<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, 1997
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 (17,757,596 shares) as of the close of the business on February 28,
1998 was $145,390,317 (based on the closing sale price of $8.1875 per share).
As of February 28, 1998, there were 20,857,024 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 1998 Annual Meeting to be held May 18, 1998 III
Exhibits to Form 10-K Annual Reports filed with the SEC for fiscal years ended
December 31, 1988, 1990, 1991, 1992, 1993, 1994, 1995 and 1996 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 186
non-affiliated general agents' offices. Approximately 71% of the Company's gross
premiums written during 1997 resulted from risks located in California, Florida,
Kentucky, Louisiana, Pennsylvania, Tennessee and Texas.
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, 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 has
fronting agreements with two non-affiliated insurance companies. The business
written under these agreements is ceded 100% to reinsurers rated "A-
(Excellent)" or better by A. M. Best Company (Best's) 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
---------------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
Gross Premiums Written: (Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial Auto $56,704 57% 62,328 57% 62,517 58%
Auto Garage 23,279 23% 26,871 24% 25,270 23%
General Liability 17,829 18% 19,744 18% 19,052 18%
Other Lines 1,964 2% 1,057 1% 1,233 1%
------- ------- ------- ------- ------- -------
Total $99,776 100% 110,000 100% 108,072 100%
======= ======= ======= ======= ======= =======
Policies in Force (End of Period) 35,962 35,903 34,309
</TABLE>
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.
3
<PAGE> 4
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.
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.
See
4
<PAGE> 5
"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
----------------------------
1998 1997 1996
---- ---- ----
Excess Reinsurer
<S> <C> <C> <C>
Dorinco Reinsurance Company 35% 50% 50%
Great Lakes American Reinsurance Company -- 40% --
Liberty Mutual Insurance Company 20% -- --
PMA Reinsurance Corporation 35% -- 50%
Republic Western Insurance Company 10% 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.
Beginning in 1995, the Company has entered into reinsurance fronting
arrangements with non-affiliated insurance companies. The Company retains no
portion as the business written under these agreements is 100% ceded. Although
these cessions are made to authorized reinsurers rated "A- (Excellent)" or
better by Best's, 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 1997. The Company has written confirmations from reinsurers
for 1998 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 186 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.
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
5
<PAGE> 6
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 bind 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.
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.
6
<PAGE> 7
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
----------------------------------
1997 1996 1995
-------- -------- --------
(Amounts in thousands)
<S> <C> <C> <C>
Unpaid claims and claim adjustment expenses,
beginning of period $105,691 95,011 80,729
Less: Ceded unpaid claims and claim adjustment
expenses, beginning of period 26,713 24,650 19,972
-------- -------- --------
Net unpaid claims and claim adjustment expenses,
beginning of period 78,978 70,361 60,757
-------- -------- --------
Net claims and claim adjustment expenses
incurred related to:
Current period 53,969 53,037 48,064
Prior periods 8,117 5,342 401
-------- -------- --------
Total net claims and claim adjustment expenses
incurred 62,086 58,379 48,465
-------- -------- --------
Net claim and claim adjustment expenses paid
related to:
Current period 17,807 17,178 14,131
Prior periods 39,554 32,584 26,953(1)
-------- -------- --------
Total net claim and claim adjustment expenses
paid 57,361 49,762 41,084
-------- -------- --------
Commutation of reinsurance treaties -- -- (2,223)(1)
-------- -------- --------
Net unpaid claims and claim adjustment expenses,
end of period 83,703 78,978 70,361
Plus: Ceded unpaid claims and claim adjustment
expenses, end of period 29,524 26,713 24,650(1)
-------- -------- --------
Unpaid claims and claim adjustment expenses,
end of period $113,227 105,691 95,011
======== ======== ========
</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 a result of claim reserve increases recorded for commercial
auto claims in Kentucky for the 1996 and 1995 accident years and adverse
development in claim adjustment expense reserves for commercial auto in the
1996, 1995 and 1994 accident years.
7
<PAGE> 8
The following table sets forth, as of December 31, 1997, 1996, and 1995,
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
------------------------------------------
1997 1996 1995
-------- -------- --------
(Amounts in thousands)
<S> <C> <C> <C>
Net reserves reported on a SAP basis $ 84,406 79,976 71,169
Adjustments:
Estimated recovery for salvage and subrogation (703) (998) (808)
-------- -------- --------
Net reserves reported on a GAAP basis $ 83,703 78,978 70,361
======== ======== ========
</TABLE>
The following table represents the development of GAAP balance sheet
reserves for the period 1987 through 1997. 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 seven years later (as of December 31, 1997) was
$28,908,000 of which $28,734,000 has been paid, leaving a net reserve of
$174,000 for claims and claim adjustment expenses in 1990 and prior years
remaining unpaid as of December 31, 1997.
"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 $2,000 net deficiency from December 31, 1990 to
December 31, 1997 (seven 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
------------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unpaid claims & claim
adjustment expenses:
Gross 27,352 29,538 35,744 45,214 53,148 66,517 72,656 80,729 95,011 105,691 113,227
Ceded 18,865 15,005 15,695 16,308 15,105 16,594 16,701 19,972 24,650 26,713 29,524
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net 8,487 14,533 20,049 28,906 38,043 49,923 55,955 60,757 70,361 78,978 83,703
Net cumulative paid as
of:
One year later 3,766 4,902 7,545 10,251 15,037 22,470 24,090 24,730 32,584 39,554
Two years later 5,895 8,660 12,340 18,145 26,819 37,032 39,182 41,874 56,605
Three years later 7,332 10,642 16,413 23,255 33,879 45,884 48,688 55,338
Four years later 8,069 12,606 19,085 26,171 37,292 51,082 54,428
Five years later 8,721 13,815 20,633 26,970 39,999 54,092
Six years later 9,064 14,249 21,020 28,399 41,143
Seven years later 9,312 14,140 21,700 28,734
Eight years later 9,329 14,632 21,871
Nine years later 9,686 14,752
Ten years later 9,706
Net reserves reestimated as of:
One year later 8,869 13,645 20,060 28,354 38,528 54,150 59,573 61,157 75,703 87,095
Two years later 9,166 13,694 20,566 28,479 42,235 57,223 59,922 62,296 80,356
Three years later 9,154 14,024 21,214 30,035 43,217 57,459 59,247 63,871
Four years later 9,355 14,675 22,431 30,129 42,493 56,832 58,414
Five years later 9,543 15,248 22,332 29,022 42,191 56,337
Six years later 9,672 15,174 22,034 29,073 41,984
Seven years later 9,606 14,572 21,965 28,908
Eight years later 9,509 14,753 21,950
Nine years later 9,787 14,782
Ten years later 9,766
Net cumulative
redundancy
(deficiency) (1,279) (249) (1,901) (2) (3,941) (6,415) (2,459) (3,115) (9,995) (8,117)
</TABLE>
The Company has an indicated deficiency of approximately 10% of unpaid claims
and claim adjustment expenses (C & CAE) for the 1996 year for reasons mentioned
previously. Net unpaid C & CAE at December 31, 1997 was approximately
$83,703,000, which the Company believes is adequate.
OPERATING RATIOS
CLAIMS, EXPENSE AND COMBINED RATIOS: Claims and expense ratios are
traditionally used to interpret the underwriting experience of property and
casualty insurance companies.
Statutory Accounting Principles (SAP) Basis - Claims and claim adjustment
expenses are stated as a percentage of premiums earned because claims may occur
over the life of a particular insurance policy. Underwriting expenses on a SAP
basis are stated as a percentage of net premiums written rather than premiums
earned because most underwriting expenses are incurred when policies are written
and are not spread over the policy period. Underwriting profit margin is
achieved when the combined ratio is less than 100%. The
9
<PAGE> 10
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:
<TABLE>
<CAPTION>
Years ended December 31
------------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
COMPANY RATIOS
Claims Ratio 60.0% 54.3% 48.7% 47.9% 51.4%
Expense Ratio 34.4% 34.5% 34.2% 34.4% 33.9%
------ ------ ------ ------ ------
Combined Ratio 94.4% 88.8% 82.9% 82.3% 85.3%
====== ====== ====== ====== ======
INDUSTRY RATIOS (1)
Claims Ratio 73.7% 78.4% 78.9% 81.1% 79.5%
Expense Ratio 26.7% 26.3% 26.1% 26.0% 26.2%
------ ------ ------ ------ ------
Combined Ratio 100.4% 104.7% 105.0% 107.1% 105.7%
====== ====== ====== ====== ======
</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 Best's.
Ratios for 1997 are 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. 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 lower claims ratios
(favorable by an estimated 13.7 percentage points in 1997 and 24.1 percentage
points in 1996, when compared to the industry) which results in the favorable
combined ratio variances of an estimated 6.0 and 15.9 percentage points in 1997
and 1996, respectively. It should be noted that the Company ratios relate only
to insurance operations. The holding company provides administrative and
financial services for its wholly-owned subsidiaries. The allocation of the
holding company's expenses solely to its insurance companies would have an
impact on their results of operations and would also affect the ratios
presented.
Generally Accepted Accounting Principles (GAAP) Basis - Claims and claim
adjustment expenses are stated as a percentage of premiums earned as they are on
a SAP basis. However, earned premiums include net policy fees earned whereas on
a SAP basis policy fees earned are recorded on a gross basis. The GAAP expense
ratio is based on premiums earned and includes the change in policy acquisition
costs and underwriting expenses. Other differences include the treatment of the
allowance for doubtful accounts. The following table presents the Company's
claims, expense and combined ratios on a GAAP basis:
10
<PAGE> 11
<TABLE>
<CAPTION>
Years ended December 31
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Claims Ratio 60.7% 54.7% 49.8% 48.8% 51.7%
Expense Ratio 33.7% 33.8% 33.1% 34.4% 33.0%
---- ---- ---- ---- ----
Combined Ratio 94.4% 88.5% 82.9% 83.2% 84.7%
==== ==== ==== ==== ====
</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
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(Amounts in thousands, except ratios)
<S> <C> <C> <C> <C> <C>
Net premiums written $ 98,858 109,227 108,689 91,170 79,278
Policyholders' surplus $ 78,496 59,012 50,140 42,350 35,906
Ratio 1.26 to 1 1.85 to 1 2.17 to 1 2.15 to 1 2.21 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,
1997 and 1996, 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
---------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average investments (1) $209,121 192,221 170,881 148,688 128,632
Investment income 9,731 9,161 8,157 6,868 6,159
Return on average investments (2) 4.7% 4.8% 4.8% 4.6% 4.8%
Taxable equivalent return on
average investments 6.5% 6.6% 6.6% 6.4% 6.6%
Net realized gains 327 472 108 135 4
Net unrealized gains (losses) $2,422 1,559 2,772 (1,829) 2,395
</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
----------------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ ------------------------
(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 $ 5,404 5,476 7,731 7,748 9,606 9,733
Tax-exempt state and
municipal bonds 84,330 85,052 97,199 97,977 87,696 88,689
Bonds available for sale:
U.S. government securities 27,322 27,404 -- -- -- --
Tax-exempt state and
municipal bonds 94,700 96,246 76,880 77,644 77,478 79,130
Certificates of deposit 595 595 595 595 620 620
-------- -------- -------- -------- -------- --------
Total fixed maturities 212,351 214,773 182,405 183,964 175,400 178,172
-------- -------- -------- -------- -------- --------
Short-term investments 2,823 2,823 20,662 20,662 5,975 5,975
-------- -------- -------- -------- -------- --------
Total investments $215,174 217,596 203,067 204,626 181,375 184,147
======== ======== ======== ======== ======== ========
</TABLE>
12
<PAGE> 13
The maturity distribution of the Company's investments in fixed maturities
is as follows:
<TABLE>
<CAPTION>
As of December 31
-----------------------------------------------------------
1997 1996
------------------------- -------------------------
(Dollar amounts in thousands)
Amortized Amortized
Cost Percent Cost Percent
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Within 1 year $ 35,142 16.6% $ 18,754 10.3%
Beyond 1 year but within 5 years 140,571 66.2% 135,052 74.1%
Beyond 5 years but within 10 years 30,608 14.4% 23,059 12.6%
Beyond 10 years but within 20 years 6,030 2.8% 5,540 3.0%
-------- -------- -------- --------
$212,351 100.0% $182,405 100.0%
======== ======== ======== ========
</TABLE>
RATING
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. To the extent this occurs,
the Company can be at a competitive disadvantage because many of these companies
have substantially greater financial and other resources and can offer a broader
variety of specialty risk coverages. The Company's competitive advantages are 1)
specialized expertise in its product lines which enables it to price with a
great deal of accuracy and 2) superior service in underwriting and claims
handling which provides its agents with a competitive advantage and a stable
market.
13
<PAGE> 14
EMPLOYEES
As of December 31, 1997, the Company employed 168 persons, of which 12 were
officers, 142 were staff and administrative personnel, and 14 were part-time
employees.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the executive officers of the Company as of February
28, 1998 is set forth below:
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Joseph D. Macchia 62 Chairman of the Board, President and Chief Executive Officer
Daniel J. Coots 46 Senior Vice President, Treasurer, Chief Financial Officer and
Director
Norman Alberigo 55 Vice President
Richard M. Buxton 49 Vice President
Brigitte G. Doyle 47 Vice President
J. Landis Graham 43 Vice President
Richard A. Laabs 42 Vice President
Joseph W. Pitts 34 Vice President
Carolyn E. Ray 45 Vice President
Sharon B. Sholden 39 Vice President
Sam Rosen 62 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. 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.
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.
Ms. Brigitte G. Doyle has served as Vice President of the Company since June
of 1997. From 1994 to May of 1997, Ms. Doyle served as Assistant Vice President
of the Company. Ms. Doyle has served in various management capacities with the
Company since 1984. Ms. Doyle has been engaged in the property and casualty
business since 1984.
14
<PAGE> 15
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.
Mr. Joseph W. Pitts has served as Vice President of the Company since August
of 1997. From 1992 to 1997, Mr. Pitts was with USAA in the position of Actuary
and Manager. Mr. Pitts has been engaged in the property and casualty business
since 1988.
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.
Ms. Sharon B. Sholden has served as Vice President of the Company since
December of 1997. From August 1995 to 1997, Ms. Sholden served as Program
Manager for TIG Insurance. From 1993 to 1995, Ms. Sholden was with Associates
Insurance in the position of Vice President. Ms. Sholden has been engaged in the
property and casualty business since 1982.
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.
15
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
<PAGE> 17
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, 1997.
The prices reported reflect actual sales transactions on these exchanges.
<TABLE>
<CAPTION>
High Low
---- ---
<C> <C> <C>
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
1997 First Quarter 9 7/8 8 7/8
1997 Second Quarter 9 3/8 8 1/8
1997 Third Quarter 9 7/8 8 7/8
1997 Fourth Quarter 10 1/16 8 1/8
</TABLE>
Cash dividends of $.01 per share were paid to shareholders of record on
March 31, June 30 and September 30, 1995. Cash dividends of $.0125 per share
were paid to shareholders of record on December 31, 1995, March 29 and June 28,
1996. Cash dividends of $.015 per share were paid to shareholders of record on
September 30 and December 31, 1996 and March 31, June 30 and September 30, 1997.
Cash dividends of $.0175 per share were paid to shareholders of record on
December 31, 1997. On February 18, 1998, the Company declared a $.0175 per share
cash dividend payable to shareholders of record on March 31, 1998. The Company
depends on cash flow from cash dividends paid by its subsidiaries.
17
<PAGE> 18
Stock dividends of 5% were paid to shareholders of record on March 31 and
September 30, 1995. In November, 1995, the Board of Directors discontinued the
semi-annual stock dividends.
The Company purchased 243,932 shares of its Common Stock during 1997.
Additionally, a total of 17,200 shares were purchased in January and February of
1998. The Company has not purchased shares of its stock since February of 1998
and has no plans to purchase additional shares.
As of February 28, 1998, there were 432 shareholders of record of the
Company's Common Stock.
