<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, 1996
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 New York 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 (17,773,930 shares) as of the close of the business on February 28,
1997 was $162,187,111 (based on the closing sale price of $9.125 per share).
As of February 28, 1997, there were 21,080,407 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 1997 Annual Meeting to be held May 12, 1997 III
Exhibits to Form 10-K Annual Reports filed with the SEC for fiscal years ended
December 31, 1988, 1990, 1991, 1992, 1993, 1994 and 1995 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 45 states on an admitted basis. The Company markets its lines of insurance
through 203 non-affiliated general agents' offices. Approximately 73% of the
Company's gross premiums written during 1996 resulted from risks located in
California, Florida, Georgia, Illinois, 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.
2
<PAGE> 3
The Company is currently writing 18 classes of general liability on a
claims-made basis. The remaining classes of general liability are written on an
occurrence basis. At December 31, 1996, approximately 2% 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 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.
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 three 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
------------------------------------------------------------------
1996 1995 1994
--------------------- -------------------- ---------------------
Gross Premiums Written: (Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial Auto $ 62,328 57% 62,517 58% 58,117 59%
Auto Garage 26,871 24% 25,270 23% 20,073 20%
General Liability 19,744 18% 19,052 18% 18,564 19%
Other Lines 1,057 1% 1,233 1% 1,410 2%
-------- --- ------- --- ------ ---
Total $110,000 100% 108,072 100% 98,164 100%
======== === ======= === ====== ===
Policies in Force (End of Period) 35,903 34,309 30,691
</TABLE>
3
<PAGE> 4
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.
The Company writes casualty policy limits of $1,000,000. For policies with
an effective date occurring from 1992 through 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 occurring in 1995 or 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 $300,000 for policies with an effective date occurring from 1992
through 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.
4
<PAGE> 5
The Company is operating under excess casualty reinsurance treaties with
three reinsurance companies, each of which reinsures a given percentage of
ceded risks. The Company's excess reinsurance is provided in varying amounts by
these reinsurers which are 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
----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Excess Reinsurer
Dorinco Reinsurance Company 50% 50% 50%
Great Lakes American Reinsurance Company 40% -- --
PMA Reinsurance Corporation -- 50% 50%
Republic Western Insurance Company 10% -- --
100% 100% 100%
</TABLE>
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.
During 1996 and 1995, the Company entered into reinsurance fronting
arrangements with three non-affiliated insurance companies. The Company 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 (in the form of trust agreements and/or letters of credit) be
maintained to assure payment of the unearned premiums and unpaid claims and
claim adjustment expenses relating to the risks insured under these fronting
arrangements.
The Company has signed contracts in force for its reinsurance treaties for
all years through 1996. The Company has written confirmations from reinsurers
for 1997 regarding the basic terms and provisions under which they will assume
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.
Marketing and Distribution
The Company markets its insurance products through 203 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 independent
local agents or brokers, commonly referred to as retail agents, who are in
direct contact with insurance buyers.
5
<PAGE> 6
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. Strict financial solvency and
liquidity levels must be maintained by each general agent. 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 45 states and plans to seek authority to write insurance on
an admitted basis in 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 reserve results.
6
<PAGE> 7
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
--------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
Unpaid claims and claim adjustment expenses,
beginning of period $ 95,011 80,729 72,656
Less: Ceded unpaid claims and claim adjustment
expenses, beginning of period 24,650 19,972 16,701
-------- ------ ------
Net unpaid claims and claim adjustment expenses,
beginning of period 70,361 60,757 55,955
-------- ------ ------
Net claims and claim adjustment expenses
incurred related to:
Current period 53,037 48,064 37,571
Prior periods 5,342 401 3,618
-------- ------ ------
Total net claims and claim adjustment expenses
incurred 58,379 48,465 41,189
-------- ------ ------
Net claim and claim adjustment expenses paid
related to:
Current period 17,178 14,131 12,297
Prior periods 32,584 26,953(1) 24,090
-------- ------ ------
Total net claim and claim adjustment expenses
paid 49,762 41,084 36,387
-------- ------ ------
Commutation of reinsurance treaties -- (2,223)(1) --
-------- ------ ------
Net unpaid claims and claim adjustment expenses,
end of period 78,978 70,361 60,757
Plus: Ceded unpaid claims and claim adjustment
expenses, end of period 26,713 24,650 (1) 19,972
-------- ------ ------
Unpaid claims and claim adjustment expenses, end
of period $105,691 95,011 80,729
======== ====== ======
</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.
The development in claims and claim adjustment expenses incurred from prior
periods was largely related to commercial auto claims occurring in the 1995 and
1994 years.
7
<PAGE> 8
The following table sets forth, as of December 31, 1996, 1995, and 1994,
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
--------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
Net reserves reported on a SAP basis $ 79,976 71,169 61,364
Adjustments:
Estimated recovery for salvage and subrogation (998) (808) (607)
-------- ------ ------
Net reserves reported on a GAAP basis $ 78,978 70,361 60,757
======== ====== ======
</TABLE>
The following table represents the development of GAAP balance sheet
reserves for the period 1986 through 1996. The top line of the table shows the
reserves for unpaid claims and claim adjustment expenses for the current and
all 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 six years later (as of December 31, 1996) was
$29,073,000 of which $28,399,000 has been paid, leaving a net reserve of
$674,000 for claims and claim adjustment expenses in 1990 and prior years
remaining unpaid as of December 31, 1996.
"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 $167,000 net deficiency from December 31, 1990
to December 31, 1996 (six 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.
8
<PAGE> 9
<TABLE>
<CAPTION>
As of and for the years ended December 31
-------------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Unpaid claims & claim
adjustment expenses:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross 16,335 27,352 29,538 35,744 45,214 53,148 66,517 72,656 80,729 95,011 105,691
Ceded 8,863 18,865 15,005 15,695 16,308 15,105 16,594 16,701 19,972 24,650 26,713
Net 7,472 8,487 14,533 20,049 28,906 38,043 49,923 55,955 60,757 70,361 78,978
Net cumulative paid as
of:
One year later 2,356 3,766 4,902 7,545 10,251 15,037 22,470 24,090 24,730 32,584
Two years later 4,741 5,895 8,660 12,340 18,145 26,819 37,032 39,182 41,874
Three years later 6,061 7,332 10,642 16,413 23,255 33,879 45,884 48,688
Four years later 6,947 8,069 12,606 19,085 26,171 37,292 51,082
Five years later 7,300 8,721 13,815 20,633 26,970 39,999
Six years later 7,647 9,064 14,249 21,020 28,399
Seven years later 7,854 9,312 14,140 21,700
Eight years later 7,999 9,329 14,632
Nine years later 7,997 9,686
Ten years later 8,253
Net reserves
reestimated as of:
One year later 7,239 8,869 13,645 20,060 28,354 38,528 54,150 59,573 61,157 75,703
Two years later 7,512 9,166 13,694 20,566 28,479 42,235 57,223 59,922 62,296
Three years later 8,055 9,154 14,024 21,214 30,035 43,217 57,459 59,247
Four years later 8,057 9,355 14,675 22,431 30,129 42,493 56,832
Five years later 8,214 9,543 15,248 22,332 29,022 42,191
Six years later 8,186 9,672 15,174 22,034 29,073
Seven years later 8,206 9,606 14,572 21,965
Eight years later 8,237 9,509 14,753
Nine years later 8,220 9,787
Ten years later 8,456
Net cumulative
redundancy
(deficiency) (984) (1,300) (220) (1,916) (167) (4,148) (6,909) (3,292) (1,539) (5,342)
</TABLE>
The Company has an indicated deficiency of approximately 8% of unpaid claims
and claim adjustment expenses (C & CAE) for the 1995 year for reasons mentioned
previously. Net unpaid C & CAE at December 31, 1996 was approximately
$78,978,000, which the Company believes is adequate. During 1996 the Company
further refined its reserving methodology which should enable the Company to
maintain a +/- 5% tolerance range of initial unpaid C & CAE in the future.
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:
9
<PAGE> 10
<TABLE>
<CAPTION>
Years ended December 31
--------------------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
COMPANY RATIOS
Claims Ratio 54.3% 48.7% 47.9% 51.4% 47.7%
Expense Ratio 34.5% 34.2% 34.4% 33.9% 33.8%
----- ----- ----- ----- -----
Combined Ratio 88.8% 82.9% 82.3% 85.3% 81.5%
===== ===== ===== ===== =====
INDUSTRY RATIOS (1)
Claims Ratio 79.8% 78.9% 81.1% 79.5% 88.1%
Expense Ratio 26.2% 26.1% 26.0% 26.2% 26.5%
----- ----- ----- ----- -----
Combined Ratio 106.0% 105.0% 107.1% 105.7% 114.6%
===== ===== ===== ===== =====
</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. 1996 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 25.5 percentage points in 1996 and 30.2 percentage
points in 1995, when compared to the industry) which results in the highly
favorable combined ratio variances of an estimated 17.2 and 22.1 percentage
points in 1996 and 1995, respectively. If the development of unpaid C & CAE was
applied to the year in which unpaid C & CAE was initially established, the
Company would still have a SAP combined ratio at or below 89% for every year
1986 through 1996. 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
10
<PAGE> 11
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:
<TABLE>
<CAPTION>
Years ended December 31
------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Claims Ratio 54.7% 49.8% 48.8% 51.7% 48.2%
Expense Ratio 33.8% 33.1% 34.4% 33.0% 33.6%
Combined Ratio 88.5% 82.9% 83.2% 84.7% 81.8%
</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 years ended December 31
------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(Amounts in thousands, except ratios)
<S> <C> <C> <C> <C> <C>
Net premiums written $ 109,227 108,689 91,170 79,278 81,250
Policyholders' surplus $ 59,012 50,140 42,350 35,906 27,291
Ratio 1.85 to 1 2.17 to 1 2.15 to 1 2.21 to 1 2.98 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, 1996 and 1995, 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.
11
<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
---------------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
Average investments (1) $192,221 170,881 148,688 128,632 102,254
Investment income 9,161 8,157 6,868 6,159 5,472
Return on average investments (2) 4.8% 4.8% 4.6% 4.8% 5.4%
Taxable equivalent return on
average investments 6.6% 6.6% 6.4% 6.6% 7.3%
Net realized gains 472 108 135 4 172
Net unrealized gains (losses) $ 1,559 2,772 (1,829) 2,395 2,270
</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
---------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
(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 held to maturity:
U.S. government securities $ 7,731 7,748 9,606 9,733 10,555 10,213
Tax-exempt state and
municipal bonds 97,199 97,977 87,696 88,689 113,088 111,687
Bonds available for sale:
Tax-exempt state and
municipal bonds 76,880 77,644 77,478 79,130 25,779 25,693
Certificates of deposit 595 595 620 620 570 570
-------- -------- -------- -------- -------- --------
Total fixed maturities 182,405 183,964 175,400 178,172 149,992 148,163
-------- -------- -------- -------- -------- --------
Short-term investments 20,662 20,662 5,975 5,975 10,394 10,394
-------- -------- -------- -------- -------- --------
Total investments $203,067 204,626 181,375 184,147 160,386 158,557
======== ======== ======== ======== ======== ========
</TABLE>
12
<PAGE> 13
The maturity distribution of the Company's investments in fixed maturities
is as follows:
<TABLE>
<CAPTION>
As of December 31
------------------------------------------------------------------
1996 1995
-------------------------- ------------------------
(Dollar amounts in thousands)
Amortized Amortized
Cost Percent Cost Percent
---- ------- ---- -------
<S> <C> <C> <C> <C>
Within 1 year $ 18,754 10.3% $ 17,781 10.1%
Beyond 1 year but within 5 years 135,052 74.1% 133,947 76.4%
Beyond 5 years but within 10 years 23,059 12.6% 16,572 9.5%
Beyond 10 years but within 20 years 5,540 3.0% 6,553 3.7%
Beyond 20 years - - 547 .3%
---------- ----- --------- -----
$ 182,405 100.0% $ 175,400 100.0%
========== ===== ========= =====
</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.
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 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
13
<PAGE> 14
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, 1996, the Company employed 189 persons, of which 13
were officers, 154 were staff and administrative personnel, and 22 were
part-time employees.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the executive officers of the Company as of
February 28, 1997 is set forth below:
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Joseph D. Macchia 61 Chairman of the Board, President and Chief Executive
Officer
Jack L. Johnson 63 Senior Vice President, Assistant Secretary and Director
Daniel J. Coots 45 Senior Vice President, Treasurer and Chief Financial
Officer
Norman Alberigo 54 Vice President
Mark D. Brissman 41 Vice President
Richard M. Buxton 48 Vice President
J. Landis Graham 42 Vice President
Richard A. Laabs 41 Vice President
Carolyn E. Ray 44 Vice President
Sam Rosen 61 Secretary and Director
</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 and became a Director in 1993. 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.
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.
14
<PAGE> 15
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. Richard M. Buxton has served as Vice President of the Company since
December of 1996. From 1986 to 1996 Mr. Buxton was with KN Energy, Inc. in the
position of Vice President of Strategic Planning and Financial Services.
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.
Mr. Richard A. Laabs has served as Vice President of the Company since
June of 1996. From August of 1995 to May of 1996, Mr. Laabs served as Assistant
Vice President of the Company. From 1990 to 1995, Mr. Laabs was with Scottsdale
Insurance Company in the position of Senior Information Systems Services
Director. Mr. Laabs has been engaged in the property and casualty insurance
business since 1978.
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 and a Director 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 35,000
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 or results of operations. 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 New York 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 through July
30, 1996 and by the New York Stock Exchange from July 31, 1996 through December
31, 1996. The prices reported reflect actual sales transactions on these
exchanges.
<TABLE>
<CAPTION>
High Low
---- ---
<C> <C> <C>
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
1996 First Quarter 11 3/4 9 3/4
1996 Second Quarter 11 5/8 9 7/8
1996 Third Quarter 10 3/4 9 3/8
1996 Fourth Quarter 10 3/4 8 3/4
</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. In August of 1996, the Board of Directors increased the quarterly
cash dividend to $.015 per share. Cash dividends of $.01 per share were granted
to shareholders of record on March 31, June 30, September 30 and December 31,
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, March 29 and
June 28, 1996. Cash dividends of $.015 per share were granted to shareholders
of record on September 30 and December 31, 1996. On February 17, 1997, the
Company declared a $.015 per share cash dividend payable to shareholders of
record on March 31, 1997. 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, 1994 and 1995. In November, 1995, the Board of Directors
discontinued the semi-annual stock dividends.
As of February 28, 1997, there were 550 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, 1996 and 1995, and the
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996, 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
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- -------- ------ ------- -----
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Data:
Gross premiums written (1) $ 110,000 108,072 98,164 85,373 83,475
Ceded premiums written 1,749 1,968 8,710 7,412 3,418
------- -------- ------ ------ ------
Net premiums written 108,251 106,104 89,454 77,961 80,057
Increase in unearned premiums (1,458) (8,849) (5,059) (2,099) (2,874)
------- ------- ------ ------ ------
Net premiums earned 106,793 97,255 84,395 75,862 77,183
Net investment income 9,161 8,157 6,868 6,159 5,472
Net realized gains 472 108 135 4 172
Insurance services 2,379 2,183 2,056 2,388 2,876
------- ------- ------ ------ ------
Total revenues 118,805 107,703 93,454 84,413 85,703
------- ------- ------ ------ ------
Claims and claim adjustment expenses 58,379 48,465 41,189 39,239 37,220
Policy acquisition costs 23,828 19,679 17,392 16,183 17,592
Underwriting and operating expenses 15,499 15,579 14,505 12,604 13,036
------- ------- ------ ------ ------
Total expenses 97,706 83,723 73,086 68,026 67,848
------- ------- ------ ------ ------
Income before income taxes 21,099 23,980 20,368 16,387 17,855
Income tax expense 5,079 6,352 5,199 3,147 4,676
------- ------- ------ ------ ------
Net income (2) $ 16,020 17,628 15,169 13,240 13,179
======= ======= ====== ====== ======
Per Share Data (3):
Net income $ .74 .81 .70 .61 .60
=== === === === ===
GAAP Operating Ratios:
Claims ratio 54.7% 49.8% 48.8% 51.7% 48.2%
Expense ratio 33.8% 33.1% 34.4% 33.0% 33.6%
---- ---- ---- ---- ----
Combined ratio 88.5% 82.9% 83.2% 84.7% 81.8%
==== ==== ==== ==== ====
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
As of December 31
----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (4):
Investments $ 203,831 183,027 160,300 136,989 120,275
Premiums receivable 15,825 15,914 12,262 10,888 9,140
Ceded unpaid claims and claim
adjustment expenses 26,713 24,650 19,972 16,701 16,594
Ceded unearned premiums 16,280 6,008 5,977 5,536 4,692
Deferred policy acquisition costs 12,634 12,115 9,831 8,509 8,203
Property and equipment 6,981 6,562 6,336 6,274 5,508
Total assets 296,846 264,156 230,576 199,187 173,839
Unpaid claims and claim
adjustment expenses 105,691 95,011 80,729 72,656 66,517
Unearned premiums 65,255 53,525 44,645 39,145 36,202
Note payable - 1,750 3,500 4,500 4,500
Total liabilities 187,493 164,714 149,029 132,369 118,958
Shareholders' equity 109,353 99,442 81,547 66,818 54,881
Shareholders' equity per share (5) $ 5.19 4.62 3.79 3.14 2.59
Return on beginning equity 16% 22% 23% 24% 31%
== == == == ==
</TABLE>
(1) Excludes premiums of $31,603,000 in 1996, $8,893,000 in 1995, $5,056,000
in 1994, $5,418,000 in 1993 and $6,942,000 in 1992 from the Company's
fronting arrangements and the commercial automobile plans of Arkansas,
California, Louisiana, Mississippi, and Pennsylvania under which the
Company is a servicing carrier.
(2) Includes after tax net realized gains of $307,000, $70,000, $87,000,
$3,000 and $114,000 for 1996, 1995, 1994, 1993 and 1992, 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 and one 5% and one 50% in 1992.
(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 for 1996 decreased 9% to $16,019,567, or $.74 per share
compared to 1995 net income of $17,627,855, or $.81 per share and 1994 net
income of $15,168,800, or $.70 per share. The Company recorded a 16% return on
beginning equity and a GAAP combined ratio of 88.5% in 1996.
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 revenues from the computer software, the plan servicing, the premium
finance and the fronting reinsurance operations. The expense item "Underwriting
and operating expenses" includes the operating expenses of these operations.
