event of a finding that Optionee has been
discharged for Cause, in addition to immediate termination of
the Option, the Optionee shall automatically forfeit all
-5-
<PAGE> 7
Option Shares for which the Company has not yet delivered the
share certificates upon refund by the Company of the Option
Price.
Any Options which are not exercisable on the date that an
Officer/Optionee or a Director/Optionee loses his status as such,
shall terminate, be of no further force or effect and shall be
available for subsequent grant under this Plan.
(F) TRANSFERS. No Option granted under the Plan may be
transferred, except by will, by the laws of descent and distribution
or pursuant to a qualified domestic relations order as defined by the
Internal Revenue Code of 1986, as amended. During the lifetime of the
person to whom an Option is granted, such Options may be exercised
only by him or by his guardian or legal representative. No Option
Shares shall be disposed of by an Optionee for at least six (6) months
from the date the Option under which they were acquired, was granted.
(G) OTHER PROVISIONS. The Option Agreements may contain
such other provisions relating to Options issued under Section 3(a)
above, not inconsistent with the provisions of this Plan, as the
Committee shall deem advisable provided, however, Options granted
under Section 3(a) shall be exercisable (subject to any restrictions
contained in this Plan) twenty (20%) percent immediately and a like
number shall become exercisable on each of the first four
anniversaries of the date on which they are granted.
(H) AMENDMENT. The Committee shall have the right,
subject to the consent of the Optionee, to amend Option Agreements
relating to Options issued under Section 3(b) above, any terms so
amended to be consistent with the provisions of this Plan.
(I) MAXIMUM OPTIONS TO ANY EMPLOYEE. No employee may be
granted Options to purchase more than three hundred thousand (300,000)
shares of Common Stock.
(J) SHAREHOLDER APPROVAL. If the shareholders do not approve
the adoption of this Plan at the next meeting of the Company's
shareholders, or any adjournment thereof, held after the annual
meeting of the shareholders on May 16, 1995, any Options granted under
this Plan prior to such shareholders' approval shall be null and void.
No Options may be exercised prior to shareholder approval of the
adoption of this Plan.
8. EXERCISE. Exercise of the Options shall be subject to the
following requirements:
(A) No Option shall be deemed to have been exercised
prior to the receipt by the Company of written notice of such exercise
and of payment in full of the Option
-6-
<PAGE> 8
Price for the Option Shares to be purchased. Each such notice shall
specify the number of Option Shares to be purchased and shall (unless
the Option Shares are covered by a then current registration statement
under the Securities Act of 1933 (the "Securities Act")), contain the
Optionee's acknowledgment in form and substance satisfactory to the
Company that (i) such Option Shares are being purchased for investment
and not for distribution or resale (other than a distribution or
resale which, in the opinion of counsel satisfactory to the Company,
may be made without violating the registration provisions of the
Securities Act), (ii) the Optionee has been advised and understands
that (A) the Option Shares have not been registered under the
Securities Act and are "restricted securities" within the meaning of
Rule 144 under the Securities Act and are subject to restrictions on
transfer, and (B) the Company is under no obligation to register the
Option Shares under the Securities Act or to take any action which
would make available to the Optionee any exemption from such
registration, and (iii) such Option Shares may not be transferred
without compliance with all applicable federal and state securities
laws. Notwithstanding the above, should the Company be advised by
counsel that issuance of shares should be delayed pending (i)
registration under federal or state securities laws, or (ii) the
receipt of an opinion that an appropriate exemption therefrom is
available, the Company may defer exercise of any Option granted
hereunder until either such event has occurred. No Optionee shall
have any rights as a shareholder with respect to Option Shares until
the date of issuance of a stock certificate for such shares.
9. ADJUSTMENTS IN COMMON STOCK. Adjustments shall be made with
reference to the number of Option Shares underlying Options and the per share
exercise price therefor as provided in this section:
(A) In the event that the outstanding shares of Stock of
the Company are hereafter increased or decreased or changed into or
exchanged for a different number or kind of shares or other securities
of the Company or of another corporation, by reason of a
recapitalization, reclassification, stock split-up, combination of
shares, dividend or other distribution payable in capital stock,
appropriate adjustment shall be made by the Committee in the number
and kind of shares for the purchase of which Options may be granted
under the Plan. In addition, the Committee shall make appropriate
adjustment in the number and kind of shares as to which outstanding
Options, or portions thereof then unexercised, shall be exercisable,
to the end that the proportionate interest of the holder of the Option
shall, to the extent practicable, be maintained as before the
occurrence of such event; provided, however, that the Committee may
provide for a reapportionment of any shares not yet exercisable if
there is an imbalance in the number of shares exercisable during the
remaining exercise periods, if any, after such increase or decrease in
shares. Such adjustment in outstanding Options shall be made without
change in the total price applicable to the unexercised portion of the
Option but with a corresponding adjustment in the Option price per
share.