18
<PAGE> 19
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, 1997 and 1996, and the consolidated statements
of operations, shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1997, 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
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Data:
Gross premiums written (1) $ 99,776 110,000 108,072 98,164 85,373
Ceded premiums written 1,637 1,749 1,968 8,710 7,412
-------- -------- -------- -------- --------
Net premiums written 98,139 108,251 106,104 89,454 77,961
Decrease (increase) in unearned premiums 4,117 (1,458) (8,849) (5,059) (2,099)
-------- -------- -------- -------- --------
Net premiums earned 102,256 106,793 97,255 84,395 75,862
Net investment income 9,731 9,161 8,157 6,868 6,159
Net realized gains 327 472 108 135 4
Insurance services 2,631 2,379 2,183 2,056 2,388
-------- -------- -------- -------- --------
Total revenues 114,945 118,805 107,703 93,454 84,413
-------- -------- -------- -------- --------
Claims and claim adjustment expenses 62,086 58,379 48,465 41,189 39,239
Policy acquisition costs 22,552 23,828 19,679 17,392 16,183
Underwriting and operating expenses 15,545 15,499 15,579 14,505 12,604
-------- -------- -------- -------- --------
Total expenses 100,183 97,706 83,723 73,086 68,026
-------- -------- -------- -------- --------
Income before income taxes 14,762 21,099 23,980 20,368 16,387
Income tax expense 2,838 5,079 6,352 5,199 3,147
-------- -------- -------- -------- --------
Net income (2) $ 11,924 16,020 17,628 15,169 13,240
======== ======== ======== ======== ========
Earnings Per Share (3):
Basic $ .57 .75 .82 .71 .62
======== ======== ======== ======== ========
Diluted $ .56 .74 .81 .70 .61
======== ======== ======== ======== ========
GAAP Operating Ratios:
Claims ratio 60.7% 54.7% 49.8% 48.8% 51.7%
Expense ratio 33.7% 33.8% 33.1% 34.4% 33.0%
-------- -------- -------- -------- --------
Combined ratio 94.4% 88.5% 82.9% 83.2% 84.7%
======== ======== ======== ======== ========
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
As of December 31
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Investments $216,802 203,831 183,027 160,300 136,989
Premiums receivable 14,250 15,825 15,914 12,262 10,888
Ceded unpaid claims and claim
adjustment expenses 29,524 26,713 24,650 19,972 16,701
Ceded unearned premiums 19,146 16,280 6,008 5,977 5,536
Deferred policy acquisition costs 11,618 12,634 12,115 9,831 8,509
Property and equipment 6,941 6,981 6,562 6,336 6,274
Total assets 313,685 296,846 264,156 230,576 199,187
Unpaid claims and claim
adjustment expenses 113,227 105,692 95,011 80,729 72,656
Unearned premiums 64,005 65,255 53,525 44,645 39,145
Note payable -- -- 1,750 3,500 4,500
Total liabilities 195,123 187,493 164,714 149,029 132,369
Shareholders' equity 118,562 109,353 99,442 81,547 66,818
Shareholders' equity per share (4) $ 5.68 5.19 4.62 3.79 3.14
Return on beginning equity 11% 16% 22% 23% 24%
======== ======== ======== ======== ========
</TABLE>
- ----------
(1) Excludes premiums of $40,136,000 in 1997, $31,603,000 in 1996, $8,893,000
in 1995, $5,056,000 in 1994 and $5,418,000 in 1993 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 $212,000, $307,000, $70,000,
$87,000 and $3,000 for 1997, 1996, 1995, 1994, and 1993, 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 and
two 5% in 1993. All prior years have been restated to comply with Statement
of Financial Accounting Standards No. 128, "Earnings Per Share".
(4) Based on number of shares outstanding at the end of each year,
retroactively adjusted for stock dividends and stock splits effected as
stock dividends.
20
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BUSINESS OPERATIONS
Net income for 1997 decreased 26% to $11,923,526, or $.56 per share
(diluted) compared to 1996 net income of $16,019,567, or $.74 per share
(diluted) and 1995 net income of $17,627,855, or $.81 per share (diluted). The
Company recorded an 11% return on beginning equity and a GAAP combined ratio of
94.4% in 1997.
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 1997 of $99,775,854 were 9% below the $110,000,103
recorded in 1996. In 1996, gross premiums written increased 2% over the 1995
level. The cancellation of the Kentucky coal truck program and a taxi program in
New Jersey contributed 3 percentage points (points) of decrease while increased
competition in the Florida, Georgia, Pennsylvania and Virginia markets
contributed another 4 points of decrease in 1997. In 1996, the small growth rate
was the result of Texas contributing 4 points of decrease due to intensified
competition. The following table compares the major product lines between the
years for gross premiums written:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------ ------------------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial auto $ 56,704 57% $ 62,328 57% $ 62,517 58%
Auto garage 23,279 23% 26,871 24% 25,270 23%
General liability 17,829 18% 19,744 18% 19,052 18%
Other lines 1,964 2% 1,057 1% 1,233 1%
-------- -------- -------- -------- -------- --------
Total $ 99,776 100% $110,000 100% $108,072 100%
======== ======== ======== ======== ======== ========
</TABLE>
COMMERCIAL AUTO was down 9% in 1997 from 1996 and flat in 1996 from 1995.
Kentucky contributed 4 points of decrease with Georgia, New Jersey, Pennsylvania
and Virginia accounting for the remaining 5 points of decrease. A decision was
made during the year to discontinue writing Kentucky coal truck risks and a New
Jersey taxi cab program because of adverse claim results. In Pennsylvania
several new carriers have entered the market and they are specifically targeting
the Company's lines of business. In Georgia and Virginia competition has
dramatically intensified with regard to pricing. In 1996, the flat premium
growth was the result of decreases from Texas and Pennsylvania being offset with
growth from Kentucky. The AUTO GARAGE product line resulted in a 13% decrease in
1997 after a 6% increase in 1996. The majority of the decrease came from
Connecticut, Florida, Pennsylvania and Virginia. In Connecticut several new
entrants to the market increased the competition by writing garage lines they
had not previously written. Competition in Florida was in the form of price
cutting from existing markets. In Pennsylvania the auto garage situation was
similar to commercial auto, i.e., new carriers entered the market and targeted
the Company's lines of
21
<PAGE> 22
business. In 1996 the auto garage line recorded a 6% increase with Florida,
Kentucky and Pennsylvania all producing significant increases. The GENERAL
LIABILITY line decreased 10% in 1997 after an increase of 4% in 1996. California
and Florida accounted for 6 points and 2 points of decrease, respectively. An
underwriting decision was made in California to not renew large general
contractors in light of the Montrose case. In Florida, increased competition
from new and existing companies contributed to the decrease. In 1996, California
and Florida were contributors to the increase while Texas was down. For 1997,
gross premiums written percentages by significant state/product line are as
follows: Texas commercial auto (22%), Kentucky commercial auto (6%),
Pennsylvania commercial auto (6%), Texas general liability (6%), and Florida
auto garage (5%) with no other individual state/product line comprising 5% or
more. The persistency rate increased to 46% in 1997 from 45% in 1996. Premiums
earned decreased 4% in 1997 to $102,255,979 and increased 10% in 1996 to
$106,792,928 as a direct result of the level of premiums written.
Net investment income increased 6% in 1997 over 1996 and increased 12% in
1996 over 1995. These increases are the result of growth in the portfolio due to
continued positive cash flows from operations. The return on average investments
for 1997 is 4.7% versus 4.8% in 1996 and 1995. 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 as compared to taxable fixed income securities. At
December 31, 1997, 83% 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
6.5% in 1997 and 6.6% in 1996 and 1995. 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, 1997, approximately 16% of the Company's
investments were in U.S. Treasury securities and 1% 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 $326,905 in 1997 versus
$471,956 in 1996 and $108,024 in 1995. All of these gains were generated from
the bonds available for sale category of the fixed maturity portfolio.
Insurance services revenues increased $252,165 from 1996 to 1997 following
an increase of $196,645 in 1996 from 1995. The table below presents the
components.
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Plan servicing $1,048,835 1,187,656 1,335,852
Fee income 608,287 343,266 62,428
Computer software 657,592 473,499 475,317
Premium finance 286,347 345,679 281,383
Other 30,258 29,054 27,529
---------- ---------- ----------
Total $2,631,319 2,379,154 2,182,509
========== ========== ==========
</TABLE>
22
<PAGE> 23
Plan servicing revenues from commercial automobile plans decreased 12% in
1997 from 1996 following an 11% decrease in 1996. Written premiums in 1997 are
14% below 1996 as a result of decreases in the Louisiana and Pennsylvania plans.
In 1996, the California, Louisiana and Pennsylvania plans all recorded decreases
in written premiums from 1995. 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 existing plans.
Fee income increased $265,021 in 1997 over 1996 and $280,838 in 1996 over
1995 as a result of continued significant growth in the fronting reinsurance
operation.
Revenues in the computer software operation increased 39% in 1997 from 1996
after being flat from 1995 to 1996. A significant increase in system sales
occurred in 1997 as a result of marketing initiatives implemented in late 1996.
New management brought in during the third quarter of 1995 has improved this
operation and revenues are expected to show increases in the future.
Revenues from the premium finance operation are down 17% in 1997 from the
1996 level which was 23% above the 1995 level. The decrease is a result of the
taxi cab programs that were discontinued, increased competition and the decision
to offer interest free payment plans from the Company's insurance companies in
order to increase premium writings. Amounts financed in 1997 were 32% below 1996
which had increased 5% over 1995. Premium finance notes receivable were
approximately $1,400,000 at December 31, 1997 versus $1,991,000 at December 31,
1996 and the average return was 17% for 1997 and 1996 versus 19% in 1995.
Claims and claim adjustment expenses (C & CAE) increased $3,706,923 in 1997
over 1996 and $9,913,707 in 1996 over 1995. The C & CAE ratio was 60.7% in 1997,
54.7% in 1996 and 49.8% in 1995. The increase in the C & CAE ratio of 6
percentage points in 1997 is the result of claim reserve increases recorded for
commercial auto claims in Kentucky from the 1995 and 1996 accident years and
adverse development in claim adjustment expense reserves for commercial auto in
the 1994, 1995 and 1996 accident years. The increase in the C & CAE ratio of 4.9
percentage points in 1996 was also related to commercial auto claims in the 1995
and 1994 accident years. 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. Approximately 2% 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 decrease in commissions from 1996 to 1997 is related to the decrease in
gross premiums written. 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. The ratio of
commissions to gross premiums written increased to 22% in 1997 and 1996 from the
20% level in 1995. The increase in 1996 is a result of a decrease in commission
income. The ratio of commissions to premiums earned was 21% for 1997 as compared
to 23% for 1996 and 1995. The decrease in 1997 was related to the decrease in
the commission expense rate in 1997 attributable to lower contingent commissions
resulting from higher C & CAE ratios.
23
<PAGE> 24
The change in deferred policy acquisition costs and deferred ceding
commission income (DAC) resulted in a net decrease to income of $1,015,802 for
1997 and a net increase to income of $519,257 and $2,284,138 for 1996 and 1995,
respectively. The change in the amount of the increase or decrease in DAC
between the comparable periods is directly related to the rate at which unearned
premiums are growing or declining as a result 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 25.9%, 25.8% and 25.5% at December 31, 1997, 1996 and 1995,
respectively.
Underwriting and operating expenses were up slightly in 1997 from 1996, and
down slightly in 1996 from 1995. As a percent of operating revenues (premiums
earned and insurance services revenues) the ratio remained relatively flat at
14.8% in 1997 while 1996 decreased to 14.2% from the 1995 level of 15.7%. The
increase in the rate in 1997 is related to the 4% decrease in operating revenues
for 1997. The decrease in 1996 was the result of savings from variable expenses
in personnel costs and in the plan servicing operation. In March 1997, the
Company began converting its computer systems to be year 2000 compliant. At
December 31, 1997, approximately 70 percent of the Company's systems were
compliant, with all systems expected to be compliant by the end of 1998. The
total cost of the project is estimated to be $850,000 and is being funded
through operating cash flows. The Company is expensing all costs associated with
these system changes. As of December 31, 1997, the amount expensed was
immaterial.
The effective tax rate of the Company was 19% in 1997, 24% in 1996, and 26%
in 1995. The lower rates in 1997 and 1996 are largely the result of tax-exempt
net investment income representing a larger portion of income than in 1995. 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 1998 the Company is targeting premiums written to be within a $105-115
million range with a GAAP combined ratio of 87.5-92.5% and a return on beginning
equity of better than 11.5%. 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, 1997, the
Company held short-term investments and cash of $3,519,906 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 3 years. The fair value of the fixed maturity
portfolio at December 31, 1997 was $2,422,271 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, 1997 and 1996, the balance on deposit for the
benefit of such policyholders totaled approximately $12,965,000 and $12,615,000,
respectively.
The increase in investments is primarily attributable to continued positive
cash flows from operating activities which are the result of continued and
substantial underwriting profits. Premiums receivable and Deferred policy
acquisition costs decreased as a result of the decrease in premiums written.
Ceded unpaid claims and claim adjustment expenses as well as ceded unearned
premiums increased largely as a result of the increase in fronting reinsurance
activity mentioned previously.
24
<PAGE> 25
Unpaid claims and claim adjustment expenses increased largely as a result of
increases to reserves on retained business as well as material increases from
plan servicing and fronting reinsurance. Unearned premiums decreased because of
the decrease in premiums written, offset to some extent by an increase in
fronting reinsurance. Accounts payable decreased because of contingent payables
based upon profitability levels that have decreased. Drafts payable increased
because a large amount of drafts were issued in the fourth quarter of 1997 in an
aggressive effort to bring specifically targeted claims to an early and fair
conclusion. 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 $794,166 at December 31,
1997.
The Company purchased 243,932 shares of its common stock during 1997 at a
cost of $2,113,560 or $8.66 per share which accounts for the increase in
Treasury stock.
During 1997, the Financial Accounting Standards Board issued Statement 130,
"Reporting Comprehensive Income". The Statement is effective for fiscal years
beginning after December 15, 1997 and will be adopted by the Company in the
first quarter of 1998.
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.
FORWARD LOOKING STATEMENTS
This Form 10-K Report and the Company's shareholder reports contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that all forward-looking
statements involve certain risks and uncertainties that could cause actual
results to differ materially from those contained in the forward-looking
statements. Important factors include, but are not limited to, (i) heightened
competition, including price competition from existing competitors, from newly
formed competitors and from the entry into the Company's markets of standard
insurance companies which historically have not competed in the Company's
specialty markets, (ii) contraction of the markets for the Company's various
lines of business, (iii) development and performance of new specialty programs,
(iv) the ongoing level of claims and claims-related expenses, (v) adequacy of
claim reserves, and (vi) general economic conditions.
25
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated Financial Statements are on pages 34 through 58:
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Management 34
Independent Auditors' Report 35
Consolidated Balance Sheets as of December 31, 1997 and 1996 36-37
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996, and 1995 38
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1996, and 1995 39-40
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996, and 1995 41-42
Notes to Consolidated Financial Statements December 31,
1997, 1996, and 1995 43-58
</TABLE>
The following Consolidated Financial Statements Schedules are on pages 59
through 70:
<TABLE>
<CAPTION>
Schedule Page
<S> <C>
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.
26
<PAGE> 27
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 1998 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference
from the Registrant's definitive 1998 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 1998 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 1998 Proxy Statement.
27
<PAGE> 28
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, 1997 and 1996
Consolidated Statements of Operations for the Years Ended December
31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December
31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements, December 31, 1997,
1996 and 1995
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:
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<S> <C>
3.1 Restated Articles of Incorporation of Registrant (Exhibit 3.1)(1)
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C>
3.2 Articles of Amendment to the Articles of Incorporation dated June 9, 1988 (Exhibit
3.2)(2)
3.6 Articles of Amendment to Articles of Incorporation effective August 13, 1993 (Exhibit
3.6)(7)
3.7 Bylaws of Registrant as restated on February 18, 1998 (11)
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 (Exhibit 4.6) (10)
10.2 (Restated) Incentive Compensation Plan of the Registrant (Exhibit 10.2)(2)
10.16 1990 Stock Option Plan of the Registrant (Exhibit 10.16)(4)
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).
</TABLE>
29
<PAGE> 30
<TABLE>
<S> <C>
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)
10.36 Form of Change of Control Agreements (11)
11 (Not required to be filed as an Exhibit. See footnote (1)(l) on page 48 of this 10-K
Report for information called for by number 11 of the Exhibit Table to Item 601 of SK)
22.2 Subsidiaries of Registrant (11)
24.2 Consent of KPMG Peat Marwick LLP to incorporation by reference (11)
25.1 Powers of Attorney (11)
27 Financial Data Schedule (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>
30
<PAGE> 31
<TABLE>
<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) 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, 1996.
(11) Filed herewith, See Exhibit Index.
</TABLE>
(b) Reports on Form 8-K
During the last quarter of the fiscal year ended December 31, 1997, 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.