RESULTS OF OPERATIONS
Gross premiums written in 1996 of $110,000,103 were 2% above the
$108,071,871 recorded in 1995. In 1995, gross premiums written increased 10%
over the 1994 level. Texas accounted for the small growth rate by contributing
4 percentage points (points) of decrease. The following table compares the
major product lines between the years for gross premiums written:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------- -------------------------- -------------------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial auto $ 62,328 57% $ 62,517 58% $ 58,117 59%
Auto garage 26,871 24% 25,270 23% 20,073 20%
General liability 19,744 18% 19,052 18% 18,564 19%
Other lines 1,057 1% 1,233 1% 1,410 2%
------- --- ------- --- ------ ---
Total $ 110,000 100% $ 108,072 100% $ 98,164 100%
======= === ======= === ====== ===
</TABLE>
COMMERCIAL AUTO was flat in 1996 from 1995 after recording a 8% increase
in 1995 from 1994. Kentucky contributed 5 points of increase, but Texas and
Pennsylvania accounted for 4 points and 2 points of decrease, respectively. The
AUTO GARAGE product line produced a 6% increase in 1996 after a 26% increase in
1995. Florida, Kentucky and Pennsylvania were all up significantly in 1996 and
Texas was not down materially. The GENERAL LIABILITY line recorded an increase
of 4% in 1996 after an increase of 3% in 1995. California and Florida produced
6 points and 5 points of increase, respectively, while Texas recorded 9 points
of decrease. For 1996, gross premiums written percentages by significant
state/product line are as follows: Texas commercial auto (20%), Kentucky
commercial auto (8%), Pennsylvania commercial auto (6%), Texas general
liability (5%), and Florida auto garage (5%) with no other individual
state/product line comprising 5% or more. The persistency rate decreased to 45%
in 1996 from 47% in 1995. Premiums earned increased 10% in 1996 to $106,792,928
and increased 15% in 1995 to $97,254,816 as a direct result of the continued
increase in writings.
19
<PAGE> 20
Net investment income increased 12% in 1996 over 1995 and increased 19% in
1995 over 1994. These increases are the result of growth in the portfolio due
to continued positive cash flows from operations. The return on average
investments for 1996 is 4.7% versus 4.8% in 1995 and 4.6% in 1994. 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, 1996, 86% of the
Company's investments were in investment grade tax-exempt bonds with an average
maturity of approximately 3.4 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 1996 and
1995 and 6.4% in 1994. 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, 1996, approximately 4% of the Company's investments were in
U.S. Treasury securities and 10% 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.
The Company recorded net realized capital gains of $471,956 in 1996 versus
$108,024 in 1995. All of these gains were generated from bonds available for
sale and were to some extent the result of extending durations.
Insurance services revenues increased $196,645 from 1995 to 1996 following
an increase of $126,152 in 1995 from 1994. The table below presents the
components.
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Computer software $ 473,499 $ 475,317 $ 559,554
Premium finance 345,679 281,383 153,736
Plan servicing 1,187,656 1,335,852 1,311,011
Fronting fees 343,266 62,428 --
Other 29,054 27,529 32,056
---------- ---------- ----------
Total $2,379,154 $2,182,509 $2,056,357
========== ========== ==========
</TABLE>
Revenues in the computer software operation were flat for 1996 following a
15% decrease in 1995. New management brought in during the third quarter of
1995 has improved this operation and revenues are expected to show moderate
increases in the future.
Revenues from the premium finance operation are up 23% in 1996 over the
1995 level which was 83% above the 1994 level. Marketing efforts implemented in
1995 and continued in 1996 account for the increases in both years. Amounts
financed in 1996 were 5% above 1995 which had increased 84% over 1994. Premium
finance notes receivable were approximately $1,991,000 at December 31, 1996
versus $2,015,000 at December 31, 1995 and the average return was 17% for 1996
versus 19% in 1995 and 18% in 1994.
20
<PAGE> 21
Plan servicing revenues from commercial automobile plans decreased 11% in
1996 from 1995 following a 2% increase in 1995. Written premiums are 28% behind
last year as a result of decreases in the three largest state plans. These
plans are depopulating as risks are moving into the voluntary market due to
lower pricing. The Company continues to pursue management contracts with other
states to administer their commercial automobile plans and is seeking a larger
participation in the existing state plans.
Fronting fee revenues increased $280,838 during 1996 as a result of
significant growth in the two fronting reinsurance accounts initiated in 1995
and the addition of a third account in 1996.
Claims and claim adjustment expenses (C & CAE) increased $9,913,707 in
1996 over 1995 and $7,276,443 in 1995 over 1994. The C & CAE ratio was 54.7% in
1996, 49.8% in 1995 and 48.8% in 1994. The increase in the C & CAE ratio of 4.9
percentage points in 1996 is largely a result of development of commercial auto
claims which occurred in 1995 and 1994. 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. 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.
The increase in commissions from 1995 to 1996 is related to the increase in
gross premiums written and to a decrease of approximately $1,669,000 in
commission income from reinsurance treaties. Commissions increased in 1995 over
1994 as a result of the increase in written premiums between these years and as
a result of additional commission income of approximately $2,164,000 recorded
in 1994 from the 5% quota share treaty (it was not renewed in 1995). The ratio
of commissions to gross premiums written increased to 22% in 1996 from 20% in
1995 and from the 19% level in 1994 as a result of the decrease in commission
income in 1996 and 1995 discussed previously. The ratio of commissions to
premiums earned was 23% for 1996 and 1995 as compared to 22% for 1994. 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 $519,257,
$2,284,138 and $1,321,946 for 1996, 1995 and 1994, 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 net 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 25.8%, 25.5% and 25.4% at
December 31, 1996, 1995 and 1994, respectively.
Underwriting and operating expenses were down slightly in 1996 from 1995,
and they were up 7% in 1995 over 1994. As a percent of operating revenues
(premiums earned and insurance services revenues) the ratio continued to
decrease to 14.2% in 1996 versus 15.7% in 1995 and 16.8% in 1994. The decrease
in 1996 was the result of savings from variable expenses of personnel and the
plan servicing operation.
21
<PAGE> 22
The effective tax rate of the Company was 24% in 1996 and 26% in 1995 and
1994. The lower rate in 1996 is largely the result of tax-exempt net investment
income representing a larger portion of income in 1996 than in previous years.
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 provision for income taxes is included in Note
5 of Notes to Consolidated Financial Statements.
For 1997 the Company is targeting premiums written to be within a $115-125
million range with a GAAP combined ratio of 85-90% and a return on beginning
equity of better than 18%. 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, 1996, the
Company held short-term investments and cash of $21,707,022 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 2.9 years. The fair value of the fixed maturity
portfolio at December 31, 1996 was $1,558,923 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. Various insurance departments of states in which
the Company operates require the deposit of funds to protect policyholders
within those states. At December 31, 1996 and 1995, the balance on deposit for
the benefit of such policyholders totalled approximately $12,615,000 and
$11,860,000, 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. Ceded unpaid claims and claim adjustment
expenses increased, as well as, ceded unearned premiums largely as a result of
the increase in fronting reinsurance activity mentioned previously.
Unpaid claims and claim adjustment expenses and unearned premiums both
increased largely as a result of increases to reserves on retained business, as
well as, material increases from plan servicing and fronting reinsurance.
Drafts payable increased because a large amount of drafts were issued in the
fourth quarter of 1996 in an aggressive effort to bring specifically targeted
claims to an early and fair conclusion. The note payable was retired during the
second quarter of 1996 (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 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 $794,808 at December
31, 1996.
The Company repurchased 470,702 shares of stock during 1996 at a cost of
$4,426,182 or $9.40 per share. The Company is authorized to purchase an
additional 529,298 shares.
22
<PAGE> 23
In March 1995, the Financial Accounting Standards Board (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
granted stock options during 1996 to its directors and officers (see Note 7 of
Notes to Consolidated Financial Statements).
During 1996, the FASB issued Statement 125, "Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities". The Statement is
effective for years beginning after December 31, 1996, and will not have any
impact on the financial statements.
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 for its major insurance companies.
23
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
<S> <C>
The following consolidated Financial Statements are on pages 33 through
58:
Report of Management 33
Independent Auditors' Report 34
Consolidated Balance Sheets as of December 31, 1996 and 1995 35-36
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995, and 1994 37
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1996, 1995, and 1994 38-39
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995, and 1994 40-41
Notes to Consolidated Financial Statements December 31,
1996, 1995, and 1994 42-58
The following Consolidated Financial Statements Schedules are on pages 59
through 70:
Schedule Page
-------- ----
Independent Auditors' Report on
Supplementary Information 59
I Summary of Investments 60
II Condensed Financial Information of the Registrant 61-67
III Supplementary Insurance Information 68
IV Reinsurance 69
VI Supplemental Information 70
</TABLE>
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 1997 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference
from the Registrant's definitive 1997 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 1997 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 1997 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, 1996 and 1995
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements, December 31,
1996, 1995 and 1994
2. The following Consolidated Financial Statement Schedules are
filed Under Part II, Item 8:
<TABLE>
<CAPTION>
Schedule Description
-------- -----------
<S> <C>
I Summary of Investments
II Condensed Financial Information of the
Registrant
III Supplementary Insurance Information
IV Reinsurance
VI Supplemental Information
</TABLE>
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)
3.5.1 Section 3.02 of the Bylaws as Amended on February 17,
1997 (10)
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)
4.6 Revised Form of Common Stock Certificate (10)
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 Bank
One Texas, N.A. (Exhibit 10.17)(6)
10.18 Promissory Note made by GAINSCO Service Corp. payable
to Bank One, Texas, N.A. (Exhibit 10.18)(6)
27
<PAGE> 28
10.19 Guaranty Agreement executed by GAINSCO, INC., in
favor of Bank One 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)
10.27 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 Bank One Texas, N.A.
made on July 26, 1990 (Exhibit 10.30)(8)
10.31 1995 Stock Option Plan of the Registrant (Exhibit
10.31) (9)
10.32 Clarification to the GAINSCO, INC. Executive
Incentive Compensation Plan (Exhibit 10.32) (9)
10.33 Loan Agreement between GAINSCO, INC. and Bank One
Texas N.A. (10)
10.34 Promissory note made by GAINSCO, INC. payable to Bank
One Texas N.A. (10)
10.35 Negative Pledge Agreement executed by GAINSCO, INC.
(10)
11 (Not required to be filed as an Exhibit. See footnote
(1)(l) 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)
28
<PAGE> 29
22.2 Subsidiaries of Registrant (10)
24.2 Consent of KPMG Peat Marwick LLP to incorporation by
reference (10) 25.1 Powers of Attorney (10)
27 Financial Data Schedule (10)
28.8 Schedule P from the 1996 Annual Statement of General
Agents Insurance Company of America, Inc. (11)
28.9 Schedule P from the 1996 Annual Statement of MGA
Insurance Company, Inc. (11)
28.10 Schedule P from the 1996 Annual Statement of GAINSCO
County Mutual Insurance Company (11)
(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.
29
<PAGE> 30
(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) 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, 1995.
(10) Filed herewith, See Exhibit Index.
(11) Filed under Form SE.
(b) Reports on Form 8-K
During the last quarter of the fiscal year ended December 31, 1996, 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: 3/28/97
---------------------------
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, 3/28/97
- - ----------------------- President and Chief ---------------
Joseph D. Macchia Executive Officer
/s/ Jack L. Johnson Senior Vice President and 3/28/97
- - ----------------------- Director ---------------
Jack L. Johnson
/s/ Daniel J. Coots Senior Vice President and 3/28/97
- - ----------------------- Chief Financial Officer ---------------
Daniel J. Coots
/s/ Sam Rosen Secretary and Director 3/28/97
- - ----------------------- ---------------
Sam Rosen
Joel C. Puckett* Director 3/28/97
- - ----------------------- ---------------
Joel C. Puckett
Norman J. E. Roe* Director 3/28/97
- - ----------------------- ---------------
Norman J. E. Roe
Harden H. Wiedemann* Director 3/28/97
- - ----------------------- ---------------
Harden H. Wiedemann
John H. Williams* Director 3/28/97
- - ----------------------- ---------------
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1996, 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, 1994, 1993 and 1992, and the related consolidated statements of
operations, shareholders' equity and cash flows for the years ended December
31, 1993, and 1992, 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,
1996, 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 24, 1997
34
<PAGE> 35
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ -------------- --------------
<S> <C> <C>
Investments (note 2):
Fixed maturities:
Bonds held to maturity, at amortized cost (fair value:
$105,725,155 - 1996, $98,421,877 - 1995) $ 104,930,347 97,301,350
Bonds available for sale, at fair value (amortized cost:
$76,879,562 - 1996, $77,478,359 - 1995) 77,643,677 79,130,048
Certificates of deposit, at cost (which approximates
fair value) 595,000 620,000
Short-term investments, at cost (which approximates
fair value) 20,662,282 5,975,412
------------ ------------
Total investments 203,831,306 183,026,810
Cash 1,044,740 1,774,608
Accrued investment income 4,308,185 4,539,236
Premiums receivable (net of allowance for doubtful
accounts: $101,000 - 1996 and 1995) (note 1) 15,824,543 15,913,734
Reinsurance balances receivable 2,156,326 3,505,818
Ceded unpaid claims and claim adjustment expenses 26,713,154 24,650,606
Ceded unearned premiums 16,280,013 6,008,187
Deferred policy acquisition costs (note 1) 12,633,938 12,114,681
Property and equipment (net of accumulated depreciation
and amortization: $4,778,524 - 1996, $3,812,976 -
1995) (note 1) 6,981,380 6,561,792
Current Federal income taxes 424,148 -
Deferred Federal income taxes (notes 1 and 5) 2,956,510 2,578,714
Management contract 1,787,570 1,837,570
Other assets 1,903,963 1,643,853
------------ ------------
Total assets $ 296,845,776 $ 264,155,609
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE> 36
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Liabilities and Shareholders' Equity
1996 1995
-------------- ------------
<S> <C> <C>
Liabilities:
Unpaid claims and claim adjustment expenses
(notes 1 and 4) $ 105,691,588 95,011,463
Unearned premiums (note 4) 65,255,153 53,525,323
Commissions payable 2,689,337 2,207,353
Accounts payable (note 1) 4,670,947 4,635,715
Reinsurance balances payable 1,057,923 1,817,056
Deferred revenue 593,300 492,393
Drafts payable 6,219,044 2,569,265
Note payable (note 3) - 1,750,000
Dividends payable (note 6) 316,312 269,066
Other liabilities 999,590 1,388,098
Current Federal income taxes - 1,047,981
----------- -----------
Total liabilities 187,493,194 164,713,713
----------- -----------
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, 21,670,369
issued at December 31, 1996
and 21,637,481 issued at December 31, 1995) 2,167,037 2,163,748
Additional paid-in capital 87,610,379 87,543,175
Net unrealized gains on fixed maturities 496,675 1,073,597
Retained earnings 24,517,265 9,673,968
Treasury stock, at cost (582,962 shares in 1996, 112,260
shares in 1995) (note 1) (5,438,774) (1,012,592)
------------ -----------
Total shareholders' equity 109,352,582 99,441,896
----------- ----------
Commitments and contingencies (notes 4, 7, and 8)
Total liabilities and shareholders' equity $ 296,845,776 264,155,609
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE> 37
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Net premiums earned (note 4) $ 106,792,928 97,254,816 84,394,874
Net investment income (note 2) 9,160,518 8,157,484 6,867,693
Net realized gains (note 1) 471,956 108,024 134,641
Insurance services 2,379,154 2,182,509 2,056,357
------------- ------------- -------------
118,804,556 107,702,833 93,453,565
------------- ------------- -------------
Expenses:
Claims and claim adjustment expenses
(notes 1 and 4) 58,378,720 48,465,013 41,188,570
Commissions 24,347,250 21,962,839 18,714,356
Change in deferred policy
acquisition costs and deferred
ceding commission income (note 1) (519,257) (2,284,138) (1,321,946)
Underwriting and operating expenses 15,499,641 15,579,260 14,505,108
------------- ------------- -------------
97,706,354 83,722,974 73,086,088
------------- ------------- -------------
Income before Federal income
taxes 21,098,202 23,979,859 20,367,477
Federal income taxes (note 5):
Current expense 5,145,780 6,412,007 5,554,864
Deferred benefit (67,145) (60,003) (356,187)
------------- ------------- -------------
5,078,635 6,352,004 5,198,677
------------- ------------- -------------
Net income $ 16,019,567 17,627,855 15,168,800
============= ============= =============
Net income per share $ .74 .81 .70
============= ============= =============
(notes 1 and 6)
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE> 38
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Common stock:
Balance at beginning of year $ 2,163,748 1,961,137 1,765,082
Issue of shares as stock dividends
(2,009,797 in 1995 and 1,814,941 in
1994) (note 6) -- 200,980 181,495
Exercise of options to purchase shares
(32,888 in 1996, 16,316 in 1995 and
145,604 in 1994) 3,289 1,631 14,560
----------- ----------- -----------
Balance at end of year 2,167,037 2,163,748 1,961,137
----------- ----------- -----------
Additional paid-in capital:
Balance at beginning of year 87,543,175 69,671,214 53,495,511
Issue of shares as stock dividends
(2,009,797 in 1995 and 1,814,941 in
1994) (note 6) -- 17,835,103 15,809,524
Exercise of options to purchase shares
(32,888 in 1996, 16,316 in 1995 and
145,604 in 1994) 67,204 36,858 366,179
----------- ----------- -----------
Balance at end of year $87,610,379 87,543,175 69,671,214
----------- ----------- -----------
</TABLE>
(continued)
38
<PAGE> 39
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net unrealized gains (losses)
on fixed maturities:
Balance at beginning of year $ 1,073,597 (55,686) --
Cumulative effect of change in
accounting principle -- -- 186,303
Change during year (576,922) 1,129,283 (241,989)
------------- ------------- -------------
Balance at end of year 496,675 1,073,597 (55,686)
------------- ------------- -------------
Retained earnings:
Balance at beginning of year 9,673,968 10,982,494 12,569,862
Net income for year 16,019,567 17,627,855 15,168,800
Cash dividends (note 6) (1,176,270) (893,943) (759,938)
Stock dividends (note 6) -- (18,042,438) (15,996,230)
------------- ------------- -------------
Balance at end of year 24,517,265 9,673,968 10,982,494
------------- ------------- -------------
Treasury stock:
Balance at beginning of year (1,012,592) (1,012,592) (1,012,362)
Change during year (4,426,182) -- (230)
------------- ------------- -------------
Balance at end of year (5,438,774) (1,012,592) (1,012,592)
------------- ------------- -------------
Total shareholders' equity at end
of year $ 109,352,582 99,441,896 81,546,567
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE> 40
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 16,019,567 17,627,855 15,168,800
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 4,720,625 4,092,621 4,899,241
Change in deferred Federal income taxes (67,145) (60,003) (356,187)
Change in accrued investment income 231,051 (251,412) (395,598)
Change in premiums receivable 89,191 (3,651,377) (1,374,079)
Change in reinsurance balances receivable 1,349,492 627,739 (881,513)
Change in ceded unpaid claims and claim
adjustment expenses (2,062,548) (4,678,318) (3,271,033)
Change in ceded unearned premiums (10,271,826) (31,218) (441,304)
Change in deferred policy acquisition costs
and deferred ceding commission income (519,257) (2,284,138) (1,321,946)
Change in management contract 50,000 50,000 50,000
Change in other assets (260,110) 297,216 (83,216)
Change in unpaid claims and claim
adjustment expenses 10,680,125 14,282,664 8,072,613
Change in unearned premiums 11,729,830 8,880,310 5,500,057
Change in commissions payable 481,984 15,734 691,830
Change in accounts payable 35,232 (626,356) 861,075
Change in reinsurance balances payable (759,133) (4,186,811) 2,086,036
Change in deferred revenue 100,907 71,985 (29,929)
Change in drafts payable 3,649,779 (2,035,093) 494,979
Change in other liabilities (388,508) (40,592) (84,666)
Change in current Federal income taxes (1,472,129) 998,521 54,076
------------ ------------ ------------
Net cash provided by operating activities $ 33,337,127 29,099,327 29,639,236
------------ ------------ ------------
</TABLE>
(continued)
40
<PAGE> 41
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from investing activities:
Bonds held to maturity:
Matured $ 10,831,897 45,123,950 11,133,500
Purchased (19,694,034) (41,967,879) (25,834,928)
Bonds available for sale:
Sold 38,403,636 10,741,080 6,378,737
Matured 8,179,440 3,506,400 13,810,800
Purchased (48,506,215) (46,243,440) (25,838,064)
Certificates of deposit matured 450,000 395,000 570,000
Certificates of deposit purchased (425,000) (445,000) (570,000)
Property and equipment purchased (1,385,136) (836,114) (739,987)
Net change in short-term investments (14,686,870) 4,418,610 (7,269,095)
------------ ------------ ------------
Net cash used for investing activities (26,832,282) (25,307,393) (28,359,037)
------------ ------------ ------------
Cash flows from financing activities:
Payments on note payable (1,750,000) (1,750,000) (1,000,000)
Cash dividends paid (1,129,024) (819,972) (740,428)
Payment for fractional shares resulting
from stock dividends -- (6,358) (5,215)
Proceeds from exercise of common stock
options 70,493 38,489 380,739
Treasury stock acquired (4,426,182) -- (230)
------------ ------------ ------------
Net cash used for financing activities (7,234,713) (2,537,841) (1,365,134)
------------ ------------ ------------
Net increase (decrease) in cash (729,868) 1,254,093 (84,935)
Cash at beginning of year 1,774,608 520,515 605,450
------------ ------------ ------------
Cash at end of year $ 1,044,740 1,774,608 520,515
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 42
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(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 controls 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 45 states
on an admitted basis. The Company markets its lines of
insurance through 203 non-affiliated general agents' offices.
