<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, 1999
GAINSCO, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1617013
(State of Incorporation) (IRS 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 ($.10 par value) The New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
-------- --------
The aggregate market value of registrant's Common Stock ($.10) par value),
registrant's only class of voting or non-voting common equity stock, held by
non-affiliates of the registrant (19,136,399 shares) as of the close of the
business on March 23, 2000 was $114,818,394 (based on the closing sale price of
$6.00 per share on that date on the New York Stock Exchange).
As of March 23, 2000, there were 20,919,833 shares of the registrant's Common
Stock ($.10 par value) 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]
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION
GAINSCO, INC. ("GNA") is a holding company that provides administrative and
financial services for its wholly owned subsidiaries. The term "Company" as
used in this document includes GNA and its subsidiaries unless the context
otherwise requires. GNA 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 three major nonstandard markets: commercial lines, personal lines and
specialty lines. The commercial lines division includes commercial auto, garage,
general liability and commercial property products. The personal lines division
includes personal auto, umbrella and personal property products. The specialty
lines division is focused on developing growth in professional liability
products. The Company's insurance operations are conducted through four
insurance companies: General Agents Insurance Company of America, Inc. ("General
Agents"), an Oklahoma corporation; MGA Insurance Company, Inc.("MGAI"), a Texas
corporation; GAINSCO County Mutual Insurance Company ("GCM"), a Texas chartered
company: and Midwest Casualty Insurance Company ("MCIC"), a North Dakota
insurance corporation acquired January 7, 2000. See "Recent Developments". The
Company is approved to write insurance in 48 states and the District of Columbia
on a non-admitted basis and in 44 states and the District of Columbia on an
admitted basis. The Company markets its commercial lines of insurance through
161 non-affiliated general agency offices and its personal line of insurance
through approximately 1,120 non-affiliated retail agencies. Approximately 75% of
the Company's gross premiums written during 1999 resulted from risks located in
California, Florida, Georgia, Pennsylvania, Tennessee and Texas.
The Company's lines of insurance are written on certain classes and types of
risks which are not generally insured by many of the standard companies,
although such companies have been competing in this market more frequently in
recent years. The strategy of the Company is to identify various types of risks
where it can price its coverages profitably and competitively. This strategy
results in changes in product mix and product design from time to time. For a
description of the product lines presently written by the Company, see "Product
Lines." The Company sets its policy premiums by applying its own judgment after
consideration of the risks involved and the competition. Part of its analysis
includes the review of historical premium rate and loss cost information as
compiled and reported by independent rating bureaus.
Through GCM, 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.
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RECENT DEVELOPMENTS
Goff Moore Strategic Partners, L.P. Transaction. On October 4, 1999 GNA
sold to Goff Moore Strategic Partners, L.P., a Texas limited partnership
("GMSP") for an aggregate purchase price of $31,620,000 (i) 31,620 shares of
GNA's Series A Convertible Preferred Stock (the "Series A Preferred Stock"),
which are convertible into 6,200,000 shares of GNA's Common Stock, par value
$0.10 per share ("Common Stock"), at a conversion price of $5.10 per share,
(ii) a five year warrant to purchase an aggregate of 1,550,000 shares of Common
Stock at an exercise price of $6.375 per share and (iii) a seven year Warrant
to purchase an aggregate of 1,550,000 shares of Common Stock at an exercise of
$8.50 per share. At closing GNA and its insurance company subsidiaries entered
into Investment Management Agreements with GMSP, pursuant to which GMSP manages
their respective investment portfolios. See "Investments" and "Item 13. Certain
Relationships and Related Transactions - Transaction with Goff Moore Strategic
Partners, L.P." Completion of these transactions (collectively, the "GMSP
Transaction") concluded the strategic alternatives review process that the
Company initiated in 1998. Proceeds from the GMSP Transaction are available
for acquisitions, investments and other corporate purposes.
Tri-State Acquisition. On January 7, 2000, the Company acquired Tri-State,
Ltd.("Tri-State"), an insurance operation specializing in underwriting,
servicing and claims handling of nonstandard personal auto insurance in
Minnesota, North Dakota and South Dakota. Tri-State owns and operates a
managing general agency, a motor vehicle driving records service company and an
insurance subsidiary, MCIC. Tri-State was incorporated in 1980 and currently
markets nonstandard personal auto insurance through over 320 retail agencies in
its three key states and commercial automobile insurance in four states. The
Company plans for Tri-State to continue to operate at its current locations to
develop personal and commercial lines of business. The purchase price
consideration consisted of $6,000,000 in cash at closing, plus additional
payments of up to $5,500,000 in cash over the next several years, contingent on
conversion of business to the Company, meeting specific profitability targets
and Tri-State's 1999 year-end book value. Tri-State's insurance subsidiary,
MCIC, had approximately $3,000,000 of policyholders' surplus at December
31,1999.
PRODUCT LINES
The Company's principal products serve certain nonstandard markets within
the commercial lines and personal 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
----------------------------------------------------------------
1999 1998 1997
----------------- --------------- ----------------
(Dollar amounts in thousands)
Gross Premiums Written:
<S> <C> <C> <C> <C> <C> <C>
Commercial Lines $ 97,139 73% $88,188 97% $99,776 100%
Personal Lines 36,759 27 2,974 3 -- --
-------- --- ------- -- ------- ---
$133,898 100% $91,162 100% $99,776 100%
======== === ======= === ======= ===
Policies in Force (End of Period) 68,943 38,939 35,962
</TABLE>
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Commercial Lines The commercial lines of insurance written by the Company
include:
Commercial Auto The commercial auto coverage underwritten by the Company
includes risks associated with local haulers of specialized freight,
tradespersons' vehicles and trucking companies.
Garage The Company's garage product line includes garage liability, garage
keepers' legal liability and dealers' open lot coverages. The Company targets
its coverage to used car dealers, recreational vehicle dealers, automobile
repair shops and wrecker/towing risks.
General Liability The Company underwrites general liability insurance for
businesses such as car washes, janitorial services, small contractors,
apartment buildings, rental dwellings and retail stores.
Property The Company underwrites commercial property coverages that include
fire, extended coverage and vandalism on commercial establishments packaged
with its liability product or on a monoline basis
Personal Lines The personal lines of insurance written by the Company include:
Personal Auto The Company's personal auto product line is in the
nonstandard personal auto market and is primarily written with minimum
liability limits.
Umbrella The Company writes personal umbrella risks which do not have
access to the preferred markets.
Property The Company writes nonstandard dwelling fire risks and is
expanding into nonstandard homeowners coverages.
Specialty Lines The Company underwrites and manages programs in professional
liability for lawyers, real estate agents, educators and other general
professions, as well as directors and officers liability.
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 the entire 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.
Commercial Lines
Prior to 1999, the Company wrote commercial casualty policy limits of
$1,000,000. For policies with an effective date occurring from 1995 through
1998, the company has first excess casualty reinsurance for 100% of casualty
claims exceeding $500,000 up to the $1,000,000 policy limits, resulting in a
maximum net claim retention per risk of $500,000 for such policies. Beginning in
1999, the Company began writing commercial casualty policy limits of $5,000,000.
The Company has first excess casualty reinsurance for 100% of casualty claims
exceeding $500,000 up to $1,000,000 and second excess casualty reinsurance for
100% of casualty claims exceeding $1,000,000 up to the $5,000,000 policy limits,
resulting in a maximum net claim retention per risk of $500,000. The Company
uses facultative reinsurance for policy limits written in excess of $5,000,000.
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The Company also has excess casualty clash reinsurance for $5,000,000 in
ultimate net losses on any one accident in excess of $1,000,000 in ultimate net
losses arising out of each accident.
Personal Lines
For its umbrella coverages, the Company has excess casualty reinsurance for
100% of umbrella claims exceeding $1,000,000 up to $10,000,000 policy limits.
The Company also has quota share reinsurance for 75% of the first $1,000,000 of
umbrella claims resulting in a maximum net claim retention per risk of
$250,000.
For its personal auto coverages, the Company has excess casualty clash
reinsurance for $5,000,000 in ultimate net losses on any one accident in excess
of $1,000,000 in ultimate net losses arising out of each accident.
Specialty Lines
For its lawyers professional liability coverages, the Company has quota
share reinsurance for 50% of the first $1,000,000 of professional liability
claims and excess casualty reinsurance for 100% of professional liability
claims exceeding $1,000,000 up to $5,000,000 policy limits resulting in a
maximum net claim retention per risk of $500,000.
For its real estate agents professional liability coverages, the Company
has quota share reinsurance for 25% of the first $1,000,000 of professional
liability claims resulting in a maximum net claim retention per risk of
$750,000.
For its educators professional liability coverages, the Company has quota
share reinsurance for 60% of the first $1,000,000 of professional liability
claims and excess casualty reinsurance for 100% of professional liability
claims exceeding $1,000,000 up to $5,000,000 policy limits resulting in a
maximum net claim retention per risk of $400,000.
For its directors and officers liability coverages, the Company has quota
share reinsurance for 90% of the first $5,000,000 of professional liability
claims resulting in a maximum net claim retention per risk of $500,000.
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 six
reinsurance companies for its commercial lines business, each of which reinsures
a given percentage of ceded risks. The Company's excess reinsurance is provided
in varying amounts by these reinsurers who are rated "A (Excellent)" or better
by Best's. See "Rating." The following table identifies each such reinsurer and
sets forth the percentage of the coverage assumed by each of them:
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<TABLE>
<CAPTION>
Percentage of Risk Reinsured
------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ----------
1st Excess 2nd Excess 1st Excess 2nd Excess 1st Excess
Excess Reinsurer : ---------- ---------- ---------- ---------- ----------
----------------
<S> <C> <C> <C> <C> <C>
American Re-insurance Company 35% 40% --% 40% --%
Dorinco Reinsurance Company -- -- 35 -- 35
First Excess and Reinsurance Corporation -- 40 35 40 --
Folksamerica Reinsurance Company 15 -- -- -- --
GE Reinsurance Corporation 20 -- -- -- --
Liberty Mutual Insurance Company 20 20 20 20 20
PMA Reinsurance Corporation -- -- -- -- 35
Republic Western Insurance Company 10 -- 10 -- 10
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
The Company carries catastrophe property reinsurance to protect it against
catastrophe occurrences for 95% of the property claims that exceed $500,000 but
do not exceed $12,500,000 for a single catastrophe. The Company also carries
property excess per risk reinsurance that covers property claims exceeding
$300,000 up to $5,000,000 net loss each risk. The Company uses facultative
reinsurance for limits written on individual risks in excess of $5,000,000.
Since 1995, the Company has had reinsurance fronting arrangements with
non-affiliated insurance companies. The Company retains no portion of the
business written under these agreements as it is 100% ceded to non-affiliated
reinsurers. 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. Sec Note (5) of
Notes to Consolidated Financial Statements.
The Company has signed contracts in force for its reinsurance treaties for
all years through 1999. The Company has written confirmations from reinsurers
for 2000 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 commercial lines insurance products through 161
non-affiliated general agency 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
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omissions insurance coverage, which indirectly protects the Company against
certain negligence on the part of general agents. The Company reviews its
appointed agencies for financial solvency and liquidity levels. 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 manuals stipulate minimum rates to be charged for the various classes of
coverage offered.
The general agents are compensated on a commission basis that varies by
line of business. In addition, the general agency contracts between the Company
and its general agents contain 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 some 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 44 states and the District of Columbia.
Nonstandard personal auto is marketed through approximately 1,120
non-affiliated retail agencies that are compensated on a commission basis. The
retail agents may represent several insurance companies and they are in direct
contact with the insurance buyer. This business is written on an admitted
basis.
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.
The process of establishing claim reserves is an imprecise science and
reflects significant judgmental factors. In many liability cases, significant
periods of time, ranging up to several years or more, may elapse between the
occurrence of an insured claim and the settlement of the claim. Some judicial
decisions and legislative actions, even after coverage is written and reserves
are initially set, broaden liability and policy definitions and increase the
severity of claim payments. As a result of this and other societal and economic
developments, the uncertainties inherent in estimating ultimate claim costs on
the basis of past experience have increased significantly, further complicating
the already difficult claim reserving process.
Ultimate liability may be greater or lower than current reserves. Reserves
are monitored by the Company using new information on reported claims and a
variety of statistical techniques. The reserves are reviewed annually by an
independent actuarial firm. The Company does not discount to present value that
portion of its claim reserves expected to be paid in future periods.
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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
-----------------------------------------
1999 1998 1997
-------- -------- --------
(Amounts in thousands)
<S> <C> <C> <C>
Unpaid claims and claim adjustment expenses, beginning of period $136,798 113,227 105,691
Less: Ceded unpaid claims and claim adjustment expenses, beginning
of period 35,030 29,524 26,713
-------- -------- --------
Net unpaid claims and claim adjustment expenses, beginning of 101,768 83,703 78,978
-------- -------- --------
period
Net claims and claim adjustment expense incurred related to:
Current period 75,976 59,635 53,969
Prior periods 373 26,718 8,117
-------- -------- --------
Total net claim and claim adjustment expenses incurred 76,349 86,353 62,086
-------- -------- --------
Net claims and claim adjustment expenses paid related to:
Current period 32,651 19,693 17,807
Prior periods 49,951 48,595 39,554
-------- -------- --------
Total net claim and claim adjustment expenses paid 82,602 68,288 57,361
-------- -------- --------
Net unpaid claims and claim adjustment expenses, end of period 95,515 101,768 83,703
Plus: Ceded unpaid claims and claim adjustment expenses, end of 37,299 35,030 29,524
-------- -------- --------
period
Unpaid claims and claim adjustment expenses, end of period $132,814 136,798 113,227
======== ======== ========
</TABLE>
For 1998 the development in claims and claim adjustment expenses incurred
was primarily the result of unanticipated development for commercial auto
claims for the 1997, 1996 and 1995 accident years. For 1997 the development in
claims and claim adjustment expenses incurred was largely a result of claim
reserve increases recorded for commercial auto claims in Kentucky for the 1996
and 1995 accident years and development in claim adjustment expense reserves
for commercial auto in the 1996, 1995 and 1994 accident years.
The following table sets forth, as of December 31, 1999, 1998, and 1997,
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
------------------------------------
1999 1998 1997
-------- -------- --------
(Amounts in thousands)
<S> <C> <C> <C>
Net unpaid claims and claim adjustment expenses reported on a SAP basis $ 96,472 102,404 84,406
Adjustments:
Estimated recovery for salvage and subrogation (957) (636) (703)
-------- -------- --------
Net unpaid claims and claim adjustment expenses reported on a GAAP $ 95,515 101,768 83,703
basis ======== ======== ========
</TABLE>
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The following table represents the development of GAAP balance sheet
reserves for the years ended December 31, 1989 through 1999. 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 second 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 third portion of the table shows the reestimated amount of
the previously recorded net unpaid claims and claim adjustment expenses 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 1994
liability for net claims and claim adjustment expenses reestimated five years
later (as of December 31, 1999) was $67,607,000 of which $66,573,000 has been
paid, leaving a net reserve of $1,034,000 for claims and claim adjustment
expenses in 1994 and prior years remaining unpaid as of December 31, 1999.
"Net cumulative deficiency" represents the change in the estimate from the
original balance sheet date to the date of the current estimate. For example,
the 1994 net unpaid claims and claim adjustment expenses indicates a $6,850,000
net deficiency from December 31, 1994 to December 31, 1999 (five years later).
Conditions and trends that have affected development of liability in the past
may or may not necessarily occur in the future. Accordingly, it may or may not
be appropriate to extrapolate future redundancies or deficiencies based on this
table.
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<TABLE>
<CAPTION>
As of and for the years ended December 31
----------------------------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unpaid claims &
claim adjustment
expenses:
Gross 35,744 45,214 53,148 66,517 72,656 80,729 95,011 105,691 113,227 136,798 132,814
Ceded 15,695 16,308 15,105 16,594 16,701 19,972 24,650 26,713 29,524 35,030 37,299
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
Net 20,049 28,906 38,043 49,923 55,955 60,757 70,361 78,978 83,703 101,768 95,515
Net cumulative paid
as of:
One year later 7,545 10,251 15,037 22,470 24,090 24,730 32,584 39,654 48,595 49,951
Two years later 12,340 18,145 26,819 37,032 39,182 41,874 56,605 70,185 82,950
Three years later 16,413 23,255 33,879 45,884 46,688 55,338 73,349 90,417
Four years later 19,085 26,171 37,292 51,082 54,428 62,389 82,667
Five years later 20,633 26,970 39,999 54,092 57,628 66,573
Six years later 21,020 28,399 41,143 55,828 58,191
Seven years later 21,700 28,734 42,020 56,754
Eight years later 21,871 28,806 42,464
Nine years later 21,830 29,109
Ten years later 22,120
Net unpaid claims
and claim
adjustment
expenses
reestimated
as of:
One year later 20,060 28,354 38,528 54,150 59,573 61,157 75,703 87,095 110,421 102,141
Two years later 20,566 28,479 42,235 57,223 59,922 62,296 80,356 104,588 111,981
Three years later 21,214 30,035 43,217 57,459 59,247 63,871 88,867 105,386
Four years later 22,431 30,129 42,493 56,832 58,414 67,442 89,030
Five years later 22,332 29,022 42,191 56,337 59,735 67,607
Six years later 22,034 29,073 41,984 56,721 59,695
Seven years later 21,965 28,908 42,356 56,938
Eight years later 21,950 28,828 42,527
Nine years later 21,872 29,037
Ten years later 22,111
Net cumulative (2,062) (131) (4,484) (7,015) (3,740) (6,850) (18,669) (26,408) (28,278) (373)
deficiency
</TABLE>
Net unpaid claims and claim adjustment expenses at December 31, 1999 were
approximately $95,515,000, which the Company believes is adequate.
INSURANCE RATIOS
CLAIMS, EXPENSE AND COMBINED RATIOS: Claims and expense ratios are
traditionally used to interpret the underwriting experience of property and
casualty insurance companies.
Statutory Accounting Principles (SAP) Basis - Claims and claim adjustment
expenses are stated as a percentage of premiums earned because claims may occur
over the life of a particular insurance policy. Underwriting expenses on a SAP
basis are stated as a percentage of net premiums written rather than premiums
earned because most underwriting expenses are incurred when policies are
written and are not spread over the policy period. Underwriting profit margin
is achieved when the combined ratio is less than 100%. The Company's claims,
expense and combined ratios and the property and casualty industry's claims,
expense and combined ratios, both on a SAP basis, are shown in the following
table:
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<TABLE>
<CAPTION>
Years ended December 31
-----------------------------------------------------
1999 1998 1997 1996 1995
----- ----- ---- ----- -----
COMPANY RATIOS
<S> <C> <C> <C> <C> <C>
Claims Ratio 67.9% 95.9% 60.0% 54.3% 48.7%
Expense Ratio 30.7 37.9 34.4 34.5 34.2
----- ----- ---- ----- -----
Combined Ratio 98.6% 133.8% 94.4% 88.8% 82.9%
===== ===== ==== ===== =====
INDUSTRY RATIOS (1)
Claims Ratio 78.3% 76.2% 72.8% 78.4% 78.9%
Expense Ratio 28.1 27.3 27.1 26.3 26.1
----- ----- ---- ----- -----
Combined Ratio 106.4% 103.5% 99.9% 104.7% 105.0%
===== ===== ==== ===== =====
</TABLE>
- ---------------------
(1) The property and casualty industry as a whole, not companies
with comparable lines of coverage, was used in the calculation
of these ratios by A.M. Best. Ratios for 1999 are A.M. Best
estimates.
The favorable variance to the industry for 1999 with regard to the claims
ratio is primarily the result of closely monitoring and adjusting pricing, when
needed, and writing shorter duration business than the industry as a whole. The
unfavorable variance to the industry with regard to the claims ratio in 1998 is
largely related to unanticipated unfavorable claim development recorded in 1998
on the 1997, 1996 and 1995 accident years for the commercial auto liability
line. For 1998, the increase in the unfavorable variance to the industry with
regard to the expense ratio is largely because of downward adjustments in
reinsurance commission income as a result of the unanticipated unfavorable
claim development in 1998. For 1999 and prior years, the unfavorable variance
to the industry with regard to the expense ratios is a function of the specific
lines that the Company writes.
The Company ratios in the table above relate only to insurance operations.
GNA as a holding company provides administrative and financial services for its
wholly owned subsidiaries. The allocation of GNA's expenses solely to its
insurance companies would have an impact on their results of operations and
would also affect the ratios presented. As such, expenses related to GNA's
strategic alternatives review process conducted in 1999 and 1998 are not
included in these ratios.
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:
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Claims Ratio 67.4% 93.7% 60.7% 54.7% 49.8%
Expense Ratio 32.0 39.0 33.7 33.8 33.1
---- ---- ---- ---- ----
Combined Ratio 99.4% 132.7% 94.4% 88.5% 82.9%
==== ===== ==== ==== ====
</TABLE>
The Company ratios in the table above 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.
11
<PAGE> 12
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 not be greater than 3 to 1.
<TABLE>
<CAPTION>
As of and for the years ended December 31
----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
Net premiums written $ 130,105 87,040 98,858 109,227 108,689
Policyholders' surplus $ 69,155 71,826 78,496 59,012 50,140
Ratio 1.88 to 1 1.21 to 1 1.26 to 1 1.85 to 1 2.17 to 1
</TABLE>
INVESTMENT PORTFOLIO HISTORICAL RESULTS AND COMPOSITION
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 ending December 31
-------------------------------------------------------------
1999 1998 1997 1996 1995
--------- ------- ------- ------- -------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
Average investments (1) $ 228,945 212,215 209,121 192,221 170,881
Investment income $ 9,722 9,803 9,731 9,161 8,157
Return on average investments (2) 4.3% 4.6% 4.7% 4.8% 4.8%
Taxable equivalent return on average investments 5.7% 6.2% 6.5% 6.6% 6.6%
Net realized gains $ 606 693 327 472 108
Net unrealized gains (losses) (3) $ (3,456) 2,922 2,422 1,559 2,772
</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.
(3) Includes net unrealized gains (losses) for total investments.
The following table sets forth the composition of the investment portfolio
of the Company.
12
<PAGE> 13
<TABLE>
<CAPTION>
As of December 31
---------------------------------------------------------------------
1999 1998 1997
--------------------- ------------------ -------------------
(Dollar amounts in thousands)
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
-------- ------- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Type of Investment
Fixed Maturities:
Bonds held to maturity:
U.S. Government securities $ -- -- 5,668 5,887 5,404 5,476
Tax-exempt state and municipal bonds 54,120 55,091 84,330 85,052
Bonds available for sale:
U.S. Government securities 24,365 24,029 13,734 13,969 27,322 27,404
Tax-exempt state and municipal bonds 148,983 146,204 130,072 131,619 94,700 96,246
Corporate bonds 27,067 26,844 -- -- -- --
Certificates of deposit 455 455 595 595 595 595
Equity investments 916 916 -- -- -- --
Marketable securities 372 254 318 269 -- --
-------- ------- ------- ------- ------- -------
202,158 198,702 204,507 207,430 212,351 214,773
-------- ------- ------- ------- ------- -------
Short-term investments 46,478(1) 46,478(1) 4,749 4,749 2,823 2,823
-------- ------- ------- ------- ------- -------
Total investments $248,636 245,180 209,256 212,179 215,174 217,596
======== ======== ======= ======= ======= =======
</TABLE>
- --------------------------------
(1) Includes proceeds from GMSP Transaction and funds accumulated pending
assumption of investment management of portfolio by GMSP. As these
funds are invested by GMSP in longer term investments, the proportion
of the portfolios invested in short- term investments is expected to
return closer to historical levels. >
The maturity distribution of the Company's investments in fixed maturities is
as follows:
<TABLE>
<CAPTION>
As of December 31
-----------------------------------------------------
1999 1998
---------------------- -------------------------
(Dollar amounts in thousands)
Amortized Amortized
Cost Percent Cost Percent
--------- ----- --------- --------
<S> <C> <C> <C> <C>
Within 1 year $ 42,770 21.3% $ 31,335 15.3%
Beyond 1 year but within 5 years 113,979 56.7 123,550 60.5
Beyond 5 years but within 10 years 35,123 17.5 46,692 22.9
Beyond 10 years but within 20 years 5,622 2.8 2,612 1.3
Beyond 20 years 3,376 1.7 -- --
--------- ----- --------- -----
$ 200,870 100.0% $ 204,189 100.0%
========= ===== ========= =====
Average duration 2.6 yrs 3.0 yrs
</TABLE>
As of December 31, 1999 and 1998, the Company did not have any
non-performing fixed maturity securities. In the quarter ended December 31,
1999 all bonds classified as held to maturity were transferred to the available
for sale classification and adjusted to fair value. The amortized cost at the
date of transfer for
13
<PAGE> 14
these bonds was $41,069,988 and the fair value was $41,036,014, resulting in an
unrealized loss before Federal income taxes of $33,794. The Company made this
change since it no longer invests in bonds with the intent of holding them to
maturity. See Note (1) of Notes to Consolidated Financial Statements.
INVESTMENT STRATEGY
Prior to the GMSP Transaction, GNA had limited investments at the holding
company level. The investment portfolios of the insurance companies until
recently consisted primarily of fixed maturity tax-exempt municipal bonds and
United States Government securities. See Note (2) of Notes to Consolidated
Financial Statements.
One of the objectives of the GMSP Transaction is to increase the returns on
the Company's investment portfolios by utilizing the investment management
skills of GMSP, whose interests are closely aligned with the Company's by
virtue of its significant investment in the Company. Commencing with the
closing of the GMSP Transaction on October 4, 1999, the investment portfolios
of GNA and its insurance company subsidiaries are managed by GMSP pursuant to
its Investment Management Agreements with the respective companies. See "Item
13. Certain Relationships and Related Transactions - Transactions with Goff
Moore Strategic Partners, L.P." The investment policies are subject to the
oversight and direction of the Investment Committees of the Boards of Directors
of the respective companies. The respective Investment Committees consist
entirely of directors not affiliated with GMSP.
The investment policies of the insurance subsidiaries, which are also
subject to the respective insurance company legal investment laws of the states
in which they are organized, are to maximize after-tax yield while maintaining
safety of capital together with adequate liquidity for insurance operations.
See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk." The
insurance company portfolios may also be invested in equity securities within
limits prescribed by applicable legal investment laws.
Approximately 50% of the bond securities held in the insurance company
subsidiaries are to be redeployed during the year 2000 in an attempt to
increase the taxable equivalent yield. This repositioning would involve selling
both taxable and tax-exempt bonds with a lower effective taxable equivalent
interest yields and reinvesting the proceeds in corporate debt with a higher
effective taxable equivalent interest yield. This strategy is expected to
result in net realized after tax investment losses in 2000. The impact on book
value is anticipated to be significantly less than the impact on earnings
because the securities have been recorded on the balance sheet at fair value at
December 31, 1999. The unrealized loss associated with the investment portfolio
was $2,246,575 (net of tax effects) at December 31, 1999. See Note (3) of Notes
to Consolidated Financial Statements. The scope and results of the investment
redeployment program will depend upon interest rates and the timing of specific
transactions.
GNA's portfolio is not restricted by state insurance company legal
investment laws and will be invested more aggressively. Equities and alternate
investments, including securities which offer the opportunity of significant
gains and a high degree of risk, are expected to be included in the holding
company portfolio.
RATING
Best's insurance reports, property-casualty, has currently assigned an "A
(Excellent)" 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.
14
<PAGE> 15
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, Texas and, beginning in 2000, North Dakota.
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 (7) of Notes to Consolidated Financial
Statements. Additionally, the Oklahoma, Texas and North Dakota statutes
restrict the ability of any one person to acquire 10% or more of the Company's
voting securities without prior regulatory approval.
COMPETITION
The property and casualty insurance industry is highly competitive. The
Company underwrites 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 believes that its principal
competitive advantages are; 1) expertise in its product lines which facilitates
underwriting selection and pricing and 2) service in underwriting and claims
handling which provides its agents with a competitive advantage and a stable
market.
EMPLOYEES
As of December 31, 1999, the Company employed 282 persons, of whom 19 were
officers, 255 were staff and administrative personnel, and 8 were part-time
employees. The Company is not a party to any collective bargaining agreement.
The Company believes that its relations with its employees are good.
15
<PAGE> 16
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the executive officers of the Company as of March
23, 2000 is set forth below:
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Glenn W. Anderson 47 President, Chief Executive Officer and Director
Richard M. Buxton 51 Senior Vice President
Daniel J. Coots 48 Senior Vice President, Chief Financial Officer
and Director
Carlos de la Torre 51 President, DLT Insurance Adjusters, Inc.
J. Landis Graham 45 Senior Vice President
McRae B. Johnston 49 President, National Specialty Lines, Inc.
Richard A. Laabs 44 Senior Vice President
Joseph W. Pitts 36 Senior Vice President
Stephen L. Porcelli 37 Senior Vice President
Carolyn E. Ray 47 Senior Vice President
Sam Rosen 64 Secretary and Director
</TABLE>
Glenn W. Anderson has served as President, Chief Executive Officer and
Director of the Company since April 1998. From 1996 to April 1998, Mr. Anderson
served as Executive Vice President of USF&G. From 1993 to 1996, Mr. Anderson
held the position of Senior Vice President with USF&G. Mr. Anderson has been
engaged in the property and casualty insurance business since 1975.
Richard M. Buxton has served as Vice President of the Company since
December of 1996. In 1999, Mr. Buxton was promoted to Senior Vice President.
From 1986 to 1996 Mr. Buxton was with KN Energy, Inc. in the position of Vice
President of Strategic Planning and Financial Services.
Daniel J. Coots has served as Vice President 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.
Carlos de la Torre joined the Company in October 1998 when the Company
acquired Lalande Group and since that time has served as President of DLT
Insurance Adjusters, Inc., a subsidiary of the Company. See "Item 13. Certain
Relationships and Related Transactions - Lalande Acquisition". Mr. de la Torre
is the founder of DLT Insurance Adjusters, Inc. and has served as President
since 1979. Mr. de la Torre has been engaged in the property and casualty
insurance business since 1970.
16
<PAGE> 17
J. Landis Graham has served as Senior Vice President of the Company since
1998. From 1993 to 1998, Mr. Graham served as Vice President of the Company.
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.
McRae B. Johnston joined the Company in October 1998 when the Company
acquired Lalande Group and since that time has served as President of National
Speciality Lines, Inc., a subsidiary of the Company. See "Item 13. Certain
Relationships and Related Transactions - Lalande Acquisition". Mr. Johnston is
co-founder of National Specialty Lines, Inc. and has served as President since
1989. Mr. Johnston has been engaged in the property and casualty insurance
business since 1976.
Richard A. Laabs has served as Vice President of the Company since June of
1996. Mr. Laabs was promoted to Senior Vice President in 1999. 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.
Joseph W. Pitts has served as Vice President of the Company since August of
1997. Mr. Pitts was promoted to Senior Vice President in 1999. 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 insurance business since 1988.
Stephen L. Porcelli has served as Senior Vice President of the Company
since 1999. From 1994 to 1999 Mr. Porcelli was with TIG Insurance Company in
the position of Senior Vice President. Mr. Porcelli has been engaged in the
property and casualty insurance business since 1989.
Carolyn E. Ray has served as Senior Vice President of the Company since
1998. From 1986 to 1998, Ms. Ray served as Vice President of the Company. 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.
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. That firm, or its predecessors, has provided significant legal services
for the Company since 1979.
ITEM 2. PROPERTIES
The Company owns its corporate offices which provide approximately 35,000
square feet of office space and additional 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.
The Company currently has this property under lease to an unaffiliated third
party.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in the proceedings styled William Steiner v.
Joseph D. Macchia, Joel C. Puckett, Daniel J. Coots and GAINSCO, INC., filed in
the United States District Court for the Northern District of Texas, Fort Worth
Division. In that case, the plaintiff asserts claims on behalf of a putative
class of persons who purchased the Company's common stock between August 6,
1997 and July 16, 1998, inclusive.
17
<PAGE> 18
The plaintiff asserts claims under section 10(b) and 20(a) of the
Securities Exchange Act of 1934, alleging that the Company's financial results
did not reflect the Company's true financial position and results of operations
in accordance with generally accepted accounting principles in that they
understated reserves for claims and claim adjustment expenses. The Company
believes that it has meritorious defenses to plaintiff's claims and intends to
vigorously defend the action.
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 that arise in the normal course of its insurance business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An Annual Meeting of Shareholders of GNA was held on December 9, 1999, in
Fort Worth, Texas. At the Annual Meeting, shareholders elected directors for the
ensuing year and until their successors are duly elected and qualified, and
ratified the selection by the Board of Directors of KPMG LLP as the Company's
independent auditors for the year ending December 31, 1999. The results of the
voting were as follows:
<TABLE>
<CAPTION>
Election of Directors For Withheld
- --------------------- ---------- ----------
<S> <C> <C>
Glenn W. Anderson 22,768,838 1,517,623
J. Randall Chappel 22,768,086 1,518,375
Daniel J. Coots 24,127,912 158,549
John C. Goff 22,758,648 1,527,813
Robert J. McGee, Jr. 22,415,374 1,871,087
Joel C. Puckett 22,569,224 1,717,237
Sam Rosen 22,565,509 1,720,952
Harden H. Wiedemann 22,733,062 1,553,399
John H. Williams 22,759,552 1,526,909
</TABLE>
Ratification of appointment of independent auditors:
<TABLE>
<CAPTION>
Abstentions and Brokers
-----------------------
For Against Non-Votes
---------- --------- ---------
<S> <C> <C>
22,845,246 1,383,014 58,201
</TABLE>
18
<PAGE> 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS.
GNA'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 New York Stock Exchange. The prices reported reflect actual sales
transactions.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
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
1998 First Quarter 8 11/16 7 7/8
1998 Second Quarter 9 7/8 6
1998 Third Quarter 7 15/16 5 15/16
1998 Fourth Quarter 7 1/8 5 15/16
1999 First Quarter 6 7/16 4 13/16
1999 Second Quarter 5 7/8 3 15/16
1999 Third Quarter 6 13/16 5 3/16
1999 Fourth Quarter 6 5/16 5 3/8
</TABLE>
Cash dividends of $.015 per share were paid to shareholders of record on
March 31, June 30 and September 30, 1997. Cash dividends of $.0175 per share
were paid to shareholders of record on December 31, 1997, March 31, June 30,
September 30 and December 31,1998 and March 31, June 30, September 30 and
December 31, 1999. On February 25, 2000, the Company declared a $.0175 per
share cash dividend payable to shareholders of record on March 31, 2000. The
Company depends on cash flow from cash dividends paid by its subsidiaries for
dividend payments on its Common Stock.
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 1998
and has no current plans to purchase additional shares.
As of March 23, 2000, there were 312 shareholders of record of GNA's Common
Stock.
19
<PAGE> 20
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
LLP, independent certified public accountants. The consolidated balance sheets
as of December 31, 1999 and 1998, and the consolidated statements of operations,
shareholders' equity and comprehensive income and cash flows for each of the
years in the three-year period ended December 31, 1999, and the independent
auditors 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
-------------------------------------------------------------
1999 1998 1997 1996 1995
--------- ------- -------- ------- -------
(Dollar amounts in thousands, except per share data)
Income Data:
<S> <C> <C> <C> <C> <C>
Gross premiums written (1) $ 133,898 91,162 99,776 110,000 108,072
Ceded premiums written 2,761 2,603 1,637 1,749 1,968
--------- ------- -------- ------- -------
Net premiums written 131,137 88,559 98,139 108,251 106,104
Decrease (increase) in unearned (17,857) 3,644 4,117 (1,458) (8,849)
--------- ------- -------- ------- -------
premiums
Net premiums earned 113,280 92,203 102,256 106,793 97,255
Net investment income 9,722 9,803 9,731 9,161 8,157
Net realized gains 606 693 327 472 108
Insurance services 1,849 2,927 2,631 2,379 2,183
--------- ------- -------- ------- -------
Total revenues 125,457 105,626 114,945 118,805 107,703
--------- ------- -------- ------- -------
Claims and claim adjustment expenses 76,349 86,353 62,086 58,379 48,465
Policy acquisition costs 24,288 23,619 22,552 23,828 19,679
Underwriting and operating expense 16,479 16,934 15,545 15,499 15,579
--------- ------- -------- ------- -------
Total expenses 117,116 126,906 100,183 97,706 83,723
--------- ------- -------- ------- -------
Income (loss) before taxes 8,341 (21,280) 14,762 21,099 23,980
Income tax expense (benefit) 1,214 (9,617) 2,838 5,079 6,352
--------- ------- -------- ------- -------
Net income (loss) (2) $ 7,127 (11,663) 11,924 16,020 17,628
========= ======= ======== ======= =======
Earnings (loss) per share:
Basic $ .34 (.56) .57 .75 .82
========= ======= ======== ======= =======
Diluted $ .32 (.56) .56 .74 .81
========= ======= ======== ======= =======
GAAP insurance ratios:
Claims ratio 67.4% 93.7% 60.7% 54.7% 49.8%
Expense ratio 32.0 39.0 33.7 33.8 33.1
--------- ------- -------- ------- -------
Combined ratio 99.4% 132.7% 94.4% 88.5% 82.9%
========= ======= ======== ======= =======
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
As of December 31
----------------------------------------------------------
1999 1998 1997 1996 1995
--------- ------- ------- ------- -------
(Dollar amounts in thousands, except per share data))
Balance Sheet Data:
------------------
<S> <C> <C> <C> <C> <C>
Investments $ 245,180 210,989 216,802 203,831 183,027
Premiums receivable $ 25,432 14,885 14,250 15,825 15,914
Ceded unpaid claims and claim adjustment expense $ 37,299 35,030 29,524 26,713 24,650
Ceded unearned premiums $ 23,149 22,388 19,146 16,280 6,008
Deferred policy acquisition costs $ 14,928 11,320 11,618 12,634 12,115
Property and equipment $ 6,855 6,717 6,941 6,981 6,562
Goodwill $ 18,351 17,058 -- -- --
Total assets $ 395,648 345,590 313,685 296,846 264,156
Unpaid claims and claim adjustment expenses $ 132,814 136,798 113,227 105,692 95,011
Unearned premiums $ 82,220 63,602 64,005 65,255 53,525
Note payable $ 18,000 18,000 - - 1,750
Total liabilities $ 257,949 240,106 195,123 187,493 164,714
Shareholders' equity $ 137,699 105,484 118,562 109,353 99,442
Shareholders' equity per share (3) $ 5.08 5.05 5.68 5.19 4.62
</TABLE>
-----------------------------------------
(1) Excludes premiums of $58,137,000 in 1999, $47,588,000 in 1998,
$40,136,000 in 1997, $31,603,000 in 1996, and $8,893,000 in 1995 from
the Company's fronting arrangements, the commercial automobile plans
of Arkansas, California, Louisiana, Mississippi, and Pennsylvania
under which the Company was a servicing carrier and the reinsurance
arrangement in Florida whereby MGAI premiums are ceded to a
non-affiliated reinsurer and assumed by General Agents.
(2) Includes after tax net realized gains of $400,000, $457,000, $212,000,
$307,000, and $70,000 for 1999, 1998,1997, 1996, and 1995,
respectively.
(3) Based on shares of Common Stock outstanding of 27,119,833, 20,896,563,
20,874,224, 21,087,407 and 21,525,221 at the end of 1999, 1998, 1997,
1996 and 1995, respectively. Common Stock outstanding at December 31,
1999 assumes conversion of the Series A Convertible Preferred stock
that was issued in conjunction with the GMSP transaction.
21
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS OPERATIONS
The Company recorded net income of $7,127,137, or $.32 per share (diluted)
in 1999, compared to a net loss in 1998 of $11,662,564, or $.56 per share
(basic), and net income for 1997 of $11,923,526, or $.56 per share (diluted)
for 1997. The Company recorded GAAP combined ratios of 99.4% in 1999 and 132.7%
in 1998.
On October 23, 1998, the Company completed the acquisition of the Lalande
Financial Group, Inc. ("Lalande Group"). The Lalande Group includes National
Specialty Lines, Inc. ("NSL") and DLT Insurance Adjusters, Inc. ("DLT"). NSL is
a managing general agency that markets nonstandard personal auto insurance
through approximately 800 retail agencies in Florida. DLT is an automobile
claims adjusting firm that provides claim services on NSL produced business and
to outside parties. The purchase price was for $18,000,000 in cash paid at
closing plus up to an additional $22,000,000 in cash to be paid over
approximately five years contingent upon the operating performance of the
Lalande Group. The Company will pay $2,000,000 of the operating performance
contingency in the second quarter of 2000.
In April 1999, the Company completed the sale of the assets of Agents
Processing Systems, Inc. ("APS"), which marketed a computer software package
related to general agency operations. The purchaser acquired all rights to the
APS software products, assignment of the APS customer contracts and other
miscellaneous assets for a nominal amount of cash, assumption of contract
obligations, a fixed number of software use licenses and development work on an
electronic data interchange project. The Company recorded a small write-off as
a result of this transaction.
On October 4, 1999 the Company sold to Goff Moore Strategic Partners, L.P.,
a Texas limited partnership ("GMSP") for an aggregate purchase price of
$31,620,000 (a) 31,620 shares of the Company's Series A Convertible Preferred
Stock, which are convertible into shares of the Company's Common Stock, par
value $.10 per share ("Common Stock"), at a conversion price of $5.10 per share,
(b) a five year Warrant to purchase an aggregate of 1,550,000 shares of Common
Stock at an exercise price of $6.375 per share and (c) a seven year Warrant to
purchase an aggregate of 1,550,000 shares of Common Stock at an exercise price
of $8.50 per share. The Company and its insurance company subsidiaries entered
into Investment Management Agreements with GMSP, pursuant to which GMSP will
manage their respective investment portfolios. Proceeds from the GMSP
Transaction are available for acquisitions, investments and other corporate
purposes.
On January 7, 2000 the Company completed the acquisition of Tri-State,
Ltd., an insurance operation specializing primarily in underwriting, servicing
and claims handling of nonstandard personal auto insurance in Minnesota, North
Dakota and South Dakota. The purchase price was for $6,000,000 with additional
payments of up to approximately $5,500,000 in cash over the next several years
based on conversion of business, specific profitability targets and Tri-State,
Ltd.'s December 31, 1999 book value.
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 expense item "Underwriting and
operating expenses" includes the operating expenses of the computer software,
plan servicing and premium finance operations.
22
<PAGE> 23
RESULTS OF OPERATIONS
Gross premiums written in 1999 of $133,898,001 were 47% above the
$91,162,086 recorded in 1998 largely because of the nonstandard personal auto
business written in Florida beginning in late 1998. The 9% decrease recorded in
1998 from 1997 was largely due to the run-off of discontinued classes and
continued pricing pressure from competition. The following table compares the
major product lines between the years for gross premiums written:
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------------------------------
1999 1998 1997
------------------ --------------- --------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Gross Premiums Written:
Commercial Lines $ 97,139 73% $88,188 97% $99,776 100%
Personal Lines 36,759 27 2,974 3 -- --
-------- ---- ------- ---- ------ ---
$133,898 100% $91,162 100% $99,776 100%
======== ==== ======= ==== ======= ===
Policies in Force (End of Period) 68,943 38,939 35,962
</TABLE>
COMMERCIAL LINES grew 10% in 1999 following a 12% decrease in 1998.
Commercial auto contributed 7 points to the increase in 1999 with Texas,
Florida and Georgia accounting for the majority. In 1998 Kentucky commercial
auto as well as the decision to exit certain other unprofitable commercial auto
classes contributed 6 points to the decrease. The garage product decreased in
both years accounting for 3 points in 1999 and in 1998. Continued pricing
pressure and new entrants to the garage market in both years are the primary
reasons. The general liability line contributed 3 points to the increase in
1999 primarily as a result of growth in Texas. In 1998 general liability
recorded small decrease as a result of continued pricing pressure and
competitors entering the market. PERSONAL LINES increased in 1999 as a result
of the Florida nonstandard personal auto business the Company began writing in
late 1998.
For 1999 gross premiums written percentages by significant product line are
as follows: commercial auto (41%), personal auto (26%), general liability (13%)
and garage (13%), with no other product line comprising 5% or more. Premiums
earned increased 23% in 1999 but decreased 10% in 1998 as a direct result of
the level of premiums written.
Net investment income decreased 1% in 1999 from 1998 after a 1% increase in
1998 over 1997. The decrease in 1999 was the result of reinvesting maturities
through the first nine months in shorter durations that had lower yields. In
the fourth quarter GMSP invested approximately $30 million in the Company and
took over management of the Company's investments. Investment income in the
fourth quarter of 1999 increased over the comparable 1998 period and offset a
large portion of the decrease in investment income recorded during the first
nine months of 1999 when compared to the first nine months of 1998. At December
31, 1999, 98% of the Company's investments were investment grade with an
average duration of approximately 2.6 years. On a taxable equivalent basis the
return on average investments was 5.7% in 1999, 6.2% in 1998 and 6.5% in 1997.
The Company classifies its bond securities as available for sale. The Company
does not have any non-performing fixed maturity securities. The Company
anticipates redeploying up to approximately 50% of its bond securities during
the year 2000 in an attempt to increase the taxable equivalent yield. This
strategy is expected to result in net realized after tax losses in 2000. The
impact on book value is anticipated to be significantly less than the impact on
earnings because the securities have been recorded on the balance sheet at fair
value at December 31, 1999. The unrealized loss associated with the investment
portfolio was $2,246,575 (net of tax effects) at December 31, 1999. The scope
and results of the investment redeployment program will depend upon interest
rates and the timing of specific transactions.
The Company recorded net realized capital gains of $605,606 in 1999 versus
$692,510 in 1998 and $326,905 in 1997. All of these gains were generated from
the bonds available for sale category of the fixed maturity portfolio.
23
<PAGE> 24
Insurance service revenues decreased $1,078,997 in 1999 from 1998 primarily
as a result of the run-off of the plan servicing business and the sale of the
computer software operation. These decreases were offset to some extent by
revenues from the claim adjusting operation.
Claims and claim adjustment expenses ("C & CAE") decreased $10,003,936 in
1999 from 1998 but increased $24,267,337 in 1998 over 1997. The C & CAE ratio
was 67.4% in 1999, 93.7% in 1998 and 60.7% in 1997. The ratio in 1998 is above
the 1999 and 1997 levels because of significant unfavorable development from
prior accident years that was recorded in 1998. The 1998 C & CAE ratio included
33 percentage points of unanticipated unfavorable development in C & CAE
incurred from the 1997, 1996 and 1995 accident years for commercial auto
liability. The Company writes in areas where catastrophes have recently
occurred. The net claims incurred from these events were approximately $900,000
in 1999. 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. The Company's premium writings for product liability
coverages are immaterial. 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 ratio of commissions to gross premiums written was 21% in 1999, 26% in
1998 and 22% in 1997. The ratio in 1998 is above 1999 and 1997 primarily due to
a reduction in reinsurance commission income of approximately $3,318,000 that
was recorded in 1998. This was a result of unfavorable development in C & CAE
incurred in 1998, mentioned previously. The ratio of commissions to premiums
earned was 25% for 1999 and 1998 versus 21% for 1997. The 1999 ratio is above
1997 primarily due to the increase in the growth rate of gross premiums written
in 1999. The increase in the ratio in 1998 is a result of the reduction in
reinsurance commission income in 1998.
The change in deferred policy acquisition costs and deferred ceding
commission income ("DAC") resulted in a net increase to income of $3,607,531 in
1999 and a net decrease to income of $297,994 and $1,015,802 for 1998 and 1997,
respectively. The change in the amount of the increase or decrease in DAC
between the comparable periods is primarily 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.
Interest expense from the note payable and amortization expense related to
the goodwill on the Lalande acquisition increased primarily as a result of
recording a full year of expenses in 1999 versus approximately three months of
expenses in 1998.
Underwriting and operating expenses were down 13% in 1999 from 1998, but
were up 9% in 1998 over 1997. The decrease for 1999 and the increase for 1998
were primarily due to approximately $2 million in non-recurring expenses
associated with a reduction in the number of employees, legal fees and
consulting fees that were incurred in 1998.
The effective tax rates of 15% for 1999 and 19% for 1997 are primarily the
result of tax-exempt income comprising a major portion of income before taxes.
For 1998 the Company generated a current tax benefit as a result of the loss
from operations. The large increase in the deferred tax benefit in 1998 is
primarily the result of the large increase recorded to C & CAE reserves in
1998. The effective tax benefit rate for 1998 of 45% is above the Federal
statutory rate largely because of tax-exempt interest income. 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 6 of
Notes to Consolidated Financial Statements.
24
<PAGE> 25
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, 1999, the
Company held short-term investments and cash that the Company believes is
adequate liquidity for the payment of claims and other short-term commitments.
This amount is larger than normal because the funds received from GMSP in
October 1999 had not been fully invested in bonds, stocks and alternative
investments at December 31, 1999.
With regard to long term liquidity, the average duration of the investment
portfolio is approximately 2.6 years. The fair value of the fixed maturity
portfolio at December 31, 1999 was $3,338,143 below amortized cost. With regard
to the availability of funds to the holding company, see Note 7 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, 1999 and 1998, the balance on deposit for
the benefit of such policyholders totaled $14,832,735 and $14,699,727,
respectively.
The increase in investments is primarily attributable to the capital
received in the GMSP transaction described previously. In the fourth quarter of
1999 all bonds classified as held to maturity were transferred to the available
for sale classification and adjusted to fair value. The amortized cost at the
date of transfer for these bonds $41,069,988 and the fair value was $41,036,014
resulting in an unrealized loss before Federal income taxes of $33,974. The
company made this change since it no longer invests in bonds with the intent of
holding them to maturity. Premiums receivable and ceded unpaid claims and claim
adjustment expenses increased primarily as a result of the personal lines
business written in 1999. Deferred policy acquisition costs (DAC) increased
primarily because of the increase in unearned premiums. Current Federal income
taxes recoverable decreased primarily due to the receipt of the refund for the
1998 year. The increase in other assets is primarily related to an increase in
funds on deposit with reinsurers for 1999.
Unpaid claims and claim adjustment expenses decreased primarily due to
commercial lines CAE reserves decreasing as a result of the large number of
prior accident year claims closed in 1999, as well as material decreases in
plan servicing and fronting reserves. Unearned premiums increased because of
the increase in premiums written mentioned previously. Commissions payable
decreased primarily because of balances settled in 1999 on commercial
reinsurance treaties. Reinsurance balances payable increased primarily because
of the increased activity in personal lines.
The increase in preferred stock, common stock warrants and additional
paid-in capital is primarily related to the GMSP transaction described
previously.
An accumulated other comprehensive loss of $2,246,575 was recorded at
December 31, 1999 as a result of the unrealized losses on bonds available for
sale. This was primarily attributable to the general increase in interest
rates.
The Company is not aware of any current recommendations by 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 exceeds the benchmark capital level under the Risk Based Capital formula
for its major insurance companies.
YEAR 2000 READINESS
There has been concern that there would be worldwide computer problems in
early 2000 due to their failure to properly recognize a year that begins with
"20" instead of the familiar "19" and because the Year 2000 is
25
<PAGE> 26
a leap year. To address these and related concerns, the Company appointed a
Year 2000 team involving personnel from all business units to assess the Year
2000 readiness of the Company and those with whom it does business, and then
address any problems found. The Company contracted with a major consulting
vendor to perform due diligence assessment and testing of its Year 2000
project. While assessing the Company's readiness, the vendor identified some
programs that required additional remediation and re-testing. The Company
believes that all identified non-conforming programs have been corrected and
that it has not experienced any material Year 2000 related system failures or
disruptions. The Company, however, plans to continue to monitor its systems and
operations and to address any date-related problems that may arise.
The Company reviewed the insurance policies written by it and its
underwriting guides to determine Year 2000 exposure. The Company made a
decision to exclude Year 2000 exposures from all insurance policies written by
it and began adding exclusions in November 1997. The Company believes Year 2000
liabilities are not fortuitous in nature and would not be covered under its
insurance policies. The Company believes that its coverage exposure with
respect to Year 2000 losses will not be material. However, changes in social
and legal trends may establish coverage unintended for Year 2000 exposures by
re-interpreting insurance contracts and exclusions. Litigation with respect to
Year 2000 claims and the attendant costs are to be expected. It is impossible
to predict what exposure insurance companies may bear for Year 2000 losses.
The Company estimates that its costs in 1998 and 1999 of addressing the
Year 2000 problem aggregated approximately $920,000, including modifying or
replacing software and other systems, hiring Year 2000 solution providers and
internal assessment, remediation and testing. These costs were funded by
internally generated funds. No material additional Year 2000 costs are
anticipated.
FORWARD LOOKING STATEMENTS
Statements made in this report that are not strictly historical may be
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that important factors,
representing certain risks and uncertainties, could cause actual results to
differ materially from those contained in the forward-looking statements. These
factors include, but are not limited to, (a) heightened competition from
existing competitors and new competitor entrants into the Company's markets,
(b) contraction of the markets for the Company's various lines of business, (c)
development and performance of new specialty programs, (d) the ongoing level of
claims and claims-related expenses, (e) adequacy of claim reserves, (f) the
ability to complete value-adding acquisitions and fully integrate newly
acquired companies and their customers and managers into the Company, as well
as, the ability to implement growth strategies which can achieve incremental
value, (g) the effectiveness of the redeployment of the Company's bond
portfolio and other investment strategies implemented by the Company's
investment manager, and (h) general economic conditions including fluctuations
in interest rates. A forward-looking statement is relevant as of the date the
statement is made. The Company undertakes no obligation to update any
forward-looking statements to reflect events or circumstances arising after the
date on which the statements are made.
26
<PAGE> 27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of economic losses due to adverse changes in the
estimated fair value of a financial instrument as the result of changes in
equity prices, interest rates, foreign exchange rates and commodity prices. The
Company's consolidated balance sheets include assets whose estimated fair
values are subject to market risk. The primary market risk to the Company is
interest rate risk associated with investments in fixed maturities. The Company
has no foreign exchange or commodity risk, and its exposure to equity risk is
immaterial.
INTEREST RATE RISK
The Company's fixed maturity investments are subject to interest rate risk.
Increases and decreases in interest rates typically result in decreases and
increases in the fair value of these investments.
Most of the Company's investable assets are in the portfolios of the
insurance company subsidiaries and come from premiums paid by policyholders.
These funds are invested predominately in high quality bonds with relatively
short durations. The fixed maturity portfolio had an average duration of 2.6
years at December 31, 1999. The fixed maturity portfolio is exposed to interest
rate fluctuations; as interest rates rise, fair values decline and as interest
rates fall, fair values rise. The changes in the fair value of the fixed
maturity portfolio are presented as a component of shareholders' equity in
accumulated other comprehensive income, net of taxes.
The effective duration of the fixed maturity portfolio is managed with
consideration given to the estimated duration of the Company's liabilities. The
Company has investment policies that limit the maximum duration and maturity of
the fixed maturity portfolio.
The Company utilizes the modified duration method to estimate the effect of
interest rate risk on the fair values of its fixed maturity portfolio. The
usefulness of this method is to a degree limited, as it is unable to accurately
incorporate the full complexity of market interactions.
27
<PAGE> 28
The table below summarizes the Company's interest rate risk and shows the
effect of a hypothetical change in interest rates as of December 31, 1999. The
selected hypothetical changes do not indicate what could be the potential best
or worst case scenarios (dollars in thousands):
<TABLE>
<CAPTION>
Estimated Estimated Hypothetical
Estimated Fair Change in Fair Value After Percentage Increase
Value at Interest Rates Hypothetical Change (Decrease) in
December 31, 1999 (BP=basis points) in Interest Rates Shareholders' Equity
----------------- ---------------- ------------------- --------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 70,507 200 BP Decrease $ 71,315 .4
(including short-term 100 BP Decrease $ 70,911 .2
Investments) 100 BP Increase $ 70,103 (.2)
200 BP Increase $ 69,699 (.4)
Obligation of states, $ 146,204 200 BP Decrease $ 153,998 3.7
municipalities and 100 BP Decrease $ 150,101 1.8
political subdivisions 100 BP Increase $ 142,307 (1.8)
200 BP Increase $ 138,410 (3.7)
Corporate bonds and $ 27,299 200 BP Decrease $ 29,535 1.1
Certificates of Deposit 100 BP Decrease $ 28,417 .5
100 BP Increase $ 26,181 (.5)
200 BP Increase $ 25,063 (1.1)
Total fixed maturity investments $ 244,010 200 BP Decrease $ 254,848 5.1
(included short-term 100 BP Decrease $ 249,429 2.6
Investments) 100 BP Increase $ 238,591 (2.6)
200 BP Increase $ 233,172 (5.1)
</TABLE>
28
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated Financial Statements are on pages 41 through 71:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Management 41
Independent Auditors' Report 42
Consolidated Balance Sheets as of December 31, 1999 and 1998 43-44
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998, and 1997 45
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the Years Ended December 31, 1999, 1998, and 1997 46-47
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998, and 1997 48-49
Notes to Consolidated Financial Statements December 31,
1999, 1998, and 1997 50-71
The following Consolidated Financial Statements Schedules are on pages 72
through 83:
Schedule Page
----
Independent Auditors' Report on
Supplementary Information 72
I Summary of Investments 73
II Condensed Financial Information of the Registrant 74-80
III Supplementary Insurance Information 81
IV Reinsurance 82
VI Supplemental Information 83
</TABLE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
29
<PAGE> 30
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".
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be supplied by a Schedule 14A
filing or an amendment to this Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 23, 2000, the number of
shares of Common Stock beneficially owned (as defined by the rules of the
Securities and Exchange Commission (the "SEC")) by (i) each person who is known
to the Company to be the beneficial owner of more than five percent of the
outstanding Common Stock, (ii) Goff Moore Strategic Partners, L.P. ("GMSP"),
(iii) each director of the Company, (iv) the Chief Executive Officer and each
of the other four most highly compensated executive officers of the Company for
the year ended December 31, 1999, and (v) all of the executive officers of the
Company as a group.
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Ownership(1)
-----------------------------------------
Number Percent of
Name of Beneficial Owner of Shares(2) Voting Stock (3)
- ------------------------------------------------ ----------- ------------
<S> <C> <C>
Goff Moore Strategic Partners, L.P., John C. Goff and
J. Randall Chappel 10,406,000 (4) 32.9%
I.G. Investment Management, Ltd. 1,924,800 (5) 6.1%
The Millers Mutual Fire Insurance Company 1,559,900 (6) 4.9%
Dimensional Fund Advisors, Inc. 1,381,842 (7) 4.4%
Joseph D. Macchia 1,361,988 (8) 4.3%
Glenn W. Anderson 692,110 (9) 2.2%
Joel C. Puckett 496,821 (10) 1.6%
Sam Rosen 243,172 (11) *
Carolyn E. Ray 135,685 (12) *
Daniel J. Coots 123,358 (13) *
John H. Williams 62,562 (14) *
Harden H. Wiedemann 54,265 (15) *
Richard M. Buxton 44,221 (16) *
J. Landis Graham 35,723 (17) *
Robert J. McGee 33,600 (18) *
Directors and executive officers as a group (17 persons) 12,392,661 (19) 39.3%
</TABLE>
- -------------------------------
* Less than 1%
30
<PAGE> 31
(1) Each person named below has the sole investment and voting power with
respect to all shares of Common Stock shown as beneficially owned by
the person, except (a) with respect to shares shown as held for a
person's account in the Company's Profit Sharing Plan, the person has
sole investment power but no voting power and (b) as otherwise
indicated below.
(2) Under applicable SEC rules, a person is deemed the "beneficial owner"
of a security with regard to which the person, directly or indirectly,
has or shares (a) the voting power, which includes the power to vote
or direct the voting of the security, or (b) the investment power,
which includes the power to dispose, or direct the disposition of the
security, in each case irrespective of the persons' economic interest
in the security. Under these SEC rules, a person is deemed to
beneficially own securities which the person has the right to acquire
within sixty days (x) through the exercise of any option or warrant or
(y) through the conversion of another security.
(3) In determining the Percent of Voting Stock owned by a person, (a) the
numerator is the number of shares of Common Stock beneficially owned
by the person, including shares the beneficial ownership of which may
be acquired within sixty days upon the exercise of options or warrants
or conversion of convertible securities, and (b) the denominator is
the sum of (i) the combined number of shares of Common Stock
outstanding and those then issuable upon conversion of the Series A
Preferred Stock and (ii) any shares of Common Stock which the person
has the right to acquire within sixty days upon the exercise of
options or warrants. The denominator does not include shares which may
be issued upon the exercise of any other options or warrants.
(4) Includes (a) 6,200,000 shares of Common Stock which GMSP may acquire
upon conversion of 31,620 shares of the Series A Preferred Stock, (b)
3,100,000 shares of Common Stock issuable upon exercise of presently
exercisable warrants to purchase shares of Common Stock, (c) 1,064,000
shares of Common Stock beneficially owned by GMSP, (d) 33,600 shares
of Common Stock that Mr. Goff has the right to acquire within 60 days
through exercise of options granted under the 1995 Stock Option Plan,
and (e) 8,400 shares of Common Stock that Mr. Chappel has the right to
acquire within 60 days through exercise of options granted under the
1995 Stock Option Plan. See "Item 13 - Certain Relationships and
Related Transactions-Transactions with Goff Moore Strategic Partners,
L.P." for information regarding GMSP and the relationship of Messrs.
Goff and Chappel to GMSP.
(5) Based on information set forth in a Schedule 13G/A, dated November 2,
1999, these shares were reported, as of June 4, 1999, to be
beneficially owned by I.G. Investment Management, Ltd., Investors
Group Inc., Investors Group Trustco Inc., Investors Group Trust Co.
Ltd. and Investors U.S. Opportunities Fund (the "IGIM Reporting
Persons"). All of the IGIM Reporting Persons have their principal
place of business at One Canada Centre, 447 Portage Avenue, Winnipeg,
Manitoba R3C 3B6. All of the IGIM Reporting Persons reported
beneficial ownership of these shares with shared voting and
dispositive power.
(6) Based on information set forth in a Schedule 13D, dated May 6, 1998,
these shares were reported, as of April 27, 1998, to be beneficially
owned by The Millers Mutual Fire Insurance Company, 300 Burnett
Street, Fort Worth, Texas 76102. The Millers Mutual Fire Insurance
Company reported beneficial ownership of these shares with sole voting
and dispositive power.
(7) Based on information set forth in a Schedule 13G, dated February 11,
1999, these shares were reported, as of December 31, 1998, to be
beneficially owned by Dimensional Fund Advisors Inc., 1299 Ocean
Avenue, 11th Floor, Santa Monica, California 90401. Dimensional Fund
Advisors Inc. reported beneficial ownership of these shares with sole
voting and dispositive power.
(8) Based on information set forth in a Schedule 13D/A, dated September
13, 1999, these shares were reported, as of September 10, 1999, to be
beneficially owned by Joseph D. Macchia, 1409 Indian Creek Drive, Fort
Worth, Texas 76107-3520. Mr. Macchia reported beneficial ownership of
these shares with sole voting and dispositive power.
(9) Includes 579,710 shares of Common Stock that Mr. Anderson has the
right to acquire within 60 days through the exercise of options
granted pursuant to his Employment Agreement with the Company and 900
shares of Common Stock held by the Profit Sharing Plan of the Company
for the account of Mr. Anderson as beneficiary.
(10) Includes 51,927 shares of Common Stock held by the Joel Puckett
Self-Employed Retirement Trust and 193,701 shares of Common Stock that
Mr. Puckett has the right to acquire within 60 days through the
exercise of options granted under the 1990 Stock Option Plan and 1995
Stock Option Plan.
(11) Includes 3,163 shares of an IRA of Mr. Rosen's wife. Mr. Rosen
disclaims beneficial ownership of those shares. Also includes 35,065
shares held for the benefit of Mr. Rosen by the Shannon, Gracey,
Ratliff & Miller, L.L.P. Profit Sharing Plan, 3,163 shares of Common
Stock held by Mr. Rosen's IRA and 124,064 shares of Common Stock that
Mr. Rosen has the right to acquire within 60 days through the exercise
of options granted under the 1990 Stock Option Plan and 1995 Stock
Option Plan.
31
<PAGE> 32
Mr. Rosen is a partner in the law firm of Shannon, Gracey, Ratliff &
Miller, L.L.P.
(12) Includes 11,695 shares of Common Stock held by the Profit Sharing Plan
of the Company for the account of Ms. Ray as beneficiary and 73,250
shares of Common Stock that Ms. Ray has the right to acquire within 60
days through the exercise of options granted under the 1990 Stock
Option Plan and 1995 Stock Option Plan.
(13) Includes 40,567 shares of Common Stock held by the Profit Sharing Plan
of the Company for the account of Mr. Coots as beneficiary and 76,270
shares of Common Stock that Mr. Coots has the right to acquire within
60 days through the exercise of options granted under the 1990 Stock
Option Plan and 1995 Stock Option Plan.
(14) Includes 42,000 shares of Common Stock that Mr. Williams has the right
to acquire within 60 days through the exercise of options granted
under the 1990 Stock Option Plan and 1995 Stock Option Plan.
(15) Includes 50,400 shares of Common Stock that Mr. Wiedemann has the
right to acquire within 60 days through the exercise of options
granted under the 1990 Stock Option Plan and 1995 Stock Option Plan.
(16) Includes 1,889 shares of Common Stock held by the Profit Sharing Plan
of the Company for the account of Mr. Buxton as beneficiary and 27,332
shares of Common Stock that Mr. Buxton has the right to acquire within
60 days through the exercise of options granted under the 1990 Stock
Option Plan and 1995 Stock Option Plan.
(17) Includes 7,545 shares of Common Stock held by the Profit Sharing Plan
of the Company for the account of Mr. Graham as beneficiary and 27,876
shares of Common Stock that Mr. Graham has the right to acquire within
60 days through the exercise of options granted under the 1990 Stock
Option Plan and 1995 Stock Option Plan.
(18) Includes 33,600 shares of Common Stock that Mr. McGee has the right to
acquire within 60 days through the exercise of options granted under
the 1990 Stock Option Plan and 1995 Stock Option Plan.
(19) Includes (a) 63,360 shares of Common Stock held by the Profit Sharing
Plan of the Company for the account of executive officers, (b)
1,309,227 shares of Common Stock that directors and executive officers
of the Company have the right to acquire within 60 days through the
exercise of options granted under the 1990 Stock Option Plan and 1995
Stock Option Plan and pursuant to Mr. Anderson's Employment Agreement
with the Company, (c) 6,2000,000 shares of Common Stock which GMSP may
acquire upon conversion of 31,620 shares of the Series A Preferred
Stock, (d) 3,100,000 shares of Common Stock issuable upon exercise of
presently exercisable warrants to purchase Common Stock held by GMSP,
and (e) 1,064,000 shares of Common Stock that GMSP has advised the
Company are beneficially owned by GMSP, of which Mr. Goff and Mr.
Chappel are principals.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of the Common Stock to file with the SEC and the New York Stock
Exchange initial reports of ownership and reports of changes in ownership of
Common Stock. Officers, directors and greater than ten-percent beneficial
owners are required by SEC regulation to furnish the Company with copies of all
Section 16(a) forms they file. Based solely upon a review of the Section 16(a)
reports to finished to it, the Company believes the persons who were required
to file Section 16(a) reports in respect of their Section 16(a) ownership of
Common Stock have filed on a timely basis all Section 16(a) reports required to
be filed by them, except that J. Randall Chappel failed to file a Form 4 with
respect to options granted to him by the Company in October 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GLENN W. ANDERSON EMPLOYMENT AGREEMENT. On April 17, 1998 Mr. Anderson
assumed the position of President and Chief Executive Officer of the Company
under an employment agreement (the "Anderson Employment Agreement") negotiated
between Mr. Anderson and the outside directors prior to his agreeing to join the
Company. The Anderson Employment Agreement provided that Mr. Anderson was to
receive an annual base salary of $340,000 (of which $238,436 was accrued and
paid in 1998), a guaranteed first year bonus of $260,000 (of which $195,000 was
accrued in 1998 and paid in 1999), payment of relocation expenses and various
other benefits aggregating $155,397 in 1998, and a non-qualified stock option to
purchase 579,710 shares of Common Stock at an exercise price initially fixed at
$8.625 per share. In 1999 pursuant to the Anderson Employment Agreement Mr.
Anderson earned $340,000 and $175,000 in bonus. The Anderson Employment
Agreement provided that, if on any trading day within five business days after
the public announcement of the Company's results of operations for the quarter
ended June 30, 1998 the last reported sales price for the Common Stock on the
New York Stock Exchange was below the initial price, Mr. Anderson's option was
to be canceled and replaced with a new option for the same number of shares and
with an exercise price equal to the lowest closing price during that five day
period. In accordance with those
32
<PAGE> 33
provisions, on July 24, 1998 Mr. Anderson was issued a replacement
non-qualified stock option to purchase 579,710 shares of Common Stock for
$5.75, subject to typical anti-dilution provisions. The options were fully
vested and exercisable upon grant and had a term of five years.
The Anderson Employment Agreement provided for an initial four year
term. On each anniversary of its making, the Anderson Employment Agreement
automatically extends for an additional one year period, unless either the
Company or Mr. Anderson delivers written notice to the other at least thirty
days prior to the anniversary. The Anderson Employment Agreement permits
termination of Mr. Anderson for cause with payment of salary accrued to the
date of termination. If Mr. Anderson's employment is terminated without cause,
he will be entitled to an amount equal to thirty-six times 150% of his then
current monthly rate of base salary. The Company also entered into a change in
control agreement with Mr. Anderson in substantially the same form as those
entered into with other executive officers of the Company. If Mr. Anderson is
terminated without cause, he will be entitled to the greater of (i) the amount
he would be entitled to upon such termination under the Anderson Employment
Agreement in the absence of a change in control or (ii) the amount called for
by his change in control agreement.
TRANSACTIONS WITH GOFF MOORE STRATEGIC PARTNERS, L.P. On October 4,
1999, the Company consummated the sale of shares of Series A Preferred Stock
and warrants to purchase Common Stock to GMSP pursuant to a Securities Purchase
Agreement ("Purchase Agreement") between the Company and GMSP dated effective
June 29, 1999 (the "GMSP Transaction"). At the closing, the Company sold to
GMSP for cash consideration of $31,620,000 (i) 31,620 shares of the Series A
Preferred Stock, which are convertible into shares of the Common Stock at a
conversion price of $5.10 per share (subject to adjustment), currently for a
total of 6,200,000 shares of Common Stock, (ii) a five year Warrant (the
"Series A Warrant") to purchase an aggregate of 1,550,000 shares of Common
Stock at an exercise price of $6.375 per share (subject to adjustment), and
(iii) a seven year Warrant (the "Series B Warrant") to purchase an aggregate of
1,550,000 shares of Common Stock at an exercise price of $8.50 per share
(subject to adjustment). At the closing, the Company and certain of the
Company's subsidiaries entered into Investment Management Agreements with GMSP,
pursuant to which GMSP will manage the consolidated investment portfolios of
the Company and its insurance company subsidiaries.