31
<PAGE> 32
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: 03/30/98
------------------------------
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, 3/30/98
- -------------------------- President and Chief ---------------------------
Joseph D. Macchia Executive Officer
/s/ Daniel J. Coots Senior Vice President and 3/30/98
- -------------------------- Chief Financial Officer ---------------------------
Daniel J. Coots
/s/ Sam Rosen Secretary and Director 3/30/98
- -------------------------- ---------------------------
Sam Rosen
Director 3/30/98
- -------------------------- ---------------------------
Jack L. Johnson
John C. Goff* Director 3/30/98
- -------------------------- ---------------------------
John C. Goff
Robert J. McGee, Jr.* Director 3/30/98
- -------------------------- ---------------------------
Robert J. McGee
Joel C. Puckett* Director 3/30/98
- -------------------------- ---------------------------
Joel C. Puckett
Harden H. Wiedemann* Director 3/30/98
- -------------------------- ---------------------------
Harden H. Wiedemann
John H. Williams* Director 3/30/98
- -------------------------- ---------------------------
John H. Williams
</TABLE>
*By: /s/ Joseph D. Macchia
-----------------------------------
Joseph D. Macchia,
Attorney in-fact
Under Power of Attorney
32
<PAGE> 33
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.
33
<PAGE> 34
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
34
<PAGE> 35
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1997, 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, 1995, 1994 and 1993, and the related consolidated statements
of operations, shareholders' equity and cash flows for the years ended December
31, 1994 and 1993, 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, 1997, appearing on pages 19 and 20, 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 16, 1998
35
<PAGE> 36
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ------------- -------------
<S> <C> <C>
Investments (note 2):
Fixed maturities:
Bonds held to maturity, at amortized cost (fair value:
$90,527,669 - 1997, $105,725,155 - 1996) $ 89,733,503 104,930,347
Bonds available for sale, at fair value (amortized cost:
$122,022,184 - 1997, $76,879,562 - 1996) 123,650,289 77,643,677
Certificates of deposit, at cost (which approximates
fair value) 595,000 595,000
Short-term investments, at cost (which approximates
fair value) 2,823,393 20,662,282
-------------- -------------
Total investments 216,802,185 203,831,306
Cash 696,513 1,044,740
Accrued investment income 4,714,828 4,308,185
Premiums receivable (net of allowance for doubtful
accounts: $81,000 - 1997, $101,000 - 1996) (note 1) 14,249,890 15,824,543
Reinsurance balances receivable 2,604,511 2,156,326
Ceded unpaid claims and claim adjustment expenses (note 1) 29,524,026 26,713,154
Ceded unearned premiums 19,146,272 16,280,013
Deferred policy acquisition costs (note 1) 11,618,136 12,633,938
Property and equipment (net of accumulated depreciation
and amortization: $5,710,365 - 1997, $4,778,524 - 1996)
(note 1) 6,941,232 6,981,380
Current Federal income taxes 796,631 424,148
Deferred Federal income taxes (notes 1 and 5) 2,676,555 2,956,510
Management contract 1,737,570 1,787,570
Other assets 2,176,957 1,903,963
-------------- -------------
Total assets $ 313,685,306 296,845,776
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE> 37
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Liabilities and Shareholders' Equity
1997 1996
------------- -------------
<S> <C> <C>
Liabilities:
Unpaid claims and claim adjustment expenses
(notes 1 and 4) $ 113,227,009 105,691,588
Unearned premiums (note 4) 64,004,507 65,255,153
Commissions payable 2,207,421 2,689,337
Accounts payable 3,542,075 4,670,947
Reinsurance balances payable 745,805 1,057,923
Deferred revenue 635,807 593,300
Drafts payable 9,393,375 6,219,044
Dividends payable (note 6) 365,300 316,312
Other liabilities 1,001,747 999,590
------------- -------------
Total liabilities 195,123,046 187,493,194
------------- -------------
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, 21,701,118 issued at December 31, 1997
and 21,670,369 issued at December 31, 1996) 2,170,112 2,167,037
Additional paid-in capital 87,697,754 87,610,379
Net unrealized gains on fixed maturities 1,058,268 496,675
Retained earnings 35,188,460 24,517,265
Treasury stock, at cost (826,894 shares in 1997, 582,962
shares in 1996) (note 1) (7,552,334) (5,438,774)
------------- -------------
Total shareholders' equity 118,562,260 109,352,582
------------- -------------
Commitments and contingencies (notes 4, 7, and 8)
Total liabilities and shareholders' equity $ 313,685,306 296,845,776
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE> 38
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- ------------
<S> <C> <C> <C>
Revenues:
Net premiums earned (note 4) $ 102,255,979 106,792,928 97,254,816
Net investment income (note 2) 9,731,132 9,160,518 8,157,484
Net realized gains (note 1) 326,905 471,956 108,024
Insurance services 2,631,319 2,379,154 2,182,509
-------------- ------------ ------------
114,945,335 118,804,556 107,702,833
-------------- ------------ ------------
Expenses:
Claims and claim adjustment expenses
(notes 1 and 4) 62,085,643 58,378,720 48,465,013
Commissions 21,536,034 24,347,250 21,962,839
Change in deferred policy
acquisition costs and deferred
ceding commission income (note 1) 1,015,802 (519,257) (2,284,138)
Underwriting and operating expenses 15,546,068 15,499,641 15,579,260
-------------- ------------ ------------
100,183,547 97,706,354 83,722,974
-------------- ------------ ------------
Income before Federal income
taxes 14,761,788 21,098,202 23,979,859
Federal income taxes (note 5):
Current expense 2,860,704 5,145,780 6,412,007
Deferred benefit (22,442) (67,145) (60,003)
-------------- ------------ ------------
2,838,262 5,078,635 6,352,004
-------------- ------------ ------------
Net income $ 11,923,526 16,019,567 17,627,855
============== ============ ============
Earnings per share (notes 1 and 6): .57 .75 .82
=== === ===
Basic .56 .74 .81
=== === ===
Diluted
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE> 39
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Common stock:
Balance at beginning of year $ 2,167,037 2,163,748 1,961,137
Issue of shares as stock dividends
(2,009,797 in 1995) (note 6) -- -- 200,980
Exercise of options to purchase shares
(30,749 in 1997, 32,888 in 1996 and
16,316 in 1995) 3,075 3,289 1,631
----------- ----------- -----------
Balance at end of year 2,170,112 2,167,037 2,163,748
----------- ----------- -----------
Additional paid-in capital:
Balance at beginning of year 87,610,379 87,543,175 69,671,214
Issue of shares as stock dividends
(2,009,797 in 1995) (note 6) -- -- 17,835,103
Exercise of options to purchase shares
(30,749 in 1997, 32,888 in 1996 and
16,316 in 1995) 87,375 67,204 36,858
----------- ----------- -----------
Balance at end of year $87,697,754 87,610,379 87,543,175
----------- ----------- -----------
</TABLE>
(continued)
39
<PAGE> 40
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net unrealized gains (losses) on fixed maturities:
Balance at beginning of year $ 496,675 1,073,597 (55,686)
Change during year 561,593 (576,922) 1,129,283
------------- ------------- -------------
Balance at end of year 1,058,268 496,675 1,073,597
------------- ------------- -------------
Retained earnings:
Balance at beginning of year 24,517,265 9,673,968 10,982,494
Net income for year 11,923,526 16,019,567 17,627,855
Cash dividends (note 6) (1,310,518) (1,176,270) (893,943)
Tax benefit on non-qualified
stock options exercised 58,187 -- --
Stock dividends (note 6) -- -- (18,042,438)
------------- ------------- -------------
Balance at end of year 35,188,460 24,517,265 9,673,968
------------- ------------- -------------
Treasury stock:
Balance at beginning of year (5,438,774) (1,012,592) (1,012,592)
Change during year (2,113,560) (4,426,182) --
------------- ------------- -------------
Balance at end of year (7,552,334) (5,438,774) (1,012,592)
------------- ------------- -------------
Total shareholders' equity at end
of year $ 118,562,260 109,352,582 99,441,896
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE> 41
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 11,923,526 16,019,567 17,627,855
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 4,756,982 4,720,625 4,092,621
Change in deferred Federal income taxes (22,442) (67,145) (60,003)
Change in accrued investment income (406,643) 231,051 (251,412)
Change in premiums receivable 1,574,653 89,191 (3,651,377)
Change in reinsurance balances receivable (448,185) 1,349,492 627,739
Change in ceded unpaid claims and claim
adjustment expenses (2,810,872) (2,062,548) (4,678,318)
Change in ceded unearned premiums (2,866,259) (10,271,826) (31,218)
Change in deferred policy acquisition costs
and deferred ceding commission income 1,015,802 (519,257) (2,284,138)
Change in management contract 50,000 50,000 50,000
Change in other assets (272,994) (260,110) 297,216
Change in unpaid claims and claim
adjustment expenses 7,535,421 10,680,125 14,282,664
Change in unearned premiums (1,250,646) 11,729,830 8,880,310
Change in commissions payable (481,916) 481,984 15,734
Change in accounts payable (1,128,872) 35,232 (626,356)
Change in reinsurance balances payable (312,118) (759,133) (4,186,811)
Change in deferred revenue 42,507 100,907 71,985
Change in drafts payable 3,174,331 3,649,779 (2,035,093)
Change in other liabilities 2,157 (388,508) (40,592)
Change in current Federal income taxes (314,296) (1,472,129) 998,521
------------ ------------ ------------
Net cash provided by operating activities $ 19,760,136 33,337,127 29,099,327
------------ ------------ ------------
</TABLE>
(continued)
41
<PAGE> 42
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from investing activities:
Bonds held to maturity:
Matured $ 16,594,930 10,831,897 45,123,950
Purchased (3,434,618) (19,694,034) (41,967,879)
Bonds available for sale:
Sold 37,694,342 38,403,636 10,741,080
Matured 7,544,426 8,179,440 3,506,400
Purchased (92,169,999) (48,506,215) (46,243,440)
Certificates of deposit matured 420,000 450,000 395,000
Certificates of deposit purchased (420,000) (425,000) (445,000)
Property and equipment purchased (891,693) (1,385,136) (836,114)
Net change in short-term investments 17,838,889 (14,686,870) 4,418,610
------------ ------------ ------------
Net cash used for investing activities (16,823,723) (26,832,282) (25,307,393)
------------ ------------ ------------
Cash flows from financing activities:
Payments on note payable -- (1,750,000) (1,750,000)
Cash dividends paid (1,261,530) (1,129,024) (819,972)
Payment for fractional shares resulting
from stock dividends -- -- (6,358)
Proceeds from exercise of common stock
options 90,450 70,493 38,489
Treasury stock acquired (2,113,560) (4,426,182) --
------------ ------------ ------------
Net cash used for financing activities (3,284,640) (7,234,713) (2,537,841)
------------ ------------ ------------
Net increase (decrease) in cash (348,227) (729,868) 1,254,093
Cash at beginning of year 1,044,740 1,774,608 520,515
------------ ------------ ------------
Cash at end of year $ 696,513 1,044,740 1,774,608
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE> 43
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(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 186 non-affiliated general agents' offices.
Approximately 71% of the Company's gross premiums written
during 1997 resulted from risks located in California,
Florida, Kentucky, Louisiana, Pennsylvania, Tennessee and
Texas.
43
<PAGE> 44
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(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 held until maturity,
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 $37,694,342, $38,403,636 and $10,741,080 in 1997,
1996 and 1995, respectively. The realized gains were
$384,184, $516,997 and $108,024 in 1997, 1996 and 1995,
respectively. The realized losses were $57,279, $45,041 and
$0 in 1997, 1996 and 1995, respectively.
(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.
44
<PAGE> 45
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
The change in the resulting deferred asset is charged
(credited) to operations. Information relating to these net
deferred amounts, as of and for the years ended December 31,
1997, 1996 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Asset balance, beginning of
period $ 12,633,938 12,114,681 9,830,543
---------- ---------- ----------
Deferred commissions 19,912,479 21,932,779 21,394,072
Deferred marketing and
underwriting expenses 5,335,856 5,854,088 5,506,882
Deferred ceding
commission income (85,152) (76,765) (71,227)
Amortization (26,178,985) (27,190,845) (24,545,589)
---------- ---------- ----------
Net change (1,015,802) 519,257 2,284,138
---------- ----------- ----------
Asset balance, end of period $ 11,618,136 12,633,938 12,114,681
========== ========== ==========
</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
----------------------------------
1997 1996
--------- ---------
<S> <C> <C>
Land $ 865,383 865,383
Buildings 6,265,159 5,766,278
Furniture and equipment 3,239,458 2,935,259
Software 2,281,597 2,192,984
Accumulated depreciation and
amortization (5,710,365) (4,778,524)
--------- ---------
$ 6,941,232 6,981,380
========= =========
</TABLE>
There are no material capital leases.
45
<PAGE> 46
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(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 826,894 shares and 582,962 shares
as treasury stock at December 31, 1997 and 1996, respectively,
with a cost basis of $9.13 and $9.33 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.
46
<PAGE> 47
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
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
--------------------------------------
1997 1996 1995
-------- -------- ------
(Amounts in thousands)
<S> <C> <C> <C>
Unpaid claims and claim adjustment expenses,
beginning of period $ 105,691 95,011 80,729
Less: Ceded unpaid claims and claim adjustment
expenses, beginning of period 26,713 24,650 19,972
-------- -------- ------
Net unpaid claims and claim adjustment expenses,
beginning of period 78,978 70,361 60,757
-------- -------- ------
Net claims and claim adjustment expenses
incurred related to:
Current period 53,969 53,037 48,064
Prior periods 8,117 5,342 401
-------- -------- ------
Total net claims and claim adjustment expenses
incurred 62,086 58,379 48,465
-------- -------- ------
Net claim and claim adjustment expenses paid
related to:
Current period 17,807 17,178 14,131
Prior periods 39,554 32,584 26,953(1)
-------- -------- ------
Total net claim and claim adjustment expenses
paid 57,361 49,762 41,084
-------- -------- ------
Commutation of reinsurance treaties - - (2,223)(1)
-------- -------- ------
Net unpaid claims and claim adjustment expenses,
end of period 83,703 78,978 70,361
Plus: Ceded unpaid claims and claim adjustment
expenses, end of period 29,524 26,713 24,650(1)
-------- -------- ------
Unpaid claims and claim adjustment expenses, end
of period $ 113,227 105,691 95,011
======== ======== ======
</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.
47
<PAGE> 48
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
The development in net claims and claim adjustment expenses
incurred from prior periods was largely a result of claim
reserve increases recorded for commercial auto claims in
Kentucky for the 1996 and 1995 accident years and adverse
development in claim adjustment expense reserves for
commercial auto in the 1996, 1995 and 1994 accident 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
$3,175,000, $6,617,909 and $5,413,486 during 1997, 1996 and
1995, respectively.
(l) Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Numerator:
Net Income $ 11,923,526 16,019,567 17,627,855
------------ ------------ ------------
Denominator:
Denominator for basic
earnings per share-
weighted average shares 20,996,386 21,441,389 21,512,741
Effect of dilutive securities:
Employee stock options 248,863 280,274 309,549
------------ ------------ ------------
Denominator for diluted
earnings per share-
weighted average shares
and assumed conversions 21,245,249 21,721,663 21,822,290
============ ============ ============
Basic earnings per share $ .57 $ .75 $ .82
============ ============ ============
Diluted earnings per share $ .56 $ .74 $ .81
============ ============ ============
</TABLE>
48
<PAGE> 49
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(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 February 1997, the FASB issued Statement 128, "Earnings Per
Share". The Statement was effective for financial statements
issued for periods ending after December 15, 1997. Earnings
per share for prior years presented in these financial
statements have been restated to comply with Statement 128.
(2) INVESTMENTS
The following schedule summarizes the components of net investment
income:
<TABLE>
<CAPTION>
Years ended December 31
--------------------------------------------------------------
Investment income on: 1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Fixed maturities $ 9,218,089 8,331,441 7,481,087
Short-term investments 782,051 1,055,481 870,210
------------- ------------- -------------
10,000,140 9,386,922 8,351,297
Investment expenses (269,008) (226,404) (193,813)
------------- ------------- -------------
Net investment income $ 9,731,132 9,160,518 8,157,484
============= ============= =============
</TABLE>
49
<PAGE> 50
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
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-1997 $ 5,404 79 (7) 5,476
US Government Securities-1996 7,731 41 (24) 7,748
Tax-exempt state & municipal bonds-1997 84,330 855 (133) 85,052
Tax-exempt state & municipal bonds-1996 97,199 875 (97) 97,977
Bonds available for sale:
US Government Securities-1997 27,322 83 (1) 27,404
US Government Securities-1996 - - - -
Tax-exempt state & municipal bonds-1997 94,700 1,580 (34) 96,246
Tax-exempt state & municipal bonds-1996 76,880 896 (132) 77,644
Certificates of Deposit - 1997 595 - - 595
Certificates of Deposit - 1996 595 - - 595
Total Fixed Maturities-1997 $ 212,351 2,597 (175) 214,773
Total Fixed Maturities-1996 182,405 1,812 (253) 183,964
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1997 and 1996, by maturity, are shown below.