Approximately 73% of the Company's gross premiums written
during 1996 resulted from risks located in California,
Florida, Georgia, Illinois, Kentucky, Louisiana,
Pennsylvania, Tennessee, Texas and West Virginia.
42
<PAGE> 43
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(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 bond securities totalled $38,403,636, $10,741,080
and $6,378,737 in 1996, 1995 and 1994, respectively. The
realized gains were $516,997, $108,024 and $134,641 in 1996,
1995 and 1994, respectively. The realized losses were $45,041
in 1996, and $0 for all other 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, 1996, 1995 and 1994
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, 1996, 1995 and 1994 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Asset balance, beginning of
period $ 12,114,681 9,830,543 8,508,597
------------ ------------ ------------
Deferred commissions 21,932,779 21,394,072 19,345,305
Deferred marketing and
underwriting expenses 5,854,088 5,506,882 4,953,694
Deferred ceding
commission income (76,765) (71,227) (1,675,640)
Amortization (27,190,845) (24,545,589) (21,301,413)
------------ ------------ ------------
Net change 519,257 2,284,138 1,321,946
------------ ------------ ------------
Asset balance, end of period $ 12,633,938 12,114,681 9,830,543
============ ============ ============
</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
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Land $ 865,383 865,383
Buildings 5,766,278 4,987,397
Furniture and equipment 2,935,259 2,665,766
Software 2,192,984 1,856,222
Accumulated depreciation and
amortization (4,778,524) (3,812,976)
----------- -----------
$ 6,981,380 6,561,792
=========== ===========
</TABLE>
There are no material capital leases
44
<PAGE> 45
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(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) Treasury Stock
The Company records treasury stock in accordance with the
"cost method" described in Accounting Principles Board Opinon
(APB) 6. The Company held 582,962 shares and 112,260 shares
as treasury stock at December 31, 1996 and 1995,
respectively, with a cost basis of $9.33 and $9.02 per share,
respectively.
(i) 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.
(j) 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, 1996, 1995 and 1994
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
------------------------------
1996 1995 1994
-------- -------- --------
(Amounts in thousands)
<S> <C> <C> <C>
Unpaid claims and claim adjustment expenses,
beginning of period $ 95,011 80,729 72,656
Less: Ceded unpaid claims and claim adjustment
expenses, beginning of period 24,650 19,972 16,701
-------- -------- --------
Net unpaid claims and claim adjustment expenses,
beginning of period 70,361 60,757 55,955
-------- -------- --------
Net claims and claim adjustment expenses incurred related to:
Current period 53,037 48,064 37,571
Prior periods 5,342 401 3,618
-------- -------- --------
Total net claims and claim adjustment expenses
incurred 58,379 48,465 41,189
-------- -------- --------
Net claim and claim adjustment expenses paid related to:
Current period 17,178 14,131 12,297
Prior periods 32,584 26,953(1) 24,090
-------- -------- --------
Total net claim and claim adjustment expenses
paid 49,762 41,084 36,387
-------- -------- --------
Commutation of reinsurance treaties -- (2,223)(1) --
-------- -------- --------
Net unpaid claims and claim adjustment expenses,
end of period 78,978 70,361 60,757
Plus: Ceded unpaid claims and claim adjustment
expenses, end of period 26,713 24,650(1) 19,972
-------- -------- --------
Unpaid claims and claim adjustment expenses, end
of period $105,691 95,011 80,729
======== ======== ========
</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, 1996, 1995 and 1994
The development in net claims and claim adjustment expenses
incurred from prior periods was largely related to commercial
auto claims occurring in the 1995 and 1994 years.
(k) 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 $6,617,909, $5,413,486 and $5,500,787 during 1996,
1995 and 1994, respectively.
(l) Earnings Per Share
The weighted average number of shares outstanding for the
years ending December 31, 1996, 1995 and 1994 were
21,441,389, 21,512,741 and 21,437,031, respectively. Primary
earnings per share were $.74, $.81 and $.70 based on the
weighted average number of shares outstanding and common
stock equivalents (which consist of stock options), when
dilutive, of 280,274, 309,549 and 278,490 for the years
ending December 31, 1996, 1995, and 1994, respectively. The
calculations were made after giving retroactive effect to the
stock dividends granted to shareholders (note 6).
(m) Stock-Based Compensation
In October 1995, the FASB issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (Statement 123). Statement 123 defines a fair
value based method of accounting for an employee stock option
or similar equity instrument. Under Statement 123, the
Company elects to measure compensation costs using the
intrinsic value based method of accounting prescribed by APB
25.
(n) 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.
During 1996, the FASB issued Statement 125, "Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities". The Statement is effective for years
47
<PAGE> 48
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
beginning after December 31, 1996, and will 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: 1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Fixed maturities $ 8,331,441 7,481,087 6,414,168
Short-term investments 1,055,481 870,210 513,771
----------- ----------- -----------
9,386,922 8,351,297 6,927,939
Investment expenses (226,404) (193,813) (60,246)
----------- ----------- -----------
Net investment income $ 9,160,518 8,157,484 6,867,693
=========== =========== ===========
</TABLE>
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-1996 7,731 41 (24) $7,748
US Government Securities-1995 9,606 157 (30) 9,733
Tax-exempt state & municipal bonds-1996 97,199 875 (97) 97,977
Tax-exempt state & municipal bonds-1995 87,696 1,071 (78) 88,689
Bonds available for sale:
Tax-exempt state & municipal bonds-1996 76,880 896 (132) 77,644
Tax-exempt state & municipal bonds-1995 77,478 1,658 (6) 79,130
Certificates of Deposit - 1996 595 - - 595
Certificates of Deposit - 1995 620 - - 620
Total Fixed Maturities-1996 $ 182,405 1,812 (253) 183,964
Total Fixed Maturities-1995 175,400 2,886 (114) 178,172
</TABLE>
48
<PAGE> 49
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
The amortized cost and estimated fair value of debt securities at
December 31, 1996 and 1995, by maturity, are shown below.
<TABLE>
<CAPTION>
1996 1995
------------------- -------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
-------- -------- -------- --------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 18,754 19,061 17,781 17,872
Due after one year but within five years 135,052 136,185 133,947 135,898
Due after five years but within ten years 23,059 23,165 16,572 17,280
Due after ten years but within twenty
years 5,540 5,553 6,553 6,578
Beyond twenty years -- -- 547 544
-------- -------- -------- --------
$182,405 183,964 175,400 178,172
======== ======== ======== ========
</TABLE>
Investments of $1,100,000 were maintained in escrow at December 31,
1996 and 1995 on behalf of certain insurance companies under the terms
of their reinsurance agreements with General Agents. In addition,
investments of $12,615,000 and $11,860,000, at December 31, 1996 and
1995, respectively, were on deposit with various regulatory bodies as
required by law.
The FASB 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 1996.
(3) NOTE PAYABLE TO BANK
The Company made principal payments of $1,750,000 in May, 1996 and
June, 1995. The 1996 payment represented the retirement of the note.
Interest was paid monthly at a rate that approximated the prime
lending rate. The Company recorded interest expense (which
approximates interest paid) of $61,335, $221,934 and $273,552 in 1996,
1995 and 1994,
49
<PAGE> 50
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
respectively. The note payable is stated at book value which
approximates fair value.
(4) REINSURANCE
In 1996, 1995 and 1994, General Agents and MGAI (the Insurers) wrote
casualty policy limits of $1,000,000. For policies with an effective
date occurring in 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 occurring in 1995 or
after, the Insurers have excess reinsurance for 100% of casualty
claims exceeding $500,000 up to the $1,000,000 policy limits. The
Company's excess reinsurance is provided in varying amounts by three
reinsurers rated "A- (Excellent)" or better by A. M. Best Company.
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 1996 and 1995, GCM entered into fronting arrangements with
three 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 (in the form of trust agreements and/or letters of
credit) be maintained to assure payment of the unearned premiums and
unpaid claims and claim adjustment expenses relating to the risks
insured under these fronting arrangements. The balances in such
accounts as of December 31, 1996 and 1995 total $20,174,000 and
$3,527,000, respectively.
The amounts deducted in the consolidated financial statements for
reinsurance ceded as of and for the years ended December 31, 1996,
1995, and 1994 respectively, are set forth in the
50
<PAGE> 51
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
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>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Premiums earned $ 1,929,455 3,809,853 8,223,984
Premiums earned - plan
servicing $ 4,760,785 5,307,038 5,101,098
Premiums earned - fronting
arrangements $ 16,081,808 721,752 --
Claims and claim adjustment
expenses $ (206,429) 13,188,258 6,425,030
Claims and claim adjustment
expenses - plan servicing $ 6,886,339 5,055,997 5,728,201
Claim and claim adjustment
expenses - fronting
arrangements $ 11,317,277 418,573 --
</TABLE>
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>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Unearned premiums $ 2,149,286 2,836,492 2,517,709
Unearned premiums - fronting
arrangements $13,625,619 2,544,837 --
Unpaid claims and claim
adjustment expenses $11,012,699 9,842,815 9,829,640
Unpaid claims and claim
adjustment expenses -
fronting arrangements $ 4,321,085 266,720 --
</TABLE>
51
<PAGE> 52
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
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 1995, 1994 and 1993, 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, 1996, 1995, and 1994, the balance in such escrow accounts
totalled $1,100,000. For 1996, 1995 and 1994, the premiums earned by
assumption were $0, $(2,496) and $0, respectively and the assumed
unpaid claims and claim adjustment expenses were $1,845,000,
$4,427,000 and $6,804,000, 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.
(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>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Income tax expense at 35% $ 7,384,371 8,392,950 7,128,617
Tax-exempt interest income (2,308,364) (2,039,995) (1,690,901)
Stock option exercise (70,714) -- (92,373)
Building rehabilitation tax
credit (77,102) -- (30,614)
Other, net 150,444 (951) (116,052)
----------- ----------- -----------
Income tax expense $ 5,078,635 6,352,004 5,198,677
=========== =========== ===========
</TABLE>
52
<PAGE> 53
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
The FASB issued Statement 109 "Accounting for Income Taxes" which
changed the Company's method of accounting for income taxes. Under APB
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. 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.
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
-----------------------------
1996 1995
----------- ----------
<S> <C> <C>
Deferred tax assets:
Discounting of unpaid claims and claim adjustment expenses $ 4,510,836 4,307,059
Discounting of unearned premiums 3,418,599 3,316,746
Accruals not currently deductible 41,640 124,667
Deferred service fee income 207,584 171,652
Other 44,557 48,419
---------- ---------
Total deferred tax assets 8,223,216 7,968,543
--------- ---------
Deferred tax liabilities:
Deferred policy acquisition costs and deferred ceding commission income 4,452,344 4,259,000
Unrealized gains on investments 267,440 578,091
Depreciation and amortization 504,547 495,840
Other 42,375 56,898
---------- ---------
Total deferred tax liabilities 5,266,706 5,389,829
--------- ---------
Net deferred tax asset $ 2,956,510 2,578,714
========= =========
</TABLE>
(6) SHAREHOLDERS' EQUITY
The Company has 250,000,000 shares of authorized $.10 par value common
stock. Of the authorized shares, 21,670,369 and 21,637,481 were issued
as of December 31, 1996 and 1995, respectively and 21,087,407 and
21,525,221 were outstanding as of December 31, 1996 and 1995,
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.
53
<PAGE> 54
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
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. In
August of 1996, the Board of Directors increased the cash dividend to
$.015 per share. The Board of Directors granted 5% stock dividends to
shareholders of record on March 31, 1995, September 30, 1995, March
31, 1994 and September 30, 1994. 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
issuing fractional shares. The earnings per share computation and the
number of stock options and their exercise price have been
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 $57,011,890,
$47,880,301 and $40,100,250 at December 31, 1996, 1995 and 1994,
respectively, and the amount of consolidated statutory net income was
$15,829,108, $15,167,151 and $13,909,896 for the years ended 1996,
1995, and 1994, respectively. The amount of policyholders' surplus of
GCM was $2,000,001, $2,260,001 and $2,250,001 at December 31, 1996,
1995 and 1994, respectively, and the amount of statutory net income
was $115,563, $369,356 and $644,257 for the years ended December 31,
1996, 1995 and 1994, respectively. The Company's statutory capital
significantly exceeds the benchmark capital level under the Risk Based
Capital formula for its major insurance companies.
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 greater 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,
1996, General Agents, the Oklahoma subsidiary, had net income of
$12,509,842 and policyholders' surplus of $57,011,890 and MGAI, the
Texas subsidiary, had net income of $4,869,266 and policyholders'
surplus of $20,112,729.
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
54
<PAGE> 55
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
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 defined in
the Rights Plan) 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 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
At December 31, 1996, the Company had two stock option plans, the 1990
Stock Option Plan (90 Plan) and the 1995 Stock Option Plan (95 Plan).
Under the 90 Plan, all options available have been granted and are
fully vested. Any unexercised options will expire in the year 2000.
The 95 Plan approved by the shareholders on May 10, 1996, reserved
1,071,000 shares for issuance under this plan. Options granted under
the 95 Plan have a maximum ten year term and are exercisable at the
rate of 20% immediately upon grant and 20% on each of the first four
anniversaries of the grant date. The exercise price of each option
equals the market price of the Company's stock on the date of grant.
A summary of the status of the Company's outstanding options as of
December 31, 1996 and 1995, and changes during the years ended
December 31, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
1996 1995
--------------------------- ----------------------------
Weighted Weighted
Underlying Average Underlying Average
Options Shares Exercise Price Shares Exercise Price
------- ---------- -------------- ---------- ---------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period 401,277 $ 2.60 388,095 $ 2.99
Granted 984,397 $ 10.57 --
Adjustment for stock dividends -- 39,311
Exercised (32,888) $ 2.14 (16,316) $ 2.36
Forfeited -- (9,813) $ 8.16
--------- -------
Outstanding, end of period 1,352,786 $ 8.38 401,277 $ 2.60
========= =======
Options exercisable at end of period 565,265 401,277
Weighted-average fair value of
options granted during the period $ 4.43 --
</TABLE>
55
<PAGE> 56
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
The following table summarizes information for the stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------- ---------------------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- - ------------------ ----------------- ------------------------ ----------------- ----------------- -------------------
<C> <C> <C> <C> <C> <C> <C>
$ 2 to 9 368,389 3.75 years $ 2.52 368,389 $ 2.52
$ 9 to 11 984,397 9.47 years $ 10.57 196,876 $ 10.57
---------- -------
$ 2 to 11 1,352,786 7.91 years $ 8.38 565,265 $ 5.40
========== =======
</TABLE>
The Company applies APB 25 and related Intepretations in accounting
for its plans. Accordingly, no compensation cost has been recognized
for its stock option plans. No options were granted during 1995. Had
compensation cost been determined consistent with Statement 123 for
the options granted during 1996, the Company's net income and earnings
per share would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended December 31, 1996
<S> <C> <C>
Net income As reported $ 16,019,567
Pro forma $ 15,504,676
Primary earnings per share As reported $ 0.74
Pro forma $ 0.71
Fully diluted earnings per share As reported $ 0.74
Pro forma $ 0.71
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model using an expected
dividend yield of 1.5%, an expected volatility of 34%, a risk-free
interest rate of 6.05% and an expected life of 7.5 years.
56
<PAGE> 57
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
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 $578,107,
$605,935, and $536,124 for 1996, 1995 and 1994, 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 consolidated financial position or results of
operations. 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, 1996
and 1995 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.
57
<PAGE> 58
(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>
1996 Quarter 1995 Quarter
------------------------------------- ------------------------------------
Fourth Third Second First Fourth Third Second First
------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross premiums
written $29,107 27,065 29,240 24,588 30,013 27,772 25,762 24,525
Total revenues 30,317 30,067 29,460 28,960 29,237 27,736 25,920 24,810
Total expenses 25,192 26,000 23,331 23,184 21,134 22,251 20,766 19,573
Net income 3,933 3,298 4,514 4,275 5,772 4,083 3,878 3,893
Net income per $ .18 .15 .21 .20 .26 .19 .18 .18
share (a)
Common share
prices (a) (b)
High 10 3/4 10 3/4 11 5/8 11 3/4 11 7/8 9 1/2 10 1/2 10
Low 8 3/4 9 3/8 9 7/8 9 3/4 8 5/16 8 7/16 9 5/16 7
</TABLE>
(a) Adjusted for stock dividends and stock splits effected as stock
dividends.