The Series A Preferred Stock issued to GMSP is presently convertible
into, and the Series A Warrant and Series B Warrant are presently exercisable
for, shares of Common Stock at the option of the holder. Assuming the Series A
Preferred Stock is fully converted and the Series A Warrant and Series B Warrant
are fully exercised on the Record Date, GMSP would own directly and have the
power to vote 10,164,000 shares of Common Stock (approximately 33.7% of the then
outstanding Common Stock). Each share of Series A Preferred Stock is entitled to
vote with the Common Stock as a single class on all matters for which the Common
Stock may vote on the basis of one vote per share of Common Stock into which it
is convertible. The shares underlying the Series A Warrant and the Series B
Warrant are not currently outstanding and do not have voting rights. The
Purchase Agreement generally prohibits GMSP, its affiliates, associates, and
employees from beneficially owning in the aggregate more than 35% of the
fully-diluted Common Stock, other than as a result of repurchases of stock by
the Company or pursuant to the acquisition of additional shares of Common Stock
pursuant to the Company's 1990 Stock Option Plan, 1995 Stock Option Plan, or
1998 Long-Term Incentive Plan.
GMSP was formed in February 1998, to serve as the primary investment
vehicle for its principals, as well as Richard E. Rainwater and his family who
are limited partners. GMSP is principally a long-term investor in companies
that it deems to have superior management and attractive growth prospects. The
partnership's Managing Principals are John C. Goff, a partner of Mr.
Rainwater's for over 12 years, and Darla
33
<PAGE> 34
D. Moore, who is Mr. Rainwater's wife and a former Managing Director of the
Chase Manhattan Bank. J. Randall Chappel is a principal of GMSP and has been
associated with Mr. Rainwater and his affiliated companies for 12 years. Mr.
Goff owns approximately 44.9% of the limited partnership interests of GMSP
Operating Partners, L.P., the general partner of GMSP. GMSP Operating Partners,
L.P. owns approximately 14.3% of the partnership interests of GMSP. Mr. Goff
also owns 50% of the membership interests of GMSP, L.L.C., the general partner
of GMSP Operating Partners, L.P. GMSP, L.L.C. owns 1% of the partnership
interests and is the general partner of GMSP Operating Partners, L.P.
The Purchase Agreement provides that GMSP is entitled to designate two
directors as long as GMSP and its affiliates, associates and employees maintain
ownership of 75% of its current security holdings in the Company or 20% of the
fully diluted Common Stock, and one director by maintaining ownership of 50% of
its current security holdings or 5% of the fully diluted Common Stock. GMSP has
designated Messrs. Goff and Chappel as its representatives on the Board. Any
substitute for Messrs. Goff or Chappel must be acceptable to the members of the
Board not affiliated with GMSP, its affiliates, associates or employees.
Pursuant to the Purchase Agreement, the Company and each of its
insurance company subsidiaries entered into Investment Management Agreements
with GMSP which provide GMSP will manage the investments of the holding and
insurance company funds of the type listed under the categories "Investments"
on the Company's reports filed with the SEC. Under the Investment Management
Agreements, GMSP is to receive investment management fees equal on an annual
basis to (i) 30 basis points multiplied by the fair market value with respect
to any portion of the portfolio invested in short term debt or investment grade
debt obligations at the end of a given calendar month or during a majority of
the days in the given calendar month and (ii) 100 basis points multiplied by
the fair market value with respect to any portion of the portfolio invested in
equity securities or other alternative investments in securities which are not
investment grade debt obligations. No fees are payable with respect to the
portions of the portfolio held in cash. Accrued fees will be paid monthly,
based on the fair value of the investments at the end of each calendar month
and subject to a minimum monthly fee of $75,000 in the aggregate under all the
Investment Management Agreements.
Pursuant to these Investment Management Agreements and with the
specific approval of the Investment Committee (which is comprised of four
directors who are not affiliated with GMSP), the Company has, and may in the
future, invest in entities in which GMSP or its principals are affiliates or
co-investors. On November 30, 1999, GNA agreed to invest $2,000,000 in GNA
Investments I, L.P., a Texas limited partnership, in which GMSP has 1% general
partner interest and GNA has 99% limited partner interest, to serve as a conduit
for co-investing with GMSP in private transactions with early stage technology
companies whose securities are speculative and involve a high degree of risk. In
February and March 2000, the Company purchased in open market transactions
common stock of Crescent Real Estate Equities, Inc. ("CEI") at an aggregate cost
of approximately $2,523,000, and debt securities of CEI at an aggregate cost of
approximately $2,443,000. John C. Goff, a principal of GMSP and a director of
GNA, is President, Chief Executive Officer and a director of CEI.
LALANDE GROUP ACQUISITION. On October 23, 1998, the Company completed
the acquisition of the Lalande Financial Group, Inc. ("Lalande Group"). The
Lalande Group includes National Specialty Lines, Inc. ("NSL") and DLT Insurance
Adjusters, Inc. ("DLT"). NSL is a managing general agency that markets
nonstandard personal auto insurance through approximately 800 retail agencies in
Florida. DLT is an automobile claims adjusting firm that provides claim services
on NSL produced business and to outside parties. The purchase price was for
$18,000,000 in cash paid at closing plus up to an additional $22,000,000 in cash
to be paid over approximately five years contingent upon the operating
performance of the Lalande Group. The Company will pay $2,000,000 of the
operating performance contingency in the second quarter of 2000.
34
<PAGE> 35
Carlos de la Torre and McRae B. Johnston entered into employment
contracts with the Company upon consummation of the Company's acquisition of
the Lalande Group. They shared the major part of the consideration paid for the
Lalande Group.
AGREEMENT WITH CLIENTSOFT. Beginning in July, 1999 and as part of the
Company's initiative for linking its agents through a new Internet system, the
Company entered into arrangements with ClientSoft, Inc. for the development of
software for an Internet-based point of sale system to facilitate the Company's
independent agents' performance of functions such as quoting, rating,
application completion, policy underwriting and requesting reports. In 1999 the
Company paid approximately $193,000 to ClientSoft under these arrangements and
has budgeted spending an additional $1,000,000 for ClientSoft services in 2000.
Glenn W. Anderson, President, Chief Executive Officer and a director of the
Company, was a director of ClientSoft from December 13, 1999 to February 22,
2000.
35
<PAGE> 36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORMS 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, 1999 and 1998
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity and Comprehensive
Income for the Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements, December 31, 1999,
1998 and 1997
2. The following Consolidated Financial Statement Schedules are filed
under Part II, Item 8:
Schedule Description
-------- -----------
I Summary of Investments
II Condensed Financial Information of the
Registrant
III Supplementary Insurance Information
IV Reinsurance
VI Supplemental Information
3. The following Exhibits:
Exhibit No.
*3.1 Restated Articles of Incorporation of Registrant
as filed with the Secretary of State of Texas on
July 24, 1986 [Exhibit 3.1, filed in
Registration Statement No. 33-7846 on Form S-1,
effective November 6, 1986].
36
<PAGE> 37
*3.2 Articles of Amendment to the Articles of
Incorporation as filed with the Secretary of
State of Texas on June 10, 1988 [Exhibit 3.2,
filed in Registration Statement No. 33-25226 on
Form S-1, effective November 14, 1988].
*3.3 Articles of Amendment to Articles of
Incorporation as filed with the Secretary of
State of Texas on August 13, 1993 [Exhibit 3.6,
Form 10-K dated March 25, 1994].
*3.4 Statement of Resolution Establishing and
Designating Series A Convertible Preferred Stock
of Registrant as filed with the Secretary of
State of the State of Texas on October 1, 1999
[Exhibit 99.18, Form 8-K dated June 29, 1999].
+3.5 Bylaws of Registrant as amended through
February 24, 2000.
*4.1 Rights Agreement, dated as of March 3, 1988,
between the Registrant and Team Bank/Fort Worth,
N.A. [Exhibit 1, Form 8-K dated March 14, 1988].
*4.2 Amendment No. 1 dated as of March 5, 1990 to
Rights Agreement dated as of March 3, 1988
between Registrant and Team Bank as Rights Agent
[Exhibit 4.2, Form 10-K dated March 27, 1992].
*4.3 Amendment No. 2 dated as of May 25, 1993 to
Rights Agreement between Registrant and Society
National Bank (successor to Team Bank (formerly
Texas American Bank/Fort Worth, N.A.)), as
Rights Agent [Exhibit 4.4, Form 10-K dated March
25, 1994].
*4.4 Amendment No. 3 to Rights Agreement and
appointment of Continental Stock Transfer & Trust
Company as Successor Rights Agent, dated
September 30, 1994 [Exhibit 10.29, Form 10-K
dated March 30, 1995].
*4.5 Amendment No. 4 dated June 29, 1999 to Rights
Agreement between Registrant and Continental
Stock Transfer & Trust Company [Exhibit 99.21,
Form 8-K dated June 29, 1999].
*4.6 Form of Common Stock Certificate [Exhibit 4.6,
Form 10-K dated March 28, 1997].
*4.7 Agreement dated August 26, 1994 appointing
Continental Stock Transfer & Trust Company
transfer agent and registrar [Exhibit 10.28,
Form 10-K dated March 30, 1995].
*10.1 1990 Stock Option Plan of the Registrant [Exhibit
10.16, Form 10-K dated March 22, 1991].
*10.2 1995 Stock Option Plan of the Registrant [Exhibit
10.31, Form 10-K dated March 28, 1996].
*10.3 1998 Long Term Incentive Plan of the Registrant
[Exhibit 99.8, Form 10-Q Report dated August 10,
1998].
37
<PAGE> 38
*10.4 Forms of Change of Control Agreements [Exhibit
10.36, Form 10-K dated March 29, 1993; Exhibit
10.36 Form 10-K dated March 30, 1998].
*10.5 Employment Agreement dated April 25, 1998
between Glenn W. Anderson and the Registrant
[Exhibit 99.5, Form 10-Q/A dated June 16, 1998].
*10.6 Change of Control Agreement for Glenn W. Anderson
[Exhibit 99.7, Form 10-Q/A dated June 16, 1998].
*10.7 Replacement Non-Qualified Stock Option Agreement
dated July 24, 1998 between Glenn W. Anderson
and the Registrant [Exhibit 99.6, Form 10-Q
Report dated August 10, 1998].
*10.8 Management Contract between GAINSCO County
Mutual Insurance Company and GAINSCO Service
Corp. and related Surplus Debenture, Amendment
to Surplus Debenture, Certificate of Authority
and accompanying Commissioner's Order granting
Certificate Authority, allowing for charter
amendments and extension of charter [Exhibits
10.23, 10.24 and 10.25, Form 10-K dated March
29, 1993; Exhibit 10.27, Form 10-K dated March
25, 1994].
*10.9 Revolving Credit Agreement dated November 13,
1998 among Registrant, GAINSCO Service Corp. and
Bank One, Texas, N.A., First Amendment thereto
dated October 4, 1999 and related Promissory
Note, Security Agreement and Pledge Agreement
[Exhibits 10.50 to 10.53, Form 10-K/A dated
March 30, 1999; Exhibit 99.22, Form 8-K dated
October 4, 1999].
*10.10 Securities Purchase Agreement dated as of June
29, 1999 between Registrant and Goff Moore
Strategic Partners, L.P. ("GMSP") and related
Series A Common Stock Purchase Warrant and
Series B Common Stock Purchase Warrant [Exhibit
2.1, Form 8-K dated June 29, 1999; Exhibits
99.19 and 99.20, Form 8-K dated October 4,
1999].
+10.11 Investment Management Agreements dated October
4, 1999 between GMSP and each of Registrant,
General Agents Insurance Company of America,
Inc., MGA Insurance Company, Inc. and Gainsco
County Mutual Insurance Company; and Investment
Management Agreement dated January 6, 2000
between GMSP and Midwest Casualty Insurance
Company.
*10.12 Stock Purchase Agreements dated August 17, 1998
with Carlos de la Torre, McRae B. Johnston,
Michael S. Johnston and Ralph Mayoral relating
to acquisition by Registrant of Lalande Group
and related employment agreements with them
[Exhibits 99.6 to 99.13, Form 8-K dated August
26, 1998].
*10.13 Asset Purchase Agreement dated March 9, 1999
between the Registrant, Agents Processing
Systems, Inc. and Insurance Business Solutions
Incorporated [Exhibit 10.49, Form 10-K dated
March 30, 1999].
38
<PAGE> 39
+10.14 Stock Purchase Agreement dated as of November
17, 1999 among Registrant, Tri-State, Ltd.,
Herbert A. Hill and Alan E. Heidt and related
Pledge Agreement dated as of January 7, 2000
executed by the Registrant in favor of Bank One,
NA and Unlimited Guaranty dated as of January 7,
2000 executed by Tri-State, Ltd. in favor of
Bank One, NA.
+10.15 Agreement of Limited Partnership of GNA
Investments I, L.P. dated as of November 30,
1999 between Registrant and Goff Moore Strategic
Partners, L.P.
+10.16 Professional Service Agreement dated as of
October 22, 1999 between Registrant and
ClientSoft, Inc.
11 Statement regarding Computation of Per Share
Earnings (the required information is included in
Note 1(m) of Notes to Consolidated Financial
Statements included in this Report and no
separate statement is, or is required to be,
filed as an exhibit)
+21 Subsidiaries of Registrant.
+23 Consent of KPMG LLP to incorporation by
reference.
+24 Powers of Attorney.
+27 Financial Data Schedule.
- -----------------
* Exhibit has previously been filed with the Commission as an exhibit in
the filing designated in brackets and is incorporated herein by this
reference. Registrant's file number for reports filed under the
Securities Exchange Act of 1934 is 1-9828.
+ Filed herewith (see Exhibit Index).
- -----------------
(b) Reports on Form 8-K
During the quarter ended December 31, 1999, the Registrant filed a
Form 8-K Report on October 7, 1999 disclosing under Item 5 the GMSP
transactions described elsewhere in this Report. No financial
statements were filed with that Form 8-K Report.
(c) Exhibits required by Item 601 of Regulation S-K.
The exhibits listed in Item 14(a) 3 of this Report, and not
incorporated by reference to a separate file, are filed herewith.
39
<PAGE> 40
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/ Glenn W. Anderson
- --------------------------------
By: Glenn W. Anderson, President
Date: 03/29/00
--------
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>
Joel C. Puckett* Chairman of the Board 3/29/00
- ---------------------------- -------
Joel C. Puckett
/s/ Glenn W. Anderson President and Chief 3/29/00
- ---------------------------- Executive Officer -------
Glenn W. Anderson
/s/ Daniel J. Coots Senior Vice President and 3/29/00
- ---------------------------- Chief Financial Officer -------
Daniel J. Coots
Sam Rosen* Secretary and Director 3/29/00
- ---------------------------- -------
Sam Rosen
J. Randall Chappel* Director 3/29/00
- ---------------------------- -------
J. Randall Chappel
John C. Goff* Director 3/29/00
- ---------------------------- -------
John C. Goff
Robert J. McGee, Jr.* Director 3/29/00
- ---------------------------- -------
Robert J. McGee
Harden H. Wiedemann* Director 3/29/00
- ---------------------------- -------
Harden H. Wiedemann
John H. Williams* Director 3/29/00
- ---------------------------- -------
John H. Williams
</TABLE>
*By: /s/ Glenn W. Anderson
-----------------------
Glenn W. Anderson,
Attorney in-fact
under Power of Attorney
40
<PAGE> 41
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 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/ GLENN W. ANDERSON
----------------------------------------------------
Glenn W. Anderson
President and Chief Executive Officer
/s/ DANIEL J. COOTS
----------------------------------------------------
Daniel J. Coots
Senior Vice President and Chief Financial Officer
41
<PAGE> 42
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders GAINSCO, INC.:
We have audited the accompanying consolidated balance sheets of GAINSCO, INC.
and subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity and comprehensive income and
cash flows for each of the years in the three-year period ended December 31,
1999. 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, 1999 and 1998, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1999, 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, 1997, 1996 and 1995, and the related consolidated statements of
operations, shareholders' equity and cash flows for the years ended December
31, 1996 and 1995, 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,
1999, 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 LLP
Dallas, Texas
February 25, 2000
42
<PAGE> 43
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
Assets 1999 1998
------------ ------------ ------------
<S> <C> <C>
Investments (note 2):
Fixed maturities:
Bonds held to maturity, at amortized cost (fair value:
$60,978,145 - 1998) $ -- 59,788,233
Bonds available for sale, at fair value (amortized cost:
$200,415,218 - 1999, $143,806,030 - 1998) 197,077,075 145,588,002
Certificates of deposit, at cost (which approximates
fair value) 455,000 595,000
Equity investments, at cost (which approximates fair value) 916,278 --
Marketable securities, at fair value (cost: $372,179 - 1999,
$318,436 - 1998) 254,051 268,585
Short-term investments, at cost (which approximates
fair value) 46,477,728 4,749,139
------------ ------------
Total investments 245,180,132 210,988,959
Cash 1,205,364 3,982,059
Accrued investment income 3,797,286 4,224,230
Premiums receivable (net of allowance for doubtful accounts:
$42,000 - 1999, $81,000 - 1998) (note 1) 25,431,714 14,885,063
Reinsurance balances receivable 3,254,930 2,392,576
Ceded unpaid claims and claim adjustment expenses (notes 1 and 5) 37,299,327 35,030,001
Ceded unearned premiums (note 5) 23,148,581 22,387,599
Deferred policy acquisition costs (note 1) 14,927,673 11,320,142
Property and equipment (net of accumulated depreciation and
amortization: $8,605,454 - 1999, $8,175,798 - 1998) (note 1) 6,855,250 6,716,636
Current Federal income taxes (note 1) 144,628 5,031,950
Deferred Federal income taxes (notes 1 and 6) 8,401,714 6,669,093
Management contract 1,637,571 1,687,571
Other assets 6,012,424 3,216,611
Goodwill (note 1) 18,351,117 17,057,772
------------ ------------
Total assets $395,647,711 345,590,262
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE> 44
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
Liabilities and Shareholders' Equity 1999 1998
------------------------------------ ------------- -------------
<S> <C> <C>
Liabilities:
Unpaid claims and claim adjustment expenses (notes 1 and 5) $ 132,813,583 136,798,149
Unearned premiums (notes 1 and 5) 82,219,785 63,601,677
Commissions payable 1,629,787 4,279,431
Accounts payable 9,198,827 7,311,920
Reinsurance balances payable 7,899,550 1,327,997
Deferred revenue 1,227,863 1,935,290
Drafts payable 4,206,314 5,834,846
Note payable (note 4) 18,000,000 18,000,000
Dividends payable (note 7) 474,598 365,690
Other liabilities 278,829 651,364
------------- -------------
Total liabilities 257,949,136 240,106,364
------------- -------------
Shareholders' Equity (notes 7 and 8):
Preferred stock ($100 par value, 10,000,000 shares
authorized, 31,620 issued at December 31, 1999) 3,162,000 --
Common stock ($.10 par value, 250,000,000 shares authorized, 21,763,927
issued at December 31, 1999 and
21,740,657 issued at December 31, 1998) 2,176,393 2,174,066
Common stock warrants 2,040,000 --
Additional paid-in capital 112,674,842 87,778,548
Accumulated other comprehensive income (loss) (notes 2 and 3) (2,246,575) 1,138,941
Retained earnings 27,586,440 22,086,868
Treasury stock, at cost (844,094 shares at December 31.1999
and December 31, 1998) (note 1) (7,694,525) (7,694,525)
------------- -------------
Total shareholders' equity 137,698,575 105,483,898
------------- -------------
Commitments and contingencies (notes 5, 8, 9 and 11)
Total liabilities and shareholders' equity $ 395,647,711 345,590,262
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
44
<PAGE> 45
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Net premiums earned (note 5) $ 113,280,292 92,203,393 102,255,979
Net investment income (note 2) 9,722,213 9,802,702 9,731,132
Net realized gains (note 1) 605,606 692,510 326,905
Insurance services 1,848,590 2,927,587 2,631,319
-------------- -------------- --------------
125,456,701 105,626,192 114,945,335
-------------- -------------- --------------
Expenses:
Claims and claims adjustment expenses
(notes 1 and 5) 76,349,044 86,352,980 62,085,643
Commissions 27,895,646 23,321,414 21,536,034
Change in deferred policy acquisitions and
deferred ceding commission income (note 1) (3,607,531) 297,994 1,015,802
Interest expense 1,265,529 101,763 --
Amortization of goodwill 688,645 171,502 --
Underwriting and operating expenses 14,524,068 16,660,628 15,546,068
-------------- -------------- --------------
117,115,401 126,906,281 100,183,547
-------------- -------------- --------------
Income (loss) before Federal income taxes 8,341,300 (21,280,089) 14,761,788
Federal income taxes (note 6):
Current expense (benefit) 1,113,399 (5,571,134) 2,860,704
Deferred expense (benefit) 100,764 (4,046,391) (22,442)
-------------- -------------- --------------
1,214,163 (9,617,525) 2,838,262
-------------- -------------- --------------
Net income (loss) $ 7,127,137 (11,662,564) 11,923,526
============== ============== ==============
Earnings (loss) per share (notes 1 and 7):
Basic $ .34 (.56) .57
============== ============== ==============
Diluted $ .32 (.56) .56
============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE> 46
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Preferred stock:
Balance at beginning of year $ -- -- --
Issuance of shares (31,620 in 1999) 3,162,000 -- --
------------ ------------ ------------
Balance at end of year 3,162,000 -- --
------------ ------------ ------------
Common stock:
Balance at beginning of year 2,174,066 2,170,112 2,167,037
Exercise of options to purchase shares
(23,270 in 1999, 39,539 in 1998 and
30,749 in 1997) 2,327 3,954 3,075
------------ ------------ ------------
Balance at end of year 2,176,393 2,174,066 2,170,112
------------ ------------ ------------
Common stock warrants:
Balance at beginning of year -- -- --
Issuance of warrants in connection with
preferred stock 2,040,000 -- --
------------ ------------ ------------
Balance at end of year 2,040,000 -- --
------------ ------------ ------------
Additional paid-in capital
Balance at beginning of year 87,778,548 87,697,754 87,610,379
Exercise of options to purchase shares
(23,270 in 1999, 39,539 in 1998 and
30,749 in 1997) 47,551 80,794 87,375
Issuance of preferred shares (31,620 in 1999) 24,762,929 -- --
Accretion of discount on preferred shares 85,814 -- --
------------ ------------ ------------
Balance at end of year $112,674,842 87,778,548 87,697,754
------------ ------------ ------------
</TABLE>
(continued)
46
<PAGE> 47
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ -----------------------
<S> <C> <C> <C> <C> <C> <C>
Retained earnings:
Balance at beginning of year $ 22,086,868 35,188,460 24,517,265
Net income (loss) for year 7,127,137 7,127,137 (11,662,564) (11,662,564) 11,923,526 11,923,526
Cash dividend - common (note 7) (1,463,227) (1,462,070) (1,310,518)
Cash dividend - preferred (note 7) (108,500) -- --
Accretion of discount on
preferred shares (85,814) -- --
Tax benefit on non-qualified
stock options exercised 29,976 23,042 58,187
------------ -----------
Balance at end of year 27,586,440 22,086,868 35,188,460
------------ ----------- -----------
Accumulated other comprehensive income (loss):
Balance at beginning of year 1,138,941 1,058,268 496,675
Unrealized gains (losses) on
securities, net of
reclassification adjustment,
net of tax (note 3) (3,385,516) (3,385,516) 80,673 80,673 561,593 561,593
------------ ---------- ----------- ----------- ----------- ----------
Comprehensive income (loss) 3,741,621 (11,581,891) 12,485,119
========== =========== ==========
Balance at end of year (2,246,575) 1,138,941 1,058,268
------------ ----------- -----------
Treasury stock:
Balance at beginning of year (7,694,525) (7,552,334) (5,438,774)
Purchases during year -- (142,191) (2,113,560)
------------ ----------- -----------
Balance at end of year (7,694,525) (7,694,525) (7,552,334)
------------ ----------- -----------
Total shareholders' equity at
end of year $137,698,575 105,483,898 118,562,260
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
47
<PAGE> 48
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 7,127,137 (11,662,564) 11,923,526
Adjustments to reconcile net income (loss) to
cash provided by/(used for) operating activities:
Depreciation and amortization 4,312,400 4,794,084 4,806,982
Change in deferred Federal income taxes 100,764 (4,046,391) (22,442)
Change in accrued investment income 426,944 490,598 (406,643)
Change in premiums receivable (10,546,651) 187,021 1,574,653
Change in reinsurance balances receivable (862,354) 211,935 (448,185)
Change in ceded unpaid claims and claim
adjustment expenses (2,269,326) (5,505,975) (2,810,872)
Change in ceded unearned premiums (760,982) (3,241,327) (2,866,259)
Change in deferred policy acquisition costs
and deferred ceding commission income (3,607,531) 297,994 1,015,802
Change in other assets (2,795,813) (440,620) (272,994)
Change in unpaid claims and claim adjustment
expenses (3,984,566) 23,571,140 7,535,421
Change in unearned premiums 18,618,108 (402,830) (1,250,646)
Change in commissions payable (2,649,644) 2,072,010 (481,916)
Change in accounts payable 1,886,907 (2,140,412) (1,128,872)
Change in reinsurance balances payable 6,571,553 582,192 (312,118)
Change in deferred revenue (707,427) (369,872) 42,507
Change in drafts payable (1,628,532) (3,558,529) 3,174,331
Change in other liabilities (372,535) (371,359) 2,157
Change in current Federal income taxes 4,917,298 (4,212,277) (314,296)
------------ ------------ ------------
Net cash provided by/(used for) operating
activities $ 13,775,750 (3,745,182) 19,760,136
------------ ------------ ------------
</TABLE>
(continued)
48
<PAGE> 49
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from investing activities: Bonds held to maturity:
Matured $ 17,833,400 30,636,243 16,594,930
Purchased -- (2,253,813) (3,434,618)
Bonds available for sale:
Sold 32,934,481 46,326,098 37,694,342
Matured 11,177,942 1,520,000 7,544,426
Purchased (61,910,875) (71,425,415) (92,169,999)
Equity investments purchased (916,278) -- --
Marketable securities sold 3,148 28,191 --
Marketable securities purchased (56,891) -- --
Certificates of deposit matured 510,000 595,000 420,000
Certificates of deposit purchased (370,000) (595,000) (420,000)
Net change in short-term investments (41,728,589) (1,312,442) 17,838,889
Property and equipment purchased (568,270) (504,229) (891,693)
Net assets acquired through purchase of
subsidiary (1998 net of cash acquired of
$ 5,865,515) (2,012,500) (12,464,783) --
------------ ------------ ------------
Net cash used for investing activities (45,104,432) (9,450,150) (16,823,723)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from note payable -- 18,000,000 --
Cash dividends paid (1,462,820) (1,461,679) (1,261,530)
Preferred stock and warrants issued (net of
transaction fees) 29,964,929 -- --
Proceeds from exercise of common stock options 49,878 84,748 90,450
Treasury stock acquired -- (142,191) (2,113,560)
------------ ------------ ------------
Net cash provided by/(used for) financing
activities 28,551,987 16,480,878 (3,284,640)
------------ ------------ ------------
Net increase (decrease) in cash (2,776,695) 3,285,546 (348,227)
Cash at beginning of year 3,982,059 696,513 1,044,740
------------ ------------ ------------
Cash at end of year $ 1,205,364 3,982,059 696,513
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE> 50
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(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., GAINSCO Service Corp. (GSC), Lalande
Financial Group, Inc. (Lalande Group), National Specialty
Lines, Inc. (NSL) and DLT Insurance Adjusters, Inc. (DLT).
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 nonstandard markets
within the commercial, personal and specialty insurance lines.
The Company is approved to write insurance in 48 states and
the District of Columbia on a non-admitted basis and in 44
states and the District of Columbia on an admitted basis. The
Company markets its commercial lines of insurance through 161
non-affiliated general agents' offices and its nonstandard
personal auto line is marketed through approximately 800
non-affiliated retail agencies. Approximately 75% of the
Company's gross premiums written during 1999 resulted from
risks located in California, Florida, Georgia, Pennsylvania,
Tennessee and Texas.
50
<PAGE> 51
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(c) Investments
Bonds held to maturity were stated at amortized cost. Bonds
available for sale and marketable securities are stated at
fair value with changes in fair value recorded as a component
of comprehensive income. Equity investments and short-term
investments are stated at cost. The equity investments,
acquired in late 1999, are predominately private equity
investments that are not traded in public markets and cost is
considered to approximate fair value. In the fourth quarter of
1999 all bonds classified as held to maturity were transferred
to the available for sale classification and adjusted to fair
value. The amortized cost at the date of transfer for these
bonds $41,069,988 and the fair value was $41,036,014 resulting
in an unrealized loss before Federal income taxes of $33,974.
The company made this change since it no longer invests in
bonds with the intent of holding them to maturity.
The "specific identification" method is used to determine
costs of investments sold. Provisions for possible losses are
recorded only when the values have experienced impairment
considered "other than temporary" by a charge to realized
losses resulting in a new cost basis of the investment.
Proceeds from the sale of bond securities totaled $32,934,481,
$46,326,098, and $37,694,342 in 1999, 1998 and 1997,
respectively. The realized gains were $684,029, $721,404, and
$384,184 in 1999, 1998 and 1997, respectively. The realized
losses were $78,423, $28,894, and $57,279 in 1999, 1998 and
1997, 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. The carrying amount of notes payable approximates
fair value due to the variable interest rate on the note.
These balances are disclosed on the face of the balance
sheets.
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, premium
taxes and 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 related premiums are earned. Deferred
ceding commission income is netted against deferred policy
acquisition costs. The
51
<PAGE> 52
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
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. The Company utilizes investment
income when assessing recoverability of deferred policy
acquisition costs.
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,
1999, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Asset balance, beginning of period $ 11,320,142 11,618,136 12,633,938
------------ ------------ ------------
Deferred commissions 27,149,110 19,709,462 19,912,479
Deferred premium taxes, boards & bureaus and fees 3,129,942 1,552,028 1,837,188
Deferred marketing and underwriting expenses 3,078,115 3,199,524 3,498,668
Deferred ceding commission income (212,127) (373,435) (85,152)
Amortization (29,537,509) (24,385,573) (26,178,985)
------------ ------------ ------------
Net change 3,607,531 (297,994) (1,015,802)
------------ ------------ ------------
Asset balance, end of period $ 14,927,673 11,320,142 11,618,136
============ ============ ============
</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
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Land $ 865,383 865,383
Buildings 6,295,850 6,289,065
Furniture and equipment 5,196,044 5,232,279
Software 3,103,427 2,505,707
Accumulated depreciation and amortization (8,605,454) (8,175,798)
------------ ------------
$ 6,855,250 6,716,636
============ ============
</TABLE>
(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
52
<PAGE> 53
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
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) Goodwill
Goodwill, which represents the excess of purchase price over
fair value of net assets acquired, is amortized on a
straight-line basis over 25 years which is the expected period
to be benefited. The Company will periodically review the
recoverability of goodwill based on an assessment of
undiscounted cash flows of future operations to ensure it is
appropriately valued.
(i) Treasury Stock
The Company records treasury stock in accordance with the
"cost method" described in Accounting Principles Board Opinion
(APB) 6. The Company held 844,094 shares as treasury stock at
December 31, 1999 and 1998 with a cost basis of $9.12 per
share.
(j) 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.
(k) 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 the ultimate cost of settlement.
Changes in claim estimates resulting from the review process
and differences between estimates and ultimate payments are
reflected in expense for the year in which the revision of
these estimates first become known.
The process of establishing claim reserves is an imprecise
science and reflects significant judgmental factors. In many
liability cases, significant periods of time, ranging up to
several years or more, may elapse between the occurrence of an
insured claim and the settlement of the claim. Some judicial
decisions and legislative actions, even after coverage is
written and reserves are initially set, broaden liability and
policy definitions and increase the severity of claim
payments. As a result of this and other societal and economic
developments, the
53
<PAGE> 54
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
uncertainties inherent in estimating ultimate claim costs on
the basis of past experience have increased significantly,
further complicating the already difficult claim reserving
process.
Ultimate liability may be greater or lower than current
reserves. Reserves are monitored by the Company using new
information on reported claims and a variety of statistical
techniques. The reserves are reviewed annually by an
independent actuarial firm. The Company does not discount to
present value that portion of its claim reserves expected to
be paid in future periods.
The following table sets forth the changes in unpaid claims
and claim adjustment expenses, net of reinsurance cessions, as
shown in the Company's consolidated financial statements for
the periods indicated:
<TABLE>
<CAPTION>
As of and for the
years ended December 31
------------------------------------------
1999 1998 1997
------------ ------------ ------------
(Amounts in thousands)
<S> <C> <C> <C>
Unpaid claims and claim adjustment expenses, beginning of period $ 136,798 113,227 105,691
Less: Ceded unpaid claims and claim adjustment expenses,
beginning of period 35,030 29,524 26,713
------------ ------------ ------------
Net unpaid claims and claim adjustment expenses, beginning of period 101,768 83,703 78,978
------------ ------------ ------------
Net claims and claim adjustment expense incurred related to:
Current period 75,976 59,635 53,969
Prior periods 373 26,718 8,117
------------ ------------ ------------
Total net claim and claim adjustment expenses incurred 76,349 86,353 62,086
------------ ------------ ------------
Net claims and claim adjustment expenses paid related to:
Current period 32,651 19,693 17,807
Prior periods 49,951 48,595 39,554
------------ ------------ ------------
Total net claim and claim adjustment expenses paid 82,602 68,288 57,361
------------ ------------ ------------
Net unpaid claims and claim adjustment expenses, end of period 95,515 101,768 83,703
Plus: Ceded unpaid claims and claim adjustment expenses, end of period 37,299 35,030 29,524
------------ ------------ ------------
Unpaid claims and claim adjustment expenses, end of period $ 132,814 136,798 113,227
============ ============ ============
</TABLE>
54
<PAGE> 55
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
For 1998 the unfavorable development in claims and claim
adjustment expenses incurred was primarily the result of
unanticipated unfavorable development for commercial auto
liability for the 1997, 1996 and 1995 accident years. For
1997, the development in claims and claim adjustment expenses
incurred 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.
(l) Income Taxes
The Company and its subsidiaries file a consolidated Federal
income tax return. Deferred income tax items are accounted for
under the asset and liability method which provides for
temporary 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 $1,340,161, $0, and $3,175,000 during 1999,
1998 and 1997, respectively. The Company received Federal
income tax refunds totaling $5,144,060 during 1999.
(m) Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
Years ended December 31
-------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Basic earnings (loss) per share:
Numerator:
Net income (loss) $ 7,127,137 (11,662,564) 11,923,526
Less: Preferred stock dividends 108,500 -- --
------------ ------------ ------------
Net income (loss) available to common $ 7,018,637 (11,662,564) 11,923,526
------------ ------------ ------------
shareholders
Denominator:
Weighted average shares outstanding 20,903,723 20,881,357 20,996,386
------------ ------------ ------------
Basic earnings (loss) per share $ .34 (.56) .57
============ ============ ============
Diluted earnings (loss) per share:
Numerator:
Net income (loss) $ 7,127,137 (11,662,564) 11,923,526
------------ ------------ ------------
Denominator:
Weighted average shares outstanding 20,903,723 20,881,357 20,996,386
Effect of dilutive securities:
Employee stock options 157,536 355,329 248,863
Convertible preferred stock 1,430,769 -- --
------------ ------------ ------------
Weighted average shares and assumed conversions 22,492,028 21,236,686 21,245,249
------------ ------------ ------------
Diluted earnings (loss) per share $ .32 (.56) .56
============ ============ ============
</TABLE>
55
<PAGE> 56
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(n) 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.
(o) Accounting Pronouncements
Effective January 1, 1998, the Company adopted FASB Statement
130, "Reporting Comprehensive Income" (Statement 130).
Statement 130 establishes standards for reporting and
presentation of comprehensive income and its components in a
full set of financial statements. Comprehensive income
consists of net income and net unrealized gains (losses) on
securities and is presented in the consolidated statements of
stockholders' equity and comprehensive income. Statement 130
requires only additional disclosures in the consolidated
financial statements. It does not affect the Company's
financial position or results of operations. Prior year
financial statements have been reclassified to conform to the
requirements of Statement 130.
Effective January 1, 1998, the Company adopted FASB Statement
131, "Disclosures about Segments of an Enterprise and Related
Information" (Statement 131) which establishes standards for
the way that public business enterprises report information
about operating segments in annual financial statements and
requires that those enterprises report selected information
about operating segments in interim financial reports.
Statement 131 also establishes standards for related
disclosures about products and services, geographic areas and
major customers. The Company makes operating decisions and
assesses performance for the commercial lines segment and the
personal lines segment. Statement 131 requires only additional
disclosures in the consolidated financial statements. It does
not affect the Company's financial position or results of
operations.
In February 1998, the FASB issued Statement 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits"
(Statement 132). Statement 132 was effective for fiscal years
beginning after December 15, 1997. The Company has no benefit
plans falling within the scope of Statement 132.
56
<PAGE> 57
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(2) INVESTMENTS
The following schedule summarizes the components of net investment
income:
<TABLE>
<CAPTION>
Years ended December 31
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Investment income on:
Fixed maturities $ 9,086,506 9,109,856 9,218,089
Short-term investments 1,019,238 896,940 782,051
------------ ------------ ------------
10,105,744 10,006,796 10,000,140
Investment expenses (383,531) (204,094) (269,008)
------------ ------------ ------------
Net investment income $ 9,722,213 9,802,702 9,731,132
============ ============ ============
</TABLE>
The following schedule summarizes the amortized cost and estimated fair
values of investments in debt securities:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Fixed maturities:
Bonds held to maturity:
U.S. Government securities - 1999 $ -- -- -- --
U.S. Government securities - 1998 5,668 235 (16) 5,887
Tax-exempt state & municipal bonds - 1999 -- -- -- --
Tax-exempt state & municipal bonds - 1998 54,120 972 (1) 55,091
Bonds available for sale:
U.S. Government securities - 1999 24,365 -- (336) 24,029
U.S. Government securities - 1998 13,734 235 -- 13,969
Tax-exempt state & municipal bonds - 1999 148,983 178 (2,957) 146,204
Tax-exempt state & municipal bonds - 1998 130,072 1,787 (240) 131,619
Corporate bonds - 1999 27,067 22 (245) 26,844
Corporate bonds - 1998 -- -- -- --
Certificates of deposit - 1999 455 -- -- 455
Certificates of deposit - 1998 595 -- -- 595
Total Fixed maturities - 1999 200,870 200 (3,538) 197,532
Total Fixed maturities - 1998 $ 204,189 3,229 (257) 207,161
</TABLE>
57
<PAGE> 58
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The amortized cost and estimated fair value of debt securities at
December 31, 1999 and 1998, by maturity, are shown below.
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 42,770 42,821 31,335 31,489
Due after one year but within five years 113,979 112,151 123,550 125,323
Due after five years but within ten years 35,123 33,755 46,692 47,734
Due after ten years but within twenty years 5,622 5,432 2,612 2,615
Due beyond twenty years 3,376 3,373 -- --
---------- ---------- ---------- ----------
$ 200,870 197,532 204,189 207,161
========== ========== ========== ==========
</TABLE>
Investments of $14,832,735 and $14,699,727, at December 31, 1999 and
1998, respectively, were on deposit with various regulatory bodies as
required by law.
(3) ACCUMULATED OTHER COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (Statement 130).
Statement 130 requires that a company include in accumulated
comprehensive income certain amounts which were previously recorded
directly to shareholders' equity.
The following schedule presents the components of other comprehensive
income:
<TABLE>
<CAPTION>
Years ended December 31
-------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) during period $ (4,613,296) 839,389 1,205,829
Reclassification adjustment for amounts included
in net income 605,606 704,863 341,839
------------ ------------ ------------
Other comprehensive income (loss) before
Federal income taxes (5,218,902) 134,526 863,990
Federal income tax expense (benefit) (1,833,386) 53,853 302,397
------------ ------------ ------------
Other comprehensive income (loss) $ (3,385,516) 80,673 561,593
============ ============ ============
</TABLE>
58
<PAGE> 59
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(4) NOTE PAYABLE
In December of 1998, the Company entered into a note payable for
$18,000,000 with a commercial bank. Interest is due monthly at an
interest rate that approximates the 30-day London Interbank Offered
Rate (LIBOR) plus 175 basis points (7.34375% at December 31, 1999).
Principal payments of $500,000 are to be paid each quarter beginning in
January 2000 with the balance of $10,500,000 due at maturity of the
note on October 1, 2003. The Company recorded interest expense of
$1,265,529 and $101,763 during 1999 and 1998, respectively. The Company
paid interest of $1,367,292 and $0 during 1999 and 1998, respectively.
The Company made a principal payment of $500,000 in January 2000.
(5) REINSURANCE
Ceded
COMMERCIAL LINES
Prior to 1999, the Company wrote commercial casualty policy limits of
$1,000,000. For policies with an effective date occurring from 1995
through 1998, the company has first excess casualty reinsurance for
100% of casualty claims exceeding $500,000 up to the $1,000,000 limits,
resulting in a maximum net claim retention per risk of $500,000 for
such policies. Beginning in 1999, the Company began writing commercial
casualty policy limits of $5,000,000. The Company has first excess
casualty reinsurance for 100% of casualty claims exceeding $500,000 up
to $1,000,000 an second excess casualty reinsurance for 100% of
casualty claims exceeding $1,000,000 up to the $5,000,000 limits,
resulting in a maximum net claim retention per risk of $500,000. The
Company uses facultative reinsurance for policy limits written in
excess of $5,000,000.
The Company also has excess casualty clash reinsurance for $5,000,000
in ultimate net losses on any one accident in excess of $1,000,000 in
ultimate net losses arising out of each accident.
PERSONAL LINES
For its umbrella coverages, the Company has excess casualty reinsurance
for 100% of umbrella claims exceeding $1,000,000 up to $10,000,000
policy limits. The Company also has quota share reinsurance for 75% of
the first $1,000,000 of umbrella claims resulting in a maximum net
claim retention per risk of $250,000.
For its personal auto coverages, the Company has excess casualty clash
reinsurance for $5,000,000 in ultimate net losses on any one accident
in excess of $1,000,000 in ultimate net losses arising out of each
accident.
SPECIALTY LINES
For its lawyers professional liability coverages, the Company has quota
share reinsurance for 50% of the first $1,000,000 of professional
liability claims and excess casualty reinsurance for 100% of
professional liability claims exceeding $1,000,000 up to $5,000,000
policy limits resulting in a maximum net claim retention per risk of
$500,000.
For its real estate agents professional liability coverages, the
Company has quota share reinsurance for 25% of the first $1,000,000 of
professional liability claims resulting in a maximum net claim
retention per risk of $750,000.
For its educators professional liability coverages, the Company has
quota share reinsurance for 60% of the first $1,000,000 of professional
liability claims and excess casualty reinsurance for 100% of
professional liability claims exceeding $1,000,000 up to $5,000,000
policy limits resulting in a maximum net claim retention per risk of
$40,000.
For its directors and officers liability coverages, the Company has
quota share reinsurance for 90% of the first $5,000,000 of professional
liability claims resulting in a maximum net claim retention per risk of
$500,000.
The Insurers carry catastrophe property reinsurance to protect against
catastrophe occurrences for 95% of the property claims that exceed
$500,000 but do not exceed $12,500,000 for a single catastrophe. The
Insurers also carry property excess per risk reinsurance which covers
property claims exceeding $300,000 up to $5,000,000 net loss each risk.
From time to time the Insurers make use of facultative reinsurance to
cede unusual risks on a negotiated basis.
MGAI utilizes a reinsurance arrangement in Florida whereby premiums are
ceded to a non-affiliated authorized reinsurer and the reinsurer cedes
the premiums to General Agents. This is necessary because General
Agents is not an authorized reinsurer in Florida.
GCM has 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 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
balances in such accounts as of December 31, 1999 and 1998 total
$30,687,000, and $33,707,000, respectively.
The amounts deducted in the consolidated financial statements for
reinsurance ceded as of and for the years ended December 31, 1999,
1998, and 1997 respectively, are set forth in the following table.
59
<PAGE> 60
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Premiums and claims ceded to the commercial automobile plans of
Arkansas, California, Louisiana, Mississippi and Pennsylvania are
designated as "plan servicing".
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Premiums earned $ 2,745,843 1,982,459 1,709,053
Premiums earned - Florida business $ 9,360,816 38,937 --
Premiums earned - plan servicing $ 977,684 3,767,180 4,090,774
Premiums earned - fronting arrangements $ 47,415,305 41,199,644 33,106,441
Claims and claim adjustment expenses $ 5,867,896 5,332,551 2,200,182
Claims and claim adjustment expenses - Florida business $ 6,998,999 26,267 --
Claims and claim adjustment expenses - plan servicing $ 3,456,779 4,429,624 4,569,993
Claims and claims adjustment expenses - fronting arrangements $ 35,075,008 34,992,635 24,616,491
</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>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Unearned premiums - Florida business $ 7,817,052 362,402 --
Unearned premiums - plan servicing $ -- 1,139,560 1,552,654
Unearned premiums - fronting arrangements $ 14,263,564 20,194,814 17,160,782
Unpaid claims and claim adjustment expenses - Florida business $ 2,651,273 24,386
Unpaid claims and claim adjustment expenses - plan servicing $ 8,094,763 9,380,484 9,431,814
Unpaid claims and claim adjustment expenses fronting arrangements 13,575,089 13,927,694 8,623,890
</TABLE>
The Insurers remain directly liable to their policyholders for all
policy obligations and the reinsuring companies are obligated to the
Insurers to the extent of the reinsured portion of the risks.
Assumed
The Insurers, from time to time, utilize reinsurance arrangements with
various non-affiliated admitted insurance companies, whereby the
Insurers underwrite the coverage and assume the policies 100% from the
companies. 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
60
<PAGE> 61
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
insured through such arrangements and assumed by the Insurers. As of
December 31, 1999, 1998 and 1997, the balance in such escrow accounts
totaled $13,200,000, $0, and $0, respectively. For 1999 and 1998 the
premiums earned by assumption were $5,396,727 and $1,883,349,
respectively. There were no premiums earned by assumption during 1997.
The assumed unpaid claims and claim adjustment expenses were
$3,148,901, $603,833 and $810,000, respectively.
(6) 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>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Income tax expense (benefit) at 35% $ 2,919,455 (7,448,031) 5,166,625
Tax-exempt interest income (2,137,175) (2,182,650) (2,486,582)
Amortization of goodwill 241,026 -- --
Other, net 190,857 13,156 158,219
------------ ------------ ------------
Income tax expense (benefit) $ 1,214,163 (9,617,525) 2,838,262
============ ============ ============
</TABLE>
Under FASB Statement 109 "Accounting for Income Taxes" the primary
objective is to establish deferred tax assets and liabilities for the
temporary differences between the financial reporting basis and the tax
basis of the Company's assets and liabilities at enacted tax rates
expected to be in effect when such amounts are realized or settled. As
a consequence, the portion of the tax expense which is a result of the
change in the deferred tax asset or liability may not always be
consistent with the income reported on the statement of operations.
61
<PAGE> 62
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
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
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Unpaid claims and claims adjustment expenses $ 4,580,133 4,987,915
Unearned premiums 4,135,577 2,936,508
Deferred service fee income 126,467 226,703
Unrealized losses on investments 1,209,695 --
Alternative minimum tax credit 3,821,354 2,478,259
Net operating loss 378,200 1,083,983
Other 21,910 36,045
------------ ------------
Total deferred tax assets 14,273,336 11,749,413
------------ ------------
Deferred tax liabilities:
Deferred policy acquisition costs and deferred ceding commission income 5,224,686 3,968,311
Unrealized gains on investments -- 623,690
Depreciation and amortization 637,924 402,565
Capitalized software -- 84,160
Other 9,012 1,594
------------ ------------
Total deferred tax liabilities 5,871,622 5,080,320
------------ ------------
Net deferred tax assets $ 8,401,714 6,669,093
============ ============
</TABLE>
In assessing the realization of its deferred tax assets, management
considers whether it is more likely than not that a portion or all of
the deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Based upon management's consideration of expected reversal
of deferred tax liabilities and projected future taxable income,
management believes it is more likely than not that the Company will
realize the benefits of these deferred tax assets.
As of December 31, 1999, the Company has net operating loss carry
forwards of approximately $1,080,571 for tax return purposes which, if
not utilized, will expire in 2018.
(7) SHAREHOLDERS' EQUITY
The Company has 250,000,000 shares of authorized $.10 par value common
stock. Of the authorized shares, 21,763,927 and 21,740,657 were issued
as of December 31, 1999 and 1998, respectively and 20,919,833 and
20,896,563 were outstanding as of December 31, 1999 and 1998,
respectively. The Company also has 10,000,000 shares of preferred stock
with $100 par value authorized of which 31,620 shares were issued and
outstanding as of December 31, 1999. There was no preferred stock
outstanding at December 31, 1998.
The preferred stock was issued at a discount which is being amortized
over a five year period using
62
<PAGE> 63
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
the effective interest method. The preferred stock is convertible to
6,200,000 shares of common stock at a conversion price of $5.10 per
share. On or after June 30, 2005, the preferred stock is redeemable, in
whole or in part, at the option of the Company at a redemption price
equal to $1,000 per preferred stock share plus any declared but unpaid
dividends and distributions on the preferred stock. The Company also
has outstanding a five year warrant to purchase an aggregate of
1,550,000 shares of common stock at an exercise price of $6.375 per
share and a seven year warrant to purchase an aggregate of 1,550,000
shares of common stock at an exercise price of $8.50 per share.
Proceeds were allocated based upon the relative fair values of the
preferred stock and the warrants, the warrants are anti-dilutive.
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 1995, $.015 per share in
August 1996, and $.0175 per share in November 1997.
The amount of consolidated statutory shareholder's equity or
policyholders' surplus of General Agents and MGAI was $67,155,036,
$69,825,964, and $76,495,883 at December 31, 1999, 1998 and 1997,
respectively, and the amount of consolidated statutory net income
(loss) was $5,703,199, $(13,682,598), and $14,155,450 for the years
ended 1999, 1998, and 1997, respectively. The amount of policyholders'
surplus of GCM was $2,000,000 at December 31, 1999, 1998 and 1997,
respectively, and the amount of statutory net income (loss) was
$(186,918), $(340,460), and $44,569 for the years ended December 31,
1999, 1998 and 1997, 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. In 2000 General Agents (the
Oklahoma subsidiary) can pay dividends to GNA of up to $6,715,504
without regulatory approval and MGAI (the Texas subsidiary) can pay
dividends to General Agents of up to $2,086,247 without regulatory
approval.
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
63
<PAGE> 64
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
to receive, upon exercise of the right, common stock having a market
value of two times the exercise price of the right. The Company is able
to redeem rights under certain conditions set forth in the Rights Plan.
If, following a public announcement that a person has acquired 20% or
more of the common stock, the Company is acquired in a merger (other
than a merger which follows an offer approved by the Continuing
Directors as defined in the Rights Plan) or other business combination
transaction or if 50% of the assets or earning power of the Company is
sold, each right (except rights which have previously become null and
void as described above), will entitle its holder to purchase, at the
right's then-current exercise price, shares of the acquiring Company's
common stock having a market value of two times the exercise price of
the right.
(8) BUSINESS TRANSACTIONS
On October 4, 1999, the Company closed the transactions contemplated by
the Securities Purchase Agreement dated as of June 29, 1999 between the
Company and Goff Moore Strategic Partners, L.P., a Texas limited
partnership ("GMSP"). At the closing, the Company sold to GMSP for an
aggregate purchase price of $31,620,000 (i) 31,620 shares of GNA's
Series A Convertible Preferred Stock, which are convertible into
6,200,000 shares of GNA's Common Stock, par value $0.10 per share
("Common Stock"), at a conversion price of $5.10 per share, (ii) a five
year Warrant to purchase an aggregate of 1,550,000 shares of Common
Stock at an exercise price of $6.375 per share and (iii) a seven year
Warrant to purchase an aggregate of 1,550,000 shares of Common Stock at
an exercise price of $8.50 per share. The Company and its insurance
company subsidiaries entered into Investment Management Agreements with
GMSP, pursuant to which GMSP will manage their respective investment
portfolios. Completion of these transactions concluded the strategic
alternatives review process that the Company initiated in 1998.
Proceeds from the GMSP transactions will be available for acquisitions,
investments, and other corporate purposes.
In April 1999, the Company completed the sale of the assets of Agents
Processing Systems, Inc. ("APS"), which marketed a computer software
package related to general agency operations. The purchaser acquired
all rights to the APS software products, assignment of the APS customer
contracts and other miscellaneous assets for a nominal amount of cash,
assumption of contract obligations, a fixed number of software use
licenses and development work on an electronic data interchange
project. The Company recorded a small write-off as a result of this
transaction.
On October 23, 1998, the Company completed the acquisition of the
Lalande Financial Group, Inc. ("Lalande Group"). The Lalande Group
includes National Specialty Lines, Inc. ("NSL") and DLT Insurance
Adjusters, Inc. ("DLT"). NSL is a managing general agency that markets
nonstandard personal auto insurance through approximately 800 retail
agencies in Florida. DLT is an automobile claims adjusting firm that
provides claim services on NSL produced business and to outside
parties. The purchase price was for $18 million in cash paid at closing
plus up to an additional $22 million in cash to be paid over
approximately five years contingent upon the operating performance of
the Lalande Group. The purchase was financed with a commercial bank
borrowing of $18 million (note 4). The transaction resulted in
goodwill of approximately $17.2 million which is being amortized on a
straight line basis over 25 years. The acquisition was accounted for
as a purchase and the results of operations since the acquisition date
have been consolidated. The Company will pay $2 million of the
operating performance contingency in the second quarter of 2000.
64
<PAGE> 65
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The pro forma unaudited results of operations for the years ended December 31,
1998 and 1997, assuming the purchase of the Lalande Group had consummated on
January 1, 1997, are presented below.
<TABLE>
<CAPTION>
1998 1997
---- ----
(Amounts in thousands, except per share data)
<S> <C> <C>
Revenues $ 112.039 122,724
Net income (loss) $ (12.285) 10,857
Basic earnings (loss) per share $ (0.59) 0.52
Diluted earnings (loss) per share $ (0.59) 0.51
</TABLE>
(9) BENEFIT PLANS
At December 31, 1999, the Company had three plans under which options
could be granted: the 1990 Stock Option Plan (90 Plan), the 1995 Stock
Option Plan (95 Plan) and the 1998 Long-Term Incentive Plan (98 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 was approved by the shareholders on May 10, 1996 and 1,071,000
shares are reserved 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 98 Plan was approved by the
shareholders on July 17, 1998, and the aggregate number of shares of
common stock that may be issued under the 98 Plan is limited to
1,000,000. Under the 98 Plan, stock options (including incentive stock
options and non-qualified stock options), stock appreciation rights and
restricted stock awards may be made. No awards were outstanding under
the 98 Plan at December 31, 1999. In 1998 options for 579,710 shares
were granted to Glenn W. Anderson under an employment agreement at an
exercise price of $5.75 per share. The exercise price of each
outstanding 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, 1999 and 1997, and changes during the years ended December
31, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
Weighted Average Weighted Average
Underlying Exercise Underlying Exercise
Shares Price Shares Price
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of 1,540,640 $ 6.42 1,352,713 $ 8.32
period:
Options granted 67,000 $ 5.78 835,814 $ 5.93
Options exercised (23,270) $ 2.14 (39,539) $ 2.14
Options forfeited (19,223) $ 6.34 (608,348) $ 10.36
---------- ----------
Options outstanding, end of period 1,565,147 $ 6.49 1,540,640 $ 6.42
========== ==========
Options exercisable at end of period 1,353,775 1,238,104
Weighted average fair value of options
granted during period 2.66 1.96
</TABLE>
65
<PAGE> 66
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The following table summarizes information for the stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ----------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price
--------------- ------------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 2 to 5 286,507 1.20 years $ 2.77 274,507 $ 2.68
$ 5 to 8 926,801 4.81 years $ 6.06 797,797 $ 5.97
$ 8 to 11 351,839 6.36 years $ 10.63 281,471 $ 10.63
------------- -----------
$ 2 to 11 1,565,147 4.50 years $ 6.49 1,353,775 $ 6.27
============= ===========
</TABLE>
During 1998 options previously granted to officers under the 95 Plan
were exchanged for options of a lesser amount with an exercise price
equal to the market price of the Company's stock on the date of
exchange.
The Company applies APB 25 and related Interpretations 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>
Years ended December 31
-------------------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------------ -----------------------------
As reported Pro forma As reported Pro forma As reported Pro forma
----------- ----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ 7,127,137 6,615,014 (11,662,564) (12,139,335) 11,923,526 11,368,790
Less: Preferred stock dividends 108,500 108,500 -- -- -- --
----------- ----------- ------------- ------------- ------------- -------------
Net income available to
common shareholders $ 7,018,637 6,506,514 (11,662,564) (12,139,335) 11,923,526 11,368,790
=========== =========== ============= ============= ============= =============
Basic earnings (loss) per share $ .34 .31 (.56) (.58) .57 .54
Diluted earnings (loss) per share $ .32 .29 (.56) (.58) .56 .54
</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: expected volatility of 25.3 to 28.4% for 1999, 32.6% for
1998 and 33.6% for 1997, risk free interest rates of 6.58% for 1999,
5.04% for 1998 and 5.88% for 1997, expected dividend yields of 1.2% for
1999 and 1998 and .74% for 1997, and an expected life of 7.5 years for
all periods presented.
66
<PAGE> 67
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The Company has a profit sharing and trust plan for the benefit of its
eligible employees. The annual contributions amounted to $0, $0, and
$396,838 for 1999, 1998 and 1997, respectively.
In 1998, the Company implemented an incentive compensation plan under
which all full time employees with at least six months of service
participate. Factors applicable to the incentive compensation plan are:
Company's net income level, individual performance, employee's salary
and position with the Company. The amounts expensed for 1999 and 1998
were $934,659 and $540,666, respectively.
(10) SEGMENT REPORTING
The Company makes operating decisions and assesses performance for the
commercial lines segment and the personal lines segment. The commercial
lines segment writes primarily commercial auto, garage, general
liability and property. The personal lines segment writes primarily
nonstandard personal auto coverages.
The Company considers many factors including the nature of the
insurance product and distribution strategies in determining how to
aggregate operating segments.
The following tables represent a summary of segment data as of and for
the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999
-------------------------------------------------------
Commercial Personal
Lines Lines Other Total
---------- ---------- ---------- ----------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Gross premiums written $ 97,139 36,759 -- 133,898
========== ========== ========== ==========
Premiums earned 91,928 21,352 -- 113,280
Net investment income 7,607 2,115 -- 9,722
Insurance services -- 992 857 1,849
Expenses (91,091) (21,537) (2,533) (115,161)
---------- ---------- ---------- ----------
Operating income (loss) 8,444 2,922 (1,676) 9,690
Net realized gains -- -- 606 606
Interest expense -- (1,266) -- (1,266)
Amortization expense -- (689) -- (689)
Income (loss) before Federal income taxes $ 8,444 967 (1,070) 8,341
========== ========== ========== ==========
Combined ratio (GAAP) basis 99.1% 100.9% 99.4%
========== ========== ==========
Total Assets $ 253,576 73,786 68,286 395,648
========== ========== ========== ==========
</TABLE>
67
<PAGE> 68
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1998
-------------------------------------------------------
Commercial Personal
Lines Lines Other Total
---------- ---------- ---------- ----------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Gross premiums written $ 88,188 2,974 -- 91,162
========== ========== ========== ==========
Premiums earned 91,697 506 -- 92,203
Net investment income 9,648 155 -- 9,803
Insurance services -- 460 2,468 2,928
Expenses (121,491) (553) (4,589) (126,633)
---------- ---------- ---------- ----------
Operating income (loss) (20,146) 568 (2,121) (21,699)
Net realized gains -- -- 693 693
Interest expense -- (102) -- (102)
Amortization expense -- (172) -- (172)
Income (loss) before Federal income taxes $ (20,146) 294 (1,428) (21,280)
========== ========== ========== ==========
Combined ratio (GAAP) basis 132.5% 109.3% 132.7%
========== ========== ==========
Total Assets $ 295,699 12,194 37,697 345,590
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------------
Commercial Personal
Lines Lines Other Total
---------- ---------- ---------- ----------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Gross premiums written $ 99,776 -- -- 99,776
=========== =========== =========== ===========
Premiums earned 102,256 -- -- 102,256
Net investment income 9,731 -- -- 9,731
Insurance services -- -- 2,631 2,631
Expenses (96,538) -- (3,645) (100,183)
----------- ----------- ----------- -----------
Operating income (loss) 15,449 -- (1,014) 14,435
Net realized gains -- -- 327 327
Interest expense -- -- -- --
Amortization expense -- -- -- --
----------- ----------- ----------- -----------
Income (loss) before Federal income taxes $ 15,449 -- (687) 14,762
=========== =========== =========== ===========
Combined ratio (GAAP) basis 94.4% -- % 94.4%
=========== =========== ===========
Total Assets $ 300,603 -- 13,082 313,685
=========== =========== =========== ===========
</TABLE>
(11) CONTINGENCIES
The Company is a defendant in the proceedings styled William Steiner v.
Joseph D. Macchia, Joel C. Puckett, Daniel J. Coots and GAINSCO, INC.,
filed in the United States District Court for the Northern District of
Texas, Fort Worth Division. In that case, the plaintiff asserts claims
on behalf of a putative class of persons who purchased the Company's
common stock between August 6, 1997 and July 16, 1998, inclusive. The
plaintiff asserts claims under sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, alleging that the Company's financial
results did not reflect the
68
<PAGE> 69
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Company's true financial position and results of operations in
accordance with generally accepted accounting principles in that they
understated reserves for claims and claim adjustment expenses. The
Company believes that it has meritorious defenses to plaintiff's claims
and intends to vigorously defend the action.
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, 1999 and 1998 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.
(12) SUBSEQUENT EVENT
On January 7, 2000, the Company acquired Tri-State, Ltd. ("Tri-State),
an insurance operation specializing primarily in underwriting,
servicing and claims handling of nonstandard personal auto insurance in
Minnesota, North Dakota and South Dakota. Tri-State operates a managing
general agency, a motor vehicle driving records service company and an
insurance subsidiary, Midwest Casualty Insurance Company (MCIC).
Tri-State was incorporated in 1980 and currently markets nonstandard
personal auto insurance through over 320 retail agencies in its three
key states and commercial automobile insurance in four states.
Tri-State will continue to operate at its current locations to develop
personal and commercial lines of business. The purchase price
consideration consisted of $6,000,000 in cash at closing, plus
additional payments of up to $5,500,000 in cash over the next several
years, based on conversion of business to the Company, meeting specific
profitability targets and Tri-State's 1999 year-end book value.
Tri-State's insurance subsidiary, MCIC, had approximately $3,000,000 of
policyholders' surplus at December 31,1999 (unaudited).
In February and March 2000, the Company purchased in open market
transactions common stock of Crescent Real Estate Equities, Inc.
("CEI") at an aggregate cost of approximately $2,523,000 and debt
securities of CEI at an aggregate cost of approximately $2,443,000.
John C. Goff, a principal of GMSP and a director of the Company, is
President, Chief Executive Officer and a director of CEI.
69
<PAGE> 70
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table contains selected unaudited consolidated financial
data for each quarter (in thousands, except per share data):
<TABLE>
<CAPTION>
1999 Quarter 1998 Quarter
----------------------------------------- ------------------------------------------
Fourth Third Second First Fourth Third Second First
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written $ 35,530 35,400 35,850 27,119 26,144 22,722 22,224 20,072
Total revenues $ 36,803 33,097 29,231 26,327 25,979 26,373 26,532 26,742
Total expenses $ 34,673 31,664 26,886 23,895 26,763 25,012 32,702 42,429
Net income (loss) $ 1,751 1,411 1,828 2,137 69 1,397 (3,770) (9,359)
Earnings (loss) per share:
Basic $ .08 .07 .09 .10 .00 .07 (.18) (.45)
Diluted $ .07 .07 .09 .10 .00 .07 (.18) (.45)
Common share prices (a)
High 6 1/2 6 15/16 6 3/8 6 9/16 7 5/16 8 1/16 9 7/8 8 13/16
Low 5 1/4 5 3 15/16 43/4 5 7/8 53/4 6 7 7/8
</TABLE>
(a) As reported by the New York Stock Exchange
70
<PAGE> 71
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION
The Board of Directors and Shareholders
GAINSCO, INC:
Under date of February 25, 2000, we reported on the consolidated balance sheets
of GAINSCO, INC. and subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of operations, shareholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 1999. 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 LLP
Dallas, Texas
February 25, 2000
71
<PAGE> 72
Schedule I
GAINSCO, INC. AND SUBSIDIARIES
Summary of Investments - Other
Than Investments in Related Parties
(Amounts in thousands)
<TABLE>
<CAPTION>
As of December 31
-------------------------------------------------
1999 1998
----------------------- -----------------------
(Amounts in thousands)
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Type of Investment
Fixed Maturities:
Bonds held to maturity:
U.S. Government securities $ -- -- 5,668 5,887
Tax-exempt state and municipal bonds -- -- 54,120 55,091
Bonds available for sale:
U.S. Government securities 24,365 24,029 13,734 13,969
Tax-exempt state and municipal bonds 148,983 146,204 130,072 131,619
Corporate bonds 27,067 26,844 -- --
Certificates of deposit 455 455 595 595
Equity investments 916 916 -- --
Marketable securities 372 254 318 269
---------- ---------- ---------- ----------
202,158 198,702 204,507 207,430
---------- ---------- ---------- ----------
Short-term investments 46,478 46,478 4,749 4,749
---------- ---------- ---------- ----------
Total investments $ 248,636 245,180 209,256 212,179
========== ========== ========== ==========
</TABLE>
See accompanying independent auditors' report on supplementary information.
72
<PAGE> 73
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------- -------------
Assets
<S> <C> <C>
Investments in subsidiaries $ 103,732,992 104,547,799
Equity Investments 916,278 --
Short term investments 31,034,925 43,538
Cash 501,725 1,178
Accrued investment income 75,392 --
Net receivables from subsidiaries 3,446,779 2,121,291
Other assets 142,178 125,218
Goodwill 18,351,117 17,057,772
------------- -------------
Total assets $ 158,201,386 123,896,796
============= =============
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable $ 2,028,213 47,208
Note payable 18,000,000 18,000,000
Dividends payable 474,598 365,690
------------- -------------
Total liabilities 20,502,811 18,412,898
------------- -------------
Shareholders' equity:
Preferred stock ($100 par value, 10,000,000 shares
authorized, 31,620 issued at December 31, 1999) 3,162,000 --
Common stock ($.10 par value, 250,000,000 shares
authorized, 21,763,927 issued at December 31, 1999 and
21,740,657 issued at December 31, 1998.) 2,176,393 2,174,066
Common stock warrants 2,040,000 --
Additional paid-in capital 112,674,842 87,778,548
Accumulated other comprehensive income (loss) (2,246,575) 1,138,941
Retained earnings 27,586,440 22,086,868
Treasury stock, at cost (844,094 shares at December 31,
1999 and December 31, 1998) (7,694,525) (7,694,525)
------------- -------------
Total shareholders' equity 137,698,575 105,483,898
------------- -------------
Total liabilities and shareholders' equity $ 158,201,386 123,896,796
============= =============
</TABLE>
See accompanying notes to condensed financial statements.
See accompanying independent auditors' report on supplementary information.
73
<PAGE> 74
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Statements of Operations
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues - dividend income $ 6,980,000 3,900,000 3,700,000
Investment income 371,928 2,255 3,779
Expenses:
Interest expense (1,265,529) (101,763) --
Amortization of goodwill (688,645) (171,502) --
Operating expense (1,720,440) (2,069,139) (1,367,178)
----------- ----------- -----------
Operating income before
Federal income taxes 3,677,314 1,559,851 2,336,601
Federal income taxes:
Current benefit (872,941) (354,324) (455,679)
Deferred expense (benefit) 44,545 (439,874) --
----------- ----------- -----------
(828,396) (794,198) (455,679)
----------- ----------- -----------
Income before equity in undistributed
income (loss) of subsidiaries 4,505,710 2,354,049 2,792,280
Equity in undistributed income of subsidiaries 2,621,427 (14,016,631) 9,131,246
----------- ----------- -----------
Net income (loss) $ 7,127,137 (11,662,564) 11,923,526
=========== =========== ===========
Earnings (loss) per share:
Basic $ .34 (.56) .57
=========== =========== ===========
Diluted $ .32 (.56) .56
=========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
See accompanying independent auditors' report on supplementary information.
74
<PAGE> 75
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Statements of Shareholders' Equity and Comprehensive Income
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Preferred stock:
Balance at beginning of year $ -- -- --
Issuance of shares (31,620 in 1999) 3,162,000 -- --
------------ ------------ ------------
Balance at end of year 3,162,000 -- --
------------ ------------ ------------
Common stock:
Balance at beginning of year 2,174,066 2,170,112 2,167,037
Exercise of options to purchase shares
(23,270 in 1999, 39,539 in 1998 and
30,749 in 1997) 2,327 3,954 3,075
------------ ------------ ------------
Balance at end of year 2,176,393 2,174,066 2,170,112
------------ ------------ ------------
Common stock warrants:
Balance at beginning of year -- -- --
Issuance of warrants in connection with
preferred stock 2,040,000 -- --
------------ ------------ ------------
Balance at end of year 2,040,000 -- --
------------ ------------ ------------
Additional paid-in capital
Balance at beginning of year 87,778,548 87,697,754 87,610,379
Exercise of options to purchase shares
(23,270 in 1999, 39,539 in 1998 and
30,749 in 1997) 47,551 80,794 87,375
Issuance of preferred shares (31,620 in 1999) 24,762,929 -- --
Accretion of discount on preferred share 85,814 -- --
------------ ------------ ------------
Balance at end of year $112,674,842 87,778,548 87,697,754
------------ ------------ ------------
</TABLE>
(continued)
75
<PAGE> 76
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Statements of Shareholders' Equity and Comprehensive Income
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Retained earnings:
Balance at beginning of year $ 22,086,868 35,188,460 24,517,265
Net income (loss) for year 7,127,137 7,127,137 (11,662,564) (11,662,564) 11,923,526 11,923,526
Cash dividend - common (1,463,227) (1,462,070) (1,310,518)
Cash dividend - preferred (108,500) -- --
Accretion of discount on
preferred shares (85,814) -- --
Tax benefit on non-qualified
stock options exercised 29,976 23,042 58,187
------------- ------------- -------------
Balance at end of year 27,586,440 22,086,868 35,188,460
------------- ------------- -------------
Accumulated other
comprehensive income (loss):
Balance at beginning of year 1,138,941 1,058,268 496,675
Unrealized gains (losses) on
securities, net of
reclassification adjustment,
net of tax (3,385,516) (3,385,516) 80,673 80,673 561,593 561,593
------------- ------------- ------------- ------------- ------------- -------------
Comprehensive income (loss) 3,741,621 (11,581,891) 12,485,119
============= ============= =============
Balance at end of year (2,246,575) 1,138,941 1,058,268
------------- ------------- -------------
Treasury stock:
Balance at beginning of year (7,694,525) (7,552,334) (5,438,774)
Change during year -- (142,191) (2,113,560)
------------- ------------- -------------
Balance at end of year (7,694,525) (7,694,525) (7,552,334)
------------- ------------- -------------
Total shareholders' equity at
end of year $ 137,698,575 105,483,898 118,562,260
============= ============= =============
</TABLE>
See accompanying notes to condensed financial statements.