<TABLE>
<CAPTION>
1997 1996
------------------------- --------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
<S> <C> <C> <C>
(Amounts in thousands)
Due in one year or less $ 35,142 35,187 18,754 19,061
Due after one year but within five years 140,571 141,871 135,052 136,185
Due after five years but within ten years 30,608 31,527 23,059 23,165
Due after ten years but within twenty
years 6,030 6,188 5,540 5,553
---------- ---------- ---------- ----------
$ 212,351 214,773 182,405 183,964
========== ========== ========== ==========
</TABLE>
50
<PAGE> 51
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
Investments of $1,100,000 were maintained in escrow at December 31,
1996 on behalf of certain insurance companies under the terms of their
reinsurance agreements with General Agents. In addition, investments
of $12,965,000 and $12,615,000, at December 31, 1997 and 1996,
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.
(3) NOTE PAYABLE TO BANK
The Company made a principal payment of $1,750,000 in May, 1996. This
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 and $221,934 in 1996 and 1995, respectively.
(4) REINSURANCE
In 1997, 1996 and 1995, General Agents and MGAI (the Insurers) wrote
casualty policy limits of $1,000,000. 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
non-affiliated insurance companies. GCM retains no portion 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, 1997 and 1996 total $29,943,000 and $20,174,000,
respectively.
The amounts deducted in the consolidated financial statements for
reinsurance ceded as of and for the years ended December 31, 1997,
1996, and 1995 respectively, are set forth in the following table.
51
<PAGE> 52
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
Premiums and claims ceded to the commercial automobile plans of
Arkansas, California, Louisiana, Mississippi and Pennsylvania are
designated as "plan servicing".
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Premiums earned $ 1,709,053 1,929,455 3,809,853
Premiums earned - plan
servicing $ 4,090,774 4,760,785 5,307,038
Premiums earned - fronting
arrangements $ 33,106,441 16,081,808 721,752
Claims and claim adjustment
expenses $ 2,200,182 (206,429) 13,188,258
Claims and claim adjustment
expenses - plan servicing $ 4,569,993 6,886,339 5,055,997
Claim and claim adjustment
expenses - fronting
arrangements $ 24,616,491 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>
1997 1996 1995
---------------- -------------- --------------
<S> <C> <C> <C>
Unearned premiums $ 1,552,654 2,149,286 2,836,492
Unearned premiums - fronting
arrangements $ 17,160,782 13,625,619 2,544,837
Unpaid claims and claim
adjustment expenses $ 9,431,814 11,012,699 9,842,815
Unpaid claims and claim
adjustment expenses -
fronting arrangements $ 8,623,890 4,321,085 266,720
</TABLE>
52
<PAGE> 53
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
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 the years ended
December 31, 1997, 1996, and 1995, the balance in such escrow accounts
totalled $0, $1,100,000 and $1,100,000, respectively. For 1997, 1996
and 1995, the premiums earned by assumption were $0, $0 and $(2,496),
respectively and the assumed unpaid claims and claim adjustment
expenses were $810,000, $1,845,000 and $4,427,000, 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>
1997 1996 1995
--------------- ------------ ------------
<S> <C> <C> <C>
Income tax expense at 35% $ 5,166,625 7,384,371 8,392,950
Tax-exempt interest income (2,486,582) (2,308,364) (2,039,995)
Building rehabilitation tax
credit (41,984) (77,102) -
Other, net 200,203 79,730 (951)
------------- ------------- -------------
Income tax expense $ 2,838,262 5,078,635 6,352,004
============= ============= =============
</TABLE>
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
53
<PAGE> 54
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
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
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Discounting of unpaid claims and claim adjustment expenses $ 4,375,152 4,475,305
Discounting of unearned premiums 3,158,477 3,463,159
Deferred service fee income 214,164 207,584
Other 34,026 41,640
----------- -----------
Total deferred tax assets 7,781,819 8,187,688
----------- -----------
Deferred tax liabilities:
Deferred policy acquisition costs and deferred ceding commission income 4,086,944 4,452,344
Unrealized gains on investments 569,837 267,440
Depreciation and amortization 386,463 504,547
Capitalized software 56,248 4,631
Other 5,772 2,216
----------- -----------
Total deferred tax liabilities 5,105,264 5,231,178
----------- -----------
Net deferred tax asset $ 2,676,555 2,956,510
=========== ===========
</TABLE>
(6) SHAREHOLDERS' EQUITY
The Company has 250,000,000 shares of authorized $.10 par value common
stock. Of the authorized shares, 21,701,118 and 21,670,369 were
issued as of December 31, 1997 and 1996, respectively and 20,874,224
and 21,087,407 were outstanding as of December 31, 1997 and 1996,
respectively. The Company also has 10,000,000 shares of preferred
stock with $100 par value authorized of which no shares have been
issued. The Board of Directors can designate the relative rights and
preferences of the authorized preferred stock to be issued.
In 1991, the Company adopted a policy to pay a quarterly cash dividend
of $.01 per share on its common stock every quarter until further
action by the Board of Directors. The Board of Directors increased
the cash dividend to: $.0125 per share in November of 1995, $.015 per
share in August of 1996, and $.0175 per share in November of 1997. In
November of 1995, the Board of Directors announced the discontinuance
of the semi-annual stock dividends. The Board of Directors granted 5%
stock dividends to shareholders of record on March 31, 1995 and
September 30, 1995. The market value of the stock dividends was
charged to retained earnings, common stock was credited for
54
<PAGE> 55
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
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 $76,495,883,
$57,011,890 and $47,880,301 at December 31, 1997, 1996 and 1995,
respectively, and the amount of consolidated statutory net income was
$14,155,450, $15,829,108 and $15,167,151 for the years ended 1997,
1996, and 1995, respectively. The amount of policyholders' surplus of
GCM was $2,000,000, $2,000,001 and $2,260,001 at December 31, 1997,
1996 and 1995, respectively, and the amount of statutory net income
was $44,569, $115,563 and $369,356 for the years ended December 31,
1997, 1996 and 1995, 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, 1997, General Agents, the Oklahoma subsidiary, had net income of
$15,449,442 and policyholders' surplus of $76,495,883 and MGAI, the
Texas subsidiary, had net income of $3,456,008 and policyholders'
surplus of $21,026,541.
In 1988, the Board of Directors declared, pursuant to a Rights Plan, a
dividend distribution of one common share purchase right on each
outstanding share of $.10 par value common stock. The dividend
distribution was made on March 18, 1988, payable to shareholders of
record on that date. In 1993, the Board of Directors amended the
Rights Plan and extended the expiration date of these rights from
March 18, 1998 to May 25, 2003. Each right, as amended during 1993,
has an exercise price of $70. The rights are not exercisable until
the Distribution Date (as defined in the Rights Plan). The Rights
Plan provides, among other things, that if any person or group (other
than the Company, one of its subsidiaries or an employee benefit plan
of the Company or a subsidiary) acquires 20% or more of the Company's
common stock (except pursuant to an offer for all outstanding common
stock which the Continuing Directors (as defined in the Rights Plan)
have determined to be in the best interests of the Company and its
shareholders), if a 20% holder engages in certain self-dealing
transactions or if a holder of 15% or more of the Company's common
stock is declared an Adverse Person (as defined in the Rights Plan) by
the Board of Directors, each holder of a right (other than the 20%
holder or the Adverse Person, whose rights would become null and void)
would have the right to receive, upon exercise of the right, common
stock having a market value of two times the exercise price of the
right. The Company is able to redeem rights under certain conditions
set forth in the Rights Plan. If, following a public announcement
that a person has acquired 20% or more of the common stock, the
Company is acquired in a merger (other than a merger which follows an
offer approved by the Continuing Directors as 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
55
<PAGE> 56
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
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, 1997, 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, 1997 and 1996, and changes during the years ended
December 31, 1997 and 1996 is presented below:
<TABLE>
<CAPTION>
1997 1996
------------------------------------ ----------------------------------
Underlying Weighted Average Underlying Weighted Average
Shares Exercise Price Shares Exercise Price
------ -------------- ---------- ----------------
Options
---------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period 1,352,786 $ 8.38 401,277 $ 2.60
Granted 158,425 $ 8.60 984,397 $ 10.57
Exercised (30,749) $ 2.94 (32,888) $ 2.14
Forfeited (127,749) $ 10.63 -
---------- ----------
Outstanding, end of period 1,352,713 $ 8.32 1,352,786 $ 8.38
========== ==========
Options exercisable at end of period 711,978 565,265
Weighted-average fair value of
options granted during the period $ 4.82 $ 4.43
</TABLE>
56
<PAGE> 57
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
The following table summarizes information for the stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ---------------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 2 to 9 461,449 4.57 years $ 4.08 362,401 $ 2.89
$ 9 to 11 891,264 8.45 years $ 10.51 349,577 $ 10.53
--------- ---------
$ 2 to 11 1,352,713 6.91 years $ 8.32 711,978 $ 6.65
========= =========
</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. Had compensation cost been determined
consistent with Statement 123 for the options granted, the Company's
net income and earnings per share would have been the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
Year ended Year ended
----------------- -----------------
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C> <C>
Net income As reported $ 11,923,526 16,019,567
Pro forma $ 11,368,790 15,504,676
Basic earnings per share As reported $ .57 .75
Pro forma $ .54 .72
Diluted earnings per share As reported $ .56 .74
Pro forma $ .54 .71
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions for 1997 and 1996, respectively: expected volatility of
33.6% and 34.0%, risk free interest rates of 5.88% and 6.05%, expected
dividend yields of .74% and .57% and an expected life of 7.5 years for
both periods presented.
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 $396,838,
$578,107, and $605,935 for 1997, 1996 and 1995, 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
57
<PAGE> 58
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
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, 1997
and 1996 the Company did not have a premiums receivable balance nor a
reinsurance balance receivable from any one entity that was material
with regard to shareholders' equity.
(9) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table contains selected unaudited consolidated financial
data for each quarter (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 Quarter 1996 Quarter
------------------------------------- -----------------------------------
Fourth Third Second First Fourth Third Second First
-------- ------- ------ ----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross premiums
written $ 26,763 23,055 26,938 23,020 29,107 27,065 29,240 24,588
Total revenues 28,816 28,484 28,850 28,795 30,317 30,067 29,460 28,960
Total expenses 25,381 27,253 22,980 24,570 25,192 26,000 23,331 23,184
Net income 2,887 1,464 4,409 3,164 3,933 3,298 4,514 4,275
Earnings per share(a):
Basic $ .14 .07 .21 .15 .19 .15 .21 .20
Diluted $ .14 .07 .21 .15 .18 .15 .21 .20
Common share
prices (b)
High 10 3/16 9 15/16 9 3/8 10 10 3/4 10 3/4 11 5/8 11 3/4
Low 8 8 1/2 8 1/8 8 3/4 8 3/4 9 3/8 9 7/8 9 3/4
</TABLE>
(a) All periods have been restated to comply with FASB Statement 128,
"Earnings Per Share".
(b) As reported by the American Stock Exchange from January 1, 1996 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 16, 1998, we reported on the consolidated balance sheets
of GAINSCO, INC. and subsidiaries as of December 31, 1997 and 1996 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, 1997.
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 16, 1998
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
------------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- ---------------------
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 $ 5,404 5,476 7,731 7,748 9,606 9,733
Tax exempt state and
municipal bonds 84,330 85,052 97,199 97,977 87,696 88,689
Bonds available for sale:
U.S. government
securities 27,322 27,404 -- -- -- --
Tax exempt state and
municipal bonds 94,700 96,246 76,880 77,644 77,478 79,130
Certificates of deposit 595 595 595 595 620 620
-------- -------- -------- -------- -------- --------
Total fixed maturities 212,351 214,773 182,405 183,964 175,400 178,172
-------- -------- -------- -------- -------- --------
Short-term investments 2,823 2,823 20,662 20,662 5,975 5,975
-------- -------- -------- -------- -------- --------
Total investments $215,174 217,596 203,067 204,626 181,375 184,147
======== ======== ======== ======== ======== ========
</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, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ------------- -------------
<S> <C> <C>
Investments in subsidiaries $ 117,359,673 102,217,935
Cash 1,614 8,243
Net receivables from subsidiaries 1,308,015 7,289,111
Short-term investments 83,475 --
Other assets 191,716 159,492
------------- -------------
Total assets $ 118,944,493 109,674,781
============= =============
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable $ 16,933 5,887
Dividends payable 365,300 316,312
------------- -------------
Total liabilities 382,233 322,199
------------- -------------
Shareholders' equity:
Preferred stock ($100 par value, 10,000,000
shares authorized, none issued) -- --
Common stock ($.10 par value, 250,000,000
shares authorized, 21,701,118 issued at
December 31, 1997 and 21,670,369 issued at
December 31, 1996) 2,170,112 2,167,037
Additional paid-in capital 87,697,754 87,610,379
Net unrealized gains on fixed maturities 1,058,268 496,675
Retained earnings 35,188,460 24,517,265
Treasury stock, at cost (826,894 shares in 1997,
582,962 shares in 1996) (7,552,334) (5,438,774)
------------- -------------
Total shareholders' equity 118,562,260 109,352,582
------------- -------------
Total liabilities and shareholders' equity $ 118,944,493 109,674,781
============= =============
</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, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues - dividend income $ 3,700,000 9,900,000 3,115,000
Investment Income 3,779 -- --
Expenses - operating expenses (1,367,178) (1,191,222) (1,092,470)
------------ ------------ ------------
Operating income before
Federal income tax benefit 2,336,601 8,708,778 2,022,530
Federal income tax benefit (455,679) (467,559) (366,716)
------------ ------------ ------------
Income before equity in undistributed
income of subsidiaries 2,792,280 9,176,337 2,389,246
Equity in undistributed income of subsidiaries 9,131,246 6,843,230 15,238,609
------------ ------------ ------------
Net income $ 11,923,526 16,019,567 17,627,855
============ ============ ============
Earnings per share:
Basic $ .57 .75 .82
============ ============ ============
Diluted .56 .74 .81
============ ============ ============
</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, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Common Stock:
Balance at beginning of year $ 2,167,037 2,163,748 1,961,137
Issue of shares as stock dividends
(2,009,797 in 1995) -- -- 200,980
Exercise of options to purchase
shares (30,749 in 1997, 32,888 in
1996 and 16,316 in 1995) 3,075 3,289 1,631
----------- ----------- -----------
Balance at end of year 2,170,112 2,167,037 2,163,748
----------- ----------- -----------
Additional paid-in capital:
Balance at beginning of year 87,610,379 87,543,175 69,671,214
Issue of shares as stock dividends
(2,009,797 in 1995) -- -- 17,835,103
Exercise of options to purchase
shares (30,749 in 1997, 32,888 in
1996 and 16,316 in 1995) 87,375 67,204 36,858
----------- ----------- -----------
Balance at end of year $87,697,754 87,610,379 87,543,175
----------- ----------- -----------
</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, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net unrealized gains (losses) on fixed maturities:
Balance at beginning of year $ 496,675 1,073,597 (55,686)
Change during year 561,593 (576,922) 1,129,283
------------ ------------ ------------
Balance at end of year 1,058,268 496,675 1,073,597
------------ ------------ ------------
Retained earnings:
Balance at beginning of year 24,517,265 9,673,968 10,982,494
Net income for year 11,923,526 16,019,567 17,627,855
Cash dividends (1,310,518) (1,176,270) (893,943)
Tax benefit on non-qualified stock
options exercised 58,187 -- --
Stock dividends -- -- (18,042,438)
------------ ------------ ------------
Balance at end of year 35,188,460 24,517,265 9,673,968
------------ ------------ ------------
Treasury stock:
Balance at beginning of year (5,438,774) (1,012,592) (1,012,592)
Change during year (2,113,560) (4,426,182) --
------------ ------------ ------------
Balance at end of year (7,552,334) (5,438,774) (1,012,592)
------------ ------------ ------------
Total shareholders' equity at end
of year $118,562,260 109,352,582 99,441,896
============ =========== ============
</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, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 11,923,526 16,019,567 17,627,855
Adjustments to reconcile net income to
cash provided by operating activities:
Change in investments in subsidiaries (5,390,712) -- --
Change in net receivable from subsidiaries 5,981,096 (3,593,152) (1,575,085)
Change in other assets (32,224) (95,992) (6,750)
Change in accounts payable 11,046 5,887 (18,798)
Change in other liabilities -- (900) --
Equity in income of subsidiaries (9,131,246) (6,843,230) (15,238,609)
------------ ------------ ------------
Net cash provided by operating
activities 3,361,486 5,492,180 788,613
------------ ------------ ------------
Cash flows from investing activities:
Net change in short-term investments (83,475) -- --
------------ ------------ ------------
Net cash used for investing
activities $ (83,475) -- --
------------ ------------ ------------
</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, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Cash dividends paid $(1,261,530) (1,129,024) (819,972)
Payments for fractional shares
resulting from stock dividends -- -- (6,358)
Proceeds from exercise of common
stock options 90,450 70,493 38,489
Treasury stock acquired (2,113,560) (4,426,182) --
----------- ----------- -----------
Net cash used for financing
activities (3,284,640) (5,484,713) (787,841)
----------- ----------- -----------
Net increase (decrease) in cash (6,629) 7,467 772
Cash at beginning of year 8,243 776 4
----------- ----------- -----------
Cash at end of year $ 1,614 8,243 776
=========== =========== ===========
</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, 1997, 1996 and 1995
(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, 1997, 1996 and
1995 included elsewhere in this Annual Report.