-7-
<PAGE> 9
(B) In the event of the dissolution or liquidation of the
Company, any Option granted and outstanding under this Plan shall
terminate as of the effective date of such action.
(C) In the event of a Reorganization (as hereinafter
defined) in which the Company is not the surviving or acquiring
company, or in which the Company is or becomes a wholly-owned
subsidiary of another company after the effective date of the
Reorganization, then
(I) If there is no plan or agreement respecting
the Reorganization ("Reorganization Agreement") or if the
Reorganization Agreement does not specifically provide for the
change, conversion or exchange of the shares under outstanding
and unexercised stock options for securities of another
corporation, any such stock options shall be deemed
exercisable for stock of the surviving corporation or parent
corporation of which the Company becomes a subsidiary at a
rate of exchange to be determined by the Committee, but in no
event shall the fair market value of the stock substituted for
the stock of the Company at the time of the Reorganization be
less than the fair market value of the stock of the Company at
the time of the Reorganization; or
(II) If there is a Reorganization Agreement and if
the Reorganization Agreement specifically provides for the
change, conversion or exchange of the shares under outstanding
and unexercised stock options for securities of another
corporation, then the Committee shall adjust the shares under
such outstanding and unexercised stock options (and shall
adjust the shares remaining under the Plan which are then
available to be optioned under the Plan, if the Reorganization
Agreement makes specific provision therefor) in a manner not
inconsistent with the provisions of the Reorganization
Agreement for the adjustment, change, conversion or exchange
of such stock and such Options.
(D) The term "Reorganization" as used in paragraph (c) of
this Section 9 shall mean any statutory merger, statutory
consolidation, sale of all or substantially all of the assets of the
Company, or sale, pursuant to an agreement with the Company, of
securities of the Company pursuant to which the Company is or becomes
a subsidiary of another company after the effective date of the
Reorganization.
(E) Adjustments and determinations under this Section 9
for Options issued under Section 3(a) above shall be made by the
Committee and for Options issued under Section 3(b) above shall be
made by the Board of Directors, whose decisions as to what adjustments
or determinations shall be made, and the extent thereof, shall be
final, binding and conclusive.
-8-
<PAGE> 10
10. AMENDMENT OF THE PLAN. Except as herein limited, the Board of
Directors of the Company may amend the Plan from time to time in such manner as
it may deem advisable, except that no such amendment shall substantially
adversely affect the rights of Optionees with regard to Options held by them;
provided, however, the Board of Directors of the Company may not, without
obtaining approval of the shareholders of the Company as required by Rule
16b-3(b) under the Securities Exchange Act of 1934 (the "Act"), amend this Plan
in any respect covered by (A), (B) or (C) of Rule 16b- 3(b)(2) of the Act; nor
may any provisions of the Plan described in Rule 16b-3(c)(2)(ii)(A) be amended
more than once every six months, other than to comport with changes in the
Internal Revenue Code, the Employee Retirement Security Act, or the rules
thereunder.
11. SECURITIES LAW RESTRICTIVE LEGEND. Share certificates issued
to Optionees upon exercise of Options under the Plan shall contain such
restrictive legends as the Committee, with reference to Options issued under
Section 3(a) above or the Board of Directors with reference to Options issued
under Section 3(b) above, may deem appropriate regarding compliance with
securities laws.
12. CONTINUED EMPLOYMENT. The grant of an Option pursuant to the
Plan shall not be construed to imply or to constitute evidence of any
agreement, express or implied, on the part of the Company to retain the
Optionee in the employ of the Company or as a member of the Company's Board of
Directors, whichever the case may be. Rights to terminate the employment of
any Optionee or the service of any Optionee as a member of the Company's Board
of Directors shall not be diminished or affected by reason of the fact that an
Option has been granted to him.
13. WITHHOLDING OF TAXES. Whenever the Company proposes or is
required to issue or transfer Option Shares, the Company shall have the right
to (a) require the recipient or transferee to remit to the Company an amount
sufficient to satisfy any federal, state and/or local withholding tax
requirements prior to the delivery or transfer of any certificate or
certificates for such Option Shares, or (b) take whatever action it deems
necessary to protect its interests.