See accompanying independent auditors' report on supplementary information.
76
<PAGE> 77
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 7,127,137 (11,662,564) 11,923,526
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation and amortization 688,645 171,502 --
Change in investments in subsidiaries -- -- (5,390,712)
Change in accrued investment income (75,392) -- --
Change in net receivables from subsidiaries (1,214,283) (813,276) 5,981,096
Change in other assets (16,960) 66,498 (32,224)
Change in accounts payable 1,981,005 30,275 11,046
Equity in (income) loss of subsidiaries (2,621,427) 14,016,612 (9,131,246)
------------ ------------ ------------
Net cash provided by operating activities 5,868,725 1,809,047 3,361,486
------------ ------------ ------------
Cash flows from investing activities:
Equity Investments purchased (916,278) -- --
Change in short term investments (30,991,387) 39,937 (83,475)
Net assets acquired through purchase of subsidiary (2,012,500) (18,330,298) --
------------ ------------ ------------
Net cash used for investing activities $(33,920,165) (18,290,361) (83,475)
------------ ------------ ------------
</TABLE>
(continued)
77
<PAGE> 78
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from note payable $ -- 18,000,000 --
Cash dividends paid (1,462,820) (1,461,679) (1,261,530)
Preferred stock issued 29,964,929 -- --
Proceeds from exercise of common stock options 49,878 84,748 90,450
Treasury stock acquired -- (142,191) (2,113,560)
------------ ------------ ------------
Net cash provided by/(used for) financing
activities 28,551,987 16,480,878 (3,284,640)
------------ ------------ ------------
Net increase (decrease) in cash 500,547 (436) (6,629)
Cash at beginning of year 1,178 1,614 8,243
------------ ------------ ------------
Cash at end of year $ 501,725 1,178 1,614
============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
See accompanying independent auditors' report on supplementary information.
78
<PAGE> 79
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Notes to Condensed Financial Statements
December 31, 1999, 1998 and 1997
(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, 1999, 1998 and 1997 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 Company acquired the net assets of the Lalande Group
of $1,101,024 in October 1998 through a 100% purchase.
The following table presents the components of the Net receivables
from subsidiaries at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
Name of subsidiary
<S> <C> <C>
Agents Processing Systems, Inc. $ 883,224 883,224
GAINSCO Service Corp 1,168,749 425,593
General Agents Insurance Company of America, Inc. 1,394,806 812,474
---------- ----------
Net receivables from subsidiaries $3,446,779 2,121,291
========== ==========
</TABLE>
See accompanying independent auditors' report on supplementary information.
79
<PAGE> 80
Schedule III
GAINSCO, INC. AND SUBSIDIARIES
Supplementary Insurance Information
Years ended December, 1999, 1998 and 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
Other Amortization
Deferred Reserves policy Claims of deferred Other
policy for claims claims and Net Net and policy operating Net
acquisition and claim Unearned benefits premiums investment claim acquisition costs and premiums
Segment costs expenses premiums payable earned income expenses costs(1) expenses written
- ------- ---------- ---------- --------- ---------- -------- ---------- -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Commercial lines $ 11,019 127,460 65,350 4,206 91,928 7,607 60,083 (24,399) 32,161 94,607
Personal lines 3,909 5,354 16,870 -- 21,352 2,115 16,266 (5,139) 7,624 36,530
Other -- -- -- -- -- -- -- -- 4,589 --
---------- -------- ------- ------- ------ ------- ------- -------- ------- -------
Total $ 14,928 132,814 82,220 4,206 113,280 9,722 76,349 (29,538) 44,374 131,137
========== ======== ======= ======= ======= ======= ======= ======= ======= =======
Year ended December 31, 1998:
Commercial lines $ 10,789 136,400 61,430 5,835 91,697 9,648 85,996 (23,680) 34,938 86,362
Personal lines 531 398 2,172 -- 506 155 357 (197) 728 2,197
Other -- -- -- -- -- -- -- -- 4,589 --
---------- -------- ------- ------- ------- ------- ------ ------- ------- -------
Total $ 11,320 136,798 63,602 5,835 92,203 9,803 86,353 (24,382) 40,255 88,559
========== ======== ======= ======= ======= ======= ======= ======= ======= =======
Year ended December 31, 1997:
Commercial lines $ 11,618 113,227 64,005 9,393 102,256 9,731 62,086 (26,179) 33,437 98,139
Personal lines -- -- -- -- -- -- -- -- -- --
Other -- -- -- -- -- -- -- -- 3,645 --
---------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Total $ 11,618 113,227 64,005 9,393 102,256 9,731 62,086 (26,179) 37,082 98,139
========== ======== ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
(1) Net of the amortization of deferred ceding commission income.
See accompanying independent auditors' report on supplementary information.
80
<PAGE> 81
Schedule IV
GAINSCO, INC. AND SUBSIDIARIES
Reinsurance
Years ended December 31, 1999, 1998 and 1997
(Amounts in thousands, except percentages)
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of amount
Direct other from other Net assumed
amount companies companies amount to net
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Premiums earned:
Property and casualty $ 113,375 -- -- 113,375
Reinsurance -- (12,107) 12,012 (95)
---------- ---------- ---------- ----------
Total $ 113,375 (12,107) 12,012 113,280 10.6%
========== ========== ========== ========== ==========
Year ended December 31, 1998
Premiums earned:
Property and casualty $ 93,632 -- -- 93,632
Reinsurance -- (2,120) 691 (1,429)
--------- ---------- ---------- ----------
Total $ 93,632 (2,120) 691 92,203 0.7%
========== ========== ========== ========== ==========
Year ended December 31, 1997
Premiums earned:
Property and casualty $ 105,949 -- -- 105,949
Reinsurance -- (3,693) -- (3,693)
---------- ---------- ---------- ----------
Total $ 105,949 (3,693) -- 102,256 --%
========== ========== ========== ========== ==========
</TABLE>
See accompanying independent auditors' report on supplementary information.
81
<PAGE> 82
Schedule VI
GAINSCO, INC. AND SUBSIDIARIES
Supplemental Information
Years ended December 31, 1999, 1998 and 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Reserves
for unpaid Discount
Deferred claims if any,
Affiliation policy and claim deducted
with acquisition adjustment in Unearned Net earned
Segment registrant costs expenses Column C premiums premiums
- -------- ---------- ---------- ---------- ---------- ---------- ----------
Year ended December 31, 1999:
Commercial lines $ -- 11,019 127,460 -- 65,350 91,928
Personal lines -- 3,909 5,354 -- 16,870 21,352
Other -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total $ -- 14,928 132,814 -- 82,220 113,280
========== ========== ========== ========== ========== ==========
Year ended December 31, 1998:
Commercial lines $ -- 10,789 136,400 -- 61,430 91,697
Personal lines -- 531 398 -- 2,172 506
Other -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total $ -- $ 11,320 136,798 -- 63,602 92,203
========== ========== ========== ========== ========== ==========
Year ended December 31, 1997:
Commercial lines $ -- 11,618 113,227 -- 64,005 102,256
Personal lines -- -- -- -- -- --
Other -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total -- $ 11,618 113,227 -- 64,005 102,256
========== ========== ========== ========== ========== ==========
<CAPTION>
Column H Column I Column J Column K Column L
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Claims and claim
adjustment
expenses incurred Amortization Paid
related to of deferred claims and
Net ----------------------- policy claim Net
investment Current Prior acquisition adjustment premiums
Segment income year year costs(1) expenses written
- ------- ---------- ---------- ---------- ---------- ---------- ----------
Year ended December 31, 1999:
Commercial lines 7,607 59,894 189 (24,399) 71,422 94,607
Personal lines 2,115 16,082 184 (5,139) 11,180 36,530
Other -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total 9,722 75,976 373 (29,538) 82,602 131,137
========== ========== ========== ========== ========== ==========
Year ended December 31, 1998:
Commercial lines 9,648 59,278 26,718 (23,680) 68,183 86,362
Personal lines 155 357 -- (197) 105 2,197
Other -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total 9,803 59,635 26,718 (24,382) 68,288 88,559
========== ========== ========== ========== ========== ==========
Year ended December 31, 1997:
Commercial lines 9,731 53,969 8,117 (26,179) 57,361 98,139
Personal lines -- -- -- -- -- --
Other -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total 9,731 53,969 8,117 (26,179) 57,361 98,139
========== ========== ========== ========== ========== ==========
</TABLE>
(1) Net of the amortization of deferred ceding commission income. See
accompanying independent auditors' report on supplementary information.
82
<PAGE> 83
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
<S> <C>
3.5 Bylaws of Registrant as amended through February 24,
2000.
10.11 Investment Management Agreements dated October 4,
1999 between GMSP and each of Registrant, General
Agents Insurance Company of America, Inc., MGA
Insurance Company, Inc. and Gainsco County Mutual
Insurance Company; and Investment Management
Agreement dated January 6, 2000 between GMSP and
Midwest Casualty Insurance Company.
10.14 Stock Purchase Agreement dated as of November 17,
1999 among Registrant, Tri-State, Ltd., Herbert A.
Hill and Alan E. Heidt and related Pledge Agreement
dated as of January 7, 2000 executed by the
Registrant in favor of Bank One, NA and Unlimited
Guaranty dated as of January 7, 2000 executed by
Tri-State, Ltd. in favor of Bank One, NA
10.15 Agreement of Limited Partnership of GNA Investments
I, L.P. dated as of November 30, 1999 between the
Registrant and Goff Moore Strategic Partners, L.P.
10.16 Professional Service Agreement dated as of October
22, 1999 between Registrant and ClientSoft, Inc.
21 Subsidiaries of Registrant.
23 Consent of KPMG LLP to incorporation by reference.
24 Powers of Attorney.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 3.5
BYLAWS
OF
GAINSCO, INC.
As amended as of February 24, 2000
Contents
ARTICLE 1: OFFICES 1
1.01 Registered Office and Agent 1
1.02 Other Offices 1
ARTICLE 2: SHAREHOLDERS 1
2.01 Place of Meetings 1
2.02 Annual Meeting 1
2.03 Voting Stock; Voting List 1
2.04 Special Meetings 1
2.05 Notice 2
2.06 Quorum 2
2.07 Majority Vote; Withdrawal of Quorum 2
2.08 Method of Voting 2
2.09 Record Date; Closing Transfer Books 3
2.10 Action Without Meeting 3
2.11 Order of Business at Meetings 3
2.12 Notice of Matters to be Considered 3
2.13 Nominations 4
ARTICLE 3: DIRECTORS 5
3.01 Management 5
3.02 Number; Qualifications; Election; and Term 5
3.03 Change in Number 5
3.04 Removal 5
3.05 Vacancies 5
3.06 Voting in Election of Directors 5
3.07 Place of Meetings 5
3.08 First Meeting 5
3.09 Regular Meetings 6
3.10 Special Meetings 6
3.11 Quorum; Majority Vote 6
3.12 Compensation 6
3.13 Procedure 6
3.14 Interested Directors and Officers 6
3.15 Action Without Meeting 7
3.16 Advisory Directors 7
3.17 Chairman of Board 7
i.
<PAGE> 2
ARTICLE 4: NOTICE AND ATTENDANCE THROUGH USE OF ELECTRONIC EQUIPMENT 8
4.01 Method 8
4.02 Waiver 8
4.03 Telephone and Similar Meetings 8
ARTICLE 5: OFFICERS AND AGENTS 8
5.01 Number; Qualification; Election; Term 8
5.02 Removal 9
5.03 Vacancies 9
5.04 Authority 9
5.05 Compensation 9
5.06 President 9
5.07 Vice Presidents 9
5.08 Secretary 9
5.09 Assistant Secretary 9
5.10 Treasurer 10
5.11 Assistant Treasurer 10
ARTICLE 6: CERTIFICATES AND SHAREHOLDERS 10
6.01 Certificates 10
6.02 Issuance 10
6.03 Payment for Shares 11
6.04 Lien 11
6.05 Lost, Stolen or Destroyed Certificates 11
6.06 Registration of Transfer 11
6.07 Registered Shareholders 12
6.08 Denial of Preemptive Rights 12
ARTICLE 7: GENERAL PROVISIONS 12
7.01 Dividends and Reserves 12
7.02 Books and Records 12
7.03 Annual Statement 13
7.04 Checks and Notes 13
7.05 Fiscal Year 13
7.06 Seal 13
7.07 Indemnification; Insurance 13
7.08 Resignation 13
7.09 Amendment of Bylaws 13
7.10 Construction 13
7.11 Table of Contents; Headings 14
7.12 Relation to Articles of Incorporation 14
ARTICLE 8: COMMITTEES 14
8.01 Designation 14
8.02 Number; Qualification; Term 14
8.03 Authority 14
ii.
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8.04 Change in Number 15
8.05 Removal 15
8.06 Vacancies 15
8.07 Meetings 15
8.08 Quorum; Majority Vote 15
8.09 Compensation 15
8.10 Committee Charters 15
iii.
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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 Glenn W. Anderson. 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 as may 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.
2.03 Voting Stock; Voting List.
(a) The holders of record as of the close of business on the record
date, determined in accordance with Sec. 2.09, of shares of the Company's common
stock, par value $.10 per share ("Common Stock"), and Series A Convertible
Preferred Stock, par value $100 per share ("Series A Preferred Stock"), shall be
entitled to vote on all matters presented at each meeting of shareholders and
are hereinafter referred to collectively as "Voting Stock." Each share of Common
Stock outstanding on the record date shall be entitled to one vote on each
matter to come before the meeting. Each share of Series A Preferred Stock shall
be entitled to vote on each matter on which the Common Stock may vote and shall
be entitled to one vote per share of Common Stock into which it is convertible
on the record date. References herein to numbers of shares of Voting Stock are
references to the combined number of shares of Common Stock outstanding on the
record date and the number of shares of Common Stock then issuable upon
conversion of the Series A Preferred Stock.
(b) 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 of Voting
Stock entitled
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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 of Voting Stock issued and
outstanding on the record date and entitled to vote will be necessary and
sufficient 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
of Voting Stock 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. 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
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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 (10) nor more than sixty (60) 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 sixty (60) 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.
2.10 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
2.12 Notice of Matters to be Considered. At an annual meeting of the
shareholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an annual meeting,
business must be specified in the notice of meeting (or any supplement thereto)
given by or at the direction of the board of directors, otherwise properly
brought before the meeting by or at the direction of the board of directors, or
otherwise properly brought before the meeting by a shareholder. In addition to
any other applicable requirements, for business to be properly brought before an
annual
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meeting by a shareholder, the shareholder must have given timely notice thereof
in writing to the secretary of the corporation. To be timely, a shareholder's
notice must be delivered to or mailed and received at the principal executive
offices of the corporation not less than fifty (50) days nor more than
seventy-five (75) days prior to the meeting; provided, however, that in the
event that less than sixty-five (65) days' notice or prior public disclosure of
the date of the meeting is given or made to shareholders, notice by the
shareholder to be timely must be so received not later than the close of
business on the 15th day following the day on which such notice of the date of
the annual meeting was mailed or such public disclosure was made. A
shareholder's notice to the secretary shall set forth as to each matter the
shareholder proposes to bring before the annual meeting (i) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (ii) the name and record
address of the shareholder proposing such business, (iii) the class and number
of shares of the corporation which are beneficially owned by the shareholder,
and (iv) any material interest of the shareholder in such business.
Notwithstanding anything in these Bylaws to the contrary, no business shall
be conducted at the annual meeting except in accordance with the procedures set
forth in this Section 2.12; provided, however, that nothing in this Section 2.12
shall be deemed to preclude discussion by any shareholder of any business
properly brought before the annual meeting in accordance with said procedure.
The chairman of an annual meeting shall, if the facts warrant, determine
and declare to the meeting that business was not properly brought before the
meeting in accordance with the provisions of this Section 2.12, and if he should
so determine, he shall so declare to the meeting and any such business not
properly brought before the meeting shall not be transacted.
2.13 Nominations. Only persons who are nominated in accordance with the
following procedures shall be eligible for election as directors. Nominations of
persons for election to the board of directors of the corporation may be made at
a meeting of shareholders by or at the direction of the board of directors by
any nominating committee or person appointed by the board of directors or by any
shareholder of the corporation entitled to vote for the election of directors at
the meeting who complies with the notice procedures set forth in this Section
2.13. Such nominations, other than those made by or at the direction of the
board of directors, shall be made pursuant to timely notice in writing to the
secretary of the corporation. To be timely, a shareholder's notice shall be
delivered to or mailed and received at the principal executive offices of the
corporation not less than fifty (50) days nor more than seventy-five (75) days
prior to the meeting; provided, however, that in the event that less than
sixty-five (65) days' notice or prior public disclosure of the date of the
meeting is given or made to shareholders, notice by the shareholder to be timely
must be so received not later than the close of business on the 15th day
following the date on which such notice of the date of the meeting was mailed or
such public disclosure was made. Such shareholder's notice to the secretary
shall set forth (a) as to each person whom the shareholder proposes to nominate
for election or re-election as a director, (i) the name, age, business address
and residence address of the person, (ii) the principal occupation or employment
of the person, (iii) the class and number of shares of capital stock of the
corporation which are beneficially owned by the person, and (iv) any other
information relating to the person that is required to be disclosed in
solicitations for proxies for election of directors pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended; and (b) as to the
shareholder giving the notice, (i) the name and record address of the
shareholder and (ii) the class and number of shares of capital stock of the
corporation which are beneficially owned by the shareholder. The corporation may
require any proposed nominee to furnish such other information as may reasonably
be required by the corporation to determine the eligibility of such proposed
nominee to serve as a director of the corporation. No person shall
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be eligible for election as a director of the corporation unless nominated in
accordance with the procedures set forth herein.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
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 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 Voting Stock 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 Voting in 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.
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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.
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) An otherwise valid contract or transaction between the
corporation and one or more of its directors or officers, or
between the corporation and any other corporation, partnership or
other entity in which one or more of the directors or officers
are directors or officers or have a financial interest, shall be
valid notwithstanding that the director or officer is present at
or participates in the meeting of the board of directors 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 of
directors 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
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(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; provided that an advisory
director who was previously a director of the Company shall be deemed a director
for the sole purpose of preventing options previously granted to him under the
stock option plans of the Company from terminating as a result of his ceasing to
serve as a director of the Company. 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 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.
3.17 Chairman of Board. The board of directors may from time to time elect
from their number individuals to serve as chairman of the board. The chairman of
the board, if one shall be elected, shall preside at all meetings of the
shareholders and the directors. In addition, the chairman of the board shall
perform such services for the board of directors and such additional duties, and
shall exercise such powers, as the board of directors may from time to time
prescribe, but shall not be deemed an officer or employee of the corporation by
virtue of holding such position.
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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, one or more vice presidents (the number and
categories thereof to be determined by the board of directors), a secretary and
a treasurer, and
(2) such other officers and assistant officers and agents as the
board of directors may determine.
(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.
(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.
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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 ranking
(by category or otherwise) determined by the board of directors or, in the
absence of any such ranking or any specific determination by the board of
directors, in the order of the length of their service as a vice president,
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
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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.
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 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
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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 any tangible or intangible benefit to the Company, including cash, promissory
notes, services performed, contracts for services to be performed, other
securities of the Company, or securities of any corporation or other entity.
(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 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.
6.05 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
(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.
6.06 Registration of Transfer. The corporation shall register the transfer
of a certificate for shares presented to it for transfer if:
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(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.
6.07 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.
6.08 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
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
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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.
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
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(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;
(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.
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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.
8.10 Committee Charters. Any committee designated by the board may adopt a
charter governing any of the matters covered by Sections 8.02 and 8.04 through
8.09 and, to the extent approved by the board of directors, any such charter
shall supercede the provisions of Sections 8.02 and 8.04 through 8.09.
15
<PAGE> 1
EXHIBIT 10.11
INVESTMENT MANAGEMENT AGREEMENT
FOR
MGA INSURANCE COMPANY, INC.
THIS INVESTMENT MANAGEMENT AGREEMENT (this "Agreement") is entered into
this 4th day of October, 1999, by and between Goff Moore Strategic Partners,
L.P., a Texas limited partnership ("GMSP"), and MGA Insurance Company, Inc., a
Texas corporation ("GNA"), an indirect subsidiary of GAINSCO, INC. ("Parent").
WHEREAS, GNA is a regulated insurance company;
WHEREAS, GNA desires to appoint GMSP to serve as investment manager with
respect to certain investments held by it; and
WHEREAS, GMSP is willing to provide investment advisory services to GNA on
the terms and conditions hereinafter set forth.
NOW, THEREFORE, for and in consideration of the premises, the mutual
covenants herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, GMSP and GNA hereby
agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Affiliate" means, with respect to any Person, any other Person that
directly, or indirectly, through one or more intermediaries controls, is
controlled by or is under common control with such specified Person. For this
purpose the term "control" (including the terms "controlling", "controlled by"
and "under common control with") shall mean the possession, direct or indirect,
of the power to direct or cause the direction of the management and policies of
a Person whether through the ownership of voting Securities, by contract, or
otherwise.
"Agreement" has the meaning set forth in the first paragraph hereof.
"Applicable Law" means any statute, law, rule, policy, guideline, or
regulation or any judgment, order, writ, injunction, or decree of any
Governmental Authority to which a specified Person or property is subject.
"Associate" means (i) any corporation or entity (other than GNA, Parent or
a Subsidiary of GNA or Parent) of which such Person is an officer or partner or
is, directly or indirectly, the beneficial owner of 10 percent or more of any
class of Equity Securities, (ii) any trust or other estate in which such Person
has a substantial beneficial interest or as to which such Person serves as
trustee or in a similar fiduciary capacity, and (iii) any relative or spouse of
such Person, or any relative of such Person, or any relative of such spouse, who
has the same home as such Person or who is a director or officer of GNA or any
of its Subsidiaries.
"Board" means the board of directors of GNA.
INVESTMENT MANAGEMENT AGREEMENT 1
<PAGE> 2
"Breach" means any violation or breach of, any misrepresentation or
inaccuracy in, any default under, or any failure to perform or comply with any
representation, warranty, covenant, obligation, or other provision of this
Agreement.
"Business Day " means any day other than a Saturday or Sunday on which
national banks are open for business in Fort Worth, Texas and New York, New
York.
"Cash" means any currency or immediately available funds on deposit with a
financial institution.
"Cause" means that GMSP has committed or engaged in (i) any malfeasance,
bad faith or negligence in respect of GMSP's material duties pursuant to this
Agreement; (ii) any commission of any fraud by GMSP; (iii) any conviction or
indictment of or plea of no contest to any felony by GMSP or any member of the
GMSP Group; (iv) any violation of the provisions of the U. S. federal securities
laws or state securities laws by GMSP or any GMSP Principal; or (v) any material
breach by GMSP of its obligations (including, without limitation, its
obligations to observe and comply with the provisions of the Policy Letter)
under, or its representations or warranties in, this Agreement if such breach
continues for more than 10 days after GMSP receives written notice, specifying
such breach with particularity and demanding cure, from GNA.
"Committee" means the Board's Investment Committee, none of the members of
which shall be members of the GMSP Group.
"Confidential Information" means information received by GMSP from GNA or
received by GNA from GMSP that is not generally known or which would logically
be considered confidential or proprietary, or which would do GNA or GMSP, as
applicable, harm if divulged, or which is marked "Confidential Information."
"Damages" has the meaning set forth in Section 10.
"Equity Securities" means any capital stock or other equity interests of
any Person, any Securities directly or indirectly convertible into, or
exercisable or exchangeable for any capital stock or other equity interests of
any Person, or any right, option, warrant or other Security which, with the
payment of additional consideration, the expiration of time or the occurrence of
any event shall give the holder thereof the right to acquire any capital stock
or other equity interests of any Person or any Security convertible into or
exercisable or exchangeable for, any capital stock or other equity interests of
any Person.
"Fair Market Value" means as to any Securities on any date, (a) if such
Securities are listed or admitted to trading on any national securities exchange
on any such trading day, the amount equal to the last sale price of such
Securities, regular way settlement, on such dates or, if no such sale takes
place on a date, the average of the closing bid and asked prices thereof on such
date, in each case as officially reported on the principal national securities
exchange on which such Securities are then listed or admitted to trading, (b) if
such Securities are not then listed or admitted to trading on any national
securities exchange but are reported through the automated quotation system of a
registered securities association, the last trading price of such Securities on
such dates, or if there shall have been no trading on a date, the average of the
closing bid and asked prices of such Securities on such date as shown by such
automated quotation system or (c) if such Securities are not then so listed,
admitted to trading or reported, the value determined by GMSP subject to review
and approval by the Committee, which valuation shall be equal to (i) cost or
(ii) in the event that either GMSP or the Committee determine that there has
been a material change in the value of such Securities since the date of
acquisition of such Securities, such other valuation as is reflective of the
value
INVESTMENT MANAGEMENT AGREEMENT 2
<PAGE> 3
of such Securities; provided, however, that, if GMSP and the Committee are
unable to agree on such fair market value, such Securities shall be valued by
such nationally recognized independent public accounting firm or investment
banking firm desiGNAted by the Committee and reasonably acceptable to GMSP. Any
such third-party valuation shall be final and binding on the parties and
enforceable in accordance with the provisions of the Texas General Arbitration
Act, and the costs and expenses thereof shall be shared equally by GMSP and GNA.
"Fees" has the meaning set forth in Section 4.
"GAAP" means generally accepted accounting principles for financial
reporting in the U.S., consistently applied.
"GMSP" has the meaning set forth in the introductory paragraph of this
Agreement.
"GMSP Group" means GMSP together with its Affiliates, Associates and
employees, including without limitation GMSP's partners, the partners of the
general partner of GMSP and the GMSP Principals.
"GMSP Material Adverse Effect" means any condition, circumstance or
development having an adverse effect on the ability of GMSP to conduct business,
the financial condition or the results of operations of GMSP that is material to
GMSP or as to the ability of GMSP to perform its obligations pursuant to this
Agreement, excluding any such condition, circumstance or development which
adversely affects the U.S. economy, financial markets or the insurance industry
generally.
"GMSP Principals" shall mean John C. Goff, J. Randall Chappel and any other
Persons employed by or otherwise affiliated with GMSP or its general partner who
have access to information regarding particular Securities being considered for
purchase or sale by GNA. The parties recognize that the limited partners of GMSP
as of the date hereof are not GMSP Principals.
"GNA" has the meaning set forth in the introductory paragraph of this
Agreement.
"GNA Applicable Insurance Department " means the Texas Department of
Insurance.
"GNA Entities" means GAINSCO, INC., a Texas corporation; GNA Insurance
Company, Inc., a Texas corporation; GAINSCO County Mutual Insurance Company, a
Texas mutual insurance company; and General Agents Insurance Company of America,
Inc., an Oklahoma corporation.
"GNA Investment Management Agreements" means the Investment Management
Agreements of even date herewith between GMSP and each of the GNA Entities,
including this Agreement.
"GNA Material Adverse Effect" means any condition, circumstance or
development having an adverse effect on the ability to conduct business, the
financial condition or the results of operations of GNA and its Subsidiaries
that is material to Parent and its Subsidiaries taken as a whole or as to the
ability of GNA to perform its obligations pursuant to this Agreement, excluding
any such condition, circumstance or development which adversely affects the U.S.
economy, financial markets or insurance industry generally.
"good faith", when used in respect of any action, means that the action was
taken with (i) honesty of intention, (ii) freedom from knowledge of
circumstances which ought to put the Person taking such action on inquiry or
negligence, and (iii) intention to abstain from taking any unconscientious
advantage of another.
INVESTMENT MANAGEMENT AGREEMENT 3
<PAGE> 4
"Governmental Authority" means any U.S. federal, state, local, foreign,
supernational or supranational court or tribunal, governmental, regulatory or
administrative agency, department, bureau, authority, commission or arbitral
panel.
"Investment Grade Debt Obligations" means any interest bearing debt
obligations issued by any Person, including a Governmental Authority, rated at
least "B minus" or the equivalent thereof by Standard & Poor's Corporation or
Moody's Investor's Service, Inc.
"Malfunction" means any failure to: (a) accurately recognize dates falling
before, on or after the Year 2000; or (b) accurately record, store, retrieve and
process data input and date information.
"Parent" has the meaning set forth in the first paragraph hereof.
"Person" means any individual, corporation, partnership, limited liability
company, association, trust or other entity or organization, including any
Governmental Authority.
"Policy Letter" has the meaning set forth in Section 2.
"Portfolio " means those investments held by GNA in Securities of the type
more particularly described under the category "Investments" in Parent's
periodic filings with the SEC.
"Proceedings" means all proceedings, actions, suits, investigations, and
inquiries by or before any arbitrator or Governmental Authority.
"Research" means research, statistical and similar information and
services.
"SEC" means the Securities and Exchange Commission.
"Security" means any capital stock, partnership interest, membership
interest, subscription, certificate of trust or other ownership interest,
warrant, bond, note, debenture, or other debt or equity interest of any Person
commonly known as a "security," and all rights and options relating to any of
the foregoing, regardless of whether traded on a national securities exchange;
but shall not include Cash Equivalents.
"Securities Purchase Agreement" means the Securities Purchase Agreement
dated June 29, 1999, between GMSP and Parent.
"Short Term Debt" means any note, draft, bill of exchange, or similar
security which has a maturity at the time of issuance of not exceeding nine (9)
months exclusive of days of grace, or any renewal thereof the maturity of which
is likewise limited.
"Subsidiary" means, with respect to any Person, any corporation or other
entity (including partnerships and other business associations) in which the
Person directly or indirectly owns at least a majority of the outstanding voting
Securities or other equity interests having the power, under ordinary
circumstances, to elect a majority of the directors, or otherwise to direct the
management and policies, of such corporation or other entity.
"U.S." means the United States of America.
INVESTMENT MANAGEMENT AGREEMENT 4
<PAGE> 5
"Year 2000" means the calendar year 2000 A.D.
2. INVESTMENT MANAGER. GNA hereby retains GMSP, and GMSP agrees to serve,
as investment manager with respect to the Portfolio on the terms and conditions
hereinafter set forth:
(a) The investment policies and all other actions of the Portfolio are
and shall at all times be subject to the oversight and direction of the
Committee. GMSP shall manage the Portfolio in accordance with the investment
objectives and policies set forth in the letter (the "Policy Letter") heretofore
delivered to GMSP by GNA. GNA may amend or supplement the contents of the Policy
Letter, including the investment criteria and other instructions set forth
therein, in whole or in part and at any time and from time to time; provided,
however, that no amendment or supplement shall be binding upon GMSP until GMSP
is notified of the amendment or supplement; and provided further, that in the
event that an amended or supplemented Policy Letter shall require GMSP to make
any changes in the manner in which GMSP has performed its services pursuant to
this Agreement, GMSP shall have a reasonable time period to comply with such
changes. GMSP shall periodically evaluate the provisions of the Policy Letter
and provide GNA with any recommendations for the amendment or supplementation of
the provisions of the Policy Letter that GMSP deems advisable for the benefit of
GNA. To the extent that the provisions of the Policy Letter, as the same may be
amended or supplemented from time to time, conflict with the provisions of this
Agreement, the provisions of this Agreement shall control.
(b) GNA will retain ownership and control of the assets in the
Portfolio at all times. The assets shall be held for the benefit of GNA solely
at one or more financial institutions or other locations specified from time to
time in the Policy Letter.
(c) Subject to the provisions of the Policy Letter and the oversight
and direction of the Committee, GMSP shall have authority to make all specific
investment decisions with respect to the assets in the Portfolio.
(d) GMSP shall exercise its discretion and discharge its obligations
under this Agreement in compliance with all Applicable Laws.
(e) GMSP shall employ and dedicate to GNA continuously during the term
of this Agreement a qualified investment portfolio manager reasonably acceptable
to GNA, who shall have the primary responsibilities of coordinating all aspects
of the day-to-day investment activities of the Portfolio.
(f) GNA acknowledges that GMSP has informed GNA that GMSP currently is
not registered as an (i) investment adviser under the Investment Advisers Act of
1940, as amended, and all other Applicable Laws or (ii) a broker or dealer under
the Securities Exchange Act of 1934, as amended, and all other Applicable Laws.
3. REPORTS.
(a) GMSP shall provide to GNA periodic financial reports with respect
to the assets in and investment performance of the Portfolio. The reports shall
include such financial information in such format as GNA may reasonably request
in connection with the administration of the Portfolio and a record of all
transactions effected during the interim period from the preceding report,
including the price per Security, the broker or dealer executing the transaction
and the commissions paid. The reports shall be made with such frequency, but not
less often than within 20 days following the end of each calendar month, as
INVESTMENT MANAGEMENT AGREEMENT 5
<PAGE> 6
GNA may reasonably request in connection with the administration of the
Portfolio; provided that the late delivery of a complete report no more than one
time in any three-year period with respect to any particular Security in the
Portfolio shall not constitute a Breach of this Agreement if (i) the delay was
caused by the failure of an unaffiliated Person in providing information to GMSP
that had been timely requested by GMSP, (ii) any portion of the report that is
not dependent upon the unaffiliated Person is delivered to GNA by GMSP on a
timely basis, and (iii) GMSP uses its commercially reasonable efforts to cause
such late report to be delivered as promptly as practicable.
(b) GMSP shall (i) afford GNA and its authorized representatives
reasonable access to the GMSP Principals, GMSP's offices and other facilities,
and all books, records and other documents of GMSP relating to the Portfolio or
this Agreement and (ii) permit GNA and its authorized representatives to make
such inspections and copies of all books, records and other documents as they
may reasonably require to verify the accuracy of any report furnished pursuant
to Section 3(a).
4. COMPENSATION; EXPENSES.
(a) For services performed by GMSP, GNA agrees to pay to GMSP
investment management fees (the "Fees") equal on an annual basis to (i) 30 basis
points multiplied by the Fair Market Value with respect to any portion of the
Portfolio invested in Short Term Debt or Investment Grade Debt Obligations at
the end of a given calendar month or during a majority of the days in the given
calendar month and (ii) 100 basis points multiplied by the Fair Market Value
with respect to any portion of the Portfolio invested in Equity Securities or
other alternative investments in Securities which are not Investment Grade Debt
Obligations. The Fees otherwise payable with respect to any calendar month (or
prorated portion thereof) shall be reduced by an amount equal to the sum of (i)
the amount of fees, commissions and expenses paid by or on behalf of GNA to any
investment or mutual fund from which any member of the GMSP Group is eligible to
receive compensation or profits plus (ii) the amount of any fees paid by or on
behalf of GNA to or accrued for the benefit of any member of the GMSP Group
under Rule 12b-1 promulgated under the Investment Company Act of 1940, as
amended, plus (iii) the amount of any finder's fees, brokerage commissions or
other benefit or compensation paid by or on behalf of GNA to or accrued for the
benefit of any member of the GMSP Group in connection with any transaction in
Securities pursuant to this Agreement. Notwithstanding anything to the contrary
contained in this Agreement, (x) no Fees shall be payable with respect to any
portion of the Portfolio invested in Cash during a majority of the days in the
given calendar month and (y) the Committee and GMSP may agree upon a different
Fee structure for special situations.
(b) The Fees shall be based on the Fair Market Value of the assets in
the Portfolio at the end of each calendar month, and shall be calculated at the
end of each calendar month based upon the actual number of days elapsed during
the calendar month, during which this Agreement is in effect over a year of 365
days. Within fifteen (15) days after the end of each calendar month, GNA shall
pay to GMSP the Fees earned with respect to the preceding calendar month. In the
event of termination prior to the end of a calendar month, GNA will pay to GMSP
a prorated portion of the Fees based upon the Fair Market Value of the assets in
the Portfolio at the time of termination. No other fees, charges or assessments
shall be payable by GNA to or for the benefit of GMSP or any member of the GMSP
Group with respect to the services performed by GMSP pursuant to this Agreement,
provided that GNA shall have the responsibility to reimburse GMSP for GMSP's
payment of any amounts described pursuant to Section 4(d) below. There shall not
be any annual reconciliation, adjustment or other "true-up" at the end of each
calendar year.
(c) GMSP shall be solely responsible for all of its general and
administrative costs and expenses incurred in connection with performing its
duties and obligations under this Agreement, which shall
INVESTMENT MANAGEMENT AGREEMENT 6
<PAGE> 7
consist of all costs and expenses in connection with the provision of office
space and facilities, equipment and personnel for servicing the investments of
the Portfolio and the salaries and fees of all personnel employed by GMSP
performing services relating to research, statistical and investment activities.
(d) GNA shall be responsible for, and pay directly, the following
costs and expenses related to GMSP's performance of its duties pursuant to this
Agreement that are reasonable and payable to Persons not affiliated with the
GMSP Group:
(i) brokerage commissions and other costs, fees and expenses
incurred in the purchase and sale of Securities;
(ii) fees and expenses of custodians selected pursuant to Section
2(b);
(iii) costs related to third party Proceedings involving GNA's
ownership of Securities pursuant to this Agreement, directly or indirectly,
including, without limitation, attorneys' fees incurred in connection therewith
(but excluding all costs related to Proceedings or other disputes between GNA
and GMSP or any member of the GMSP Group or which constitute Cause);
(iv) interest on and fees and expenses arising out of all
borrowings made by GNA with respect to the purchase of Securities, including,
but not limited to, the arranging thereof;
(v) taxes, fees or other governmental charges levied against GNA;
and
(vi) any other expense, whether ordinary or extraordinary, that
is determined by the Committee to be appropriate for GNA to pay pursuant to this
Agreement.
(e) In discharging its duties pursuant to this Agreement, GMSP may
give preference, and may cause GNA to pay higher negotiated commission rates, to
unaffiliated brokers which, in addition to having the capacity of obtaining the
best price for the Security itself and of executing the order with speed,
efficiency and confidentiality, also provide Research to GMSP or GNA. Research
furnished by brokers through whom Securities transactions are effected may be
used by GMSP in servicing all of its accounts, and there shall be no reduction
in the compensation of GMSP hereunder as a consequence of its receipt of such
Research. In the allocation of brokerage, however, GMSP must determine in good
faith, and demonstrate to GNA upon request, that the amount of the commission is
reasonable in relation to the value of the brokerage services and Research
provided by the broker, viewed in terms of either the particular transaction or
GMSP's overall responsibilities with respect to the Portfolio. In the allocation
of brokerage for the Portfolio, GMSP shall be subject always to Applicable Law
and such policies and requirements that the Committee may adopt or approve as
reflected in the Policy Letter.
(f) In the event that, in any calendar month, the aggregate amount of
Fees (as such term is defined in the respective GNA Investment Management
Agreements) paid to GMSP by the GNA Entities pursuant to the GNA Investment
Management Agreements is less than $75,000, GNA shall pay to GMSP an amount
equal to the product of (i) the quotient of the Fair Market Value of the
Portfolio divided by the Fair Market Value of all of the Portfolios (as such
term is defined in the respective GNA Investment Management Agreements) of all
of the GNA Entities, multiplied by (ii) an amount equal to the difference
between $75,000 and the sum of the aggregate Fees paid to GMSP by all of the GNA
Entities with respect to such calendar month.
INVESTMENT MANAGEMENT AGREEMENT 7
<PAGE> 8
5. ACTIVITIES OF GMSP.
(a) The services of GMSP to GNA are not deemed to be exclusive, and
GMSP shall be free to engage in any other business or to render similar services
to others. GMSP and any member of the GMSP Group may engage independently or
with others, for its or their own accounts and for the accounts of others, in
other business ventures and activities of every nature and description,
including, without limitation, purchasing, selling or holding Securities for the
account of any other Person or for its or his own account, including Securities
included within the Portfolio or eligible for investment pursuant to this
Agreement; provided, that the management of such entities and accounts do not
interfere with the performance of their obligations and duties to GNA pursuant
to this Agreement. GNA shall not have any rights or obligations by virtue of
this Agreement in and to such independent ventures and activities or the income
or profits derived therefrom. The foregoing notwithstanding, without the prior
written consent of GNA in a specific case, GMSP shall at all times adhere, and
cause the members of the GMSP Group or the GMSP Principals, as the case may be,
to adhere, to the following:
(i) Neither GMSP nor any member of the GMSP Group shall act,
either as principal or agent, on the opposite side of any transaction in which
GNA or the Portfolio is involved.
(ii) GMSP and each GMSP Principal shall at all times (A) place
the interests of GNA before such member's personal transactional interests; (B)
conduct all personal transactions in Securities in such a manner as to avoid any
actual or potential conflict of interest or abuse of such Person's position of
trust and confidence in relation to GNA; and (C) promptly disclose to GNA all
personal transactions made by or on behalf of such Person in Securities which
are or were at any time during the preceding two years in the Portfolio or
issued by Persons whose Securities are in the Portfolio.
(b) On any issue involving an actual or potential conflict of interest
which is not specifically authorized by or pursuant to this Agreement, GMSP
shall submit such issue to the Committee for prior approval, and shall take such
actions, if any, as are determined by the Committee to be necessary or
appropriate to ameliorate the conflict of interest. If GMSP carries out the
actions specified by the Committee in respect of a matter giving rise to a
conflict of interest, neither GMSP nor any member of the GMSP Group shall have
any liability to GNA in respect of actions taken in good faith by them as a
consequence of the approval by the Committee.
(c) GMSP shall be liable for any breach of this Section 5 by any
member of the GMSP Group as if GMSP had committed such breach.
6. DURATION AND TERMINATION. The term of this Agreement shall commence on
the date of this Agreement and shall continue until terminated:
(a) by the written agreement of GNA and GMSP;
(b) by GMSP upon not less than 90 days written notice to GNA at any
time after the third anniversary hereof;
(c) by GNA upon not less than 90 days written notice to GMSP at any
time after the third anniversary hereof;
INVESTMENT MANAGEMENT AGREEMENT 8
<PAGE> 9
(d) by GNA, at any time, immediately upon written notice to GMSP
following (i) the good faith determination by both the Committee and two-thirds
of the members of the Board (excluding members of the Board desiGNAted for
election by GMSP or its successors in interest under the Securities Purchase
Agreement or otherwise affiliated with GMSP) that an event that constitutes
Cause has occurred and is continuing beyond any applicable period for notice and
opportunity to cure or (ii) the commencement by a Governmental Authority of any
Proceeding alleging any matter which, if proven, would constitute Cause.
(e) by GMSP upon not less than 10 days notice in the event that GNA
defaults in the performance of any of its material obligations hereunder and
such default continues for not less than 10 days after GNA receives notice of
such default; provided, however, that in the event that such default is of a
nature that it cannot, with due diligence, be cured within 10 days, GMSP may not
terminate this Agreement so long as GNA begins to cure such default within 10
days and thereafter diligently pursues such cure to completion.
Termination of this Agreement shall not terminate GMSP's obligations under
Section 3 to furnish reports concerning facts and circumstances prior to
termination or under Section 11 to maintain the confidentiality of Confidential
Information , terminate GNA's obligations to pay fees earned by GMSP prior to
the date of termination, or terminate either party's obligations to indemnify
the other party pursuant to this Agreement.
7. REPRESENTATIONS AND WARRANTIES OF GMSP.
(a) GMSP is a limited partnership duly organized, validly existing and
in good standing under the Texas Revised Limited Partnership Act, as amended,
and has the power and authority to own all of its properties and assets and to
carry on its business as now being conducted. GMSP is duly qualified and in good
standing (to the extent applicable) to transact business in each jurisdiction in
which the performance of its obligations hereunder require such qualification
except where the failure to be duly qualified or in good standing would not have
or reasonably be expected to have a GMSP Material Adverse Effect.
(b) GMSP has all requisite power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement have been duly authorized by all necessary action
on the part of GMSP. This Agreement has been duly and validly executed and
delivered by GMSP and, assuming the due authorization, execution and delivery
hereof by GNA, constitutes the valid and binding obligation of GMSP, enforceable
against GMSP in accordance with its terms, except as would be limited by
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or
other similar laws affecting the enforcement of creditors' rights generally and
except that the availability of equitable remedies, including specific
performance, may be subject to the discretion of any court before which any
proceeding therefor may be brought.
(c) No declaration, filing or registration with, or notice to or
authorization, consent or approval of any Governmental Authority is necessary
for the execution, delivery and performance of this Agreement by GMSP other than
as described in the Securities Purchase Agreement or with the GNA Applicable
Insurance Department.
(d) The execution, delivery and performance of this Agreement by GMSP
do not and will not result in any violation by GMSP under any provisions of:
(i) the partnership agreement or similar governing documents of
GMSP;
INVESTMENT MANAGEMENT AGREEMENT 9
<PAGE> 10
(ii) any statute, law, ordinance, rule, regulation, judgment,
decree, order, injunction, writ, permit or license of any Governmental Authority
applicable to GMSP or any of its properties or assets; or
(iii) any note, bond, mortgage, indenture, deed of trust,
license, franchise, permit, concession, contract, lease or other instrument,
obligation or agreement of any kind to which GMSP is now a party or by which it
or any of its properties or assets may be bound or affected;
excluding from the foregoing clauses (ii) and (iii) such violations as could
not, individually or in the aggregate, reasonably be expected to have a GMSP
Material Adverse Effect;
(e) There is no Proceeding pending, or to the knowledge of GMSP,
threatened against GMSP that questions the validity of this Agreement or any
action to be taken by GMSP in connection with this Agreement except as could
not, individually or in the aggregate, reasonably be expected to have a GMSP
Material Adverse Effect.
(f) GMSP is, and during the term of this Agreement will continue to be
(i) either exempt from registration or duly registered as an investment adviser
under the Investment Advisers Act of 1940 and all Applicable Laws and (ii)
qualified and eligible to manage the Portfolio under the statutes and
regulations administered by the GNA Applicable Insurance Department, provided
that GNA shall inform GMSP immediately in the event that GNA becomes aware of
any changes in the qualification and eligibility requirements with respect to
such statutes and regulations. GMSP will provide prompt written notice to GNA if
GMSP ceases to be so registered or qualified or becomes aware of any fact, event
or circumstance which will or is reasonably likely to cause it to cease to be so
registered or qualified.
(g) Taken in the aggregate, the factual information (including,
without limitation, information regarding its knowledge, investment experience
and investment track record) furnished by GMSP to GNA subsequent to May 11, 1999
in writing for purposes of this Agreement did not contain untrue statements of
material facts, or omit to state material facts necessary to make the statements
made not misleading in the light of the circumstances under which they were
made, as of the date as of which such information is dated. All financial
forecasts prepared and furnished by GMSP to GNA subsequent to May 11, 1999 were
prepared in good faith on the basis of assumptions believed to be reasonable and
data, information, tests or conditions believed to be valid or accurate or to
exist at the time such forecasts were prepared.
(h) All of the equipment, Software and computer hardware owned or used
by GMSP or used and operated by third parties on behalf of GMSP, which performs
or is or may be required to perform functions involving dates or the computation
of dates, or containing date related data, has the programming, design and
performance capabilities to ensure that:
(i) it will not suffer any Malfunction that would reasonably be
expected to have a GMSP Material Adverse Effect; and
(ii) it will not, as a result of the date change at the end of
the twentieth century or the input, processing, storage or use of dates up to
and including December 31, 2001, (A) be adversely affected, (B) require changes
in inputting or operating practices, (C) produce invalid or incorrect output or
results, (D) cause any abnormal ending scenario, or (E) suffer any diminution in
functionality or performance that, in any of the above, could reasonably be
expected to have a GMSP Material Adverse Effect.
INVESTMENT MANAGEMENT AGREEMENT 10
<PAGE> 11
8. REPRESENTATIONS AND WARRANTIES OF GNA.
(a) GNA is an insurance company duly organized and validly existing
under the laws of the State of Texas, and has the power and authority to own all
of its properties and assets and to carry on its business as now being
conducted. GNA is duly qualified and in good standing to transact business in
each jurisdiction in which the performance of its obligations hereunder require
such qualification except where the failure to be duly qualified or in good
standing would not have or reasonably be expected to have a GNA Material Adverse
Effect.
(b) GNA has all requisite power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement have been duly authorized by all necessary action
on the part of GNA. This Agreement has been duly and validly executed and
delivered by GNA and, assuming the due authorization, execution and delivery
hereof by GMSP, constitutes the valid and binding obligation of GNA, enforceable
against GNA in accordance with its terms, except as would be limited by
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or
other similar laws affecting the enforcement of creditors' rights generally and
except that the availability of equitable remedies, including specific
performance, may be subject to the discretion of any court before which any
proceeding therefor may be brought.
(c) No declaration, filing or registration with, or notice to or
authorization, consent or approval of any Governmental Authority is necessary
for the execution, delivery and performance of this Agreement by GNA other than
as described in the Securities Purchase Agreement or with the GNA Applicable
Insurance Department.
(d) The execution, delivery and performance of this Agreement by GNA
do not and will not result in any violation by GNA under any provisions of:
(i) articles of incorporation or similar governing documents of
GNA;
(ii) any statute, law, ordinance, rule, regulation, judgment,
decree, order, injunction, writ, permit or license of any Governmental Authority
applicable to GNA or any of its properties or assets; or
(iii) any note, bond, mortgage, indenture, deed of trust,
license, franchise, permit, concession, contract, lease or other instrument,
obligation or agreement of any kind to which GNA is now a party or by which it
or any of its properties or assets may be bound or affected;
excluding from the foregoing clauses (ii) and (iii) such violations as could
not, in the aggregate, reasonably be expected to have a GNA Material Adverse
Effect.
(e) There is no Proceeding pending, or to the knowledge of GNA,
threatened against GNA that questions the validity of this Agreement or any
action to be taken by GNA in connection with this Agreement except as could not,
in the aggregate, reasonably be expected to have a GNA Material Adverse Effect.
(f) GNA has such knowledge and experience in financial and business
matters that it is capable of evaluating the risks and merits of entering into
this Agreement.
INVESTMENT MANAGEMENT AGREEMENT 11
<PAGE> 12
(g) No part of the funds to be used to purchase and hold Securities or
to pay any amounts pursuant to this Agreement constitutes an asset of any
employee benefit plan within the meaning of Section 3 of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and GNA is not a "benefit
plan investor" (as such term is defined in 29 C.F.R. ss.2510.3-101(f)(2)).
9. LIABILITY. It is recognized that decisions concerning investments or
potential investments involve the exercise of judgment and the risk of loss. To
the extent permitted by Applicable Law, neither GMSP nor any of its officers,
directors, or employees nor other members of the GMSP Group shall be liable for
any loss suffered by GNA on account of such investments, or any act taken or
omission made in good faith under this Agreement. For purposes of the foregoing
sentence, no action or omission by GMSP shall be considered to have been made
"in good faith" if GMSP was negligent, violated any law, or made any
misrepresentation (whether affirmatively or by omission).
10. INDEMNIFICATION.
(a) GNA shall indemnify, defend, and hold harmless GMSP and the GMSP
Principals from and against any and all claims, actions, causes of action,
demands, losses, damages, liabilities, costs, and expenses (including reasonable
attorneys' fees and expenses) (collectively, "Damages"), asserted against,
resulting to, imposed upon, or incurred by any of them, directly or indirectly,
by reason of or resulting from (i) any Breach by GNA of any of its
representations, warranties, covenants, or agreements contained in this
Agreement or in any certificate, instrument, or document delivered pursuant
hereto or (ii) any Proceeding brought against any of them by a Person other than
GNA or any of its Affiliates, Associates or shareholders in respect of any
action taken in good faith on behalf of GNA in the course of the performance of
GMSP's duties under this Agreement; provided, however, that GNA shall indemnify,
defend, and hold harmless GMSP and the GMSP Principals from and against any
reasonable expenses incurred by such Person(s) in connection with a Proceeding
brought against any of them by any of GNA's shareholders if such Person(s) is
wholly successful, on the merits or otherwise, in the defense of such
Proceeding, and provided, further, that GNA's obligation to indemnify, defend
and hold harmless as provided in this Section 10(a) shall not apply to the first
$750,000 in the aggregate of claims hereunder (other than claims for expenses in
defending a Proceeding for which the Person is entitled to indemnification under
clause (ii) of this Section) and provided, further, that such $750,000 amount
shall be reduced dollar-for-dollar by an amount equal to the cumulative
aggregate of all claims made under one or more of the GNA Investment Management
Agreements.
(b) GMSP shall indemnify, defend, and hold harmless GNA and its
Affiliates, Associates, directors, officers and employees from and against any
and all Damages asserted against, resulting to, imposed upon, or incurred by any
of them, directly or indirectly, by reason of or resulting from any Breach by
GMSP of any of its representations, warranties, covenants, or agreements
contained in this Agreement or in any certificate, instrument, or document
delivered pursuant hereto; provided, however, that GMSP's obligation to
indemnify, defend and hold harmless as provided in this Section 10(b) shall not
apply to the first $750,000 in the aggregate of claims hereunder and provided,
further, that such $750,000 amount shall be reduced dollar-for-dollar by an
amount equal to the cumulative aggregate of all claims made under one or more of
the GNA Investment Management Agreements.
(c) Promptly after receipt by an indemnified party under Section 10(a)
or (b) of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against an indemnifying party
under such Section, give written notice to the indemnifying party of the
commencement thereof, but the failure so to notify the indemnifying party shall
not relieve it of any liability
INVESTMENT MANAGEMENT AGREEMENT 12
<PAGE> 13
that it may have to any indemnified party except to the extent the indemnifying
party demonstrates that the defense of such action is prejudiced thereby. In
case any such action shall be brought against an indemnified party and it shall
give written notice to the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate therein and, to the extent
that it may wish, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party. If the indemnifying party elects to
assume the defense of such action, the indemnified party shall have the right to
employ separate counsel at its own expense and to participate in the defense
thereof. If the indemnifying party elects not to assume (or fails to assume) the
defense of such action, the indemnified party shall be entitled to assume the
defense of such action with counsel of its own choice, at the expense of the
indemnifying party. If the action is asserted against both the indemnifying
party and the indemnified party and there is a conflict of interests which
renders it inappropriate for the same counsel to represent both the indemnifying
party and the indemnified party, the indemnifying party shall be responsible for
paying for separate counsel for the indemnified party; provided, however, that
if there is more than one indemnified party, the indemnifying party shall not be
responsible for paying for more than one separate firm of attorneys to represent
the indemnified parties, regardless of the number of indemnified parties. The
indemnifying party shall have no liability with respect to any compromise or
settlement of any action effected without its written consent (which shall not
be unreasonably withheld).
11. CONFIDENTIALITY. Each of GMSP and GNA shall keep all Confidential
Information in confidence, and shall not disclose said information to any other
party other than such party's employees, advisors, attorneys and accountants,
who will be advised of the confidential nature of information. Each party shall
protect the Confidential Information with the same degree of care as such party
normally uses in the protection of its confidential and proprietary information.
Each party further agrees not to use Confidential Information for any purpose
except in connection with the performance of its duties under this Agreement.
The restrictions set forth herein shall not apply with respect to Confidential
Information which (i) is already generally available to the public when received
by such party; (ii) becomes available to the public through no fault of any
member of the GMSP Group or GNA, as applicable; or (iii) is required to be
disclosed by Applicable Law or a Governmental Authority.
12. INSURANCE. GMSP shall maintain at all times during the term of this
Agreement fiduciary liability insurance of the type customary for investment
managers in similar situations naming GNA as an insured with such limits, terms,
conditions and "tail" provisions as are reasonably acceptable to GNA and GMSP
and shall provide GNA with complete copies of all binders and other policy
information. GMSP also shall obtain and maintain a fidelity bond in the amount
of not less than $5,000,000 and otherwise containing terms and conditions
reasonably acceptable to GNA. In the event that any such policy or bond is
canceled or suspended, GMSP promptly shall notify GNA in writing.
13. NOTICES. All notices required to be given in writing hereunder shall be
deemed to have been given if (i) delivered personally or by documented courier
or delivery service, (ii) transmitted by facsimile or (iii) mailed by registered
or certified mail (return receipt requested and postage prepaid) to the
following listed Persons at the addresses and facsimile numbers specified below,
or to such other Persons, addresses or facsimile numbers as a party entitled to
notice shall give, in the manner hereinabove described, to the others entitled
to notice:
If to GMSP, to: 777 Main Street, Suite 2250
Fort Worth, Texas 76102
Attention: J. Randall Chappel
Fax: (817) 820-6651
INVESTMENT MANAGEMENT AGREEMENT 13
<PAGE> 14
If to GNA, to: 500 Commerce Street
Fort Worth, Texas 76102-5439
Attention: President
Fax: (817) 338-1454
If given personally or by documented courier or delivery service, a notice shall
be deemed to have been given when it is received. If transmitted by facsimile, a
notice shall be deemed to have been given on the date received, if electronic
confirmation of receipt occurs during normal business hours on a Business Day,
and otherwise, on the first Business Day following electronic confirmation of
receipt. If given by mail, it shall be deemed to have been given on the third
Business Day following the day on which it was posted.
14. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof.
15. NATURE OF RELATIONSHIP. The parties hereto intend that the services
provided by GMSP to GNA pursuant to this Agreement are being provided as an
independent contractor. Nothing contained in this Agreement shall constitute or
be construed to be or create a general partnership or joint venture between GMSP
and GNA or their respective successors or assigns.
16. BINDING EFFECT; ASSIGNMENT; NO THIRD PARTY BENEFIT. This Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, legal representatives, successors, and permitted assigns.
Neither this Agreement nor any of the rights, interests, or obligations
hereunder may be assigned by either of the parties hereto without the prior
written consent of the other party. Nothing in this Agreement, express or
implied, is intended to or shall confer upon any Person other than the parties
hereto, and their respective heirs, legal representatives, successors, and
permitted assigns, any rights, benefits, or remedies of any nature whatsoever
under or by reason of this Agreement.
17. INTERPRETATION. The headings contained in this Agreement are for
reference purposes only and shall not affect the meaning or interpretation of
this Agreement. For purposes of this Agreement, the words "includes" and
"including" shall mean "including without limitation" and the word "or" is used
in the inclusive sense. All capitalized terms defined herein are equally
applicable to both the singular and plural forms.
18. SEVERABILITY. In the event that this Agreement, or any of its
provisions, or the performance of any provision, is found to be illegal or
unenforceable under applicable law now or hereafter in effect, the parties shall
be excused from performance of such portions of this Agreement as shall be found
to be illegal or unenforceable under the applicable laws or regulations without
affecting the validity of the remaining provisions of the Agreement.
19. TIME OF ESSENCE. With regard to all dates and time periods set forth in
this Agreement, time is of the essence.
20. NO WAIVER OF PRIVILEGE. Neither GNA nor GMSP nor any of their
respective subsidiaries or affiliates waives any attorney-client, work product
or other privilege with respect to any information furnished pursuant to this
Agreement.
INVESTMENT MANAGEMENT AGREEMENT 14
<PAGE> 15
21. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO
THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
22. COUNTERPARTS. This Agreement may be executed by the parties hereto in
any number of counterparts, each of which shall be deemed an original, but all
of which shall constitute one and the same agreement. Each counterpart may
consist of a number of copies hereof each signed by less than all, but together
signed by all, the parties hereto.
INVESTMENT MANAGEMENT AGREEMENT 15
<PAGE> 16
IN WITNESS WHEREOF, GMSP and GNA have caused this Agreement to be executed
all as of the day and year first above written.
MGA INSURANCE COMPANY, INC.
a Texas corporation
By: /s/ Glenn W. Anderson
---------------------------------------------------
Glenn W. Anderson, President
GOFF MOORE STRATEGIC PARTNERS, L.P.,
a Texas limited partnership
By: GMSP Operating Partners, L.P., its general partner
By: GMSP, L.L.C., its general partner
By: /s/ John C. Goff
----------------------------------------------
John C. Goff, Managing Principal
By: /s/ J. Randall Chappel
-----------------------------------------------
J. Randall Chappel, Principal
INVESTMENT MANAGEMENT AGREEMENT 16
<PAGE> 17
INVESTMENT MANAGEMENT AGREEMENT
FOR
GENERAL AGENTS INSURANCE COMPANY OF AMERICA, INC.
THIS INVESTMENT MANAGEMENT AGREEMENT (this "Agreement") is entered into
this 4th day of October, 1999, by and between Goff Moore Strategic Partners,
L.P., a Texas limited partnership ("GMSP"), and General Agents Insurance Company
of America, Inc., an Oklahoma corporation ("GNA"), a subsidiary of GAINSCO, INC.
("Parent").
WHEREAS, GNA is a regulated insurance company;
WHEREAS, GNA desires to appoint GMSP to serve as investment manager with
respect to certain investments held by it; and
WHEREAS, GMSP is willing to provide investment advisory services to GNA
on the terms and conditions hereinafter set forth.
NOW, THEREFORE, for and in consideration of the premises, the mutual
covenants herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, GMSP and GNA hereby
agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Affiliate" means, with respect to any Person, any other Person that
directly, or indirectly, through one or more intermediaries controls, is
controlled by or is under common control with such specified Person. For this
purpose the term "control" (including the terms "controlling", "controlled by"
and "under common control with") shall mean the possession, direct or indirect,
of the power to direct or cause the direction of the management and policies of
a Person whether through the ownership of voting Securities, by contract, or
otherwise.
"Agreement" has the meaning set forth in the first paragraph hereof.
"Applicable Law" means any statute, law, rule, policy, guideline, or
regulation or any judgment, order, writ, injunction, or decree of any
Governmental Authority to which a specified Person or property is subject.
"Associate" means (i) any corporation or entity (other than GNA, Parent
or a Subsidiary of GNA or Parent) of which such Person is an officer or partner
or is, directly or indirectly, the beneficial owner of 10 percent or more of any
class of Equity Securities, (ii) any trust or other estate in which such Person
has a substantial beneficial interest or as to which such Person serves as
trustee or in a similar fiduciary capacity, and (iii) any relative or spouse of
such Person, or any relative of such Person, or any relative of such spouse, who
has the same home as such Person or who is a director or officer of GNA or any
of its Subsidiaries.
"Board" means the board of directors of GNA.
INVESTMENT MANAGEMENT AGREEMENT 1
<PAGE> 18
"Breach" means any violation or breach of, any misrepresentation or
inaccuracy in, any default under, or any failure to perform or comply with any
representation, warranty, covenant, obligation, or other provision of this
Agreement.
"Business Day" means any day other than a Saturday or Sunday on which
national banks are open for business in Fort Worth, Texas and New York, New
York.
"Cash" means any currency or immediately available funds on deposit with
a financial institution.
"Cause" means that GMSP has committed or engaged in (i) any malfeasance,
bad faith or negligence in respect of GMSP's material duties pursuant to this
Agreement; (ii) any commission of any fraud by GMSP; (iii) any conviction or
indictment of or plea of no contest to any felony by GMSP or any member of the
GMSP Group; (iv) any violation of the provisions of the U. S. federal securities
laws or state securities laws by GMSP or any GMSP Principal; or (v) any material
breach by GMSP of its obligations (including, without limitation, its
obligations to observe and comply with the provisions of the Policy Letter)
under, or its representations or warranties in, this Agreement if such breach
continues for more than 10 days after GMSP receives written notice, specifying
such breach with particularity and demanding cure, from GNA.
"Committee" means the Board's Investment Committee, none of the members
of which shall be members of the GMSP Group.
"Confidential Information" means information received by GMSP from GNA or
received by GNA from GMSP that is not generally known or which would logically
be considered confidential or proprietary, or which would do GNA or GMSP, as
applicable, harm if divulged, or which is marked "Confidential Information."
"Damages" has the meaning set forth in Section 10.
"Equity Securities" means any capital stock or other equity interests of
any Person, any Securities directly or indirectly convertible into, or
exercisable or exchangeable for any capital stock or other equity interests of
any Person, or any right, option, warrant or other Security which, with the
payment of additional consideration, the expiration of time or the occurrence of
any event shall give the holder thereof the right to acquire any capital stock
or other equity interests of any Person or any Security convertible into or
exercisable or exchangeable for, any capital stock or other equity interests of
any Person.
"Fair Market Value" means as to any Securities on any date, (a) if such
Securities are listed or admitted to trading on any national securities exchange
on any such trading day, the amount equal to the last sale price of such
Securities, regular way settlement, on such dates or, if no such sale takes
place on a date, the average of the closing bid and asked prices thereof on such
date, in each case as officially reported on the principal national securities
exchange on which such Securities are then listed or admitted to trading, (b) if
such Securities are not then listed or admitted to trading on any national
securities exchange but are reported through the automated quotation system of a
registered securities association, the last trading price of such Securities on
such dates, or if there shall have been no trading on a date, the average of the
closing bid and asked prices of such Securities on such date as shown by such
automated quotation system or (c) if such Securities are not then so listed,
admitted to trading or reported, the value determined by GMSP subject to review
and approval by the Committee, which valuation shall be equal to (i) cost or
(ii) in the event that either GMSP or the Committee determine that there has
been a material change in the value of such Securities since the date of
acquisition of such Securities, such other valuation as is reflective of the
value
INVESTMENT MANAGEMENT AGREEMENT 2
<PAGE> 19
of such Securities; provided, however, that, if GMSP and the Committee are
unable to agree on such fair market value, such Securities shall be valued by
such nationally recognized independent public accounting firm or investment
banking firm desiGNAted by the Committee and reasonably acceptable to GMSP. Any
such third-party valuation shall be final and binding on the parties and
enforceable in accordance with the provisions of the Texas General Arbitration
Act, and the costs and expenses thereof shall be shared equally by GMSP and GNA.
"Fees" has the meaning set forth in Section 4.
"GAAP" means generally accepted accounting principles for financial
reporting in the U.S., consistently applied.
"GMSP" has the meaning set forth in the introductory paragraph of this
Agreement.
"GMSP Group" means GMSP together with its Affiliates, Associates and
employees, including without limitation GMSP's partners, the partners of the
general partner of GMSP and the GMSP Principals.
"GMSP Material Adverse Effect" means any condition, circumstance or
development having an adverse effect on the ability of GMSP to conduct business,
the financial condition or the results of operations of GMSP that is material to
GMSP or as to the ability of GMSP to perform its obligations pursuant to this
Agreement, excluding any such condition, circumstance or development which
adversely affects the U.S. economy, financial markets or the insurance industry
generally.
"GMSP Principals" shall mean John C. Goff, J. Randall Chappel and any
other Persons employed by or otherwise affiliated with GMSP or its general
partner who have access to information regarding particular Securities being
considered for purchase or sale by GNA. The parties recognize that the limited
partners of GMSP as of the date hereof are not GMSP Principals.
"GNA" has the meaning set forth in the introductory paragraph of this
Agreement.
"GNA Applicable Insurance Department" means the Oklahoma Department of
Insurance.
"GNA Entities" means GAINSCO, INC., a Texas corporation; MGA Insurance
Company, Inc., a Texas corporation; GAINSCO County Mutual Insurance Company, a
Texas mutual insurance company; and General Agents Insurance Company of America,
Inc., an Oklahoma corporation.
"GNA Invest ment Management Agreements" means the Investment Management
Agreements of even date herewith between GMSP and each of the GNA Entities,
including this Agreement.
"GNA Material Adverse Effect" means any condition, circumstance or
development having an adverse effect on the ability to conduct business, the
financial condition or the results of operations of GNA and its Subsidiaries
that is material to Parent and its Subsidiaries taken as a whole or as to the
ability of GNA to perform its obligations pursuant to this Agreement, excluding
any such condition, circumstance or development which adversely affects the U.S.
economy, financial markets or insurance industry generally.
"good faith", when used in respect of any action, means that the action
was taken with (i) honesty of intention, (ii) freedom from knowledge of
circumstances which ought to put the Person taking such action on inquiry or
negligence, and (iii) intention to abstain from taking any unconscientious
advantage of another.
INVESTMENT MANAGEMENT AGREEMENT 3
<PAGE> 20
"Governmental Authority" means any U.S. federal, state, local, foreign,
supernational or supranational court or tribunal, governmental, regulatory or
administrative agency, department, bureau, authority, commission or arbitral
panel.
"Investment Grade Debt Obligations" means any interest bearing debt
obligations issued by any Person, including a Governmental Authority, rated at
least "B minus" or the equivalent thereof by Standard & Poor's Corporation or
Moody's Investor's Service, Inc.
"Malfunction" means any failure to: (a) accurately recognize dates
falling before, on or after the Year 2000; or (b) accurately record, store,
retrieve and process data input and date information.
"Parent" has the meaning set forth in the first paragraph hereof.
"Person" means any individual, corporation, partnership, limited
liability company, association, trust or other entity or organization, including
any Governmental Authority.
"Policy Letter" has the meaning set forth in Section 2.
"Portfolio" means those investments held by GNA in Securities of the type
more particularly described under the category "Investments" in Parent's
periodic filings with the SEC.
"Proceedings" means all proceedings, actions, suits, investigations, and
inquiries by or before any arbitrator or Governmental Authority.
"Research" means research, statistical and similar information and
services.
"SEC" means the Securities and Exchange Commission.
"Security" means any capital stock, partnership interest, membership
interest, subscription, certificate of trust or other ownership interest,
warrant, bond, note, debenture, or other debt or equity interest of any Person
commonly known as a "security," and all rights and options relating to any of
the foregoing, regardless of whether traded on a national securities exchange;
but shall not include Cash Equivalents.
"Securities Purchase Agreement" means the Securities Purchase Agreement
dated June 29, 1999, between GMSP and Parent.
"Short Term Debt" means any note, draft, bill of exchange, or similar
security which has a maturity at the time of issuance of not exceeding nine (9)
months exclusive of days of grace, or any renewal thereof the maturity of which
is likewise limited.
"Subsidiary" means, with respect to any Person, any corporation or other
entity (including partnerships and other business associations) in which the
Person directly or indirectly owns at least a majority of the outstanding voting
Securities or other equity interests having the power, under ordinary
circumstances, to elect a majority of the directors, or otherwise to direct the
management and policies, of such corporation or other entity.
"U.S." means the United States of America.
INVESTMENT MANAGEMENT AGREEMENT 4
<PAGE> 21
"Year 2000" means the calendar year 2000 A.D.
2. INVESTMENT MANAGER. GNA hereby retains GMSP, and GMSP agrees to serve,
as investment manager with respect to the Portfolio on the terms and conditions
hereinafter set forth:
(a) The investment policies and all other actions of the Portfolio are
and shall at all times be subject to the oversight and direction of the
Committee. GMSP shall manage the Portfolio in accordance with the investment
objectives and policies set forth in the letter (the "Policy Letter") heretofore
delivered to GMSP by GNA. GNA may amend or supplement the contents of the Policy
Letter, including the investment criteria and other instructions set forth
therein, in whole or in part and at any time and from time to time; provided,
however, that no amendment or supplement shall be binding upon GMSP until GMSP
is notified of the amendment or supplement; and provided further, that in the
event that an amended or supplemented Policy Letter shall require GMSP to make
any changes in the manner in which GMSP has performed its services pursuant to
this Agreement, GMSP shall have a reasonable time period to comply with such
changes. GMSP shall periodically evaluate the provisions of the Policy Letter
and provide GNA with any recommendations for the amendment or supplementation of
the provisions of the Policy Letter that GMSP deems advisable for the benefit of
GNA. To the extent that the provisions of the Policy Letter, as the same may be
amended or supplemented from time to time, conflict with the provisions of this
Agreement, the provisions of this Agreement shall control.