(2) RELATED PARTIES
During 1997, the Company made a capital contribution to
GAINSCO Service Corp. by forgiving an intercompany debt in the
amount of $5,390,712.
The following table presents the components of the Net
receivables from subsidiaries at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Name of Subsidiary 1997 1996
------------------ ----------- ------------
<S> <C> <C>
Agents Processing Systems, Inc. $ 883,224 439,711
GAINSCO Service Corp. 218,287 5,677,163
General Agents Insurance
Company of America, Inc. 206,504 1,172,237
----------- ---------
Net receivable from subsidiaries $ 1,308,015 7,289,111
=========== =========
</TABLE>
See accompanying independent auditors' report on supplementary information.
67
<PAGE> 68
Schedule III
GAINSCO, INC. AND SUBSIDIARIES
Supplementary Insurance Information
Years ended December, 1997, 1996 and 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
Other
Deferred Reserves policy
policy for claims claims and Net
acquisition and claim Unearned benefits premiums
Segment costs expenses premiums payable earned
- ------- ------- ---------- -------- --------- --------
Year ended December 31, 1997
<S> <C> <C> <C> <C> <C>
Property and casualty insurance $ 11,618 113,227 64,005 9,393 102,256
-------- ------- ------ ----- -------
Total $ 11,618 113,227 64,005 9,393 102,256
======== ======= ====== ===== =======
Year ended December 31, 1996
Property and casualty insurance $ 12,634 105,691 65,255 6,219 106,793
-------- ------- ------ ----- -------
Total $ 12,634 105,691 65,255 6,219 106,793
======== ======= ====== ===== =======
Year ended December 31, 1995
Property and casualty insurance $ 12,115 95,011 53,525 2,569 97,255
-------- ------ ------ ----- ------
Total $ 12,115 95,011 53,525 2,569 97,255
======== ====== ====== ===== ======
<CAPTION>
Amortization
of deferred Other
Net Claims policy operating Net
investment & claim acquisition costs and premiums
Segment income expenses costs (1) expenses written
- ------- -------- -------- ----------- --------- --------
Year ended December 31, 1997
<S> <C> <C> <C> <C> <C>
Property and casualty insurance 9,731 62,086 (26,179) 37,082 98,139
----- ------ ------- ------ ------
Total 9,731 62,086 (26,179) 37,082 98,139
===== ====== ====== ====== ======
Year ended December 31, 1996
Property and casualty insurance 9,161 58,379 (27,191) 39,847 108,251
----- ------ ------ ------ -------
Total 9,161 58,379 (27,191) 39,847 108,251
===== ====== ====== ====== =======
Year ended December 31, 1995
Property and casualty insurance 8,157 48,465 (24,546) 37,542 106,104
----- ------ ------ ------ -------
Total 8,157 48,465 (24,546) 37,542 106,104
===== ====== ====== ====== =======
</TABLE>
(1) Net of the amortization of deferred ceding commission income.
See accompanying independent auditors' report on supplementary information.
<PAGE> 69
Schedule IV
GAINSCO, INC. AND SUBSIDIARIES
Reinsurance
Years ended December 31, 1997, 1996 and 1995
(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, 1997:
Premiums earned:
Property and casualty $ 137,071 -- -- 137,071
Reinsurance -- (34,815) -- (34,815)
--------- ------ --------- -------
Total $ 137,071 (34,815) -- 102,256 -- %
========= ====== ========= ======= ====
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 -- %
========= ===== ========= ======= ====
</TABLE>
See accompanying independent auditors' report on supplementary information.
69
<PAGE> 70
Schedule VI
GAINSCO, INC. AND SUBSIDIARIES
Supplemental Information
Years ended December 31, 1997, 1996 and 1995
(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
with acquisition adjustment in Unearned Net earned
registrant costs expenses Column C premiums premiums
---------- ------- ---------- -------- -------- --------
Year ended December 31, 1997
<S> <C> <C> <C> <C> <C> <C>
Property and casualty insurance $ -- 11,618 113,227 -- 64,005 102,256
-- ------ ------- --- ------ -------
Total $ -- 11,618 113,227 -- 64,005 102,256
== ====== ======= === ====== =======
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
== ====== ====== === ====== ======
<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 premium
income year years costs (1) expenses written
-------- ---- ----- ----------- ---------- -------
Year ended December 31, 1997
Property and casualty insurance 9,731 53,969 8,117 (26,179) 57,361 98,139
----- ------ ----- ------ ------ ------
Total 9,731 53,969 8,117 (26,179) 57,361 98,139
===== ====== ===== ====== ====== ======
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
===== ====== === ====== ====== =======
</TABLE>
(1) Net of the amortization of deferred ceding commission income.
See accompanying independent auditors' report on supplementary information.
<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)
3.6 Articles of Amendment to Articles of Incorporation effective August
13, 1993 (Exhibit 3.6)(7)
3.7 Bylaws of Registrant as restated on February 18, 1998 (11)
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 (Exhibit 4.6) (10)
10.2 (Restated) Incentive Compensation Plan of the Registrant (Exhibit
10.2)(2)
10.16 1990 Stock Option Plan of the Registrant (Exhibit 10.16)(4)
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).
</TABLE>
71
<PAGE> 72
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description No. Page
----------- ----------- --------
<S> <C>
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).
10.31 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)
10.36 Form of Change of Control Agreements (11)
11 (Not required to be filed as an Exhibit. See footnote (1)(l) on page
48 of this 10-K Report for information called for by number 11 of the
Exhibit Table to Item 601 of SK)
22.2 Subsidiaries of Registrant (11)
24.2 Consent of KPMG Peat Marwick to incorporation by reference (11)
25.1 Powers of Attorney (11)
27 Financial Data Schedule (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>
72
<PAGE> 73
<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) 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, 1996.
(11) Filed herewith.
</TABLE>
73
<PAGE> 1
EXHIBIT 3.7
BYLAWS
OF
GAINSCO, INC.
As amended as of February 18, 1998
Contents
ARTICLE 1: OFFICES
1.01 Registered Office and Agent
1.02 Other Offices
ARTICLE 2: SHAREHOLDERS
2.01 Place of Meetings
2.02 Annual Meeting
2.03 Voting List
2.04 Special Meetings
2.05 Notice
2.06 Quorum
2.07 Majority Vote; Withdrawal of Quorum
2.08 Method of Voting
2.09 Record Date; Closing Transfer Books
2.10 Action Without Meeting
2.11 Order of Business at Meetings
ARTICLE 3: DIRECTORS
3.01 Management
3.02 Number; Qualifications; Election; and Term
3.03 Change in Number
3.04 Removal
3.05 Vacancies
3.06 Election of Directors
3.07 Place of Meetings
3.08 First Meeting
3.09 Regular Meetings
3.10 Special Meetings
3.11 Quorum; Majority Vote
3.12 Compensation
3.13 Procedure
3.14 Interested Directors and Officers
3.15 Action Without Meeting
3.16 Advisory Directors
ARTICLE 4: NOTICE AND ATTENDANCE THROUGH USE OF ELECTRONIC EQUIPMENT
4.01 Method
4.02 Waiver
4.03 Telephone and Similar Meetings
i.
<PAGE> 2
ARTICLE 5: OFFICERS AND AGENTS
5.01 Number; Qualification; Election; Term
5.02 Removal
5.03 Vacancies
5.04 Authority
5.05 Compensation
5.06 President
5.07 Vice Presidents
5.08 Secretary
5.09 Assistant Secretary
5.10 Treasurer
5.11 Assistant Treasurer
5.12 Chairman of the Board
5.13 Vice-Chairman of the Board
5.14 Second Vice Presidents
ARTICLE 6: CERTIFICATES AND SHAREHOLDERS
6.01 Certificates
6.02 Issuance
6.03 Payment for Shares
6.04 Subscriptions
6.05 Lien
6.06 Lost, Stolen or Destroyed Certificates
6.07 Registration of Transfer
6.08 Registered Shareholders
6.09 Denial of Preemptive Rights
ARTICLE 7: GENERAL PROVISIONS
7.01 Dividends and Reserves
7.02 Books and Records
7.03 Annual Statement
7.04 Checks and Notes
7.05 Fiscal Year
7.06 Seal
7.07 Indemnification; Insurance
7.08 Resignation
7.09 Amendment of Bylaws
7.10 Construction
7.11 Table of Contents; Headings
7.12 Relation to Articles of Incorporation
ARTICLE 8: COMMITTEES
8.01 Designation
8.02 Number; Qualification; Term
8.03 Authority
8.04 Change in Number
8.05 Removal
8.06 Vacancies
8.07 Meetings
8.08 Quorum; Majority Vote
8.09 Compensation
ii.
<PAGE> 3
ARTICLE 1: OFFICES
1.01 Registered Office and Agent. The registered office of the
corporation shall be at 500 Commerce Street, Fort Worth, Texas 76102. The name
of the registered agent at such address is Joseph D. Macchia. Anything in these
Bylaws to the contrary notwithstanding revision of the registered office or the
registered agent of the corporation in accordance with the provisions of the
Texas Business Corporation Act shall automatically and without further action
amend this section to name such newly adopted office or registered agent.
1.02 Other Offices. The corporation may have offices at other places
both within and without the State of Texas as the board of directors may
determine or as the business of the corporation may require.
ARTICLE 2: SHAREHOLDERS
2.01 Place of Meetings. All meetings of the shareholders shall be held
at such time and place, in or out of the State of Texas, as shall be stated in
the notice of the meeting or in a waiver of notice.
2.02 Annual Meeting. An annual meeting of the shareholders shall be
held each year at a time and on a day during the month of May to be selected by
the board of directors. At the meeting, the shareholders shall elect directors
and transact such other business as may properly be brought before the meeting.
In the event the annual meeting is omitted by oversight or otherwise and not
held as provided herein, an annual meeting may be called in the manner provided
for special meetings herein at a subsequent date and the business transacted at
such meeting shall be valid as if transacted at the annual meeting held during
the month of May.
2.03 Voting List. At least ten days before each meeting of
shareholders, a complete list of the shareholders entitled to vote at the
meeting, arranged in alphabetical order, with the address of each and the number
of voting shares held by each, shall be prepared by the officer or agent having
charge of the stock transfer books. The list, for a period of ten days prior to
the meeting, shall be kept on file at the registered office of the corporation
and shall be subject to inspection by any shareholder at any time during usual
business hours. The list shall also be produced and kept open at the time and
place of the meeting during the whole time thereof, and shall be subject to the
inspection of any shareholder during the whole time of the meeting.
2.04 Special Meetings. Special meetings of the shareholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the articles
of incorporation, may be called by the president, the Board of Directors, or the
holders of not less than twenty-five percent of all of the shares entitled to
vote at the meetings. Business transacted at a special meeting shall be confined
to the objects stated in the notice of the meeting.
2.05 Notice. Written or printed notice stating the place, day and hour
of the meeting and, in the case of a special meeting, the purpose or purposes
for which the meeting is called, shall be delivered not less than ten nor more
than fifty days before the date of the meeting, either personally or by mail, by
or at the direction of the president, the secretary, or the officer or person
calling the meeting, to each shareholder of record entitled to vote at the
meeting. If mailed, such notice shall be deemed to be delivered when deposited
in the United States mail addressed to the shareholder at his address as it
appears on the stock transfer books of the corporation, with postage thereon
prepaid.
2.06 Quorum. At all meetings of the shareholders, the presence in
person or by proxy of the holders of a majority of the shares issued and
outstanding and entitled to vote will be necessary and sufficient
1
<PAGE> 4
to constitute a quorum for the transaction of business except as otherwise
provided by law, the articles of incorporation or these bylaws. If a quorum is
not present or represented at a meeting of the shareholders, the shareholders
entitled to vote, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice (other than announcement
at the meeting of the time and place at which the meeting is to be reconvened)
until a quorum is present or represented. At such adjourned meeting at which a
quorum is present or represented, any business may be transacted which might
have been transacted at the meeting as originally notified. For purposes of
determining the presence or absence of a quorum under this bylaw 2.06,
abstentions and broker non-votes (as such terms are defined in bylaw 2.07) shall
be treated as shares present and entitled to vote.
2.07 Majority Vote; Withdrawal of Quorum. When a quorum is present at
any meeting of the shareholders, the vote of the holders of a majority of the
shares entitled to vote, present in person or represented by proxy and voting
"for" or "against" any question brought before the meeting shall decide such
question, unless the question is one upon which, by express provision of law,
the articles of incorporation or these bylaws, a different vote is required in
which case such express provision shall govern and control the decision of such
question but if such other express provision does not specify that the
affirmative vote of a given percent of outstanding shares are required, the
matter shall be approved or adopted if the required percent of the shares
entitled to vote, present in person or represented by proxy and voting "for" or
"against" such matter has voted "for". Abstentions and broker non-votes are not
counted (even though such shares are considered present and entitled to vote for
purposes of determining a quorum pursuant to bylaw 2.06). The term "abstentions"
shall refer to shares which are not voted "for" or "against" a particular
question by a holder or holders present in person or by proxy at a meeting and
entitled to vote such shares on such question. The term "broker non-vote" shall
refer to shares held by brokers or nominees as to which instructions have not
been received from the beneficial owners or persons entitled to vote and that
the broker or nominee does not have discretionary power to vote on the
particular question on which the vote is being counted. Anything herein to the
contrary notwithstanding, any alteration, amendment, or repeal of bylaws 2.07,
3.02, 3.03, 3.04, 3.05, 3.11 and 7.09, or adoption of any provision inconsistent
therewith, by the shareholders shall require the vote of the holders of
two-thirds (2/3) of the shares having voting power. The shareholders present at
a duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum.
2.08 Method of Voting. Each outstanding share shall be entitled to one
vote on each matter submitted to a vote at a meeting of shareholders. At any
meeting of the shareholders, every shareholder having the right to vote may vote
either in person, or by proxy executed in writing by the shareholder or by his
duly authorized attorney-in-fact. No proxy shall be valid after seven months
from the date of its execution, unless otherwise provided in the proxy. Each
proxy shall be revocable unless expressly provided therein to be irrevocable and
unless otherwise made irrevocable by law. Each proxy shall be filed with the
secretary of the corporation prior to or at the time of the meeting. Voting for
directors shall be in accordance with Section 3.06 of these bylaws. Any vote may
be taken by voice or by show of hands unless someone entitled to vote objects,
in which case, written ballots shall be used.
2.09 Record Date; Closing Transfer Books. The board of directors may
fix in advance a record date for the purpose of determining shareholders
entitled to notice of or to vote at a meeting of the shareholders, the record
date to be not less than ten nor more than fifty days prior to the meeting; or
the board of directors may close the stock transfer books for such purpose for a
period of not less than ten nor more than fifty days prior to such meeting. In
the absence of any action by the board of directors, the date upon which the
notice of the meeting is mailed shall be the record date.