(b) As reported by the American Stock Exchange from January 1, 1995
to July 30, 1996. As reported by the New York Stock Exchange
thereafter.
58
<PAGE> 59
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION
The Board of Directors and Shareholders GAINSCO, INC:
Under date of February 24, 1997, we reported on the consolidated balance sheets
of GAINSCO, INC. and subsidiaries as of December 31, 1996 and 1995 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, 1996.
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 24, 1997
59
<PAGE> 60
Schedule I
GAINSCO, INC. AND SUBSIDIARIES
Summary of Investments - Other
Than Investments in Related Parties
(Amounts in thousands)
<TABLE>
<CAPTION>
As of December 31
--------------------------------------------------------------------
1996 1995 1994
-------------------- ------------------ --------------------
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 $ 7,731 7,748 9,606 9,733 10,555 10,213
Tax exempt state and
municipal bonds 97,199 97,977 87,696 88,689 113,088 111,687
Bonds available for sale:
Tax exempt state and
municipal bonds 76,880 77,644 77,478 79,130 25,779 25,693
Certificates of deposit 595 595 620 620 570 570
-------- -------- -------- -------- -------- --------
Total fixed maturities 182,405 183,964 175,400 178,172 149,992 148,163
-------- -------- -------- -------- -------- --------
Short-term investments 20,662 20,662 5,975 5,975 10,394 10,394
-------- -------- -------- -------- -------- --------
Total investments $203,067 204,626 181,375 184,147 160,386 158,557
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying independent auditors' report on supplementary information.
60
<PAGE> 61
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ ------------ --------
<S> <C> <C>
Investments in subsidiaries $ 102,217,935 95,951,627
Cash 8,243 776
Net receivables from subsidiaries 7,289,111 3,695,959
Other assets 159,492 63,500
------------- -----------
Total assets $ 109,674,781 99,711,862
============= ===========
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable $ 5,887 --
Dividends payable 316,312 269,066
Other liabilities -- 900
------------- -----------
Total liabilities 322,199 269,966
------------- -----------
Shareholders' equity:
Preferred stock ($100 par value, 10,000,000
shares authorized, none issued) -- --
Common stock ($.10 par value, 250,000,000
shares authorized, 21,670,369 issued at
December 31, 1996 and 21,637,481 issued at
December 31, 1995) 2,167,037 2,163,748
Additional paid-in capital 87,610,379 87,543,175
Net unrealized gains on fixed maturities 496,675 1,073,597
Retained earnings 24,517,265 9,673,968
Treasury stock, at cost (582,962 shares in 1996,
112,260 shares in 1995) (5,438,774) (1,012,592)
------------- -----------
Total shareholders' equity 109,352,582 99,441,896
------------- -----------
Total liabilities and shareholders' equity $ 109,674,781 99,711,862
============= ===========
</TABLE>
See accompanying notes to condensed financial statements. See accompanying
independent auditors' report on supplementary information.
61
<PAGE> 62
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Statements of Operations
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Revenues - dividend income $ 9,900,000 3,115,000 800,000
Expenses - operating expenses (1,191,222) (1,092,470) (1,024,949)
------------ ----------- -----------
Operating income before
Federal income tax benefit 8,708,778 2,022,530 (224,949)
Federal income tax benefit (467,559) (366,716) (429,324)
------------ ----------- -----------
Income before equity in undistributed
income of subsidiaries 9,176,337 2,389,246 204,375
Equity in undistributed income of subsidiaries 6,843,230 15,238,609 14,964,425
------------ ----------- -----------
Net income $ 16,019,567 17,627,855 15,168,800
============ =========== ===========
Net income per share $ .74 .81 .70
============ =========== ===========
</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 Shareholders' Equity
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Common Stock:
<S> <C> <C> <C>
Balance at beginning of year $ 2,163,748 1,961,137 1,765,082
Issue of shares as stock dividends
(2,009,797 in 1995 and 1,814,941
in 1994) -- 200,980 181,495
Exercise of options to purchase
shares (32,888 in 1996, 16,316 in
1995 and 145,604 in 1994) 3,289 1,631 14,560
----------- ----------- ----------
Balance at end of year 2,167,037 2,163,748 1,961,137
----------- ----------- ----------
Additional paid-in capital:
Balance at beginning of year 87,543,175 69,671,214 53,495,511
Issue of shares as stock dividends
(2,009,797 in 1995 and 1,814,941
in 1994) -- 17,835,103 15,809,524
Exercise of options to purchase
shares (32,888 in 1996, 16,316 in
1995 and 145,604 in 1994) 67,204 36,858 366,179
----------- ----------- ----------
Balance at end of year $87,610,379 $87,543,175 69,671,214
----------- ----------- ----------
</TABLE>
(continued)
63
<PAGE> 64
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Statements of Shareholders' Equity
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ----------- -----------
<S> <C> <C> <C>
Net unrealized gains (losses) on fixed maturities:
Balance at beginning of year $ 1,073,597 (55,686) --
Cumulative effect of change in
accounting principle -- -- 186,303
Change during year (576,922) 1,129,283 (241,989)
------------- ----------- -----------
Balance at end of year 496,675 1,073,597 (55,686)
------------- ----------- -----------
Retained earnings:
Balance at beginning of year 9,673,968 10,982,494 12,569,862
Net income for year 16,019,567 17,627,855 15,168,800
Cash dividends (1,176,270) (893,943) (759,938)
Stock dividends -- (18,042,438) (15,996,230)
------------- ----------- -----------
Balance at end of year 24,517,265 9,673,968 10,982,494
------------- ----------- -----------
Treasury stock:
Balance at beginning of year (1,012,592) (1,012,592) (1,012,362)
Change during year (4,426,182) -- (230)
------------- ----------- -----------
Balance at end of year (5,438,774) (1,012,592) (1,012,592)
------------- ----------- -----------
Total shareholders' equity at end
of year $ 109,352,582 99,441,896 81,546,567
============= =========== ===========
</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)
Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ---------- ----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 16,019,567 17,627,855 15,168,800
Adjustments to reconcile net income to cash
provided by operating activities:
Change in investments in subsidiaries -- -- (100,000)
Change in net receivable from subsidiaries (3,593,152) (1,575,085) 241,178
Change in other assets (95,992) (6,750) (4,473)
Change in accounts payable 5,887 (18,798) 18,798
Change in other liabilities (900) -- 900
Equity in income of subsidiaries (6,843,230) (15,238,609) (14,964,425)
------------ ----------- -----------
Net cash provided by operating
activities 5,492,180 788,613 360,778
------------ ----------- -----------
Cash flows from investing activities:
Cash contribution to subsidiaries -- -- (900)
------------ ----------- -----------
Net cash used for investing
activities $ -- -- (900)
------------ ----------- -----------
</TABLE>
(continued)
65
<PAGE> 66
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- -------- --------
Cash flows from financing activities:
<S> <C> <C> <C>
Cash dividends paid $(1,129,024) (819,972) (740,428)
Payments for fractional shares
resulting from stock dividends -- (6,358) (5,215)
Proceeds from exercise of common
stock options 70,493 38,489 380,739
Treasury stock acquired (4,426,182) -- (230)
----------- -------- --------
Net cash used for financing
activities (5,484,713) (787,841) (365,134)
----------- -------- --------
Net increase (decrease) in cash 7,467 772 (5,256)
Cash at beginning of year 776 4 5,260
----------- -------- --------
Cash at end of year $ 8,243 776 4
=========== ======== ========
</TABLE>
See accompanying notes to condensed financial statements. See accompanying
independent auditors' report on supplementary information.
66
<PAGE> 67
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Notes to Condensed Financial Statements
December 31, 1996, 1995 and 1994
(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, 1996,
1995 and 1994 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 1996 1995
------------------ ------------ --------
<S> <C> <C>
Agents Processing Systems, Inc. $ 439,711 551,211
GAINSCO Service Corp. 5,677,163 2,688,908
General Agents Insurance
Company of America, Inc. 1,172,237 455,840
---------- ---------
Net receivable from subsidiaries $7,289,111 3,695,959
========== =========
</TABLE>
See accompanying independent auditors' report on supplementary information.
67
<PAGE> 68
Schedule III
GAINSCO, INC. AND SUBSIDIARIES
Supplementary Insurance Information
Years ended December, 1996, 1995 and 1994
(Amounts in thousands)
<TABLE>
<CAPTION>
Other Amortization
Deferred Reserves policy of deferred Other
policy for claims claims and Net Net Claims policy operating Net
acquisition and claim Unearned benefits premiums investment & claim acquisition costs and premiums
Segment costs expenses premiums payable earned income expenses costs(1) expenses written
- - ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Property and casualty insurance $12,634 105,691 65,255 6,219 106,793 9,161 58,379 (27,191) 39,847 108,251
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total $12,634 105,691 65,255 6,219 106,793 9,161 58,379 (27,191) 39,847 108,251
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Year ended December 31, 1995
Property and casualty insurance $12,115 95,011 53,525 2,569 97,255 8,157 48,465 (24,546) 37,542 106,104
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total $12,115 95,011 53,525 2,569 97,255 8,157 48,465 (24,546) 37,542 106,104
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Year ended December 31, 1994
Property and casualty insurance $ 9,831 80,729 44,645 4,604 84,395 6,868 41,189 (21,301) 33,219 89,454
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total $ 9,831 80,729 44,645 4,604 84,395 6,868 41,189 (21,301) 33,219 89,454
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
(1) Net of the amortization of deferred ceding commission income.
See accompanying independent auditors' report on supplementary information.
68
<PAGE> 69
Schedule IV
GAINSCO, INC. AND SUBSIDIARIES
Reinsurance
Years ended December 31, 1996, 1995 and 1994
(Amounts in thousands, except percentages)
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed from of amount
Direct other other Net assumed
amount companies companies amount to net
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Premiums earned:
Property and casualty $125,112 -- -- 125,112
Reinsurance -- (18,319) -- (18,319)
-------- -------- -------- -------- --------
Total $125,112 (18,319) -- 106,793 - %
======== ======== ======== ======== ========
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 - %
======== ======== ======== ======== ========
</TABLE>
See accompanying independent auditors' report on supplementary information.
69
<PAGE> 70
Schedule VI
GAINSCO, INC. AND SUBSIDIARIES
Supplemental Information
Years ended December 31, 1996, 1995 and 1994
(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, 1996:
Property and casualty insurance $ - 12,634 105,691 - 65,255 106,793
------- ------ ------- --- ------ -------
Total $ - 12,634 105,691 - 65,255 106,793
======= ====== ======= === ====== =======
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
======= ====== ====== === ====== ======
<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, 1996:
Property and casualty insurance 9,161 53,037 5,342 (27,191) 49,762 108,251
----- ------ ----- ------ ------ -------
Total 9,161 53,037 5,342 (27,191) 49,762 108,251
===== ====== ===== ====== ====== =======
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
===== ====== ===== ====== ====== =======
</TABLE>
(1) Net of the amortization of deferred ceding commission income.
See accompanying independent auditors' report on supplementary information.
70
<PAGE> 71
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description No. Page
- - ----------- ----------- --------
<S> <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)
3.5.1 Section 3.02 of the Bylaws as Amended on February 17, 1997 (10)
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)
4.6 Revised Form of Common Stock Certificate (10)
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 Bank One Texas, N.A. (Exhibit
10.17)(6)
</TABLE>
71
<PAGE> 72
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description No. Page
- - ----------- ----------- --------
<S> <C>
10.18 Promissory Note made by GAINSCO Service Corp. payable to Bank One,
Texas, N.A. (Exhibit 10.18)(6)
10.19 Guaranty Agreement executed by GAINSCO, INC., in favor of Bank One
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)
10.27 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 Bank One
Texas, N.A. made on July 26, 1990 (Exhibit 10.30)(8)
10.31 1995 Stock Option Plan of the Registrant (Exhibit 10.31)(9)
10.32 Clarification to the GAINSCO, INC. Executive Incentive Compensation
Plan (Exhibit 10.32)(9)
10.33 Loan Agreement between GAINSCO, INC. and Bank One Texas N.A. (10)
10.34 Promissory note made by GAINSCO, INC. payable to Bank One Texas N.A.
(10)
10.35 Negative Pledge Agreement executed by GAINSCO, INC. (10)
</TABLE>
72
<PAGE> 73
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description No. Page
- - ----------- ----------- --------
<S> <C>
11 (Not required to be filed as an Exhibit. See footnote (1)(l) 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 (10)
24.2 Consent of KPMG Peat Marwick to incorporation by reference (10)
25.1 Powers of Attorney (10)
27 Financial Data Schedule
28.8 Schedule P from the 1996 Annual Statement of General
Agents Insurance Company of America, Inc. (11)
28.9 Schedule P from the 1996 Annual Statement of MGA
Insurance Company, Inc. (11)
28.10 Schedule P from the 1996 Annual Statement of
GAINSCO County Mutual Insurance Company (11)
(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.
</TABLE>
73
<PAGE> 74
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description No. Page
- - ----------- ----------- --------
<S> <C>
(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) 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, 1995.
(10) Filed herewith.
(11) Filed under Form SE.
</TABLE>
74
<PAGE> 1
EXHIBIT 3.5.1
February 17, 1997
AMENDMENT TO THE BYLAWS OF GAINSCO, INC.
The following amendment to Section 3.02 of the Bylaws of GAINSCO INC.
was adopted by the Board of Directors on February 17, 1997:
"3.02 Number: Qualifications: Election: and Term. The board of
directors shall consist of up to nine (9) directors, none of
whom need to be shareholders or residents of the State of
Texas. The directors shall be elected at the annual meeting of
the shareholders, except as provided in Bylaws 3.03 and 3.05.
Each director shall hold office until his successor shall be
elected and shall qualify."
<PAGE> 1
EXHIBIT 4.6
45342
INCORPORATED UNDER THE LAWS COMMON STOCK
OF THE STATE OF TEXAS TEN CENT ($.10) PAR VALUE
NUMBER SHARES
NYSE SYMBOL: GNA
THIS CERTIFICATE IS TRANSFERABLE IN CUSIP 363127 10 1
NEW YORK, NEW YORK AND JERSEY CITY, NEW JERSEY SEE REVERSE FOR CERTAIN
DEFINITIONS AND RESTRICTIONS
GAINSCO, INC.
This Certifies that
is the owner of
SHARES OF FULLY PAID AND NON-ASSESSABLE COMMON STOCK OF
Gainsco, Inc. transferable on the books of the Corporation by the holder hereof
in person or by duly authorized attorney upon surrender of this Certificate
properly endorsed.
This Certificate is not valid until countersigned by the Transfer Agent
and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
[GAINSCO, INC. LOGO] [CORPORATE SEAL]
[ILLEGIBLE] Dated: 10-7-96
PRESIDENT Countersigned and Registered:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
Transfer Agent
and Registrar,
By
[ILLEGIBLE]
SECRETARY Authorized Signature
<PAGE> 2
[GAINSCO, INC. LOGO]
GAINSCO, INC.
THE ARTICLES OF INCORPORATION OF THE CORPORATION ON FILE IN THE OFFICE OF THE
SECRETARY OF STATE OF TEXAS SET FORTH: (A) THE AGGREGATE NUMBER OF SHARES AND
THE PAR VALUE OF EACH CLASS OF CAPITAL SHARES THE CORPORATION IS AUTHORIZED TO
ISSUE, INCLUDING ONE OR MORE SERIES OF PREFERRED STOCK, AND (B) A STATEMENT OF
THE AUTHORITY VESTED IN THE BOARD OF DIRECTORS TO ESTABLISH SERIES AND TO FIX
AND DETERMINE THE VARIATIONS IN THE RELATIVE RIGHTS AND PREFERENCES BETWEEN ANY
SUCH SERIES OF THE PREFERRED STOCK SO ESTABLISHED. THE CORPORATION WILL FURNISH
A COPY OF SUCH STATEMENT TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE
ON WRITTEN REQUEST TO THE CORPORATION AT ITS REGISTERED OFFICE.
THE PRE-EMPTIVE RIGHT OF SHAREHOLDERS TO ACQUIRE ANY SHARES OF THE CORPORATION
HAS BEEN DENIED BY A STATEMENT IN THE ARTICLES OF INCORPORATION OF THE
CORPORATION WHICH ARE ON FILE IN THE OFFICE OF THE SECRETARY OF STATE OF TEXAS.
THE CORPORATION WILL FURNISH A COPY OF SUCH STATEMENT TO THE RECORD HOLDER OF
THIS CERTIFICATE WITHOUT CHARGE ON REQUEST TO THE CORPORATION AT ITS PRINCIPAL
PLACE OF BUSINESS OR REGISTERED OFFICE.
This Certificate also evidences and entitles the holder hereof to certain
Rights as set forth in a Rights Agreement between the Corporation and
Continental Stock Transfer & Trust Company dated as of March 8, 1988, as
amended (the "Rights Agreement"), the terms of which are hereby incorporated
herein by reference and a copy of which is on file at the principal executive
offices of the Corporation. Under certain circumstances, as set forth in the
Rights Agreement, such Rights will be evidenced by separate certificates and
will no longer be evidenced by this Certificate. The Corporation will mail to
the holder of this Certificate a copy of the Rights Agreement without charge
promptly following receipt of a written request therefor. Under certain
circumstances as set forth in the Rights Agreement, Rights beneficially owned
by acquiring Persons (as defined in the Rights Agreement) and any subsequent
holder of such Rights may be suspended.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT--__________Custodian___________
(Cust) (Minor)
under Uniform Gifts to Minors
Act___________________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received ______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- - --------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Shares
- - --------------------------------------------------------------------------
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint ____________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated ____________, 19__.
NOTICE:
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
X
-------------------------------------------------------------------------------
(SIGNATURE)
X
-------------------------------------------------------------------------------
(SIGNATURE)
- - --------------------------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN "ELIGIBLE GUARANTOR INSTITUTION" AS
DEFINED IN RULE 17Ad-15 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
- - --------------------------------------------------------------------------------
SIGNATURE(S) GUARANTEED BY:
- - --------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 10.33
LOAN AGREEMENT
This Loan Agreement is entered into effective this 9 day of Sept,
1996, between GAINSCO, INC., a Texas corporation, with its principal offices at
500 Commerce Street, Fort Worth, Texas 76102 ("Borrower"); and BANK ONE, TEXAS,
NATIONAL ASSOCIATION, a national banking association with offices at 500
Throckmorton Street, Fort Worth, Texas 76102 ("Lender").