(b) GNA will retain ownership and control of the assets in the
Portfolio at all times. The assets shall be held for the benefit of GNA solely
at one or more financial institutions or other locations specified from time to
time in the Policy Letter.
(c) Subject to the provisions of the Policy Letter and the oversight
and direction of the Committee, GMSP shall have authority to make all specific
investment decisions with respect to the assets in the Portfolio.
(d) GMSP shall exercise its discretion and discharge its obligations
under this Agreement in compliance with all Applicable Laws.
(e) GMSP shall employ and dedicate to GNA continuously during the term
of this Agreement a qualified investment portfolio manager reasonably acceptable
to GNA, who shall have the primary responsibilities of coordinating all aspects
of the day-to-day investment activities of the Portfolio.
(f) GNA acknowledges that GMSP has informed GNA that GMSP currently is
not registered as an (i) investment adviser under the Investment Advisers Act of
1940, as amended, and all other Applicable Laws or (ii) a broker or dealer under
the Securities Exchange Act of 1934, as amended, and all other Applicable Laws.
3. REPORTS.
(a) GMSP shall provide to GNA periodic financial reports with respect
to the assets in and investment performance of the Portfolio. The reports shall
include such financial information in such format as GNA may reasonably request
in connection with the administration of the Portfolio and a record of all
transactions effected during the interim period from the preceding report,
including the price per Security, the broker or dealer executing the transaction
and the commissions paid. The reports shall be made with such frequency, but not
less often than within 20 days following the end of each calendar month, as
INVESTMENT MANAGEMENT AGREEMENT 5
<PAGE> 22
GNA may reasonably request in connection with the administration of the
Portfolio; provided that the late delivery of a complete report no more than one
time in any three-year period with respect to any particular Security in the
Portfolio shall not constitute a Breach of this Agreement if (i) the delay was
caused by the failure of an unaffiliated Person in providing information to GMSP
that had been timely requested by GMSP, (ii) any portion of the report that is
not dependent upon the unaffiliated Person is delivered to GNA by GMSP on a
timely basis, and (iii) GMSP uses its commercially reasonable efforts to cause
such late report to be delivered as promptly as practicable.
(b) GMSP shall (i) afford GNA and its authorized representatives
reasonable access to the GMSP Principals, GMSP's offices and other facilities,
and all books, records and other documents of GMSP relating to the Portfolio or
this Agreement and (ii) permit GNA and its authorized representatives to make
such inspections and copies of all books, records and other documents as they
may reasonably require to verify the accuracy of any report furnished pursuant
to Section 3(a).
4. COMPENSATION; EXPENSES.
(a) For services performed by GMSP, GNA agrees to pay to GMSP
investment management fees (the "Fees") equal on an annual basis to (i) 30 basis
points multiplied by the Fair Market Value with respect to any portion of the
Portfolio invested in Short Term Debt or Investment Grade Debt Obligations at
the end of a given calendar month or during a majority of the days in the given
calendar month and (ii) 100 basis points multiplied by the Fair Market Value
with respect to any portion of the Portfolio invested in Equity Securities or
other alternative investments in Securities which are not Investment Grade Debt
Obligations. The Fees otherwise payable with respect to any calendar month (or
prorated portion thereof) shall be reduced by an amount equal to the sum of (i)
the amount of fees, commissions and expenses paid by or on behalf of GNA to any
investment or mutual fund from which any member of the GMSP Group is eligible to
receive compensation or profits plus (ii) the amount of any fees paid by or on
behalf of GNA to or accrued for the benefit of any member of the GMSP Group
under Rule 12b-1 promulgated under the Investment Company Act of 1940, as
amended, plus (iii) the amount of any finder's fees, brokerage commissions or
other benefit or compensation paid by or on behalf of GNA to or accrued for the
benefit of any member of the GMSP Group in connection with any transaction in
Securities pursuant to this Agreement. Notwithstanding anything to the contrary
contained in this Agreement, (x) no Fees shall be payable with respect to any
portion of the Portfolio invested in Cash during a majority of the days in the
given calendar month and (y) the Committee and GMSP may agree upon a different
Fee structure for special situations.
(b) The Fees shall be based on the Fair Market Value of the assets in
the Portfolio at the end of each calendar month, and shall be calculated at the
end of each calendar month based upon the actual number of days elapsed during
the calendar month, during which this Agreement is in effect over a year of 365
days. Within fifteen (15) days after the end of each calendar month, GNA shall
pay to GMSP the Fees earned with respect to the preceding calendar month. In the
event of termination prior to the end of a calendar month, GNA will pay to GMSP
a prorated portion of the Fees based upon the Fair Market Value of the assets in
the Portfolio at the time of termination. No other fees, charges or assessments
shall be payable by GNA to or for the benefit of GMSP or any member of the GMSP
Group with respect to the services performed by GMSP pursuant to this Agreement,
provided that GNA shall have the responsibility to reimburse GMSP for GMSP's
payment of any amounts described pursuant to Section 4(d) below. There shall not
be any annual reconciliation, adjustment or other "true-up" at the end of each
calendar year.
(c) GMSP shall be solely responsible for all of its general and
administrative costs and expenses incurred in connection with performing its
duties and obligations under this Agreement, which shall
INVESTMENT MANAGEMENT AGREEMENT 6
<PAGE> 23
consist of all costs and expenses in connection with the provision of office
space and facilities, equipment and personnel for servicing the investments of
the Portfolio and the salaries and fees of all personnel employed by GMSP
performing services relating to research, statistical and investment activities.
(d) GNA shall be responsible for, and pay directly, the following
costs and expenses related to GMSP's performance of its duties pursuant to this
Agreement that are reasonable and payable to Persons not affiliated with the
GMSP Group:
(i) brokerage commissions and other costs, fees and expenses
incurred in the purchase and sale of Securities;
(ii) fees and expenses of custodians selected pursuant to Section
2(b);
(iii) costs related to third party Proceedings involving GNA's
ownership of Securities pursuant to this Agreement, directly or indirectly,
including, without limitation, attorneys' fees incurred in connection therewith
(but excluding all costs related to Proceedings or other disputes between GNA
and GMSP or any member of the GMSP Group or which constitute Cause);
(iv) interest on and fees and expenses arising out of all
borrowings made by GNA with respect to the purchase of Securities, including,
but not limited to, the arranging thereof;
(v) taxes, fees or other governmental charges levied against GNA;
and
(vi) any other expense, whether ordinary or extraordinary, that is
determined by the Committee to be appropriate for GNA to pay pursuant to this
Agreement.
(e) In discharging its duties pursuant to this Agreement, GMSP may
give preference, and may cause GNA to pay higher negotiated commission rates, to
unaffiliated brokers which, in addition to having the capacity of obtaining the
best price for the Security itself and of executing the order with speed,
efficiency and confidentiality, also provide Research to GMSP or GNA. Research
furnished by brokers through whom Securities transactions are effected may be
used by GMSP in servicing all of its accounts, and there shall be no reduction
in the compensation of GMSP hereunder as a consequence of its receipt of such
Research. In the allocation of brokerage, however, GMSP must determine in good
faith, and demonstrate to GNA upon request, that the amount of the commission is
reasonable in relation to the value of the brokerage services and Research
provided by the broker, viewed in terms of either the particular transaction or
GMSP's overall responsibilities with respect to the Portfolio. In the allocation
of brokerage for the Portfolio, GMSP shall be subject always to Applicable Law
and such policies and requirements that the Committee may adopt or approve as
reflected in the Policy Letter.
(f) In the event that, in any calendar month, the aggregate amount of
Fees (as such term is defined in the respective GNA Investment Management
Agreements) paid to GMSP by the GNA Entities pursuant to the GNA Investment
Management Agreements is less than $75,000, GNA shall pay to GMSP an amount
equal to the product of (i) the quotient of the Fair Market Value of the
Portfolio divided by the Fair Market Value of all of the Portfolios (as such
term is defined in the respective GNA Investment Management Agreements) of all
of the GNA Entities, multiplied by (ii) an amount equal to the difference
between $75,000 and the sum of the aggregate Fees paid to GMSP by all of the GNA
Entities with respect to such calendar month.
INVESTMENT MANAGEMENT AGREEMENT 7
<PAGE> 24
5. ACTIVITIES OF GMSP.
(a) The services of GMSP to GNA are not deemed to be exclusive, and
GMSP shall be free to engage in any other business or to render similar services
to others. GMSP and any member of the GMSP Group may engage independently or
with others, for its or their own accounts and for the accounts of others, in
other business ventures and activities of every nature and description,
including, without limitation, purchasing, selling or holding Securities for the
account of any other Person or for its or his own account, including Securities
included within the Portfolio or eligible for investment pursuant to this
Agreement; provided, that the management of such entities and accounts do not
interfere with the performance of their obligations and duties to GNA pursuant
to this Agreement. GNA shall not have any rights or obligations by virtue of
this Agreement in and to such independent ventures and activities or the income
or profits derived therefrom. The foregoing notwithstanding, without the prior
written consent of GNA in a specific case, GMSP shall at all times adhere, and
cause the members of the GMSP Group or the GMSP Principals, as the case may be,
to adhere, to the following:
(i) Neither GMSP nor any member of the GMSP Group shall act,
either as principal or agent, on the opposite side of any transaction in which
GNA or the Portfolio is involved.
(ii) GMSP and each GMSP Principal shall at all times (A) place the
interests of GNA before such member's personal transactional interests; (B)
conduct all personal transactions in Securities in such a manner as to avoid any
actual or potential conflict of interest or abuse of such Person's position of
trust and confidence in relation to GNA; and (C) promptly disclose to GNA all
personal transactions made by or on behalf of such Person in Securities which
are or were at any time during the preceding two years in the Portfolio or
issued by Persons whose Securities are in the Portfolio.
(b) On any issue involving an actual or potential conflict of interest
which is not specifically authorized by or pursuant to this Agreement, GMSP
shall submit such issue to the Committee for prior approval, and shall take such
actions, if any, as are determined by the Committee to be necessary or
appropriate to ameliorate the conflict of interest. If GMSP carries out the
actions specified by the Committee in respect of a matter giving rise to a
conflict of interest, neither GMSP nor any member of the GMSP Group shall have
any liability to GNA in respect of actions taken in good faith by them as a
consequence of the approval by the Committee.
(c) GMSP shall be liable for any breach of this Section 5 by any
member of the GMSP Group as if GMSP had committed such breach.
6. DURATION AND TERMINATION. The term of this Agreement shall commence on
the date of this Agreement and shall continue until terminated:
(a) by the written agreement of GNA and GMSP;
(b) by GMSP upon not less than 90 days written notice to GNA at any
time after the third anniversary hereof;
(c) by GNA upon not less than 90 days written notice to GMSP at any
time after the third anniversary hereof;
INVESTMENT MANAGEMENT AGREEMENT 8
<PAGE> 25
(d) by GNA, at any time, immediately upon written notice to GMSP
following (i) the good faith determination by both the Committee and two-thirds
of the members of the Board (excluding members of the Board desiGNAted for
election by GMSP or its successors in interest under the Securities Purchase
Agreement or otherwise affiliated with GMSP) that an event that constitutes
Cause has occurred and is continuing beyond any applicable period for notice and
opportunity to cure or (ii) the commencement by a Governmental Authority of any
Proceeding alleging any matter which, if proven, would constitute Cause.
(e) by GMSP upon not less than 10 days notice in the event that GNA
defaults in the performance of any of its material obligations hereunder and
such default continues for not less than 10 days after GNA receives notice of
such default; provided, however, that in the event that such default is of a
nature that it cannot, with due diligence, be cured within 10 days, GMSP may not
terminate this Agreement so long as GNA begins to cure such default within 10
days and thereafter diligently pursues such cure to completion.
Termination of this Agreement shall not terminate GMSP's obligations
under Section 3 to furnish reports concerning facts and circumstances prior to
termination or under Section 11 to maintain the confidentiality of Confidential
Information , terminate GNA's obligations to pay fees earned by GMSP prior to
the date of termination, or terminate either party's obligations to indemnify
the other party pursuant to this Agreement.
7. REPRESENTATIONS AND WARRANTIES OF GMSP.
(a) GMSP is a limited partnership duly organized, validly existing and
in good standing under the Texas Revised Limited Partnership Act, as amended,
and has the power and authority to own all of its properties and assets and to
carry on its business as now being conducted. GMSP is duly qualified and in good
standing (to the extent applicable) to transact business in each jurisdiction in
which the performance of its obligations hereunder require such qualification
except where the failure to be duly qualified or in good standing would not have
or reasonably be expected to have a GMSP Material Adverse Effect.
(b) GMSP has all requisite power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement have been duly authorized by all necessary action
on the part of GMSP. This Agreement has been duly and validly executed and
delivered by GMSP and, assuming the due authorization, execution and delivery
hereof by GNA, constitutes the valid and binding obligation of GMSP, enforceable
against GMSP in accordance with its terms, except as would be limited by
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or
other similar laws affecting the enforcement of creditors' rights generally and
except that the availability of equitable remedies, including specific
performance, may be subject to the discretion of any court before which any
proceeding therefor may be brought.
(c) No declaration, filing or registration with, or notice to or
authorization, consent or approval of any Governmental Authority is necessary
for the execution, delivery and performance of this Agreement by GMSP other than
as described in the Securities Purchase Agreement or with the GNA Applicable
Insurance Department.
(d) The execution, delivery and performance of this Agreement by GMSP
do not and will not result in any violation by GMSP under any provisions of:
(i) the partnership agreement or similar governing documents of
GMSP;
INVESTMENT MANAGEMENT AGREEMENT 9
<PAGE> 26
(ii) any statute, law, ordinance, rule, regulation, judgment,
decree, order, injunction, writ, permit or license of any Governmental Authority
applicable to GMSP or any of its properties or assets; or
(iii) any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, concession, contract, lease or other instrument, obligation
or agreement of any kind to which GMSP is now a party or by which it or any of
its properties or assets may be bound or affected;
excluding from the foregoing clauses (ii) and (iii) such violations as could
not, individually or in the aggregate, reasonably be expected to have a GMSP
Material Adverse Effect;
(e) There is no Proceeding pending, or to the knowledge of GMSP,
threatened against GMSP that questions the validity of this Agreement or any
action to be taken by GMSP in connection with this Agreement except as could
not, individually or in the aggregate, reasonably be expected to have a GMSP
Material Adverse Effect.
(f) GMSP is, and during the term of this Agreement will continue to be
(i) either exempt from registration or duly registered as an investment adviser
under the Investment Advisers Act of 1940 and all Applicable Laws and (ii)
qualified and eligible to manage the Portfolio under the statutes and
regulations administered by the GNA Applicable Insurance Department, provided
that GNA shall inform GMSP immediately in the event that GNA becomes aware of
any changes in the qualification and eligibility requirements with respect to
such statutes and regulations. GMSP will provide prompt written notice to GNA if
GMSP ceases to be so registered or qualified or becomes aware of any fact, event
or circumstance which will or is reasonably likely to cause it to cease to be so
registered or qualified.
(g) Taken in the aggregate, the factual information (including,
without limitation, information regarding its knowledge, investment experience
and investment track record) furnished by GMSP to GNA subsequent to May 11, 1999
in writing for purposes of this Agreement did not contain untrue statements of
material facts, or omit to state material facts necessary to make the statements
made not misleading in the light of the circumstances under which they were
made, as of the date as of which such information is dated. All financial
forecasts prepared and furnished by GMSP to GNA subsequent to May 11, 1999 were
prepared in good faith on the basis of assumptions believed to be reasonable and
data, information, tests or conditions believed to be valid or accurate or to
exist at the time such forecasts were prepared.
(h) All of the equipment, Software and computer hardware owned or used
by GMSP or used and operated by third parties on behalf of GMSP, which performs
or is or may be required to perform functions involving dates or the computation
of dates, or containing date related data, has the programming, design and
performance capabilities to ensure that:
(i) it will not suffer any Malfunction that would reasonably be
expected to have a GMSP Material Adverse Effect; and
(ii) it will not, as a result of the date change at the end of the
twentieth century or the input, processing, storage or use of dates up to and
including December 31, 2001, (A) be adversely affected, (B) require changes in
inputting or operating practices, (C) produce invalid or incorrect output or
results, (D) cause any abnormal ending scenario, or (E) suffer any diminution in
functionality or performance that, in any of the above, could reasonably be
expected to have a GMSP Material Adverse Effect.
INVESTMENT MANAGEMENT AGREEMENT 10
<PAGE> 27
8. REPRESENTATIONS AND WARRANTIES OF GNA.
(a) GNA is an insurance company duly organized and validly existing
under the laws of the State of Oklahoma, and has the power and authority to own
all of its properties and assets and to carry on its business as now being
conducted. GNA is duly qualified and in good standing to transact business in
each jurisdiction in which the performance of its obligations hereunder require
such qualification except where the failure to be duly qualified or in good
standing would not have or reasonably be expected to have a GNA Material Adverse
Effect.
(b) GNA has all requisite power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement have been duly authorized by all necessary action
on the part of GNA. This Agreement has been duly and validly executed and
delivered by GNA and, assuming the due authorization, execution and delivery
hereof by GMSP, constitutes the valid and binding obligation of GNA, enforceable
against GNA in accordance with its terms, except as would be limited by
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or
other similar laws affecting the enforcement of creditors' rights generally and
except that the availability of equitable remedies, including specific
performance, may be subject to the discretion of any court before which any
proceeding therefor may be brought.
(c) No declaration, filing or registration with, or notice to or
authorization, consent or approval of any Governmental Authority is necessary
for the execution, delivery and performance of this Agreement by GNA other than
as described in the Securities Purchase Agreement or with the GNA Applicable
Insurance Department.
(d) The execution, delivery and performance of this Agreement by GNA
do not and will not result in any violation by GNA under any provisions of:
(i) articles of incorporation or similar governing documents of
GNA;
(ii) any statute, law, ordinance, rule, regulation, judgment,
decree, order, injunction, writ, permit or license of any Governmental Authority
applicable to GNA or any of its properties or assets; or
(iii) any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, concession, contract, lease or other instrument, obligation
or agreement of any kind to which GNA is now a party or by which it or any of
its properties or assets may be bound or affected;
excluding from the foregoing clauses (ii) and (iii) such violations as could
not, in the aggregate, reasonably be expected to have a GNA Material Adverse
Effect.
(e) There is no Proceeding pending, or to the knowledge of GNA,
threatened against GNA that questions the validity of this Agreement or any
action to be taken by GNA in connection with this Agreement except as could not,
in the aggregate, reasonably be expected to have a GNA Material Adverse Effect.
(f) GNA has such knowledge and experience in financial and business
matters that it is capable of evaluating the risks and merits of entering into
this Agreement.
INVESTMENT MANAGEMENT AGREEMENT 11
<PAGE> 28
(g) No part of the funds to be used to purchase and hold Securities or
to pay any amounts pursuant to this Agreement constitutes an asset of any
employee benefit plan within the meaning of Section 3 of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and GNA is not a "benefit
plan investor" (as such term is defined in 29 C.F.R. ss.2510.3-101(f)(2)).
9. LIABILITY. It is recognized that decisions concerning investments or
potential investments involve the exercise of judgment and the risk of loss. To
the extent permitted by Applicable Law, neither GMSP nor any of its officers,
directors, or employees nor other members of the GMSP Group shall be liable for
any loss suffered by GNA on account of such investments, or any act taken or
omission made in good faith under this Agreement. For purposes of the foregoing
sentence, no action or omission by GMSP shall be considered to have been made
"in good faith" if GMSP was negligent, violated any law, or made any
misrepresentation (whether affirmatively or by omission).
10. INDEMNIFICATION.
(a) GNA shall indemnify, defend, and hold harmless GMSP and the GMSP
Principals from and against any and all claims, actions, causes of action,
demands, losses, damages, liabilities, costs, and expenses (including reasonable
attorneys' fees and expenses) (collectively, "Damages"), asserted against,
resulting to, imposed upon, or incurred by any of them, directly or indirectly,
by reason of or resulting from (i) any Breach by GNA of any of its
representations, warranties, covenants, or agreements contained in this
Agreement or in any certificate, instrument, or document delivered pursuant
hereto or (ii) any Proceeding brought against any of them by a Person other than
GNA or any of its Affiliates, Associates or shareholders in respect of any
action taken in good faith on behalf of GNA in the course of the performance of
GMSP's duties under this Agreement; provided, however, that GNA shall indemnify,
defend, and hold harmless GMSP and the GMSP Principals from and against any
reasonable expenses incurred by such Person(s) in connection with a Proceeding
brought against any of them by any of GNA's shareholders if such Person(s) is
wholly successful, on the merits or otherwise, in the defense of such
Proceeding, and provided, further, that GNA's obligation to indemnify, defend
and hold harmless as provided in this Section 10(a) shall not apply to the first
$750,000 in the aggregate of claims hereunder (other than claims for expenses in
defending a Proceeding for which the Person is entitled to indemnification under
clause (ii) of this Section) and provided, further, that such $750,000 amount
shall be reduced dollar-for-dollar by an amount equal to the cumulative
aggregate of all claims made under one or more of the GNA Investment Management
Agreements.
(b) GMSP shall indemnify, defend, and hold harmless GNA and its
Affiliates, Associates, directors, officers and employees from and against any
and all Damages asserted against, resulting to, imposed upon, or incurred by any
of them, directly or indirectly, by reason of or resulting from any Breach by
GMSP of any of its representations, warranties, covenants, or agreements
contained in this Agreement or in any certificate, instrument, or document
delivered pursuant hereto; provided, however, that GMSP's obligation to
indemnify, defend and hold harmless as provided in this Section 10(b) shall not
apply to the first $750,000 in the aggregate of claims hereunder and provided,
further, that such $750,000 amount shall be reduced dollar-for-dollar by an
amount equal to the cumulative aggregate of all claims made under one or more of
the GNA Investment Management Agreements.
(c) Promptly after receipt by an indemnified party under Section
10(a) or (b) of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against an indemnifying party
under such Section, give written notice to the indemnifying party of the
commencement thereof, but the failure so to notify the indemnifying party shall
not relieve it of any liability
INVESTMENT MANAGEMENT AGREEMENT 12
<PAGE> 29
that it may have to any indemnified party except to the extent the indemnifying
party demonstrates that the defense of such action is prejudiced thereby. In
case any such action shall be brought against an indemnified party and it shall
give written notice to the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate therein and, to the extent
that it may wish, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party. If the indemnifying party elects to
assume the defense of such action, the indemnified party shall have the right to
employ separate counsel at its own expense and to participate in the defense
thereof. If the indemnifying party elects not to assume (or fails to assume) the
defense of such action, the indemnified party shall be entitled to assume the
defense of such action with counsel of its own choice, at the expense of the
indemnifying party. If the action is asserted against both the indemnifying
party and the indemnified party and there is a conflict of interests which
renders it inappropriate for the same counsel to represent both the indemnifying
party and the indemnified party, the indemnifying party shall be responsible for
paying for separate counsel for the indemnified party; provided, however, that
if there is more than one indemnified party, the indemnifying party shall not be
responsible for paying for more than one separate firm of attorneys to represent
the indemnified parties, regardless of the number of indemnified parties. The
indemnifying party shall have no liability with respect to any compromise or
settlement of any action effected without its written consent (which shall not
be unreasonably withheld).
11. CONFIDENTIALITY. Each of GMSP and GNA shall keep all Confidential
Information in confidence, and shall not disclose said information to any other
party other than such party's employees, advisors, attorneys and accountants,
who will be advised of the confidential nature of information. Each party shall
protect the Confidential Information with the same degree of care as such party
normally uses in the protection of its confidential and proprietary information.
Each party further agrees not to use Confidential Information for any purpose
except in connection with the performance of its duties under this Agreement.
The restrictions set forth herein shall not apply with respect to Confidential
Information which (i) is already generally available to the public when received
by such party; (ii) becomes available to the public through no fault of any
member of the GMSP Group or GNA, as applicable; or (iii) is required to be
disclosed by Applicable Law or a Governmental Authority.
12. INSURANCE. GMSP shall maintain at all times during the term of this
Agreement fiduciary liability insurance of the type customary for investment
managers in similar situations naming GNA as an insured with such limits, terms,
conditions and "tail" provisions as are reasonably acceptable to GNA and GMSP
and shall provide GNA with complete copies of all binders and other policy
information. GMSP also shall obtain and maintain a fidelity bond in the amount
of not less than $5,000,000 and otherwise containing terms and conditions
reasonably acceptable to GNA. In the event that any such policy or bond is
canceled or suspended, GMSP promptly shall notify GNA in writing.
13. NOTICES. All notices required to be given in writing hereunder shall
be deemed to have been given if (i) delivered personally or by documented
courier or delivery service, (ii) transmitted by facsimile or (iii) mailed by
registered or certified mail (return receipt requested and postage prepaid) to
the following listed Persons at the addresses and facsimile numbers specified
below, or to such other Persons, addresses or facsimile numbers as a party
entitled to notice shall give, in the manner hereinabove described, to the
others entitled to notice:
If to GMSP, to: 777 Main Street, Suite 2250
Fort Worth, Texas 76102
Attention: J. Randall Chappel
Fax: (817) 820-6651
INVESTMENT MANAGEMENT AGREEMENT 13
<PAGE> 30
If to GNA, to: 500 Commerce Street
Fort Worth, Texas 76102-5439
Attention: President
Fax: (817) 338-1454
If given personally or by documented courier or delivery service, a notice shall
be deemed to have been given when it is received. If transmitted by facsimile, a
notice shall be deemed to have been given on the date received, if electronic
confirmation of receipt occurs during normal business hours on a Business Day,
and otherwise, on the first Business Day following electronic confirmation of
receipt. If given by mail, it shall be deemed to have been given on the third
Business Day following the day on which it was posted.
14. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof.
15. NATURE OF RELATIONSHIP. The parties hereto intend that the services
provided by GMSP to GNA pursuant to this Agreement are being provided as an
independent contractor. Nothing contained in this Agreement shall constitute or
be construed to be or create a general partnership or joint venture between GMSP
and GNA or their respective successors or assigns.
16. BINDING EFFECT; ASSIGNMENT; NO THIRD PARTY BENEFIT. This Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, legal representatives, successors, and permitted assigns.
Neither this Agreement nor any of the rights, interests, or obligations
hereunder may be assigned by either of the parties hereto without the prior
written consent of the other party. Nothing in this Agreement, express or
implied, is intended to or shall confer upon any Person other than the parties
hereto, and their respective heirs, legal representatives, successors, and
permitted assigns, any rights, benefits, or remedies of any nature whatsoever
under or by reason of this Agreement.
17. INTERPRETATION. The headings contained in this Agreement are for
reference purposes only and shall not affect the meaning or interpretation of
this Agreement. For purposes of this Agreement, the words "includes" and
"including" shall mean "including without limitation" and the word "or" is used
in the inclusive sense. All capitalized terms defined herein are equally
applicable to both the singular and plural forms.
18. SEVERABILITY. In the event that this Agreement, or any of its
provisions, or the performance of any provision, is found to be illegal or
unenforceable under applicable law now or hereafter in effect, the parties shall
be excused from performance of such portions of this Agreement as shall be found
to be illegal or unenforceable under the applicable laws or regulations without
affecting the validity of the remaining provisions of the Agreement.
19. TIME OF ESSENCE. With regard to all dates and time periods set forth
in this Agreement, time is of the essence.
20. NO WAIVER OF PRIVILEGE. Neither GNA nor GMSP nor any of their
respective subsidiaries or affiliates waives any attorney-client, work product
or other privilege with respect to any information furnished pursuant to this
Agreement.
INVESTMENT MANAGEMENT AGREEMENT 14
<PAGE> 31
21. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO
THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
22. COUNTERPARTS. This Agreement may be executed by the parties hereto in
any number of counterparts, each of which shall be deemed an original, but all
of which shall constitute one and the same agreement. Each counterpart may
consist of a number of copies hereof each signed by less than all, but together
signed by all, the parties hereto.
INVESTMENT MANAGEMENT AGREEMENT 15
<PAGE> 32
IN WITNESS WHEREOF, GMSP and GNA have caused this Agreement to be
executed all as of the day and year first above written.
GENERAL AGENTS INSURANCE COMPANY
OF AMERICA, INC.,
an Oklahoma corporation
By: /s/ Glenn W. Anderson
----------------------------------------
Glenn W. Anderson, President
GOFF MOORE STRATEGIC PARTNERS, L.P.,
a Texas limited partnership
By: GMSP Operating Partners, L.P., its
general partner
By: GMSP, L.L.C., its general partner
By: /s/ John C. Goff
------------------------------------
John C. Goff, Managing Principal
By: /s/ J. Randall Chappel
------------------------------------
J. Randall Chappel, Principal
INVESTMENT MANAGEMENT AGREEMENT 16
<PAGE> 33
INVESTMENT MANAGEMENT AGREEMENT
FOR
GAINSCO, INC.
THIS INVESTMENT MANAGEMENT AGREEMENT (this "Agreement") is entered into
this 4th day of October, 1999, by and between Goff Moore Strategic Partners,
L.P., a Texas limited partnership ("GMSP"), and GAINSCO, INC., a Texas
corporation ("GNA").
WHEREAS, GNA is a holding company whose subsidiaries are regulated
insurance companies;
WHEREAS, GNA desires to appoint GMSP to serve as investment manager with
respect to certain investments held by it; and
WHEREAS, GMSP is willing to provide investment advisory services to GNA on
the terms and conditions hereinafter set forth.
NOW, THEREFORE, for and in consideration of the premises, the mutual
covenants herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, GMSP and GNA hereby
agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Affiliate" means, with respect to any Person, any other Person that
directly, or indirectly, through one or more intermediaries controls, is
controlled by or is under common control with such specified Person. For this
purpose the term "control" (including the terms "controlling", "controlled by"
and "under common control with") shall mean the possession, direct or indirect,
of the power to direct or cause the direction of the management and policies of
a Person whether through the ownership of voting Securities, by contract, or
otherwise.
"Agreement" has the meaning set forth in the first paragraph hereof.
"Applicable Law" means any statute, law, rule, policy, guideline, or
regulation or any judgment, order, writ, injunction, or decree of any
Governmental Authority to which a specified Person or property is subject.
"Associate" means (i) any corporation or entity (other than GNA or a
Subsidiary of GNA) of which such Person is an officer or partner or is, directly
or indirectly, the beneficial owner of 10 percent or more of any class of Equity
Securities, (ii) any trust or other estate in which such Person has a
substantial beneficial interest or as to which such Person serves as trustee or
in a similar fiduciary capacity, and (iii) any relative or spouse of such
Person, or any relative of such Person, or any relative of such spouse, who has
the same home as such Person or who is a director or officer of GNA or any of
its Subsidiaries.
"Board" means the board of directors of GNA.
INVESTMENT MANAGEMENT AGREEMENT 1
<PAGE> 34
"Breach" means any violation or breach of, any misrepresentation or
inaccuracy in, any default under, or any failure to perform or comply with any
representation, warranty, covenant, obligation, or other provision of this
Agreement.
"Business Day" means any day other than a Saturday or Sunday on which
national banks are open for business in Fort Worth, Texas and New York, New
York.
"Cash" means any currency or immediately available funds on deposit with a
financial institution.
"Cause" means that GMSP has committed or engaged in (i) any malfeasance,
bad faith or negligence in respect of GMSP's material duties pursuant to this
Agreement; (ii) any commission of any fraud by GMSP; (iii) any conviction or
indictment of or plea of no contest to any felony by GMSP or any member of the
GMSP Group; (iv) any violation of the provisions of the U. S. federal securities
laws or state securities laws by GMSP or any GMSP Principal; or (v) any material
breach by GMSP of its obligations (including, without limitation, its
obligations to observe and comply with the provisions of the Policy Letter)
under, or its representations or warranties in, this Agreement if such breach
continues for more than 10 days after GMSP receives written notice, specifying
such breach with particularity and demanding cure, from GNA.
"Committee" means the Board's Investment Committee, none of the members of
which shall be members of the GMSP Group.
"Confidential Information" means information received by GMSP from GNA or
received by GNA from GMSP that is not generally known or which would logically
be considered confidential or proprietary, or which would do GNA or GMSP, as
applicable, harm if divulged, or which is marked "Confidential Information."
"Damages" has the meaning set forth in Section 10.
"Equity Securities" means any capital stock or other equity interests of
any Person, any Securities directly or indirectly convertible into, or
exercisable or exchangeable for any capital stock or other equity interests of
any Person, or any right, option, warrant or other Security which, with the
payment of additional consideration, the expiration of time or the occurrence of
any event shall give the holder thereof the right to acquire any capital stock
or other equity interests of any Person or any Security convertible into or
exercisable or exchangeable for, any capital stock or other equity interests of
any Person.
"Fair Market Value" means as to any Securities on any date, (a) if such
Securities are listed or admitted to trading on any national securities exchange
on any such trading day, the amount equal to the last sale price of such
Securities, regular way settlement, on such dates or, if no such sale takes
place on a date, the average of the closing bid and asked prices thereof on such
date, in each case as officially reported on the principal national securities
exchange on which such Securities are then listed or admitted to trading, (b) if
such Securities are not then listed or admitted to trading on any national
securities exchange but are reported through the automated quotation system of a
registered securities association, the last trading price of such Securities on
such dates, or if there shall have been no trading on a date, the average of the
closing bid and asked prices of such Securities on such date as shown by such
automated quotation system or (c) if such Securities are not then so listed,
admitted to trading or reported, the value determined by GMSP subject to review
and approval by the Committee, which valuation shall be equal to (i) cost or
(ii) in the event that either GMSP or the Committee determine that there has
been a material change in the value of such Securities since the date of
acquisition of such Securities, such other valuation as is reflective of the
value
INVESTMENT MANAGEMENT AGREEMENT 2
<PAGE> 35
of such Securities; provided, however, that, if GMSP and the Committee are
unable to agree on such fair market value, such Securities shall be valued by
such nationally recognized independent public accounting firm or investment
banking firm designated by the Committee and reasonably acceptable to GMSP. Any
such third-party valuation shall be final and binding on the parties and
enforceable in accordance with the provisions of the Texas General Arbitration
Act, and the costs and expenses thereof shall be shared equally by GMSP and GNA.
"Fees" has the meaning set forth in Section 4.
"GAAP" means generally accepted accounting principles for financial
reporting in the U.S., consistently applied.
"GMSP" has the meaning set forth in the introductory paragraph of this
Agreement.
"GMSP Group" means GMSP together with its Affiliates, Associates and
employees, including without limitation GMSP's partners, the partners of the
general partner of GMSP and the GMSP Principals.
"GMSP Material Adverse Effect" means any condition, circumstance or
development having an adverse effect on the ability of GMSP to conduct business,
the financial condition or the results of operations of GMSP that is material to
GMSP or as to the ability of GMSP to perform its obligations pursuant to this
Agreement, excluding any such condition, circumstance or development which
adversely affects the U.S. economy, financial markets or the insurance industry
generally.
"GMSP Principals" shall mean John C. Goff, J. Randall Chappel and any other
Persons employed by or otherwise affiliated with GMSP or its general partner who
have access to information regarding particular Securities being considered for
purchase or sale by GNA. The parties recognize that the limited partners of GMSP
as of the date hereof are not GMSP Principals.
"GNA" has the meaning set forth in the introductory paragraph of this
Agreement.
"GNA Applicable Insurance Department" means the Oklahoma Department of
Insurance and the Texas Department of Insurance.
"GNA Entities" means GAINSCO, INC., a Texas corporation; MGA Insurance
Company, Inc., a Texas corporation; GAINSCO County Mutual Insurance Company, a
Texas mutual insurance company; and General Agents Insurance Company of America,
Inc., an Oklahoma corporation.
"GNA Investment Management Agreements" means the Investment Management
Agreements of even date herewith between GMSP and each of the GNA Entities,
including this Agreement.
"GNA Material Adverse Effect" means any condition, circumstance or
development having an adverse effect on the ability to conduct business, the
financial condition or the results of operations of GNA and its Subsidiaries
that is material to GNA and its Subsidiaries taken as a whole or as to the
ability of GNA to perform its obligations pursuant to this Agreement, excluding
any such condition, circumstance or development which adversely affects the U.S.
economy, financial markets or insurance industry generally provided, that no
change in the prices at which the Common Stock is quoted or traded on the NYSE
or otherwise shall be a GNA Material Adverse Effect
INVESTMENT MANAGEMENT AGREEMENT 3
<PAGE> 36
"good faith", when used in respect of any action, means that the action was
taken with (i) honesty of intention, (ii) freedom from knowledge of
circumstances which ought to put the Person taking such action on inquiry or
negligence, and (iii) intention to abstain from taking any unconscientious
advantage of another.
"Governmental Authority" means any U.S. federal, state, local, foreign,
supernational or supranational court or tribunal, governmental, regulatory or
administrative agency, department, bureau, authority, commission or arbitral
panel.
"Investment Grade Debt Obligations" means any interest bearing debt
obligations issued by any Person, including a Governmental Authority, rated at
least "B minus" or the equivalent thereof by Standard & Poor's Corporation or
Moody's Investor's Service, Inc.
"Malfunction" means any failure to: (a) accurately recognize dates falling
before, on or after the Year 2000; or (b) accurately record, store, retrieve and
process data input and date information.
"Person" means any individual, corporation, partnership, limited liability
company, association, trust or other entity or organization, including any
Governmental Authority.
"Policy Letter" has the meaning set forth in Section 2.
"Portfolio" means those investments held by GNA at the holding company
level in Securities of the type more particularly described under the category
"Investments" in GNA's periodic filings with the SEC.
"Proceedings" means all proceedings, actions, suits, investigations, and
inquiries by or before any arbitrator or Governmental Authority.
"Research" means research, statistical and similar information and
services.
"SEC" means the Securities and Exchange Commission.
"Security" means any capital stock, partnership interest, membership
interest, subscription, certificate of trust or other ownership interest,
warrant, bond, note, debenture, or other debt or equity interest of any Person
commonly known as a "security," and all rights and options relating to any of
the foregoing, regardless of whether traded on a national securities exchange;
but shall not include Cash Equivalents.
"Securities Purchase Agreement" means the Securities Purchase Agreement
dated June 29, 1999, between GMSP and GAINSCO, INC.
"Short Term Debt" means any note, draft, bill of exchange, or similar
security which has a maturity at the time of issuance of not exceeding nine (9)
months exclusive of days of grace, or any renewal thereof the maturity of which
is likewise limited.
"Subsidiary " means, with respect to any Person, any corporation or other
entity (including partnerships and other business associations) in which the
Person directly or indirectly owns at least a majority of the outstanding voting
Securities or other equity interests having the power, under ordinary
circumstances, to elect a majority of the directors, or otherwise to direct the
management and policies, of such corporation or other entity.
INVESTMENT MANAGEMENT AGREEMENT 4
<PAGE> 37
"U.S." means the United States of America.
"Year 2000" means the calendar year 2000 A.D.
2. INVESTMENT MANAGER. GNA hereby retains GMSP, and GMSP agrees to serve,
as investment manager with respect to the Portfolio on the terms and conditions
hereinafter set forth:
(a) The investment policies and all other actions of the Portfolio are
and shall at all times be subject to the oversight and direction of the
Committee. GMSP shall manage the Portfolio in accordance with the investment
objectives and policies set forth in the letter (the "Policy Letter") heretofore
delivered to GMSP by GNA. GNA may amend or supplement the contents of the Policy
Letter, including the investment criteria and other instructions set forth
therein, in whole or in part and at any time and from time to time; provided,
however, that no amendment or supplement shall be binding upon GMSP until GMSP
is notified of the amendment or supplement; and provided further, that in the
event that an amended or supplemented Policy Letter shall require GMSP to make
any changes in the manner in which GMSP has performed its services pursuant to
this Agreement, GMSP shall have a reasonable time period to comply with such
changes. GMSP shall periodically evaluate the provisions of the Policy Letter
and provide GNA with any recommendations for the amendment or supplementation of
the provisions of the Policy Letter that GMSP deems advisable for the benefit of
GNA. To the extent that the provisions of the Policy Letter, as the same may be
amended or supplemented from time to time, conflict with the provisions of this
Agreement, the provisions of this Agreement shall control.
(b) GNA will retain ownership and control of the assets in the
Portfolio at all times. The assets shall be held for the benefit of GNA solely
at one or more financial institutions or other locations specified from time to
time in the Policy Letter.
(c) Subject to the provisions of the Policy Letter and the oversight
and direction of the Committee, GMSP shall have authority to make all specific
investment decisions with respect to the assets in the Portfolio.
(d) GMSP shall exercise its discretion and discharge its obligations
under this Agreement in compliance with all Applicable Laws.
(e) GMSP shall employ and dedicate to GNA continuously during the term
of this Agreement a qualified investment portfolio manager reasonably acceptable
to GNA, who shall have the primary responsibilities of coordinating all aspects
of the day-to-day investment activities of the Portfolio.
(f) GNA acknowledges that GMSP has informed GNA that GMSP currently is
not registered as an (i) investment adviser under the Investment Advisers Act of
1940, as amended, and all other Applicable Laws or (ii) a broker or dealer under
the Securities Exchange Act of 1934, as amended, and all other Applicable Laws.
3. REPORTS.
(a) GMSP shall provide to GNA periodic financial reports with respect
to the assets in and investment performance of the Portfolio. The reports shall
include such financial information in such format as GNA may reasonably request
in connection with the administration of the Portfolio and a record of all
transactions effected during the interim period from the preceding report,
including the price per
INVESTMENT MANAGEMENT AGREEMENT 5
<PAGE> 38
Security, the broker or dealer executing the transaction and the commissions
paid. The reports shall be made with such frequency, but not less often than
within 20 days following the end of each calendar month, as GNA may reasonably
request in connection with the administration of the Portfolio; provided that
the late delivery of a complete report no more than one time in any three-year
period with respect to any particular Securities in the Portfolio shall not
constitute a Breach of this Agreement if (i) the delay was caused by the failure
of an unaffiliated Person in providing information to GMSP that had been timely
requested by GMSP, (ii) any portion of the report that is not dependent upon the
unaffiliated Person is delivered to GNA by GMSP on a timely basis, and (iii)
GMSP uses its commercially reasonable efforts to cause such late report to be
delivered as promptly as practicable.
(b) GMSP shall (i) afford GNA and its authorized representatives
reasonable access to the GMSP Principals, GMSP's offices and other facilities,
and all books, records and other documents of GMSP relating to the Portfolio or
this Agreement and (ii) permit GNA and its authorized representatives to make
such inspections and copies of all books, records and other documents as they
may reasonably require to verify the accuracy of any report furnished pursuant
to Section 3(a).
4. COMPENSATION; EXPENSES.
(a) For services performed by GMSP, GNA agrees to pay to GMSP
investment management fees (the "Fees") equal on an annual basis to (i) 30 basis
points multiplied by the Fair Market Value with respect to any portion of the
Portfolio invested in Short Term Debt or Investment Grade Debt Obligations at
the end of a given calendar month or during a majority of the days in the given
calendar month and (ii) 100 basis points multiplied by the Fair Market Value
with respect to any portion of the Portfolio invested in Equity Securities or
other alternative investments in Securities which are not Investment Grade Debt
Obligations. The Fees otherwise payable with respect to any calendar month (or
prorated portion thereof) shall be reduced by an amount equal to the sum of (i)
the amount of fees, commissions and expenses paid by or on behalf of GNA to any
investment or mutual fund from which any member of the GMSP Group is eligible to
receive compensation or profits plus (ii) the amount of any fees paid by or on
behalf of GNA to or accrued for the benefit of any member of the GMSP Group
under Rule 12b-1 promulgated under the Investment Company Act of 1940, as
amended, plus (iii) the amount of any finder's fees, brokerage commissions or
other benefit or compensation paid by or on behalf of GNA to or accrued for the
benefit of any member of the GMSP Group in connection with any transaction in
Securities pursuant to this Agreement. Notwithstanding anything to the contrary
contained in this Agreement, (x) no Fees shall be payable with respect to any
portion of the Portfolio invested in Cash during a majority of the days in the
given calendar month and (y) the Committee and GMSP may agree upon a different
Fee structure for special situations.
(b) The Fees shall be based on the Fair Market Value of the assets in
the Portfolio at the end of each calendar month, and shall be calculated at the
end of each calendar month based upon the actual number of days elapsed during
the calendar month, during which this Agreement is in effect over a year of 365
days. Within fifteen (15) days after the end of each calendar month, GNA shall
pay to GMSP the Fees earned with respect to the preceding calendar month. In the
event of termination prior to the end of a calendar month, GNA will pay to GMSP
a prorated portion of the Fees based upon the Fair Market Value of the assets in
the Portfolio at the time of termination. No other fees, charges or assessments
shall be payable by GNA to or for the benefit of GMSP or any member of the GMSP
Group with respect to the services performed by GMSP pursuant to this Agreement,
provided that GNA shall have the responsibility to reimburse GMSP for GMSP's
payment of any amounts described pursuant to Section 4(d) below. There shall not
be any annual reconciliation, adjustment or other "true-up" at the end of each
calendar year.
INVESTMENT MANAGEMENT AGREEMENT 6
<PAGE> 39
(c) GMSP shall be solely responsible for all of its general and
administrative costs and expenses incurred in connection with performing its
duties and obligations under this Agreement, which shall consist of all costs
and expenses in connection with the provision of office space and facilities,
equipment and personnel for servicing the investments of the Portfolio and the
salaries and fees of all personnel employed by GMSP performing services relating
to research, statistical and investment activities.
(d) GNA shall be responsible for, and pay directly, the following
costs and expenses related to GMSP's performance of its duties pursuant to this
Agreement that are reasonable and payable to Persons not affiliated with the
GMSP Group:
(i) brokerage commissions and other costs, fees and expenses
incurred in the purchase and sale of Securities;
(ii) fees and expenses of custodians selected pursuant to Section
2(b);
(iii) costs related to third party Proceedings involving GNA's
ownership of Securities pursuant to this Agreement, directly or indirectly,
including, without limitation, attorneys' fees incurred in connection therewith
(but excluding all costs related to Proceedings or other disputes between GNA
and GMSP or any member of the GMSP Group or which constitute Cause);
(iv) interest on and fees and expenses arising out of all
borrowings made by GNA with respect to the purchase of Securities, including,
but not limited to, the arranging thereof;
(v) taxes, fees or other governmental charges levied against GNA;
and
(vi) any other expense, whether ordinary or extraordinary, that
is determined by the Committee to be appropriate for GNA to pay pursuant to this
Agreement.
(e) In discharging its duties pursuant to this Agreement, GMSP may
give preference, and may cause GNA to pay higher negotiated commission rates, to
unaffiliated brokers which, in addition to having the capacity of obtaining the
best price for the Security itself and of executing the order with speed,
efficiency and confidentiality, also provide Research to GMSP or GNA. Research
furnished by brokers through whom Securities transactions are effected may be
used by GMSP in servicing all of its accounts, and there shall be no reduction
in the compensation of GMSP hereunder as a consequence of its receipt of such
Research. In the allocation of brokerage, however, GMSP must determine in good
faith, and demonstrate to GNA upon request, that the amount of the commission is
reasonable in relation to the value of the brokerage services and Research
provided by the broker, viewed in terms of either the particular transaction or
GMSP's overall responsibilities with respect to the Portfolio. In the allocation
of brokerage for the Portfolio, GMSP shall be subject always to Applicable Law
and such policies and requirements that the Committee may adopt or approve as
reflected in the Policy Letter.
(f) In the event that, in any calendar month, the aggregate amount of
Fees (as such term is defined in the respective GNA Investment Management
Agreements) paid to GMSP by the GNA Entities pursuant to the GNA Investment
Management Agreements is less than $75,000, GNA shall pay to GMSP an amount
equal to the product of (i) the quotient of the Fair Market Value of the
Portfolio divided by the Fair Market Value of all of the Portfolios (as such
term is defined in the respective GNA Investment Management Agreements) of all
of the GNA Entities, multiplied by (ii) an amount equal to the difference
INVESTMENT MANAGEMENT AGREEMENT 7
<PAGE> 40
between $75,000 and the sum of the aggregate Fees paid to GMSP by all of the GNA
Entities with respect to such calendar month.
5. ACTIVITIES OF GMSP.
(a) The services of GMSP to GNA are not deemed to be exclusive, and
GMSP shall be free to engage in any other business or to render similar services
to others. GMSP and any member of the GMSP Group may engage independently or
with others, for its or their own accounts and for the accounts of others, in
other business ventures and activities of every nature and description,
including, without limitation, purchasing, selling or holding Securities for the
account of any other Person or for its or his own account, including Securities
included within the Portfolio or eligible for investment pursuant to this
Agreement; provided, that the management of such entities and accounts do not
interfere with the performance of their obligations and duties to GNA pursuant
to this Agreement. GNA shall not have any rights or obligations by virtue of
this Agreement in and to such independent ventures and activities or the income
or profits derived therefrom. The foregoing notwithstanding, without the prior
written consent of GNA in a specific case, GMSP shall at all times adhere, and
cause the members of the GMSP Group or the GMSP Principals, as the case may be,
to adhere, to the following:
(i) Neither GMSP nor any member of the GMSP Group shall act,
either as principal or agent, on the opposite side of any transaction in which
GNA or the Portfolio is involved.
(ii) GMSP and each GMSP Principal shall at all times (A) place
the interests of GNA before such member's personal transactional interests; (B)
conduct all personal transactions in Securities in such a manner as to avoid any
actual or potential conflict of interest or abuse of such Person's position of
trust and confidence in relation to GNA; and (C) promptly disclose to GNA all
personal transactions made by or on behalf of such Person in Securities which
are or were at any time during the preceding two years in the Portfolio or
issued by Persons whose Securities are in the Portfolio.
(b) On any issue involving an actual or potential conflict of interest
which is not specifically authorized by or pursuant to this Agreement, GMSP
shall submit such issue to the Committee for prior approval, and shall take such
actions, if any, as are determined by the Committee to be necessary or
appropriate to ameliorate the conflict of interest. If GMSP carries out the
actions specified by the Committee in respect of a matter giving rise to a
conflict of interest, neither GMSP nor any member of the GMSP Group shall have
any liability to GNA in respect of actions taken in good faith by them as a
consequence of the approval by the Committee.
(c) GMSP shall be liable for any breach of this Section 5 by any
member of the GMSP Group as if GMSP had committed such breach.
6. DURATION AND TERMINATION. The term of this Agreement shall commence on
the date of this Agreement and shall continue until terminated:
(a) by the written agreement of GNA and GMSP;
(b) by GMSP upon not less than 90 days written notice to GNA at any
time after the third anniversary hereof;
INVESTMENT MANAGEMENT AGREEMENT 8
<PAGE> 41
(c) by GNA upon not less than 90 days written notice to GMSP at any
time after the third anniversary hereof;
(d) by GNA, at any time, immediately upon written notice to GMSP
following (i) the good faith determination by both the Committee and two-thirds
of the members of the Board (excluding members of the Board designated for
election by GMSP or its successors in interest under the Securities Purchase
Agreement or otherwise affiliated with GMSP) that an event that constitutes
Cause has occurred and is continuing beyond any applicable period for notice and
opportunity to cure or (ii) the commencement by a Governmental Authority of any
Proceeding alleging any matter which, if proven, would constitute Cause.
(e) by GMSP upon not less than 10 days notice in the event that GNA
defaults in the performance of any of its material obligations hereunder and
such default continues for not less than 10 days after GNA receives notice of
such default; provided, however, that in the event that such default is of a
nature that it cannot, with due diligence, be cured within 10 days, GMSP may not
terminate this Agreement so long as GNA begins to cure such default within 10
days and thereafter diligently pursues such cure to completion.
Termination of this Agreement shall not terminate GMSP's obligations under
Section 3 to furnish reports concerning facts and circumstances prior to
termination or under Section 11 to maintain the confidentiality of Confidential
Information , terminate GNA's obligations to pay fees earned by GMSP prior to
the date of termination, or terminate either party's obligations to indemnify
the other party pursuant to this Agreement.
7. REPRESENTATIONS AND WARRANTIES OF GMSP.
(a) GMSP is a limited partnership duly organized, validly existing and
in good standing under the Texas Revised Limited Partnership Act, as amended,
and has the power and authority to own all of its properties and assets and to
carry on its business as now being conducted. GMSP is duly qualified and in good
standing (to the extent applicable) to transact business in each jurisdiction in
which the performance of its obligations hereunder require such qualification
except where the failure to be duly qualified or in good standing would not have
or reasonably be expected to have a GMSP Material Adverse Effect.
(b) GMSP has all requisite power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement have been duly authorized by all necessary action
on the part of GMSP. This Agreement has been duly and validly executed and
delivered by GMSP and, assuming the due authorization, execution and delivery
hereof by GNA, constitutes the valid and binding obligation of GMSP, enforceable
against GMSP in accordance with its terms, except as would be limited by
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or
other similar laws affecting the enforcement of creditors' rights generally and
except that the availability of equitable remedies, including specific
performance, may be subject to the discretion of any court before which any
proceeding therefor may be brought.
(c) No declaration, filing or registration with, or notice to or
authorization, consent or approval of any Governmental Authority is necessary
for the execution, delivery and performance of this Agreement by GMSP other than
as described in the Securities Purchase Agreement or with any GNA Applicable
Insurance Department.
INVESTMENT MANAGEMENT AGREEMENT 9
<PAGE> 42
(d) The execution, delivery and performance of this Agreement by GMSP
do not and will not result in any violation by GMSP under any provisions of:
(i) the partnership agreement or similar governing documents of
GMSP;
(ii) any statute, law, ordinance, rule, regulation, judgment,
decree, order, injunction, writ, permit or license of any Governmental Authority
applicable to GMSP or any of its properties or assets; or
(iii) any note, bond, mortgage, indenture, deed of trust,
license, franchise, permit, concession, contract, lease or other instrument,
obligation or agreement of any kind to which GMSP is now a party or by which it
or any of its properties or assets may be bound or affected;
excluding from the foregoing clauses (ii) and (iii) such violations as could
not, individually or in the aggregate, reasonably be expected to have a GMSP
Material Adverse Effect;
(e) There is no Proceeding pending, or to the knowledge of GMSP,
threatened against GMSP that questions the validity of this Agreement or any
action to be taken by GMSP in connection with this Agreement except as could
not, individually or in the aggregate, reasonably be expected to have a GMSP
Material Adverse Effect.
(f) GMSP is, and during the term of this Agreement will continue to be
(i) either exempt from registration or duly registered as an investment adviser
under the Investment Advisers Act of 1940 and all Applicable Laws and (ii)
qualified and eligible to manage the Portfolio under the statutes and
regulations administered by the GNA Applicable Insurance Departments, provided
that GNA shall inform GMSP immediately in the event that GNA becomes aware of
any changes in the qualification and eligibility requirements with respect to
such statutes and regulations. GMSP will provide prompt written notice to GNA if
GMSP ceases to be so registered or qualified or becomes aware of any fact, event
or circumstance which will or is reasonably likely to cause it to cease to be so
registered or qualified.
(g) Taken in the aggregate, the factual information (including,
without limitation, information regarding its knowledge, investment experience
and investment track record) furnished by GMSP to GNA subsequent to May 11, 1999
in writing for purposes of this Agreement did not contain untrue statements of
material facts, or omit to state material facts necessary to make the statements
made not misleading in the light of the circumstances under which they were
made, as of the date as of which such information is dated. All financial
forecasts prepared and furnished by GMSP to GNA subsequent to May 11, 1999 were
prepared in good faith on the basis of assumptions believed to be reasonable and
data, information, tests or conditions believed to be valid or accurate or to
exist at the time such forecasts were prepared.
(h) All of the equipment, Software and computer hardware owned or used
by GMSP or used and operated by third parties on behalf of GMSP, which performs
or is or may be required to perform functions involving dates or the computation
of dates, or containing date related data, has the programming, design and
performance capabilities to ensure that:
(i) it will not suffer any Malfunction that would reasonably be
expected to have a GMSP Material Adverse Effect; and
INVESTMENT MANAGEMENT AGREEMENT 10
<PAGE> 43
(ii) it will not, as a result of the date change at the end of
the twentieth century or the input, processing, storage or use of dates up to
and including December 31, 2001, (A) be adversely affected, (B) require changes
in inputting or operating practices, (C) produce invalid or incorrect output or
results, (D) cause any abnormal ending scenario, or (E) suffer any diminution in
functionality or performance that, in any of the above, could reasonably be
expected to have a GMSP Material Adverse Effect.
8. REPRESENTATIONS AND WARRANTIES OF GNA.
(a) GNA is a corporation duly organized and validly existing under the
laws of the State of Texas, and has the power and authority to own all of its
properties and assets and to carry on its business as now being conducted. GNA
is duly qualified and in good standing to transact business in each jurisdiction
in which the performance of its obligations hereunder require such qualification
except where the failure to be duly qualified or in good standing would not have
or reasonably be expected to have a GNA Material Adverse Effect.
(b) GNA has all requisite power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement have been duly authorized by all necessary action
on the part of GNA. This Agreement has been duly and validly executed and
delivered by GNA and, assuming the due authorization, execution and delivery
hereof by GMSP, constitutes the valid and binding obligation of GNA, enforceable
against GNA in accordance with its terms, except as would be limited by
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or
other similar laws affecting the enforcement of creditors' rights generally and
except that the availability of equitable remedies, including specific
performance, may be subject to the discretion of any court before which any
proceeding therefor may be brought.
(c) No declaration, filing or registration with, or notice to or
authorization, consent or approval of any Governmental Authority is necessary
for the execution, delivery and performance of this Agreement by GNA other than
as described in the Securities Purchase Agreement or with any GNA Applicable
Insurance Department.
(d) The execution, delivery and performance of this Agreement by GNA
do not and will not result in any violation by GNA under any provisions of:
(i) articles of incorporation or similar governing documents of
GNA;
(ii) any statute, law, ordinance, rule, regulation, judgment,
decree, order, injunction, writ, permit or license of any Governmental Authority
applicable to GNA or any of its properties or assets; or
(iii) any note, bond, mortgage, indenture, deed of trust,
license, franchise, permit, concession, contract, lease or other instrument,
obligation or agreement of any kind to which GNA is now a party or by which it
or any of its properties or assets may be bound or affected;
excluding from the foregoing clauses (ii) and (iii) such violations as could
not, in the aggregate, reasonably be expected to have a GNA Material Adverse
Effect.
(e) There is no Proceeding pending, or to the knowledge of GNA,
threatened against GNA that questions the validity of this Agreement or any
action to be taken by GNA in connection with this
INVESTMENT MANAGEMENT AGREEMENT 11
<PAGE> 44
Agreement except as could not, in the aggregate, reasonably be expected to have
a GNA Material Adverse Effect.
(f) GNA has such knowledge and experience in financial and business
matters that it is capable of evaluating the risks and merits of entering into
this Agreement.
(g) No part of the funds to be used to purchase and hold Securities or
to pay any amounts pursuant to this Agreement constitutes an asset of any
employee benefit plan within the meaning of Section 3 of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and GNA is not a "benefit
plan investor" (as such term is defined in 29 C.F.R. ss.2510.3-101(f)(2)).
9. LIABILITY. It is recognized that decisions concerning investments or
potential investments involve the exercise of judgment and the risk of loss. To
the extent permitted by Applicable Law, neither GMSP nor any of its officers,
directors, or employees nor other members of GMSP Group shall be liable for any
loss suffered by GNA on account of such investments, or any act taken or
omission made in good faith under this Agreement. For purposes of the foregoing
sentence, no action or omission by GMSP shall be considered to have been made
"in good faith" if GMSP was negligent, violated any law, or made any
misrepresentation (whether affirmatively or by omission).
10. INDEMNIFICATION.
(a) GNA shall indemnify, defend, and hold harmless GMSP and the GMSP
Principals from and against any and all claims, actions, causes of action,
demands, losses, damages, liabilities, costs, and expenses (including reasonable
attorneys' fees and expenses) (collectively, "Damages"), asserted against,
resulting to, imposed upon, or incurred by any of them, directly or indirectly,
by reason of or resulting from (i) any Breach by GNA of any of its
representations, warranties, covenants, or agreements contained in this
Agreement or in any certificate, instrument, or document delivered pursuant
hereto or (ii) any Proceeding brought against any of them by a Person other than
GNA or any of its Affiliates, Associates or shareholders in respect of any
action taken in good faith on behalf of GNA in the course of the performance of
GMSP's duties under this Agreement; provided, however, that GNA shall indemnify,
defend, and hold harmless GMSP and the GMSP Principals from and against any
reasonable expenses incurred by such Person(s) in connection with a Proceeding
brought against any of them by any of GNA's shareholders if such Person(s) is
wholly successful, on the merits or otherwise, in the defense of such
Proceeding, and provided, further, that GNA's obligation to indemnify, defend
and hold harmless as provided in this Section 10(a) shall not apply to the first
$750,000 in the aggregate of claims hereunder (other than claims for expenses in
defending a Proceeding for which the Person is entitled to indemnification under
clause (ii) of this Section) and provided, further, that such $750,000 amount
shall be reduced dollar-for-dollar by an amount equal to the cumulative
aggregate of all claims made under one or more of the GNA Investment Management
Agreements.
(b) GMSP shall indemnify, defend, and hold harmless GNA and its
Affiliates, Associates, directors, officers and employees from and against any
and all Damages asserted against, resulting to, imposed upon, or incurred by any
of them, directly or indirectly, by reason of or resulting from any Breach by
GMSP of any of its representations, warranties, covenants, or agreements
contained in this Agreement or in any certificate, instrument, or document
delivered pursuant hereto; provided, however, that GMSP's obligation to
indemnify, defend and hold harmless as provided in this Section 10(b) shall not
apply to the first $750,000 in the aggregate of claims hereunder and provided,
further, that such $750,000 amount
INVESTMENT MANAGEMENT AGREEMENT 12
<PAGE> 45
shall be reduced dollar-for-dollar by an amount equal to the cumulative
aggregate of all claims made under one or more of the GNA Investment Management
Agreements.
(c) Promptly after receipt by an indemnified party under Section 10(a)
or (b) of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against an indemnifying party
under such Section, give written notice to the indemnifying party of the
commencement thereof, but the failure so to notify the indemnifying party shall
not relieve it of any liability that it may have to any indemnified party except
to the extent the indemnifying party demonstrates that the defense of such
action is prejudiced thereby. In case any such action shall be brought against
an indemnified party and it shall give written notice to the indemnifying party
of the commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it may wish, to assume the defense
thereof with counsel reasonably satisfactory to such indemnified party. If the
indemnifying party elects to assume the defense of such action, the indemnified
party shall have the right to employ separate counsel at its own expense and to
participate in the defense thereof. If the indemnifying party elects not to
assume (or fails to assume) the defense of such action, the indemnified party
shall be entitled to assume the defense of such action with counsel of its own
choice, at the expense of the indemnifying party. If the action is asserted
against both the indemnifying party and the indemnified party and there is a
conflict of interests which renders it inappropriate for the same counsel to
represent both the indemnifying party and the indemnified party, the
indemnifying party shall be responsible for paying for separate counsel for the
indemnified party; provided, however, that if there is more than one indemnified
party, the indemnifying party shall not be responsible for paying for more than
one separate firm of attorneys to represent the indemnified parties, regardless
of the number of indemnified parties. The indemnifying party shall have no
liability with respect to any compromise or settlement of any action effected
without its written consent (which shall not be unreasonably withheld).
11. CONFIDENTIALITY. Each of GMSP and GNA shall keep all Confidential
Information in confidence, and shall not disclose said information to any other
party other than such party's employees, advisors, attorneys and accountants,
who will be advised of the confidential nature of information. Each party shall
protect the Confidential Information with the same degree of care as such party
normally uses in the protection of its confidential and proprietary information.
Each party further agrees not to use Confidential Information for any purpose
except in connection with the performance of its duties under this Agreement.
The restrictions set forth herein shall not apply with respect to Confidential
Information which (i) is already generally available to the public when received
by such party; (ii) becomes available to the public through no fault of any
member of the GMSP Group or GNA, as applicable; or (iii) is required to be
disclosed by Applicable Law or a Governmental Authority.
12. INSURANCE. GMSP shall maintain at all times during the term of this
Agreement fiduciary liability insurance of the type customary for investment
managers in similar situations naming GNA as an insured with such limits, terms,
conditions and "tail" provisions as are reasonably acceptable to GNA and GMSP
and shall provide GNA with complete copies of all binders and other policy
information. GMSP also shall obtain and maintain a fidelity bond in the amount
of not less than $5,000,000 and otherwise containing terms and conditions
reasonably acceptable to GNA. In the event that any such policy or bond is
canceled or suspended, GMSP promptly shall notify GNA in writing.
13. NOTICES. All notices required to be given in writing hereunder shall be
deemed to have been given if (i) delivered personally or by documented courier
or delivery service, (ii) transmitted by facsimile or (iii) mailed by registered
or certified mail (return receipt requested and postage prepaid) to the
following listed Persons at the addresses and facsimile numbers specified below,
or to such other Persons, addresses
INVESTMENT MANAGEMENT AGREEMENT 13
<PAGE> 46
or facsimile numbers as a party entitled to notice shall give, in the manner
hereinabove described, to the others entitled to notice:
If to GMSP, to: 777 Main Street, Suite 2250
Fort Worth, Texas 76102
Attention: J. Randall Chappel
Fax: (817) 820-6651
If to GNA, to: 500 Commerce Street
Fort Worth, Texas 76102-5439
Attention: Chief Executive Officer
Fax: (817) 338-1454
If given personally or by documented courier or delivery service, a notice shall
be deemed to have been given when it is received. If transmitted by facsimile, a
notice shall be deemed to have been given on the date received, if electronic
confirmation of receipt occurs during normal business hours on a Business Day,
and otherwise, on the first Business Day following electronic confirmation of
receipt. If given by mail, it shall be deemed to have been given on the third
Business Day following the day on which it was posted.
14. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof.
15. NATURE OF RELATIONSHIP. The parties hereto intend that the services
provided by GMSP to GNA pursuant to this Agreement are being provided as an
independent contractor. Nothing contained in this Agreement shall constitute or
be construed to be or create a general partnership or joint venture between GMSP
and GNA or their respective successors or assigns.
16. BINDING EFFECT; ASSIGNMENT; NO THIRD PARTY BENEFIT. This Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, legal representatives, successors, and permitted assigns.
Neither this Agreement nor any of the rights, interests, or obligations
hereunder may be assigned by either of the parties hereto without the prior
written consent of the other party. Nothing in this Agreement, express or
implied, is intended to or shall confer upon any Person other than the parties
hereto, and their respective heirs, legal representatives, successors, and
permitted assigns, any rights, benefits, or remedies of any nature whatsoever
under or by reason of this Agreement.
17. INTERPRETATION. The headings contained in this Agreement are for
reference purposes only and shall not affect the meaning or interpretation of
this Agreement. For purposes of this Agreement, the words "includes" and
"including" shall mean "including without limitation" and the word "or" is used
in the inclusive sense. All capitalized terms defined herein are equally
applicable to both the singular and plural forms.
18. SEVERABILITY. In the event that this Agreement, or any of its
provisions, or the performance of any provision, is found to be illegal or
unenforceable under applicable law now or hereafter in effect, the parties shall
be excused from performance of such portions of this Agreement as shall be found
to be illegal or unenforceable under the applicable laws or regulations without
affecting the validity of the remaining provisions of the Agreement.
INVESTMENT MANAGEMENT AGREEMENT 14
<PAGE> 47
19. TIME OF ESSENCE. With regard to all dates and time periods set forth in
this Agreement, time is of the essence.
20. NO WAIVER OF PRIVILEGE. Neither GNA nor GMSP nor any of their
respective subsidiaries or affiliates waives any attorney-client, work product
or other privilege with respect to any information furnished pursuant to this
Agreement.
21. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO
THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
22. COUNTERPARTS. This Agreement may be executed by the parties hereto in
any number of counterparts, each of which shall be deemed an original, but all
of which shall constitute one and the same agreement. Each counterpart may
consist of a number of copies hereof each signed by less than all, but together
signed by all, the parties hereto.
INVESTMENT MANAGEMENT AGREEMENT 15
<PAGE> 48
IN WITNESS WHEREOF, GMSP and GNA have caused this Agreement to be executed
all as of the day and year first above written.
GAINSCO, INC.
By: /s/ Glenn W. Anderson
--------------------------------------------------
Glenn W. Anderson
President and Chief Executive Officer
GOFF MOORE STRATEGIC PARTNERS, L.P.,
a Texas limited partnership
By: GMSP Operating Partners, L.P., its general partner
By: GMSP, L.L.C., its general partner
By: /s/ John C. Goff
----------------------------------------------
John C. Goff, Managing Principal
By: /s/ J. Randall Chappel
----------------------------------------------
J. Randall Chappel, Principal
INVESTMENT MANAGEMENT AGREEMENT 16
<PAGE> 49
INVESTMENT MANAGEMENT AGREEMENT
FOR
GAINSCO COUNTY MUTUAL INSURANCE COMPANY
THIS INVESTMENT MANAGEMENT AGREEMENT (this "Agreement") is entered into
this 4th day of October, 1999, by and between Goff Moore Strategic Partners,
L.P., a Texas limited partnership ("GMSP"), and GAINSCO COUNTY MUTUAL INSURANCE
COMPANY ("GNA"), a Texas county mutual insurance company which on October 13,
1996 entered into a management contract with GAINSCO Services Corp., a Texas
corporation which is wholly-owned subsidiary of GAINSCO, INC. ("Parent") and
owns the charter of GNA.
WHEREAS, GNA is a regulated insurance company;
WHEREAS, GNA desires to appoint GMSP to serve as investment manager
with respect to certain investments held by it; and
WHEREAS, GMSP is willing to provide investment advisory services to GNA
on the terms and conditions hereinafter set forth.
NOW, THEREFORE, for and in consideration of the premises, the mutual
covenants herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, GMSP and GNA hereby
agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Affiliate" means, with respect to any Person, any other Person that
directly, or indirectly, through one or more intermediaries controls, is
controlled by or is under common control with such specified Person. For this
purpose the term "control" (including the terms "controlling", "controlled by"
and "under common control with") shall mean the possession, direct or indirect,
of the power to direct or cause the direction of the management and policies of
a Person whether through the ownership of voting Securities, by contract, or
otherwise.
"Agreement" has the meaning set forth in the first paragraph hereof.
"Applicable Law" means any statute, law, rule, policy, guideline, or
regulation or any judgment, order, writ, injunction, or decree of any
Governmental Authority to which a specified Person or property is subject.
"Associate" means (i) any corporation or entity (other than GNA, Parent
or a Subsidiary of GNA or Parent) of which such Person is an officer or partner
or is, directly or indirectly, the beneficial owner of 10 percent or more of any
class of Equity Securities, (ii) any trust or other estate in which such Person
has a substantial beneficial interest or as to which such Person serves as
trustee or in a similar fiduciary capacity, and (iii) any relative or spouse of
such Person, or any relative of such Person, or any relative of such spouse, who
has the same home as such Person or who is a director or officer of GNA or any
of its Subsidiaries.
"Board" means the board of directors of GNA.