2
<PAGE> 5
2.10 Action Without Meeting. Any action required by statute to be
taken at a meeting of the shareholders, or any action which may be taken at a
meeting of the shareholders, may be taken without a meeting if a consent in
writing, setting forth the action so taken, shall be signed by all of the
shareholders entitled to vote with respect to the subject matter thereof and
such consent shall have the same force and effect as a unanimous vote of the
shareholders. The consent may be in more than one counterpart so long as each
shareholder signs one of the counterparts. The consent shall be placed in the
Minute Book.
2.11 Order of Business at Meetings. The order of business at annual
meetings and so far as practicable at other meetings of shareholders shall be as
follows unless changed by the board of directors:
(1) call to order
(2) proof of due notice of meeting
(3) determination of quorum and examination of proxies
(4) announcement of availability of voting list (see Bylaw 2.03)
(5) announcement of distribution of annual statement (see Bylaw
8.03)
(6) reading and disposing of minutes of last meeting of
shareholders
(7) reports of officers and committees
(8) appointment of voting inspectors
(9) unfinished business
(10) new business
(11) nomination of directors
(12) opening of polls for voting
(13) recess
(14) reconvening; closing of polls
(15) report of voting inspectors
(16) other business
(17) adjournment
ARTICLE 3: DIRECTORS
3.01 Management. The business and affairs of the corporation shall be
managed by the board of directors who may exercise all such powers of the
corporation and do all such lawful acts and things as are not (by statute or by
the articles of incorporation or by these bylaws) directed or required to be
exercised or done by the shareholder.
3.02 Number; Qualifications; Election; and Term. The board of
directors shall consist of nine (9) directors until the annual meeting of
shareholders to be held in May 1998 at which time the number of directors shall
be reduced to eight (8) directors until thereafter changed by resolution adopted
by the board of directors pursuant to Bylaw 3.03. None of the members of the
board of directors 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.
3.03 Change in Number. The number of directors may be increased or
decreased from time to time by resolution adopted by the Board of Directors but
no decrease shall have the effect of shortening the term of any incumbent
director.
3.04 Removal. Any director may be removed either for or without cause
at any special or annual meeting of shareholders, by the affirmative vote of
over two-thirds in number of shares of the shareholders
3
<PAGE> 6
present in person or by proxy at such meeting and entitled to vote for the
election of such director if notice of intention to act upon such matter shall
have been given in the notice calling such meeting.
3.05 Vacancies. Any vacancy occurring in the board of directors (by
death, resignation or removal) may be filled by an affirmative vote of a
majority of the remaining directors though less than a quorum of the board of
directors. A director elected to fill a vacancy shall be elected for the
unexpired term of his predecessor in office. Any directorship to be filled by
reason of an increase in the number of directors shall be filled either (i) by
election at an annual meeting or at a special meeting of shareholders called for
that purpose or (ii) by the Board, provided the Board may not fill more than two
such directorships during the period between any two successive annual meetings
of shareholders.
3.06 Election of Directors. Directors shall be elected by plurality
vote. Cumulative voting shall not be permitted.
3.07 Place of Meetings. Meetings of the board of directors, regular or
special, may be held either within or without the State of Texas.
3.08 First Meeting. The first meeting of each newly elected board
shall be held without further notice immediately following the annual meeting of
shareholders, and at the same place, unless (by unanimous consent of the
directors then elected and serving) such time or place shall be changed.
3.09 Regular Meetings. Regular meetings of the board of directors may
be held without notice at such time and place as shall from time to time be
determined by the board.
3.10 Special Meetings. Special meetings of the board of directors may
be called by the president on three days' notice to each director, either
personally or by mail or by telegram. Special meetings shall be called by the
president or secretary in like manner and on like notice on the written request
of a majority of the directors. Except as otherwise expressly provided by
statute, or by the articles of incorporation, or by these bylaws, neither the
business to be transacted at, nor the purpose of, any special meeting need be
specified in a notice or waiver of notice.
3.11 Quorum; Majority Vote. At all meetings of the board of directors,
a majority of the board of directors fixed by these Bylaws shall constitute a
quorum for the transaction of business. The act of a majority of the directors
present at any meeting at which a quorum is present shall be the act by the
board of directors, except as otherwise specifically provided by statute, by the
Articles of Incorporation or by these Bylaws. Anything herein to the contrary
not withstanding, any alteration, amendment, or repeal of Bylaws 2.07, 3.02,
3.03, 3.04, 3.05, 3.11 and 7.09, or adoption of any provision inconsistent
therewith, by the board of directors shall require the affirmative vote of
two-thirds (2/3) of the board of directors of the corporation. If a quorum is
not present at a meeting of the board of directors, the directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum is present.
3.12 Compensation. By resolution of the board of directors, the
directors may be paid their expenses, if any, of attendance at each meeting of
the board of directors and may be paid a fixed sum for attendance at each
meeting of the board of directors or a stated salary as director. No such
payment shall preclude any director from serving the corporation in any other
capacity and receiving compensation therefor. Members of the Executive Committee
or of special or standing committees may, by resolution of the board of
directors, be allowed like compensation for attending committee meetings.
4
<PAGE> 7
3.13 Procedure. The board of director shall keep regular minutes of
its proceedings. The minutes shall be placed in the minute book of the
corporation.
3.14 Interested Directors and Officers .
(a) No contract or transaction between the Corporation
and one or more of its directors or officers, or
between the Corporation and any other corporation,
partnership, association, or other organization in
which one or more of the directors or officers are
directors or officers or have a financial
interest, shall be void or voidable solely for
this reason, solely because the director or
officer is present at or participates in the
meeting of the board or committee thereof which
authorizes the contract or transaction, or solely
because his or their votes are counted for such
purposes, if:
(1) The material facts as to his relationship or
interest and as to the contract or
transaction are disclosed or are known to
the board of directors or the committee, and
the board or committee in good faith
authorizes the contract or transaction by
the affirmative vote of a majority of the
disinterested directors, even though the
disinterested directors be less than a
quorum; or
(2) The material facts as to his relationship or
interest and as to the contract or
transaction are disclosed or are known to
the shareholders entitled to vote thereon,
and the contract or transaction is
specifically approved in good faith by vote
of the shareholders; or
(3) The contract or transaction is fair as to
the Corporation as of the time it is
authorized, approved, or ratified by the
board of directors, a committee thereof, or
the shareholders.
(b) Common or interested directors may be counted in
determining the presence of a quorum at a meeting
of the board of directors.
3.15 Action Without Meeting. Any action required or permitted to be
taken at a meeting of the board of directors may be taken without a meeting if a
consent in writing, setting forth the action so taken, is signed by all members
of the board of directors. Such consent shall have the same force and effect as
a unanimous vote at a meeting and may be stated as such in any document or
instrument filed with the Secretary of State.
3.16 Advisory Directors. The board of directors, by resolution adopted
by not less than a majority of the directors then in office, may from time to
time appoint such number of individuals as it may deem appropriate to serve as
advisory directors at the pleasure of the board of directors. Advisory directors
may be given such designations (including without limitation "advisory
director," "director emeritus" or "honorary director") as the board of directors
may from time to time determine. Advisory directors are not, and shall not have
the duties and responsibilities of, directors of the corporation, and the terms
"director" or "member of the board of directors" as used in these Bylaws shall
not be deemed to mean or include advisory directors. Without limiting the
generality of the foregoing, advisory directors shall not be entitled (a) to
receive any notice of any meeting of the board of directors, (b) to attend any
meeting of the board of directors except at the invitation of the board of
directors, (c) to vote on any matter presented for action by the board of
directors or, except at the invitation of the board of directors, to participate
in the consideration
5
<PAGE> 8
of any such matter or the formulation or determination of corporate policy, (d)
to receive any non-public information regarding the business or affairs of the
corporation or any matters presented for action or consideration by the board of
directors, or (e) to receive any compensation for serving as an advisory
director except as the board of directors may otherwise determine by resolution.
ARTICLE 4: NOTICE AND ATTENDANCE THROUGH USE OF ELECTRONIC EQUIPMENT
4.01 Method. Whenever by statute or the articles of incorporation or
these bylaws, notice is required to be given to any director or shareholder, and
no provision is made as to how the notice shall be given, it shall not be
construed to mean personal notice, but any such notice may be given (a) in
writing, by mail, postage prepaid, addressed to the director or shareholder at
the address appearing on the books of the corporation, or (b) in any other
method permitted by law. Any notice required or permitted to be given by mail
shall be deemed given at the time when the same is thus deposited in the United
States mails.
4.02 Waiver. Whenever, by statute or the articles of incorporation or
these bylaws, notice is required to be given to any shareholder or director, a
waiver thereof in writing signed by the person or persons entitled to such
notice, whether before or after the time stated in such notice, shall be
equivalent to the giving of such notice. Attendance of a director at a meeting
shall constitute a waiver of notice of such meeting, except where a director
attends for the express purpose of objecting to the transaction of any business
on the ground that the meeting is not lawfully called or convened.
4.03 Telephone and Similar Meetings. Shareholders, directors and
committee members may participate in and hold a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting shall constitute presence in person at the meeting,
except where a person participates in the meeting for the express purpose of
objecting to the transaction of any business on the ground that the meeting is
not lawfully called or convened.
ARTICLE 5: OFFICERS AND AGENTS
5.01 Number; Qualification; Election; Term.
(a) The corporation shall have:
(1) a president, a vice president, a secretary and
a treasurer, and
(2) such other officers (including a chairman of
the board and additional vice presidents) and assistant
officers and agents as the board of directors may think
necessary.
(b) No officer or agent need be a shareholder, a director or a
resident of Texas.
(c) Officers named in Section 5.01(a)(1) shall be elected by
the board of directors on the expiration of an officer's term or whenever a
vacancy exists. Officers and agents named in Section 5.01(a)(2) may be elected
by the board at any meeting.
(d) Unless otherwise specified by the board at the time of
election or appointment, or in any employment contract approved by the board,
each officer's and agent's term shall end at the first meeting of directors
after the next annual meeting of shareholders. He shall serve until the end of
his term or, if earlier, his death, resignation or removal.
6
<PAGE> 9
(e) Any two or more offices may be held by the same person,
except that the president and the secretary shall not be the same person.
5.02 Removal. Any officer or agent elected or appointed by the board
of directors may be removed by the board of directors whenever in its judgment
the best interests of the corporation will be served thereby. Such removal shall
be without prejudice to the contract rights, if any, of the person so removed.
Election or appointment of an officer or agent shall not of itself create
contract rights.
5.03 Vacancies. Any vacancy occurring in any office of the corporation
(by death, resignation, removal or otherwise) maybe filled by the board of
directors.
5.04 Authority. Officers and agents shall have such authority and
perform such duties in the management of the corporation as are provided in
these bylaws or as may be determined by resolution of the board of directors not
inconsistent with these bylaws.
5.05 Compensation. The compensation of officers and agents shall be
fixed from time to time by the board of directors.
5.06 President. The president shall be the chief executive officer of
the corporation; he shall preside at all meetings of the shareholders and the
board of directors, shall have general and active management of the business and
affairs of the corporation, shall see that all orders and resolutions of the
board are carried into effect. He shall perform such other duties and have such
other authority and powers as the board of directors may from time to time
prescribe.
5.07 Vice Presidents. The vice presidents, in the order of their
seniority unless otherwise determined by the board of directors, shall, in the
absence or disability of the president, perform the duties and have the
authority and exercise the powers of the president. They shall perform such
other duties and have such other authority and powers as the board of directors
may from time to time prescribe or as the president may from time to time
delegate.
5.08 Secretary.
(a) The secretary shall attend all meetings of the board of
directors and all meetings of the shareholders and record the minutes of all
proceedings in a book to be kept for that purpose.
(b) The secretary shall give, or cause to be given, notice of
all meetings of the shareholders and special meetings of the board of directors.
(c) The secretary shall keep in safe custody the seal of the
corporation and, when authorized by the board of directors or the executive
committee, affix the same to any instrument requiring it.
(d) The secretary shall be under the supervision of the
president and shall perform such other duties and have such other authority and
powers as the board of directors may from time to time prescribe or as the
president may from time to time delegate.
5.09 Assistant Secretary. The assistant secretary shall, in the
absence or disability of the secretary, perform the duties and have the
authority and exercise the powers of the secretary. He shall
7
<PAGE> 10
perform such other duties and have such other powers as the board of directors
may from time to time prescribe or as the president may from time to time
delegate.
5.10 Treasurer.
(a) The treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements of the corporation and shall deposit all monies and other valuable
effects in the name and to the credit of the corporation in such depositories as
may be designated by the board of directors.
(b) He shall disburse the funds of the corporation as may be
ordered by the board of directors, taking proper vouchers for such
disbursements, and shall render to the president and directors, at the regular
meetings of the board, or whenever they may require it, an account of all his
transactions as treasurer and of the financial condition of the corporation.
(c) If required by the board of directors, he shall give the
corporation a bond in such form, in such sum, and with such surety or sureties
as shall be satisfactory to the board for the faithful performance of the duties
of his office and for the restoration to the corporation, in case of his death,
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in his possession or under his control
belonging to the corporation.
(d) He shall perform such other duties and have such other
authority and powers as the board of directors may from time to time prescribe
or as the president may from time to time delegate.
5.11 Assistant Treasurer. The assistant treasurer shall, in the
absence or disability of the treasurer, perform the duties and have the
authority and exercise the powers of the treasurer. He shall perform such other
duties and have such other powers as the board of directors may from time to
time prescribe or the president may from time to time delegate.
5.12 Chairman of the Board. The chairman of the board shall have such
duties as may be assigned to him from time to time by the board of directors.
5.13 Vice-Chairman of the Board. The vice chairman of the board shall
act as a liaison between the board of directors and the shareholders of the
corporation and shall keep the shareholders fully advised with regard to
progress of the corporation and with regard to any major policy decisions made
by the board of directors.
5.14 Second Vice Presidents. The board of directors may designate vice
presidents to serve in the absence of the vice president in charge of any area
of responsibility and, in such event, to perform the duties and have the
authority of such absent vice president. Additionally, a second vice president
shall perform such other duties and have such other authority and powers as the
board of directors may from time to time prescribe.
ARTICLE 6: CERTIFICATES AND SHAREHOLDERS
6.01 Certificates. Certificates in the form determined by the board of
directors shall be delivered representing all shares to which shareholders are
entitled. Certificates shall be consecutively numbered and shall be entered in
the books of the corporation or its agents as they are issued. Each certificate
shall state on its face the holder's name, the number and class of shares, the
par value of shares or a statement that such
8
<PAGE> 11
shares are without par value, and such other matters as may be required by law.
They shall be signed by the president or a vice president and such other officer
or officers as the board of directors shall designate, and may be sealed with
the seal of the corporation or a facsimile thereof. If any certificate is
countersigned by a transfer agent or registered by a registrar (either of which
is other than the corporation or an employee of the corporation), the signature
of any such officer may be facsimile. In case any officer who has signed or
whose facsimile signature has been placed upon such certificate shall have
ceased to be such officer before such certificate is issued, it may be issued by
the corporation with the same effect as if he were such officer at the date of
its issuance.
6.02 Issuance. Shares (both treasury and authorized but unissued) may
be issued for such consideration (not less than par value) and to such persons
as the board of directors may determine from time to time. Shares may not be
issued until the full amount of the consideration, fixed as provided by law, has
been paid.
6.03 Payment for Shares.
(a) Kind. The consideration for the issuance of shares shall
consist of money paid, labor done (including services actually performed for the
corporation) or property (tangible or intangible) actually received. Neither
promissory notes nor the promise of future services shall constitute payment for
shares.
(b) Validation. In the absence of fraud in the transaction,
the judgment of the board of directors as to the value of consideration received
shall be conclusive.
(c) Effect. When consideration, fixed as provided by law, has
been paid, the shares shall be deemed to have been issued and shall be
considered fully paid and nonassessable.
(d) Allocation of Consideration. The consideration received
for shares shall be allocated by the board of directors in accordance with law,
between stated capital and capital surplus accounts.
6.04 Subscriptions. Unless otherwise provided in the subscription
agreement, subscriptions for shares, whether made before or after organization
of the corporation, shall be paid in full at such time or in such installments
and at such times as shall be determined by the board of directors. Any call
made by the board of directors for payment on subscriptions shall be uniform as
to all shares of the same series. In case of default in the payment on any
installment or call when payment is due, the corporation may proceed to collect
the amount due in the same manner as any debt due to the corporation.
6.05 Lien. For any indebtedness of a shareholder to the corporation,
the corporation shall have a first and prior lien on all shares of its stock
owned by him and on all dividends or other distributions declared thereon.