In consideration of the mutual covenants and agreements herein
contained and of the loan described below, Borrower and Lender agree as
follows:
ARTICLE 1
GENERAL TERMS
Section 1.1 Terms Defined Above. As used in this Agreement, the terms
"Borrower" and "Lender" have the meanings indicated above.
Section 1.2 Certain Definitions. As used in this Agreement, the
following terms have the meanings assigned below, unless the context otherwise
requires:
"Agreement" means this Loan Agreement, as the same may from time to
time be amended or supplemented.
"Base Rate" means the variable rate of interest per annum established
by Lender from time to time as its base rate, whether or not charged. Such rate
is established by Lender as a general reference rate of interest, taking into
account such factors as Lender may deem appropriate, it being understood that
many of Lender's commercial or other loans are priced in relation to such rate,
that such rate is not necessarily the lowest or best rate actually charged to
any customer and that Lender may make various commercial or other loans at
rates of interest having no relationship to such rate. In the event there
exists any dispute or uncertainty with respect to the interest rate
constituting the Base Rate, the rate certified in writing by the President,
Cashier, any Vice President, or any Assistant Cashier of Lender as constituting
the Base Rate shall be conclusive evidence of such fact.
"Borrowing Request" means a request for the Loan to be made pursuant
to Section 2.1 hereof.
"Business Day" means any day other than a Saturday, Sunday or day on
which commercial banks are authorized or required to be closed under the laws
of the State of Texas.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Event of Default" means the occurrence of any of the events specified
in Section 7.1 hereof, provided that any requirement for notice or lapse of
time or any other condition precedent has been satisfied.
Loan Agreement - Page 1
<PAGE> 2
"Excepted Liens" means: (i) liens for taxes, assessments or other
governmental charges or levies not yet due or which are being contested in good
faith by appropriate action; (ii) liens in connection with workers
compensation, unemployment insurance or other social security, old age pension
or public liability obligations; (iii) legal or equitable encumbrances deemed
to exist by reason of negative pledge covenants and other covenants or
undertakings of like nature; (iv) legal or equitable encumbrances deemed to
exist by reason of the existence of any litigation or other legal proceeding or
arising out of a judgment or award with respect to which an appeal is being
prosecuted; (v) vendor's, carrier's, warehouseman's, repairman's, mechanic's,
workman's, materialman's, construction or other like liens arising by operation
of law in the ordinary course of business or incident to the construction or
improvement of any Properties in respect of obligations which are not yet due
or which are being contested in good faith by appropriate proceedings by or on
behalf of Borrower; (vi) servitudes, easements, restrictions, rights-of-way and
other similar rights in real or immovable Properties or any interest therein,
provided the same do not materially impair the use of such Properties for the
purposes for which it is held by Borrower.
"Facility Fee" means the fee on the revolving line of credit evidenced
by the Note, payable by Borrower to Lender in quarterly installments, and
calculated as three-eighths of one percent (3/8%) of the average for the prior
quarter of an amount determined daily equal to the difference between
$5,000,000 and the daily outstanding principal balance owing on the Loan.
"Financial Statements" means the financial statement or statements
described or referred to in Section 3.5 hereof
"Governmental Requirement" means any law, statute, code, ordinance,
order, rule, regulation, judgment, decree, injunction, franchise, permit,
certificate, license, authorization or other direction or requirement
(including, without limitation any of the foregoing which relate to
environmental standards or controls, energy regulations and occupational,
safety and health standards or controls) of any (domestic or foreign) federal,
state, county, municipal or other government, department, commission, board,
court, agency or any other instrumentality of any of them, which exercises
jurisdiction over Borrower or any Properties of Borrower.
"Highest Lawful Rate" means the maximum non-usurious interest rate, if
any, that at any time or from time to time may be contracted for, taken,
reserved, charged or received on the Note or on other Indebtedness, as the case
may be, under laws applicable to Lender which are presently in effect or, to
the extent allowed by law, under such applicable laws which may hereafter be in
effect and which allow a higher maximum non-usurious interest rate than
applicable laws now allow.
"Indebtedness" means any and all amounts owing or to be owing by
Borrower to Lender in connection with this Agreement, the Note, any Security
Instruments and all other liabilities of Borrower to Lender from time to time
existing, whether in connection with this or other transactions.
Loan Agreement - Page 2
<PAGE> 3
"Lien" means any interest in Properties securing an obligation owed
to, or a claim by, a Person other than the owner of the Properties, whether
such interest is based on the common law, statute or contract, and including
but not limited to the lien or security interest arising from a mortgage,
encumbrance, pledge, security agreement, conditional sale or trust receipt or a
lease, consignment or bailment for security purposes. The term "Lien" shall
include reservations, exceptions, encroachments, easements, rights-of-way,
covenants, conditions, restrictions, leases and other title exceptions and
encumbrances affecting the Properties.
"Material Adverse Effect" means any material and adverse effect on (i)
the assets, liabilities, financial condition, business, operations, affairs or
circumstances of Borrower from those reflected in the Financial Statements or
from the facts represented or warranted in this Agreement or any Security
Instrument, or (ii) the ability of Borrower to carry out its business as at the
date of this Agreement or as proposed at the date of this Agreement to be
conducted or meet its obligations under this Agreement, the Note and the
Security Instruments on a timely basis.
"Note" means the promissory note of Borrower described in Section 2.1
hereof and being in the form of note attached as Exhibit A hereto, together
with any and all renewals, extensions for any period, increases or
rearrangements thereof.
"Person" means any individual, corporation, partnership, joint
venture, association, joint stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other form of
entity.
"Plan" means any plan subject to Title IV of ERISA and maintained by
Borrower, or any such plan to which Borrower is required to contribute on
behalf of its employees.
"Potential Default" means the occurrence of any of the events
specified in Section 7.1 hereof; whether or not any requirement for notice or
lapse of time or other condition precedent has been satisfied.
"Properties" means any interest of Borrower in any kind of property or
asset, whether real, personal or mixed, and tangible or intangible.
"Security Instruments" means the agreements or instruments described
or referred to in Subsection 8.1(d) hereof and any and all other agreements or
instruments now or hereafter executed and delivered by Borrower or any other
Person (other than participation or similar agreements between Lender and any
other lender or creditor with respect to any Indebtedness pursuant to this
Agreement) in connection with, or as security for the payment or performance
of the Note or this Agreement, as such agreements may be amended or
supplemented from time to time.
Section 1.3 Accounting Principles. Where the character or amount of
any asset or liability or item of income or expense is required to be
determined or other accounting computation is required to be made for the
purposes of this Agreement, this shall be done in accordance with generally
accepted accounting principles applied on a basis consistent with those
Loan Agreement - Page 3
<PAGE> 4
reflected by the Financial Statements, except where such principles are
inconsistent with the requirements of this Agreement.
ARTICLE 2
AMOUNT AND TERMS OF LOAN
Section 2.1 The Loan and Facility Fee. (a) Subject to the terms and
conditions and relying on the representations and warranties contained in this
Agreement, Lender agrees to make a revolving loan in the amount of
$5,000,000.00 to Borrower (the "Loan"). To evidence the Loan made by Lender
pursuant to this Section, Borrower will execute and deliver the Note in the
principal amount of the Loan, which Note will be payable, bear interest and
otherwise be in the form attached as Exhibit A.
(b) The Note evidences a revolving line of credit for
Borrower. Pursuant to this Agreement and so long as there is no current Event
of Default, Borrower may borrow, repay, and re-borrow on the Note. Borrower may
request advances on the Note and make payments from time to time, provided that
the aggregate principal amount outstanding on the Note shall not at any time
exceed $5,000,000; and the unpaid principal balance of the Note shall increase
and decrease with each new advance or principal payment.
(c) On the first day of each February, May, August, and
November and at maturity, Borrower will pay to Lender the Facility Fee on the
Note. The Facility Fee is calculated as three-eighths of one percent (3/8%) of
the average for the prior quarter of an amount determined daily equal to the
difference between $5,000,000 and the daily outstanding principal balance owing
on the Loan. The Facility Fee is payable to Lender quarterly for the prior
quarter. The first payment of the Facility Fee will be due November 1, 1996.
Section 2.2 Notice and Manner of Borrowing. The amount and date of
each advance hereunder shall be designated by a Borrowing Request properly
completed. The Loan shall be made at the office of Lender and shall be funded
in immediately available funds in the amount so requested.
Section 2.3 Computation. All payments of interest shall be computed on
the per annum basis of a year of 360 days and for the actual number of days
(including the first day but excluding the last day) elapsed unless such
calculation would result in a usurious rate, in which case interest shall be
calculated on the per annum basis of a year of 365 or 366 days, as the case
may be.
Section 2.4 Voluntary Prepayments. Borrower may at its option
prepay the principal amount of the Note outstanding hereunder in the manner and
as provided therein.
Section 2.5 Payment Procedure. All payments and prepayments made by
Borrower under the Note or this Agreement shall be made to Lender at its
offices described above in immediately available funds before 12:00 noon, Fort
Worth time, on the date that such payment is required to be made. Borrower
hereby authorizes Lender, if and to the extent payment or
Loan Agreement - Page 4
<PAGE> 5
prepayment is not made when due hereunder or under the Note or Security
Instruments, to charge from time to time against Borrower's account with Lender
any amount so due. Any payment received and accepted by Lender after such time
shall be considered for all purposes (including the calculation of interest, to
the extent permitted by law) as having been made on the next Business Day.
Section 2.6 Business Days. If the date for any Loan payment or
prepayment hereunder falls on a day which is not a Business Day, then, for all
purposes of the Note and this Agreement, the same shall be deemed to have
fallen on the next Business Day and such extension of time shall in such case
be included in the computation of interest.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
To induce Lender to enter into this Agreement, Borrower represents and
warrants to Lender that:
Section 3.1 Corporate Existence. Borrower is a corporation duly
organized, legally existing, and in good standing under the laws of the State
of Texas and is duly qualified as a foreign corporation in all jurisdictions
wherein the Properties owned or leased or the business transacted by Borrower
makes such qualification necessary.
Section 3.2 Corporate Power and Authority. Borrower is duly
authorized and empowered to create and issue the Note; Borrower is duly
authorized and empowered to execute, deliver, and perform this Agreement and
the Security Instruments; and all corporate action on Borrower's part requisite
for the due creation and issuance of the Note and for the due execution,
delivery, and performance of this Agreement and of the Security Instruments
has been duly and effectively taken.
Section 3.3 Binding Obligations. This Agreement, the Note, and the
Security Instruments constitute valid and binding obligations of Borrower,
enforceable in accordance with their terms (except that enforcement may be
subject to any applicable bankruptcy, insolvency or similar laws generally
affecting the enforcement of creditors' rights).
Section 3.4 No Legal Bar or Resultant Lien. Borrower's execution,
delivery, and performance of the Note, this Agreement, and the Security
Instruments does not and will not violate any provisions of its articles of
incorporation or bylaws or any contract, agreement, instrument, or Governmental
Requirement presently in effect to which Borrower is subject, or result in the
creation or imposition of, or obligation to create, any Lien upon any
Properties of Borrower, other than those permitted by this Agreement.
Section 3.5 Financial Condition. The audited annual consolidated
financial statements of Borrower for its fiscal year ended December 31, 1995,
and the unaudited interim consolidated financial statements of Borrower for its
fiscal quarter ended March 31, 1996 (including any related schedules or notes),
which have been delivered to Lender, have been prepared in
Loan Agreement - Page 5
<PAGE> 6
accordance with generally accepted accounting principles, consistently applied,
and fully and accurately present the financial condition and changes in
financial position of Borrower at the date or dates and for the period or
periods stated (subject only to normal year-end audit adjustments with respect
to such unaudited interim statements). No change, either in any case or in the
aggregate, has since occurred in the condition, financial or otherwise, of
Borrower which would have a Material Adverse Effect.
Section 3.6 Investments and Guaranties. At the date of this Agreement,
Borrower has not made investments in, advances to or guaranties of the
obligations of any Person, except those the material details of which are set
forth in the Financial Statements.
Section 3.7 Liabilities and Litigation. Except for liabilities
incurred in the normal course of business, Borrower has at the date of this
Agreement no material liabilities, direct or contingent, except those the
material details of which have been set forth in the Financial Statements. At
the date of this Agreement there is no litigation, legal, administrative, or
arbitral proceeding, investigation, or other action of any nature pending or,
to the knowledge of Borrower, threatened against or affecting Borrower or any
of its Properties which involves the possibility of any judgment of liability
not fully covered by insurance and which would have a Material Adverse Effect.
Section 3.8 Taxes; Charges. Borrower has filed all tax returns and
reports required to be filed and has paid all taxes, assessments, fees, and
other Governmental charges levied upon it or upon its Properties or income
which are due and payable, including interest and penalties, or has provided
adequate reserves for the payment thereof.
Section 3.9 Title. Borrower has good title to its material Properties,
free and clear of all Liens, except (i) Liens the material details of which
have been set forth in the Financial Statements, (ii) Liens and minor
irregularities in title which do not materially interfere with the occupation,
use, and the normal course of Borrower's business as presently conducted or
materially impair the value thereof for such business, or (iii) Liens otherwise
permitted or contemplated by this Agreement or the Security Instruments.
Section 3.10 Defaults. Borrower is not in default nor has any event or
circumstance occurred which, but for the passage of time of the giving of
notice, or both, would constitute a default (in any respect which would have a
Material Adverse Effect) under any loan or credit agreement, indenture,
mortgage, deed of trust, security agreement, or other agreement or instrument
evidencing or pertaining to any obligation for the payment of money of
Borrower, or under any material agreement or instrument to which Borrower is a
party or by which Borrower or its Properties are bound. No Potential Default
hereunder has occurred and is continuing.
Section 3.11 Casualties and Taking of Properties. Since the date of
the Financial Statements, neither the business nor the Properties of Borrower
have been materially and adversely affected as a result of any fire, explosion,
earthquake, flood, drought, windstorm, accident, strike or other labor
disturbance, embargo, requisition, or taking of Properties or cancellation of
contracts, permits, or concessions by any domestic or foreign government or any
agency thereof, riot, activities of armed forces, or acts of God or of any
public enemy.
Loan Agreement - Page 6
<PAGE> 7
Section 3.12 Use of Proceeds; Margin Stock. The proceeds of the Note
will be used by Borrower for the purpose of providing financing for purchasing
treasury stock of Borrower, for Borrower's working capital, and for other
general corporate purposes. None of such proceeds will be used for the purpose
of purchasing or carrying any "margin stock" as defined in Regulation U of the
Board of Governors of the Federal Reserve System (12 C.F.R., Part 221) or for
the purpose of reducing or retiring any indebtedness which was originally
incurred to purchase or carry a margin stock or for any other purpose which
might constitute this transaction a "purpose credit" within the meaning of such
Regulation U. Borrower is not engaged (principally or as one of Borrower's
important activities) in the business of extending credit for the purpose of
purchasing or carrying margin stocks. Neither Borrower nor any Person acting on
behalf of Borrower has taken or will take any action which might cause the
Note, this Agreement, or any of the Security Instruments to violate Regulation
U or any other regulation of the Board of Governors of the Federal Reserve
System or to violate Section 7 of the Securities Exchange Act of 1934 or any
rule or regulation thereunder, in each case as now in effect or as the same may
hereinafter be in effect.
Section 3.13 Compliance with the Law. Borrower is not:
(a) in violation of any Governmental Requirement; nor
(b) failed to obtain any license, permit, franchise, or
other governmental authorization necessary to the ownership of any of its
Properties or the conduct of its business;
which violation or failure would have (in the event such violation or failure
were asserted by any Person through appropriate action) a Material Adverse
Effect.
Section 3.14 ERISA. Borrower is in compliance in all material respects
with the applicable provisions of ERISA, and no "reportable event," as such
term is defined in section 4043 of ERISA, has occurred with respect to any Plan
of Borrower.
Section 3.15 No Material Misstatements. No information, exhibit, or
report furnished to Lender by Borrower in connection with the negotiation of
this Agreement contained any material misstatement or fact or omitted to state
a material fact or any fact necessary to make the statements contained therein
not misleading.
Section 3.16 Investment Company Act. Borrower is not an "investment
company" or a company "controlled" by an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
Section 3.17 Public Utility Holding Company Act. Borrower is not (i)
a "holding company," or (ii) a "subsidiary company" of a "holding company," or
(iii) an "affiliate" of a "holding company" or of a "subsidiary company" of a
"holding company," or (iv) a "public utility," within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
Section 3.18 Leases. Borrower enjoys peaceful and undisturbed
possession of all leases necessary for the operation of its Properties, none of
which contain any unusual or burdensome
Loan Agreement - Page 7
<PAGE> 8
provisions which might affect or impair the operation of the Properties. All
leases are valid and in full force and effect.
ARTICLE 4
AFFIRMATIVE COVENANTS
Borrower will at all times comply with the covenants contained in this
Article 4, from the date hereof and for so long as any part of the Indebtedness
is outstanding;
Section 4.1 Financial Statements and Reports. Borrower will promptly
furnish to Lender from time to time upon request such information regarding its
business and affairs and financial condition as Lender may reasonably request,
and will furnish or cause to be furnished to Lender:
(a) Audited Annual Reports for Borrower - Promptly after
becoming available, and in any event within 90 days after the close of each
fiscal year of Borrower, the audited balance sheet of Borrower as at the end of
such year, the audited statement of profit and loss of Borrower for such year
and the audited statement of reconciliation of capital accounts of Borrower for
such year, setting forth in each case in comparative form the corresponding
figures for the preceding fiscal year, accompanied by the related report of
independent public accountants acceptable to Lender which report shall be to
the effect that such statements have been prepared in accordance with generally
accepted accounting principles consistently followed throughout the period
indicated, except for such changes in such principles with which the
independent public accountants shall have concurred; and
(b) Annual Statutory Reports - Promptly after becoming
available, and in any event within 90 days after the close of each fiscal year
of 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 (collectively the "Insurance
Companies"), the statutory statements of each of the Insurance Companies as at
the end of such year, prepared on both a consolidated and an individual basis
and in accordance with the requirements of the states in which the Insurance
Companies are licensed to operate (the "statutory basis"), setting forth in
each case in comparative form the corresponding figures for the preceding
fiscal year; and
(c) Quarterly Reports - Promptly after becoming
available, and in any event within 45 days after the end of each fiscal quarter
of Borrower, the balance sheets of Borrower as of the end of such period, the
statements of profit and loss of Borrower for such fiscal quarter and for the
period from the beginning of the fiscal year to the close of such fiscal
quarter, and the statements of reconciliation of capital accounts of Borrower
for such fiscal quarter and for the period from the beginning of the fiscal
year to the close of such fiscal quarter, setting forth in each case in
comparative form the corresponding figures for the same period of the preceding
fiscal year, certified by the chief financial officer of Borrower to have been
prepared in accordance with generally accepted accounting principles,
consistently followed throughout the period indicated,
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except to the extent stated therein, subject to the normal changes resulting
from year-end adjustments; and
(d) Quarterly Statutory Reports - Promptly after becoming
available, and in any event within 45 days after the end of each fiscal quarter
of the Insurance Companies, the statutory statements of each of the Insurance
Companies, prepared in accordance with the statutory basis; and
(e) Additional Information - As soon as available, such
other information, not otherwise required herein, respecting the business
affairs, assets, and liabilities of Borrower and the Insurance Companies, as
Lender may from time to time reasonably request.