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"Breach" means any violation or breach of, any misrepresentation or
inaccuracy in, any default under, or any failure to perform or comply with any
representation, warranty, covenant, obligation, or other provision of this
Agreement.
"Business Day" means any day other than a Saturday or Sunday on which
national banks are open for business in Fort Worth, Texas and New York, New
York.
"Cash" means any currency or immediately available funds on deposit
with a financial institution.
"Cause" means that GMSP has committed or engaged in (i) any
malfeasance, bad faith or negligence in respect of GMSP's material duties
pursuant to this Agreement; (ii) any commission of any fraud by GMSP; (iii) any
conviction or indictment of or plea of no contest to any felony by GMSP or any
member of the GMSP Group; (iv) any violation of the provisions of the U. S.
federal securities laws or state securities laws by GMSP or any GMSP Principal;
or (v) any material breach by GMSP of its obligations (including, without
limitation, its obligations to observe and comply with the provisions of the
Policy Letter) under, or its representations or warranties in, this Agreement if
such breach continues for more than 10 days after GMSP receives written notice,
specifying such breach with particularity and demanding cure, from GNA.
"Committee" means the Board's Investment Committee, none of the members
of which shall be members of the GMSP Group.
"Confidential Information" means information received by GMSP from GNA
or received by GNA from GMSP that is not generally known or which would
logically be considered confidential or proprietary, or which would do GNA or
GMSP, as applicable, harm if divulged, or which is marked "Confidential
Information."
"Damages" has the meaning set forth in Section 10.
"Equity Securities" means any capital stock or other equity interests
of any Person, any Securities directly or indirectly convertible into, or
exercisable or exchangeable for any capital stock or other equity interests of
any Person, or any right, option, warrant or other Security which, with the
payment of additional consideration, the expiration of time or the occurrence of
any event shall give the holder thereof the right to acquire any capital stock
or other equity interests of any Person or any Security convertible into or
exercisable or exchangeable for, any capital stock or other equity interests of
any Person.
"Fair Market Value" means as to any Securities on any date, (a) if such
Securities are listed or admitted to trading on any national securities exchange
on any such trading day, the amount equal to the last sale price of such
Securities, regular way settlement, on such dates or, if no such sale takes
place on a date, the average of the closing bid and asked prices thereof on such
date, in each case as officially reported on the principal national securities
exchange on which such Securities are then listed or admitted to trading, (b) if
such Securities are not then listed or admitted to trading on any national
securities exchange but are reported through the automated quotation system of a
registered securities association, the last trading price of such Securities on
such dates, or if there shall have been no trading on a date, the average of the
closing bid and asked prices of such Securities on such date as shown by such
automated quotation system or (c) if such Securities are not then so listed,
admitted to trading or reported, the value determined by GMSP subject to review
and approval by the Committee, which valuation shall be equal to (i) cost or
(ii) in the event that either GMSP or the Committee determine that there has
been a material change in the value of such Securities since the date of
acquisition of such Securities, such other valuation as is reflective of the
value
INVESTMENT MANAGEMENT AGREEMENT
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of such Securities; provided, however, that, if GMSP and the Committee are
unable to agree on such fair market value, such Securities shall be valued by
such nationally recognized independent public accounting firm or investment
banking firm designated by the Committee and reasonably acceptable to GMSP. Any
such third-party valuation shall be final and binding on the parties and
enforceable in accordance with the provisions of the Texas General Arbitration
Act, and the costs and expenses thereof shall be shared equally by GMSP and GNA.
"Fees" has the meaning set forth in Section 4.
"GAAP" means generally accepted accounting principles for financial
reporting in the U.S., consistently applied.
"GMSP" has the meaning set forth in the introductory paragraph of this
Agreement.
"GMSP Group" means GMSP together with its Affiliates, Associates and
employees, including without limitation GMSP's partners, the partners of the
general partner of GMSP and the GMSP Principals.
"GMSP Material Adverse Effect" means any condition, circumstance or
development having an adverse effect on the ability of GMSP to conduct business,
the financial condition or the results of operations of GMSP that is material to
GMSP or as to the ability of GMSP to perform its obligations pursuant to this
Agreement, excluding any such condition, circumstance or development which
adversely affects the U.S. economy, financial markets or the insurance industry
generally.
"GMSP Principals" shall mean John C. Goff, J. Randall Chappel and any
other Persons employed by or otherwise affiliated with GMSP or its general
partner who have access to information regarding particular Securities being
considered for purchase or sale by GNA. The parties recognize that the limited
partners of GMSP as of the date hereof are not GMSP Principals.
"GNA" has the meaning set forth in the introductory paragraph of this
Agreement.
"GNA Applicable Insurance Department" means the Texas Department of
Insurance.
"GNA Entities" means GAINSCO, INC., a Texas corporation; MGA Insurance
Company, Inc., a Texas corporation; GAINSCO County Mutual Insurance Company, a
Texas mutual insurance company; and General Agents Insurance Company of America,
Inc., an Oklahoma corporation.
"GNA Investment Management Agreements" means the Investment Management
Agreements of even date herewith between GMSP and each of the GNA Entities,
including this Agreement.
"GNA Material Adverse Effect" means any condition, circumstance or
development having an adverse effect on the ability to conduct business, the
financial condition or the results of operations of GNA and its Subsidiaries
that is material to Parent and its Subsidiaries taken as a whole or as to the
ability of GNA to perform its obligations pursuant to this Agreement, excluding
any such condition, circumstance or development which adversely affects the U.S.
economy, financial markets or insurance industry generally.
"good faith", when used in respect of any action, means that the action
was taken with (i) honesty of intention, (ii) freedom from knowledge of
circumstances which ought to put the Person taking such action on inquiry or
negligence, and (iii) intention to abstain from taking any unconscientious
advantage of another.
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"Governmental Authority" means any U.S. federal, state, local, foreign,
supernational or supranational court or tribunal, governmental, regulatory or
administrative agency, department, bureau, authority, commission or arbitral
panel.
"Investment Grade Debt Obligations" means any interest bearing debt
obligations issued by any Person, including a Governmental Authority, rated at
least "B minus" or the equivalent thereof by Standard & Poor's Corporation or
Moody's Investor's Service, Inc.
"Malfunction" means any failure to: (a) accurately recognize dates
falling before, on or after the Year 2000; or (b) accurately record, store,
retrieve and process data input and date information.
"Parent" has the meaning set forth in the first paragraph hereof.
"Person" means any individual, corporation, partnership, limited
liability company, association, trust or other entity or organization, including
any Governmental Authority.
"Policy Letter" has the meaning set forth in Section 2.
"Portfolio" means those investments held by GNA in Securities of the
type more particularly described under the category "Investments" in Parent's
periodic filings with the SEC.
"Proceedings" means all proceedings, actions, suits, investigations,
and inquiries by or before any arbitrator or Governmental Authority.
"Research" means research, statistical and similar information and
services.
"SEC" means the Securities and Exchange Commission.
"Security" means any capital stock, partnership interest, membership
interest, subscription, certificate of trust or other ownership interest,
warrant, bond, note, debenture, or other debt or equity interest of any Person
commonly known as a "security," and all rights and options relating to any of
the foregoing, regardless of whether traded on a national securities exchange;
but shall not include Cash Equivalents.
"Securities Purchase Agreement" means the Securities Purchase Agreement
dated June 29, 1999, between GMSP and Parent.
"Short Term Debt" means any note, draft, bill of exchange, or similar
security which has a maturity at the time of issuance of not exceeding nine (9)
months exclusive of days of grace, or any renewal thereof the maturity of which
is likewise limited.
"Subsidiary" means, with respect to any Person, any corporation or
other entity (including partnerships and other business associations) in which
the Person directly or indirectly owns at least a majority of the outstanding
voting Securities or other equity interests having the power, under ordinary
circumstances, to elect a majority of the directors, or otherwise to direct the
management and policies, of such corporation or other entity.
"U.S." means the United States of America.
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"Year 2000" means the calendar year 2000 A.D.
2. INVESTMENT MANAGER. GNA hereby retains GMSP, and GMSP agrees to
serve, as investment manager with respect to the Portfolio on the terms and
conditions hereinafter set forth:
(a) The investment policies and all other actions of the
Portfolio are and shall at all times be subject to the oversight and direction
of the Committee. GMSP shall manage the Portfolio in accordance with the
investment objectives and policies set forth in the letter (the "Policy Letter")
heretofore delivered to GMSP by GNA. GNA may amend or supplement the contents of
the Policy Letter, including the investment criteria and other instructions set
forth therein, in whole or in part and at any time and from time to time;
provided, however, that no amendment or supplement shall be binding upon GMSP
until GMSP is notified of the amendment or supplement; and provided further,
that in the event that an amended or supplemented Policy Letter shall require
GMSP to make any changes in the manner in which GMSP has performed its services
pursuant to this Agreement, GMSP shall have a reasonable time period to comply
with such changes. GMSP shall periodically evaluate the provisions of the Policy
Letter and provide GNA with any recommendations for the amendment or
supplementation of the provisions of the Policy Letter that GMSP deems advisable
for the benefit of GNA. To the extent that the provisions of the Policy Letter,
as the same may be amended or supplemented from time to time, conflict with the
provisions of this Agreement, the provisions of this Agreement shall control.
(b) GNA will retain ownership and control of the assets in the
Portfolio at all times. The assets shall be held for the benefit of GNA solely
at one or more financial institutions or other locations specified from time to
time in the Policy Letter.
(c) Subject to the provisions of the Policy Letter and the
oversight and direction of the Committee, GMSP shall have authority to make all
specific investment decisions with respect to the assets in the Portfolio.
(d) GMSP shall exercise its discretion and discharge its
obligations under this Agreement in compliance with all Applicable Laws.
(e) GMSP shall employ and dedicate to GNA continuously during
the term of this Agreement a qualified investment portfolio manager reasonably
acceptable to GNA, who shall have the primary responsibilities of coordinating
all aspects of the day-to-day investment activities of the Portfolio.
(f) GNA acknowledges that GMSP has informed GNA that GMSP
currently is not registered as an (i) investment adviser under the Investment
Advisers Act of 1940, as amended, and all other Applicable Laws or (ii) a broker
or dealer under the Securities Exchange Act of 1934, as amended, and all other
Applicable Laws.
3. REPORTS.
(a) GMSP shall provide to GNA periodic financial reports with
respect to the assets in and investment performance of the Portfolio. The
reports shall include such financial information in such format as GNA may
reasonably request in connection with the administration of the Portfolio and a
record of all transactions effected during the interim period from the preceding
report, including the price per Security, the broker or dealer executing the
transaction and the commissions paid. The reports shall be made with such
frequency, but not less often than within 20 days following the end of each
calendar month, as
INVESTMENT MANAGEMENT AGREEMENT
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GNA may reasonably request in connection with the administration of the
Portfolio; provided that the late delivery of a complete report no more than one
time in any three-year period with respect to any particular Security in the
Portfolio shall not constitute a Breach of this Agreement if (i) the delay was
caused by the failure of an unaffiliated Person in providing information to GMSP
that had been timely requested by GMSP, (ii) any portion of the report that is
not dependent upon the unaffiliated Person is delivered to GNA by GMSP on a
timely basis, and (iii) GMSP uses its commercially reasonable efforts to cause
such late report to be delivered as promptly as practicable.
(b) GMSP shall (i) afford GNA and its authorized
representatives reasonable access to the GMSP Principals, GMSP's offices and
other facilities, and all books, records and other documents of GMSP relating to
the Portfolio or this Agreement and (ii) permit GNA and its authorized
representatives to make such inspections and copies of all books, records and
other documents as they may reasonably require to verify the accuracy of any
report furnished pursuant to Section 3(a).
4. COMPENSATION; EXPENSES.
(a) For services performed by GMSP, GNA agrees to pay to GMSP
investment management fees (the "Fees") equal on an annual basis to (i) 30 basis
points multiplied by the Fair Market Value with respect to any portion of the
Portfolio invested in Short Term Debt or Investment Grade Debt Obligations at
the end of a given calendar month or during a majority of the days in the given
calendar month and (ii) 100 basis points multiplied by the Fair Market Value
with respect to any portion of the Portfolio invested in Equity Securities or
other alternative investments in Securities which are not Investment Grade Debt
Obligations. The Fees otherwise payable with respect to any calendar month (or
prorated portion thereof) shall be reduced by an amount equal to the sum of (i)
the amount of fees, commissions and expenses paid by or on behalf of GNA to any
investment or mutual fund from which any member of the GMSP Group is eligible to
receive compensation or profits plus (ii) the amount of any fees paid by or on
behalf of GNA to or accrued for the benefit of any member of the GMSP Group
under Rule 12b-1 promulgated under the Investment Company Act of 1940, as
amended, plus (iii) the amount of any finder's fees, brokerage commissions or
other benefit or compensation paid by or on behalf of GNA to or accrued for the
benefit of any member of the GMSP Group in connection with any transaction in
Securities pursuant to this Agreement. Notwithstanding anything to the contrary
contained in this Agreement, (x) no Fees shall be payable with respect to any
portion of the Portfolio invested in Cash during a majority of the days in the
given calendar month and (y) the Committee and GMSP may agree upon a different
Fee structure for special situations.
(b) The Fees shall be based on the Fair Market Value of the
assets in the Portfolio at the end of each calendar month, and shall be
calculated at the end of each calendar month based upon the actual number of
days elapsed during the calendar month, during which this Agreement is in effect
over a year of 365 days. Within fifteen (15) days after the end of each calendar
month, GNA shall pay to GMSP the Fees earned with respect to the preceding
calendar month. In the event of termination prior to the end of a calendar
month, GNA will pay to GMSP a prorated portion of the Fees based upon the Fair
Market Value of the assets in the Portfolio at the time of termination. No other
fees, charges or assessments shall be payable by GNA to or for the benefit of
GMSP or any member of the GMSP Group with respect to the services performed by
GMSP pursuant to this Agreement, provided that GNA shall have the responsibility
to reimburse GMSP for GMSP's payment of any amounts described pursuant to
Section 4(d) below. There shall not be any annual reconciliation, adjustment or
other "true-up" at the end of each calendar year.
(c) GMSP shall be solely responsible for all of its general
and administrative costs and expenses incurred in connection with performing its
duties and obligations under this Agreement, which shall
INVESTMENT MANAGEMENT AGREEMENT
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consist of all costs and expenses in connection with the provision of office
space and facilities, equipment and personnel for servicing the investments of
the Portfolio and the salaries and fees of all personnel employed by GMSP
performing services relating to research, statistical and investment activities.
(d) GNA shall be responsible for, and pay directly, the
following costs and expenses related to GMSP's performance of its duties
pursuant to this Agreement that are reasonable and payable to Persons not
affiliated with the GMSP Group:
(i) brokerage commissions and other costs, fees and
expenses incurred in the purchase and sale of Securities;
(ii) fees and expenses of custodians selected
pursuant to Section 2(b);
(iii) costs related to third party Proceedings
involving GNA's ownership of Securities pursuant to this Agreement, directly or
indirectly, including, without limitation, attorneys' fees incurred in
connection therewith (but excluding all costs related to Proceedings or other
disputes between GNA and GMSP or any member of the GMSP Group or which
constitute Cause);
(iv) interest on and fees and expenses arising out of
all borrowings made by GNA with respect to the purchase of Securities,
including, but not limited to, the arranging thereof;
(v) taxes, fees or other governmental charges levied
against GNA; and
(vi) any other expense, whether ordinary or
extraordinary, that is determined by the Committee to be appropriate for GNA to
pay pursuant to this Agreement.
(e) In discharging its duties pursuant to this Agreement, GMSP
may give preference, and may cause GNA to pay higher negotiated commission
rates, to unaffiliated brokers which, in addition to having the capacity of
obtaining the best price for the Security itself and of executing the order with
speed, efficiency and confidentiality, also provide Research to GMSP or GNA.
Research furnished by brokers through whom Securities transactions are effected
may be used by GMSP in servicing all of its accounts, and there shall be no
reduction in the compensation of GMSP hereunder as a consequence of its receipt
of such Research. In the allocation of brokerage, however, GMSP must determine
in good faith, and demonstrate to GNA upon request, that the amount of the
commission is reasonable in relation to the value of the brokerage services and
Research provided by the broker, viewed in terms of either the particular
transaction or GMSP's overall responsibilities with respect to the Portfolio. In
the allocation of brokerage for the Portfolio, GMSP shall be subject always to
Applicable Law and such policies and requirements that the Committee may adopt
or approve as reflected in the Policy Letter.
(f) In the event that, in any calendar month, the aggregate
amount of Fees (as such term is defined in the respective GNA Investment
Management Agreements) paid to GMSP by the GNA Entities pursuant to the GNA
Investment Management Agreements is less than $75,000, GNA shall pay to GMSP an
amount equal to the product of (i) the quotient of the Fair Market Value of the
Portfolio divided by the Fair Market Value of all of the Portfolios (as such
term is defined in the respective GNA Investment Management Agreements) of all
of the GNA Entities, multiplied by (ii) an amount equal to the difference
between $75,000 and the sum of the aggregate Fees paid to GMSP by all of the GNA
Entities with respect to such calendar month.
INVESTMENT MANAGEMENT AGREEMENT
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5. ACTIVITIES OF GMSP.
(a) The services of GMSP to GNA are not deemed to be
exclusive, and GMSP shall be free to engage in any other business or to render
similar services to others. GMSP and any member of the GMSP Group may engage
independently or with others, for its or their own accounts and for the accounts
of others, in other business ventures and activities of every nature and
description, including, without limitation, purchasing, selling or holding
Securities for the account of any other Person or for its or his own account,
including Securities included within the Portfolio or eligible for investment
pursuant to this Agreement; provided, that the management of such entities and
accounts do not interfere with the performance of their obligations and duties
to GNA pursuant to this Agreement. GNA shall not have any rights or obligations
by virtue of this Agreement in and to such independent ventures and activities
or the income or profits derived therefrom. The foregoing notwithstanding,
without the prior written consent of GNA in a specific case, GMSP shall at all
times adhere, and cause the members of the GMSP Group or the GMSP Principals, as
the case may be, to adhere, to the following:
(i) Neither GMSP nor any member of the GMSP Group
shall act, either as principal or agent, on the opposite side of any transaction
in which GNA or the Portfolio is involved.
(ii) GMSP and each GMSP Principal shall at all times
(A) place the interests of GNA before such member's personal transactional
interests; (B) conduct all personal transactions in Securities in such a manner
as to avoid any actual or potential conflict of interest or abuse of such
Person's position of trust and confidence in relation to GNA; and (C) promptly
disclose to GNA all personal transactions made by or on behalf of such Person in
Securities which are or were at any time during the preceding two years in the
Portfolio or issued by Persons whose Securities are in the Portfolio.
(b) On any issue involving an actual or potential conflict of
interest which is not specifically authorized by or pursuant to this Agreement,
GMSP shall submit such issue to the Committee for prior approval, and shall take
such actions, if any, as are determined by the Committee to be necessary or
appropriate to ameliorate the conflict of interest. If GMSP carries out the
actions specified by the Committee in respect of a matter giving rise to a
conflict of interest, neither GMSP nor any member of the GMSP Group shall have
any liability to GNA in respect of actions taken in good faith by them as a
consequence of the approval by the Committee.
(c) GMSP shall be liable for any breach of this Section 5 by
any member of the GMSP Group as if GMSP had committed such breach.
6. DURATION AND TERMINATION. The term of this Agreement shall commence
on the date of this Agreement and shall continue until terminated:
(a) by the written agreement of GNA and GMSP;
(b) by GMSP upon not less than 90 days written notice to GNA
at any time after the third anniversary hereof;
(c) by GNA upon not less than 90 days written notice to GMSP
at any time after the third anniversary hereof;
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(d) by GNA, at any time, immediately upon written notice to
GMSP following (i) the good faith determination by both the Committee and
two-thirds of the members of the Board (excluding members of the Board
designated for election by GMSP or its successors in interest under the
Securities Purchase Agreement or otherwise affiliated with GMSP) that an event
that constitutes Cause has occurred and is continuing beyond any applicable
period for notice and opportunity to cure or (ii) the commencement by a
Governmental Authority of any Proceeding alleging any matter which, if proven,
would constitute Cause.
(e) by GMSP upon not less than 10 days notice in the event
that GNA defaults in the performance of any of its material obligations
hereunder and such default continues for not less than 10 days after GNA
receives notice of such default; provided, however, that in the event that such
default is of a nature that it cannot, with due diligence, be cured within 10
days, GMSP may not terminate this Agreement so long as GNA begins to cure such
default within 10 days and thereafter diligently pursues such cure to
completion.
Termination of this Agreement shall not terminate GMSP's obligations
under Section 3 to furnish reports concerning facts and circumstances prior to
termination or under Section 11 to maintain the confidentiality of Confidential
Information , terminate GNA's obligations to pay fees earned by GMSP prior to
the date of termination, or terminate either party's obligations to indemnify
the other party pursuant to this Agreement.
7. REPRESENTATIONS AND WARRANTIES OF GMSP.
(a) GMSP is a limited partnership duly organized, validly
existing and in good standing under the Texas Revised Limited Partnership Act,
as amended, and has the power and authority to own all of its properties and
assets and to carry on its business as now being conducted. GMSP is duly
qualified and in good standing (to the extent applicable) to transact business
in each jurisdiction in which the performance of its obligations hereunder
require such qualification except where the failure to be duly qualified or in
good standing would not have or reasonably be expected to have a GMSP Material
Adverse Effect.
(b) GMSP has all requisite power and authority to enter into
and perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement have been duly authorized by all necessary action
on the part of GMSP. This Agreement has been duly and validly executed and
delivered by GMSP and, assuming the due authorization, execution and delivery
hereof by GNA, constitutes the valid and binding obligation of GMSP, enforceable
against GMSP in accordance with its terms, except as would be limited by
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or
other similar laws affecting the enforcement of creditors' rights generally and
except that the availability of equitable remedies, including specific
performance, may be subject to the discretion of any court before which any
proceeding therefor may be brought.
(c) No declaration, filing or registration with, or notice to
or authorization, consent or approval of any Governmental Authority is necessary
for the execution, delivery and performance of this Agreement by GMSP other than
as described in the Securities Purchase Agreement or with the GNA Applicable
Insurance Department.
(d) The execution, delivery and performance of this Agreement
by GMSP do not and will not result in any violation by GMSP under any provisions
of:
(i) the partnership agreement or similar governing
documents of GMSP;
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(ii) any statute, law, ordinance, rule, regulation,
judgment, decree, order, injunction, writ, permit or license of any Governmental
Authority applicable to GMSP or any of its properties or assets; or
(iii) any note, bond, mortgage, indenture, deed of
trust, license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which GMSP is now a party or
by which it or any of its properties or assets may be bound or affected;
excluding from the foregoing clauses (ii) and (iii) such violations as could
not, individually or in the aggregate, reasonably be expected to have a GMSP
Material Adverse Effect;
(e) There is no Proceeding pending, or to the knowledge of
GMSP, threatened against GMSP that questions the validity of this Agreement or
any action to be taken by GMSP in connection with this Agreement except as could
not, individually or in the aggregate, reasonably be expected to have a GMSP
Material Adverse Effect.
(f) GMSP is, and during the term of this Agreement will
continue to be (i) either exempt from registration or duly registered as an
investment adviser under the Investment Advisers Act of 1940 and all Applicable
Laws and (ii) qualified and eligible to manage the Portfolio under the statutes
and regulations administered by the GNA Applicable Insurance Department,
provided that GNA shall inform GMSP immediately in the event that GNA becomes
aware of any changes in the qualification and eligibility requirements with
respect to such statutes and regulations. GMSP will provide prompt written
notice to GNA if GMSP ceases to be so registered or qualified or becomes aware
of any fact, event or circumstance which will or is reasonably likely to cause
it to cease to be so registered or qualified.
(g) Taken in the aggregate, the factual information
(including, without limitation, information regarding its knowledge, investment
experience and investment track record) furnished by GMSP to GNA subsequent to
May 11, 1999 in writing for purposes of this Agreement did not contain untrue
statements of material facts, or omit to state material facts necessary to make
the statements made not misleading in the light of the circumstances under which
they were made, as of the date as of which such information is dated. All
financial forecasts prepared and furnished by GMSP to GNA subsequent to May 11,
1999 were prepared in good faith on the basis of assumptions believed to be
reasonable and data, information, tests or conditions believed to be valid or
accurate or to exist at the time such forecasts were prepared.
(h) All of the equipment, Software and computer hardware owned
or used by GMSP or used and operated by third parties on behalf of GMSP, which
performs or is or may be required to perform functions involving dates or the
computation of dates, or containing date related data, has the programming,
design and performance capabilities to ensure that:
(i) it will not suffer any Malfunction that would
reasonably be expected to have a GMSP Material Adverse Effect; and
(ii) it will not, as a result of the date change at
the end of the twentieth century or the input, processing, storage or use of
dates up to and including December 31, 2001, (A) be adversely affected, (B)
require changes in inputting or operating practices, (C) produce invalid or
incorrect output or results, (D) cause any abnormal ending scenario, or (E)
suffer any diminution in functionality or performance that, in any of the above,
could reasonably be expected to have a GMSP Material Adverse Effect.
INVESTMENT MANAGEMENT AGREEMENT
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8. REPRESENTATIONS AND WARRANTIES OF GNA.
(a) GNA is an insurance company duly organized and validly
existing under the laws of the State of Texas, and has the power and authority
to own all of its properties and assets and to carry on its business as now
being conducted. GNA is duly qualified and in good standing to transact business
in each jurisdiction in which the performance of its obligations hereunder
require such qualification except where the failure to be duly qualified or in
good standing would not have or reasonably be expected to have a GNA Material
Adverse Effect.
(b) GNA has all requisite power and authority to enter into
and perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement have been duly authorized by all necessary action
on the part of GNA. This Agreement has been duly and validly executed and
delivered by GNA and, assuming the due authorization, execution and delivery
hereof by GMSP, constitutes the valid and binding obligation of GNA, enforceable
against GNA in accordance with its terms, except as would be limited by
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or
other similar laws affecting the enforcement of creditors' rights generally and
except that the availability of equitable remedies, including specific
performance, may be subject to the discretion of any court before which any
proceeding therefor may be brought.
(c) No declaration, filing or registration with, or notice to
or authorization, consent or approval of any Governmental Authority is necessary
for the execution, delivery and performance of this Agreement by GNA other than
as described in the Securities Purchase Agreement or with the GNA Applicable
Insurance Department.
(d) The execution, delivery and performance of this Agreement
by GNA do not and will not result in any violation by GNA under any provisions
of:
(i) articles of incorporation or similar governing
documents of GNA;
(ii) any statute, law, ordinance, rule, regulation,
judgment, decree, order, injunction, writ, permit or license of any Governmental
Authority applicable to GNA or any of its properties or assets; or
(iii) any note, bond, mortgage, indenture, deed of
trust, license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which GNA is now a party or
by which it or any of its properties or assets may be bound or affected;
excluding from the foregoing clauses (ii) and (iii) such violations as could
not, in the aggregate, reasonably be expected to have a GNA Material Adverse
Effect.
(e) There is no Proceeding pending, or to the knowledge of
GNA, threatened against GNA that questions the validity of this Agreement or any
action to be taken by GNA in connection with this Agreement except as could not,
in the aggregate, reasonably be expected to have a GNA Material Adverse Effect.
(f) GNA has such knowledge and experience in financial and
business matters that it is capable of evaluating the risks and merits of
entering into this Agreement.
INVESTMENT MANAGEMENT AGREEMENT
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(g) No part of the funds to be used to purchase and hold
Securities or to pay any amounts pursuant to this Agreement constitutes an asset
of any employee benefit plan within the meaning of Section 3 of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and GNA is not a
"benefit plan investor" (as such term is defined in 29 C.F.R. Section
2510.3-101(f)(2)).
9. LIABILITY. It is recognized that decisions concerning investments or
potential investments involve the exercise of judgment and the risk of loss. To
the extent permitted by Applicable Law, neither GMSP nor any of its officers,
directors, or employees nor other members of the GMSP Group shall be liable for
any loss suffered by GNA on account of such investments, or any act taken or
omission made in good faith under this Agreement. For purposes of the foregoing
sentence, no action or omission by GMSP shall be considered to have been made
"in good faith" if GMSP was negligent, violated any law, or made any
misrepresentation (whether affirmatively or by omission).
10. INDEMNIFICATION.
(a) GNA shall indemnify, defend, and hold harmless GMSP and
the GMSP Principals from and against any and all claims, actions, causes of
action, demands, losses, damages, liabilities, costs, and expenses (including
reasonable attorneys' fees and expenses) (collectively, "Damages"), asserted
against, resulting to, imposed upon, or incurred by any of them, directly or
indirectly, by reason of or resulting from (i) any Breach by GNA of any of its
representations, warranties, covenants, or agreements contained in this
Agreement or in any certificate, instrument, or document delivered pursuant
hereto or (ii) any Proceeding brought against any of them by a Person other than
GNA or any of its Affiliates, Associates or shareholders in respect of any
action taken in good faith on behalf of GNA in the course of the performance of
GMSP's duties under this Agreement; provided, however, that GNA shall indemnify,
defend, and hold harmless GMSP and the GMSP Principals from and against any
reasonable expenses incurred by such Person(s) in connection with a Proceeding
brought against any of them by any of GNA's shareholders if such Person(s) is
wholly successful, on the merits or otherwise, in the defense of such
Proceeding, and provided, further, that GNA's obligation to indemnify, defend
and hold harmless as provided in this Section 10(a) shall not apply to the first
$750,000 in the aggregate of claims hereunder (other than claims for expenses in
defending a Proceeding for which the Person is entitled to indemnification under
clause (ii) of this Section) and provided, further, that such $750,000 amount
shall be reduced dollar-for-dollar by an amount equal to the cumulative
aggregate of all claims made under one or more of the GNA Investment Management
Agreements.
(b) GMSP shall indemnify, defend, and hold harmless GNA and
its Affiliates, Associates, directors, officers and employees from and against
any and all Damages asserted against, resulting to, imposed upon, or incurred by
any of them, directly or indirectly, by reason of or resulting from any Breach
by GMSP of any of its representations, warranties, covenants, or agreements
contained in this Agreement or in any certificate, instrument, or document
delivered pursuant hereto; provided, however, that GMSP's obligation to
indemnify, defend and hold harmless as provided in this Section 10(b) shall not
apply to the first $750,000 in the aggregate of claims hereunder and provided,
further, that such $750,000 amount shall be reduced dollar-for-dollar by an
amount equal to the cumulative aggregate of all claims made under one or more of
the GNA Investment Management Agreements.
(c) Promptly after receipt by an indemnified party under
Section 10(a) or (b) of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against an
indemnifying party under such Section, give written notice to the indemnifying
party of the commencement thereof, but the failure so to notify the indemnifying
party shall not relieve it of any liability
INVESTMENT MANAGEMENT AGREEMENT
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that it may have to any indemnified party except to the extent the indemnifying
party demonstrates that the defense of such action is prejudiced thereby. In
case any such action shall be brought against an indemnified party and it shall
give written notice to the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate therein and, to the extent
that it may wish, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party. If the indemnifying party elects to
assume the defense of such action, the indemnified party shall have the right to
employ separate counsel at its own expense and to participate in the defense
thereof. If the indemnifying party elects not to assume (or fails to assume) the
defense of such action, the indemnified party shall be entitled to assume the
defense of such action with counsel of its own choice, at the expense of the
indemnifying party. If the action is asserted against both the indemnifying
party and the indemnified party and there is a conflict of interests which
renders it inappropriate for the same counsel to represent both the indemnifying
party and the indemnified party, the indemnifying party shall be responsible for
paying for separate counsel for the indemnified party; provided, however, that
if there is more than one indemnified party, the indemnifying party shall not be
responsible for paying for more than one separate firm of attorneys to represent
the indemnified parties, regardless of the number of indemnified parties. The
indemnifying party shall have no liability with respect to any compromise or
settlement of any action effected without its written consent (which shall not
be unreasonably withheld).
11. CONFIDENTIALITY. Each of GMSP and GNA shall keep all Confidential
Information in confidence, and shall not disclose said information to any other
party other than such party's employees, advisors, attorneys and accountants,
who will be advised of the confidential nature of information. Each party shall
protect the Confidential Information with the same degree of care as such party
normally uses in the protection of its confidential and proprietary information.
Each party further agrees not to use Confidential Information for any purpose
except in connection with the performance of its duties under this Agreement.
The restrictions set forth herein shall not apply with respect to Confidential
Information which (i) is already generally available to the public when received
by such party; (ii) becomes available to the public through no fault of any
member of the GMSP Group or GNA, as applicable; or (iii) is required to be
disclosed by Applicable Law or a Governmental Authority.
12. INSURANCE. GMSP shall maintain at all times during the term of this
Agreement fiduciary liability insurance of the type customary for investment
managers in similar situations naming GNA as an insured with such limits, terms,
conditions and "tail" provisions as are reasonably acceptable to GNA and GMSP
and shall provide GNA with complete copies of all binders and other policy
information. GMSP also shall obtain and maintain a fidelity bond in the amount
of not less than $5,000,000 and otherwise containing terms and conditions
reasonably acceptable to GNA. In the event that any such policy or bond is
canceled or suspended, GMSP promptly shall notify GNA in writing.
13. NOTICES. All notices required to be given in writing hereunder
shall be deemed to have been given if (i) delivered personally or by documented
courier or delivery service, (ii) transmitted by facsimile or (iii) mailed by
registered or certified mail (return receipt requested and postage prepaid) to
the following listed Persons at the addresses and facsimile numbers specified
below, or to such other Persons, addresses or facsimile numbers as a party
entitled to notice shall give, in the manner hereinabove described, to the
others entitled to notice:
If to GMSP, to: 777 Main Street, Suite 2250
Fort Worth, Texas 76102
Attention: J. Randall Chappel
Fax: (817) 820-6651
INVESTMENT MANAGEMENT AGREEMENT
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If to GNA, to: 500 Commerce Street
Fort Worth, Texas 76102-5439
Attention: President
Fax: (817) 338-1454
If given personally or by documented courier or delivery service, a notice shall
be deemed to have been given when it is received. If transmitted by facsimile, a
notice shall be deemed to have been given on the date received, if electronic
confirmation of receipt occurs during normal business hours on a Business Day,
and otherwise, on the first Business Day following electronic confirmation of
receipt. If given by mail, it shall be deemed to have been given on the third
Business Day following the day on which it was posted.
14. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof.
15. NATURE OF RELATIONSHIP. The parties hereto intend that the services
provided by GMSP to GNA pursuant to this Agreement are being provided as an
independent contractor. Nothing contained in this Agreement shall constitute or
be construed to be or create a general partnership or joint venture between GMSP
and GNA or their respective successors or assigns.
16. BINDING EFFECT; ASSIGNMENT; NO THIRD PARTY BENEFIT. This Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, legal representatives, successors, and permitted assigns.
Neither this Agreement nor any of the rights, interests, or obligations
hereunder may be assigned by either of the parties hereto without the prior
written consent of the other party. Nothing in this Agreement, express or
implied, is intended to or shall confer upon any Person other than the parties
hereto, and their respective heirs, legal representatives, successors, and
permitted assigns, any rights, benefits, or remedies of any nature whatsoever
under or by reason of this Agreement.
17. INTERPRETATION. The headings contained in this Agreement are for
reference purposes only and shall not affect the meaning or interpretation of
this Agreement. For purposes of this Agreement, the words "includes" and
"including" shall mean "including without limitation" and the word "or" is used
in the inclusive sense. All capitalized terms defined herein are equally
applicable to both the singular and plural forms.
18. SEVERABILITY. In the event that this Agreement, or any of its
provisions, or the performance of any provision, is found to be illegal or
unenforceable under applicable law now or hereafter in effect, the parties shall
be excused from performance of such portions of this Agreement as shall be found
to be illegal or unenforceable under the applicable laws or regulations without
affecting the validity of the remaining provisions of the Agreement.
19. TIME OF ESSENCE. With regard to all dates and time periods set
forth in this Agreement, time is of the essence.
20. NO WAIVER OF PRIVILEGE. Neither GNA nor GMSP nor any of their
respective subsidiaries or affiliates waives any attorney-client, work product
or other privilege with respect to any information furnished pursuant to this
Agreement.
INVESTMENT MANAGEMENT AGREEMENT
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21. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD
TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
22. COUNTERPARTS. This Agreement may be executed by the parties hereto
in any number of counterparts, each of which shall be deemed an original, but
all of which shall constitute one and the same agreement. Each counterpart may
consist of a number of copies hereof each signed by less than all, but together
signed by all, the parties hereto.
[Intentionally Left Blank]
INVESTMENT MANAGEMENT AGREEMENT
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IN WITNESS WHEREOF, GMSP and GNA have caused this Agreement to be
executed all as of the day and year first above written.
GAINSCO SERVICES CORP.,
a Texas corporation
By: /s/ Glenn W. Anderson
-----------------------------------------------------
Glenn W. Anderson, President
GOFF MOORE STRATEGIC PARTNERS, L.P.,
a Texas limited partnership
By: GMSP Operating Partners, L.P., its general partner
By: GMSP, L.L.C., its general partner
By: /s/ John C. Goff
-------------------------------------------------
John C. Goff, Managing Principal
By: /s/ J. Randall Chappell
-------------------------------------------------
J. Randall Chappel, Principal
INVESTMENT MANAGEMENT AGREEMENT
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<PAGE> 65
INVESTMENT MANAGEMENT AGREEMENT
FOR
MIDWEST CASUALTY INSURANCE COMPANY
THIS INVESTMENT MANAGEMENT AGREEMENT (this "Agreement") is entered into
this 1st day of January, 2000, by and between Goff Moore Strategic Partners,
L.P., a Texas limited partnership ("GMSP"), and Midwest Casualty Insurance
Company, a North Dakota insurance corporation ("GNA"), an indirect subsidiary of
GAINSCO, INC. ("Parent").
WHEREAS, GNA is a regulated insurance company;
WHEREAS, GNA desires to appoint GMSP to serve as investment manager
with respect to certain investments held by it; and
WHEREAS, GMSP is willing to provide investment advisory services to GNA
on the terms and conditions hereinafter set forth.
NOW, THEREFORE, for and in consideration of the premises, the mutual
covenants herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, GMSP and GNA hereby
agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Affiliate" means, with respect to any Person, any other Person that
directly, or indirectly, through one or more intermediaries controls, is
controlled by or is under common control with such specified Person. For this
purpose the term "control" (including the terms "controlling", "controlled by"
and "under common control with") shall mean the possession, direct or indirect,
of the power to direct or cause the direction of the management and policies of
a Person whether through the ownership of voting Securities, by contract, or
otherwise.
"Agreement" has the meaning set forth in the first paragraph hereof.
"Applicable Law" means any statute, law, rule, policy, guideline, or
regulation or any judgment, order, writ, injunction, or decree of any
Governmental Authority to which a specified Person or property is subject.
"Associate" means (i) any corporation or entity (other than GNA, Parent
or a Subsidiary of GNA or Parent) of which such Person is an officer or partner
or is, directly or indirectly, the beneficial owner of 10 percent or more of any
class of Equity Securities, (ii) any trust or other estate in which such Person
has a substantial beneficial interest or as to which such Person serves as
trustee or in a similar fiduciary capacity, and (iii) any relative or spouse of
such Person, or any relative of such Person, or any relative of such spouse, who
has the same home as such Person or who is a director or officer of GNA or any
of its Subsidiaries.
"Board" means the board of directors of GNA.
INVESTMENT MANAGEMENT AGREEMENT 1
<PAGE> 66
"Breach" means any violation or breach of, any misrepresentation or
inaccuracy in, any default under, or any failure to perform or comply with any
representation, warranty, covenant, obligation, or other provision of this
Agreement.
"Business Day" means any day other than a Saturday or Sunday on which
national banks are open for business in Fort Worth, Texas and New York, New
York.
"Cash" means any currency or immediately available funds on deposit
with a financial institution.
"Cause" means that GMSP has committed or engaged in (i) any
malfeasance, bad faith or negligence in respect of GMSP's material duties
pursuant to this Agreement; (ii) any commission of any fraud by GMSP; (iii) any
conviction or indictment of or plea of no contest to any felony by GMSP or any
member of the GMSP Group; (iv) any violation of the provisions of the U. S.
federal securities laws or state securities laws by GMSP or any GMSP Principal;
or (v) any material breach by GMSP of its obligations (including, without
limitation, its obligations to observe and comply with the provisions of the
Policy Letter) under, or its representations or warranties in, this Agreement if
such breach continues for more than 10 days after GMSP receives written notice,
specifying such breach with particularity and demanding cure, from GNA.
"Committee" means the Board's Investment Committee, none of the members
of which shall be members of the GMSP Group.
"Confidential Information" means information received by GMSP from GNA
or received by GNA from GMSP that is not generally known or which would
logically be considered confidential or proprietary, or which would do GNA or
GMSP, as applicable, harm if divulged, or which is marked "Confidential
Information."
"Damages" has the meaning set forth in Section 10.
"Equity Securities" means any capital stock or other equity interests
of any Person, any Securities directly or indirectly convertible into, or
exercisable or exchangeable for any capital stock or other equity interests of
any Person, or any right, option, warrant or other Security which, with the
payment of additional consideration, the expiration of time or the occurrence of
any event shall give the holder thereof the right to acquire any capital stock
or other equity interests of any Person or any Security convertible into or
exercisable or exchangeable for, any capital stock or other equity interests of
any Person.
"Fair Market Value" means as to any Securities on any date, (a) if such
Securities are listed or admitted to trading on any national securities exchange
on any such trading day, the amount equal to the last sale price of such
Securities, regular way settlement, on such dates or, if no such sale takes
place on a date, the average of the closing bid and asked prices thereof on such
date, in each case as officially reported on the principal national securities
exchange on which such Securities are then listed or admitted to trading, (b) if
such Securities are not then listed or admitted to trading on any national
securities exchange but are reported through the automated quotation system of a
registered securities association, the last trading price of such Securities on
such dates, or if there shall have been no trading on a date, the average of the
closing bid and asked prices of such Securities on such date as shown by such
automated quotation system or (c) if such Securities are not then so listed,
admitted to trading or reported, the value determined by GMSP subject to review
and approval by the Committee, which valuation shall be equal to (i) cost or
(ii) in the event that either GMSP or the Committee determine that there has
been a material change in the value of such Securities since the date of
acquisition of such Securities, such other valuation as is reflective of the
value
INVESTMENT MANAGEMENT AGREEMENT 2
<PAGE> 67
of such Securities; provided, however, that, if GMSP and the Committee are
unable to agree on such fair market value, such Securities shall be valued by
such nationally recognized independent public accounting firm or investment
banking firm designated by the Committee and reasonably acceptable to GMSP. Any
such third-party valuation shall be final and binding on the parties and
enforceable in accordance with the provisions of the Texas General Arbitration
Act, and the costs and expenses thereof shall be shared equally by GMSP and GNA.
"Fees" has the meaning set forth in Section 4.
"GAAP" means generally accepted accounting principles for financial
reporting in the U.S., consistently applied.
"GMSP" has the meaning set forth in the introductory paragraph of this
Agreement.
"GMSP Group" means GMSP together with its Affiliates, Associates and
employees, including without limitation GMSP's partners, the partners of the
general partner of GMSP and the GMSP Principals.
"GMSP Material Adverse Effect" means any condition, circumstance or
development having an adverse effect on the ability of GMSP to conduct business,
the financial condition or the results of operations of GMSP that is material to
GMSP or as to the ability of GMSP to perform its obligations pursuant to this
Agreement, excluding any such condition, circumstance or development which
adversely affects the U.S. economy, financial markets or the insurance industry
generally.
"GMSP Principals" shall mean John C. Goff, J. Randall Chappel and any
other Persons employed by or otherwise affiliated with GMSP or its general
partner who have access to information regarding particular Securities being
considered for purchase or sale by GNA. The parties recognize that the limited
partners of GMSP as of the date hereof are not GMSP Principals.
"GNA" has the meaning set forth in the introductory paragraph of this
Agreement.
"GNA Applicable Insurance Department" means the Insurance Department
of North Dakota.
"GNA Entities" means GAINSCO, INC., a Texas corporation; GNA Insurance
Company, Inc., a Texas corporation; GAINSCO County Mutual Insurance Company, a
Texas mutual insurance company; General Agents Insurance Company of America,
Inc., an Oklahoma corporation and Midwest Casualty Insurance Company, a North
Dakota insurance corporation.
"GNA Investment Management Agreements" means the Investment Management
Agreements of even date herewith between GMSP and each of the GNA Entities,
including this Agreement.
"GNA Material Adverse Effect" means any condition, circumstance or
development having an adverse effect on the ability to conduct business, the
financial condition or the results of operations of GNA and its Subsidiaries
that is material to Parent and its Subsidiaries taken as a whole or as to the
ability of GNA to perform its obligations pursuant to this Agreement, excluding
any such condition, circumstance or development which adversely affects the U.S.
economy, financial markets or insurance industry generally.
INVESTMENT MANAGEMENT AGREEMENT 3
<PAGE> 68
"good faith", when used in respect of any action, means that the action
was taken with (i) honesty of intention, (ii) freedom from knowledge of
circumstances which ought to put the Person taking such action on inquiry or
negligence, and (iii) intention to abstain from taking any unconscientious
advantage of another.
"Governmental Authority" means any U.S. federal, state, local, foreign,
supernational or supranational court or tribunal, governmental, regulatory or
administrative agency, department, bureau, authority, commission or arbitral
panel.
"Investment Grade Debt Obligations" means any interest bearing debt
obligations issued by any Person, including a Governmental Authority, rated at
least "B minus" or the equivalent thereof by Standard & Poor's Corporation or
Moody's Investor's Service, Inc.
"Malfunction" means any failure to: (a) accurately recognize dates
falling before, on or after the Year 2000; or (b) accurately record, store,
retrieve and process data input and date information.
"Parent" has the meaning set forth in the first paragraph hereof.
"Person" means any individual, corporation, partnership, limited
liability company, association, trust or other entity or organization, including
any Governmental Authority.
"Policy Letter" has the meaning set forth in Section 2.
"Portfolio" means those investments held by GNA in Securities of the
type more particularly described under the category "Investments" in Parent's
periodic filings with the SEC.
"Proceedings" means all proceedings, actions, suits, investigations,
and inquiries by or before any arbitrator or Governmental Authority.
"Research" means research, statistical and similar information and
services.
"SEC" means the Securities and Exchange Commission.
"Security" means any capital stock, partnership interest, membership
interest, subscription, certificate of trust or other ownership interest,
warrant, bond, note, debenture, or other debt or equity interest of any Person
commonly known as a "security," and all rights and options relating to any of
the foregoing, regardless of whether traded on a national securities exchange;
but shall not include Cash Equivalents.
"Securities Purchase Agreement" means the Securities Purchase Agreement
dated June 29, 1999, between GMSP and Parent.
"Short Term Debt" means any note, draft, bill of exchange, or similar
security which has a maturity at the time of issuance of not exceeding nine (9)
months exclusive of days of grace, or any renewal thereof the maturity of which
is likewise limited.
"Subsidiary" means, with respect to any Person, any corporation or
other entity (including partnerships and other business associations) in which
the Person directly or indirectly owns at least a majority of the outstanding
voting Securities or other equity interests having the power, under ordinary
INVESTMENT MANAGEMENT AGREEMENT 4
<PAGE> 69
circumstances, to elect a majority of the directors, or otherwise to direct the
management and policies, of such corporation or other entity.
"U.S." means the United States of America.
"Year 2000" means the calendar year 2000 A.D.
2. INVESTMENT MANAGER. GNA hereby retains GMSP, and GMSP agrees to
serve, as investment manager with respect to the Portfolio on the terms and
conditions hereinafter set forth:
(a) The investment policies and all other actions of the
Portfolio are and shall at all times be subject to the oversight and direction
of the Committee. GMSP shall manage the Portfolio in accordance with the
investment objectives and policies set forth in the letter (the "Policy Letter")
heretofore delivered to GMSP by GNA. GNA may amend or supplement the contents of
the Policy Letter, including the investment criteria and other instructions set
forth therein, in whole or in part and at any time and from time to time;
provided, however, that no amendment or supplement shall be binding upon GMSP
until GMSP is notified of the amendment or supplement; and provided further,
that in the event that an amended or supplemented Policy Letter shall require
GMSP to make any changes in the manner in which GMSP has performed its services
pursuant to this Agreement, GMSP shall have a reasonable time period to comply
with such changes. GMSP shall periodically evaluate the provisions of the Policy
Letter and provide GNA with any recommendations for the amendment or
supplementation of the provisions of the Policy Letter that GMSP deems advisable
for the benefit of GNA. To the extent that the provisions of the Policy Letter,
as the same may be amended or supplemented from time to time, conflict with the
provisions of this Agreement, the provisions of this Agreement shall control.
(b) GNA will retain ownership and control of the assets in the
Portfolio at all times. The assets shall be held for the benefit of GNA solely
at one or more financial institutions or other locations specified from time to
time in the Policy Letter.
(c) Subject to the provisions of the Policy Letter and the
oversight and direction of the Committee, GMSP shall have authority to make all
specific investment decisions with respect to the assets in the Portfolio.
(d) GMSP shall exercise its discretion and discharge its
obligations under this Agreement in compliance with all Applicable Laws.
(e) GMSP shall employ and dedicate to GNA continuously during
the term of this Agreement a qualified investment portfolio manager reasonably
acceptable to GNA, who shall have the primary responsibilities of coordinating
all aspects of the day-to-day investment activities of the Portfolio.
(f) GNA acknowledges that GMSP has informed GNA that GMSP
currently is not registered as an (i) investment adviser under the Investment
Advisers Act of 1940, as amended, and all other Applicable Laws or (ii) a broker
or dealer under the Securities Exchange Act of 1934, as amended, and all other
Applicable Laws.
INVESTMENT MANAGEMENT AGREEMENT 5
<PAGE> 70
3. REPORTS.
(a) GMSP shall provide to GNA periodic financial reports with
respect to the assets in and investment performance of the Portfolio. The
reports shall include such financial information in such format as GNA may
reasonably request in connection with the administration of the Portfolio and a
record of all transactions effected during the interim period from the preceding
report, including the price per Security, the broker or dealer executing the
transaction and the commissions paid. The reports shall be made with such
frequency, but not less often than within 20 days following the end of each
calendar month, as GNA may reasonably request in connection with the
administration of the Portfolio; provided that the late delivery of a complete
report no more than one time in any three-year period with respect to any
particular Security in the Portfolio shall not constitute a Breach of this
Agreement if (i) the delay was caused by the failure of an unaffiliated Person
in providing information to GMSP that had been timely requested by GMSP, (ii)
any portion of the report that is not dependent upon the unaffiliated Person is
delivered to GNA by GMSP on a timely basis, and (iii) GMSP uses its commercially
reasonable efforts to cause such late report to be delivered as promptly as
practicable.
(b) GMSP shall (i) afford GNA and its authorized
representatives reasonable access to the GMSP Principals, GMSP's offices and
other facilities, and all books, records and other documents of GMSP relating to
the Portfolio or this Agreement and (ii) permit GNA and its authorized
representatives to make such inspections and copies of all books, records and
other documents as they may reasonably require to verify the accuracy of any
report furnished pursuant to Section 3(a).
4. COMPENSATION; EXPENSES.
(a) For services performed by GMSP, GNA agrees to pay to GMSP
investment management fees (the "Fees") equal on an annual basis to (i) 30 basis
points multiplied by the Fair Market Value with respect to any portion of the
Portfolio invested in Short Term Debt or Investment Grade Debt Obligations at
the end of a given calendar month or during a majority of the days in the given
calendar month and (ii) 100 basis points multiplied by the Fair Market Value
with respect to any portion of the Portfolio invested in Equity Securities or
other alternative investments in Securities which are not Investment Grade Debt
Obligations. The Fees otherwise payable with respect to any calendar month (or
prorated portion thereof) shall be reduced by an amount equal to the sum of (i)
the amount of fees, commissions and expenses paid by or on behalf of GNA to any
investment or mutual fund from which any member of the GMSP Group is eligible to
receive compensation or profits plus (ii) the amount of any fees paid by or on
behalf of GNA to or accrued for the benefit of any member of the GMSP Group
under Rule 12b-1 promulgated under the Investment Company Act of 1940, as
amended, plus (iii) the amount of any finder's fees, brokerage commissions or
other benefit or compensation paid by or on behalf of GNA to or accrued for the
benefit of any member of the GMSP Group in connection with any transaction in
Securities pursuant to this Agreement. Notwithstanding anything to the contrary
contained in this Agreement, (x) no Fees shall be payable with respect to any
portion of the Portfolio invested in Cash during a majority of the days in the
given calendar month and (y) the Committee and GMSP may agree upon a different
Fee structure for special situations.
(b) The Fees shall be based on the Fair Market Value of the
assets in the Portfolio at the end of each calendar month, and shall be
calculated at the end of each calendar month based upon the actual number of
days elapsed during the calendar month, during which this Agreement is in effect
over a year of 365 days. Within fifteen (15) days after the end of each calendar
month, GNA shall pay to GMSP the Fees earned with respect to the preceding
calendar month. In the event of termination prior to the end of a calendar
month, GNA will pay to GMSP a prorated portion of the Fees based upon the Fair
Market
INVESTMENT MANAGEMENT AGREEMENT 6
<PAGE> 71
Value of the assets in the Portfolio at the time of termination. No other fees,
charges or assessments shall be payable by GNA to or for the benefit of GMSP or
any member of the GMSP Group with respect to the services performed by GMSP
pursuant to this Agreement, provided that GNA shall have the responsibility to
reimburse GMSP for GMSP's payment of any amounts described pursuant to Section
4(d) below. There shall not be any annual reconciliation, adjustment or other
"true-up" at the end of each calendar year.
(c) GMSP shall be solely responsible for all of its general
and administrative costs and expenses incurred in connection with performing its
duties and obligations under this Agreement, which shall consist of all costs
and expenses in connection with the provision of office space and facilities,
equipment and personnel for servicing the investments of the Portfolio and the
salaries and fees of all personnel employed by GMSP performing services relating
to research, statistical and investment activities.
(d) GNA shall be responsible for, and pay directly, the
following costs and expenses related to GMSP's performance of its duties
pursuant to this Agreement that are reasonable and payable to Persons not
affiliated with the GMSP Group:
(i) brokerage commissions and other costs, fees and
expenses incurred in the purchase and sale of Securities;
(ii) fees and expenses of custodians selected
pursuant to Section 2(b);
(iii) costs related to third party Proceedings
involving GNA's ownership of Securities pursuant to this Agreement, directly or
indirectly, including, without limitation, attorneys' fees incurred in
connection therewith (but excluding all costs related to Proceedings or other
disputes between GNA and GMSP or any member of the GMSP Group or which
constitute Cause);
(iv) interest on and fees and expenses arising out of
all borrowings made by GNA with respect to the purchase of Securities,
including, but not limited to, the arranging thereof;
(v) taxes, fees or other governmental charges levied
against GNA; and
(vi) any other expense, whether ordinary or
extraordinary, that is determined by the Committee to be appropriate for GNA to
pay pursuant to this Agreement.
(e) In discharging its duties pursuant to this Agreement, GMSP
may give preference, and may cause GNA to pay higher negotiated commission
rates, to unaffiliated brokers which, in addition to having the capacity of
obtaining the best price for the Security itself and of executing the order with
speed, efficiency and confidentiality, also provide Research to GMSP or GNA.
Research furnished by brokers through whom Securities transactions are effected
may be used by GMSP in servicing all of its accounts, and there shall be no
reduction in the compensation of GMSP hereunder as a consequence of its receipt
of such Research. In the allocation of brokerage, however, GMSP must determine
in good faith, and demonstrate to GNA upon request, that the amount of the
commission is reasonable in relation to the value of the brokerage services and
Research provided by the broker, viewed in terms of either the particular
transaction or GMSP's overall responsibilities with respect to the Portfolio. In
the allocation of brokerage for the Portfolio, GMSP shall be subject always to
Applicable Law and such policies and requirements that the Committee may adopt
or approve as reflected in the Policy Letter.
INVESTMENT MANAGEMENT AGREEMENT 7
<PAGE> 72
(f) In the event that, in any calendar month, the aggregate
amount of Fees (as such term is defined in the respective GNA Investment
Management Agreements) paid to GMSP by the GNA Entities pursuant to the GNA
Investment Management Agreements is less than $75,000, GNA shall pay to GMSP an
amount equal to the product of (i) the quotient of the Fair Market Value of the
Portfolio divided by the Fair Market Value of all of the Portfolios (as such
term is defined in the respective GNA Investment Management Agreements) of all
of the GNA Entities, multiplied by (ii) an amount equal to the difference
between $75,000 and the sum of the aggregate Fees paid to GMSP by all of the GNA
Entities with respect to such calendar month.
5. ACTIVITIES OF GMSP.
(a) The services of GMSP to GNA are not deemed to be
exclusive, and GMSP shall be free to engage in any other business or to render
similar services to others. GMSP and any member of the GMSP Group may engage
independently or with others, for its or their own accounts and for the accounts
of others, in other business ventures and activities of every nature and
description, including, without limitation, purchasing, selling or holding
Securities for the account of any other Person or for its or his own account,
including Securities included within the Portfolio or eligible for investment
pursuant to this Agreement; provided, that the management of such entities and
accounts do not interfere with the performance of their obligations and duties
to GNA pursuant to this Agreement. GNA shall not have any rights or obligations
by virtue of this Agreement in and to such independent ventures and activities
or the income or profits derived therefrom. The foregoing notwithstanding,
without the prior written consent of GNA in a specific case, GMSP shall at all
times adhere, and cause the members of the GMSP Group or the GMSP Principals, as
the case may be, to adhere, to the following:
(i) Neither GMSP nor any member of the GMSP Group
shall act, either as principal or agent, on the opposite side of any transaction
in which GNA or the Portfolio is involved.
(ii) GMSP and each GMSP Principal shall at all times
(A) place the interests of GNA before such member's personal transactional
interests; (B) conduct all personal transactions in Securities in such a manner
as to avoid any actual or potential conflict of interest or abuse of such
Person's position of trust and confidence in relation to GNA; and (C) promptly
disclose to GNA all personal transactions made by or on behalf of such Person in
Securities which are or were at any time during the preceding two years in the
Portfolio or issued by Persons whose Securities are in the Portfolio.
(b) On any issue involving an actual or potential conflict of
interest which is not specifically authorized by or pursuant to this Agreement,
GMSP shall submit such issue to the Committee for prior approval, and shall take
such actions, if any, as are determined by the Committee to be necessary or
appropriate to ameliorate the conflict of interest. If GMSP carries out the
actions specified by the Committee in respect of a matter giving rise to a
conflict of interest, neither GMSP nor any member of the GMSP Group shall have
any liability to GNA in respect of actions taken in good faith by them as a
consequence of the approval by the Committee.
(c) GMSP shall be liable for any breach of this Section 5 by
any member of the GMSP Group as if GMSP had committed such breach.
6. DURATION AND TERMINATION. The term of this Agreement shall commence
on the date of this Agreement and shall continue until terminated:
INVESTMENT MANAGEMENT AGREEMENT 8
<PAGE> 73
(a) by the written agreement of GNA and GMSP;
(b) by GMSP upon not less than 90 days written notice to GNA
at any time after the third anniversary hereof;
(c) by GNA upon not less than 90 days written notice to GMSP
at any time after the third anniversary hereof;
(d) by GNA, at any time, immediately upon written notice to
GMSP following (i) the good faith determination by both the Committee and
two-thirds of the members of the Board (excluding members of the Board
designated for election by GMSP or its successors in interest under the
Securities Purchase Agreement or otherwise affiliated with GMSP) that an event
that constitutes Cause has occurred and is continuing beyond any applicable
period for notice and opportunity to cure or (ii) the commencement by a
Governmental Authority of any Proceeding alleging any matter which, if proven,
would constitute Cause.
(e) by GMSP upon not less than 10 days notice in the event
that GNA defaults in the performance of any of its material obligations
hereunder and such default continues for not less than 10 days after GNA
receives notice of such default; provided, however, that in the event that such
default is of a nature that it cannot, with due diligence, be cured within 10
days, GMSP may not terminate this Agreement so long as GNA begins to cure such
default within 10 days and thereafter diligently pursues such cure to
completion.
Termination of this Agreement shall not terminate GMSP's obligations
under Section 3 to furnish reports concerning facts and circumstances prior to
termination or under Section 11 to maintain the confidentiality of Confidential
Information, terminate GNA's obligations to pay fees earned by GMSP prior to
the date of termination, or terminate either party's obligations to indemnify
the other party pursuant to this Agreement.
7. REPRESENTATIONS AND WARRANTIES OF GMSP.
(a) GMSP is a limited partnership duly organized, validly
existing and in good standing under the Texas Revised Limited Partnership Act,
as amended, and has the power and authority to own all of its properties and
assets and to carry on its business as now being conducted. GMSP is duly
qualified and in good standing (to the extent applicable) to transact business
in each jurisdiction in which the performance of its obligations hereunder
require such qualification except where the failure to be duly qualified or in
good standing would not have or reasonably be expected to have a GMSP Material
Adverse Effect.
(b) GMSP has all requisite power and authority to enter into
and perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement have been duly authorized by all necessary action
on the part of GMSP. This Agreement has been duly and validly executed and
delivered by GMSP and, assuming the due authorization, execution and delivery
hereof by GNA, constitutes the valid and binding obligation of GMSP, enforceable
against GMSP in accordance with its terms, except as would be limited by
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or
other similar laws affecting the enforcement of creditors' rights generally and
except that the availability of equitable remedies, including specific
performance, may be subject to the discretion of any court before which any
proceeding therefor may be brought.
INVESTMENT MANAGEMENT AGREEMENT 9
<PAGE> 74
(c) No declaration, filing or registration with, or notice to
or authorization, consent or approval of any Governmental Authority is necessary
for the execution, delivery and performance of this Agreement by GMSP other than
with the GNA Applicable Insurance Department.
(d) The execution, delivery and performance of this Agreement
by GMSP do not and will not result in any violation by GMSP under any provisions
of:
(i) the partnership agreement or similar governing
documents of GMSP;
(ii) any statute, law, ordinance, rule, regulation,
judgment, decree, order, injunction, writ, permit or license of any Governmental
Authority applicable to GMSP or any of its properties or assets; or
(iii) any note, bond, mortgage, indenture, deed of
trust, license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which GMSP is now a party or
by which it or any of its properties or assets may be bound or affected;
excluding from the foregoing clauses (ii) and (iii) such violations as could
not, individually or in the aggregate, reasonably be expected to have a GMSP
Material Adverse Effect;
(e) There is no Proceeding pending, or to the knowledge of
GMSP, threatened against GMSP that questions the validity of this Agreement or
any action to be taken by GMSP in connection with this Agreement except as could
not, individually or in the aggregate, reasonably be expected to have a GMSP
Material Adverse Effect.
(f) GMSP is, and during the term of this Agreement will
continue to be (i) either exempt from registration or duly registered as an
investment adviser under the Investment Advisers Act of 1940 and all Applicable
Laws and (ii) qualified and eligible to manage the Portfolio under the statutes
and regulations administered by the GNA Applicable Insurance Department,
provided that GNA shall inform GMSP immediately in the event that GNA becomes
aware of any changes in the qualification and eligibility requirements with
respect to such statutes and regulations. GMSP will provide prompt written
notice to GNA if GMSP ceases to be so registered or qualified or becomes aware
of any fact, event or circumstance which will or is reasonably likely to cause
it to cease to be so registered or qualified.
(g) Taken in the aggregate, the factual information
(including, without limitation, information regarding its knowledge, investment
experience and investment track record) furnished by GMSP to GNA in writing for
purposes of this Agreement did not contain untrue statements of material facts,
or omit to state material facts necessary to make the statements made not
misleading in the light of the circumstances under which they were made, as of
the date as of which such information is dated. All financial forecasts prepared
and furnished by GMSP to GNA were prepared in good faith on the basis of
assumptions believed to be reasonable and data, information, tests or conditions
believed to be valid or accurate or to exist at the time such forecasts were
prepared.
(h) All of the equipment, Software and computer hardware owned
or used by GMSP or used and operated by third parties on behalf of GMSP, which
performs or is or may be required to perform functions involving dates or the
computation of dates, or containing date related data, has the programming,
design and performance capabilities to ensure that:
INVESTMENT MANAGEMENT AGREEMENT 10
<PAGE> 75
(i) it will not suffer any Malfunction that would
reasonably be expected to have a GMSP Material Adverse Effect; and
(ii) it will not, as a result of the date change at
the end of the twentieth century or the input, processing, storage or use of
dates up to and including December 31, 2001, (A) be adversely affected, (B)
require changes in inputting or operating practices, (C) produce invalid or
incorrect output or results, (D) cause any abnormal ending scenario, or (E)
suffer any diminution in functionality or performance that, in any of the above,
could reasonably be expected to have a GMSP Material Adverse Effect.
8. REPRESENTATIONS AND WARRANTIES OF GNA.
(a) GNA is an insurance company duly organized and validly
existing under the laws of the State of North Dakota, and has the power and
authority to own all of its properties and assets and to carry on its business
as now being conducted. GNA is duly qualified and in good standing to transact
business in each jurisdiction in which the performance of its obligations
hereunder require such qualification except where the failure to be duly
qualified or in good standing would not have or reasonably be expected to have a
GNA Material Adverse Effect.
(b) GNA has all requisite power and authority to enter into
and perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement have been duly authorized by all necessary action
on the part of GNA. This Agreement has been duly and validly executed and
delivered by GNA and, assuming the due authorization, execution and delivery
hereof by GMSP, constitutes the valid and binding obligation of GNA, enforceable
against GNA in accordance with its terms, except as would be limited by
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or
other similar laws affecting the enforcement of creditors' rights generally and
except that the availability of equitable remedies, including specific
performance, may be subject to the discretion of any court before which any
proceeding therefor may be brought.
(c) No declaration, filing or registration with, or notice to
or authorization, consent or approval of any Governmental Authority is necessary
for the execution, delivery and performance of this Agreement by GNA other than
with the GNA Applicable Insurance Department.
(d) The execution, delivery and performance of this Agreement
by GNA do not and will not result in any violation by GNA under any provisions
of:
(i) articles of incorporation or similar governing
documents of GNA;
(ii) any statute, law, ordinance, rule, regulation,
judgment, decree, order, injunction, writ, permit or license of any Governmental
Authority applicable to GNA or any of its properties or assets; or
(iii) any note, bond, mortgage, indenture, deed of
trust, license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which GNA is now a party or
by which it or any of its properties or assets may be bound or affected;
excluding from the foregoing clauses (ii) and (iii) such violations as could
not, in the aggregate, reasonably be expected to have a GNA Material Adverse
Effect.
INVESTMENT MANAGEMENT AGREEMENT 11
<PAGE> 76
(e) There is no Proceeding pending, or to the knowledge of
GNA, threatened against GNA that questions the validity of this Agreement or any
action to be taken by GNA in connection with this Agreement except as could not,
in the aggregate, reasonably be expected to have a GNA Material Adverse Effect.
(f) GNA has such knowledge and experience in financial and
business matters that it is capable of evaluating the risks and merits of
entering into this Agreement.
(g) No part of the funds to be used to purchase and hold
Securities or to pay any amounts pursuant to this Agreement constitutes an asset
of any employee benefit plan within the meaning of Section 3 of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and GNA is not a
"benefit plan investor" (as such term is defined in 29 C.F.R.
ss.2510.3-101(f)(2)).
9. LIABILITY. It is recognized that decisions concerning investments or
potential investments involve the exercise of judgment and the risk of loss. To
the extent permitted by Applicable Law, neither GMSP nor any of its officers,
directors, or employees nor other members of the GMSP Group shall be liable for
any loss suffered by GNA on account of such investments, or any act taken or
omission made in good faith under this Agreement. For purposes of the foregoing
sentence, no action or omission by GMSP shall be considered to have been made
"in good faith" if GMSP was negligent, violated any law, or made any
misrepresentation (whether affirmatively or by omission).
10. INDEMNIFICATION.
(a) GNA shall indemnify, defend, and hold harmless GMSP and
the GMSP Principals from and against any and all claims, actions, causes of
action, demands, losses, damages, liabilities, costs, and expenses (including
reasonable attorneys' fees and expenses) (collectively, "Damages"), asserted
against, resulting to, imposed upon, or incurred by any of them, directly or
indirectly, by reason of or resulting from (i) any Breach by GNA of any of its
representations, warranties, covenants, or agreements contained in this
Agreement or in any certificate, instrument, or document delivered pursuant
hereto or (ii) any Proceeding brought against any of them by a Person other than
GNA or any of its Affiliates, Associates or shareholders in respect of any
action taken in good faith on behalf of GNA in the course of the performance of
GMSP's duties under this Agreement; provided, however, that GNA shall indemnify,
defend, and hold harmless GMSP and the GMSP Principals from and against any
reasonable expenses incurred by such Person(s) in connection with a Proceeding
brought against any of them by any of GNA's shareholders if such Person(s) is
wholly successful, on the merits or otherwise, in the defense of such
Proceeding, and provided, further, that GNA's obligation to indemnify, defend
and hold harmless as provided in this Section 10(a) shall not apply to the first
$750,000 in the aggregate of claims hereunder (other than claims for expenses in
defending a Proceeding for which the Person is entitled to indemnification under
clause (ii) of this Section) and provided, further, that such $750,000 amount
shall be reduced dollar-for-dollar by an amount equal to the cumulative
aggregate of all claims made under one or more of the GNA Investment Management
Agreements.
(b) GMSP shall indemnify, defend, and hold harmless GNA and
its Affiliates, Associates, directors, officers and employees from and against
any and all Damages asserted against, resulting to, imposed upon, or incurred by
any of them, directly or indirectly, by reason of or resulting from any Breach
by GMSP of any of its representations, warranties, covenants, or agreements
contained in this Agreement or in any certificate, instrument, or document
delivered pursuant hereto; provided, however, that GMSP's obligation to
indemnify, defend and hold harmless as provided in this Section 10(b) shall not
apply
INVESTMENT MANAGEMENT AGREEMENT 12
<PAGE> 77
to the first $750,000 in the aggregate of claims hereunder and provided,
further, that such $750,000 amount shall be reduced dollar-for-dollar by an
amount equal to the cumulative aggregate of all claims made under one or more of
the GNA Investment Management Agreements.
(c) Promptly after receipt by an indemnified party under
Section 10(a) or (b) of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against an
indemnifying party under such Section, give written notice to the indemnifying
party of the commencement thereof, but the failure so to notify the indemnifying
party shall not relieve it of any liability that it may have to any indemnified
party except to the extent the indemnifying party demonstrates that the defense
of such action is prejudiced thereby. In case any such action shall be brought
against an indemnified party and it shall give written notice to the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it may wish, to assume
the defense thereof with counsel reasonably satisfactory to such indemnified
party. If the indemnifying party elects to assume the defense of such action,
the indemnified party shall have the right to employ separate counsel at its own
expense and to participate in the defense thereof. If the indemnifying party
elects not to assume (or fails to assume) the defense of such action, the
indemnified party shall be entitled to assume the defense of such action with
counsel of its own choice, at the expense of the indemnifying party. If the
action is asserted against both the indemnifying party and the indemnified party
and there is a conflict of interests which renders it inappropriate for the same
counsel to represent both the indemnifying party and the indemnified party, the
indemnifying party shall be responsible for paying for separate counsel for the
indemnified party; provided, however, that if there is more than one indemnified
party, the indemnifying party shall not be responsible for paying for more than
one separate firm of attorneys to represent the indemnified parties, regardless
of the number of indemnified parties. The indemnifying party shall have no
liability with respect to any compromise or settlement of any action effected
without its written consent (which shall not be unreasonably withheld).