14. CHANGE IN CONTROL. Any other provisions contained herein to
the contrary notwithstanding, all Options granted by the Committee to
Officer/Optionees shall become exercisable immediately in the event of a change
in control of the Company. For purposes of this Plan, a "change in control of
the Company" shall be deemed to have occurred if (A) any "person" (as such term
is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or a corporation
owned, directly or
-9-
<PAGE> 11
indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 25% or more of the
combined voting power of the Company's then outstanding securities; or (B)
during any period of two consecutive years (not including any period prior to
the adoption of this Plan), individuals who at the beginning of such period
constitute the Board and any new director (other than a director designated by
a person who has entered into an agreement with the Company to effect a
transaction described in clauses (A), (C) or (D) of this Subsection) whose
election by the Board or nomination for election by the Company's stockholders
was approved by a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof; or (C) the shareholders of the Company
approve a merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least 75% of the combined voting power
of the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or (D) the shareholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of all or substantially all the
Company's assets.
15. TERMINOLOGY. The headings in this Plan are solely for the
convenience of reference and shall be given no effect in the construction or
interpretation of this Plan. Wherever required by context, any gender shall
include any other gender, the singular shall include the plural and the plural
shall include the singular.
Adopted by the Board of Directors on the 16th day of May, 1995.
By /s/ J. D. MACCHIA
-----------------------------------
J. D. Macchia, Chairman
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<PAGE> 1
CLARIFICATION TO THE
GAINSCO, INC.
EXECUTIVE INCENTIVE COMPENSATION PLAN
WHEREAS, GAINSCO, INC. ("GAINSCO") has adopted and continues to
maintain a plan providing incentive compensation for a select group of its
executives which is entitled the GAINSCO Executive Incentive Compensation Plan
(the "Plan");
AND WHEREAS, the Plan is attached to and its terms are incorporated
into the Employment Agreement (the "Agreement") between GAINSCO and Joseph D.
Macchia (the "Employee"), which was executed on July 5, 1979;
AND WHEREAS, GAINSCO has administered the Plan in a consistent manner
over the years to reflect the true intent of the parties relative to the
entitlement of the Employee to the benefits provided by the Plan and the amount
of those benefits.
AND WHEREAS, certain ambiguous provisions of the Plan could possibly be
misinterpreted to represent some intent or meaning inconsistent with the
original intent and meaning of GAINSCO relative to the entitlement of the
Employee to the benefits provided by the Plan and the amount of those benefits.
NOW THEREFORE, the Plan is hereby corrected as follows to remove any
ambiguity from the terms of the Plan and to make the language of the Plan
accurately reflect the original meaning and intent of GAINSCO relative to the
entitlement of the Employee to the benefits provided by the Plan and the amount
of those benefits as reflected by the manner in which GAINSCO has administered
the Plan over the years.
The recital paragraph of the Plan which precedes Paragraph I is hereby
deleted in its entirety and the following is substituted in its place:
The following plan of executive incentive
compensation shall become effective for the calendar year 1988
and subsequent years unless rescinded or modified by the Board
of Directors. However, to the extent that this plan is or has
been incorporated into the terms of the Employment Agreement
between GAINSCO, INC. and Joseph D. Macchia (the "Employee:"),
and the terms of such Employment Agreement provide that the
Employee's Base Share of the Fund created under this plan
shall not be reduced without the consent of the Employee, then
the Board of Directors does not have the power to rescind,
modify or terminate the plan or take any other action,
relative to the administration of the plan which would have
the effect of reducing the Employee's Base
<PAGE> 2
Share of the Fund created under this plan without the consent
of the Employee.
The Executive Incentive Compensation Committee shall
be made up of three persons, consisting of the President and
two members of the Board of Directors. A simple majority vote
shall be necessary for administering the plan.
EXECUTED on behalf of GAINSCO, INC. as of the 16th day of May, 1995.
By: S/Jack L. Johnson
------------------------------
Jack L. Johnson
Senior Vice President
<PAGE> 1
Exhibit 22.2
S U B S I D I A R I E S O F R E G I S T R A N T
[FLOW CHART]
* GAINSCO Service Corp. owns the charter and management contract, thereby
giving it 100% control of GAINSCO County Mutual Insurance Company.
<PAGE> 1
Exhibit 24.2
[KPMG PEAT MARWICK LLP]
CONSENT OF INDEPENDENT AUDITORS
TO INCORPORATION BY REFERENCE
The Board of Directors
GAINSCO, Inc.:
We consent to incorporation by reference in the registration statement
(No. 33-48634) on Form S-8 of GAINSCO, INC. of our report dated February 26,
1996, relating to the consolidated balance sheets of GAINSCO, INC. and
subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1995, and all related
schedules, which report appears in the December 31, 1995 annual report on Form
10-K of GAINSCO, INC.