All financial statements, reports, and information required concerning Borrower
shall be prepared and computed on a consolidated basis so as to include
information concerning its subsidiaries. All financial statements and reports
concerning the Insurance Companies shall be prepared on both a consolidated and
an individual basis and in accordance with the requirements of the states in
which they are licensed to operate.
Section 4.2 Certificates of Compliance. Borrower will furnish or cause
to be furnished to Lender concurrently with the furnishing of the quarterly
financial statements and statutory reports pursuant to Subsections 4.1(c) and
(d) hereof, a certificate of compliance signed by the chief financial officer
of Borrower (i) stating that a review of the activities of Borrower has been
made under his supervision with a view to determining whether Borrower has
fulfilled all of its obligations under this Agreement, the Security
Instruments, and the Note; (ii) stating that Borrower has fulfilled its
obligations under such instruments and that all representations made herein
continue to be true and correct (or specifying the nature of any change), or if
any Potential Default shall have occurred which is continuing, specifying such
Potential Default and the nature and status thereof; (iii) specifically
affirming compliance of Borrower and the Insurance Companies with Sections 6.1
through 6.5 hereof, in the form of the Compliance Certificate attached hereto
as Exhibit B; and (iv) containing or accompanied by such financial or other
details, information, and materials as Lender may reasonably request to
evidence such compliance.
Section 4.3 Taxes and Other Liens. Borrower will pay and discharge
promptly all taxes, assessments, and governmental charges or levies imposed
upon Borrower or upon its income or any of its Properties, as well as all
claims of any kind (including claims for labor, materials, supplies, and rent)
which, if unpaid, might become a Lien upon any or all of its Properties;
provided, however, Borrower shall not be required to pay any such tax,
assessment, charge, levy, or claim if the amount, applicability, or validity
thereof shall currently be contested in good faith by appropriate proceedings
diligently conducted by or on behalf of Borrower and if Borrower shall have set
up reserves therefor adequate under generally accepted accounting principles.
Section 4.4 Maintenance. Borrower will (i) maintain its corporate
existence, rights, and franchises; (ii) observe and comply (to the extent
necessary so that any failure would not have a Material Adverse Effect) with
all Governmental Requirements, and (iii) maintain its Properties (and any
Properties leased by or consigned to it or held under title retention or
conditional sales
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contracts) in good and workable condition at all times and make all repairs,
replacements, additions, and improvements to its Properties as are needed and
proper so that the business carried on in connection therewith may be conducted
properly and efficiently at all times.
Section 4.5 Further Assurances. Borrower will promptly cure any
defects in the creation and issuance of the Note and the execution and delivery
of this Agreement and the Security Instruments. Borrower will at its expense
promptly execute and deliver to Lender upon request all such other and further
documents, agreements, and instruments in compliance with or accomplishment of
the covenants and agreements in this Agreement and in the Security Instruments
or to further evidence and more fully describe the collateral intended as
security for the Note, or to correct any omissions in the Security Instruments,
or more fully to state the security obligations set out herein or in any of the
Security Instruments, or to perfect, protect, or preserve any Liens created
pursuant to any of the Security Instruments, or to make any recordings, to file
any notices, or obtain any consents, all as may be necessary or appropriate in
connection therewith.
Section 4.6 Reimbursement of Expenses. Borrower will pay all legal
fees incurred by Lender in connection with the preparation of this Agreement
and any and all Security Instruments contemplated hereby (including any
amendments hereto or thereto or consents or waivers hereunder or thereunder)
and will also pay all fees, charges or taxes for the recording or filing of the
Security Instruments. Borrower will also pay all out-of-pocket expenses of
Lender in connection with the administration of this Agreement and the Security
Instruments. Borrower will, upon request, promptly reimburse Lender for all
amounts expended, advanced, or incurred by Lender to satisfy any obligation of
Borrower under this Agreement or any Security Instrument or to collect the
Note, or to enforce the rights of Lender under this Agreement or any Security
Instrument, which amounts will include all court costs, attorneys fees
(including, without limitation, for trial, appeal, or other proceedings), fees
of auditors and accountants, and investigation expenses reasonably incurred by
Lender in connection with any such matters, together with interest at the
post-maturity rate specified in the Note on each such amount from the date of
written demand or request by Lender for reimbursement until the date of
reimbursement to Lender.
Section 4.7 Insurance. Borrower now maintains and will continue to
maintain with financially sound and reputable insurers, insurance with respect
to its Properties and business against such liabilities, casualties, risks, and
contingencies and in such types and amounts as is customary in the case of
Persons engaged in the same or similar businesses and similarly situated. Upon
request of Lender, Borrower will furnish or cause to be furnished to Lender
from time to time a summary of the insurance coverage in form and substance
satisfactory to Lender and if requested will furnish Lender copies of the
applicable policies. In the case of any fire, accident, or other casualty
causing loss or damage to any Properties of Borrower, the proceeds of such
policies shall be used (i) to repair or replace the damaged Properties, or (ii)
to prepay the Indebtedness. Borrower will obtain endorsements to the policies
pertaining to all Properties in which Lender shall have a Lien under the
Security Instruments, naming Lender as a loss payee and containing provisions
that such policies will not be canceled without 30 days prior written notice
having been given by the insurance company to Lender.
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Section 4.8 Accounts and Records. Borrower will keep books of record
and account in which full, true and correct entries will be made of all
dealings or transactions in relation to its business and activities, in
accordance with generally accepted accounting principles, consistently applied,
except only for changes in accounting principles or practices with which
Borrower's independent public accountants concur and Lender consents.
Section 4.9 Right of Inspection. Borrower will permit any officer,
employee or agent of Lender to visit and inspect any of the Properties of
Borrower, examine Borrower's books of record and accounts, take copies and
extracts therefrom, and discuss the affairs, finances, and accounts of Borrower
with Borrower's officers, accountants, and auditors, all at such reasonable
times and as often as Lender may desire.
Section 4.10 Notice of Certain Events. Borrower shall promptly notify
Lender if it learns of the occurrence of (i) any event which constitutes a
Potential Default, together with a detailed statement by a responsible officer
of the steps being taken to cure the effect of such Potential Default; or (ii)
the receipt of any notice from, or the taking of any other action by, the
holder of any promissory note, debenture, or other evidence of indebtedness of
Borrower with respect to a claimed default, together with a detailed statement
by a responsible officer specifying the notice given or other action taken by
such holder and the nature of the claimed default and what action Borrower is
taking or proposes to take with respect thereto; or (iii) any legal, judicial,
or regulatory proceedings affecting Borrower, or any of its Properties in which
the amount involved is material and is not covered by insurance or which, if
adversely determined, would have a Material Adverse Effect; or (iv) any event
or condition having a Material Adverse Effect.
Section 4.11 ERISA Information and Compliance. Borrower will promptly
furnish to Lender (i) if requested by Lender, promptly after the filing thereof
with the United States Secretary of Labor or the Pension Benefit Guaranty
Corporation, copies of each annual and other report with respect to each Plan
or any trust created thereunder, and (ii) immediately upon becoming aware of
the occurrence of any "reportable event," as such term is defined in Section
4043 of ERISA, or of any "prohibited transaction," as such term is defined in
Section 4975 of the Internal Revenue Code of 1954, as amended, in connection
with any Plan or any trust created thereunder, a written notice signed by the
president or the principal financial officer of Borrower specifying the nature
thereof, what action Borrower is taking or proposes to take with respect
thereto and, when known, any action taken by the Internal Revenue Service with
respect thereto. Borrower will fund all current service pension liabilities as
they are incurred under the provisions of all Plans from time to time in effect
for the benefit of employees of Borrower and comply with all applicable
provisions of ERISA.
Section 4.12 Fort Worth Office. Borrower will at all times during the
term hereof maintain an office located in Fort Worth, Texas.
Section 4.13 Withholding Taxes. Borrower will make timely payment or
deposit of all amounts of tax required to be withheld and paid to or deposited
with the United States pursuant to the provisions of Title C of the Internal
Revenue Code of 1954, as from time to time amended, with respect to any and all
wages paid to employees.
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Section 4.14 Regulatory and Environmental Compliance. Borrower shall
comply with all Governmental Requirements applicable to its business and to the
use of its Properties, including, without limitation, all Environmental
Requirements. As used herein, "Environmental Requirements" means all applicable
present and future federal, state, and local statutes, regulations, ordinances,
orders, actions, policies, or common law relating to the protection of human
health or the environment.
Section 4.15 Best Rating. Borrower shall cause General Agents
Insurance Company of America, Inc., to operate and maintain at all times its
business so as to ensure an "A" (excellent) or better rating by A.M. Best
Company.
ARTICLE 5
NEGATIVE COVENANTS
Borrower will at all times comply (and will cause the Insurance
Companies to comply) with the covenants contained in this Article 5, from the
date hereof and for so long as any part of the Indebtedness is outstanding:
Section 5.1 Other Liabilities. Without Lender's prior written consent,
Borrower will not incur or suffer to exist any indebtedness except: (a)
indebtedness to Lender; (b) indebtedness to trade creditors incurred in the
ordinary course of business; and (c) indebtedness in respect of taxes,
assessments, and governmental charges or levies, so long as continued existence
of such taxes or other liabilities does not result in a violation of Section
4.3 hereof.
Section 5.2 Liens. Borrower will not create, incur, assume or suffer
to exist any Lien on any of its Properties (now owned or hereafter acquired)
except:
(a) Liens securing the payment of any Indebtedness;
(b) Excepted Liens; and
(c) Liens existing on Properties owned by Borrower on the
date of this Agreement which are disclosed to Lender in Exhibit 5.2 hereto, and
all renewals and extensions thereof.
Section 5.3 Transactions with Affiliates. Borrower will not enter into
any transaction, including, without limitation, the purchase, sale, or exchange
of property or the rendering of any service, with any Affiliate, except in the
ordinary course of and pursuant to the reasonable requirements of Borrower's
business and upon fair and reasonable terms no less favorable to Borrower than
Borrower would obtain in a comparable arm's length transaction with a person or
entity not an Affiliate. This covenant respecting transactions with an
Affiliate does not pertain to transactions of an immaterial nature. As used
herein, the term "Affiliate" means any Person that directly or indirectly,
through one or more intermediaries, controls or is controlled by, or is under
common control with Borrower.
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Section 5.4 Loans and Advances by Borrower. Borrower shall not,
without the prior written consent of Lender, make or permit to remain
outstanding any loans or investments to any Person.
Section 5.5 Sales and Leasebacks. Borrower will not enter into any
arrangement, directly or indirectly, with any Person whereby Borrower shall
sell or transfer any Properties, whether now owned or hereafter acquired, and
whereby Borrower shall then or thereafter rent or lease as lessee such
Properties or any part thereof or other Properties which Borrower intends to
use for substantially the same purpose or purposes as the Properties sold or
transferred.
Section 5.6 Merger, Etc. Borrower will not merge or consolidate with,
or sell, assign, lease, or otherwise dispose of (whether in one transaction or
in a series of transactions) all, substantially all, or any integral portion of
its Properties (whether now owned or hereafter acquired) to any Person.
Section 5.7 Proceeds of Note. Borrower will not permit the proceeds of
the Note to be used for any purposes other than those permitted by Section 3.12
hereof.
Section 5.8 ERISA Compliance. Borrower will not at any time permit any
Plan maintained by it to:
(a) engage in any "prohibited transaction" as such term
is defined in Section 4975 of the Internal Revenue Code of 1954, as amended;
(b) incur any "accumulated funding deficiency" as such
term is defined in Section 302 of ERISA; or
(c) terminate any such Plan in a manner which could
result in the imposition of a Lien on the Properties of Borrower pursuant to
Section 4068 of ERISA.
Section 5.9 Nature of Business. Borrower will not permit any material
change to be made in the character of its business as carried on at the date
hereof.
Section 5.10 Sale or Discount of Receivables. Borrower will not,
except to minimize losses on bona fide debts previously contracted, discount or
sell with recourse, or sell for less than the greater of the face or market
value thereof, any of its notes receivable or accounts receivable.
Section 5.11 Contingent Liabilities. Borrower will not guarantee the
obligations of any Person.
Section 5.12 Compensation and Management Fees. Borrower will not pay
any management or similar fees nor pay any unreasonable or unusual increases in
employee compensation.
Section 5.13 Purchase of Substantial Assets. Borrower will not
purchase, lease, or otherwise acquire all or substantially all of the assets of
any other Person or entity, without
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Lender's prior written consent, unless the aggregate contract price of all such
transactions does not exceed $5,000,000.
Section 5.14 Prepayments. Except with respect to revolving lines of
credit entered into with Lender's prior written consent, Borrower will not
directly or indirectly pay any indebtedness other than indebtedness owing to
Lender, prior to the date on which such indebtedness is due and payable in
accordance with the terms thereof (regardless of any right to prepay under the
terms of such indebtedness).
Section 5.15 Fiscal Year. Borrower will not change its fiscal year or
present methods of accounting.
Section 5.16 Cash Flow Coverage Ratio. Borrower will not allow the
cash flow coverage ratio to be less than 1.20:1.0. Such ratio is defined as the
quotient obtained by dividing: (a) the maximum allowable annual dividends
payable to Borrower under applicable state law by General Agents Insurance
Company of America, Inc. as of the preceding December 31; by (b) the sum of:
(i) Borrower's "annualized" year-to-date non-consolidated operating expenses,
plus (ii) annualized" year-to-date cash dividends paid or declared by Borrower,
plus (iii) $1,500,000. The cash flow coverage ratio will be calculated
substantially in the manner set forth in the Compliance Certificate attached
hereto as Exhibit B.
ARTICLE 6
FINANCIAL AND INVESTMENT RATIOS AND COVENANTS
FOR INSURANCE COMPANIES
Borrower will at all times cause the Insurance Companies to comply
with the following:
Section 6.1 Minimum Risk-based Capital. Risk-Adjusted Surplus to
Policyholders (as calculated in accordance with principles approved by The
National Association of Insurance Commissioners) will not be less than four (4)
times the Authorized Control Level Risk-based Capital.
Section 6.2 Maximum Combined Ratio. The "combined ratio" for the
Insurance Companies, measured as the sum for Insurance Companies of (i) the
"loss ratio" and (ii) the "expense ratio," shall not exceed 100% at any time.
Section 6.3 Bond Portfolio Investment Ratio. The Insurance Companies
shall not, without the prior written consent of Lender, invest in or hold bonds
which carry Standard and Poor's or Moody's ratings of less than BBB/Baa. The
bond holdings of the Insurance Companies rated AA/Aa or better, when combined
with the investments of the Insurance Companies in U.S. Treasury Securities and
short-term money market funds, shall represent not less than 80% of the
Insurance Companies' consolidated investment portfolio at any time.
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Section 6.4 Equity Investments Ratio. The equity investments of
the Insurance Companies shall not exceed 10% of the Insurance Companies'
consolidated investment portfolio at any time.
Section 6.5 Investments in High-Yield Securities. None of the
Insurance Companies shall, without Lender's prior written consent, invest in
any high-yield securities (commonly referred to as "junk securities"), nor in
any equity securities of issuers of such securities.
The ratios set forth above in this Article 6 shall be based upon the
consolidated reports prepared on a statutory basis and as furnished by the
Insurance Companies to Lender. For purposes of determining compliance with this
Agreement, the ratios will be calculated substantially in the manner set forth
in the Compliance Certificate attached hereto as Exhibit B, which manner of
calculation may differ from that used by the National Association of Insurance
Commissioners in reporting similar ratios.
ARTICLE 7
EVENTS OF DEFAULT
Section 7.1 Events of Default. Any of the following events shall be
considered an "Event of Default" as that term is used herein:
(a) Payments - default is made in the payment or
prepayment when due of any installment of principal or interest on the Note or
other Indebtedness; or
(b) Representations and Warranties - any representation
or warranty by Borrower in this Agreement or any Security Instrument proves to
have been incorrect in any material respect as of the date hereof; or any
representation, statement (including financial statements), certificate,
request, or other document furnished pursuant to or under this Agreement or any
Security Instrument (whether by Borrower, any Person party to any Security
Instrument, or any officer, accountant, or attorney thereof) proves to have
been incorrect in any material respect as of the date when made or deemed made;
or
(c) Affirmative Covenants - default is made in the due
observance or performance by Borrower of any of the covenants or agreements
contained in Article 4 of this Agreement; or
(d) Negative Covenants - default is made in the due
observance or performance by Borrower of any of the covenants or agreements
contained in Article 5 of this Agreement; or
(e) Financial Covenants - default is made in the due
observance or performance by Borrower of, or there is otherwise any failure to
comply with the standards and ratios set forth in, any of the terms, covenants,
or agreements contained in Article 6 of this Agreement, and such default or
failure continues unremedied for a period of 10 days after the
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earlier of (i) notice thereof being given by Lender to Borrower, or (ii) such
default otherwise becoming known to Borrower; or
(f) Security Instrument Obligations - default is made in
the due observance or performance by Borrower or any other Person of any of the
covenants or agreements contained in any Security Instrument; or
(g) Involuntary Bankruptcy or Other Proceedings - an
involuntary case or other proceeding shall be commenced against Borrower which
seeks liquidation, reorganization, or other relief with respect to it or its
debts or other liabilities under any bankruptcy, insolvency, or other similar
law now or hereafter in effect, or seeking the appointment of a trustee,
receiver, liquidator, custodian, or other similar official of it or any
substantial part of its Properties, and such involuntary case or other
proceeding shall remain undismissed or unstayed for a period of 30 days; or an
order for relief against Borrower shall be entered in any such case under the
federal Bankruptcy Code; or
(h) Voluntary Bankruptcy - Borrower shall commence a
voluntary case or other proceeding seeking liquidation, reorganization, or
other relief with respect to itself or its debts or other liabilities under any
bankruptcy, insolvency, or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian, or other
similar official of it or any substantial part of its Properties, or shall
consent to any such relief or to the appointment of or taking possession by any
such official in an involuntary case or other proceeding commenced against it,
or shall make a general assignment for the benefit of creditors, or shall fail
generally to, or shall admit in writing its inability to, pay its debts
generally as they become due, or shall take any corporate action to authorize
or effect any of the foregoing; or
(i) Discontinuance of Business - Borrower discontinues
its usual business; or
(j) Default on Other Indebtedness - Borrower fails to
make any payment due on any other indebtedness or obligation for the payment of
money; or any event shall occur or any condition shall exist in respect of any
such indebtedness or obligation, or under any agreement or instrument under or
by which any such indebtedness or obligation is created, evidenced, or secured,
the effect of which, with notice, lapse of time, or both, is to cause or to
permit any holder of such indebtedness or obligation or a trustee to cause such
indebtedness or obligation, or a portion thereof; to become due prior to its
stated maturity or prior to its regularly scheduled dates of payment; or
(k) Undischarged Judgments - Borrower shall fail within
30 days to pay, bond, or otherwise discharge any judgment or order for the
payment of money that is not otherwise being satisfied in accordance with its
terms or is not stayed on appeal; or
(l) Security Instruments - the Security Instruments after
delivery thereof shall for any reason, except to the extent permitted by the
terms thereof; cease to be in full force and effect and valid, binding, and
enforceable (except as enforceability may be limited as stated in Section 3.3
hereof) in accordance with their terms, or cease to create a valid and
perfected lien of
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the priority required thereby on any of the collateral purported to be covered
thereby, or Borrower shall so state in writing.