11. CONFIDENTIALITY. Each of GMSP and GNA shall keep all Confidential
Information in confidence, and shall not disclose said information to any other
party other than such party's employees, advisors, attorneys and accountants,
who will be advised of the confidential nature of information. Each party shall
protect the Confidential Information with the same degree of care as such party
normally uses in the protection of its confidential and proprietary information.
Each party further agrees not to use Confidential Information for any purpose
except in connection with the performance of its duties under this Agreement.
The restrictions set forth herein shall not apply with respect to Confidential
Information which (i) is already generally available to the public when received
by such party; (ii) becomes available to the public through no fault of any
member of the GMSP Group or GNA, as applicable; or (iii) is required to be
disclosed by Applicable Law or a Governmental Authority.
12. INSURANCE. GMSP shall maintain at all times during the term of this
Agreement fiduciary liability insurance of the type customary for investment
managers in similar situations naming GNA as an insured with such limits, terms,
conditions and "tail" provisions as are reasonably acceptable to GNA and GMSP
and shall provide GNA with complete copies of all binders and other policy
information. GMSP also shall obtain and maintain a fidelity bond in the amount
of not less than $5,000,000 and otherwise containing terms and conditions
reasonably acceptable to GNA. In the event that any such policy or bond is
canceled or suspended, GMSP promptly shall notify GNA in writing.
13. NOTICES. All notices required to be given in writing hereunder
shall be deemed to have been given if (i) delivered personally or by documented
courier or delivery service, (ii) transmitted by facsimile or (iii) mailed by
registered or certified mail (return receipt requested and postage prepaid) to
the following
INVESTMENT MANAGEMENT AGREEMENT 13
<PAGE> 78
listed Persons at the addresses and facsimile numbers specified below, or to
such other Persons, addresses or facsimile numbers as a party entitled to notice
shall give, in the manner hereinabove described, to the others entitled to
notice:
If to GMSP, to: 777 Main Street, Suite 2250
Fort Worth, Texas 76102
Attention: J. Randall Chappel
Fax: (817) 820-6651
If to GNA, to: 500 Commerce Street
Fort Worth, Texas 76102-5439
Attention: President
Fax: (817) 338-1454
If given personally or by documented courier or delivery service, a notice shall
be deemed to have been given when it is received. If transmitted by facsimile, a
notice shall be deemed to have been given on the date received, if electronic
confirmation of receipt occurs during normal business hours on a Business Day,
and otherwise, on the first Business Day following electronic confirmation of
receipt. If given by mail, it shall be deemed to have been given on the third
Business Day following the day on which it was posted.
14. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof.
15. NATURE OF RELATIONSHIP. The parties hereto intend that the services
provided by GMSP to GNA pursuant to this Agreement are being provided as an
independent contractor. Nothing contained in this Agreement shall constitute or
be construed to be or create a general partnership or joint venture between GMSP
and GNA or their respective successors or assigns.
16. BINDING EFFECT; ASSIGNMENT; NO THIRD PARTY BENEFIT. This Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, legal representatives, successors, and permitted assigns.
Neither this Agreement nor any of the rights, interests, or obligations
hereunder may be assigned by either of the parties hereto without the prior
written consent of the other party. Nothing in this Agreement, express or
implied, is intended to or shall confer upon any Person other than the parties
hereto, and their respective heirs, legal representatives, successors, and
permitted assigns, any rights, benefits, or remedies of any nature whatsoever
under or by reason of this Agreement.
17. INTERPRETATION. The headings contained in this Agreement are for
reference purposes only and shall not affect the meaning or interpretation of
this Agreement. For purposes of this Agreement, the words "includes" and
"including" shall mean "including without limitation" and the word "or" is used
in the inclusive sense. All capitalized terms defined herein are equally
applicable to both the singular and plural forms.
18. SEVERABILITY. In the event that this Agreement, or any of its
provisions, or the performance of any provision, is found to be illegal or
unenforceable under applicable law now or hereafter in effect, the parties shall
be excused from performance of such portions of this Agreement as shall be found
to be illegal or unenforceable under the applicable laws or regulations without
affecting the validity of the remaining provisions of the Agreement.
INVESTMENT MANAGEMENT AGREEMENT 14
<PAGE> 79
19. TIME OF ESSENCE. With regard to all dates and time periods set
forth in this Agreement, time is of the essence.
20. NO WAIVER OF PRIVILEGE. Neither GNA nor GMSP nor any of their
respective subsidiaries or affiliates waives any attorney-client, work product
or other privilege with respect to any information furnished pursuant to this
Agreement.
21. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD
TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
22. COUNTERPARTS. This Agreement may be executed by the parties hereto
in any number of counterparts, each of which shall be deemed an original, but
all of which shall constitute one and the same agreement. Each counterpart may
consist of a number of copies hereof each signed by less than all, but together
signed by all, the parties hereto.
INVESTMENT MANAGEMENT AGREEMENT 15
<PAGE> 80
IN WITNESS WHEREOF, GMSP and GNA have caused this Agreement to be
executed all as of the day and year first above written.
MIDWEST CASUALTY INSURANCE COMPANY
a North Dakota insurance corporation
By: /s/ Herbert A. Hill
------------------------------------------
Herbert A. Hill, President
GOFF MOORE STRATEGIC PARTNERS, L.P.,
a Texas limited partnership
By: GMSP Operating Partners, L.P., its
general partner
By: GMSP, L.L.C., its general partner
By: /s/ John C. Goff
-------------------------------------
John C. Goff, Managing Principal
By: /s/ J. Randall Chappel
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J. Randall Chappel, Principal
INVESTMENT MANAGEMENT AGREEMENT 16
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EXHIBIT 10.14
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (this "Agreement") is made as of November
17, 1999, by and among GAINSCO, INC., a Texas corporation ("Buyer"), Herbert A.
Hill ("Hill"), Alan E. Heidt ("Heidt" and together with Hill, the "Sellers") and
Tri-State, Ltd., a North Dakota corporation ("TSL").
RECITALS:
WHEREAS, Sellers are the record and beneficial owners of all of the
outstanding capital stock of TSL; and
WHEREAS, Sellers desire to sell, and Buyer desires to purchase, all of
the issued and outstanding shares of the capital stock of TSL (the "Shares") for
the consideration and on the terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises, mutual covenants and
agreements set forth and for other good and valuable consideration, the
adequacy, sufficiency and receipt of which are hereby acknowledged, the parties
agree as follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement, the following terms have the meanings
specified or referred to in this Article I:
"Acquired Company" -- any of TSL or its Subsidiaries, and the term
"Acquired Companies" means TSL and its Subsidiaries, collectively.
"Applicable Contract" -- any Contract (a) under which any Acquired
Company has or may acquire any rights, (b) under which any Acquired Company has
or may become subject to any obligation or liability, or (c) by which any
Acquired Company or any of the assets owned or used by it is or may become
bound.
"Best Efforts" -- the efforts that a prudent Person desirous of
achieving a result would use in similar circumstances to ensure that such result
is achieved as expeditiously as possible.
"Breach" -- a "Breach" of a representation, warranty, covenant,
obligation, or other provision of this Agreement or any instrument delivered
pursuant to this Agreement will be deemed to have occurred if there is or has
been (a) any inaccuracy in or breach of, or any failure to perform or
STOCK PURCHASE AGREEMENT 1
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comply with, such representation, warranty, covenant, obligation, or other
provision, or (b) any claim (by any Person) or other occurrence or circumstance
that is or was inconsistent with such representation, warranty, covenant,
obligation, or other provision, and the term "Breach" means any such inaccuracy,
breach, failure, claim, occurrence, or circumstance.
"Buyer's Disclosure Letter" -- the disclosure letter delivered by Buyer
to Sellers concurrently with the execution and delivery of this Agreement.
"Closing Date" -- the date and time as of which the Closing actually
takes place.
"Consent" -- any approval, consent, ratification, waiver, or other
authorization (including any Governmental Authorization).
"Contemplated Transactions" -- all of the transactions contemplated by
this Agreement, including (a) the sale of the Shares by Sellers to Buyer; (b)
the execution, delivery, and performance of the Hill Employment Agreement, the
Heidt Employment Agreement and the Sellers' Release; (c) the performance by
Buyer, Sellers and TSL of their respective covenants and obligations under this
Agreement; and (d) Buyer's acquisition and ownership of the Shares and exercise
of control over the Acquired Companies.
"Contract" -- any agreement, contract, obligation, promise, or
undertaking (whether written or oral and whether express or implied) that is
legally binding, including any contract of insurance or reinsurance written by
or for the benefit of the specified Person
"December 31, 1999 Audit" -- the audit of the balance sheets and
related statements of income, changes in shareholders' equity, and cash flow for
the Acquired Companies as of and for the year ended December 31, 1999, performed
by Eide Bailly, LLP, independent certified public accountants.
"Employee Benefit Plan" -- any "Employee Pension Benefit Plan" (as
defined in Section 3(2) of ERISA), "Employee Welfare Benefit Plan" (as defined
in Section 3(1) of ERISA), "Multi-employer Plan" (as defined in Section 3(37) of
ERISA), plan of deferred compensation, medical plan, life insurance plan,
long-term disability plan, dental plan or other plan providing for the welfare
of any of TSL's employees or former employees or beneficiaries thereof (as
applicable), personnel policy (including but not limited to vacation time,
holiday pay, bonus programs, moving expense reimbursement programs and sick
leave), excess benefit plan, bonus or incentive plan (including but not limited
to stock options, restricted stock, stock bonus and deferred bonus plans),
salary reduction agreement, change-of-control agreement, employment agreement,
consulting agreement or any other benefit, program or contract.
"Encumbrance" -- any charge, claim, community property interest,
condition, equitable interest, lien, option, pledge, security interest, right of
first refusal, or restriction of any kind,
STOCK PURCHASE AGREEMENT 2
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including any restriction on use, voting, transfer, receipt of income, or
exercise of any other attribute of ownership.
"Environmental Law" -- the Federal Comprehensive Environmental
Response, Compensation and Liability Act, the Federal Water Pollution Control
Act, the Safe Drinking Water Act, the Federal Clean Water Act, the Federal Clean
Air Act, the Federal Resource Conservation and Recovery Act, the Hazardous
Materials Transportation Act, the Federal Solid Waste Disposal Act, the Federal
Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide
Act, and the Occupational Safety and Health Act, each as amended, and all other
environmental statutes enacted by any Governmental Body, and any executive
order, ordinances, rules or regulations promulgated under any of the foregoing.
"ERISA" -- the Employee Retirement Income Security Act of 1974 or any
successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"Facilities" -- any real property, leaseholds, or other interests
currently or formerly owned or operated by any Acquired Company and any
buildings, plants, structures, or equipment (including motor vehicles) currently
or formerly owned or operated by any Acquired Company.
"GAAP" -- United States generally accepted accounting principles,
applied on a basis consistent with the basis on which the TSL Balance Sheet and
the other financial statements referred to in Section 3.4 were prepared.
"Governmental Authorization" -- any approval, consent, license, permit,
waiver, or other authorization issued, granted, given, or otherwise made
available by or under the authority of any Governmental Body or pursuant to any
Legal Requirement.
"Governmental Body" -- any (a) nation, state, county, city, town,
village, district, or other jurisdiction of any nature; (b) federal, state,
local, municipal, foreign, or other government; (c) governmental or
quasi-governmental authority of any nature (including any governmental agency,
branch, department, official, or entity and any court or other tribunal); (d)
multi-national organization or body; or (e) body exercising, or entitled to
exercise, any administrative, executive, judicial, legislative, police,
regulatory, or taxing authority or power of any nature.
"Hazardous Materials" -- any waste or other substance that is listed,
defined, designated, or classified as, or otherwise determined to be, hazardous,
radioactive, or toxic or a pollutant or a contaminant under or pursuant to any
Environmental Law, including any admixture or solution thereof, and specifically
including petroleum and all derivatives thereof or synthetic substitutes
therefor and asbestos or asbestos-containing materials.
"Insurance Permit" -- any Governmental Authorization in any
jurisdiction to underwrite, place, sell or otherwise transact insurance or
reinsurance, or to engage in other insurance-related activities.
STOCK PURCHASE AGREEMENT 3
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"Investment Guidelines" -- a written statement of the current
investment programs, containing the investment policies and guidelines.
"IRC" -- the Internal Revenue Code of 1986 or any successor law, and
regulations issued by the IRS pursuant to the Internal Revenue Code or any
successor law.
"IRS" -- the United States Internal Revenue Service or any successor
agency, and, to the extent relevant, the United States Department of the
Treasury.
"Knowledge" -- an individual will be deemed to have "Knowledge" of a
particular fact or other matter if (a) such individual is actually aware of such
fact or other matter; or (b) a prudent individual could be expected to discover
or otherwise become aware of such fact or other matter in the course of
conducting a reasonable investigation concerning the existence of such fact or
other matter. A Person (other than an individual) will be deemed to have
"Knowledge" of a particular fact or other matter if any individual who is
serving, or who has at any relevant time served, as a director or officer of
such Person has, or at any time had, knowledge of such fact or other matter and
the matter is within the scope of duties of that individual.
"Legal Requirement" -- any federal, state, local, municipal, foreign,
international, multinational, or other administrative order, constitution, law,
ordinance, principle of common law, regulation, statute, or treaty.
"Order" -- any award, decision, injunction, judgment, order, ruling,
subpoena, or verdict entered, issued, made, or rendered by any court,
administrative agency, or other Governmental Body or by any arbitrator.
"Ordinary Course of Business" -- an action taken by a Person will be
deemed to have been taken in the "Ordinary Course of Business" only if (a) such
action is consistent with the past practices of such Person and is taken in the
ordinary course of the normal day-to-day operations of such Person; (b) such
action is not required to be authorized by the board of directors of such Person
(or by any Person or group of Persons exercising similar authority); and (c)
such action is similar in nature and magnitude to actions customarily taken,
without any authorization by the board of directors (or by any Person or group
of Persons exercising similar authority), in the ordinary course of the normal
day-to-day operations of other Persons that are in the same line of business as
such Person.
"Organizational Documents" -- the articles or certificate of
incorporation and the bylaws of a corporation and any amendment thereto.
"Person" -- any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, or other entity
or Governmental Body.
STOCK PURCHASE AGREEMENT 4
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"Plan Affiliate" -- with respect to any Person, any other person or
entity with whom the Person constitutes all or part of a controlled group, or
which would be treated with the Person as under common control or whose
employees would be treated as employed by the Person, under Section 414 of the
IRC and any regulations, administrative rulings and case law interpreting the
foregoing.
"Proceeding" -- any action, arbitration, audit, hearing, investigation,
litigation, or suit (whether civil, criminal, administrative, investigative, or
informal) commenced, brought, conducted, or heard by or before, or otherwise
involving, any Governmental Body or arbitrator.
"Proprietary Rights Agreement" -- any confidentiality, noncompetition,
or proprietary rights agreement.
"Related Person" -- with respect to a particular individual, (a) each
other member of such individual's Family; (b) any Person that is directly or
indirectly controlled by such individual or one or more members of such
individual's Family; (c) any Person in which such individual or members of such
individual's Family hold (individually or in the aggregate) a Material Interest;
and (d) any Person with respect to which such individual or one or more members
of such individual's Family serves as a director, officer, partner, executor, or
trustee (or in a similar capacity).
With respect to a specified Person other than an individual, (a) any
Person that directly or indirectly controls, is directly or indirectly
controlled by, or is directly or indirectly under common control with such
specified Person; (b) any Person that holds a Material Interest in such
specified Person; (c) each Person that serves as a director, officer, partner,
executor, or trustee of such specified Person (or in a similar capacity); (d)
any Person in which such specified Person holds a Material Interest; (e) any
Person with respect to which such specified Person serves as a general partner
or a trustee (or in a similar capacity); and (f) any Related Person of any
individual described in clause (b) or (c).
For purposes of this definition, (a) the "Family" of an individual
includes (i) the individual, (ii) the individual's spouse and former spouses,
(iii) any other natural person who is related to the individual or the
individual's spouse within the second degree, and (iv) any other natural person
who resides with such individual, and (b) "Material Interest" means direct or
indirect beneficial ownership (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934) of voting securities or other voting interests
representing at least ten percent (10%) of the outstanding voting power of a
Person or equity securities or other equity interests representing at least ten
percent (10%) of the outstanding equity securities or equity interests in a
Person.
"Release" -- any spilling, leaking, emitting, discharging, depositing,
escaping, leaching, dumping, or other releasing into the Environment, whether
intentional or unintentional.
STOCK PURCHASE AGREEMENT 5
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"Representative" -- with respect to a particular Person, any director,
officer, employee, agent, consultant, advisor, or other representative of such
Person, including legal counsel, accountants, and financial advisors.
"Securities Act" -- the Securities Act of 1933 or any successor law,
and regulations and rules issued pursuant to that Act or any successor law.
"Sellers' Disclosure Letter" -- the disclosure letter delivered by
Sellers to Buyer concurrently with the execution and delivery of this Agreement.
"Subsidiary" -- with respect to any Person (the "Owner"), any
corporation or other Person of which securities or other interests having the
power to elect a majority of that corporation's or other Person's board of
directors or similar governing body, or otherwise having the power to direct the
business and policies of that corporation or other Person (other than securities
or other interests having such power only upon the happening of a contingency
that has not occurred) are held by the Owner or one or more of its Subsidiaries.
"Tax" -- any tax (including any income tax, capital gains tax,
value-added tax, sales tax, property tax, gift tax or estate tax), levy,
assessment, tariff, duty (including any customs duty), deficiency or other fee,
and any related charge or amount (including any fine, penalty, interest or
addition to tax), imposed, assessed or collected by or under the authority of
any Governmental Body or payable pursuant to any tax-sharing agreement or any
other Contract relating to the sharing or payment of any such tax, levy,
assessment, tariff, duty, deficiency or fee.
"Tax Return" -- any return (including any information return), report,
statement, schedule, notice, form, or other document or information filed with
or submitted to, or required to be filed with or submitted to, any Governmental
Body in connection with the determination, assessment, collection, or payment of
any Tax or in connection with the administration, implementation, or enforcement
of or compliance with any Legal Requirement relating to any Tax.
"Threatened" -- a claim, Proceeding, dispute, action, or other matter
will be deemed to have been "Threatened" if any demand or statement has been
made (orally or in writing) or any notice has been given (orally or in writing),
or if any other event has occurred or any other circumstances exist, that would
lead a prudent Person to conclude that such a claim, Proceeding, dispute,
action, or other matter is likely to be asserted, commenced, taken, or otherwise
pursued in the future.
"Year 2000 Compliant" -- with respect to any item of software or
hardware shall mean that such item will operate after the year 2000 and will
correctly keep track of dates before and after the year 2000 and will interface
with other applications by correctly providing date output both before and after
the year 2000.
STOCK PURCHASE AGREEMENT 6
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ARTICLE II
SALE AND TRANSFER OF SHARES; CLOSING
2.1 SHARES. Subject to the terms and conditions of this Agreement, at
the Closing, Sellers will sell and transfer the Shares to Buyer, and Buyer will
purchase the Shares from Sellers.
2.2 PURCHASE PRICE.
(a) The purchase price (the "Purchase Price") for the Shares shall be
(i) $6,000,000 in cash (the "Initial Purchase Price"), subject to adjustment
pursuant to Section 2.2(c) below, plus (ii) the payments made pursuant to
Section 2.3 hereof, if any.
(b) Within thirty (30) days following the receipt of audited
consolidated financial statements for the Acquired Companies as of December 31,
1999, Buyer shall deliver to the Sellers' Advisory Representative (defined
below) a written calculation of the Book Value Change (defined in Section 2.3(a)
below). If the Sellers' Advisory Representative does not deliver a written
objection with respect to the calculation of the Book Value Change to Buyer
within ten (10) days after the receipt by the Sellers' Advisory Representative
of the Buyer's calculation, such calculation shall be conclusive and binding
upon the parties to this Agreement. If the Sellers' Advisory Representative does
deliver a timely written objection with respect to the calculation of the Book
Value Change, the calculation of the Book Value Change shall be submitted to an
Independent CPA Firm (defined below), whose calculation of the Book Value Change
shall be completed within thirty (30) days after submission and shall be
conclusive and binding upon the parties to this Agreement.
(c) Upon the later of (i) thirty (30) days following the date that the
calculation of the Book Value Change is conclusive and binding upon the parties
or (ii) the Closing Date, if the Book Value Change is a positive number, Buyer
will pay to Seller an amount (the "Book Value Adjustment Amount") equal to the
Book Value Change plus interest on the amount of the Book Value Change, accruing
from the Closing Date at the Applicable Rate (defined below). If the Book Value
Change is a negative number, Buyer shall offset from the Integration
Consideration (defined below) otherwise payable to Sellers, an amount in the
aggregate equal to the Book Value Change, plus interest accruing from the
Closing Date on the amount of the Book Value Change at the Applicable Rate.
2.3 INTEGRATION CONSIDERATION AND EARNOUT PAYMENTS.
(a) The terms below shall have the following respective meanings for
the purposes of this Section 2.3:
"Acquired Companies" means, for purposes of this Section 2.3, TSL
and its Subsidiaries, collectively, and any business or businesses
conducted by Buyer, or by any Subsidiaries or affiliated corporations
of Buyer, that represent a succession to and a continuation of the
business conducted by TSL and its Subsidiaries, collectively, as the
same may be expanded or contracted from and after Closing.
STOCK PURCHASE AGREEMENT 7
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"Applicable Rate" means the annual rate on 13-week U.S. Government
Treasury Bills as of the most recent auction date for which results are
quoted in the "Money Rates" section of the "Wall Street Journal" on the
Closing Date.
"Book Value Change" means the change in the book value, computed in
accordance with GAAP, of TSL from December 31, 1998 to December 31,
1999. As used in this definition, "book value" means total assets less
total liabilities.
"Computation Statement" means a statement setting forth in
reasonable detail Buyer's calculation of the Pre-Tax Earnings of the
Acquired Companies during the applicable Earnout Period and the
calculation of the Earnout Amount for such Earnout Period.
"Earned Premiums" means earned premiums as determined in accordance
with GAAP.
"Earnout Commencement Date" means January 1, 2001, or such earlier
date that is mutually agreed upon by Buyer and Sellers and that is the
first day of a calendar quarter.
"Earnout Consideration" means the sum of $3,000,000.
"Earnout Period" means the following periods, as applicable: (i)
the first Earnout Period will commence on the Earnout Commencement Date
and will terminate one day prior to the first anniversary of the
Earnout Commencement Date; (ii) the second Earnout Period will commence
on the first anniversary of the Earnout Commencement Date and will
terminate one day prior to the second anniversary of the Earnout
Commencement Date; and (iii) the third Earnout Period will commence on
the second anniversary of the Earnout Commencement Date and will
terminate one day prior to the third anniversary of the Earnout
Commencement Date.
"Earnout Ratio" means, for each applicable Earnout Period, the
quotient of (i) the difference between (A) Pre-Tax Earnings for that
Earnout Period and (B) the Threshold Earnout Level for that Earnout
Period divided by (ii) $2,000,000; provided, however, that in the event
the Threshold Earnout Level for such Earnout Period is equal to or
exceeds the Pre-Tax Earnings for the Earnout Period, the Earnout Ratio
shall be zero (0).
"Incurred Losses and Loss Adjustment Expenses" means, for any
period, (A) case basis reserves plus losses incurred but not reported
("IBNR"), including development of losses for the applicable Earnout
Period, as of the end of the period, using the latest information
available at the conclusion of each Earnout Period or Release Period,
plus (B) losses and Loss Adjustment Expenses paid during the period and
less (C) case basis reserves plus IBNR, including development of losses
for the applicable Earnout Period, as of the beginning of the period,
using the latest information available at the conclusion of each
Earnout Period or Release Period.
STOCK PURCHASE AGREEMENT 8
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"Independent Actuarial Firm" means either Tillinghast-Towers Perrin
or Milliman & Robertson, Inc., whichever is mutually agreed upon by
Buyer and the Sellers' Advisory Representative.
"Independent CPA Firm" means a national public accounting firm
selected by Buyer and reasonably satisfactory to the Sellers' Advisory
Representative.
"Integration Date" means the latest to occur of (i) the date on
which ninety percent (90%) or more of the personal auto policies in
force as of the Closing Date written by or through the Acquired
Companies are policies in force of Subsidiaries of Buyer, (ii) the date
on which Buyer's Lalande Group electronic data processing systems and
work flow systems, or alternative systems designated by Buyer have been
installed on site and are functional or (iii) the Closing Date.
"Loss Adjustment Expenses" means, for any period, expenses incurred
in the course of investigating and settling claims, including, without
limitation, legal and adjusters' fees and the costs of paying claims
and related expenses.
"Loss Ratio" means, for any period, the quotient of (i) Incurred
Losses and Loss Adjustment Expenses for the period and (ii) Earned
Premiums for the period.
"Payment Date" means the date sixty (60) days after the termination
of each Earnout Period (or the next succeeding business day if such
date is not a business day).
"Pre-Tax Earnings" means, for each Earnout Period, the difference
between (i) the net earnings, before all income taxes and interest
expense, of Buyer and its Subsidiaries, attributable to the operation
of the Acquired Companies, minus (ii) the amount of the Support
Functions Reimbursement, calculated in accordance with GAAP. Pre-Tax
Earnings shall be calculated (x) on the accrual basis of accounting in
accordance with GAAP and (y) as though the Acquired Companies were a
single corporation with all of its shares owned by persons who are
neither directly nor indirectly related to Buyer.
"Release Date" means the date sixty (60) days after the termination
of each Release Period (or the next succeeding business day if such
date is not a business day).
"Release Period" means the following periods, as applicable: (i)
the first Release Period for the first Earnout Period will commence one
day after the termination date of the first Earnout Period and will
terminate on the first anniversary of such termination date, and the
second Release Period for the first Earnout Period will commence one
day after the first anniversary of the termination date of the first
Earnout Period and will terminate on the second anniversary of such
termination date; (ii) the first Release Period for the second Earnout
Period will commence one day after the termination date of the second
Earnout Period and will terminate on the first anniversary of such
termination date, and the second
STOCK PURCHASE AGREEMENT 9
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Release Period for the second Earnout Period will commence one day
after the first anniversary of the termination date of the second
Earnout Period and will terminate on the second anniversary of such
termination date; and (iii) the first Release Period for the third
Earnout Period will commence one day after the termination date of the
third Earnout Period and will terminate on the first anniversary of
such termination date, and the second Release Period for the third
Earnout Period will commence one day after the first anniversary of the
termination date of the third Earnout Period and will terminate on the
second anniversary of such termination date.
"Reserve Adjustment" means the amount of reserve adjustments for
increases (compared to the amounts therefor set forth on the audited
TSL balance sheet at December 31, 1999) in ultimate estimated
liabilities relating to 1999 and prior accident years. The Reserve
Adjustment shall be calculated by Buyer and delivered to the Sellers'
Advisory Representative at least sixty (60) days prior to the Payment
Date for the first Earnout Period. If the Sellers' Advisory
Representative does not deliver to Buyer a written objection with
respect to the calculation of the Reserve Adjustment within ten (10)
days following receipt, the calculation of the Reserve Adjustment shall
be conclusive and binding upon the parties to this Agreement. If the
Sellers' Advisory Representative does deliver a timely written
objection with respect to the calculation of the Reserve Adjustment,
the calculation of the Reserve Adjustment shall be submitted to an
Independent Actuarial Firm, whose calculation of the Reserve Adjustment
shall be conclusive and binding upon the parties to this Agreement. If
the Reserve Adjustment calculated in accordance with the foregoing is
determined to be negative due to net decreases in ultimate estimated
liabilities relating to 1999 and prior accident years, the Reserve
Adjustment will be zero (0).
"Sellers' Advisory Representative" means Hill, acting on behalf of
himself and Heidt, together.
"Subsequent Earnout Payment" means (i) the $1,000,000 for that
Earnout Period multiplied by (ii) the Earnout Ratio for that Earnout
Period.
"Support Functions Reimbursement" means a reasonable monthly fee
charged to the Acquired Companies to cover Buyer's expenses in
connection with providing direct support functions as are reasonably
necessary or desirable, such as information systems support, actuarial
support, human resources support and accounting support. In the event
the Acquired Companies require special attention for any unusual
circumstance in any month, the monthly fee may be increased for that
month to reflect a reasonable amount for the services provided. In such
case Buyer shall provide, as part of its Computation Statement, the
basis for such increased monthly fee.
"Threshold Earnout Level" means the following amounts,
corresponding to the applicable Earnout Period: (i) for the first
Earnout Period, $2,000,000; (ii) for the second Earnout Period,
$2,500,000; and (iii) for the third Earnout Period, $3,000,000.
STOCK PURCHASE AGREEMENT 10
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(b) INTEGRATION CONSIDERATION. Except as provided in this Agreement,
Buyer will deliver to Sellers additional consideration (the "Integration
Consideration") for the Shares equal to $1,500,000 within thirty (30) days after
the Integration Date. Additionally, in the event that electronic data processing
systems and work flow systems of Buyer's Lalande Group, or alternative systems
designated by Buyer, are not installed on site and functional on or prior to
ninety (90) days following the Closing Date, then Buyer shall deliver to Sellers
as part of the Integration Consideration interest accruing from the ninety-first
(91st) day following the Closing Date on the Integration Consideration at the
Applicable Rate. As provided in Section 2.2(c), if the Book Value Change is a
negative number, Buyer shall offset against the Integration Consideration an
amount in the aggregate equal to the Book Value Change plus interest accruing
from the Closing Date on the amount of the integral Book Value Change at the
Applicable Rate.
(c) SUBSEQUENT EARNOUT PAYMENTS
(i) On the Payment Date for the first Earnout Period, Buyer will
deliver to Sellers (A) additional consideration (the "First Earnout
Period Subsequent Earnout Payment") for the Shares, equal to the
Subsequent Earnout Payment for the first Earnout Period multiplied by
50%; provided, however, that the amount paid pursuant to this clause
(i) shall not exceed $500,000 for the first Earnout Period minus (B) an
amount equal to the Reserve Adjustment, unless such amount is less than
zero, in which case Buyer shall pay no amount to Seller, and further
provided that if such amount is less than zero, no amount shall be paid
by Sellers.
(ii) On the Payment Date for the second Earnout Period, Buyer will
deliver to Sellers additional consideration (the "Second Earnout Period
Subsequent Earnout Payment") for the Shares equal to 50% of the
Subsequent Earnout Payment for the second Earnout Period; provided,
however, that the amount paid pursuant to this clause (ii) shall not
exceed $500,000 for the second Earnout Period.
(iii) On the Payment Date for the third Earnout Period, Buyer will
deliver to Sellers additional consideration (the "Third Earnout Period
Subsequent Earnout Payment") for the Shares equal to 50% of the
Subsequent Earnout Payment for the third Earnout Period; provided,
however, that the amount paid pursuant to this clause (iii) shall not
exceed $500,000 for the third Earnout Period.
(iv) At the conclusion of each Earnout Period, Buyer shall prepare
a Computation Statement for the Earnout Amount earned during such
Earnout Period and shall provide such Computation Statement to the
Sellers' Advisory Representative for his review and comments within
forty-five (45) days after the termination of such Earnout Period. If,
within thirty (30) days after delivery of the Computation Statement to
the Sellers' Advisory Representative, the Sellers' Advisory
Representative has not given written notice to Buyer disputing such
statement and indicating the basis of such dispute such Computation
Statement shall be conclusive and binding on Sellers. In the event the
Sellers' Advisory Representative gives Buyer such notice of dispute
within such 30-day period, the Sellers' Advisory Representative
STOCK PURCHASE AGREEMENT 11
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and Buyer will use their Best Efforts to settle the dispute within 30
days after the giving of such notice. Any dispute unresolved after such
30-day period shall be submitted to an Independent CPA Firm. The
decision of such Independent CPA Firm with respect to such dispute
shall be final and binding on the parties hereto. If, as a result of
such arbitration, it is determined that Sellers are entitled to an
Earnout Amount which exceeds the Earnout Amount set forth on the
applicable Computation Statement by an aggregate amount greater than
ten percent (10%) of such Earnout Amount, Buyer shall pay the cost of
the arbitration. Otherwise, Sellers shall pay the cost of the
arbitration. Buyer shall maintain books and records for the Acquired
Companies in a manner which will facilitate its calculation of each
Earnout Amount and the review by the Sellers' Advisory Representative
of each Computation Statement. Buyer shall make available, at Buyer's
offices during normal business hours, to the Sellers' Advisory
Representative and his attorneys, accountants and other representatives
for examination, such of its books of account, contracts, licenses,
leases, instruments, commitments, sale orders, purchase orders,
records, accountant's work papers and other documents as are relevant
to the preparation of the Computation Statement.
(d) RETROACTIVE PAYMENTS
(i) First Earnout Period Retroactive Payments.
(A) On the first anniversary of the Payment Date for the
first Earnout Period, Buyer will deliver to Sellers additional
consideration (the "First Period Second Year Payment") for the
Shares equal to the:
((((Loss Ratio for the first Earnout Period - Loss Ratio for the first Earnout
Period recomputed as of the first anniversary of the end of the first Earnout
Period) x Earned Premiums for the first Earnout Period) + Pre-Tax Earnings for
the first Earnout Period - $2,000,000) x 0.50 x 75%) - the Reserve Adjustment -
First Earnout Period Subsequent Earnout Payment.
Provided, however, that if the sum of the First Earnout
Period Subsequent Earnout Payment and the First Period
Second Year Payment exceeds $750,000 for the first Earnout
Period, Buyer shall only pay Sellers an amount equal to the
difference between (i) $750,000 for the first Earnout
Period minus the Reserve Adjustment and (ii) the First
Earnout Period Subsequent Earnout Payment. If the First
Period Second Year Payment is less than zero, Buyer shall
pay no amount to Sellers; and further provided that if the
First Period Second Year Payment is less than zero, no
amount shall be paid by Sellers.
(B) On the second anniversary of the Payment Date for the
first Earnout Period, Buyer will deliver to Sellers additional
consideration (the "First Period Third Year Payment") for the
Shares equal to the:
STOCK PURCHASE AGREEMENT 12
<PAGE> 13
((((Loss Ratio for the first Earnout Period - Loss Ratio for the first Earnout
Period recomputed as of the second anniversary of the end of the first Earnout
Period) x Earned Premiums for the first Earnout Period) + Pre-Tax Earnings for
the first Earnout Period - $2,000,000) x 0.50) - the Reserve Adjustment- First
Earnout Period Subsequent Earnout Payment - First Period Second Year Payment.
Provided, however, that if the sum of the First Earnout
Period Subsequent Earnout Payment, the First Period Second
Year Payment and the First Period Third Year Payment
exceeds $1,000,000 for the first Earnout Period, Buyer
shall only pay Sellers an amount equal to (i) $1,000,000
for the first Earnout Period minus the Reserve Adjustment,
minus (ii) the First Earnout Period Subsequent Earnout
Payment minus (iii) the First Period Second Year Payment.
If the First Period Third Year Payment is less than zero,
Buyer shall pay no amount to Sellers; and further provided
that if the First Period Third Year Payment is less than
zero, Sellers shall pay the integral amount of the First
Period Third Year Payment to Buyer, not to exceed the sum
of (x) the First Earnout Period Subsequent Earnout Payment
plus (y) the First Period Second Year Payment plus (z) the
Reserve Adjustment.
The Future Earnout Amount for the First Earnout Period
shall be equal to (i) $1,000,000 for the first Earnout
Period minus the Reserve Adjustment, minus (ii) the First
Earnout Period Subsequent Earnout Payment minus (iii) the
First Period Second Year Payment minus (iv) the First
Period Third Year Payment, unless such amount is less than
zero, in which case the Future Earnout Amount for the
First Earnout Period shall be equal to zero.
(ii) Second Earnout Period Retroactive Payments.
(A) On the first anniversary of the Payment Date for the
second Earnout Period, Buyer will deliver to Seller additional
consideration (the "Second Period Second Year Payment") for
the Shares equal to the:
((((Loss Ratio for the second Earnout Period - Loss Ratio for the second Earnout
Period recomputed as of the first anniversary of the end of the second Earnout
Period) x Earned Premiums for the second Earnout Period) + Pre-Tax Earnings for
the second Earnout Period - $2,500,000) x 0.50 x 75%) - Second Earnout Period
Subsequent Earnout Payment.
Provided, however, that if the sum of the Second Earnout
Period Subsequent Earnout Payment and the Second Period
Second Year Payment exceeds $750,000 for the second Earnout
Period, Buyer shall only pay Seller an amount equal to the
difference between
STOCK PURCHASE AGREEMENT 13
<PAGE> 14
(i) $750,000 for the second Earnout Period, minus (ii) the
Second Earnout Period Subsequent Earnout Payment. If the
Second Period Second Year Payment is less than zero, Buyer
shall pay no amount to Seller; and further provided that if
the Second Period Second Year Payment is less than zero, no
amount shall be paid by Seller.
(B) On the second anniversary of the Payment Date for the
second Earnout Period, Buyer will deliver to Seller additional
consideration (the "Second Period Third Year Payment") for the
Shares equal to the:
((((Loss Ratio for the second Earnout Period - Loss Ratio for the second Earnout
Period recomputed as of the second anniversary of the end of the second Earnout
Period) x Earned Premiums for the second Earnout Period) + Pre-Tax Earnings for
the second Earnout Period - $2,500,000) x 0.50) - Second Earnout Period
Subsequent Earnout Payment - Second Period Second Year Payment.
Provided, however, that if the sum of the Second Earnout
Period Subsequent Earnout Payment, the Second Period Second
Year Payment and the Second Period Third Year Payment
exceeds the sum of (x) $1,000,000 for the second Earnout
Period and (y) the Future Earnout Amount for the First
Earnout Period, Buyer shall only pay Seller an amount equal
to (i) $1,000,000 for the second Earnout Period, plus (ii)
the Future Earnout Amount for the First Earnout Period
minus (iii) the Second Earnout Period Subsequent Earnout
Payment minus (iv) the Second Period Second Year Payment.
If the Third Year Payment is less than zero, Buyer shall
pay no amount to Seller; and further provided that if the
Second Period Third Year Payment is less than zero, Seller
shall pay the integral amount of the Second Period Third
Year Payment to Buyer, not to exceed the sum of (x) the
Second Earnout Period Subsequent Earnout Payment and (y)
the Second Period Second Year Payment. The Future Earnout
Amount for the Second Earnout Period shall be equal to (i)
$1,000,000 for the second Earnout Period plus (ii) the
Future Earnout Amount for the First Earnout Period minus
(iii) the Second Earnout Period Subsequent Earnout Payment
minus (iv) the Second Period Second Year Payment minus (v)
the Second Period Third Year Payment, unless such amount is
less than zero, in which case the Future Earnout Amount for
the Second Earnout Period shall be equal to zero.
(iii) Third Earnout Period Retroactive Payments.
STOCK PURCHASE AGREEMENT 14
<PAGE> 15
(A) On the first anniversary of the Payment Date for the
third Earnout Period, Buyer will deliver to Seller additional
consideration (the "Third Period Second Year Payment") for the
Shares equal to the:
((((Loss Ratio for the third Earnout Period - Loss Ratio for the third Earnout
Period recomputed as of the first anniversary of the end of the third Earnout
Period) x Earned Premiums for the third Earnout Period) + Pre-Tax Earnings for
the third Earnout Period - $3,000,000) x 0.50 x 75%) - Third Earnout Period
Subsequent Earnout Payment.
Provided, however, that if the sum of the Third Earnout
Period Subsequent Earnout Payment and the Third Period
Second Year Payment exceeds $750,000 for the third Earnout
Period, Buyer shall only pay Seller an amount equal to the
difference between (i) $750,000 for the third Earnout
Period and (ii) the Third Earnout Period Subsequent Earnout
Payment. If the Third Period Second Year Payment is less
than zero, Buyer shall pay no amount to Seller; and further
provided that if the Third Period Second Year Payment is
less than zero, no amount shall be paid by Seller.
(B) On the second anniversary of the Payment Date for the
third Earnout Period, Buyer will deliver to Seller additional
consideration (the "Third Period Third Year Payment") for the
Shares equal to the:
((((Loss Ratio for the third Earnout Period - Loss Ratio for the third Earnout
Period recomputed as of the second anniversary of the end of the third Earnout
Period) x Earned Premiums for the third Earnout Period) + Pre-Tax Earnings for
the third Earnout Period - $3,000,000) x 0.50) - Third Earnout Period Subsequent
Earnout Payment - Third Period Second Year Payment.
Provided, however, that if the sum of the Third Earnout
Period Subsequent Earnout Payment, the Third Period Second
Year Payment and the Third Period Third Year Payment
exceeds the sum of (x) $1,000,000 for the third Earnout
Period and (y) the Future Earnout Amount for the Second
Earnout Period, Buyer shall only pay Seller an amount equal
to (i) $1,000,000 for the third Earnout Period, plus (ii)
the Future Earnout Amount for the Second Earnout Period
minus (iii) the Third Earnout Period Subsequent Earnout
Payment minus (iv) the Third Period Second Year Payment. If
the Third Period Second Year Payment is less than zero,
Buyer shall pay no amount to Seller; and further provided
that if the Third Period Third Year Payment is less than
zero, Seller shall pay the integral amount of the Third
Period Third Year Payment to Buyer, not to exceed the sum
of (x) the Third Earnout Period Subsequent Earnout Payment
and (y) the Third Period Second Year Payment.
STOCK PURCHASE AGREEMENT 15
<PAGE> 16
(iv) At the conclusion of each Release Period, Buyer shall prepare
a Retroactive Computation Statement for the Pre-Tax Earnings
recomputed for the applicable Earnout Period and shall provide such
Retroactive Computation Statement to the Sellers' Advisory
Representative for his review and comments within forty-five (45) days
after the termination of such Release Period. If, within thirty (30)
days after delivery of the Retroactive Computation Statement to the
Sellers' Advisory Representative, the Sellers' Advisory Representative
has not given written notice to Buyer disputing such statement and
indicating the basis of such dispute such Retroactive Computation
Statement shall be conclusive and binding on Sellers. In the event the
Sellers' Advisory Representative gives Buyer such notice of dispute
within such 30-day period, the Sellers' Advisory Representative and
Buyer will use their Best Efforts to settle the dispute within 30 days
after the giving of such notice. Except as set forth in Section
2.3(d)(v), any dispute unresolved after such 30-day period shall be
submitted to an Independent CPA Firm. The decision of such Independent
CPA Firm with respect to such dispute shall be final and binding on
the parties hereto. If, as a result of such arbitration(s), it is
determined that Sellers are entitled to such disputed amount, Buyer
shall pay the cost of the arbitration(s). Otherwise, Sellers shall pay
the cost of the arbitration(s). Buyer shall maintain books and records
for the Acquired Companies in a manner which will facilitate its
recomputation of the Pre-Tax Earnings applicable for each Earnout
Period and the review by the Sellers' Advisory Representative of each
Retroactive Computation Statement. Buyer shall make available, at
Buyer's offices during normal business hours, to the Sellers' Advisory
Representative and his attorneys, accountants and other
representatives for examination, such of its books of account,
contracts, licenses, leases, instruments, commitments, sale orders,
purchase orders, records, accountant's work papers and other documents
as are relevant to the preparation of the Retroactive Computation
Statement.
(v) After the conclusion of the final Release Period with respect
to each Earnout Period, in the event that the Sellers' Advisory
Representative gives Buyer notice (in accordance with Section
2.3(d)(iv)) that the Sellers' Advisory Representative disputes the
calculation of the Retroactive Computation Statement based upon (in
whole or in part) the determination of Incurred Loss and Loss
Adjustment Expense, then the Sellers' Advisory Representative and
Buyer will use their Best Efforts to settle the dispute within 30 days
after the giving of notice of dispute. Any dispute relating to the
determination of Incurred Loss and Loss Adjustment Expense unresolved
after such 30 day period shall be submitted to an Independent
Actuarial Firm. The decision of such Independent Actuarial Firm with
respect to such dispute shall be final and binding on the parties
hereto. If, as a result of such arbitration(s), it is determined that
Sellers are entitled to such disputed amount, Buyer shall pay the cost
of the arbitration(s). Otherwise, Sellers shall pay the cost of the
arbitration(s).
(e) An example of the payments to be made pursuant to this Section 2.3
is attached hereto as Exhibit 2.3(e). Such example is for illustrative purposes
only.
STOCK PURCHASE AGREEMENT 16
<PAGE> 17
2.4 CLOSING. The purchase and sale (the "Closing") provided for in this
Agreement will take place at the offices of Jackson Walker LLP, at 301 Commerce
Street, Suite 2400, Fort Worth, Texas, at 10:00 a.m. (local time) on a date that
is no later than five (5) days after all conditions to Closing have been
satisfied, or at such other time and place as the parties may agree. Subject to
the provisions of Article IX, failure to consummate the purchase and sale
provided for in this Agreement on the date and time and at the place determined
pursuant to this Section 2.4 will not result in the termination of this
Agreement and will not relieve any party of any obligation under this Agreement.
2.5 CLOSING OBLIGATIONS. At the Closing:
(a) Sellers will deliver to Buyer:
(i) certificates representing the Shares, duly endorsed (or
accompanied by duly executed stock powers), for transfer to Buyer;
(ii) a release in the form of Exhibit 2.5(a)(ii) executed by both
Sellers ("Sellers' Release");
(iii) an employment agreement in the form of Exhibit 2.5(a)(iii),
executed by Hill (the "Hill Employment Agreement");
(iv) an employment agreement in the form of Exhibit 2.5(a)(iv),
executed by Heidt (the "Heidt Employment Agreement");
(v) a certificate executed by Sellers and TSL, representing and
warranting to Buyer that each of Sellers' and the TSL's representations
and warranties in this Agreement was accurate in all respects as of the
date of this Agreement and is accurate in all respects as of the
Closing Date as if made on the Closing Date (giving full effect to any
supplements to the Sellers' Disclosure Letter delivered by Sellers and
TSL to Buyer prior to the Closing Date in accordance with Section 6.4);
(vi) an opinion of Pearce & Durick P.L.L.P., dated the Closing
Date, in the form of Exhibit 2.5(a)(vi); and
(vii) A Lease in the form of Exhibit 2.5(a)(vii), executed by Hill
(the "Real Property Lease").
(b) Buyer will deliver to Sellers:
(i) $6,000,000 by wire transfer payable to the orders of Hill and
Heidt pro rata in accordance with their respective ownership interests
in TSL;
STOCK PURCHASE AGREEMENT 17
<PAGE> 18
(ii) a certificate executed by Buyer, representing and warranting
to Sellers that each of Buyer's representations and warranties in this
Agreement was accurate in all respects as of the date of this Agreement
and is accurate in all respects as of the Closing Date as if made on
the Closing Date (giving full effect to any supplements to the Buyer's
Disclosure Letter prior to the Closing Date in accordance with Section
6.4);
(iii) the Hill Employment Agreement and the Heidt Employment
Agreement, each executed by Buyer;
(iv) an opinion of Jackson Walker LLP, dated the Closing Date, in
the form of Exhibit 2.5(b)(iv); and
(v) the Real Property Lease, executed on behalf of TSL.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLERS AND THE COMPANY
Sellers and TSL jointly and severally represent and warrant to Buyer as
follows:
3.1 ORGANIZATION AND GOOD STANDING.
(a) Part 3.1 of the Sellers' Disclosure Letter contains a complete and
accurate list, for each Acquired Company, of its name, its jurisdiction of
incorporation, other jurisdictions in which it is authorized to do business, and
its capitalization (including the identity of each shareholder and the number of
shares held by each). Each Acquired Company is a corporation duly organized,
validly existing, and in good standing under the laws of its jurisdiction of
incorporation, with full corporate power and authority to conduct its business
as it is now being conducted, to own or use the properties and assets that it
purports to own or use, and to perform all its obligations under Applicable
Contracts. Each Acquired Company is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each state or other
jurisdiction in which either the ownership or use of the properties owned or
used by it, or the nature of the activities conducted by it, requires such
qualification. No jurisdiction, other than those listed in Part 3.1 of the
Sellers' Disclosure Letter, has claimed, in writing, that any Acquired Company
is required to hold a Governmental Authorization, and none of the Acquired
Companies files or is required to file any Tax Returns in any other
jurisdiction.
(b) Sellers have delivered to Buyer true and correct copies of the
Organizational Documents of each Acquired Company, as currently in effect.
STOCK PURCHASE AGREEMENT 18
<PAGE> 19
3.2 AUTHORITY; NO CONFLICT.
(a) This Agreement constitutes the legal, valid, and binding obligation
of TSL and Sellers, enforceable against TSL and Sellers in accordance with its
terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other laws affecting creditors' rights generally
and by general principles of equity. Upon the execution and delivery by Sellers
of the Hill Employment Agreement, the Heidt Employment Agreement and the
Sellers' Release (collectively, the "Sellers' Closing Documents"), the Sellers'
Closing Documents will constitute the legal, valid, and binding obligations of
Sellers, enforceable against Sellers in accordance with their respective terms,
except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other laws affecting creditors' rights generally
and by general principles of equity. Each Seller has all right, power,
authority, and capacity to execute and deliver this Agreement and the Sellers'
Closing Documents and to perform his obligations under this Agreement and the
Sellers' Closing Documents. TSL has all corporate right, power and authority to
execute and deliver this Agreement and to perform its obligations under this
Agreement.
(b) Except as set forth in Part 3.2 of the Sellers' Disclosure Letter,
neither the execution and delivery of this Agreement nor the consummation or
performance of any of the Contemplated Transactions will, directly or indirectly
(with or without notice or lapse of time) (i) conflict with, or result in a
violation of any provision of the Organizational Documents of any of the
Acquired Companies; (ii) conflict with, or result in a violation of, or give any
Governmental Body or other Person the right to challenge any of the Contemplated
Transactions or to exercise any remedy or obtain any relief under, any Legal
Requirement or any Order to which any Acquired Company or Sellers, or any of the
assets owned or used by any Acquired Company, may be subject; (iii) conflict
with, or result in a violation of any of the terms or requirements of, or give
any Governmental Body the right to revoke, suspend, terminate, or modify, any
Insurance Permit or other Governmental Authorization that is held by any
Acquired Company or that otherwise relates to the business of, or any of the
assets owned or used by, any Acquired Company; (iv) conflict with, or result in
a violation or breach of any provision of, or give any Person the right to
declare a default or exercise any remedy under, or to accelerate the maturity or
performance of, or to cancel, terminate, or modify, any Applicable Contract; or
(v) result in the imposition or creation of any Encumbrance upon or with respect
to any of the assets owned or used by any Acquired Company.
Except as set forth in Part 3.2 of the Sellers' Disclosure Letter,
neither Sellers nor any Acquired Company is or will be required to give any
notice to or obtain any Consent from any Person in connection with the execution
and delivery of this Agreement or the consummation or performance of any of the
Contemplated Transactions.
3.3 CAPITALIZATION. The authorized equity securities of TSL consist of
50,000 shares of common stock, $1.00 par value per share, of which 10,060 shares
are issued and outstanding. The ownership of TSL is as set forth in Part 3.3 of
the Sellers' Disclosure Letter. Sellers are and will be on the Closing Date the
record and beneficial owners and holders of all of the outstanding shares of
TSL's capital stock, free and clear of all Encumbrances. TSL has no other class
or series of capital
STOCK PURCHASE AGREEMENT 19
<PAGE> 20
stock authorized, issued and outstanding. There are no outstanding or authorized
options, warrants, purchase rights, subscription rights, conversion rights or
other contracts or commitments that could require any Acquired Company to issue,
sell or otherwise cause to become outstanding any of its capital stock. There
are no outstanding or authorized stock appreciation, phantom stock, profit
participation or similar rights with respect to the Acquired Companies. With the
exception of the shares listed in Part 3.3 of the Sellers' Disclosure Letter,
all of the outstanding equity securities and other securities of each Acquired
Company are owned of record and beneficially by one or more of the Acquired
Companies, free and clear of all Encumbrances.
Except as set forth in Part 3.3 of the Sellers' Disclosure Letter, no
legend or other reference to any purported Encumbrance appears upon any
certificate representing equity securities of any Acquired Company. All of the
outstanding equity securities of each Acquired Company have been duly authorized
and validly issued and are fully paid and nonassessable. There are no Contracts
relating to the issuance, sale, or transfer of any equity securities or other
securities of any Acquired Company. None of the outstanding equity securities or
other securities of any Acquired Company was issued in violation of the
Securities Act or any other Legal Requirement. No Acquired Company owns, or has
any Contract to acquire, any equity securities or other securities of any Person
(other than Acquired Companies) or any direct or indirect equity or ownership
interest in any other business. Except as set forth in Part 3.3 of the Sellers'
Disclosure Letter, there are no restrictions upon the voting or transfer of, or
the declaration or payment of any dividend or distribution on, any shares of
capital stock of any Acquired Company.
3.4 FINANCIAL STATEMENTS. Sellers have delivered to Buyer the audited
balance sheets of the Acquired Companies as of December 31 for the year 1998,
the unaudited balance sheets of the Acquired Companies as of December 31 for the
years 1996 and 1997 and the related audited (or unaudited, as the case may be)
statements of income, changes in shareholders' equity, and cash flow for each of
the fiscal years then ended, together with the report thereon, if applicable, of
the independent certified public accountants responsible for such audited
statements (including the notes thereto, the "TSL Balance Sheet"). Sellers shall
deliver to Buyer at least fifteen (15) days prior to Closing a reviewed balance
sheet of the Acquired Companies as of the most recently practicable date, but no
earlier than September 30, 1999 (the "TSL Interim Balance Sheet") and the
related reviewed statements of income, changes in shareholders' equity, and cash
flow for the interim period then ended, including in each case the notes
thereto. Such financial statements and notes fairly present the financial
condition and the results of operations, changes in shareholders' equity, and
cash flow of the Acquired Companies at the respective dates of and for the
periods referred to in such financial statements, all in accordance with GAAP,
subject, in the case of interim financial statements, to normal recurring
year-end adjustments (the effect of which will not, individually or in the
aggregate, be materially adverse) and the absence of notes (that, if presented,
would not differ materially from those included in the TSL Balance Sheet); the
financial statements referred to in this Section 3.4 reflect the consistent
application of such accounting principles throughout the periods involved,
except as disclosed in the notes to such financial statements; and the reserves
carried in such financial statements for the payment of estimated claims and
claim adjustment expenses for both reported and unreported claims are adequate
in all material respects to cover the incurred claims
STOCK PURCHASE AGREEMENT 20
<PAGE> 21
on all policies of insurance written by any wholly owned insurance company
subsidiaries of TSL. No financial statements of any Person other than the
Acquired Companies are required by GAAP to be included in the financial
statements of TSL.
3.5 BOOKS AND RECORDS. The books of account, minute books, stock record
books, and other records of the Acquired Companies, all of which have been made
available to Buyer, are complete and correct and have been maintained in
accordance with sound business practices, including the maintenance of an
adequate system of internal controls. The minute books of the Acquired Companies
contain accurate and complete records of all meetings held of, and corporate
action taken by, the shareholders, the Boards of Directors, and committees of
the Boards of Directors of the Acquired Companies, and no meeting of any such
shareholders, Board of Directors, or committee has been held for which minutes
have not been prepared and are not contained in such minute books. At the
Closing, all of those books and records will be in the possession of the
Acquired Companies.
3.6 TITLE TO PROPERTIES; ENCUMBRANCES. Part 3.6 of the Sellers'
Disclosure Letter contains a complete and accurate list of all real property,
leaseholds, or other interests therein owned by any Acquired Company. Sellers
have delivered or made available to Buyer copies of the deeds and other
instruments (as recorded) by which the Acquired Companies acquired such real
property and interests, and copies of all title insurance policies, opinions,
abstracts, and surveys in the possession of Sellers or the Acquired Companies
and relating to such property or interests. The Acquired Companies own (with
good and marketable title in the case of real property, subject only to the
matters permitted by the following sentence) all the properties and assets
(whether real, personal, or mixed and whether tangible or intangible) that they
purport to own located in the facilities owned or operated by the Acquired
Companies or reflected as owned in the books and records of the Acquired
Companies, including all of the properties and assets reflected in the TSL
Balance Sheet and the TSL Interim Balance Sheet (except for personal property
sold since the date of the TSL Balance Sheet and the TSL Interim Balance Sheet,
as the case may be, in the Ordinary Course of Business), and all of the
properties and assets purchased or otherwise acquired by the Acquired Companies
since the date of the TSL Balance Sheet (except for personal property acquired
and sold since the date of the TSL Balance Sheet in the Ordinary Course of
Business and consistent with past practice), which subsequently purchased or
acquired properties and assets (other than short-term investments) are listed in
Part 3.6 of the Sellers' Disclosure Letter. All material properties and assets
reflected in the TSL Balance Sheet and the TSL Interim Balance Sheet are free
and clear of all Encumbrances and are not, in the case of real property, subject
to any rights of way, building use restrictions, exceptions, variances,
reservations, or limitations of any nature.
3.7 ACCOUNTS RECEIVABLE. All accounts receivable of the Acquired
Companies that are reflected on the TSL Balance Sheet or the TSL Interim Balance
Sheet or on the accounting records of the Acquired Companies as of the Closing
Date (collectively, the "TSL Accounts Receivable") represent or will represent
valid obligations arising from sales actually made or services actually
performed in the Ordinary Course of Business. Unless paid prior to the Closing
Date, the TSL Accounts Receivable are or will be as of the Closing Date current
and collectible net of the
STOCK PURCHASE AGREEMENT 21
<PAGE> 22
respective reserves shown on the TSL Balance Sheet or the TSL Interim Balance
Sheet or on the accounting records of the Acquired Companies as of the Closing
Date (which reserves are adequate and calculated consistent with past practice
and, in the case of the reserve as of the Closing Date, will not represent a
greater percentage of the TSL Accounts Receivable as of the Closing Date than
the reserve with respect to the TSL Accounts Receivable as reflected in the TSL
Interim Balance Sheet and will not represent a material adverse change in the
composition of such TSL Accounts Receivable in terms of aging). Subject to such
reserves, each of the TSL Accounts Receivable either has been or, to the
Knowledge of TSL and Sellers, will be collected in full, without any set-off,
within ninety days after the day on which it first becomes due and payable.
There is no contest, claim, or right of set-off, other than returns in the
Ordinary Course of Business, under any Contract with any obligor of an TSL
Accounts Receivable relating to the amount or validity of such TSL Accounts
Receivable. Part 3.7 of the Sellers' Disclosure Letter contains a complete and
accurate list of all TSL Accounts Receivable as of the date of the TSL Interim
Balance Sheet, which list sets forth the aging of such TSL Accounts Receivable.
3.8 NO UNDISCLOSED LIABILITIES. Except as set forth in Part 3.8 of the
Sellers' Disclosure Letter, the Acquired Companies have no material liabilities
or obligations of any nature (whether known or unknown and whether absolute,
accrued, contingent, or otherwise) except for liabilities or obligations
reflected or reserved against in the TSL Balance Sheet or the TSL Interim
Balance Sheet and current liabilities incurred in the Ordinary Course of
Business since the respective dates thereof.
3.9 TAXES.
(a) The Acquired Companies or Sellers, as applicable, have filed or
caused to be filed on a timely basis all Tax Returns that are or were required
to be filed by or with respect to any of the Acquired Companies, pursuant to
applicable Legal Requirements. Sellers have delivered or made available to Buyer
copies of, and Part 3.9 of the Sellers' Disclosure Letter contains a complete
and accurate list of, all such Tax Returns filed since January 1, 1996. The
Acquired Companies or Sellers, as applicable, have paid, or made provision for
the payment of, all Taxes that have or may have become due pursuant to those Tax
Returns or otherwise, or pursuant to any assessment received by Sellers or any
Acquired Company, except such Taxes, if any, as are listed in Part 3.9 of the
Sellers' Disclosure Letter and are being contested in good faith and as to which
adequate reserves (determined in accordance with GAAP) have been provided in the
TSL Balance Sheet and the TSL Interim Balance Sheet.
(b) Part 3.9 of the Sellers' Disclosure Letter contains a complete and
accurate list of all audits of all such Tax Returns, including a reasonably
detailed description of the nature and outcome of each audit. All deficiencies
proposed as a result of such audits have been paid, reserved against, settled,
or, as described in Part 3.9 of the Sellers' Disclosure Letter, are being
contested in good faith by appropriate proceedings. Part 3.9 of the Sellers'
Disclosure Letter describes all adjustments to the United States federal income
Tax Returns filed by any Acquired Company or Sellers for all taxable years since
1995 with respect to or that are directly or indirectly related to any Acquired
STOCK PURCHASE AGREEMENT 22
<PAGE> 23
Company, and the resulting deficiencies proposed by the IRS. Except as described
in Part 3.9 of the Sellers' Disclosure Letter, neither Sellers nor any Acquired
Company has given or been requested to give waivers or extensions (or is or
would be subject to a waiver or extension given by any other Person) of any
statute of limitations relating to the payment of Taxes of, with respect to, or
that are directly or indirectly related to any Acquired Company or for which
Sellers or any Acquired Company may be liable.
(c) The charges, accruals, and reserves with respect to, or that are
directly or indirectly related to, Taxes on the respective books of each
Acquired Company are adequate (determined in accordance with GAAP) and are at
least equal to that Acquired Company's liability for Taxes. There exists no
proposed tax assessment against any Acquired Company or Sellers with respect to
or that is directly or indirectly related to any Acquired Company except as
disclosed in the TSL Balance Sheet or in Part 3.9 of the Sellers' Disclosure
Letter. All Taxes with respect to or that are directly or indirectly related to
any Acquired Company that any Acquired Company or either Seller is or was
required by Legal Requirements to withhold or collect have been duly withheld or
collected and, to the extent required, have been paid to the proper Governmental
Body or other Person.
(d) All Tax Returns filed by any Acquired Company or by Sellers with
respect to or that are directly or indirectly related to any Acquired Company
are true, correct, and complete. There is no tax sharing agreement that will
require any payment by any Acquired Company after the date of this Agreement.
During the consistency period (as defined in Section 338(h)(4) of the IRC with
respect to the sale of the Shares to Buyer), no Acquired Company or target
affiliate (as defined in Section 338(h)(6) of the IRC with respect to the sale
of the Shares to Buyer) has sold or will sell any property or assets to Buyer or
to any member of the affiliated group (as defined in Section 338(h)(5) of the
IRC) that includes Buyer. Part 3.9 of the Sellers' Disclosure Letter lists all
such target affiliates.
3.10 NO MATERIAL ADVERSE CHANGE. Since the date of the TSL Balance
Sheet, there has not been any material adverse change in the business,
operations, properties, prospects, assets, or condition of any Acquired Company,
and no event has occurred or circumstance exists that may result in such a
material adverse change.
3.11 EMPLOYEE BENEFIT PLANS. Except as set forth in Part 3.11 of the
Sellers' Disclosure Letter, neither TSL nor any Plan Affiliate has maintained,
sponsored, adopted, made contributions to or obligated itself to make
contributions to or to pay any benefits or grant rights under or with respect to
any Employee Benefit Plan, whether or not written, which could give rise to or
result in TSL or such Plan Affiliate having any material debt, liability, claim
or obligation of any kind or nature, whether accrued, absolute, contingent,
direct, indirect, known or unknown, perfected or inchoate or otherwise and
whether or not due or to become due. Correct and complete copies of all Employee
Benefit Plans of TSL previously have been furnished to Buyer. The Employee
Benefit Plans of TSL are in compliance in all material respects with governing
documents and agreements and with applicable laws. There has not been any act or
omission by TSL under ERISA or the terms of the Employee Benefit Plans of TSL,
or any other applicable law or agreement which could give
STOCK PURCHASE AGREEMENT 23
<PAGE> 24
rise to any liability of TSL, whether under ERISA, the IRC or other laws or
agreements. Neither TSL nor any Plan Affiliate maintains or contributes to, or
has maintained or contributed to, any Employee Benefit Plan subject to Title IV
of ERISA.
3.12 COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS.
(a) Except as set forth in Part 3.12 of the Sellers' Disclosure Letter,
each Acquired Company is, and at all times since January 1, 1996 has been, in
full compliance with each Legal Requirement that is or was applicable to it or
to the conduct or operation of its business or the ownership or use of any of
its assets.
(b) Part 3.12 of the Sellers' Disclosure Letter contains a complete and
accurate list of each Governmental Authorization, including each Governmental
Authorization to conduct insurance, insurance agency or brokerage and premium
finance business and each Insurance Permit, that is held by any Acquired Company
or that otherwise relates to the business of, or to any of the assets owned or
used by, any Acquired Company. Each Governmental Authorization listed or
required to be listed in Part 3.12 of the Sellers' Disclosure Letter is valid
and in full force and effect. Each Acquired Company owns or possesses all right,
title and interest in and to all of the Governmental Authorizations and
Insurance Permits that are necessary to enable it to carry on the business of
such Acquired Company as presently conducted. Each Acquired Company has taken
all necessary action to maintain such Governmental Authorizations. No loss or
expiration of any such Governmental Authorization is threatened, pending or, to
the Knowledge of TSL and Sellers, reasonably foreseeable. The consummation of
the transactions contemplated hereby will not result in the suspension,
modification, cancellation, revocation or nonrenewal of any such Governmental
Authorization. Except for compliance with periodic renewal procedures, no
approvals or authorizations are required to permit the Acquired Companies to
continue their business as presently conducted, following the Closing.
(c) None of the Acquired Companies or, to the Knowledge of Sellers and
TSL, any of its agents or brokers are engaged in any insurance underwriting,
insurance agency or brokerage or premium finance business in any jurisdiction in
which it is not duly authorized or qualified to transact such business.
(d) Except as set forth in Part 3.12 of the Sellers' Disclosure Letter,
each of the Acquired Companies has filed all material reports, statements,
registrations, applications, filings or other documents and submissions required
to be filed with, or provided to any Governmental Body. Except as set forth in
Part 3.12 of the Sellers' Disclosure Letter, all such reports, statements,
registrations, applications, filings, documents and submissions were in
compliance in all material respects with all applicable Legal Requirements when
filed, and no material deficiencies have been asserted by any Governmental Body
with respect thereto.
(e) Sellers have furnished to Buyer true and complete copies of all
annual and quarterly statements filed with or submitted to any state insurance
regulatory authority and all reports of
STOCK PURCHASE AGREEMENT 24
<PAGE> 25
examinations (whether financial, market conduct or other) issued by any state
insurance regulatory authorities in respect of any of the Acquired Companies
covering, in whole or in part, any period on or after January 1, 1993, together
with true and complete copies of all written responses submitted by or on behalf
of any of Sellers, the Acquired Companies or their Affiliates in respect of any
such report of examination. In addition, Sellers have made, or has caused the
Acquired Companies to make, available to Buyer all files of Sellers and the
Acquired Companies relating to correspondence with insurance regulatory
authorities and other Governmental Bodies.
3.13 LEGAL PROCEEDINGS; ORDERS.
(a) Except as set forth in Part 3.13 of the Sellers' Disclosure Letter,
there is no pending Proceeding (i) that has been commenced by or against any
Acquired Company or that otherwise relates to or may affect the business of, or
any of the assets owned or used by, any Acquired Company; or (ii) that
challenges, or that may have the effect of preventing, delaying, making illegal,
or otherwise interfering with, any of the Contemplated Transactions.
To the Knowledge of Sellers and TSL, (1) no such Proceeding has been
Threatened, and (2) no event has occurred or circumstance exists that may give
rise to or serve as a basis for the commencement of any such Proceeding not in
the Ordinary Course of Business of the Acquired Companies. Sellers have
delivered to Buyer copies of all pleadings, correspondence, and other documents
relating to each Proceeding listed in Part 3.13 of the Sellers' Disclosure
Letter. The Proceedings listed in Part 3.13 of the Sellers' Disclosure Letter
will not have a material adverse effect on the business, operations, assets,
condition, or prospects of any Acquired Company.
(b) Except as set forth in Part 3.13 of the Sellers' Disclosure Letter:
(i) there is no Order to which any of the Acquired Companies, or any of the
assets owned or used by any Acquired Company, is subject; and (ii) each Acquired
Company is, and at all times since January 1, 1995 has been, in full compliance
with all of the terms and requirements of each Order to which it, or any of the
assets owned or used by it, is or has been subject.
(c) Except as set forth in Part 3.13 of the Sellers' Disclosure Letter,
no claim is pending nor, to the Knowledge of Sellers or TSL, threatened against
any of the Acquired Companies by any state insurance Governmental Body.
3.14 ABSENCE OF CERTAIN CHANGES AND EVENTS. Except as set forth in Part
3.14 of the Sellers' Disclosure Letter, since the date of the TSL Balance Sheet,
the Acquired Companies have conducted their businesses only in the Ordinary
Course of Business and there has not been any:
(a) change in any Acquired Company's authorized or issued capital
stock; grant of any stock option or right to purchase shares of capital stock of
any Acquired Company; issuance of any security convertible into such capital
stock; grant of any registration rights; purchase, redemption, retirement, or
other acquisition by any Acquired Company of any shares of any such capital
stock; or declaration or payment of any dividend or other distribution or
payment in respect of shares of capital stock;
STOCK PURCHASE AGREEMENT 25
<PAGE> 26
(b) amendment to the Organizational Documents of any Acquired Company;
(c) payment or increase by any Acquired Company of any bonuses,
salaries, or other compensation to any shareholder, director, officer, or
(except in the Ordinary Course of Business) employee or entry into any
employment, severance, or similar Contract with any director, officer, or
employee;
(d) adoption of, or increase in the payments to or benefits under, any
profit sharing, bonus, deferred compensation, savings, insurance, pension,
retirement, or other Employee Benefit Plan for or with any employees of any
Acquired Company;
(e) damage to or destruction or loss of any asset or property of any
Acquired Company, whether or not covered by insurance, materially and adversely
affecting the properties, assets, business, financial condition, or prospects of
the Acquired Companies, taken as a whole;
(f) entry into, termination of, or receipt of notice of termination of
(i) any license, distributorship, dealer, sales representative, joint venture,
credit, or similar agreement, or (ii) any Contract or transaction involving a
total remaining commitment by or to any Acquired Company of at least $10,000;
(g) sale, lease, or other disposition of any material asset or property
of any Acquired Company or mortgage, pledge, or imposition of any lien or other
encumbrance on any material asset or property of any Acquired Company, including
the sale, lease, or other disposition of any of the TSL Intellectual Property
Assets (as defined in Section 3.20);
(h) cancellation or waiver of any claims or rights with a value to any
Acquired Company in excess of $10,000;
(i) material change in the accounting methods used by any Acquired
Company;
(j) agreement, whether oral or written, by any Acquired Company to do
any of the foregoing; or
(k) change in its business, underwriting, billing, reserving,
reinsurance, investment or claims adjustment policies and practices or any
change in any activity that (i) has had the effect of accelerating the recording
and billing of premiums or accounts receivable or delaying the payment of
expenses or the establishment of loss and loss adjustment expense and other
reserves in connection with the business or any material accounts of any of the
Acquired Companies or (ii) has had the effect of materially altering, modifying
or changing the historic financial or accounting practices or policies of any of
the Acquired Companies, including accruals of and reserves for Taxes.