/s/
--------------------------------
KPMG Peat Marwick LLP
Dallas, Texas
March 25, 1996
<PAGE> 1
Exhibit 25.1
SPECIAL POWER OF ATTORNEY
THE STATE OF TEXAS )
) KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF DALLAS )
THAT I, the undersigned, of Dallas County, Texas, have made, constituted
and appointed and by these presents do make, constitute and appoint JOSEPH D.
MACCHIA, DANIEL J. COOTS and SAM ROSEN, and each of them severally, my true and
lawful attorneys and agents to execute in my name, place and stead in my
capacity as Director of GAINSCO, INC. the Annual Report on Form 10-K of
GAINSCO, INC. ("Form 10-K") for the fiscal year ended December 31, 1995, each
of said attorneys and agents to have power to act with or without the other and
to have full power and authority to do and perform in the name of and on
behalf of the undersigned every act whatsoever necessary or advisable to be
done in the premises as fully and to all intents and purposes as the
undersigned might or could do in person, such power to extend to the execution
of any amendment to the Form 10-K.
WITNESS MY HAND this 20th day of March, 1996
/s/ John H. Williams
-----------------------
JOHN H. WILLIAMS
<PAGE> 2
Exhibit 25.1
SPECIAL POWER OF ATTORNEY
THE STATE OF MINNESOTA )
) KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF HENNEPIN )
THAT I, the undersigned, of Hennepin County, Minnesota, have made,
constituted and appointed and by these presents do make, constitute and appoint
JOSEPH D. MACCHIA, DANIEL J. COOTS and SAM ROSEN, and each of them severally,
my true and lawful attorneys and agents to execute in my name, place and stead
in my capacity as Director of GAINSCO, INC. the Annual Report on Form 10-K of
GAINSCO, INC. ("Form 10-K") for the fiscal year ended December 31, 1995, each
of said attorneys and agents to have power to act with or without the other and
to have full power and authority to do and perform in the name of and on behalf
of the undersigned every act whatsoever necessary or advisable to be done in
the premises as fully and to all intents and purposes as the undersigned might
or could do in person, such power to extend to the execution of any amendment
to the Form 10-K.
WITNESS MY HAND this 20th day of March, 1996.
/s/ Joel C. Puckett
------------------------
JOEL C. PUCKETT
<PAGE> 3
Exhibit 25.1
THE STATE OF TEXAS )
) KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF DALLAS )
THAT I, the undersigned, of Dallas County, Texas, have made,
constituted and appointed and by these presents do make, constitute and appoint
JOSEPH D. MACCHIA, DANIEL J. COOTS and SAM ROSEN, and each of them severally,
my true and lawful attorneys and agents to execute in my name, place and stead
in my capacity as Director of GAINSCO, Inc. the Annual Report on Form 10-K of
GAINSCO, INC. ("Form 10-K") for the fiscal year ended December 31, 1995, each
of said attorneys and agents to have power to act with or without the other and
to have full power and authority to do and performa in the name of and on
behalf of the undersigned every act whatsoever necessary or advisable to be
done in the premises as fully and to all intents and purposes as the
undersigned might or could do in person, such power to extend to the execution
of any amendment to the Form 10-K.
WITNESS MY HAND this 20th day of March, 1996.
/s/ Harden H. Wiedemann
--------------------------
HARDEN H. WIEDEMANN
<PAGE> 4
Exhibit 25.1
SPECIAL POWER OF ATTORNEY
THE STATE OF MICHIGAN )
) KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF ANTRIM )
THAT I, the undersigned, of Antrim County, Michigan, have made,
constituted and appointed and by these presents do make, constitute and appoint
JOSEPH D. MACCHIA, DANIEL J. COOTS and SAM ROSEN, and each of them severally,
my true and lawful attorneys and agents to execute in my name, place and
stead in my capacity as Director of GAINSCO, INC. the Annual Report on Form
10-K of GAINSCO, INC. ("Form 10-K") for the fiscal year ended December 31,
1995, each of said attorneys and agents to have power to act with or without
the other and to have full power and authority to do and perform in the name of
and on behalf of the undersigned every act whatsoever necessary or advisable to
be done in the premises as fully and to all intents and purposes as the
undersigned might or could do in person, such power to extend to the execution
of any amendment to the Form 10-K.
WITNESS MY HAND this 20th day of MARCH, 1996.
/s/ Norman J.E. Roe
----------------------
NORMAN J.E. ROE
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<FISCAL-YEAR-END> DEC-31-1995
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