6.06 Lost, Stolen or Destroyed Certificates. The corporation shall
issue a new certificate in place of any certificate for shares previously issued
if the registered owner of the certificate:
(a) Claim. Makes proof in affidavit form that it has been
lost, destroyed or wrongfully taken; and
(b) Timely Request. Requests the issuance of a new certificate
before the corporation has notice that the certificate has been acquired by a
purchaser for value in good faith and without notice of an adverse claim; and
9
<PAGE> 12
(c) Bond. Gives a bond in such form, and with such surety or
sureties, with fixed or open penalty, as the corporation may direct, to
indemnify the corporation (and its transfer agent and registrar, if any) against
any claim that may be made on account of the alleged loss, destruction or theft
of the certificate; and
(d) Other Requirements. Satisfies any other reasonable
requirements imposed by the corporation.
When a certificate has been lost, apparently destroyed or wrongfully taken, and
the holder of record fails to notify the corporation within a reasonable time
after he has notice of it, and the corporation registers a transfer of the
shares represented by the certificate before receiving such notification, the
holder of record is precluded from making any claim against the corporation for
the transfer or for a new certificate.
6.07 Registration of Transfer. The corporation shall register the
transfer of a certificate for shares presented to it for transfer if:
(a) Endorsement. The certificate is properly endorsed by the
registered owner or by his duly authorized attorney; and
(b) Guarantee and Effectiveness of Signature. The signature of
such person has been guaranteed by a national banking association or member of
the New York Stock Exchange, and reasonable assurance is given that such
endorsements are effective; and
(c) Adverse Claims. The corporation has no notice of an
adverse claim or has discharged any duty to inquire into such a claim; and
(d) Collection of Taxes. Any applicable law relating to the
collection of taxes has been complied with.
6.08 Registered Shareholders. The corporation shall be entitled to
treat the holder of record of any share or shares of stock as the holder in fact
thereof and, accordingly, shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person,
whether or not it has express or other notice thereof, except as otherwise
provided by law.
6.09 Denial of Preemptive Rights. No shareholder of corporation nor
other person shall have any preemptive rights whatsoever.
ARTICLE 7: GENERAL PROVISIONS
7.01 Dividends and Reserves.
(a) Declaration and Payment. Subject to statute and the
articles of incorporation, dividends may be declared by the board of directors
at any regular or special meeting and may be paid in cash, in property or in
shares of the corporation. The declaration and payment shall be at the
discretion of the board of directors.
(b) Record Date. The board of directors may fix in advance a
record date for the purpose of determining shareholders entitled to receive
payment of any dividend, the record date to be not more than fifty days prior to
the payment date of such dividend, or the board of directors may close the stock
10
<PAGE> 13
transfer books for such purpose for a period of not more than fifty days prior
to the payment date of such dividend. In the absence of any action by the board
of directors, the date upon which the board of directors adopts the resolution
declaring the dividend shall be the record date.
(c) Reserves. By resolution the board of directors may create
such reserve or reserves out of the earned surplus of the corporation as the
directors from time to time, in their discretion, think proper to provide for
contingencies, or to equalize dividends, or to repair or maintain any property
of the corporation, or for any other purpose they think beneficial to the
corporation. The directors may modify or abolish any such reserve in the manner
in which it was created.
7.02 Books and Records. The corporation shall keep correct and
complete books and records of account and shall keep minutes of the proceedings
of its shareholders and board of directors, and shall keep at its registered
office or principal place of business, or at the office of its transfer agent or
registrar, a record of its shareholders, giving the names and addresses of all
shareholders and the number and class of the shares held by each.
7.03 Annual Statement. The board of directors shall present at each
annual meeting of shareholders a full and clear statement of the business and
condition of the corporation, including a reasonably detailed balance sheet,
income statement and surplus statement.
7.04 Checks and Notes. All checks or demands for money and notes of
the corporation shall be signed by such officer or officers or such other person
or persons as the board of directors may from time to time designate.
7.05 Fiscal Year. The fiscal year of the corporation shall be fixed by
resolution of the board of directors.
7.06 Seal. The corporation seal (of which there may be one or more)
shall contain the name of the corporation and the name of the state of
incorporation. The seal may be used by impressing it or reproducing a facsimile
of it, or otherwise.
7.07 Indemnification; Insurance.
The corporation shall indemnify to the full extent permitted by law any
person who is made a named defendant or respondent in any action, suit or
proceeding, whether civil, criminal, administrative, arbitrative or
investigative, or in any appeal in such action, suit or proceeding, by reason of
the fact that he or she is or was a director or officer of the corporation,
against all expenses (including attorney's fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by such director or officer
in connection with any such action, suit or proceeding. The corporation may
indemnify other persons, as permitted by law. The corporation may advance
expenses to directors, officers or other persons, as permitted by law. The
corporation may purchase and maintain insurance on behalf of the directors,
officers or other persons, against any liability asserted against such persons
in their capacities as directors, officers or otherwise, of the corporation,
whether or not the corporation would have the power to indemnify such directors,
officers or other persons against such liability.
7.08 Resignation. Any director, officer or agent may resign by giving
written notice to the president or the secretary. The resignation shall take
effect at the time specified therein, or immediately if no time is specified
therein. Unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
11
<PAGE> 14
7.09 Amendment of Bylaws. These Bylaws may be altered, amended or
repealed or new Bylaws may be adopted by the board of directors (subject to the
shareholders repealing or changing the action of the board of directors, or
making new Bylaws, at an annual or special meeting called and held as provided
in these Bylaws) at any meeting at which a quorum is present.
7.10 Construction. Whenever the context so requires, the masculine
shall include the feminine and neuter, and the singular shall include the
plural, and conversely. If any portion of these bylaws shall be invalid or
inoperative, then, so far as is reasonable and possible:
(a) The remainder of these bylaws shall be considered valid
and operative, and
(b) Effect shall be given to the intent manifested by the
portion held invalid or inoperative.
7.11 Table of Contents; Headings. The table of contents and headings
used in these bylaws have been inserted for convenience only and do not
constitute matter to be construed in interpretation.
7.12 Relation to Articles of Incorporation. These bylaws are subject
to and governed by the articles of incorporation.
ARTICLE 8: COMMITTEES
8.01 Designation. The board of directors may, by resolution adopted by
a majority of the whole board, designate from among its members an executive
committee and one or more such other committees as it may determine necessary.
8.02 Number; Qualification; Term. The executive committee and any
other designated committees shall consist of two or more directors, not less
than a majority of whom in each case shall be directors who are not officers or
employees of the Company. The committees shall serve at the pleasure of the
board of directors.
8.03 Authority. Each committee, to the extent provided in such
resolution, shall have and may exercise all of the authority of the board of
directors in the management of the business and affairs of the corporation,
except in the following matters and except where action of the full board of
directors is required by statute or by the articles of incorporation:
(a) Amending the articles of incorporation;
(b) Amending, altering or repealing the bylaws of the
corporation or adopting new bylaws;
(c) Approving and/or recommending or submitting to
shareholders:
(1) merger
(2) consolidation
(3) sale, lease (as Lessor), exchange or other
disposition of all or substantially all the property and assets of the
corporation;
(4) dissolution;
12
<PAGE> 15
(d) Filling vacancies in the board of directors or any such
committee;
(e) Electing or removing officers of the corporation or
members of any such committee;
(f) Fixing compensation of any person who is a member of any
such committee;
(g) Declaring dividends;
(h) Altering or repealing any resolution of the board of
directors.
8.04 Change in Number. The number of committee members may be
increased or decreased (but not below two) from time to time by resolution
adopted by a majority of the whole board of directors.
8.05 Removal. Any committee member may be removed by the board of
directors by the affirmative vote of a majority of the whole board, whenever in
its judgment the best interests of the corporation will be served thereby.
8.06 Vacancies. A vacancy occurring in any committee (by death,
resignation, removal or otherwise) may be filled by the board of directors in
the manner provided for original designation in paragraph 8.01.
8.07 Meetings. Time, place and notice (if any) of all committee
meetings shall be determined by the respective committee. (see also paragraph
4.03).
8.08 Quorum; Majority Vote. At meetings of any committee, a majority
of the number of members designated by the board of directors shall constitute a
quorum for the transaction of business. The act of a majority of the members
present at any meeting at which a quorum is present shall be the act of the
committee, except as otherwise specifically provided by statute or by the
articles of incorporation or by these bylaws. If a quorum is not present at a
meeting of the committee, the members present thereat may adjourn the meeting
from time to time, without notice other than an announcement at the meeting
until a quorum is present.
8.09 Compensation. Compensation of committee members shall be fixed
pursuant to the provisions of paragraph 3.12 of these bylaws.
13
<PAGE> 1
EXHIBIT 10.36
____________, 19__
- ---------------------
- ---------------------
- ---------------------
Dear _________:
GAINSCO Service Corp. (the "Company") considers it essential to the best
interests of its stockholders to foster the continuous employment of key
management personnel. In this connection, the Board of Directors of the Company
(the "Board") recognizes that, as is the case with many publicly held
corporations, the possibility of a change in control may exist and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the Company and its stockholders.
The Board has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of members of the
Company's management, including yourself, to their assigned duties without
distraction in the face of potentially disturbing circumstances arising from the
possibility of a change in control of the Company, although no such change is
now contemplated.
In order to induce you to remain in the employ of the Company and in
consideration of your agreement set forth in Subsection 2(ii) hereof, the
Company agrees that you shall receive the severance benefits set forth in this
letter agreement ("Agreement") in the event your employment with the Company is
terminated subsequent to a "change in control of the Company" (as defined in
Section 2 hereof) under the circumstances described below.
1. Term of Agreement. This Agreement shall commence on its effective date
and shall continue in effect through December 31, 19__; provided, however, that
commencing on January 1, 19__ and each January thereafter, the term of this
Agreement shall automatically be extended for one additional year unless, not
later than the September 30 preceding each such January 1, the Company shall
have given notice that it does not wish to extend this Agreement; provided,
further, if a change in control of the Company shall have occurred during the
original or extended term of this Agreement, this Agreement shall continue in
effect for the later of (i) the original or extended term or (ii) a period of
twenty-four (24) months beyond the month in which such change in control
occurred. Notwithstanding the foregoing, in no event shall the term of this
Agreement extend beyond the date that you attain sixty-five years of age.
<PAGE> 2
Page 2
2. Change in Control. (i) No benefits shall be payable hereunder unless
there shall have been a change in control of the Company, as set forth below.
For purposes of this Agreement, a "change in control of the Company" shall be
deemed to have occurred if (A) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), other than a trustee or other fiduciary holding securities
under an employee benefit plan of the Company or a corporation owned, directly
or indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 25% or more of the
combined voting power of the Company's then outstanding securities; or (B)
during any period of two consecutive years (not including any period prior to
the execution of this Agreement), individuals who at the beginning of such
period constitute the Board and any new director (other than a director
designated by a person who has entered into an agreement with the Company to
effect a transaction described in clauses (A), (C) or (D) of this Subsection)
whose election by the Board or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved,
cease for any reason to constitute a majority thereof; or (C) the shareholders
of the Company approve a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least 75% of the combined
voting power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or (D) the
shareholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all the Company's assets.
(ii) For purposes of this Agreement, a "potential change in control
of the Company" shall be deemed to have occurred if (A) the Company enters into
an agreement, the consummation of which would result in the occurrence of a
change in control of the Company, (B) any person (including the Company)
publicly announces an intention to take or to consider taking actions which if
consummated would constitute a change in control of the Company; (C) any person,
other than a trustee or other fiduciary holding securities under an employee
benefit plan of the Company or a corporation owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company, who is or becomes the beneficial owner,
directly or indirectly, of securities of the Company representing 10% or more of
the combined voting power of the Company's then outstanding securities,
increases his beneficial ownership of such securities by 5% or more of the
combined voting power of the Company's then outstanding securities on the date
hereof; or (D) the Board adopts a resolution to the effect that, for purposes of
this Agreement, a potential change in control of the Company has occurred. You
agree that, subject to the terms and conditions of this Agreement, in the event
of a potential change in control of the Company, you will remain in the employ
of the Company until the earliest of (i) a date
<PAGE> 3
Page 3
which is six (6) months from the occurrence of such potential change in control
of the Company, (ii) the termination by you of your employment by reason of
Disability or Retirement as defined in Subsection 3(i), or (iii) the occurrence
of a change in control of the Company.
3. Termination Following Change in Control. If any of the events
described in Subsection 2(i) hereof constituting a change in control of the
Company shall have occurred, you shall be entitled to the benefits provided in
Subsection 4(iii) hereof upon the subsequent termination of your employment
during the term of this Agreement unless such termination is (A) because of your
death, Disability or Retirement, (B) by the Company for Cause, or (C) by you
other than for Good Reason.
(i) Disability; Retirement. If, as a result of your incapacity due
to physical or mental illness, you shall have been absent from the full-time
performance of your duties with the Company for a period of six (6) consecutive
months, and within thirty (30) days after written notice of termination is given
you shall not have returned to the full-time performance of your duties, your
employment may be terminated for "Disability." Termination by the Company or you
of your employment based on "Retirement" shall mean termination with your
consent in accordance with the Company's Pension Plan (as hereafter defined)
including early retirement, generally applicable to its salaried employees,
provided, however, that termination based on "Retirement" shall not include
retirement in conjunction with termination by you for Good Reason.
(ii) Cause. Termination by the Company of your employment for "Cause"
shall mean termination upon (A) the willful and continued failure by you to
substantially perform your duties with the Company (other than any such failure
resulting from your incapacity due to physical or mental illness or any such
actual or anticipated failure after the issuance of a Notice of Termination, by
you for Good Reason as defined in Subsections 3(iv) and 3(iii), respectively)
after a written demand for substantial performance is delivered to you by the
Board, which demand specifically identifies the manner in which the Board
believes that you have not substantially performed your duties, or (B) the
willful engaging by you in conduct which is demonstrably and materially
injurious to the Company, monetarily or otherwise. For purposes of this
Subsection, no act, or failure to act, on your part shall be deemed "willful"
unless done, or omitted to be done, by you not in good faith and without
reasonable belief that your action or omission was in the best interest of the
Company. Notwithstanding the foregoing, you shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to you a
copy of a resolution duly adopted by the affirmative vote of not less than
three-quarters (3/4) of the entire membership of the Board at a meeting of the
Board called and held for such purpose (after reasonable notice to you and an
opportunity for you, together with your counsel, to be heard before the Board),
finding that in the good faith opinion of the Board you were guilty of conduct
set forth above in clauses (A) or (B) of the first sentence of this Subsection
and specifying the particulars thereof in detail.
(iii) Good Reason. You shall be entitled to terminate your employment
for Good
<PAGE> 4
Page 4
Reason. For purposes of this Agreement, "Good Reason" shall mean, without your
express written consent, the occurrence after a change in control of the Company
of any of the following circumstances unless, in the case of paragraphs (A),
(E), (F), (G) or (H), such circumstances are fully corrected prior to the Date
of Termination specified in the Notice of Termination, as defined in Subsections
3(v) and 3(iv), respectively, given in respect thereof:
(A) the assignment to you of any duties inconsistent with your
present status as Vice President of the Company (or such other title or
titles as you may be holding immediately prior to the change in control of
the Company) or a substantial adverse alteration in the nature or status of
your responsibilities from those in effect immediately prior to the change
in control of the Company;
(B) a reduction by the Company in your annual base salary as in
effect on the date of the change in control of the Company;
(C) the relocation of the Company's principal executive offices to a
location outside of Fort Worth, Texas (or, if different, the metropolitan
area in which such offices are located immediately prior to the change in
control of the Company) or the Company's requiring you to be based anywhere
other than the Company's principal executive offices except for required
travel on the Company's business to an extent substantially consistent with
your present business travel obligations;
(D) the failure by the Company, without your consent, to pay to you
any portion of your current compensation, or to pay to you any portion of
an installment of deferred compensation under any deferred compensation
program of the Company, within seven (7) days of the date such compensation
is due;
(E) except as provided below, the failure by the Company to continue
in effect any compensation plan in which you participate immediately prior
to the change in control of the Company which is material to your total
compensation, including but not limited to the Company's 1995 Stock Option
Plan and the Executive Incentive Compensation Plan or any substitute or
additional plans adopted prior to the change in control, unless an
equitable arrangement (embodied in an ongoing substitute or alternative
plan) has been made with respect to such plan, or the failure by the
Company to continue your participation therein (or in such substitute or
additional plans) on a basis not materially less favorable, both in terms
of the amount of benefits provided and the level of your participation
relative to other participants, as existed at the time of the change in
control;
(F) except as provided below, the failure of GAINSCO, Inc. to
continue to provide you with benefits substantially similar to those
enjoyed by you under the Company's Profit Sharing Plan and Trust of
GAINSCO, Inc. (the "Pension Plan") or under any of the
<PAGE> 5
Page 5
Company's other deferred compensation plans, life insurance, medical,
health and accident, or disability plans in which you were participating at
the time of the change in control of the Company, the taking of any action
by the Company which would directly or indirectly materially reduce any of
such benefits or deprive you of any material fringe benefit enjoyed by you
at the time of the change in control of the Company, or the failure by the
Company to provide you with the number of paid vacation days to which you
are entitled on the basis of years of service with the Company in
accordance with the Company's normal vacation policy for officers in effect
at the time of the change in control of the Company;
(G) the failure of the Company to obtain a satisfactory agreement
from any successor to assume and agree to perform this Agreement, as
contemplated in Section 5 hereof; or
(H) any purported termination of your employment which is not
effected pursuant to a Notice of Termination satisfying the requirements of
Subsection (iv) below (and, if applicable, the requirements of Subsection
(ii) above); for purposes of this Agreement, no such purported termination
shall be effective.