STOCK PURCHASE AGREEMENT 26
<PAGE> 27
3.15 CONTRACTS; NO DEFAULTS.
(a) Part 3.15(a) of the Sellers' Disclosure Letter contains a complete
and accurate list, and Sellers have delivered to Buyer true and complete copies,
of all the material Contracts of each Acquired Company. Part 3.15(a) of the
Sellers' Disclosure Letter sets forth reasonably complete details concerning
such Contracts, including the parties to the Contracts, the amount of the
remaining commitment of the Acquired Companies under the Contracts, and the
Acquired Companies' office where details relating to the Contracts are located.
(b) Except as set forth in Part 3.15(b) of the Sellers' Disclosure
Letter, each Contract identified or required to be identified in Part 3.15(a) of
the Sellers' Disclosure Letter is in full force and effect and is valid and
enforceable in accordance with its terms.
(c) Except as set forth in Part 3.15(c) of the Sellers' Disclosure
Letter:
(i) each Acquired Company is, and at all times since January 1,
1996 has been, in full compliance with all applicable terms and
requirements of each Contract under which such Acquired Company has or
had any obligation or liability or by which such Acquired Company or
any of the assets owned or used by such Acquired Company is or was
bound;
(ii) each other Person that has or had any obligation or liability
under any Contract under which an Acquired Company has or had any
rights is, and at all times since January 1, 1996 has been, in full
compliance with all applicable terms and requirements of such Contract;
(iii) no event has occurred or circumstance exists that (with or
without notice or lapse of time) may conflict with, or result in a
violation or breach of, or give any Acquired Company or other Person
the right to declare a default or exercise any remedy under, or to
accelerate the maturity or performance of, or to cancel, terminate, or
modify, any Applicable Contract; and
(iv) no Acquired Company has given to or received from any other
Person, at any time since January 1, 1996, any notice or other
communication (whether oral or written) regarding any actual, alleged,
possible, or potential violation or breach of, or default under, any
Contract.
(d) The Contracts relating to the sale or provision of services by the
Acquired Companies have been entered into in the Ordinary Course of Business and
have been entered into without the commission of any act alone or in concert
with any other Person, or any consideration having been paid or promised, that
is or would be in violation of any Legal Requirement.
STOCK PURCHASE AGREEMENT 27
<PAGE> 28
3.16 INSURANCE.
(a) Sellers have delivered to Buyer true and complete copies of all
policies of insurance to which any Acquired Company is an insured or a
beneficiary or under which any Acquired Company, or any director of any Acquired
Company, is or has been covered at any time within the three (3) years preceding
the date of this Agreement;
(b) Part 3.16(b) of the Sellers' Disclosure Letter sets forth, by year,
for the current policy year and each of the three (3) preceding policy years, a
summary of the loss experience under each policy described in Section 3.16(a).
TSL and Sellers have no Knowledge of any loss experience that would affect
future potential insurability with respect to such policies.
(c) Except as set forth in Part 3.16(c) of the Sellers' Disclosure
Letter:
(i) All policies to which any Acquired Company is an insured or a
beneficiary or that provide coverage to any Acquired Company or any
director or officer of an Acquired Company (A) are valid, outstanding,
and enforceable; (B) taken together, provide adequate insurance
coverage as is customary for similar entities in similar businesses for
the assets and the operations of the Acquired Companies for all risks
to which the Acquired Companies are normally exposed; (C) are
sufficient for compliance with all Legal Requirements and Contracts to
which any Acquired Company is a party or by which any of them is bound;
and (D) will continue in full force and effect following the
consummation of the Contemplated Transactions.
(ii) No Acquired Company has received (A) any refusal of coverage
or any notice that a defense will be afforded with reservation of
rights, or (B) any notice of cancellation or any other indication that
any insurance policy is no longer in full force or effect or will not
be renewed or that the issuer of any policy is not willing or able to
perform its obligations thereunder.
(iii) The Acquired Companies have paid all premiums due, and have
otherwise performed all of their respective obligations, under each
policy to which any Acquired Company is an insured or a beneficiary or
that provides coverage to any Acquired Company or director thereof.
(iv) The Acquired Companies have given notice to the insurer of all
claims that may be insured thereby.
3.17 ENVIRONMENTAL MATTERS. Except as set forth in Part 3.17 of the
Sellers' Disclosure Letter, to the Knowledge of Sellers and TSL, each of the
Acquired Companies is in compliance with all Environmental Laws, the failure to
comply with which could have a Material Adverse Effect. Neither (i) either
Seller nor (ii) any of the Acquired Companies has received notice of any
material violation by any of the Acquired Companies of, or material default by
the same under, any
STOCK PURCHASE AGREEMENT 28
<PAGE> 29
Environmental Law, and neither (i) either Seller nor (ii) TSL has any Knowledge
of any existing facts or circumstances that are likely to result in any such
violation or default. There is no action, suit, claim, proceeding or
investigation pending or, to the Knowledge of Sellers and TSL, threatened
against any of the Acquired Companies that alleges or would allege any violation
of any Environmental Law.
3.18 EMPLOYEES.
(a) Part 3.18 of the Sellers' Disclosure Letter contains a complete and
accurate list of the following information for each employee or director of the
Acquired Companies, including each employee on leave of absence or layoff
status: employer; name; job title; current compensation paid or payable and any
change in compensation since January 1, 1996; paid time off accrued; and service
credited for purposes of vesting and eligibility to participate under any
Acquired Company's pension, retirement, profit-sharing, thrift-savings, deferred
compensation, stock bonus, stock option, cash bonus, employee stock ownership
(including investment credit or payroll stock ownership), severance pay,
insurance, medical, welfare, or vacation plan, other Employee Pension Benefit
Plan or Employee Welfare Benefit Plan, or any other Employee Benefit Plan or any
Director Plan.
(b) No employee or director of any Acquired Company is a party to, or
is otherwise bound by, any agreement or arrangement, including any Proprietary
Rights Agreement, between such employee or director and any other Person that in
any way adversely affects or will affect (i) the performance of his duties as an
employee or director of the Acquired Companies, or (ii) the ability of any
Acquired Company to conduct its business, including any Proprietary Rights
Agreement with Sellers or the Acquired Companies by any such employee or
director. To each Seller's and TSL's Knowledge, no director or officer of any
Acquired Company intends to terminate his employment with such Acquired Company.
(c) Part 3.18 of the Sellers' Disclosure Letter also contains a
complete and accurate list of the following information for each retired
employee or director of the Acquired Companies, or their dependents, receiving
benefits or scheduled to receive benefits in the future: name, pension benefit,
pension option election, retiree medical insurance coverage, retiree life
insurance coverage, and other benefits.
3.19 LABOR RELATIONS; COMPLIANCE. Except as set forth on Part 3.19 of
the Sellers' Disclosure Letter, since January 1, 1996, no Acquired Company has
been or is a party to any collective bargaining or other labor Contract. Since
January 1, 1996, there has not been, there is not presently pending or existing,
and, to the Knowledge of TSL and Sellers, there is not Threatened, (a) any
strike, slowdown, picketing, work stoppage, lockout or employee grievance
process, (b) any Proceeding against or affecting any Acquired Company relating
to the alleged violation of any Legal Requirement pertaining to labor relations
or employment matters or (c) any application for certification of a collective
bargaining agent. Each Acquired Company has complied in all respects with all
Legal Requirements relating to employment, equal employment opportunity,
nondiscrimination, immigration, wages, hours, benefits, collective bargaining
and occupational
STOCK PURCHASE AGREEMENT 29
<PAGE> 30
safety and health. No Acquired Company is liable for the payment of any
compensation, damages, taxes, fines, penalties, or other amounts, however
designated, for failure to comply with any of the foregoing Legal Requirements.
3.20 INTELLECTUAL PROPERTY.
(a) Each Acquired Company (i) owns or has ordered all the licenses,
trademarks, tradenames, copyrights, marks, patents and applications for patents
listed and attributed to it on Part 3.20(a) of the Sellers' Disclosure Letter
(the "TSL Intellectual Property Assets"), (ii) neither owns nor uses any such
items which are not listed in the Sellers' Disclosure Letter, (iii) pays no
royalties to anyone with respect to any such items, and (iv) has full and lawful
right to bring actions for the infringement thereof. Each Acquired Company owns,
or possesses adequate and enforceable rights to use without payment of
royalties, all licenses, trademarks, tradenames, copyrights, patents, trade
secrets and processes necessary for the conduct of, or use in, its business as
the same is presently being conducted, the absence of which would have a
material adverse effect or the potential for a material adverse effect on such
Acquired Company.
(b) Except as set forth in Part 3.20(b) of the Sellers' Disclosure
Letter, TSL has no Knowledge nor has received any notice to the effect that any
service it or any other Acquired Company provides or sells, or any process or
method it employs in its business for the use by it or another of any such
service, may infringe, or is in conflict with, any asserted right of another.
There is no pending or Threatened claim or litigation action against any
Acquired Company contesting its right to use or the validity of any of the TSL
Intellectual Property Assets or asserting its misuse of any of the foregoing,
which would deprive it of the right to assert its rights thereunder or which
would prevent the sale of any service provided or sold by it.
(c) The software systems of each Acquired Company are Year 2000
Compliant.
3.21 CERTAIN PAYMENTS. Since January 1, 1996, no Acquired Company or
director, officer, agent, or employee of any Acquired Company, or any other
Person associated with or acting for or on behalf of any Acquired Company, has
directly or indirectly (a) made any contribution, gift, bribe, rebate, payoff,
influence payment, kickback, or other payment to any Person, private or public,
regardless of form, whether in money, property, or services (i) to obtain
favorable treatment in securing business, (ii) to pay for favorable treatment
for business secured, (iii) to obtain special concessions or for special
concessions already obtained, for or in respect of any Acquired Company or any
affiliate of an Acquired Company, or (iv) in violation of any Legal Requirement
or (b) established or maintained any fund or asset that has not been recorded in
the books and records of the Acquired Companies.
STOCK PURCHASE AGREEMENT 30
<PAGE> 31
3.22 DISCLOSURE.
(a) No representation or warranty of Sellers or TSL in this Agreement
and no statement in the Sellers' Disclosure Letter omits to state a material
fact necessary to make the statements herein or therein, in light of the
circumstances in which they were made, not misleading.
(b) There is no fact known to Sellers or TSL that has specific
application to Sellers or any Acquired Company (other than general economic or
industry conditions) and that materially adversely affects or, as far as Sellers
or TSL can reasonably foresee, materially threatens, the assets, business,
prospects, financial condition, or results of operations of the Acquired
Companies (on a consolidated basis) that has not been set forth in this
Agreement or the Sellers' Disclosure Letter.
3.23 RELATIONSHIPS WITH RELATED PERSONS. Except as set forth in Part
3.23 of the Sellers' Disclosure Letter, neither either Seller nor any Related
Person of either Seller or of any Acquired Company has, or since January 1, 1996
has had, any interest in any property (whether real, personal, or mixed and
whether tangible or intangible), used in or pertaining to the Acquired
Companies' businesses. Except as set forth in Part 3.23 of the Sellers'
Disclosure Letter, neither either Seller nor any Related Person of either Seller
or of any Acquired Company is, or since January 1, 1996, has owned (of record or
as a beneficial owner) an equity interest or any other financial or profit
interest in, a Person that has (i) had business dealings or a material financial
interest in any transaction with any Acquired Company, or (ii) engaged in
competition with any Acquired Company with respect to any line of the products
or services of such Acquired Company ("TSL Competing Business") in any market
presently served by such Acquired Company. Except as set forth in Part 3.23 of
the Sellers' Disclosure Letter, neither Seller nor any Related Person of either
Seller or of any Acquired Company is a party to any Contract with, or has any
claim or right against, any Acquired Company.
3.24 AGENTS AND PRODUCERS. Part 3.24 of the Sellers' Disclosure Letter
lists all agents, brokers, producers, underwriting managers and other Persons of
each of the Acquired Companies who were paid, directly or indirectly, either (i)
at least $25,000 in commissions by or through any of the Acquired Companies,
during the year ended December 31, 1998, including the total amount of
commissions paid to such Persons in such year, or (ii) at least $18,750 in
commissions by or through any of the Acquired Companies, during the nine months
ended September 30, 1999, including the total amount of commissions paid to such
Persons in such period. To the Knowledge of TSL and Sellers, each of the
Acquired Companies generally enjoys good relations with the Persons listed on
Part 3.24 of the Sellers' Disclosure Letter as a whole, and also generally
enjoys good relations with its other insurance agents, brokers and producers as
a whole. To the Knowledge of Sellers and TSL, all Persons listed on Part 3.24 of
the Sellers' Disclosure Letter are duly licensed to act as agents, brokers or
producers in the jurisdictions where they engage in such activities.
3.25 THREATS OF CANCELLATION. Except as set forth in Part 3.25 of the
Sellers' Disclosure Letter hereto, since January 1, 1996, no policyholder or
group of policyholders under a group policy, or agent, broker, producer or other
Person writing, selling or producing insurance, reinsurance or retrocessional
coverage, which, individually or in the aggregate together with other related
policyholders, agents, brokers and producers, accounted for one percent (1%) or
more of the aggregate gross premiums written by or through the Acquired
Companies in any year ended since
STOCK PURCHASE AGREEMENT 31
<PAGE> 32
December 31, 1996, has terminated or given written notice of termination of its
relationship with any of the Acquired Companies. The Acquired Companies have
received no notice that any such policyholder, group of policyholders, agent,
broker, producer or other such Person will or is reasonably likely to terminate
such relationship as a result of the transactions contemplated by this
Agreement. 3.26 INVESTMENTS. Part 3.26 of the Sellers' Disclosure Letter
contains (a) a true and complete list of all securities and other investments
owned by each of the Acquired Companies as of the end of the most recent
calendar month, including the date of purchase, book value or amortized cost,
market value and carrying value thereof on the books and records of account of
such Acquired Company as of such date and (b) the Investment Guidelines of each
such Acquired Company. Except as set forth in Part 3.26 of the Sellers'
Disclosure Letter, none of the securities and other investments owned by such
Persons is in default in the payment of principal or interest or dividends. All
such securities and other investments substantially comply with the Investment
Guidelines and all insurance laws and regulations of each of the jurisdictions
to which the Acquired Companies are subject with respect thereto.
3.27 BANK ACCOUNTS. Part 3.27 of the Sellers' Disclosure Letter
contains a true and complete list of (a) the names and locations of all banks,
trust companies, securities brokers and other financial institutions at which
any of the Acquired Companies has an account or safe deposit box or maintains a
banking, custodial, trading or other similar relationship, (b) a true and
complete list and description of each such account, box and relationship and (c)
the name of every Person authorized to draw thereon or having access thereto.
3.28 BROKERS OR FINDERS. Except for those certain obligations to Philo
Smith & Co., Inc., Sellers, each Acquired Company and their agents have incurred
no obligation or liability, contingent or otherwise, for brokerage or finders'
fees or agents' commissions or other similar payment in connection with this
Agreement.
3.29 CLAIMS AGAINST BUYER. Each Seller hereby represents that, both as
of the date of this Agreement and as of the Closing, such Seller has no
Knowledge of the basis of any claims, demands, or causes of action capable of
being raised by either Seller against Buyer or any director, officer or employee
of Buyer whatsoever arising contemporaneously with or prior to the Closing Date
or on account of or arising out of any matter, cause or event occurring
contemporaneously with or prior to the Closing Date, whether or not relating to
claims pending on, or asserted after, the Closing Date other than any
obligations of Buyer arising under the Agreement.
STOCK PURCHASE AGREEMENT 32
<PAGE> 33
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Sellers as follows:
4.1 ORGANIZATION AND GOOD STANDING. Buyer is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Texas.
4.2 AUTHORITY; NO CONFLICT.
(a) This Agreement constitutes the legal, valid, and binding obligation
of Buyer, enforceable against Buyer in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium and other laws affecting creditors' rights generally and by general
principles of equity. Upon the execution and delivery by Buyer of the Hill
Employment Agreement and the Heidt Employment Agreement, the Hill Employment
Agreement and the Heidt Employment Agreement will constitute the legal, valid,
and binding obligations of Buyer, enforceable against Buyer in accordance with
their respective terms, except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and other laws affecting creditors'
rights generally and by general principles of equity. Buyer has all corporate
right, power, and authority to execute and deliver this Agreement, the Hill
Employment Agreement and the Heidt Employment Agreement and to perform its
obligations under this Agreement, the Hill Employment Agreement and the Heidt
Employment Agreement.
(b) Except as set forth in Part 4.2 of the Buyer's Disclosure Letter,
neither the execution and delivery of this Agreement nor the consummation or
performance of any of the Contemplated Transactions will, directly or indirectly
(with or without notice or lapse of time) (i) conflict with, or result in a
violation of any provision of the Organizational Documents of Buyer; (ii)
conflict with, or result in a violation of, or give any Governmental Body or
other Person the right to challenge any of the Contemplated Transactions or to
exercise any remedy or obtain any relief under, any Legal Requirement or any
Order to which Buyer, or any of the assets owned or used by Buyer, may be
subject; (iii) conflict with, or result in a violation of any of the terms or
requirements of, or give any Governmental Body the right to revoke, suspend,
terminate, or modify, any Insurance Permit or other Governmental Authorization
that is held by Buyer or that otherwise relates to the business of, or any of
the assets owned or used by, Buyer; (iv) conflict with, or result in a violation
or breach of any provision of, or give any Person the right to declare a default
or exercise any remedy under, or to accelerate the maturity or performance of,
or to cancel, terminate, or modify, any Applicable Contract; or (v) result in
the imposition or creation of any Encumbrance upon or with respect to any of the
assets owned or used by Buyer.
Except as set forth in Part 4.2 of the Buyer's Disclosure Letter, Buyer
is not and will not be required to give any notice to or obtain any Consent from
any Person in connection with the
STOCK PURCHASE AGREEMENT 33
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execution and delivery of this Agreement or the consummation or performance of
any of the Contemplated Transactions.
4.3 INVESTMENT INTENT. Buyer is acquiring the Shares for its own
account and not with a view to their distribution within the meaning of Section
2(11) of the Securities Act.
4.4 CERTAIN PROCEEDINGS. There is no pending Proceeding that has been
commenced against Buyer and that challenges, or may have the effect of
preventing, delaying, making illegal, or otherwise interfering with, any of the
Contemplated Transactions.
4.5 BROKERS OR FINDERS. Buyer and its officers and agents have incurred
no obligation or liability, contingent or otherwise, for brokerage or finders'
fees or agents' commissions or other similar payment in connection with this
Agreement.
4.6 DISCLOSURE.
(a) No representation or warranty of Buyer in this Agreement and no
statement in the Buyer's Disclosure Letter omits to state a material fact
necessary to make the statements herein or therein, in light of the
circumstances in which they were made, not misleading.
(b) There is no fact known to Buyer that has specific application to
Buyer (other than general economic or industry conditions) and that materially
adversely affects or, as far as Buyer can reasonably foresee, materially
threatens, the assets, business, prospects, financial condition, or results of
operations of Buyer (on a consolidated basis) that has not been set forth in
this Agreement or the Buyer's Disclosure Letter.
ARTICLE V
COVENANTS OF SELLERS AND TSL
5.1 ACCESS AND INVESTIGATION. Between the date of this Agreement and
the Closing Date, Sellers and TSL will, and will cause each Acquired Company and
its Representatives to, (a) afford Buyer and its Representatives (collectively,
"Buyer's Advisors") full and free access to each Acquired Company, its
personnel, properties, contracts, books and records, and all other documents and
data, (b) furnish Buyer and Buyer's Advisors with copies of all such contracts,
books and records, and other existing documents and data as Buyer may reasonably
request, and (c) furnish Buyer and Buyer's Advisors with such additional
financial, operating, and other data and information as Buyer may reasonably
request.
5.2 OPERATION OF THE BUSINESSES OF THE ACQUIRED COMPANIES. Between the
date of this Agreement and the Closing Date, Sellers and TSL will, and will
cause each Acquired Company to:
STOCK PURCHASE AGREEMENT 34
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(a) conduct the business of such Acquired Company only in the Ordinary
Course of Business and in accordance with all valid regulations, laws and orders
of all Governmental Bodies;
(b) preserve intact the current business organization of such Acquired
Company, keep available the services of the current officers, employees, and
agents of such Acquired Company, and maintain the relations and good will with
suppliers, customers, landlords, creditors, employees, agents, and others having
business relationships with such Acquired Company;
(c) confer with Buyer concerning operational matters of a material
nature; and
(d) otherwise report from time to time to Buyer concerning the status
of the business, operations, and finances of such Acquired Company.
5.3 NEGATIVE COVENANT. Except as otherwise expressly permitted by this
Agreement or disclosed in the Sellers' Disclosure Letter, between the date of
this Agreement and the Closing Date, Sellers and TSL will not, and will cause
each Acquired Company not to, without the prior consent of Buyer, take any
affirmative action, or fail to take any reasonable action within their or its
control, as a result of which any of the changes or events listed in Section
3.14 is likely to occur.
5.4 REQUIRED APPROVALS. As promptly as practicable after the date of
this Agreement, Sellers will, and will cause each Acquired Company to, make all
filings required by Legal Requirements to be made by them in order to consummate
the Contemplated Transactions. Between the date of this Agreement and the
Closing Date, Sellers will, and will cause each Acquired Company to, (a)
cooperate with Buyer with respect to all filings that Buyer elects to make or is
required by Legal Requirements to make in connection with the Contemplated
Transactions and (b) cooperate with Buyer in obtaining all consents identified
in Part 4.2 of the Buyer's Disclosure Letter.
5.5 NOTIFICATION. Between the date of this Agreement and the Closing
Date, Sellers will promptly notify Buyer in writing if Sellers or any Acquired
Company becomes aware of any fact or condition that causes or constitutes a
Breach of any of Sellers' or the Company's representations and warranties as of
the date of this Agreement, or if either Seller or the Company becomes aware of
the occurrence after the date of this Agreement of any fact or condition that
would (except as expressly contemplated by this Agreement) cause or constitute a
Breach of any such representation or warranty had such representation or
warranty been made as of the time of occurrence or discovery of such fact or
condition. Should any such fact or condition require any change in the Sellers'
Disclosure Letter if the Sellers' Disclosure Letter were dated the date of the
occurrence or discovery of any such fact or condition, Sellers will promptly
deliver to Buyer a supplement to the Sellers' Disclosure Letter specifying such
change. During the same period, Sellers will promptly notify Buyer of the
occurrence of any Breach of any covenant of Sellers or the Company in this
Article V or of the occurrence of any event that may make the satisfaction of
the conditions in Article VII impossible or unlikely. No notice given pursuant
to this Section 5.5 will contain any untrue statement or omit to state a
material fact necessary to make the statements therein or in this Agreement, in
light of the circumstances in which they were made, not misleading.
STOCK PURCHASE AGREEMENT 35
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5.6 PAYMENT OF INDEBTEDNESS BY RELATED PERSONS. Except as expressly
provided in this Agreement, Sellers will cause all indebtedness owed to an
Acquired Company by either Seller or any Related Person of any Seller to be paid
in full contemporaneous with Closing.
5.7 BEST EFFORTS. Between the date of this Agreement and the Closing
Date, Sellers will use their Best Efforts to cause the conditions in Articles
VII and VIII to be satisfied.
5.8 REVIEWED FINANCIAL STATEMENTS OF THE ACQUIRED COMPANIES. Sellers
and TSL shall deliver the financial statements as required by Section 3.4.
5.9 NO SOLICITATION.
(a) Until the earlier to occur of (i) the Closing or (ii) the
termination of this Agreement, TSL agrees that neither it nor any of its
Subsidiaries nor any of the officers and directors of it or its Subsidiaries
shall, and that it shall direct and use its reasonable efforts to cause its and
its Subsidiaries' employees, agents and representatives (including any
investment banker, attorney or accountant retained by it or any of its
Subsidiaries) not to, directly or indirectly, initiate, solicit, encourage or
knowingly facilitate (including by way of furnishing information) any inquiries
or the making of any proposal or offer with respect to a merger, reorganization,
share exchange, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction involving, or any purchase
(including, without limitation, by way of tender offer) or sale of any of the
assets of any of the Acquired Companies (other than in the Ordinary Course of
Business) or shares of the common stock of any of the Acquired Companies (any
such proposal or offer (other than a proposal or offer made by Buyer) being
hereinafter referred to as an "Acquisition Proposal").
(b) TSL further agrees that neither it nor any of its Subsidiaries nor
any of the officers and directors of it or its Subsidiaries shall, and that it
shall direct and use its Best Efforts to cause its and its Subsidiaries'
employees, agents and representatives (including any investment banker, attorney
or accountant retained by it or any of its Subsidiaries) not to, directly or
indirectly, have any discussion with or provide any confidential information or
data to any Person relating to an Acquisition Proposal, or engage in any
negotiations concerning an Acquisition Proposal or accept an Acquisition
Proposal.
(c) TSL agrees that it will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any parties
conducted heretofore with respect to any Acquisition Proposal.
5.10 ANNUAL STATEMENT. Sellers will use their Best Efforts to cause an
appropriate officer of each Acquired Company that was employed by such Acquired
Company during the 1999 calendar year to execute the Annual Statement and all
other insurance regulatory and filings relating to the 1999 calendar year
required (as applicable) to be filed with respect to such Acquired Company.
STOCK PURCHASE AGREEMENT 36
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5.11 AUDIT COSTS. The Acquired Companies shall take all action
necessary to ensure that all costs of the December 31, 1999 Audit are accrued
and reflected on the balance sheets for the Acquired Companies as of December
31, 1999.
5.12 PERSONAL GUARANTIES. Sellers shall use their commercially
reasonable efforts to cause the personal guaranties of the indebtedness
described in Part 6.5 of Sellers' Disclosure Letter to be extinguished or
released within 15 days following the Closing Date.
5.13 NON-COMPETITION AGREEMENT.
(a) Buyer and Sellers hereby agree and acknowledge that a portion of
the Initial Purchase Price, constituting at least $100,000.00, represents the
value of the good will established by Sellers in TSL and transferred to Buyer by
this Agreement.
(b) Each Seller, on his own behalf, acknowledges that: (i) the services
to be performed by him under the attached Hill Employment Agreement and Heidt
Employment Agreement, respectively, are of a special, unique, unusual,
extraordinary, and intellectual character; (ii ) Buyer's business is currently
national in scope and its services and products are marketed throughout the
United States and the scope of TSL's business and the market for its products
currently extends through the states of North Dakota, South Dakota and Minnesota
and is contemplated to be expanded following the Closing; (iii) TSL competes
with other businesses that are or could be located in any part of the United
States; (iv) Buyer has required that each Seller make the covenants set forth in
this section as a condition to Buyer's purchase of the shares of capital stock
of TSL owned by each Seller pursuant to this Agreement; and (v) the provisions
of this section are reasonable and necessary to protect the TSL's business.
(c) In consideration of the acknowledgments by each Seller, and in
consideration of the amounts paid or to be paid by Buyer to each Seller under
this Agreement, each Seller covenants on his own behalf that he will not,
directly or indirectly:
(i) during the Employment Term (as defined below), except in the
course of his employment by TSL, engage or invest in, own, manage, operate,
finance, control, or participate in the ownership, management, operation,
financing, or control of, be employed by, associated with, or in any manner
connected with, lend Seller's name or any similar name to, lend Seller's credit
to or render services or advice to, any business whose products, services or
activities compete in whole or in part with the products, services or activities
of TSL, Buyer or any affiliate thereof anywhere in the world; provided, however,
that each Seller may purchase or otherwise acquire up to (but not more than)
five percent (5%) of any class of securities of any enterprise involved in the
Business (defined below) (but without otherwise participating in the activities
of such enterprise), other than Buyer, if such securities are listed on any
national or regional securities exchange or have been registered under Section
12(g) of the Securities Exchange Act of 1934; and further provided that
Executive may purchase securities of Buyer in those purchase windows authorized
for Buyer's officers by the Chief Executive Officer of Buyer;
STOCK PURCHASE AGREEMENT 37
<PAGE> 38
(ii) during the Post-Employment Period (as defined below), engage
or invest in, own, manage, operate, finance, control, or participate in the
ownership, management, operation, financing, or control of, be employed by,
associated with, or in any manner connected with, lend the Executive's name or
any similar name to, lend Executive's credit to or render services or advice to,
any business whose products, services or activities are involved in, directly or
indirectly or in whole or in part, the Business in Burleigh County, North
Dakota, or any geographical areas outside of North Dakota in which TSL conducts
operations as of the Closing Date; provided, however, that each Seller may
purchase or otherwise acquire, directly or indirectly, up to (but not more than)
five percent of any class of securities of any enterprise involved in the
Business (but without otherwise participating in the activities of such
enterprise), if such securities are listed on any national or regional
securities exchange or have been registered under Section 12(g) of the
Securities Exchange Act of 1934; provided, further, that in the event that,
during the Post-Agreement Period, TSL, Buyer and all affiliates thereof cease to
engage in any given segment of the Business in the States of North Dakota, South
Dakota and Minnesota, then the provisions of this Section 5.13(c)(ii) will not
apply to either Seller with respect to that particular segment of Business in
the States of North Dakota, South Dakota and Minnesota only but will remain in
effect and applicable to each Seller for all other purposes.
(iii) whether for Seller's own account or for the account of any
other Person, at any time during the Employment Term and the Post-Employment
Period, solicit business of the same or similar type being carried on by TSL,
from any Person known by Seller to be a customer of TSL, whether or not Seller
had personal contact with such Person during and by reason of Seller's
employment with TSL;
(iv) whether for Seller's own account or the account of any other
Person (A) at any time during the Employment Term and the Post-Employment
Period, solicit, employ, or otherwise engage as an employee, independent
contractor, or otherwise, any Person who is or was an employee of TSL at any
time during the Employment Term or in any manner induce or attempt to induce any
employee of TSL to terminate his employment with TSL; or (B) at any time during
the Employment Term and the Post-Employment Period, interfere with TSL's
relationship with any Person, including any Person who at any time during the
Employment Term was an employee, agent, insurer, or customer of TSL; or
(v) at any time during or after the Employment Term, disparage TSL
or any of its shareholders, directors, officers, employees, or agents.
(d) For purposes of this sections the term "Employment Term" shall have
an identical meaning to Term as defined in the Hill Employment Agreement or the
Heidt Employment Agreement, respectively; "Post-Employment Period" means the
period beginning on the date of termination of Seller's employment with TSL,
plus the remainder of the Term, if any, not fulfilled by Seller for any reason
plus three years. For purposes of this section, the term "Business" means the
business of writing, underwriting, selling, claims adjusting, acting as an agent
with respect to
STOCK PURCHASE AGREEMENT 38
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nonstandard private passenger automotive or commercial automotive insurance or
other related insurance activities.
(e) If any covenant in this section is held to be unreasonable,
arbitrary, or against public policy, such covenant will be considered to be
divisible with respect to scope, time, and geographic area, and such lesser
scope, time, or geographic area, or all of them, as a court of competent
jurisdiction may determine to be reasonable, not arbitrary, and not against
public policy, will be effective, binding, and enforceable against each Seller.
(f) The period of time applicable to any covenant in this section will
be extended by the duration of any violation by each Seller, respectively, of
such covenant.
(g) Each Seller will, while the covenant under this section is in
effect, give notice to TSL, within ten days after accepting any other
employment, of the identity of Seller's employer. Buyer or TSL may notify such
employer that Seller is bound by this Agreement and, at TSL's election, furnish
such employer with a copy of this Agreement or relevant portions thereof.
(h) Each Seller acknowledges on his own behalf that the injury that
would be suffered by TSL as a result of a breach of the provisions of this
section would be irreparable and that an award of monetary damages to TSL for
such a breach would be an inadequate remedy. Consequently, TSL will have the
right, in addition to any other rights it may have, to obtain injunctive relief
to restrain any breach or threatened breach or otherwise to specifically enforce
any provision of this section, and TSL will not be obligated to post bond or
other security in seeking such relief.
(i) The covenants by each Seller in this section are essential elements
of this Agreement, and without each Seller's agreement to comply with such
covenants, Buyer would not have purchased the capital stock of TSL owned by
Sellers under this Agreement and TSL would not have agreed to employ or continue
the employment of each Seller pursuant to the attached Hill Employment Agreement
and Heidt Employment Agreement, respectively. TSL and each Seller have
independently consulted their respective counsel and have been advised in all
respects concerning the reasonableness and propriety of such covenants, with
specific regard to the nature of the business conducted by TSL.
(j) Each Seller's covenants in this section are independent covenants
and the existence of any claim by either Seller against TSL under this Agreement
or otherwise, or against Buyer, will not excuse either Seller's breach of any
covenant in this section.
(k) Notwithstanding the provisions of Section 10.5 or any other
provision of this Agreement to the contrary, the provisions of this Section 5.13
will continue in full force and effect after Closing as is necessary or
appropriate to enforce the covenants and agreements of each Seller in this
section.
STOCK PURCHASE AGREEMENT 39
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ARTICLE VI
COVENANTS OF BUYER
6.1 APPROVALS OF GOVERNMENTAL BODIES. As promptly as practicable after
the date of this Agreement, Buyer will make all filings required by Legal
Requirements to be made by it in order to consummate the Contemplated
Transactions. Between the date of this Agreement and the Closing Date, Buyer
will (a) cooperate with Sellers with respect to all filings that Sellers elect
to make or is required by Legal Requirements to make in connection with the
Contemplated Transactions and (b) cooperate with Sellers in obtaining all
consents identified in Part 3.2 of the Sellers' Disclosure Letter; provided that
this Agreement will not require Buyer to dispose of or make any change in any
portion of its business or to incur any other burden to obtain a Governmental
Authorization.
6.2 BEST EFFORTS. Except as set forth in the proviso to Section 6.1,
between the date of this Agreement and the Closing Date, Buyer will use its Best
Efforts to cause the conditions in Articles VII and VIII to be satisfied.
6.3 ACCESS. Between the date of this Agreement and the Closing Date,
Buyer shall provide to Sellers responses to the Sellers' reasonable due
diligence requests.
6.4 NOTIFICATION. Between the date of this Agreement and the Closing
Date, Buyer will promptly notify Sellers in writing if Buyer becomes aware of
any fact or condition that causes or constitutes a Breach of any of Buyer's
representations and warranties as of the date of this Agreement, or if Buyer
becomes aware of the occurrence after the date of this Agreement of any fact or
condition that would (except as expressly contemplated by this Agreement) cause
or constitute a Breach of any such representation or warranty had such
representation or warranty been made as of the time of occurrence or discovery
of such fact or condition. Should any such fact or condition require any change
in the Buyer's Disclosure Letter if the Buyer's Disclosure Letter were dated the
date of the occurrence or discovery of any such fact or condition, Buyer will
promptly deliver to Sellers a supplement to the Buyer's Disclosure Letter
specifying such change. During the same period, Buyer will promptly notify
Sellers of the occurrence of any Breach of any covenant of Buyer in this Article
VI or of the occurrence of any event that may make the satisfaction of the
conditions in Article VIII impossible or unlikely. No notice given pursuant to
this Section 6.4 will contain any untrue statement or omit to state a material
fact necessary to make the statements therein or in this Agreement, in light of
the circumstances in which they were made, not misleading.
6.5 PERSONAL GUARANTIES. To the extent that Sellers' efforts to cause
the personal guaranties of the indebtedness described in Part 6.5 of the
Sellers' Disclosure Letter to be extinguished or released within 15 days after
the Closing Date are unsuccessful, Buyer shall take all action necessary
(including without limitation causing the underlying indebtedness to be
extinguished) to cause such personal guaranties to be extinguished or released
within 45 days after the Closing Date.
STOCK PURCHASE AGREEMENT 40
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ARTICLE VII
CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE
Buyer's obligation to purchase the Shares and to take the other actions
required to be taken by Buyer at the Closing is subject to the satisfaction, at
or prior to the Closing, of each of the following conditions (any of which may
be waived by Buyer, in whole or in part):
7.1 ACCURACY OF REPRESENTATIONS. Each of Sellers' and the Company's
representations and warranties in this Agreement must have been accurate in all
material respects (other than those contained in Section 3.29, which must have
been accurate without regard to materiality) as of the date of this Agreement,
and must be accurate in all material respects (other than those contained in
Section 3.29, which must be accurate without regard to materiality) as of the
Closing Date as if made on the Closing Date, without giving effect to any
supplement to the Sellers' Disclosure Letter.
7.2 SELLERS' PERFORMANCE. Each of the covenants and obligations that
Sellers and the Company are required to perform or to comply with pursuant to
this Agreement at or prior to the Closing must have been duly performed and
complied with in all material respects.
7.3 CONSENTS. Each of the Consents identified in Part 3.2 of the
Sellers' Disclosure Letter and Part 4.2 of the Buyer's Disclosure Letter must
have been obtained and must be in full force and effect.
7.4 ADDITIONAL DOCUMENTS. Each of the following documents must have
been delivered to Buyer:
(a) estoppel certificates executed on behalf of all landlords, lenders
and lessors of the Acquired Companies, dated as of a date not more than five (5)
days prior to the Closing Date;
(b) such other documents as Buyer may reasonably request for the
purpose of (i) evidencing the accuracy of any of Sellers' and the Company's
representations and warranties, (ii) evidencing the performance by Sellers and
the Company of, or the compliance by Sellers and the Company with, any covenant
or obligation required to be performed or complied with by Sellers and the
Company, (iii) evidencing the satisfaction of any condition referred to in this
Article VII or (iv) otherwise facilitating the consummation or performance of
any of the Contemplated Transactions.
7.5 NO CLAIM REGARDING STOCK OWNERSHIP OR SALE PROCEEDS. There must not
have been made or Threatened by any Person any claim asserting that such Person
(a) is the holder or the beneficial owner of, or has the right to acquire or to
obtain beneficial ownership of, any stock of, or any other voting, equity, or
ownership interest in, any of the Acquired Companies or (b) is entitled to all
or any portion of the Purchase Price payable for the Shares.
STOCK PURCHASE AGREEMENT 41
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7.6 NO PROHIBITION. Neither the consummation nor the performance of any
of the Contemplated Transactions will, directly or indirectly (with or without
notice or lapse of time), materially contravene, or conflict with, or result in
a material violation of, or cause Buyer or any Person affiliated with Buyer to
suffer any material adverse consequence under, (a) any applicable Legal
Requirement or Order or (b) any Legal Requirement or Order that has been
published, introduced, or otherwise proposed by or before any Governmental Body.
Neither the consummation nor the performance of the Contemplated Transactions
will directly or indirectly violate an Order.
7.7 REGULATORY APPROVAL. Buyer or a Subsidiary of Buyer shall have
obtained the necessary regulatory approvals in the states in which any of the
Acquired Companies operate to consummate the Contemplated Transactions.
7.8 TRANSFER OF CERTAIN ASSETS. Hill shall have purchased the company
airplane and real property described in Part 7.8 of the Sellers' Disclosure
Letter on the terms described therein and assumed all associated liabilities,
obligations and indebtedness, including but not limited to future and accrued
but unpaid maintenance costs and taxes.
7.9 CLOSING DELIVERIES. All items contemplated in Section 2.5(a) shall
have been delivered to Buyer.
ARTICLE VIII
CONDITIONS PRECEDENT TO SELLERS' OBLIGATION TO CLOSE
Sellers' obligation to sell the Shares and to take the other actions
required to be taken by Sellers at the Closing is subject to the satisfaction,
at or prior to the Closing, of each of the following conditions (any of which
may be waived by Sellers, in whole or in part):
8.1 ACCURACY OF REPRESENTATIONS. Each of Buyer's representations and
warranties in this Agreement must have been accurate in all material respects as
of the date of this Agreement, and must be accurate in all material respects as
of the Closing Date as if made on the Closing Date, without giving effect to any
supplement to the Buyer's Disclosure Letter.
8.2 BUYER'S PERFORMANCE. Each of the covenants and obligations that
Buyer is required to perform or to comply with pursuant to this Agreement at or
prior to the Closing must have been performed and complied with in all material
respects.
8.3 CONSENTS. Each of the Consents identified in Part 3.2 of the
Sellers' Disclosure Letter and Part 4.2 of the Buyer's Disclosure Letter must
have been obtained and must be in full force and effect.
STOCK PURCHASE AGREEMENT 42
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8.4 ADDITIONAL DOCUMENTS. Buyer must have caused such other documents
as Sellers may reasonably request for the purpose of (i) evidencing the accuracy
of any representation or warranty of Buyer, (ii) evidencing the performance by
Buyer of, or the compliance by Buyer with, any covenant or obligation required
to be performed or complied with by Buyer, (iii) evidencing the satisfaction of
any condition referred to in this Article VIII or (iv) otherwise facilitating
the consummation of any of the Contemplated Transactions.
8.5 NO PROHIBITION. Neither the consummation nor the performance of any
of the Contemplated Transactions will, directly or indirectly (with or without
notice or lapse of time), materially contravene, or conflict with, or result in
a material violation of, or cause Sellers or any Person affiliated with either
Seller to suffer any material adverse consequence under, (a) any applicable
Legal Requirement or Order or (b) any Legal Requirement or Order that has been
published, introduced, or otherwise proposed by or before any Governmental Body.
Neither the consummation nor the performance of the Contemplated Transactions
will directly or indirectly violate an Order.
8.6 CLOSING DELIVERIES. All items contemplated in Section 2.5(b) shall
have been delivered to Sellers.
ARTICLE IX
TERMINATION
9.1 TERMINATION EVENTS. This Agreement may, by notice given prior to or
at the Closing, be terminated:
(a) by either Buyer or Sellers if a material Breach of any provision of
this Agreement has been committed by the other party and such Breach has not
been waived or such Breach has not been remedied within thirty (30) days after
written notice is given specifying the Breach and demanding it to be remedied;
(b) (i) by Buyer if any of the conditions in Article VII has not been
satisfied as of the Closing Date or if satisfaction of such a condition is or
becomes impossible (other than through the failure of Buyer to comply with its
obligations under this Agreement) and Buyer has not waived such condition on or
before the Closing Date; or (ii) by Sellers, if any of the conditions in Article
VIII has not been satisfied as of the Closing Date or if satisfaction of such a
condition is or becomes impossible (other than through the failure of Sellers to
comply with their obligations under this Agreement) and Sellers have not waived
such condition on or before the Closing Date;
(c) by mutual consent of Buyer and Sellers;
STOCK PURCHASE AGREEMENT 43
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(d) by either Buyer or Sellers if the Closing has not occurred (other
than through the failure of any party seeking to terminate this Agreement to
comply fully with its obligations under this Agreement) on or before June 30,
2000, or such later date as the parties may agree upon; or
(e) by Buyer if Buyer is not completely satisfied on or before November
19, 1999 in its sole discretion with the results of the review of the Acquired
Companies' operations and books and records by Buyer and Buyer's Advisors.
9.2 EFFECT OF TERMINATION. Each party's right of termination under
Section 9.1 is in addition to any other rights it may have under this Agreement
or otherwise, and the exercise of a right of termination will not be an election
of remedies. If this Agreement is terminated pursuant to Section 9.1, all
further obligations of the parties under this Agreement will terminate, except
that the obligations in Sections 11.1 and 11.3 will survive; provided, however,
that if this Agreement is terminated by a party because of the Breach of the
Agreement by the other party or because one or more of the conditions to the
terminating party's obligations under this Agreement is not satisfied as a
result of the other party's failure to comply with its obligations under this
Agreement, the terminating party's right to pursue all legal remedies will
survive such termination unimpaired.
ARTICLE X
INDEMNIFICATION; REMEDIES
10.1 SURVIVAL; RIGHT TO INDEMNIFICATION NOT AFFECTED BY KNOWLEDGE. All
representations, warranties, covenants, and obligations in this Agreement, the
Sellers' Disclosure Letter, the supplements to the Sellers' Disclosure Letter,
the certificates delivered pursuant to Section 2.5(a)(iv), and any other
certificate or document delivered pursuant to this Agreement will survive the
Closing. The right to indemnification, payment of Damages or other remedy based
on such representations, warranties, covenants, and obligations will not be
affected by any investigation conducted with respect to, or any Knowledge
acquired (or capable of being acquired) at any time, whether before or after the
execution and delivery of this Agreement or the Closing Date, with respect to
the accuracy or inaccuracy of or compliance with, any such representation,
warranty, covenant, or obligation. The waiver of any condition based on the
accuracy of any representation or warranty, or on the performance of or
compliance with any covenant or obligation, will not affect the right to
indemnification, payment of Damages, or other remedy based on such
representations, warranties, covenants, and obligations.
10.2 INDEMNIFICATION AND PAYMENT OF DAMAGES BY SELLERS. Sellers will
indemnify and hold harmless Buyer, the Acquired Companies, and their respective
Representatives, shareholders, controlling persons, and affiliates
(collectively, the "Indemnified Persons") for, and will pay to the Indemnified
Persons the amount of, any loss, liability, claim, damage (including incidental
and consequential damages), expense (including costs of investigation and
defense and reasonable
STOCK PURCHASE AGREEMENT 44
<PAGE> 45
attorneys' fees) or diminution of value, whether or not involving a third-party
claim (collectively, "Damages"), arising, directly or indirectly, from or in
connection with:
(a) any Breach of any representation or warranty made by Sellers or TSL
in this Agreement (without giving effect to any supplement to the Sellers'
Disclosure Letter), the Sellers' Disclosure Letter, the supplements to the
Sellers' Disclosure Letter, or any other certificate or document delivered by
either or both Sellers or TSL under this Agreement;
(b) any Breach of any representation or warranty made by Sellers or TSL
in this Agreement as if such representation or warranty were made on and as of
the Closing Date without giving effect to any supplement to the Sellers'
Disclosure Letter, other than any such Breach that is disclosed in a supplement
to the Sellers' Disclosure Letter and is expressly identified in the
certificates delivered pursuant to Section 2.5(a)(v) as having caused the
condition specified in Section 7.1 not to be satisfied;
(c) any Breach by either Seller or TSL of any covenant or obligation of
Sellers or TSL; or
(d) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by any such Person with either Seller, TSL, any other
Acquired Company (or any Person acting on their behalf) in connection with any
of the Contemplated Transactions;
provided, however, that Sellers shall have no obligation to make any payment to
Indemnified Persons under Sections 10.2 and 10.3 unless the aggregate amount to
which the Indemnified Persons are entitled by reason of all claims under
Sections 10.2 and 10.3 exceeds the sum of $50,000 in the aggregate under
Sections 10.2 and 10.3, it being understood that only after such sum is
exceeded, shall the aggregate of all claims under Sections 10.2 and 10.3 be
payable by Sellers on demand.
The remedies provided in this Section 10.2 will not be exclusive of or limit any
other remedies that may be available to Buyer or the other Indemnified Persons.
10.3 INDEMNIFICATION AND PAYMENT OF DAMAGES BY SELLERS -- ENVIRONMENTAL
MATTERS. In addition to the provisions of Section 10.2, Sellers will indemnify
and hold harmless Buyer, the Acquired Companies, and the other Indemnified
Persons for, and will pay to Buyer, the Acquired Companies, and the other
Indemnified Persons the amount of, any Damages (including costs of cleanup,
containment, or other remediation) arising, directly or indirectly, from or in
connection with:
(a) any Environmental, Health, and Safety Liabilities arising out of or
relating to: (i) (A) the ownership, operation, or condition at any time on or
prior to the Closing Date of the Facilities or any other properties and assets
(whether real, personal, or mixed and whether tangible or intangible) in which
Sellers, each Seller, any Acquired Company has or had an interest, or (B) any
STOCK PURCHASE AGREEMENT 45
<PAGE> 46
Hazardous Materials or other contaminants that were present on the Facilities or
such other properties and assets at any time on or prior to the Closing Date; or
(ii) (A) any Hazardous Materials or other contaminants, wherever located, that
were, or were allegedly, generated, transported, stored, treated, Released, or
otherwise handled by Sellers, any Acquired Company, or by any other Person for
whose conduct they are or may be held responsible at any time on or prior to the
Closing Date, or (B) any Hazardous Activities that were, or were allegedly,
conducted by Sellers, any Acquired Company or by any other Person for whose
conduct they are or may be held responsible; or
(b) any bodily injury (including illness, disability, and death, and
regardless of when any such bodily injury occurred, was incurred, or manifested
itself), personal injury, property damage (including trespass, nuisance,
wrongful eviction, and deprivation of the use of real property), or other damage
of or to any Person, including any employee or former employee of either Seller,
any Acquired Company, or any other Person for whose conduct they are or may be
held responsible, in any way arising from or allegedly arising from any
Hazardous Activity conducted or allegedly conducted with respect to the
Facilities or the operation of the Acquired Companies prior to the Closing Date,
or from Hazardous Material that was (i) present or suspected to be present on or
before the Closing Date on or at the Facilities (or present or suspected to be
present on any other property, if such Hazardous Material emanated or allegedly
emanated from any of the Facilities and was present or suspected to be present
on any of the Facilities on or prior to the Closing Date) or (ii) Released or
allegedly Released by either Seller, any Acquired Company, or any other Person
for whose conduct they are or may be held responsible, at any time on or prior
to the Closing Date;
provided, however, that Sellers shall have no obligation to make any payment to
Indemnified Persons under Sections 10.2 and 10.3 unless the aggregate amount to
which the Indemnified Persons are entitled by reason of all claims under
Sections 10.2 and 10.3 exceeds the sum of$50,000 in the aggregate under Sections
10.2 and 10.3, it being understood that only after such sum is exceeded, shall
the aggregate of all claims under Sections 10.2 and 10.3 be payable by Sellers
on demand.
Buyer will be entitled to control any Cleanup, any related Proceeding,
and, except as provided in the following sentence, any other Proceeding with
respect to which indemnity may be sought under this Section 10.3. The procedure
described in Section 10.7 will apply to any claim solely for monetary damages
relating to a matter covered by this Section 10.3.
10.4 INDEMNIFICATION AND PAYMENT OF DAMAGES BY BUYER. Buyer will
indemnify and hold harmless Sellers, and will pay to Sellers the amount of any
Damages arising, directly or indirectly, from or in connection with (a) any
Breach of any representation or warranty made by Buyer in this Agreement
(without giving effect to any supplement to the Buyer's Disclosure Letter), the
Buyer's Disclosure Letter, the supplements to the Buyer's Disclosure Letter, or
any other certificate or document delivered by Buyer pursuant to this Agreement;
(b) any Breach of any representation or warranty made by Buyer in this
Agreement as if such representation or warranty were made on and as of the
Closing Date without giving effect to any supplement to the Buyer's Disclosure
Letter, other than any such Breach that is disclosed in a
STOCK PURCHASE AGREEMENT 46
<PAGE> 47
supplement to the Buyer's Disclosure Letter and is expressly identified in the
certificate delivered pursuant to Section 2.5(b)(ii) as having caused the
condition specified in Section 8.1 not to be satisfied;
(c) any Breach by Buyer of any covenant or obligation of Buyer in this
Agreement; or
(d) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by such Person with Buyer (or any Person acting on its
behalf) in connection with any of the Contemplated Transactions (other than
Philo Smith & Co., Inc.);
provided, however, that Buyer shall have no obligation to make any payment to
Sellers under this Section 10.4 unless the aggregate amount to which Sellers are
entitled by reason of all claims under this Section 10.4 exceeds $50,000 in the
aggregate of all amounts collectible under the Acquired Companies' errors and
omissions policies, it being understood that once such amount is exceeded, the
aggregate of all claims under this Section 10.4 shall be payable by Buyer on
demand.
The remedies provided in this Section 10.4 will not be exclusive of or limit any
other remedies that may be available to Sellers.
10.5 TIME LIMITATIONS. If the Closing occurs, Sellers will have no
liability (for indemnification or otherwise) with respect to any representation
or warranty, or covenant or obligation to be performed and complied with prior
to the Closing Date, other than those in Sections 3.3, 3.9, 3.11, 3.17, unless
on or before the earlier of (i) the second anniversary of the Date for the third
Earnout Period or (ii) July 1, 2003, Buyer notifies Sellers of a claim
specifying the factual basis of that claim in reasonable detail to the extent
then known by Buyer; a claim with respect to Section 3.3, 3.9, 3.11, 3.17, or a
claim for indemnification or reimbursement not based upon any representation or
warranty or any covenant or obligation to be performed and complied with prior
to the Closing Date, may be made at any time. If the Closing occurs, Buyer will
have no liability (for indemnification or otherwise) with respect to any
representation or warranty, or covenant or obligation to be performed and
complied with prior to the Closing Date, unless on or before July 1, 2003,
Sellers notify Buyer of a claim specifying the factual basis of that claim in
reasonable detail to the extent then known by Sellers.
10.6 RIGHT OF SET-OFF. Upon notice to Sellers specifying in reasonable
detail the basis for such set-off, Buyer may set off any amount to which it may
be entitled under this Article X against amounts otherwise payable to Sellers
under this Agreement. The exercise of such right of set-off by Buyer in good
faith, whether or not ultimately determined to be justified, will not constitute
a Breach of this Agreement. Neither the exercise of nor the failure to exercise
such right of set-off shall constitute an election of remedies or limit Buyer in
any manner in the enforcement of any other remedies that may be available to it.
Any amount set-off pursuant to this Section 10.6 shall be considered a reduction
in the Purchase Price of that amount. In the event that it is finally determined
that any set-off pursuant to this Section 10.6 was wrongful, the amount
determined to have been
STOCK PURCHASE AGREEMENT 47
<PAGE> 48
wrongfully set-off shall be paid to Sellers pro rata in accordance with their
ownership interests in TSL (immediately prior to the Closing) together with
interest accruing at the Applicable Rate from the date such amount originally
was to be paid to Sellers.
10.7 PROCEDURE FOR INDEMNIFICATION -- THIRD PARTY CLAIMS.
(a) Promptly after receipt by an indemnified party under Section 10.2
or 10.4, or (to the extent provided in the last sentence of Section 10.3)
Section 10.3 of notice of the commencement of any Proceeding against it, such
indemnified party will, if a claim is to be made against an indemnifying party
under such Section, give notice to the indemnifying party of the commencement of
such claim, but the failure to notify the indemnifying party will not relieve
the indemnifying party of any liability that it may have to any indemnified
party, except and only to the extent that the indemnifying party demonstrates
that the defense of such action is prejudiced by the indemnifying party's
failure to give such notice.
(b) If any Proceeding referred to in Section 10.7(a) is brought against
an indemnified party and it gives notice to the indemnifying party of the
commencement of such Proceeding, the indemnifying party will, unless the claim
involves Taxes not related to the Acquired Companies, be entitled to participate
in such Proceeding with respect to the Acquired Companies and, to the extent
that it wishes (unless (i) the indemnifying party is also a party to such
Proceeding and the indemnified party determines in good faith that joint
representation would be inappropriate, or (ii) the indemnifying party fails to
provide reasonable assurance to the indemnified party of its financial capacity
to defend such Proceeding and provide indemnification with respect to such
Proceeding), to assume the defense of such Proceeding with counsel satisfactory
to the indemnified party and, after notice from the indemnifying party to the
indemnified party of its election to assume the defense of such Proceeding, the
indemnifying party will not, as long as it diligently conducts such defense, be
liable to the indemnified party under this Article X for any fees of other
counsel or any other expenses with respect to the defense of such Proceeding,
subsequently incurred by the indemnified party in connection with the defense of
such Proceeding, other than reasonable costs of investigation. If the
indemnifying party assumes the defense of a Proceeding, (i) it will be
conclusively established for purposes of this Agreement that the claims made in
that Proceeding are within the scope of and subject to indemnification; (ii) no
compromise or settlement of such claims may be effected by the indemnifying
party without the indemnified party's consent unless (A) there is no finding or
admission of any violation of Legal Requirements or any violation of the rights
of any Person and no effect on any other claims that may be made against the
indemnified party, and (B) the sole relief provided is monetary damages that are
paid in full by the indemnifying party; and (iii) the indemnified party will
have no liability with respect to any compromise or settlement of such claims
effected without its consent. If notice is given to an indemnifying party of the
commencement of any Proceeding and the indemnifying party does not, within ten
days after the indemnified party's notice is given, give notice to the
indemnified party of its election to assume the defense of such Proceeding, the
indemnifying party will be bound by any determination made in such Proceeding or
any compromise or settlement effected by the indemnified party.
STOCK PURCHASE AGREEMENT 48
<PAGE> 49
(c) Notwithstanding the foregoing, if an indemnified party determines
in good faith that there is a reasonable probability that a Proceeding may
adversely affect it or its affiliates other than as a result of monetary damages
for which it would be entitled to indemnification under this Agreement, the
indemnified party may, by notice to the indemnifying party, assume the exclusive
right to defend, compromise, or settle such Proceeding, but the indemnifying
party will not be bound by any determination of a Proceeding so defended or any
compromise or settlement effected without its consent (which may not be
unreasonably withheld).
10.8 PROCEDURE FOR INDEMNIFICATION -- OTHER CLAIMS. A claim for
indemnification for any matter not involving a third-party claim may be asserted
by notice to the party from whom indemnification is sought.
ARTICLE XI
GENERAL PROVISIONS
11.1 EXPENSES. Except as otherwise expressly provided in this
Agreement, the Sellers shall be responsible for the obligations of the Acquired
Companies and Sellers with regard to both (i) Philo Smith & Co., Inc. and (ii)
expenses incurred by either Seller or any Acquired Company in connection with
the negotiation, preparation and execution of this Agreement and the
Contemplated Transactions, including all fees and expenses of Sellers' or any of
the Acquired Companies' agents, representatives, counsel, and accountants
(including, without limitation, all costs and expenses related to the December
31, 1999 Audit pursuant to Section 5.11 of this Agreement). Buyer shall be
responsible for the obligations of Buyer with regard to expenses incurred by
Buyer in connection with the negotiation, preparation and execution of this
Agreement and the Contemplated Transactions, including all fees and expenses of
Buyer's agents, representatives, counsel, and accountants. In the event of
termination of this Agreement, the obligation of Buyer to pay such expenses will
be subject to any rights of Buyer arising from a breach of this Agreement by
another party.
11.2 PUBLIC ANNOUNCEMENTS. Any public announcement or similar publicity
with respect to this Agreement or the Contemplated Transactions will be issued,
if at all, at such time and in such manner as Buyer determines. Buyer will use
its commercially reasonable efforts to provide copies of public announcements to
Sellers for Sellers' review prior to release. Unless consented to by Buyer in
advance or required by Legal Requirements, prior to the Closing Sellers shall,
and shall cause the Acquired Companies to, keep this Agreement strictly
confidential and may not make any disclosure of this Agreement to any Person
other than any professional advisors of Sellers. Sellers and Buyer will consult
with each other concerning the means by which the Acquired Companies' employees,
customers, and suppliers and others having dealings with the Acquired Companies
will be informed of the Contemplated Transactions, and Buyer will have the right
to be present for any such communication.
STOCK PURCHASE AGREEMENT 49
<PAGE> 50
11.3 CONFIDENTIALITY. Between the date of this Agreement and the
Closing Date, Buyer and Sellers will maintain in confidence, and will cause the
directors, officers, employees, agents, and advisors of Buyer and the Acquired
Companies to maintain in confidence, and not use to the detriment of another
party or an Acquired Company any written, oral, or other information obtained in
confidence from another party or an Acquired Company in connection with this
Agreement or the Contemplated Transactions, unless (a) such information is
already known to such party or to others not bound by a duty of confidentiality
or such information becomes publicly available through no fault of such party,
(b) the use of such information is necessary or appropriate in making any filing
or obtaining any consent or approval required for the consummation of the
Contemplated Transactions, or (c) the furnishing or use of such information is
required by legal proceedings.
If the Contemplated Transactions are not consummated, each party will
return or destroy as much of such written information as the other party may
reasonably request. Whether or not the Closing takes place, Sellers waive, and
will upon Buyer's request cause the Acquired Companies to waive, any cause of
action, right, or claim arising out of the access of Buyer or its
representatives to any trade secrets or other confidential information of the
Acquired Companies except for the competitive misuse by Buyer of such trade
secrets or confidential information.
11.4 NOTICES. All notices, consents, waivers, and other communications
under this Agreement must be in writing and will be deemed to have been duly
given when (a) delivered by hand (with written confirmation of receipt), (b)
sent by telecopier (with written confirmation of receipt), provided that a copy
is mailed by registered mail, return receipt requested, or (c) when received by
the addressee, if sent by a nationally recognized overnight delivery service
(receipt requested), in each case to the appropriate addresses and telecopier
numbers set forth below (or to such other addresses and telecopier numbers as a
party may designate by notice to the other parties):
If to either Seller or TSL:
1605 E. Capitol Avenue
Bismarck, North Dakota 58501
Facsimile No.: (701) 223-0842
(Notices to TSL should be to the attention of Herbert A. Hill)
with a copy of all notices to Sellers and TSL to:
Pearce & Durick P.L.L.P.
P.O. Box 400
314 East Thayer Avenue
Bismarck, North Dakota 58502
Attention: Patrick W. Durick
Facsimile No.: (701) 223-7865
STOCK PURCHASE AGREEMENT 50
<PAGE> 51
If to Buyer:
GAINSCO, INC.
500 Commerce Street
Fort Worth, Texas 76102-5439
Attention: Chief Executive Officer
Facsimile No.: (817) 338-1454
with a copy to:
Jackson Walker L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202
Attention: Byron F. Egan
Fax: (214) 953-5822
11.5 JURISDICTION; SERVICE OF PROCESS. Any action or proceeding seeking
to enforce any provision of, or based on any right arising out of, this
Agreement may be brought against any of the parties in the courts of the State
of Texas, County of Dallas, or, if it has or can acquire jurisdiction, in the
United States District Court for the Northern District of Texas, Dallas
Division, and each of the parties consents to the jurisdiction of such courts
(and of the appropriate appellate courts) in any such action or proceeding and
waives any objection to venue laid therein. Process in any action or proceeding
referred to in the preceding sentence may be served on any party anywhere in the
world.
11.6 FURTHER ASSURANCES. The parties agree (a) to furnish upon request
to each other such further information, (b) to execute and deliver to each other
such other documents, and (c) to do such other acts and things, all as the other
party may reasonably request for the purpose of carrying out the intent of this
Agreement and the documents referred to in this Agreement.
11.7 WAIVER. The rights and remedies of the parties to this Agreement
are cumulative and not alternative. The rights of Buyer and Sellers hereunder
are in addition to all other rights provided by law. Neither the failure nor any
delay by any party in exercising any right, power, or privilege under this
Agreement or the documents referred to in this Agreement will operate as a
waiver of such right, power, or privilege, and no single or partial exercise of
any such right, power, or privilege will preclude any other or further exercise
of such right, power, or privilege or the exercise of any other right, power, or
privilege. To the maximum extent permitted by applicable law, (a) no claim or
right arising out of this Agreement or the documents referred to in this
Agreement can be discharged by one party, in whole or in part, by a waiver or
renunciation of the claim or right unless in writing signed by the other party;
(b) no waiver that may be given by a party will be applicable except in the
specific instance for which it is given; and (c) no notice to or demand on one
party will be deemed to be a waiver of any obligation of such party or of the
right of the party giving such notice or demand to take further action without
notice or demand as provided in this Agreement or the documents referred to in
this Agreement.
11.8 ENTIRE AGREEMENT AND MODIFICATION. This Agreement supersedes all
prior agreements between the parties with respect to its subject matter and
constitutes (along with the documents referred to in this Agreement) a complete
and exclusive statement of the terms of the agreement between the parties with
respect to its subject matter. This Agreement may not be amended except by a
written agreement executed by the parties hereto.
STOCK PURCHASE AGREEMENT 51
<PAGE> 52
11.9 SELLERS' DISCLOSURE LETTER.
(a) The disclosures in the Sellers' Disclosure Letter, and those in any
Supplement thereto, must relate only to the representations and warranties in
the Section of the Agreement to which they expressly relate and not to any other
representation or warranty in this Agreement.
(b) In the event of any inconsistency between the statements in the
body of this Agreement and those in the Sellers' Disclosure Letter (other than
an exception expressly set forth as such in the Sellers' Disclosure Letter with
respect to a specifically identified representation or warranty), the statements
in the body of this Agreement will control.
11.10 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS. Neither party
may assign any of its rights under this Agreement without the prior consent of
the other parties, except that Buyer may assign any of its rights under this
Agreement to any Subsidiary of Buyer. Subject to the preceding sentence, this
Agreement will apply to, be binding in all respects upon, and inure to the
benefit of the successors and permitted assigns of the parties. Nothing
expressed or referred to in this Agreement will be construed to give any Person
other than the parties to this Agreement any legal or equitable right, remedy,
or claim under or with respect to this Agreement or any provision of this
Agreement. This Agreement and all of its provisions and conditions are for the
sole and exclusive benefit of the parties to this Agreement and their successors
and assigns. In the event Buyer assigns any of its rights under this Agreement
to any Subsidiary of Buyer and such Subsidiary does not fulfill its obligations
under this Agreement, Buyer shall assume and fulfill such Subsidiary's
obligations under this Agreement.
11.11 SEVERABILITY. If any provision of this Agreement is held invalid
or unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
11.12 ARTICLE AND SECTION HEADINGS, CONSTRUCTION AND USAGE. The
headings of Articles and Sections in this Agreement are provided for convenience
only and will not affect its construction or interpretation. All references to
"Article" or "Articles" refer to the corresponding Article or Articles of this
Agreement, and all references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement. All words used in this
Agreement will be construed to be of such gender or number as the circumstances
require. Unless otherwise expressly provided, the word "including" does not
limit the preceding words or terms, and "or" is used in the inclusive sense of
"and/or". Where the Agreement provides that a payment will be made by Buyer to
the Sellers collectively, such payment shall be made to the Sellers pro rata in
accordance with their ownership interest in TSL immediately prior to the
Closing.
11.13 TIME OF ESSENCE. With regard to all dates and time periods set
forth or referred to in this Agreement, time is of the essence.
STOCK PURCHASE AGREEMENT 52
<PAGE> 53
11.14 GOVERNING LAW. This Agreement will be governed by the laws of the
State of Texas without regard to conflicts of laws principles.
11.15 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.
[Intentionally left blank.]
STOCK PURCHASE AGREEMENT 53
<PAGE> 54
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first written above.
SELLERS
/s/ Herbert A. Hill
-------------------------------------------
Herbert A. Hill
/s/ Alan E. Heidt
-------------------------------------------
Alan E. Heidt
TRI-STATE, LTD.
By: /s/ Herbert A. Hill
---------------------------------------
Name: Herbert A. Hill
Title: President
GAINSCO, INC.
By: /s/ Glenn W. Anderson
---------------------------------------
Name: Glenn W. Anderson
Title: President and Chief Executive
Officer
STOCK PURCHASE AGREEMENT 54
<PAGE> 55
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT ("Agreement") is made as of the 7th day of January,
2000, by GAINSCO, INC., a Texas corporation (hereinafter called "Pledgor",
whether one or more), in favor of BANK ONE, NA ("Bank"). Pledgor hereby agrees
with Bank as follows:
1. DEFINITIONS. As used in this Agreement, the following terms shall have
the meanings indicated below:
(a) The term "Borrower" shall mean GAINSCO, Inc., a Texas corporation,
and GAINSCO Service Corp., a Texas corporation, or either of them.
(b) The term "Code" shall mean the Uniform Commercial Code as in
effect in the State of Texas on the date of this Agreement or as it may
hereafter be amended from time to time.
(c) The term "Collateral" shall mean all property specifically
described on Schedule A attached hereto and made a part hereof. The term
Collateral, as used herein, shall also include (i) all certificates,
instruments and/or other documents evidencing the foregoing, (ii) all
renewals, replacements and substitutions of all of the foregoing, (iii) all
Additional Property (as hereinafter defined), and (iv) all PRODUCTS and
PROCEEDS of all of the foregoing. The designation of proceeds does not
authorize Pledgor to sell, transfer or otherwise convey any of the
foregoing property. The delivery at any time by Pledgor to Secured Party of
any property as a pledge to secure payment or performance of any
indebtedness or obligation whatsoever shall also constitute a pledge of
such property as Collateral hereunder.
(d) The term "Indebtedness" shall mean all indebtedness, obligations
and liabilities of Borrower to Secured Party of any kind or character, now
existing or hereafter arising, whether direct, indirect, related,
unrelated, fixed, contingent, liquidated, unliquidated, joint, several or
joint and several, including without limitation all indebtedness,
obligations and liabilities of Borrower to Secured Party now existing or
hereafter arising by note, draft, acceptance, guaranty, endorsement, letter
of credit, assignment, purchase, overdraft, discount, indemnity agreement
or otherwise, (ii) all accrued but unpaid interest on any of the
indebtedness described in (i) above, (iii) all obligations of Borrower to
Secured Party under any documents evidencing, securing, governing and/or
pertaining to all or any part of the indebtedness described in (i) and (ii)
above, (iv) all costs and expenses incurred by Secured Party in connection
with the collection and administration of all or any part of the
indebtedness and obligations described in (i), (ii) and (iii) above or the
protection or preservation of, or realization upon, the collateral securing
all or any part of such indebtedness and obligations, including without
limitation all reasonable attorneys' fees, and (v) all renewals,
extensions, modifications and rearrangements of the indebtedness and
obligations described in (i), (ii), (iii) and (iv) above.
(e) The term "Loan Documents" shall mean all instruments and documents
evidencing, securing, governing, guaranteeing and/or pertaining to the
Indebtedness, including without limitation the Revolving Credit Agreement
dated as of November 13, 1998 (as the same may be amended from time to
time, the "Credit Agreement") among GAINSCO, Inc., GAINSCO Service Corp.
and Bank.
(f) The term "Obligated Party" shall mean any party other than
Borrower who secures, guarantees and/or is otherwise obligated to pay all
or any portion of the Indebtedness.
(g) The term "Secured Party" shall mean Bank, its successors and
assigns, including without limitation, any party to whom Bank, or its
successors or assigns, may assign its rights and interests under this
Agreement.
All words and phrases used herein which are expressly defined in Section 1.201,
Chapter 8 or Chapter 9 of the Code shall have the meaning provided for therein.
Other words and phrases defined elsewhere in the Code shall have the meaning
specified therein except to the extent such meaning is inconsistent with a
definition in Section 1.201, Chapter 8 or Chapter 9 of the Code.
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2. SECURITY INTEREST. As security for the Indebtedness, Pledgor, for value
received, hereby grants to Secured Party a continuing security interest in the
Collateral.