Section 7.2 Certain Remedies. Upon the occurrence of any Event of
Default described in Subsection 7.1(g) or (h) hereof; the obligations, if any,
of Lender hereunder shall immediately terminate, and the entire principal
amount of all indebtedness then outstanding together with interest then accrued
thereon shall automatically and immediately become due and payable, all without
written notice and without presentment, demand, protest, notice of protest or
dishonor, notice of intention to accelerate, notice of acceleration, or any
other notice of default of any kind, all of which are hereby expressly waived
by Borrower. Upon the occurrence and at any time during the continuance of any
other Event of Default, Lender may by written notice to Borrower (i) declare
the entire principal amount of all Indebtedness then outstanding together with
interest then accrued thereon to be immediately due and payable without
presentment, demand, protest, notice of protest or dishonor, notice of
intention to accelerate, or other notice of default of any kind, all of which
are hereby expressly waived by Borrower, and (ii) terminate the obligations, if
any, of Lender hereunder unless and until Lender shall reinstate same in
writing.
Section 7.3 Right of Set-off. Upon the occurrence and during the
continuance of any Event of Default, or if Borrower becomes insolvent, however
evidenced, Lender is hereby authorized at any time and from time to time,
without notice to Borrower (any such notice being expressly waived by
Borrower), to set-off and apply any and all deposits (general or special, time
or demand, provisional or final) at any time held and other indebtedness at any
time owing by Lender to or for the credit or the account of Borrower against
any and all of the Indebtedness of Borrower, irrespective of whether or not
Lender shall have made any demand under this Agreement or the Note and although
such obligations may be unmatured. Lender agrees promptly to notify Borrower
after any such set-off and application, provided that the failure to give such
notice shall not affect the validity of such set-off and application. The
rights of Lender under this Section are in addition to other rights and
remedies (including, without limitation, other rights of set-off) which Lender
may have.
ARTICLE 8
CONDITIONS OF LENDING
The obligation of Lender to make the Loan pursuant to this Agreement
is subject to the conditions precedent stated in this Article 8:
Section 8.1 Closing and Documentation. The obligation of Lender to
make the Loan under this Agreement is subject to the following conditions
precedent wherein each document to be delivered to Lender shall be in form,
substance, and detail satisfactory to Lender, in its sole discretion:
(a) Closing - On a Business Day acceptable to Lender
there shall have occurred a closing at which Borrower shall deliver to Lender
executed counterparts of this
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Agreement and of all instruments, certificates, and opinions referred to in
this Article 8 not previously delivered.
(b) Note - Borrower shall have duly and validly issued,
executed, and delivered the Note to Lender.
(c) Secretary's Certificates -
(i) Lender shall have received certificates of
the secretary or assistant secretary of Borrower setting forth (A) resolutions
of its board of directors in form and substance satisfactory to Lender with
respect to the authorization of the Note, this Agreement, and any Security
Instruments provided herein and the officers of Borrower authorized to sign
such instruments, and (B) specimen signatures of the officers so authorized.
(ii) Lender shall also have received a copy,
certified as true by the secretary or assistant secretary of Borrower, of the
articles of incorporation and the bylaws of Borrower.
(d) Security Instruments - Lender shall have received the
following instruments, each duly and validly executed and delivered by the
respective parties thereto (other than Lender), and in sufficient executed
counterparts for recording purposes when applicable, as security for the Note
and other Indebtedness:
(i) Negative Pledge from Borrower by the terms of
which Borrower agrees not to pledge, transfer, or encumber any of its assets,
whether now owned or hereafter acquired, including stock held in its
subsidiaries.
(ii) Lender reserves the right at any time to
require the pledge of all of Borrower's stock in its subsidiaries as security
for the Loan, and any failure by Borrower to deliver such pledge on request in
form, substance, and detail satisfactory to Lender, shall constitute an
additional Event of Default under this Agreement. If required, the pledge or
security agreement covering the stock in the subsidiaries will also be a
Security Instrument.
(e) Other - Lender shall have received such other
documents as it may reasonably have requested at any time at or prior to the
closing referred to in Subsection 8.1(a) hereof
ARTICLE 9
MISCELLANEOUS
Section 9.1 Notices. Any notice required or permitted to be given
under or in connection with this Agreement, the Security Instruments, or the
Note shall be in writing and shall be mailed by first class or express mail,
postage prepaid, or sent by telex, telegram, telecopy, or other similar form of
rapid transmission confirmed by mailing (by first class or express mail,
postage prepaid) with written confirmation at substantially the same time as
such rapid
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transmission, or personally delivered to an officer of the receiving party. All
such communications shall be mailed, sent, or delivered, (a) if to Borrower, to
its address shown at the beginning of this Agreement, or to such other address
and to such individual's or department's attention as Borrower may have
furnished Lender in writing; or (b) if to Lender, to its address shown at the
beginning of this Agreement, or to such other address and to such individual's
or department's attention as Lender may have furnished Borrower in writing. Any
communication so addressed and mailed shall be deemed to be given when so
mailed and any notice so sent by rapid transmission shall be deemed to be given
when receipt of such transmission is acknowledged, and any communication so
delivered in person shall be deemed to be given when receipted for by, or
actually received by, an authorized officer of Borrower or Lender.
Section 9.2 Amendments and Waivers. No provision of this Agreement,
the Security Instruments, or the Note may be amended or waived, except in
writing signed by Borrower (and any other Person, who is a party to any
Security Instrument being amended or with respect to which a waiver is being
obtained) and Lender.
Section 9.3 Invalidity. In the event that any one or more of the
provisions contained in the Note, this Agreement, or in any Security Instrument
shall, for any reason be held invalid, illegal, or unenforceable in any
respect, such invalidity, illegality, or unenforceability shall not affect any
other provision of the Note, this Agreement, or any Security Instrument.
Section 9.4 Survival of Agreements. All covenants and agreements of
Borrower herein and in the Security Instruments not fully performed before the
date hereof or the date of the Security Instruments and all representations and
warranties of Borrower herein or in the Security Instruments, shall survive
such date or dates.
Section 9.5 Successors and Assigns. All covenants and agreements
contained by or on behalf of Borrower in the Note, this Agreement, and any
Security Instrument shall bind its successors and assigns and shall inure to
the benefit of Lender and its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest herein, without the prior written consent of Lender. In the event that
Lender sells participations in the Note or other Indebtedness of Borrower
incurred or to be incurred pursuant to this Agreement, to other lenders, each
of such other lenders shall have the rights of set-off against such
Indebtedness and similar rights or Liens to the same extent as may be available
to Lender.
Section 9.6 Renewal. Extension. or Rearrangement. All provisions of
this Agreement and of any Security Instruments relating to the Note or other
Indebtedness shall apply with equal force and effect to each and all promissory
notes hereafter executed which in whole or in part represent a renewal,
extension of any period, increase, or rearrangement of any part of the
Indebtedness, originally represented by the Note or of any part of such other
Indebtedness.
Section 9.7 Waivers. No course of dealing on the part of Lender, its
officers, employees, consultants, attorneys, or agents, nor any failure or
delay by Lender with respect to exercising any right, power, or privilege of
Lender under the Note, this Agreement, or any
Loan Agreement - Page 19
<PAGE> 20
Security Instrument shall operate as a waiver thereof; except as otherwise
provided in Section 9.2 hereof.
Section 9.8 Cumulative Rights. Rights and remedies of Lender under the
Note, this Agreement, and each Security Instrument shall be cumulative, and the
exercise or partial exercise of any such right or remedy shall not preclude the
exercise of any other right or remedy.
Section 9.9 Singular and Plural. Words used herein in the singular,
where the context so permits, shall be deemed to include the plural and vice
versa. The definitions of words in the singular herein shall apply to such
words when used in the plural where the context so permits and vice versa.
Section 9.10 Construction. This Agreement, the Note, and each Security
Instrument are contracts made under, and shall be construed in accordance with
and governed by, the laws of the United States of America and the State of
Texas, as such laws are now in effect and, with respect to usury laws, if any,
applicable to Lender and to the extent allowed thereby, as such laws may
hereafter be in effect which allow a higher maximum nonusurious interest rate
than now allowed.
Section 9.11 Performance by Lender. Should any covenant, duty, or
agreement of Borrower fail to be performed in accordance with this Agreement,
the Note, or any Security Instrument, Lender may, at its option, perform or
attempt to perform such covenant, duty, or agreement on behalf of Borrower. In
such event, Borrower shall, at the request of Lender, promptly pay to Lender
any amount expended in such performance or attempted performance, together with
interest thereon at the Highest Lawful Rate from the date of such expenditure
by Lender until repaid. Notwithstanding the foregoing, it is expressly
understood that Lender does not assume any liability or responsibility for the
performance of any of the duties of Borrower or any other Person hereunder or
in connection with all or any part of any Properties upon which Lender has or
will acquire a Lien.
Section 9.12 Indemnification of Lender. Borrower hereby indemnifies
and holds Lender harmless against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, claims, costs, expenses, and
disbursements of any kind or nature whatsoever which may be imposed on,
incurred by, or asserted against Lender, in any way relating to, or arising out
of this Agreement, the Note, the Security Instruments, or any of the
transactions contemplated therein, directly or indirectly, from any claims made
or actions, suits, or proceedings commenced by or on behalf of any Person other
than Lender.
Section 9.13 Expenditures by Lender. Any sums spent by Lender pursuant
to the exercise of any right or remedy provided under this Agreement, the Note,
or any Security Instrument shall become part of the Indebtedness and shall bear
interest at the Highest Lawful Rate from the date spent until the date repaid
by Borrower.
Section 9.14 Interest. It is the intention of the parties hereto to
conform strictly to usury laws applicable to Lender. Accordingly, if the
transactions contemplated hereby would be usurious under applicable law
(including the laws of the United States of America and the State of Texas),
then, in that event, notwithstanding anything to the contrary in the Note, this
Agreement,
Loan Agreement - Page 20
<PAGE> 21
or in any Security Instrument or other agreement entered into in connection
with or as security for the Note, it is agreed as follows: (i) the aggregate of
all consideration which constitutes interest under law applicable to Lender
that is contracted for, taken, reserved, charged, or received under the Note,
this Agreement, or Security Instruments or under any of the other aforesaid
agreements or otherwise with respect to the Note and the Indebtedness, after
giving effect to reductions, if any, required by law from the nominal amount
loaned to or incurred by Borrower hereunder to determine the true principal
amount thereof; shall under no circumstances exceed the maximum amount of
nonusurious interest allowed by such applicable law, and the excess, if any,
shall be credited by Lender on the principal amount of the Indebtedness (or, if
the principal amount of the Indebtedness shall have been paid in full, refunded
to Borrower); and (ii) in the event that the maturity of the principal amount
of and accrued interest with respect to the Note and the Indebtedness is
accelerated by reason of an election of Lender resulting from any Event of
Default under this Agreement or otherwise, or in the event of any required or
permitted prepayment, then such consideration that constitutes interest under
law applicable to Lender may never, after giving effect to reductions, if any,
required by law from the nominal amount loaned to or incurred by Borrower
hereunder to determine the true principal amount thereof; include more than the
maximum amount of nonusurious interest allowed by such applicable law, and
excess interest, if any, provided for in this Agreement or otherwise shall be
canceled automatically as of the date of such acceleration or prepayment and,
if theretofore paid, shall be credited by Lender on the principal amount of the
Indebtedness (or, if the principal amount of the Indebtedness shall have been
paid in full, refunded by Lender to Borrower). All interest so paid or agreed
to be paid under the Note, this Agreement, or any Security Instrument shall, to
the extent permitted by applicable law, be amortized, prorated, allocated, and
spread throughout the full period of the Loan until payment in full of the
Indebtedness so that the interest for such full period shall not exceed the
maximum amount of nonusurious interest allowed by such applicable law. To the
extent that Article 5069-1.04, as amended, of the Texas Revised Civil Statutes
is applicable to Lender for the purpose of determining the Highest Lawful Rate,
Lender hereby elects to determine the applicable rate ceiling under such
Article by the indicated (weekly) rate ceiling from time to time in effect,
subject to Lender's right subsequently to change such method in accordance with
applicable law.
Section 9.15 References. The words "herein," "hereof;" "hereunder,"
and other words of similar import when used in this Agreement refer to this
Agreement as a whole, and not to any particular article, section, or
subsection.
Section 9.16 Entire Agreement. The Note, this Agreement, and the
Security Instruments embody the entire agreement and understanding between
Lender, Borrower, and the other respective parties and supersede all prior
agreements and understandings between such parties relating to the subject
matter hereof and thereof
Section 9.17 Exhibits. The exhibits attached to this Agreement are
incorporated herein and shall be considered a part of this Agreement for the
purposes stated herein, except that in the event of any conflict between any of
the provisions of such exhibits and the provisions of this Agreement, the
provisions of this Agreement shall prevail.
Section 9.18 Titles of Articles. All titles or headings to articles,
sections, subsections, or other divisions of this Agreement or the exhibits
hereto are only for the convenience of the parties
Loan Agreement- Page 21
<PAGE> 22
and shall not be construed to have any effect or meaning with respect to the
other content of such articles, sections, subsections, or other divisions,
such content being controlling as to the agreement between the parties hereto.
Section 9.19 Counterparts. This Agreement may be executed in two or
more counterparts, and it shall not be necessary that the signatures of all
parties hereto be contained on any one counterpart hereof; each counterpart
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
THIS WRITTEN LOAN AGREEMENT TOGETHER WITH THE OTHER LOAN INSTRUMENTS
MENTIONED HEREIN REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT
BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN AGREEMENTS BETWEEN THE PARTIES.
Executed effective as of the date first written above.
BORROWER:
GAINSCO, INC.
By: /s/ DANIEL J. COOTS
-------------------------------
Daniel J. Coots,
Senior Vice President
and Chief Financial Officer
LENDER:
BANK ONE, TEXAS, N.A.
By: /s/ JOHN D. HUDGENS
-------------------------------
John D. Hudgens
Vice President
Exhibits
A - Note
B - Compliance Certificate
Loan Agreement - Page 22
<PAGE> 23
NOTICE OF FINAL AGREEMENT
To: GAINSCO, INC. ("Borrower")
500 Commerce Street
Fort Worth, Texas 76102
As of the effective date of this Notice, Borrower and BANK ONE, TEXAS, NATIONAL
ASSOCIATION ("BANK") have consummated a transaction pursuant to which Bank has
agreed to make a loan or loans to Borrower, to renew and extend an existing
loan or loans to Borrower, or to otherwise extend credit or make financial
accommodations to or for the benefit of Borrower, in an aggregate amount up to
$5,000,000.00 (collectively, whether one or more, the "LOAN").
In connection with the Loan, Borrower and Bank and the undersigned guarantors
and other obligors, if any (collectively, whether one or more, "OTHER
OBLIGORS") have executed and delivered and may hereafter execute and deliver
certain agreements, instruments, and documents (collectively hereinafter
referred to as the "WRITTEN LOAN AGREEMENT").
It is the intention of Borrower, Bank, and Other Obligors that this Notice be
incorporated by reference into each of the written agreements, instruments and
documents comprising the Written Loan Agreement. Borrower, Bank, and Other
Obligors each warrant and represent that the entire agreement made and existing
by or among Borrower, Bank, and Other Obligors with respect to the Loan is and
shall be contained within the Written Loan Agreement, as amended and
supplemented hereby, and that no agreements or promises exist or shall exist by
or among, Borrower, Bank, and Other Obligors that are not reflected in the
Written Loan Agreement.
THE WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN AGREEMENTS BETWEEN THE PARTIES.
Effective Date: September 9, 1996.
BANK ONE TEXAS, NATIONAL ASSOCIATION
By: /s/ JOHN D. HUDGENS
-------------------------------
John D. Hudgens,
Vice President
ACKNOWLEDGED AND AGREED:
BORROWER:
GAINSCO, INC.
By: /s/ DANIEL J. COOTS
- - ----------------------------------
Daniel J. Coots
Senior Vice President and
Chief Financial Officer
<PAGE> 1
EXHIBIT 10.34
BANK ONE, TEXAS, NATIONAL ASSOCIATION
REVOLVING PROMISSORY NOTE
$5,000,000.00 Fort Worth, Texas 9-9, 1996
PROMISE TO PAY. For value received, on or before August 15, 1997
("Maturity Date"), GAINSCO, INC. ("Borrower"), a Texas corporation, promises to
pay to the order of BANK ONE, TEXAS, NATIONAL ASSOCIATION ("Bank") at its
offices in Tarrant County, Texas, at 500 Throckmorton Street, Fort Worth, Texas
76102, the principal amount of Five Million Dollars ($5,000,000.00) ("Total
Principal Amount"), or such amount less than the Total Principal Amount is
outstanding from time to time if the total amount outstanding under this
Promissory Note ("Note") is less than the Total Principal Amount, together with
interest on such portion of the Total Principal Amount which has been advanced
to Borrower from the date advanced until paid at a fluctuating rate per annum
which shall from day to day be equal to the lesser of (a) the Maximum Rate (as
hereinafter defined), or (b) a rate ("Contract Rate"), calculated on the basis
of the actual days elapsed but computed as if each year consisted of 360 days,
equal to the Bank One Base Rate of interest ("Base Rate") as established from
time to time by Bank (which may not be the lowest, best, or most favorable rate
of interest which Bank may charge on loans to its customers), each change in
the rate to be charged on this Note to become effective without notice to
Borrower on the effective date of each change in the Maximum Rate or the Base
Rate, as the case may be; provided, however, that if at any time the Contract
Rate shall exceed the Maximum Rate, thereby causing the interest on this Note
to be limited to the Maximum Rate, then any subsequent reduction in the Base
Rate shall not reduce the rate of interest on this Note below the Maximum Rate
until the total amount of interest accrued on this Note equals the amount of
interest which would have accrued on this Note if the Contract Rate had at all
times been in effect. The term "Maximum Rate," as used herein, shall mean at
the particular time in question the maximum rate of interest which, under
applicable law, may then be charged on this Note. If such maximum rate of
interest changes after the date hereof and this Note provides for a fluctuating
rate of interest, the Maximum Rate shall be automatically increased or
decreased, as the case may be, without notice to Borrower from time to time as
of the effective date of each change in such maximum rate. If applicable law
ceases to provide for such a maximum rate of interest, the Maximum Rate shall
be equal to eighteen percent (18%) per annum.