Your right to terminate your employment pursuant to this Subsection shall not be
affected by your incapacity due to physical or mental illness. Your continued
employment shall not constitute consent to, or a waiver of rights with respect
to, any circumstance constituting Good Reason hereunder. You may not terminate
your employment for Good Reason pursuant to paragraphs (E) or (F) on account of
the discontinuance of any plan or benefit (without an equitable substitution)
which is part of a uniform, non-discriminatory, Company-wide reduction in
benefits.
(iv) Notice of Termination. Any purported termination of your
employment by the Company or by you shall be communicated by written Notice of
Termination to the other party hereto in accordance with Section 6 hereof. For
purposes of this Agreement, a "Notice of Termination" shall mean a notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of your employment under the provision so
indicated.
(v) Date of Termination, Etc. "Date of Termination" shall mean (A)
if your employment is terminated for Disability, thirty (30) days after Notice
of Termination is given (provided that you shall not have returned to the
full-time performance of your duties during such thirty (30) day period), and
(B) if your employment is terminated pursuant to Subsection (ii) or (iii) above
or for any other reason (other than Disability), the date specified in the
Notice of Termination (which, in the case of a termination pursuant to
Subsection (ii) above shall not be less than thirty (30) days, and in the case
of a termination pursuant to Subsection (iii) above shall not be less than
fifteen (15) nor more than sixty (60) days, respectively, from the date such
Notice of Termination is given); provided that if within fifteen (15) days after
any Notice of Termination is given, or, if later, prior
<PAGE> 6
Page 6
to the Date of Termination (as determined without regard to this proviso), the
party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (which is not
appealable or with respect to which the time for appeal therefrom has expired
and no appeal has been perfected); provided further that the Date of Termination
shall be extended by a notice of dispute only if such notice is given in good
faith and the party giving such notice pursues the resolution of such dispute
with reasonable diligence. Notwithstanding the pendency of any such dispute, the
Company will continue to pay you your full compensation in effect when the
notice giving rise to the dispute was given (including, but not limited to, base
salary) and continue you as a participant in all compensation, benefit and
insurance plans in which you were participating whether or not specifically
referenced in this Agreement when the notice giving rise to the dispute was
given, until the dispute is finally resolved in accordance with this Subsection.
Amounts paid under this Subsection are in addition to all other amounts due
under this Agreement and shall not be offset against or reduce any other amounts
due under this Agreement, except as provided in Subsection 4(iii)(B) below.
4. Compensation Upon Termination or During Disability. Following a change
in control of the Company, as defined by Subsection 2(i), upon termination of
your employment or during a period of Disability you shall be entitled to the
following benefits:
(i) During any period that you fail to perform your full-time duties
with the Company as a result of incapacity due to physical or mental illness,
you shall continue to receive your salary at the rate in effect at the
commencement of such period, together with all other compensation and benefits
payable to you during such period, until this Agreement is terminated pursuant
to Section 3(i) hereof. Thereafter, or in the event your employment shall be
terminated by the Company or by you for Retirement, or by reason of your death,
your benefits shall be determined under the Company's retirement, insurance and
other compensation plans and programs then in effect in accordance with the
terms of such programs.
(ii) If your employment shall be terminated by the Company for Cause
or by you other than for Good Reason, Disability, death or Retirement, the
Company shall pay you your full base salary through the Date of Termination at
the rate in effect at the time Notice of Termination is given, plus all other
amounts to which you are entitled under any compensation or benefit plan of the
Company at the time such payments are due, and the Company shall have no further
obligations to you under this Agreement.
(iii) If your employment by the Company shall be terminated (a) by the
Company other than for Cause, Retirement or Disability or (b) by you for Good
Reason, then you shall be entitled to the benefits provided below:
<PAGE> 7
Page 7
(A) the Company shall pay you your full base salary through the Date
of Termination at the rate in effect at the time Notice of Termination is
given, plus all other amounts to which you are entitled under any
compensation plan of the Company, at the time such payments are due, except
as otherwise provided below; and
(B) in lieu of any further salary payments to you for periods
subsequent to the Date of Termination, the Company shall pay as severance
pay to you a lump sum cash severance payment in an amount equal to two
times your "base amount" (within the meaning of section 280G(b)(3) of the
Internal Revenue Code of 1986, as amended (the "Code")), provided, however,
that such severance payment shall be no less than 1.25 times the amount
reported on your Form W-2 statement issued by the Company with respect to
the year preceding that in which the Date of Termination occurs.
Notwithstanding any other provision of this Agreement, in the event that
any payment or benefit received or to be received by you in connection with
a change in control or the termination of your employment (whether payable
pursuant to the terms of this Agreement or any other plan, arrangement or
agreement with the Company, its successors, any person whose actions result
in a change in control or any person affiliated with (or which, as a result
of the completion of the transactions causing a change in control, will
become affiliated) the Company or such person within the meaning of section
1504 of the Code) (all such payments and benefits being hereinafter called
the "Severance Payments") would not be deductible (in whole or in part), by
the Company, an affiliate or any person making such payment or providing
such benefit as a result of section 280G of the Code, then, to the extent
necessary to make such portion of the Severance Payments deductible (and
after taking into account any reduction in the Severance Payments provided
by reason of section 280G of the Code in such other plan, arrangement or
agreement), (A) the cash Severance Payments shall first be reduced (if
necessary, to zero), and (B) all other non-cash Severance Payments shall
next be reduced. For purposes of this limitation (i) no portion of the
Severance Payments the receipt or enjoyment of which you shall have
effectively waived in writing prior to the Date of Termination shall be
taken into account, (ii) no portion of the Severance Payments shall be
taken into account which in the opinion of tax counsel selected by the
Company's independent auditors and reasonably acceptable to you does not
constitute a "parachute payment" within the meaning of section 280G(b)(2)
of the Code, including by reason of section 280G(b)(4)(A) of the Code,
(iii) the Severance Payments shall be reduced only to the extent necessary
so that the Severance Payments (other than those referred to in clauses (i)
or (ii)) in their entirety constitute reasonable compensation for services
actually rendered within the meaning of section 280G(b)(4)(B) of the Code
or are otherwise not subject to disallowance as deductions, in the opinion
of tax counsel referred to in clause (ii); and (iv) the value of any
non-cash benefit or any deferred payment or benefit included in the
Severance Payments shall be determined by the Company's independent
auditors in accordance with the principles of sections 280G(d)(3) and (4)
of the Code.
<PAGE> 8
Page 8
(C) the payment provided for in paragraph (B) above, shall be made
not later than the fifth day following the Date of Termination, provided,
however, that if the amount of such payment cannot be finally determined on
or before such day, the Company shall pay to you on such day an estimate,
as determined in good faith by the Company, of the minimum amount of such
payment and shall pay the remainder of such payment (together with interest
at the rate provided in section 1274(b)(2)(B) of the Code) as soon as the
amount thereof can be determined but in no event later the thirtieth day
after the Date of Termination. In the event that the amount of the
estimated payment exceeds the amount subsequently determined to have been
due, such excess shall constitute a loan by the Company to you, payable on
the fifth day after demand by the Company (together with interest at the
rate provided in section 1274(b)(2)(B) of the Code).
(D) the Company also shall pay to you all legal fees and expenses
incurred by you as a result of such termination (including all such legal
fees and legal expenses, if any, incurred in contesting or disputing any
such termination or in seeking to obtain or enforce any right or benefit
provided by this Agreement or in connection with any tax audit or
proceeding to the extent attributable to the application of section 4999 of
the Code to any payment or benefit provided hereunder). Such payments shall
be made at the later of the times specified in paragraph (C) above, or
within five (5) days after your request for payment accompanied with such
evidence of fees and expenses incurred as the Company reasonably may
require.
(iv) You shall not be required to mitigate the amount of any payment
provided for in this Section 4 by seeking other employment or otherwise, nor
shall the amount of any payment or benefit provided for in this Section 4 be
reduced by any compensation earned by you as the result of employment by another
employer, by retirement benefits, by offset against any amount claimed to be
owed by you to the Company, or otherwise.
(v) In addition to all other amounts payable to you under this
Section 4, you shall be entitled to receive all benefits payable to you, at the
respective time or times such payments are due, under the Pension Plan[s], and
any other plan or agreement relating to retirement benefits.
5. Successors; Binding Agreement. (i) The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place. Failure of the Company to obtain such
assumption and agreement prior to the effectiveness of any such succession shall
be a breach of this Agreement and shall entitle you to compensation from the
Company in the same amount and on the same terms as you would be entitled to
hereunder if you terminate your employment for Good Reason following a change in
control of the Company, except that for purposes of implementing the foregoing,
the date
<PAGE> 9
Page 9
on which any such succession becomes effective shall be deemed the Date of
Termination. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
(ii) This Agreement shall inure to the benefit of and be enforceable
by your personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If you should die while
any amount would still be payable to you hereunder if you had continued to live,
all such amounts, unless otherwise provided herein, shall be paid in accordance
with terms of this Agreement to your devisee, legatee or other designee or, if
there is no such designee, to your estate.
6. Notice. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage pre-paid, addressed as
follows:
If to the Company:
GAINSCO Service Corp.
Attn: President
500 Commerce Street
Fort Worth, Texas 76102-5439
If to you:
- ---------------------
- ---------------------
- ---------------------
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of address shall be
effective only upon receipt.
7. Miscellaneous. No provision of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by you and such officer as may be duly authorized to act on
the Company's behalf. No waiver by either party hereto at any time of any breach
by the other party hereto of, or non-compliance with, any condition or provision
of this Agreement to be performed by such other party shall be deemed a waiver
of similar of dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not expressly set forth in this
<PAGE> 10
Page 10
Agreement. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Texas. All references to
sections of the Exchange Act or the Code shall be deemed also to refer to any
successor provisions to such sections. Any payments provided for hereunder shall
be paid net of any applicable withholding required under federal, state or local
law. The obligations of the Company under Subsections 4(i), 4(ii), 4(iii)(D) and
4(v) shall survive the expiration of the term of this Agreement.
8. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
9. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
10. Arbitration. Any dispute or controversy arising under or in connection
with this Agreement shall be settled, at the Company's expense, exclusively by
arbitration in Tarrant County, Texas in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that you
shall be entitled to seek specific performance of your right to be paid until
the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
If this letter sets forth our agreement on the subject matter hereof,
kindly signed and return to the Company the enclosed copy of this letter which
will then constitute our agreement on this subject.
Sincerely,
GAINSCO Service Corp.
By:
------------------------------
<PAGE> 11
Page 11
Agreed to effective the ____
day of _____________, ______
____________________________
GUARANTEE
GAINSCO, INC., a Texas corporation, unconditionally guarantees payment and
performance in full of all obligations of GAINSCO Service Corp. ("Service
Corp.") under the above and foregoing change in control agreement (the "Change
in Control Agreement") between Service Corp. and _______________ and any
renewals or extensions thereof whether or not the terms of the Change in Control
Agreement are modified.
This guarantee is a continuing guarantee and may not be revoked by the
guarantor without the written consent of _______________ and shall expire only
when the Change in Control Agreement and all renewals or extensions of it have
terminated.
GAINSCO, INC.
By:
------------------------------
<PAGE> 1
EXHIBIT 22.2
S U B S I D I A R I E S O F R E G I S T R A N T
<TABLE>
<S> <C> <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 statements (No.
33-48634 and No. 33-37070) on Form S-8 of GAINSCO, INC. of our reports dated
February 16, 1998, relating to the consolidated balance sheets of GAINSCO, INC.
and subsidiaries as of December 31, 1997 and 1996, 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, 1997, and all related
schedules, which reports appear in the December 31, 1997 annual report on Form
10-K of GAINSCO, INC.
KPMG Peat Marwick L.L.P.
Dallas, Texas
March 30, 1998
<PAGE> 1
EXHIBIT 25.1
SPECIAL POWER OF ATTORNEY
THE STATE OF TEXAS )
KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF TARRANT )
THAT I, the undersigned, of Tarrant 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, 1997, each of
said attorneys and agents to have power to act in the name of and on behalf of
the undersigned on 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 24th day of March, 1998.
/s/ Robert J. McGee
-----------------------------
ROBERT J. McGEE
<PAGE> 2
EXHIBIT 25.1
SPECIAL POWER OF ATTORNEY
THE STATE OF MINNESOTA )
KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF HENNEPIN )
THAT I, the undersigned, of Hennepin County, Minnesota, have made,
constituted and appointed and by these presents do make, constitute and appoint
JOSEPH D. MACCHIA, DANIEL J. COOTS and SAM ROSEN, and each of them severally, my
true and lawful attorneys and agents to execute in my name, place and stead in
my capacity as Director of GAINSCO, INC. the Annual Report on Form 10-K of
GAINSCO, INC. ("Form 10-K") for the fiscal year ended December 31, 1998, each of
said attorneys and agents to have power to act in the name of and on behalf of
the undersigned on every act whatsoever necessary or advisable to be done in the
premises as fully and to all intents and purposes as the undersigned might or
could do in person, such power to extend to the execution of any amendment to
the Form 10-K.
WITNESS MY HAND this 20th day of March, 1998.
/s/ Joel C. Puckett
---------------------------
JOEL C. PUCKETT
<PAGE> 3
EXHIBIT 25.1
THE STATE OF TEXAS )
KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF TARRANT )
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, 1997, each of
said attorneys and agents to have power to act in the name of and on behalf of
the undersigned on every act whatsoever necessary or advisable to be done in the
premises as fully and to all intents and purposes as the undersigned might or
could do in person, such power to extend to the execution of any amendment to
the Form 10-K.
WITNESS MY HAND this 20th day of March, 1998.
/s/ Harden H. Wiedemann
-----------------------------
HARDEN H. WIEDEMANN
<PAGE> 4
EXHIBIT 25.1
SPECIAL POWER OF ATTORNEY
THE STATE OF TEXAS )
KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF TARRANT )
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, 1997, each of
said attorneys and agents to have power to act in the name of and on behalf of
the undersigned on every act whatsoever necessary or advisable to be done in the
premises as fully and to all intents and purposes as the undersigned might or
could do in person, such power to extend to the execution of any amendment to
the Form 10-K.
WITNESS MY HAND this 20th day of March, 1998.
/s/ John H. Williams
-----------------------------
JOHN H. WILLIAMS
<PAGE> 5
SPECIAL POWER OF ATTORNEY
THE STATE OF TEXAS )
KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF TARRANT )
THAT I, the undersigned, of Tarrant 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, 1997, each
of said attorneys and agents to have power to act in the name of and on behalf
of the undersigned on 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 24 day of March, 1998.
/S/ John C. Goff
--------------------------------
JOHN C. GOFF
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 123650289
<DEBT-CARRYING-VALUE> 89733503
<DEBT-MARKET-VALUE> 90527669
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 216802185
<CASH> 696513
<RECOVER-REINSURE> 2604511
<DEFERRED-ACQUISITION> 11618136
<TOTAL-ASSETS> 313685306
<POLICY-LOSSES> 113227009
<UNEARNED-PREMIUMS> 64004507
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
0
<INVESTMENT-INCOME> 0
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 78,978
<PROVISION-CURRENT> 53,969
<PROVISION-PRIOR> 8,117
<PAYMENTS-CURRENT> 17807
<PAYMENTS-PRIOR> 39554
<RESERVE-CLOSE> 85703
<CUMULATIVE-DEFICIENCY> (8117)
</TABLE>