PAYMENT TERMS. The principal of and all accrued but unpaid interest on
this Note shall be due and payable as follows:
(a) interest shall be due and payable monthly as it accrues,
commencing on the first (1st) day of October, 1996, and continuing on the first
(1st) day of each successive month thereafter during the term of this Note; and
(b) the outstanding principal balance of this Note, together with
all accrued but unpaid interest, shall be due and payable on the Maturity Date.
PAST DUE PAYMENTS. To the extent that any interest is not paid on or
before the fifth day after it becomes due and payable, Bank may, at its option,
add such accrued interest to the principal of this Note. Notwithstanding
anything herein to the contrary, upon an Event of Default (as hereinafter
defined) or at
Revolving Promissory Note - Page 1
<PAGE> 2
maturity whether by acceleration or otherwise, all principal of this Note
shall, at the option of Bank, bear interest at the Maximum Rate until paid.
SECURITY. This Note evidences obligations and indebtedness from time
to time owing by Borrower to Bank pursuant to that certain Loan Agreement of
even date herewith by and between Borrower and Bank ("Loan Agreement"), and is
secured by, a Negative Pledge Agreement of even date. This Note, the Loan
Agreement, and all other documents evidencing, securing, governing,
guaranteeing or pertaining to this Note, including but not limited to those
documents described above, are hereinafter collectively referred to as the
"Loan Documents." The holder of this Note is entitled to the benefits and
security provided in the Loan Documents.
REVOLVING CREDIT. Under the Loan Agreement, Borrower may request
advances and make payments hereunder from time to time, provided that it is
understood and agreed that the aggregate principal amount outstanding from time
to time hereunder shall not at any time exceed the Total Principal Amount. The
unpaid balance of this Note shall increase and decrease with each new advance
or payment hereunder, as the case may be. This Note shall not be deemed
terminated or canceled prior to the Maturity Date, although the entire
principal balance hereof may from time to time be paid in full. Borrower may
borrow, repay and reborrow hereunder. All regularly scheduled payments of the
indebtedness evidenced by this Note and by any of the other Loan Documents
shall be applied first to any accrued but unpaid interest then due and payable
hereunder or thereunder and then to the principal amount then due and payable.
All non-regularly scheduled payments shall be applied to such indebtedness in
such order and manner as the holder of this Note may from time to time
determine in its sole discretion. All payments and prepayments of principal of
or interest on this Note shall be made in lawful money of the United States of
America in immediately available funds, at the address of Bank indicated above,
or such other place as the holder of this Note shall designate in writing to
Borrower. If any payment of principal of or interest on this Note shall become
due on a day which is not a Business Day (as hereinafter defined), such payment
shall be made on the next succeeding Business Day and any such extension of
time shall be included in computing interest in connection with such payment.
As used herein, the term "Business Day" shall mean any day other than a
Saturday, Sunday, or any other day on which national banking associations are
authorized to be closed. The books and records of Bank shall be prima facie
evidence of all outstanding principal of and accrued and unpaid interest on
this Note.
BUSINESS LOAN. Borrower agrees that no advances under this Note shall
be used for personal, family, or household purposes, and that all advances
hereunder shall be used solely for business, commercial, investment, or other
similar purposes.
DEFAULTS: REMEDIES. Borrower agrees that upon the occurrence of any
one or more of the following events of default ("Event of Default"):
(a) failure of Borrower to pay any installment of
principal of or interest on this Note or on any other indebtedness of Borrower
to Bank when due; or
(b) the occurrence of any event of default specified in any of
the other Loan Documents; or
Revolving Promissory Note - Page 2
<PAGE> 3
(c) the bankruptcy or insolvency of the assignment for
the benefit of creditors by, or the appointment of a receiver for any of the
property of or the liquidation, termination, dissolution, or death or legal
incapacity of any party liable for the payment of this Note, whether as maker,
endorser, guarantor, surety, or otherwise;
the holder of this Note may, at its option, without further notice or demand,
(i) declare the outstanding principal balance of and accrued but unpaid
interest on this Note at once due and payable, (ii) refuse to advance any
additional amounts under this Note, (iii) foreclose all liens securing payment
hereof; (iv) pursue any and all other rights, remedies, and recourses available
to the holder hereof, including but not limited to any such rights, remedies,
or recourses under the Loan Documents, at law or in equity, or (v) pursue any
combination of the foregoing.
CUMULATIVE REMEDIES AND WAIVER. The failure to exercise the option to
accelerate the maturity of this Note or any other right, remedy, or recourse
available to the holder hereof upon the occurrence of an Event of Default
hereunder shall not constitute a waiver of the right of the holder of this Note
to exercise the same at that time or at any subsequent time with respect to
such Event of Default or any other Event of Default. The rights, remedies, and
recourses of the holder hereof; as provided in this Note and in any of the
other Loan Documents, shall be cumulative and concurrent and may be pursued
separately, successively, or together as often as occasion therefore shall
arise, at the sole discretion of the holder hereof. The acceptance by the
holder hereof of any payment under this Note which is less than the payment in
full of all amounts due and payable at the time of such payment shall not (i)
constitute a waiver of or impair, reduce, release, or extinguish any right,
remedy, or recourse of the holder hereof, or nullify any prior exercise of any
such right, remedy, or recourse, or (ii) impair, reduce, release, or extinguish
the obligations of any party liable under any of the Loan Documents as
originally provided herein or therein.
SAVINGS CLAUSE. This Note and all of the other Loan Documents are
intended to be performed in accordance with, and only to the extent permitted
by, all applicable usury laws. If any provision hereof or of any of the other
Loan Documents or the application thereof to any person or circumstance shall,
for any reason and to any extent, be invalid or unenforceable, neither the
application of such provision to any other person or circumstance nor the
remainder of the instrument in which such provision is contained shall be
affected thereby, and all provisions shall be enforced to the greatest extent
permitted by law. It is expressly stipulated and agreed to be the intent of the
holder hereof to at all times comply with the usury and other applicable laws
now or hereafter governing the interest payable on the indebtedness evidence by
this Note. If the applicable law is ever revised, repealed, or judicially
interpreted so as to render usurious any amount called for under this Note or
under any of the other Loan Documents, or contracted for, charged, taken,
reserved, or received with respect to the indebtedness evidenced by this Note,
or if Bank's exercise of the option to accelerate the maturity of this Note or
if any prepayment by Borrower results in Borrower having paid any interest in
excess of that permitted by law, then it is the express intent of Borrower and
Bank that all excess amounts theretofore collected by Bank be credited on the
principal balance of this Note (or, if this Note and all other indebtedness
arising under or pursuant to the other Loan Documents have been paid in full,
refunded to Borrower), and the provisions of this Note and the other Loan
Documents immediately be deemed reformed and the amounts thereafter collectable
hereunder and thereunder reduced, without the necessity of the execution of any
new document, so as to comply with the then applicable law, but so as to permit
the recovery of the fullest amount otherwise
Revolving Promissory Note - Page 3
<PAGE> 4
called for hereunder or thereunder. All sums paid, or agreed to be paid, by
Borrower for the use, forbearance, detention, taking, charging, receiving, or
reserving of the indebtedness of Borrower to Bank under this Note or arising
under or pursuant to the other Loan Documents shall, to the maximum extent
permitted by applicable law, be amortized, prorated, allocated, and spread
throughout the full term of such indebtedness until payment in full so that the
rate or amount of interest on account of such indebtedness does not exceed the
usury ceiling from time to time in effect and applicable to such indebtedness
for so long as such indebtedness is outstanding. To the extent federal law
permits Bank to contract for, charge or receive a greater amount of interest,
Bank will rely on federal law instead of TEX REV. CIV. STAT. ANN. art.
5069-1.04, as amended, for the purpose of determining the Maximum Rate.
Additionally, to the maximum extent permitted by applicable law now or
hereafter in effect, Bank may, at its option and from time to time, implement
any other method of computing the Maximum Rate under such Article 5069-1.04, as
amended, or under other applicable law by giving notice, if required, to
Borrower as provided by applicable law now or hereafter in effect.
Notwithstanding anything to the contrary contained herein or in any of the
other Loan Documents, it is not the intention of Bank to accelerate the
maturity of any interest that has not accrued at the time of such acceleration
or to collect unearned interest at the time of such acceleration.
APPLICABILITY OF LAWS. In no event shall TEX. REV. CIV. STAT. ANN.
art. 5069 Ch. 15 (which regulates certain revolving loan accounts and revolving
tri-party accounts) apply to this Note. To the extent that TEX. REV. CIV. STAT.
ANN. art. 5069-1.04, as amended, is applicable to this Note, the "indicated
rate ceiling" specified in such article is the applicable ceiling; provided
that, if any applicable law permits greater interest, the law permitting the
greatest interest shall apply.
ATTORNEYS FEES AND COSTS. If this Note is placed in the hands of an
attorney for collection, or is collected in whole or in part by suit or through
probate, bankruptcy, or other legal proceedings of any kind, Borrower agrees to
pay, in addition to all other sums payable hereunder, all costs and expenses of
collection, including but not limited to reasonable attorneys fees.
WAIVER OF NOTICE. Borrower and any and all endorsers and guarantors of
this Note severally waive presentment for payment, notice of nonpayment,
protest, demand, notice of protest, notice of intent to accelerate, notice of
acceleration and dishonor, diligence in enforcement and indulgences of every
kind and without further notice hereby agree to renewals, extensions, exchanges
or releases of collateral, taking of additional collateral, indulgences or
partial payments, either before or after maturity.
CAPTIONS. Captions used herein are for convenience only and should not
be used in interpreting this Note.
Revolving Promissory Note - Page 4
<PAGE> 5
GOVERNING LAW. THIS NOTE HAS BEEN EXECUTED UNDER, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS,
EXCEPT AS SUCH LAWS ARE PREEMPTED BY APPLICABLE FEDERAL LAWS.
GAINSCO, NC.
By: /s/ DANIEL J. COOTS
------------------------------
Daniel J. Coots,
Senior Vice President and
Chief Financial Officer
Revolving Promissory Note - Page 5
<PAGE> 1
EXHIBIT 10.35
NEGATIVE PLEDGE AGREEMENT
This Negative Pledge Agreement (the "Negative Pledge") is executed
effective 9-9, 1996, by GAINSCO, INC. ("Borrower"), a Texas corporation, and
BANK ONE, TEXAS, NATIONAL ASSOCIATION ("Bank One"), in connection with a loan
from Bank One to Borrower.
1. Obligations. Bank One has agreed to make a loan to Borrower to
be evidenced by a Revolving Promissory Note of even date, in the original
principal sum of $5,000,000.00. The revolving promissory note and all
extensions and renewals thereof and any and all other loans, advances, or
extensions of credit by Bank One to Borrower (whether created directly or
acquired by Bank One indirectly by assignment or otherwise), and whether now
existing or hereafter arising, absolute or contingent, primary or secondary
will be collectively called the "Obligations".
2. Negative Pledge. In consideration of Bank One extending credit
to Borrower, so long as any of the Obligations shall remain unpaid and
outstanding, Borrower agrees not to mortgage, encumber, pledge, or grant a lien
upon or security interest in all or any part of Borrower's assets, whether now
owned or hereafter acquired, including without limitation, all stock and other
evidence of ownership in Borrower's subsidiary corporations (all collectively
referred to as the "Assets"). Borrower also will not create, incur, suffer, or
permit to exist any mortgage, deed of trust, pledge, assignment, title
retention, lien, security interest, or any other preferential arrangement,
charge, or encumbrance (including any conditional sale or finance lease), on,
in, or with respect to the Assets, without Bank One's prior written consent.
3. Additional Covenants. So long as any of the Obligations remain
unpaid, Borrower further agrees that: (a) Borrower will not sell, lease,
assign, or convey all or any part of the Assets without first obtaining Bank
One's prior written consent; and (b) Borrower will cause the Assets to be kept
free and clear of any and all liens, mortgage, charges, security interest, and
encumbrances of every character, except for those consented to in writing by
Bank One.
4. Events of Default. The happening of any of the following
events or conditions shall constitute an "Event of Default" hereunder: (a)
Borrower fails or refuses to punctually and properly perform, observe, and
comply with all of the terms, covenants, and conditions of this Negative
Pledge; or (b) Any of the Assets is attached or otherwise levied upon or placed
in the hands of a receiver or other representative of a court.
5. Remedies. Upon the occurrence of an Event of Default, or at
any time thereafter, Bank One may, at its option, among other things, declare
the unpaid principal balance of and the interest accruing on the Obligations to
be immediately due and
Negative Pledge Agreement - Page 1
<PAGE> 2
payable, without any notice, presentment, protest, notice of protest, notice of
intent to accelerate, notice of acceleration, or demand of any kind, all of
which are hereby expressly waived.
6. Release of Negative Pledge. Upon full and complete payment of
the Obligations owing by Borrower to Bank One, Bank One will release this
Negative Pledge.
7. Miscellaneous. (a) Borrower agrees to execute any and all
further documents, including financing statements, and to take all actions as
Bank One may require in the furtherance of this Negative Pledge.
(b) This Negative Pledge, together with the covenants and
warranties contained herein, shall inure to the benefit of Bank One and any
subsequent owner of the Obligations, and shall be binding upon Borrower, and
its successors and assigns.
(c) The laws of the State of Texas and of the United
States shall govern the rights and duties of Borrower and Bank One hereunder
and the validity, construction, enforcement, and interpretation of this
Negative Pledge. The duties and obligations herein imposed upon Borrower are
performable in Fort Worth, Tarrant County, Texas.
(d) Borrower is making this Negative Pledge Agreement in
order to induce Bank One into making the loan represented by the note described
above, and Borrower acknowledges that Bank One is relying on the covenants and
warranties of the Borrower herein in making that loan.
EXECUTED to be effective on the date first written above.
GAINSCO, INC.
By: /s/ DANIEL J. COOTS
----------------------------
Daniel J. Coots,
Senior Vice President and
Chief Financial Officer
BANK ONE, TEXAS, NATIONAL ASSOCIATION
By: /s/ JOHN D. HUDGENS
----------------------------
John D. Hudgens,
Vice President
Negative Pledge Agreement - Page 2
<PAGE> 1
EXHIBIT 22.2
SUBSIDIARIES OF REGISTRANT
<TABLE>
<S> <C> <C> <C> <C>
-------------
GAINSCO, INC.
75-1617013
(Texas)
-------------
- - --------------- ----------------- ----------------- --------------- --------------
GAINSCO Service Agents Processing General Agents General Agents Risk Retention
Corp. Systems, Inc. Insurance Company Premium Finance Administrators
of America, Inc. Company Inc.
75-2282846 75-1796560 75-1629914 75-1631637 75-2217958
(Texas) (Texas) (Oklahoma) (Texas) (Nevada)
- - --------------- ----------------- ----------------- --------------- --------------
*
- - ---------------- --------------- -------------
GAINSCO County MGA Premium MGA Insurance
Mutual Insurance Finance Company Company, Inc.
Company
75-2447701 75-2371163 75-1767545
(Texas) (Texas) (Texas)
- - ---------------- --------------- -------------
----------------
MGA Agency, Inc.
75-1622457
(Texas)
----------------
</TABLE>
* 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
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 24, 1997,
relating to the consolidated balance sheets of GAINSCO, INC. and subsidiaries
as of December 31, 1996 and 1995, 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, 1996, and all related schedules, which
report appears in the December 31, 1996 annual report on Form 10-K of GAINSCO,
INC.
/s/ KPMG PEAT MARWICK LLP
----------------------------
KPMG Peat Marwick LLP
Dallas, Texas
March 11, 1997
<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, 1996, each
of said attorneys and agents to have power to act 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 17th day of March, 1997.
/s/ HARDEN H. WIEDEMANN
-----------------------------
HARDEN H. WIEDEMANN
<PAGE> 2
EXHIBIT 25.1
SPECIAL POWER OF ATTORNEY
THE STATE OF ARIZONA
KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF MARICOPA
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, 1996, each
of said attorneys and agents to have power to act 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 15th day of March, 1997.
/s/ NORMAN J. E. ROE
-----------------------------
NORMAN J.E. ROE
<PAGE> 3
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, 1996, each
of said attorneys and agents to have power to act 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 17th day of March, 1997.
/s/ JOEL C. PUCKETT
-----------------------------
JOEL C. PUCKETT
<PAGE> 4
EXHIBIT 25.1
SPECIAL POWER OF ATTORNEY
THE STATE OF TEXAS Section
KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF DALLAS Section
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, 1996, each
of said attorneys and agents to have power to act in the name of and on behalf
of the undersigned every act whatsoever necessary or advisable to be done in
the premises as filly 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 16th day of March, 1997.
/s/ JOHN H. WILLIAMS
-----------------------------
JOHN H. WILLIAMS
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 77,643,677
<DEBT-CARRYING-VALUE> 104,930,347
<DEBT-MARKET-VALUE> 105,725,155
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 203,831,306
<CASH> 1,044,740
<RECOVER-REINSURE> 2,156,326
<DEFERRED-ACQUISITION> 12,633,938
<TOTAL-ASSETS> 296,845,776
<POLICY-LOSSES> 105,691,588
<UNEARNED-PREMIUMS> 65,255,153
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,167,037
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 296,845,776
106,792,928
<INVESTMENT-INCOME> 9,160,518
<INVESTMENT-GAINS> 471,956
<OTHER-INCOME> 2,379,154
<BENEFITS> 58,378,720
<UNDERWRITING-AMORTIZATION> (519,257)
<UNDERWRITING-OTHER> 15,499,641
<INCOME-PRETAX> 21,098,202
<INCOME-TAX> 5,078,635
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,019,567
<EPS-PRIMARY> .74
<EPS-DILUTED> .74
<RESERVE-OPEN> 70,361
<PROVISION-CURRENT> 53,037
<PROVISION-PRIOR> 5,342
<PAYMENTS-CURRENT> 17,178
<PAYMENTS-PRIOR> 32,584
<RESERVE-CLOSE> 78,978
<CUMULATIVE-DEFICIENCY> (5,342)
</TABLE>