3. ADDITIONAL PROPERTY. Collateral shall also includes the following
property (collectively, the "Additional Property") which Pledgor becomes
entitled to receive or shall receive in connection with any other Collateral:
(a) any stock certificate, including without limitation, any certificate
representing a stock dividend or any certificate in connection with any
recapitalization, reclassification, merger, consolidation, conversion, sale of
assets, combination of shares, stock split or spin-off; (b) any option, warrant,
subscription or right, whether as an addition to or in substitution of any other
Collateral; (c) any dividends or distributions of any kind whatsoever, whether
distributable in cash, stock or other property; (d) any interest, premium or
principal payments; and (e) any conversion or redemption proceeds; provided,
however, that until the occurrence of an Event of Default (as hereinafter
defined), Pledgor shall be entitled to all cash dividends and all interest paid
on the Collateral (except interest paid on any certificate of deposit pledged
hereunder) free of the security interest created under this Agreement. All
Additional Property received by Pledgor (except for dividends permitted to be
retained by Pledgor pursuant to the immediately preceding sentence) shall be
received in trust for the benefit of Secured Party. All Additional Property and
all certificates or other written instruments or documents evidencing and/or
representing the Additional Property that is received by Pledgor, together with
such instruments of transfer as Secured Party may request, shall immediately be
delivered to or deposited with Secured Party and held by Secured Party as
Collateral under the terms of this Agreement. If the Additional Property
received by Pledgor shall be shares of stock or other securities, such shares of
stock or other securities shall be duly endorsed in blank or accompanied by
proper instruments of transfer and assignment duly executed in blank with, if
requested by Secured Party, signatures guaranteed by a bank or member firm of
the New York Stock Exchange, all in form and substance satisfactory to Secured
Party. Secured Party shall be deemed to have possession of any Collateral in
transit to Secured Party or its agent.
4. VOTING RIGHTS. As long as no Event of Default shall have occurred
hereunder, any voting rights incident to any stock or other securities pledged
as Collateral may be exercised by Pledgor; provided, however, that Pledgor will
not exercise, or cause to be exercised, any such voting rights, without the
prior written consent of Secured Party, if the direct or indirect effect of such
vote will result in an Event of Default hereunder.
5. MAINTENANCE OF COLLATERAL. Other than the exercise of reasonable care to
assure the safe custody of any Collateral in Secured Party's possession from
time to time, Secured Party does not have any obligation, duty or responsibility
with respect to the Collateral. Without limiting the generality of the
foregoing, Secured Party shall not have any obligation, duty or responsibility
to do any of the following: (a) ascertain any maturities, calls, conversions,
exchanges, offers, tenders or similar matters relating to the Collateral or
informing Pledgor with respect to any such matters; (b) fix, preserve or
exercise any right, privilege or option (whether conversion, redemption or
otherwise) with respect to the Collateral unless (i) Pledgor makes written
demand to Secured Party to do so, (ii) such written demand is received by
Secured Party in sufficient time to permit Secured Party to take the action
demanded in the ordinary course of its business, and (iii) Pledgor provides
additional collateral, acceptable to Secured Party in its sole discretion; (c)
collect any amounts payable in respect of the Collateral (Secured Party being
liable to account to Pledgor only for what Secured Party may actually receive or
collect thereon); (d) sell all or any portion of the Collateral to avoid market
loss; (e) sell all or any portion of the Collateral unless and until (i) Pledgor
makes written demand upon Secured Party to sell the Collateral, and (ii) Pledgor
provides additional collateral, acceptable to Secured Party in its sole
discretion; or (f) hold the Collateral for or on behalf of any party other than
Pledgor.
6. REPRESENTATIONS AND WARRANTIES. Pledgor hereby represents and warrants
the following to Secured Party:
(a) Due Authorization. The execution, delivery and performance of this
Agreement and all of the other Loan Documents by Pledgor have been duly
authorized by all necessary corporate action of Pledgor, to the extent
Pledgor is a corporation, or by all necessary partnership action, to the
extent Pledgor is a partnership.
(b) Enforceability. This Agreement and the other Loan Documents
constitute legal, valid and binding obligations of Pledgor, enforceable in
accordance with their respective terms, except as limited by
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<PAGE> 57
bankruptcy, insolvency or similar laws of general application relating to
the enforcement of creditors' rights and except to the extent specific
remedies may generally be limited by equitable principles.
(c) Ownership and Liens. Pledgor has good and indefeasible title to
the Collateral free and clear of all liens, security interests,
encumbrances or adverse claims, except for the security interest created by
this Agreement. No dispute, right of setoff, counterclaim or defense exists
with respect to all or any part of the Collateral. Pledgor has not executed
any other security agreement currently affecting the Collateral and no
financing statement or other instrument similar in effect covering all or
any part of the Collateral is on file in any recording office except as may
have been executed or filed in favor of Secured Party.
(d) No Conflicts or Consents. Neither the ownership, the intended use
of the Collateral by Pledgor, the grant of the security interest by Pledgor
to Secured Party herein nor (except for restrictions imposed by any
applicable Insurance Holding Company Laws (as hereinafter defined) the
exercise by Secured Party of its rights or remedies hereunder, will (i)
conflict with any provision of (A) any domestic or foreign law, statute,
rule or regulation, (B) the articles or certificate of incorporation,
charter, bylaws or partnership agreement, as the case may be, of Pledgor,
or (C) any agreement, judgment, license, order or permit applicable to or
binding upon Pledgor or otherwise affecting the Collateral, or (ii) result
in or require the creation of any lien, charge or encumbrance upon any
assets or properties of Pledgor or of any person except as may be expressly
contemplated in the Loan Documents. Except as expressly contemplated in the
Loan Documents, no consent, approval, authorization or order of, and no
notice to or filing with, any court, governmental authority or third party
is required in connection with the grant by Pledgor of the security
interest herein or the exercise by Secured Party of its rights and remedies
hereunder.
(e) Security Interest. Pledgor has and will have at all times full
right, power and authority to grant a security interest in the Collateral
to Secured Party in the manner provided herein, free and clear of any lien,
security interest or other charge or encumbrance. This Agreement creates a
legal, valid and binding security interest in favor of Secured Party in the
Collateral.
(f) Location. Pledgor's residence or chief executive office, as the
case may be, and the office where the records concerning the Collateral are
kept is located at its address set forth on the signature page hereof.
(g) Solvency of Pledgor. As of the date hereof, and after giving
effect to this Agreement and the completion of all other transactions
contemplated by Pledgor at the time of the execution of this Agreement, (i)
Pledgor is and will be solvent, (ii) the fair saleable value of Pledgor's
assets exceeds and will continue to exceed Pledgor's liabilities (both
fixed and contingent), (iii) Pledgor is and will continue to be able to pay
its debts as they mature, and (iv) if Pledgor is not an individual, Pledgor
has and will have sufficient capital to carry on Pledgor's businesses and
all businesses in which Pledgor is about to engage.
(h) Nature of Ownership. Pledgor is the registered owner of the
securities pledged as Collateral and a certificate has been issued in
Pledgor's name to evidence Pledgor's ownership in such securities.
(i) Securities/100% Ownership. Any certificates evidencing securities
pledged as Collateral are valid and genuine and have not been altered. All
securities pledged as Collateral have been duly authorized and validly
issued, are fully paid and non-assessable, and were not issued in violation
of the preemptive rights of any party or of any agreement by which Pledgor
or the issuer thereof is bound. No restrictions or conditions exist with
respect to the transfer or voting of any securities pledged as Collateral,
except as has been disclosed to Secured Party in writing. To the best of
Pledgor's knowledge, no issuer of such securities (other than securities of
a class which are publicly traded) has any outstanding stock rights, rights
to subscribe, options, warrants or convertible securities outstanding or
any other rights outstanding entitling any party to have issued to such
party capital stock of such issuer, except as has been disclosed to Secured
Party in writing. Pledgor owns 100% of the issued and outstanding shares of
capital stock of each issuer listed on Schedule A attached hereto.
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(j) Chattel Paper, Documents and Instruments. The security interest in
chattel paper, documents and instruments of Pledgor granted hereunder is
valid and genuine, and all such chattel paper, documents and instruments
have only one original counterpart. No party other than Pledgor or Secured
Party is in actual or constructive possession of any such chattel paper,
documents or instruments.
7. AFFIRMATIVE COVENANTS. Pledgor will comply with the covenants contained
in this Section at all times during the period of time this Agreement is
effective unless Secured Party shall otherwise consent in writing.
(a) Ownership and Liens. Pledgor will maintain good and indefeasible
title to all Collateral free and clear of all liens, security interests,
encumbrances or adverse claims, except for the security interest created by
this Agreement and the security interests and other encumbrances expressly
permitted by the other Loan Documents. Pledgor will not permit any dispute,
right of setoff, counterclaim or defense to exist with respect to all or
any part of the Collateral. Pledgor will cause any financing statement or
other security instrument with respect to the Collateral to be terminated,
except as may exist or as may have been filed in favor of Secured Party.
Pledgor will defend at its expense Secured Party's right, title and
security interest in and to the Collateral against the claims of any third
party.
(b) Inspection of Books and Records. Pledgor will keep adequate
records concerning the Collateral and will permit Secured Party and all
representatives and agents appointed by Secured Party to inspect Pledgor's
books and records of or relating to the Collateral at any time during
normal business hours, to make and take away photocopies, photographs and
printouts thereof and to write down and record any such information.
(c) Adverse Claim. Pledgor covenants and agrees to promptly notify
Secured Party of any claim, action or proceeding affecting title to the
Collateral, or any part thereof, or the security interest created hereunder
and, at Pledgor's expense, defend Secured Party's security interest in the
Collateral against the claims of any third party. Pledgor also covenants
and agrees to promptly deliver to Secured Party a copy of all written
notices received by Pledgor with respect to the Collateral, including
without limitation, notices received from the issuer of any securities
pledged hereunder as Collateral.
(d) Delivery of Instruments and/or Certificates. Contemporaneously
herewith, Pledgor covenants and agrees to deliver to Secured Party any
certificates, documents or instruments representing or evidencing the
Collateral, together with Pledgor's endorsement thereon and/or accompanied
by proper instruments of transfer and assignment duly executed in blank
with, if requested by Secured Party, signatures guaranteed by a bank or
member firm of the New York Stock Exchange, all in form and substance
satisfactory to Secured Party. If required by Secured Party, Pledgor also
covenants and agrees to cooperate with Secured Party in registering the
pledge of the securities pledged as Collateral with the issuer of such
securities.
(e) Further Assurances. Pledgor will from time to time at its expense
promptly execute and deliver all further instruments and documents and take
all further action necessary or appropriate or that Secured Party may
request in order (i) to perfect and protect the security interest created
or purported to be created hereby and the first priority of such security
interest, (ii) to enable Secured Party to exercise and enforce its rights
and remedies hereunder in respect of the Collateral, and (iii) to otherwise
effect the purposes of this Agreement, including without limitation,
executing and filing such financing or continuation statements, or any
amendments thereto.
(f) Chattel Paper, Documents and Instruments. Pledgor will take such
action as may be requested by Secured Party in order to cause any chattel
paper, documents or instruments to be valid and enforceable and will cause
all chattel paper to have only one original counterpart. Upon request by
Secured Party, Pledgor will deliver to Secured Party all originals of
chattel paper, documents or instruments and will mark all chattel paper
with a legend indicating that such chattel paper is subject to the security
interest granted hereunder.
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8. NEGATIVE COVENANTS. Pledgor will comply with the covenants contained in
this Section at all times during the period of time this Agreement is effective,
unless Secured Party shall otherwise consent in writing.
(a) Transfer or Encumbrance. Pledgor will not (i) sell, assign (by
operation of law or otherwise) or transfer Pledgor's rights in any of the
Collateral, (ii) grant a lien or security interest in or execute, file or
record any financing statement or other security instrument with respect to
the Collateral to any party other than Secured Party, or (iii) deliver
actual or constructive possession of any certificate, instrument or
document evidencing and/or representing any of the Collateral to any party
other than Secured Party.
(b) Impairment of Security Interest. Pledgor will not take or fail to
take any action which would in any manner impair the value or
enforceability of Secured Party's security interest in any Collateral.
(c) Dilution of Ownership. As to any securities pledged as Collateral
(other than securities of a class which are publicly traded), Pledgor will
not consent to or approve of the issuance of (i) any additional shares of
any class of securities of such issuer (unless immediately upon issuance
additional securities are pledged and delivered to Secured Party pursuant
to the terms hereof to the extent necessary to give Secured Party a
security interest after such issuance in at least the same percentage of
such issuer's outstanding securities as Secured Party had before such
issuance), (ii) any instrument convertible voluntarily by the holder
thereof or automatically upon the occurrence or non-occurrence of any event
or condition into, or exchangeable for, any such securities, or (iii) any
warrants, options, contracts or other commitments entitling any third party
to purchase or otherwise acquire any such securities.
(d) Restrictions on Securities. Pledgor will not enter into any
agreement creating, or otherwise permit to exist, any restriction or
condition upon the transfer, voting or control of any securities pledged as
Collateral, except as consented to in writing by Secured Party.
9. RIGHTS OF SECURED PARTY. Secured Party shall have the rights contained
in this Section at all times during the period of time this Agreement is
effective.
(a) Power of Attorney. Pledgor hereby irrevocably appoints Secured
Party as Pledgor's attorney-in-fact, such power of attorney being coupled
with an interest, with full authority in the place and stead of Pledgor and
in the name of Pledgor or otherwise, to take any action and to execute any
instrument which Secured Party may from time to time in Secured Party's
discretion deem necessary or appropriate to accomplish the purposes of this
Agreement, including without limitation, the following action: (i) subject
to any applicable Insurance Holding Company Laws, transfer any securities,
instruments, documents or certificates pledged as Collateral in the name of
Secured Party or its nominee; (ii) use any interest, premium or principal
payments, conversion or redemption proceeds or other cash proceeds received
in connection with any Collateral to reduce any of the Indebtedness; (iii)
exchange any of the securities pledged as Collateral for any other property
upon any merger, consolidation, reorganization, recapitalization or other
readjustment of the issuer thereof, and, in connection therewith, to
deposit and deliver any and all of such securities with any committee,
depository, transfer agent, registrar or other designated agent upon such
terms and conditions as Secured Party may deem necessary or appropriate;
(iv) exercise or comply with any conversion, exchange, redemption,
subscription or any other right, privilege or option pertaining to any
securities pledged as Collateral; provided, however, except as provided
herein, Secured Party shall not have a duty to exercise or comply with any
such right, privilege or option (whether conversion, redemption or
otherwise) and shall not be responsible for any delay or failure to do so;
and (v) file any claims or take any action or institute any proceedings
which Secured Party may deem necessary or appropriate for the collection
and/or preservation of the Collateral or otherwise to enforce the rights of
Secured Party with respect to the Collateral.
(b) Performance by Secured Party. If Pledgor fails to perform any
agreement or obligation provided herein, Secured Party may itself perform,
or cause performance of, such agreement or obligation, and the expenses of
Secured Party incurred in connection therewith shall be a part of the
Indebtedness, secured by the Collateral and payable by Pledgor on demand.
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(c) Notification of Account Debtors and Other Rights. With respect to
chattel paper or instruments which are Collateral, Secured Party, without
notice to Pledgor, shall have the right at any time and from time to time
after the occurrence and during the continuation of an Event of Default to
notify and direct the account debtor or obligor thereon to thereafter make
all payments on such Collateral directly to Secured Party, regardless of
whether Pledgor was previously making collections thereon. Each account
debtor and obligor making payment to Secured Party hereunder shall be fully
protected in relying on the written statement of Secured Party that it then
holds a security interest which entitles it to receive such payment, and
the receipt of Secured Party for such payment shall be full acquittance
therefor to the party making such payment. Payments received by Secured
Party shall be held or disposed of by it in accordance with the terms of
this Agreement. Secured Party shall, however, never be obligated to
collect, or use any effort to collect, any such payments, its sole
liability to the Pledgor being to account for payments, if any, actually
received.
Notwithstanding any other provision herein to the contrary, Secured Party does
not have any duty to exercise or continue to exercise any of the foregoing
rights and shall not be responsible for any failure to do so or for any delay in
doing so.
10. EVENTS OF DEFAULT. Each of the following constitutes an "Event of
Default" under this Agreement:
(a) Non-Performance of Covenants. The failure of Pledgor or any
Obligated Party to timely and properly observe, keep or perform (i) any
covenant, agreement, warranty or condition contained in Sections 7(a), 7(e)
or 8 or (ii) any other covenant, agreement, warranty or condition required
herein and, in the case of (ii), such failure shall continue for fifteen
(15) days; or
(b) Default Under other Credit Agreement. The occurrence of an Event
of Default under Article 8 of the Credit Agreement; or
(c) False Representation. Any representation contained herein or in
any of the other Loan Documents made by Borrower or any Obligated Party is
false or misleading in any material respect; or
(d) Execution on Collateral. The Collateral or any portion thereof is
taken on execution or other process of law in any action against Pledgor;
or
(e) Abandonment. Pledgor abandons the Collateral or any portion
thereof; or
(f) Action by Other Lienholder. The holder of any lien or security
interest on any of the Collateral (without hereby implying the consent of
Secured Party to the existence or creation of any such lien or security
interest on the Collateral), declares a default thereunder or institutes
foreclosure or other proceedings for the enforcement of its remedies
thereunder; or
(g) Dilution of Ownership. The issuer of any securities (other than
securities of a class which are publicly traded) constituting Collateral
hereafter issues any shares of any class of capital stock (unless
immediately upon issuance, additional securities are pledged and delivered
to Secured Party pursuant to the terms hereof to the extent necessary to
give Secured Party a security interest after such issuance in at least the
same percentage of such issuer's outstanding securities as Secured Party
had before such issuance) or any options, warrants or other rights to
purchase any such capital stock.
11. REMEDIES AND RELATED RIGHTS. If an Event of Default shall have
occurred, and without limiting any other rights and remedies provided herein,
under any of the other Loan Documents or otherwise available to Secured Party,
Secured Party may exercise one or more of the rights and remedies provided in
this Section.
(a) Remedies. Secured Party may from time to time at its discretion,
subject to compliance with any applicable Insurance Holding Company Laws,
without limitation and without notice except as expressly provided in any
of the Loan Documents:
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(i) exercise in respect of the Collateral all the rights and
remedies of a secured party under the Code (whether or not
the Code applies to the affected Collateral);
(ii) reduce its claim to judgment or foreclose or otherwise
enforce, in whole or in part, the security interest granted
hereunder by any available judicial procedure;
(iii) sell or otherwise dispose of, at its office, on the
premises of Pledgor or elsewhere, the Collateral, as a unit
or in parcels, by public or private proceedings, and by way
of one or more contracts (it being agreed that the sale or
other disposition of any part of the Collateral shall not
exhaust Secured Party's power of sale, but sales or other
dispositions may be made from time to time until all of the
Collateral has been sold or disposed of or until the
Indebtedness has been paid and performed in full), and at
any such sale or other disposition it shall not be
necessary to exhibit any of the Collateral;
(iv) buy the Collateral, or any portion thereof, at any public
sale;
(v) buy the Collateral, or any portion thereof, at any private
sale if the Collateral is of a type customarily sold in a
recognized market or is of a type which is the subject of
widely distributed standard price quotations;
(vi) apply for the appointment of a receiver for the Collateral,
and Pledgor hereby consents to any such appointment; and
(vii) at its option, retain the Collateral in satisfaction of the
Indebtedness whenever the circumstances are such that
Secured Party is entitled to do so under the Code or
otherwise.
Pledgor agrees that in the event Pledgor is entitled to receive any notice
under the Uniform Commercial Code, as it exists in the state governing any
such notice, of the sale or other disposition of any Collateral, reasonable
notice shall be deemed given five (5) days after such notice is deposited
in a depository receptacle under the care and custody of the United States
Postal Service, postage prepaid, at Pledgor's address set forth on the
signature page hereof, ten (10) days prior to the date of any public sale,
or after which a private sale, of any of such Collateral is to be held.
Secured Party shall not be obligated to make any sale of Collateral
regardless of notice of sale having been given. Secured Party may adjourn
any public or private sale from time to time by announcement at the time
and place fixed therefor, and such sale may, without further notice, be
made at the time and place to which it was so adjourned. Pledgor further
acknowledges and agrees that the redemption by Secured Party of any
certificate of deposit pledged as Collateral shall be deemed to be a
commercially reasonable disposition under Section 9.504(c) of the Code.
(b) Private Sale of Securities. Pledgor recognizes that Secured Party
may be unable to effect a public sale of all or any part of the securities
pledged as Collateral because of restrictions in applicable federal and
state securities laws and that Secured Party may, therefore, determine to
make one or more private sales of any such securities to a restricted group
of purchasers who will be obligated to agree, among other things, to
acquire such securities for their own account, for investment and not with
a view to the distribution or resale thereof. Pledgor acknowledges that
each any such private sale may be at prices and other terms less favorable
then what might have been obtained at a public sale and, notwithstanding
the foregoing, agrees that each such private sale shall be deemed to have
been made in a commercially reasonable manner and that Secured Party shall
have no obligation to delay the sale of any such securities for the period
of time necessary to permit the issuer to register such securities for
public sale under any federal or state securities laws. Pledgor further
acknowledges and agrees that any offer to sell such securities which has
been made privately in the manner described above to not less than five (5)
bona fide offerees shall be deemed to involve a "public sale" for the
purposes of Section 9.504(c) of the Code, notwithstanding that such sale
may not constitute a "public offering"
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<PAGE> 62
under any federal or state securities laws and that Secured Party may, in
such event, bid for the purchase of such securities.
(c) Application of Proceeds. If any Event of Default shall have
occurred, Secured Party may at its discretion apply or use any cash held by
Secured Party as Collateral, and any cash proceeds received by Secured
Party in respect of any sale or other disposition of, collection from, or
other realization upon, all or any part of the Collateral as follows in
such order and manner as Secured Party may elect:
(i) to the repayment or reimbursement of the reasonable costs
and expenses (including, without limitation, reasonable
attorneys' fees and expenses) incurred by Secured Party in
connection with (A) the administration of the Loan
Documents, (B) the custody, preservation, use or operation
of, or the sale of, collection from, or other realization
upon, the Collateral, and (C) the exercise or enforcement
of any of the rights and remedies of Secured Party
hereunder;
(ii) to the payment or other satisfaction of any liens and other
encumbrances upon the Collateral;
(iii) to the satisfaction of the Indebtedness;
(iv) by holding such cash and proceeds as Collateral;
(v) to the payment of any other amounts required by applicable
law (including without limitation, Section 9.504(a)(3) of
the Code or any other applicable statutory provision); and
(vi) by delivery to Pledgor or any other party lawfully entitled
to receive such cash or proceeds whether by direction of a
court of competent jurisdiction or otherwise.
(d) Deficiency. In the event that the proceeds of any sale of,
collection from, or other realization upon, all or any part of the
Collateral by Secured Party are insufficient to pay all amounts to which
Secured Party is legally entitled, Borrower and any party who guaranteed or
is otherwise obligated to pay all or any portion of the Indebtedness shall
be liable for the deficiency, together with interest thereon as provided in
the Loan Documents.
(e) Non-Judicial Remedies. In granting to Secured Party the power to
enforce its rights hereunder without prior judicial process or judicial
hearing, Pledgor expressly waives, renounces and knowingly relinquishes any
legal right which might otherwise require Secured Party to enforce its
rights by judicial process. Pledgor recognizes and concedes that
non-judicial remedies are consistent with the usage of trade, are
responsive to commercial necessity and are the result of a bargain at arm's
length. Nothing herein is intended to prevent Secured Party or Pledgor from
resorting to judicial process at either party's option.
(f) Other Recourse. Pledgor waives any right to require Secured Party
to proceed against any third party, exhaust any Collateral or other
security for the Indebtedness, or to have any third party joined with
Pledgor in any suit arising out of the Indebtedness or any of the Loan
Documents, or pursue any other remedy available to Secured Party. Pledgor
further waives any and all notice of acceptance of this Agreement and of
the creation, modification, rearrangement, renewal or extension of the
Indebtedness. Pledgor further waives any defense arising by reason of any
disability or other defense of any third party or by reason of the
cessation from any cause whatsoever of the liability of any third party.
Until all of the Indebtedness shall have been paid in full, Pledgor shall
have no right of subrogation and Pledgor waives the right to enforce any
remedy which Secured Party has or may hereafter have against any third
party, and waives any benefit of and any right to participate in any other
security whatsoever now or hereafter held by Secured Party. Pledgor
authorizes Secured Party, and without notice or demand and without any
reservation of rights against Pledgor and without affecting Pledgor's
liability hereunder or on the Indebtedness, to (i) take or hold any other
property of any type
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<PAGE> 63
from any third party as security for the Indebtedness, and exchange,
enforce, waive and release any or all of such other property, (ii) apply
such other property and direct the order or manner of sale thereof as
Secured Party may in its discretion determine, (iii) renew, extend,
accelerate, modify, compromise, settle or release any of the Indebtedness
or other security for the Indebtedness, (iv) waive, enforce or modify any
of the provisions of any of the Loan Documents executed by any third party,
and (v) release or substitute any third party.
(g) Voting Rights. Upon the occurrence of an Event of Default, Pledgor
will not exercise any voting rights with respect to securities pledged as
Collateral. Pledgor hereby irrevocably appoints Secured Party as Pledgor's
attorney-in-fact (such power of attorney being coupled with an interest)
and proxy to exercise, subject to compliance with any applicable Insurance
Holding Company Laws, any voting rights with respect to Pledgor's
securities pledged as Collateral upon the occurrence of an Event of
Default.
(h) Dividend Rights and Interest Payments. Upon the occurrence of an
Event of Default:
(i) all rights of Pledgor to receive and retain the dividends
and interest payments which it would otherwise be authorized
to receive and retain pursuant to Section 3 shall
automatically cease, and all such rights shall thereupon
become vested with Secured Party which shall thereafter have
the sole right to receive, hold and apply as Collateral such
dividends and interest payments; and
(ii) all dividend and interest payments which are received by
Pledgor contrary to the provisions of clause (i) of this
Subsection shall be received in trust for the benefit of
Secured Party, shall be segregated from other funds of
Pledgor, and shall be forthwith paid over to Secured Party
in the exact form received (properly endorsed or assigned if
requested by Secured Party), to be held by Secured Party as
Collateral.
(i) Insurance Holding Company Laws. Because of laws and regulations
governing change of control of insurance companies that may be applicable
(collectively, the "Insurance Holding Company Laws"), certain purchasers of
the Collateral at foreclosure may be required to obtain regulatory approval
prior to a final and binding acquisition of the Collateral. The Pledgor
acknowledges that such laws and regulations may adversely affect the
purchase price to be paid by a purchaser of the Collateral, or any part
thereof, at a private or public foreclosure sale, and that the Bank may
(and is hereby authorized by the Pledgor to) modify the notices,
advertisements, terms and procedures of any foreclosure sale of the
Collateral in order to comply with Insurance Holding Company Laws. Without
limiting the foregoing, the Pledgor acknowledges that the Bank may accept
bids at foreclosure sale on a provisional basis, pending receipt by the
successful bidder of necessary regulatory approvals under the Insurance
Holding Company Laws. In addition, the Pledgor acknowledges that the Bank
may (but shall not be required to) limit bidding at foreclosure sales to
those parties which have demonstrated an ability to comply with
requirements of the Insurance Holding Company Laws. Moreover, the Pledgor
acknowledges that the Bank may require the successful bidder at a
foreclosure sale to execute a purchase agreement, deposit a portion of the
purchase price, and take other actions reflecting the requirements of the
Insurance Holding Company Laws and the resulting delay in consummating a
foreclosure sale.
12. INDEMNITY. Pledgor hereby indemnifies and agrees to hold harmless
Secured Party, and its officers, directors, employees, agents and
representatives (each an "Indemnified Person") from and against any and all
liabilities, obligations, claims, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind or nature
(collectively, the "Claims") which may be imposed on, incurred by, or asserted
against, any Indemnified Person (whether or not caused by any Indemnified
Person's sole, concurrent or contributory negligence) arising in connection with
the Loan Documents, the Indebtedness or the Collateral (including without
limitation, the enforcement of the Loan Documents and the defense of any
Indemnified Person's actions and/or inactions in connection with the Loan
Documents), except to the limited extent the Claims against an Indemnified
Person are proximately caused by such Indemnified Person's gross negligence or
willful misconduct. If Pledgor or any third party ever alleges such gross
negligence or willful misconduct by any Indemnified Person, the indemnification
provided for in this Section shall nonetheless be paid upon demand, subject to
later adjustment or reimbursement, until such time as a court of competent
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GAINSCO, Inc.
<PAGE> 64
jurisdiction enters a final judgment as to the extent and effect of the alleged
gross negligence or willful misconduct. The indemnification provided for in this
Section shall survive the termination of this Agreement and shall extend and
continue to benefit each individual or entity who is or has at any time been an
Indemnified Person hereunder.
13. MISCELLANEOUS.
(a) Entire Agreement. This Agreement contains the entire agreement of
Secured Party and Pledgor with respect to the Collateral. If the parties
hereto are parties to any prior agreement, either written or oral, relating
to the Collateral, the terms of this Agreement shall amend and supersede
the terms of such prior agreements as to transactions on or after the
effective date of this Agreement, but all security agreements, financing
statements, guaranties, other contracts and notices for the benefit of
Secured Party shall continue in full force and effect to secure the
Indebtedness unless Secured Party specifically releases its rights
thereunder by separate release.
(b) Amendment. No modification, consent or amendment of any provision
of this Agreement or any of the other Loan Documents shall be valid or
effective unless the same is in writing and signed by the party against
whom it is sought to be enforced.
(c) Actions by Secured Party. The lien, security interest and other
security rights of Secured Party hereunder shall not be impaired by (i) any
renewal, extension, increase or modification with respect to the
Indebtedness, (ii) any surrender, compromise, release, renewal, extension,
exchange or substitution which Secured Party may grant with respect to the
Collateral, or (iii) any release or indulgence granted to any endorser,
guarantor or surety of the Indebtedness. The taking of additional security
by Secured Party shall not release or impair the lien, security interest or
other security rights of Secured Party hereunder or affect the obligations
of Pledgor hereunder.
(d) Waiver by Secured Party. Secured Party may waive any Event of
Default without waiving any other prior or subsequent Event of Default.
Secured Party may remedy any default without waiving the Event of Default
remedied. Neither the failure by Secured Party to exercise, nor the delay
by Secured Party in exercising, any right or remedy upon any Event of
Default shall be construed as a waiver of such Event of Default or as a
waiver of the right to exercise any such right or remedy at a later date.
No single or partial exercise by Secured Party of any right or remedy
hereunder shall exhaust the same or shall preclude any other or further
exercise thereof, and every such right or remedy hereunder may be exercised
at any time. No waiver of any provision hereof or consent to any departure
by Pledgor therefrom shall be effective unless the same shall be in writing
and signed by Secured Party and then such waiver or consent shall be
effective only in the specific instances, for the purpose for which given
and to the extent therein specified. No notice to or demand on Pledgor in
any case shall of itself entitle Pledgor to any other or further notice or
demand in similar or other circumstances.
(e) Costs and Expenses. Pledgor will upon demand pay to Secured Party
the amount of any and all costs and expenses (including without limitation,
attorneys' fees and expenses), which Secured Party may incur in connection
with (i) the transactions which give rise to the Loan Documents, (ii) the
preparation of this Agreement and the perfection and preservation of the
security interests granted under the Loan Documents, (iii) the
administration of the Loan Documents, (iv) the custody, preservation, use
or operation of, or the sale of, collection from, or other realization
upon, the Collateral, (v) the exercise or enforcement of any of the rights
of Secured Party under the Loan Documents, or (vi) the failure by Pledgor
to perform or observe any of the provisions hereof.
(f) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND APPLICABLE FEDERAL
LAWS, EXCEPT TO THE EXTENT PERFECTION AND THE EFFECT OF PERFECTION OR
NON-PERFECTION OF THE SECURITY INTEREST GRANTED HEREUNDER, IN RESPECT OF
ANY PARTICULAR COLLATERAL, ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER
THAN THE STATE OF TEXAS.
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GAINSCO, Inc.
<PAGE> 65
(g) Venue. This Agreement has been entered into in the county in Texas
where Bank's address for notice purposes is located, and it shall be
performable for all purposes in such county. Courts within the State of
Texas shall have jurisdiction over any and all disputes arising under or
pertaining to this Agreement and venue for any such disputes shall be in
the county or judicial district where this Agreement has been executed and
delivered.
(h) Severability. If any provision of this Agreement is held by a
court of competent jurisdiction to be illegal, invalid or unenforceable
under present or future laws, such provision shall be fully severable,
shall not impair or invalidate the remainder of this Agreement and the
effect thereof shall be confined to the provision held to be illegal,
invalid or unenforceable.
(i) No Obligation. Nothing contained herein shall be construed as an
obligation on the part of Secured Party to extend or continue to extend
credit to Borrower.
(j) Notices. All notices, requests, demands or other communications
required or permitted to be given pursuant to this Agreement shall be in
writing and given by (i) personal delivery, (ii) expedited delivery service
with proof of delivery, or (iii) United States mail, postage prepaid,
registered or certified mail, return receipt requested, sent to the
intended addressee at the address set forth on the signature page hereof or
to such different address as the addressee shall have designated by written
notice sent pursuant to the terms hereof and shall be deemed to have been
received either, in the case of personal delivery, at the time of personal
delivery, in the case of expedited delivery service, as of the date of
first attempted delivery at the address and in the manner provided herein,
or in the case of mail, five (5) days after deposit in a depository
receptacle under the care and custody of the United States Postal Service.
Either party shall have the right to change its address for notice
hereunder to any other location within the continental United States by
notice to the other party of such new address at least thirty (30) days
prior to the effective date of such new address.
(k) Binding Effect and Assignment. This Agreement (i) creates a
continuing security interest in the Collateral, (ii) shall be binding on
Pledgor and the heirs, executors, administrators, personal representatives,
successors and assigns of Pledgor, and (iii) shall inure to the benefit of
Secured Party and its successors and assigns. Without limiting the
generality of the foregoing, Secured Party may pledge, assign or otherwise
transfer the Indebtedness and its rights under this Agreement and any of
the other Loan Documents to any other party, subject to any rights of
Pledgor hereunder. Pledgor's rights and obligations hereunder may not be
assigned or otherwise transferred without the prior written consent of
Secured Party.
(l) Termination. It is contemplated by the parties hereto that from
time to time there may be no outstanding Indebtedness, but notwithstanding
such occurrences, this Agreement shall remain valid and shall be in full
force and effect as to subsequent outstanding Indebtedness. Upon (i) the
satisfaction in full of the Indebtedness, (ii) the termination or
expiration of any commitment of Secured Party to extend credit to Borrower,
(iii) written request for the termination hereof delivered by Pledgor to
Secured Party, and (iv) written release delivered by Secured Party to
Pledgor, this Agreement and the security interests created hereby shall
terminate. Upon termination of this Agreement and Pledgor's written
request, Secured Party will, at Pledgor's sole cost and expense, return to
Pledgor such of the Collateral as shall not have been sold or otherwise
disposed of or applied pursuant to the terms hereof and execute and deliver
to Pledgor such documents as Pledgor shall reasonably request to evidence
such termination.
(m) JURY TRIAL WAIVER. PLEDGOR AND BANK EACH HEREBY WAIVE ANY RIGHT TO
A JURY TRIAL WITH RESPECT TO ANY MATTER ARISING OR RELATING TO THIS
AGREEMENT OR THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY.
(n) Cumulative Rights. All rights and remedies of Secured Party
hereunder are cumulative of each other and of every other right or remedy
which Secured Party may otherwise have at law or in equity or under any of
the other Loan Documents, and the exercise of one or more of such rights or
remedies shall not prejudice or impair the concurrent or subsequent
exercise of any other rights or remedies.
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GAINSCO, Inc.
<PAGE> 66
(o) Gender and Number. Within this Agreement, words of any gender
shall be held and construed to include the other gender, and words in the
singular number shall be held and construed to include the plural and words
in the plural number shall be held and construed to include the singular,
unless in each instance the context requires otherwise.
(p) Descriptive Headings. The headings in this Agreement are for
convenience only and shall in no way enlarge, limit or define the scope or
meaning of the various and several provisions hereof.
[SIGNATURE PAGE FOLLOWS]
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GAINSCO, Inc.
<PAGE> 67
EXECUTED as of the date first written above.
Pledgor's Address: PLEDGOR:
-------
500 Commerce Street GAINSCO, INC.
Fort Worth, Texas 76102
By:
--------------------------------------------
Its:
--------------------------------------------
Secured Party's Address:
Bank One, NA
1 Bank One Plaza
Chicago, Illinois 60670-0085
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GAINSCO, Inc.
<PAGE> 68
SCHEDULE A TO
PLEDGE AGREEMENT
BY GAINSCO, INC.
The following property is a part of the Collateral as defined in Subsection
1(c):
(a) All shares of capital stock of Tri-State, Ltd., a North Dakota corporation,
owned by Pledgor, including without limitation 10,060 shares of common
stock evidenced by share certificate no. 9 issued in the name of Pledgor.
<PAGE> 69
UNLIMITED GUARANTY
THIS UNLIMITED GUARANTY ("Guaranty") is made as of the 7th day of
January, 2000, by Guarantor (as hereinafter defined) for the benefit of Bank (as
hereinafter defined).
1. Definitions. As used in this Guaranty, the following terms shall
have the meanings indicated below:
(a) The term "Bank" shall mean BANK ONE, NA, whose address for
notice purposes is the following:
1 Bank One Plaza
Chicago, Illinois 60670-0085
Attn: Thomas W. Doddridge
(b) The term "Borrower" (whether one or more) shall mean the
following: GAINSCO, INC. and GAINSCO SERVICE CORP., or either of them.
(c) The term "Guaranteed Indebtedness" shall mean (i) all
indebtedness, obligations and liabilities of Borrower to Bank of any
kind or character, now existing or hereafter arising, whether direct,
indirect, related, unrelated, fixed, contingent, liquidated,
unliquidated, joint, several or joint and several, and regardless of
whether such indebtedness, obligations and liabilities may, prior to
their acquisitions by Bank, be or have been payable to or in favor of a
third party and subsequently acquired by Bank (it being contemplated
that Bank may make such acquisitions from third parties), including
without limitation all indebtedness, obligations and liabilities of
Borrower to Bank now existing or hereafter arising by note, draft,
acceptance, guaranty, endorsement, letter of credit, assignment,
purchase, overdraft, discount, indemnity agreement or otherwise, (ii)
all accrued but unpaid interest on any of the indebtedness described in
(i) above, (iii) all obligations of Borrower to Bank under any
documents evidencing, securing, governing and/or pertaining to all or
any part of the indebtedness described in (i) and (ii) above
(collectively, the "Loan Documents"), (iv) all costs and expenses
incurred by Bank in connection with the collection and administration
of all or any part of the indebtedness and obligations described in
(i), (ii) and (iii) above or the protection or preservation of, or
realization upon, the collateral securing all or any part of such
indebtedness and obligations, including without limitation all
reasonable attorneys' fees, and (v) all renewals, extensions,
modifications and rearrangements of the indebtedness and obligations
described in (i), (ii), (iii) and (iv) above.
(d) The term "Guarantor" shall mean TRI-STATE, LTD., a North
Dakota corporation, whose address for notice purposes is the following:
500 Commerce Street
Fort Worth, Texas 76102.
2. Obligations. As an inducement to Bank to extend or continue to
extend credit and other financial accommodations to Borrower, Guarantor, for
value received, does hereby unconditionally and absolutely guarantee the prompt
and full payment and performance of the Guaranteed Indebtedness when due or
declared to be due and at all times thereafter.
3. Character of Obligations. This is an absolute, continuing and
unconditional guaranty of payment and not of collection and if at any time or
from time to time there is no outstanding Guaranteed Indebtedness, the
obligations of Guarantor with respect to any and all Guaranteed Indebtedness
incurred thereafter shall not be affected. All Guaranteed Indebtedness
heretofore, concurrently herewith or hereafter made by Bank to Borrower shall be
conclusively presumed to have been made or acquired in acceptance hereof.
Guarantor shall be liable, jointly and severally, with Borrower and any other
guarantor of all or any part of the Guaranteed Indebtedness.
UNLIMITED GUARANTY - PAGE 1
<PAGE> 70
4. Right of Revocation. Guarantor understands and agrees that Guarantor
may revoke its future obligations under this Guaranty at any time by giving Bank
written notice that Guarantor will not be liable hereunder for any indebtedness
or obligations of Borrower incurred on or after the effective date of such
revocation. Such revocation shall be deemed to be effective on the day following
the day Bank receives such notice delivered either by: (a) personal delivery to
the address and designated department of Bank identified in subparagraph 1(a)
above, or (b) United States mail, registered or certified, return receipt
requested, postage prepaid, addressed to Bank at the address shown in
subparagraph 1(a) above. Notwithstanding such revocation, Guarantor shall remain
liable on its obligations hereunder until payment in full to Bank of (x) all of
the Guaranteed Indebtedness that is outstanding on the effective date of such
revocation, and any renewals and extensions thereof, and (y) all loans, advances
and other extensions of credit made to or for the account of Borrower on or
after the effective date of such revocation pursuant to the obligation of Bank
under a commitment or agreement made to or with Borrower prior to the effective
date of such revocation. The terms and conditions of this Guaranty, including
without limitation the consents and waivers set forth in paragraph 7 hereof,
shall remain in effect with respect to the Guaranteed Indebtedness described in
the preceding sentence in the same manner as if such revocation had not been
made by Guarantor.
5. Representations and Warranties. Guarantor hereby represents and
warrants the following to Bank:
(a) This Guaranty may reasonably be expected to benefit,
directly or indirectly, Guarantor, and (i) if Guarantor is a
corporation, the Board of Directors of Guarantor has determined that
this Guaranty may reasonably be expected to benefit, directly or
indirectly, Guarantor, or (ii) if Guarantor is a partnership, the
requisite number of its partners have determined that this Guaranty may
reasonably be expected to benefit, directly or indirectly, Guarantor;
and
(b) Guarantor is familiar with, and has independently reviewed
the books and records regarding, the financial condition of Borrower
and is familiar with the value of any and all collateral intended to be
security for the payment of all or any part of the Guaranteed
Indebtedness; provided, however, Guarantor is not relying on such
financial condition or collateral as an inducement to enter into this
Guaranty; and
(c) Guarantor has adequate means to obtain from Borrower on a
continuing basis information concerning the financial condition of
Borrower and Guarantor is not relying on Bank to provide such
information to Guarantor either now or in the future; and
(d) Guarantor has the power and authority to execute, deliver
and perform this Guaranty and any other agreements executed by
Guarantor contemporaneously herewith, and the execution, delivery and
performance of this Guaranty and any other agreements executed by
Guarantor contemporaneously herewith do not and will not violate (i)
any agreement or instrument to which Guarantor is a party, (ii) any
law, rule, regulation or order of any governmental authority to which
Guarantor is subject, or (iii) its articles or certificate of
incorporation or bylaws, if Guarantor is a corporation, or its
partnership agreement, if Guarantor is a partnership; and
(e) Neither Bank nor any other party has made any
representation, warranty or statement to Guarantor in order to induce
Guarantor to execute this Guaranty; and
(f) As of the date hereof, and after giving effect to this
Guaranty and the obligations evidenced hereby, (i) Guarantor is and
will be solvent, (ii) the fair saleable value of Guarantor's assets
exceeds and will continue to exceed its liabilities (both fixed and
contingent), (iii) Guarantor is and will continue to be able to pay its
debts as they mature, and (iv) if Guarantor is not an individual,
Guarantor has and will continue to have sufficient capital to carry on
its business and all businesses in which it is about to engage.
6. Covenants. Guarantor hereby covenants and agrees with Bank as
follows:
(a) Guarantor shall not, so long as its obligations under this
Guaranty continue, transfer or pledge any material portion of its
assets for less than full and adequate consideration; and
UNLIMITED GUARANTY - PAGE 2
<PAGE> 71
(b) Guarantor shall promptly furnish to Bank at any time and
from time to time such financial statements and other financial
information of Guarantor as are required under the Loan Documents; and
(c) Guarantor shall comply with all terms and provisions of
the Loan Documents that apply to Guarantor.
7. Consent and Waiver.
(a) Guarantor waives (i) promptness, diligence and notice of
acceptance of this Guaranty and notice of the incurring of any
obligation, indebtedness or liability to which this Guaranty applies or
may apply and waives presentment for payment, notice of nonpayment,
protest, demand, notice of protest, notice of intent to accelerate,
notice of acceleration, notice of dishonor, diligence in enforcement
and indulgences of every kind, and (ii) the taking of any other action
by Bank, including without limitation, giving any notice of default or
any other notice to, or making any demand on, Borrower, any other
guarantor of all or any part of the Guaranteed Indebtedness or any
other party.
(b) Guarantor waives any rights Guarantor has under, or any
requirements imposed by, Chapter 34 of the Texas Business and Commerce
Code, as in effect on the date of this Guaranty or as it may be amended
from time to time.
(c) Bank may at any time, without the consent of or notice to
Guarantor, without incurring responsibility to Guarantor and without
impairing, releasing, reducing or affecting the obligations of
Guarantor hereunder: (i) change the manner, place or terms of payment
of all or any part of the Guaranteed Indebtedness, or renew, extend,
modify, rearrange or alter all or any part of the Guaranteed
Indebtedness; (ii) change the interest rate accruing on any of the
Guaranteed Indebtedness (including, without limitation, any periodic
change in such interest rate that occurs because such Guaranteed
Indebtedness accrues interest at a variable rate which may fluctuate
from time to time); (iii) sell, exchange, release, surrender,
subordinate, realize upon or otherwise deal with in any manner and in
any order any collateral for all or any part of the Guaranteed
Indebtedness or this Guaranty or setoff against all or any part of the
Guaranteed Indebtedness; (iv) neglect, delay, omit, fail or refuse to
take or prosecute any action for the collection of all or any part of
the Guaranteed Indebtedness or this Guaranty or to take or prosecute
any action in connection with any of the Loan Documents; (v) exercise
or refrain from exercising any rights against Borrower or others, or
otherwise act or refrain from acting; (vi) settle or compromise all or
any part of the Guaranteed Indebtedness and subordinate the payment of
all or any part of the Guaranteed Indebtedness to the payment of any
obligations, indebtedness or liabilities which may be due or become due
to Bank or others; (vii) apply any deposit balance, fund, payment,
collections through process of law or otherwise or other collateral of
Borrower to the satisfaction and liquidation of the indebtedness or
obligations of Borrower to Bank, if any, not guaranteed under this
Guaranty pursuant to paragraph 4 or 11 herein; and (viii) apply any
sums paid to Bank by Guarantor, Borrower or others to the Guaranteed
Indebtedness in such order and manner as Bank, in its sole discretion,
may determine.
(d) Should Bank seek to enforce the obligations of Guarantor
hereunder by action in any court or otherwise, Guarantor waives any
requirement, substantive or procedural, that (i) Bank first enforce any
rights or remedies against Borrower or any other person or entity
liable to Bank for all or any part of the Guaranteed Indebtedness,
including without limitation that a judgment first be rendered against
Borrower or any other person or entity, or that Borrower or any other
person or entity should be joined in such cause, or (ii) Bank shall
first enforce rights against any collateral which shall ever have been
given to secure all or any part of the Guaranteed Indebtedness or this
Guaranty. Such waiver shall be without prejudice to Bank's right, at
its option, to proceed against Borrower or any other person or entity,
whether by separate action or by joinder.
(e) In addition to any other waivers, agreements and covenants
of Guarantor set forth herein, Guarantor hereby further waives and
releases all claims, causes of action, defenses and offsets for any act
or omission of Bank, its directors, officers, employees,
representatives or agents in connection with Bank's administration of
the Guaranteed Indebtedness, except for Bank's willful misconduct and
gross negligence.
UNLIMITED GUARANTY - PAGE 3
<PAGE> 72
8. Obligations Not Impaired.
(a) Guarantor agrees that its obligations hereunder shall not
be released, diminished, impaired, reduced or affected by the
occurrence of any one or more of the following events: (i) the death,
disability or lack of corporate power of Borrower, Guarantor (except as
provided in paragraph 11 herein) or any other guarantor of all or any
part of the Guaranteed Indebtedness, (ii) any receivership, insolvency,
bankruptcy or other proceedings affecting Borrower, Guarantor or any
other guarantor of all or any part of the Guaranteed Indebtedness, or
any of their respective property; (iii) the partial or total release or
discharge of Borrower or any other guarantor of all or any part of the
Guaranteed Indebtedness, or any other person or entity from the
performance of any obligation contained in any instrument or agreement
evidencing, governing or securing all or any part of the Guaranteed
Indebtedness, whether occurring by reason of law or otherwise; (iv) the
taking or accepting of any collateral for all or any part of the
Guaranteed Indebtedness or this Guaranty; (v) the taking or accepting
of any other guaranty for all or any part of the Guaranteed
Indebtedness; (vi) any failure by Bank to acquire, perfect or continue
any lien or security interest on collateral securing all or any part of
the Guaranteed Indebtedness or this Guaranty; (vii) the impairment of
any collateral securing all or any part of the Guaranteed Indebtedness
or this Guaranty; (viii) any failure by Bank to sell any collateral
securing all or any part of the Guaranteed Indebtedness or this
Guaranty in a commercially reasonable manner or as otherwise required
by law; (ix) any invalidity or unenforceability of or defect or
deficiency in any of the Loan Documents; or (x) any other circumstance
which might otherwise constitute a defense available to, or discharge
of, Borrower or any other guarantor of all or any part of the
Guaranteed Indebtedness.
(b) This Guaranty shall continue to be effective or be
reinstated, as the case may be, if at any time any payment of all or
any part of the Guaranteed Indebtedness is rescinded or must otherwise
be returned by Bank upon the insolvency, bankruptcy or reorganization
of Borrower, Guarantor, any other guarantor of all or any part of the
Guaranteed Indebtedness, or otherwise, all as though such payment had
not been made.
(c) In the event Borrower is a corporation, joint stock
association or partnership, or is hereafter incorporated, none of the
following shall affect Guarantor's liability hereunder: (i) the
unenforceability of all or any part of the Guaranteed Indebtedness
against Borrower by reason of the fact that the Guaranteed Indebtedness
exceeds the amount permitted by law; (ii) the act of creating all or
any part of the Guaranteed Indebtedness is ultra vires; or (iii) the
officers or partners creating all or any part of the Guaranteed
Indebtedness acted in excess of their authority. Guarantor hereby
acknowledges that withdrawal from, or termination of, any ownership
interest in Borrower now or hereafter owned or held by Guarantor shall
not alter, affect or in any way limit the obligations of Guarantor
hereunder.
9. Actions against Guarantor. In the event of a default in the payment
or performance of all or any part of the Guaranteed Indebtedness when such
Guaranteed Indebtedness becomes due, whether by its terms, by acceleration or
otherwise, Guarantor shall, without notice or demand, promptly pay the amount
due thereon to Bank, in lawful money of the United States, at Bank's address set
forth in subparagraph 1(a) above. One or more successive or concurrent actions
may be brought against Guarantor, either in the same action in which Borrower is
sued or in separate actions, as often as Bank deems advisable. The exercise by
Bank of any right or remedy under this Guaranty or under any other agreement or
instrument, at law, in equity or otherwise, shall not preclude concurrent or
subsequent exercise of any other right or remedy. The books and records of Bank
shall be admissible in evidence in any action or proceeding involving this
Guaranty and shall be prima facie evidence of the payments made on, and the
outstanding balance of, the Guaranteed Indebtedness.
10. Payment by Guarantor. Whenever Guarantor pays any sum which is or
may become due under this Guaranty, written notice must be delivered to Bank
contemporaneously with such payment. Such notice shall be effective for purposes
of this paragraph when contemporaneously with such payment Bank receives such
notice either by: (a) personal delivery to the address and designated department
of Bank identified in subparagraph 1(a) above, or (b) United States mail,
certified or registered, return receipt requested, postage prepaid, addressed to
Bank at the address shown in subparagraph 1(a) above. In the absence of such
notice to Bank by Guarantor in compliance
UNLIMITED GUARANTY - PAGE 4
<PAGE> 73
with the provisions hereof, any sum received by Bank on account of the
Guaranteed Indebtedness shall be conclusively deemed paid by Borrower.
11. [intentionally omitted.]
12. Notice of Sale. In the event that Guarantor is entitled to receive
any notice under the Uniform Commercial Code, as it exists in the state
governing any such notice, of the sale or other disposition of any collateral
securing all or any part of the Guaranteed Indebtedness or this Guaranty,
reasonable notice shall be deemed given when such notice is deposited in the
United States mail, postage prepaid, at the address for Guarantor set forth in
subparagraph 1(d) above, five (5) days prior to the date any public sale, or
after which any private sale, of any such collateral is to be held; provided,
however, that notice given in any other reasonable manner or at any other
reasonable time shall be sufficient.
13. Waiver by Bank. No delay on the part of Bank in exercising any
right hereunder or failure to exercise the same shall operate as a waiver of
such right. In no event shall any waiver of the provisions of this Guaranty be
effective unless the same be in writing and signed by an officer of Bank, and
then only in the specific instance and for the purpose given.
14. Successors and Assigns. This Guaranty is for the benefit of Bank,
its successors and assigns. This Guaranty is binding upon Guarantor and
Guarantor's heirs, executors, administrators, personal representatives and
successors, including without limitation any person or entity obligated by
operation of law upon the reorganization, merger, consolidation or other change
in the organizational structure of Guarantor.
15. Costs and Expenses. Guarantor shall pay on demand by Bank all costs
and expenses, including without limitation, all reasonable attorneys' fees
incurred by Bank in connection with the preparation, administration, enforcement
and/or collection of this Guaranty. This covenant shall survive the payment of
the Guaranteed Indebtedness.
16. Severability. If any provision of this Guaranty is held by a court
of competent jurisdiction to be illegal, invalid or unenforceable under present
or future laws, such provision shall be fully severable, shall not impair or
invalidate the remainder of this Guaranty and the effect thereof shall be
confined to the provision held to be illegal, invalid or unenforceable.
17. No Obligation. Nothing contained herein shall be construed as an
obligation on the part of Bank to extend or continue to extend credit to
Borrower.
18. Amendment. No modification or amendment of any provision of this
Guaranty, nor consent to any departure by Guarantor therefrom, shall be
effective unless the same shall be in writing and signed by an officer of Bank
and of Guarantor, and then shall be effective only in the specific instance and
for the purpose for which given.
19. Cumulative Rights. All rights and remedies of Bank hereunder are
cumulative of each other and of every other right or remedy which Bank may
otherwise have at law or in equity or under any instrument or agreement, and the
exercise of one or more of such rights or remedies shall not prejudice or impair
the concurrent or subsequent exercise of any other rights or remedies.
20. GOVERNING LAW. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND APPLICABLE FEDERAL LAWS.
21. Venue. This Guaranty has been entered into in the county in Texas
where Bank's address for notice purposes is located, and it shall be performable
for all purposes in such county. Courts within the State of Texas shall have
jurisdiction over any and all disputes arising under or pertaining to this
Guaranty and venue for any such disputes shall be in the county or judicial
district where the Bank's address for notice purposes is located.
UNLIMITED GUARANTY - PAGE 5
<PAGE> 74
22. Compliance with Applicable Usury Laws. Notwithstanding any other
provision of this Guaranty or of any instrument or agreement evidencing,
governing or securing all or any part of the Guaranteed Indebtedness, Guarantor
and Bank by its acceptance hereof agree that Guarantor shall never be required
or obligated to pay interest in excess of the maximum nonusurious interest rate
as may be authorized by applicable law for the written contracts which
constitute the Guaranteed Indebtedness. It is the intention of Guarantor and
Bank to conform strictly to the applicable laws which limit interest rates, and
any of the aforesaid contracts for interest, if and to the extent payable by
Guarantor, shall be held to be subject to reduction to the maximum nonusurious
interest rate allowed under said law.
23. Descriptive Headings. The headings in this Guaranty are for
convenience only and shall not define or limit the provisions hereof.
24. Gender. Within this Guaranty, words of any gender shall be held and
construed to include the other gender.
25. Entire Agreement. This Guaranty contains the entire agreement
between Guarantor and Bank regarding the subject matter hereof and supersedes
all prior written and oral agreements and understandings, if any, regarding
same; provided, however, this Guaranty is in addition to and does not replace,
cancel, modify or affect any other guaranty of Guarantor now or hereafter held
by Bank that relates to Borrower or any other person or entity.
(SIGNATURE PAGE FOLLOWS)
UNLIMITED GUARANTY - PAGE 6
<PAGE> 75
EXECUTED as of the date first above written.
GUARANTOR:
TRI-STATE, LTD.
By:
-------------------------------
Its:
------------------------------
UNLIMITED GUARANTY - PAGE 7
<PAGE> 1
EXHIBIT 10.15
CONFORMED COPY
AGREEMENT OF LIMITED PARTNERSHIP
OF
GNA INVESTMENTS I, L. P.
(A TEXAS LIMITED PARTNERSHIP)
DATED AS OF NOVEMBER 30, 1999
THE LIMITED PARTNERSHIP INTERESTS DESCRIBED HEREIN HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY OTHER APPLICABLE SECURITIES
LAWS IN RELIANCE UPON EXEMPTIONS THEREFROM. THEY MAY NOT BE OFFERED FOR SALE,
SOLD, PLEDGED, HYPOTHECATED, ASSIGNED OR OTHERWISE TRANSFERRED EXCEPT IN
COMPLIANCE WITH APPLICABLE SECURITIES LAWS AND THE RESTRICTIONS ON TRANSFER SET
FORTH IN THIS AGREEMENT.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I.
DEFINITIONS ...................................................................... 1
1.1 Certain Definitions ..................................................... 1
1.2 Terms Defined in Investment Management Agreement ........................ 5
ARTICLE II.
FORMATION ........................................................................ 6
2.1 Formation, Name and Principal Office .................................... 6
2.2 Office and Agent for Service of Process ................................. 6
2.3 Purpose of the Partnership .............................................. 6
2.4 Names and Addresses of the Partners ..................................... 6
2.5 Term of the Partnership ................................................. 6
2.6 Required Documents ...................................................... 7
ARTICLE III.
CAPITALIZATION ................................................................... 7
3.1 Initial Capital Contribution ............................................ 7
3.2 Additional Capital Contributions ........................................ 7
3.3 Withdrawal and Return on Capital ........................................ 7
3.4 Loans ................................................................... 8
3.5 Limitation of Liability ................................................. 8
ARTICLE IV.
ALLOCATIONS ...................................................................... 8
4.1 Allocation of Net Income and Net Loss ................................... 8
4.2 Special Allocations ..................................................... 8
4.3 Other Allocation Rules .................................................. 9
4.4 Allocations for Federal Income Tax Purposes ............................. 9
4.5 Withholding Taxes ....................................................... 9
ARTICLE V.
DISTRIBUTIONS .................................................................... 10
5.1 Distributions ........................................................... 10
ARTICLE VI.
ADMINISTRATIVE PROVISIONS ........................................................ 11
6.1 Rights of the Limited Partner ........................................... 11
6.2 Management by the General Partner ....................................... 12
6.3 Powers of the General Partner ........................................... 12
6.4 Limitations on Powers of the General Partner ............................ 13
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
6.5 Other Ventures .......................................................... 13
6.6 Duties with Respect to Investment Decisions ............................. 14
6.7 Payment of Organization Costs and Expenses .............................. 15
6.8 Partner Compensation .................................................... 15
6.9 Filing of Tax Returns ................................................... 15
6.10 Tax Matters Partner ..................................................... 15
6.11 Records and Financial Statements ........................................ 16
6.12 Tax Reports to Partners ................................................. 17
6.13 Valuation of Partnership Assets ......................................... 18
6.14 Confidentiality ......................................................... 18
ARTICLE VII.
TRANSFER OF A PARTNERSHIP INTEREST; WITHDRAWALS .................................. 18
7.1 Transfers by the Limited Partner ........................................ 18
7.2 Withdrawal by a Limited Partner ......................................... 19
7.3 Transfers by the General Partner ........................................ 20
7.4. Withdrawal by the General Partner ....................................... 20
ARTICLE VIII.
DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP ................................... 20
8.1 Dissolution Events ...................................................... 20
8.2 Conversion of General Partner Interest to a Limited Partner Interest .... 20
8.3 Winding Up of the Partnership ........................................... 20
8.4 Application of Proceeds of Liquidation .................................. 21
8.5 Restoration Obligation .................................................. 21
8.6 Timing of Liquidating Distributions ..................................... 21
8.7 Liquidating Trust ....................................................... 21
ARTICLE IX.
LIABILITY AND INDEMNIFICATION OF THE GENERAL PARTNER .................... 22
9.1 Liability ............................................................... 22
9.2 Indemnification ......................................................... 22
ARTICLE X.
GENERAL PROVISIONS ............................................................... 22
10.1 Special Meetings ........................................................ 22
10.2 Entire Agreement ........................................................ 22
10.3 Amendments .............................................................. 22
10.4 Governing Law ........................................................... 23
10.5 Severability ............................................................ 23
10.6 Counterparts ............................................................ 23
10.7 Survival of Rights ...................................................... 23
10.8 Notices ................................................................. 23
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
10.9 Consents ................................................................ 23
10.10 No Partition ............................................................ 23
10.11 Representations by Limited Partner ...................................... 23
</TABLE>
Attachments:
Schedule A Investment Criteria
Schedule B Names, Addresses, Initial Capital Contributions and Sharing
Ratios
iii
<PAGE> 5
AGREEMENT OF LIMITED PARTNERSHIP
OF
GNA INVESTMENTS I, L. P.
(A TEXAS LIMITED PARTNERSHIP)
THIS AGREEMENT OF LIMITED PARTNERSHIP (this "AGREEMENT") of GNA Investments
I, L. P. a Texas limited partnership (the "PARTNERSHIP"), is entered into as of
November 30, 1999 by and among Goff Moore Strategic Partners, L.P., a Texas
limited partnership ("GMSP"), as the sole General Partner, and GAINSCO, INC., a
Texas corporation ("GNA") as the sole Limited Partner.
WHEREAS, GNA and GMSP have heretofore entered into an Investment Management
Agreement dated as of October 4, 1999 (the "INVESTMENT MANAGEMENT AGREEMENT")
pursuant to which GMSP is serving as investment manager with respect to certain
investments of GMSP; and
WHEREAS, GNA and GMSP are entering into this Agreement to facilitate the
co-investment by GNA with GMSP in investments that meet the criteria set forth
in Schedule A (the "INVESTMENT CRITERIA").
NOW, THEREFORE, for and in consideration of the premises, the mutual
covenants herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, GMSP and GNA hereby
agree as follows:
ARTICLE I.
DEFINITIONS
1.1 CERTAIN DEFINITIONS. As used in this Agreement, the following terms
shall have the following meanings:
"ACT" means the Texas Revised Limited Partnership Act, as amended.
"AGREEMENT" has the meaning specified in the first paragraph hereof.
"ASSIGNEE" means a Person who has acquired all or a portion of the Limited
Partner's Interest in the Partnership, but who has not become a Substitute
Limited Partner.
"BANKRUPTCY"or "BANKRUPT" means, with respect to a Person, (i) the making
of a general assignment for the benefit of creditors, (ii) the entry of an order
for relief in any bankruptcy, reorganization or insolvency proceeding, (iii) the
filing or commencement by or against the Person of any application or petition
for the appointment of a trustee, receiver or other similar official over
<PAGE> 6
the Person or any substantial part of the Person's assets, or of any proceeding
under any bankruptcy, insolvency or reorganization statute or under any
liquidation or other law relating to relief of debtors, unless, in the case of
such an action or proceeding filed or commenced against the Person without the
Person's acquiescence or consent, the action or proceeding is dismissed within
ninety (90) days after the date of its filing or commencement.
"BOOK BASIS" means, with respect to any Partnership asset, the asset's
adjusted basis for federal income tax purposes, except that (i) the initial Book
Basis of a Partnership asset contributed by a Partner to the Partnership shall
be the gross Fair Market Value of the asset on the date of contribution, as
determined by the Valuation Partner in accordance with Section 6.13; (ii) upon
the occurrence of a Revaluation Event, the Book Basis of each Partnership asset
shall be adjusted to its respective Fair Market Value on such date, as
determined by the Valuation Partner in accordance with Section 6.13; and (iii)
if the Book Basis of any Partnership asset has been determined pursuant to
subsection (i) or (ii) above, the Book Basis of the asset shall thereafter be
adjusted by depreciation, amortization or other cost recovery deductions
determined in accordance with the provisions of Treasury regulations Section
1.704-1(b)(2)(iv)(g)(3) in lieu of any depreciation, amortization or other cost
recovery deductions allowable for federal income tax purposes.
"CAPITAL ACCOUNT" means, for each Partner, a separate account that is:
(a) increased by (i) the amount of such Partner's Capital
Contributions and (ii) allocations of Net Income and items of Income to such
Partner pursuant to Article IV;
(b) decreased by (i) the amount of cash distributed to such Partner by
the Partnership, (ii) the Fair Market Value of any other property distributed to
such Partner by the Partnership (determined as of the date of distribution,
without regard to Code Section 7701(g), and net of liabilities secured by such
property that the Partner assumes or to which the Partner's ownership of the
property is subject), and (iii) allocations of Net Loss and items of Loss to
such Partner pursuant to Article IV; and
(c) otherwise adjusted so as to conform to the requirements of Code
Sections 704(b) and the Treasury regulations thereunder.
"CAPITAL CONTRIBUTIONS" means, for a Partner, the amount of cash and the
Fair Market Value, without regard to Code Section 7701(g), of any other property
(determined as of the date of contribution and net of liabilities secured by
such property that the Partnership assumes or to which the Partnership's
ownership of the property is subject) contributed by the Partner to the capital
of the Partnership. Unless otherwise permitted by the General Partner, all
Capital Contributions shall be made in cash.
"CODE" means the Internal Revenue Code of 1986, as amended.
2
<PAGE> 7
"EXPENSES" of the Partnership means all direct, out-of-pocket costs and
expenses reasonably incurred either by the Partnership or by the General Partner
or an Affiliate thereof on behalf of the Partnership relating to (a) the fees
and expenses associated with the preparation of financial statements pursuant to
Section 6.11 and the tax reports described in Section 6.12, (b) the fees, costs
and expenses incurred in connection with investigating, negotiating, acquiring,
holding, selling or exchanging of Securities (including fees and expenses of
lawyers, accountants, consultants, brokerage fees, incentive fees or finder's
fees, investment banker's fees, commitment fees, underwriting discounts or sales
fees), (c) legal, audit and other expenses incurred in connection with the
registration of the offer and sale of Securities owned by the Partnership under
the Securities Act of 1933, as amended, and any applicable state or foreign
securities laws, and (d) other expenses described in Section 4(d) of the
Investment Management Agreement; provided, however, that in no event shall
Expenses include any of the following costs and expenses incurred by the
Partnership or the General Partner or any of its Affiliates: (i) the salaries,
wages and employee benefits of all officers, directors, and employees of the
General Partner or an Affiliate thereof, (ii) office rent, utility charges and
equipment and furniture costs and expenses, (iii) any other general,
administrative and overhead expense, including insurance premiums relating to
the matters described in this clause (iii) and the preceding clauses (i) and
(ii), and (iv) amounts payable by the Partnership (other than for the actual
value of services rendered to or property purchased by the Partnership) in
consequence of any actual or alleged fraud, negligence, breach of fiduciary
duty, violation of any law, governmental rule or regulation or other misconduct
by the General Partner.
"FAIR MARKET VALUE" has the meaning specified in the Investment Management
Agreement in the case of Securities and, in the case of any other asset, means
the price that would obtain in a transaction between a willing buyer and a
willing seller in which neither party was under any compulsion to enter into the
transaction.
"FISCAL YEAR" means the period from January 1 through December 31 of each
year.
"GENERAL PARTNER" means Goff Moore Strategic Partners, L.P., a Texas
limited partnership, or any other Person admitted to the Partnership as a
general partner pursuant to Section 7.3 or 8.1(c).
"GMSP" has the meaning set forth in the first paragraph hereof.
"GNA" has the meaning set forth in the first paragraph hereof.
"INCOME" means, for each Fiscal Year, each item of income and gain as
determined, recognized and classified for federal income tax purposes, provided,
that (i) items of income or gain exempt from federal income tax shall be
included as items of Income, (ii) upon a disposition of any Partnership asset,
items of income or gain arising therefrom shall be computed by reference to the
asset's Book Basis on the date of disposition rather than the asset's adjusted
tax basis, (iii) upon a distribution of any Partnership asset, whether or not in
connection with the liquidation of the Partnership, any unrealized items of
income or gain inherent therein that have not previously been reflected in the
Partners' Capital Accounts shall be included as items of Income as if the asset
had
3
<PAGE> 8
been sold for its Fair Market Value on the date of its distribution, and (iv) if
the Book Basis of any Partnership asset is adjusted upwards upon the occurrence
of a Revaluation Event, the amount of the adjustment shall be included as an
item of Income.
"INTEREST" means all of a Partner's interest in the Partnership, including
rights to distributions, allocations, information and reports, and to vote,
consent or approve.
"INTEREST RATE" means a varying rate per annum equal to the lesser of (i)
the "prime rate" as quoted by the Wall Street Journal (Southwest Edition) from
time to time or (ii) the maximum nonusurious rate permitted from time to time by
Applicable Law.
"INVESTMENT CRITERIA" has the meaning set forth in the second WHEREAS
clause of this Agreement.
"INVESTMENT MANAGEMENT AGREEMENT" has the meaning set forth in the first
WHEREAS clause of this Agreement.
"LIMITED PARTNER" means GNA and any other Person admitted to the
Partnership as a limited partner or as a Substitute Limited Partner and which
has not withdrawn from the Partnership or transferred its entire Interest to a
Substitute Limited Partner pursuant to Article VII. Except where the context
requires otherwise, a reference in this Agreement to the "LIMITED PARTNER" shall
mean all of the Limited Partners of the Partnership at the time of
determination.
"LIQUIDATOR" means the General Partner unless another Person is selected
pursuant to Section 8.3.
"LOSS" means, for each Fiscal Year, each item of loss or deduction as
determined, recognized and classified for federal income tax purposes; provided
that (i) expenditures of the Partnership described in Code Section 705(a)(2)(B)
or treated as Code Section 705(a)(2)(B) expenditures pursuant to Treasury
regulations Section 1.704-1(b)(2)(iv)(i) shall be included as items of Loss,
(ii) upon a disposition of any Partnership asset, items of loss or deduction
arising therefrom shall be computed by reference to the asset's Book Basis on
the date of disposition rather than the asset's adjusted tax basis, (iii) upon a
distribution of any Partnership asset, whether or not in connection with the
liquidation of the Partnership, any unrealized items of loss or deduction
inherent therein which have not previously been reflected in the Partners'
Capital Accounts shall be included as items of Loss as if the asset had been
sold for its Fair Market Value on the date of distribution, (iv) if the Book
Basis of any Partnership asset is adjusted downwards upon the occurrence of a
Revaluation Event, the amount of the adjustment shall be included as an item of
Loss, and (v) if the Book Basis of any Partnership asset differs from the
adjusted tax basis of the asset, items of depreciation, amortization or other
cost recovery deductions attributable to the asset shall be determined in
accordance with the provisions of Treasury regulations Section
1.704-1(b)(2)(iv)(g)(3) in lieu of any depreciation, amortization or other cost
recovery deductions allowable for federal income tax purposes.
4
<PAGE> 9
"NET INCOME" and "NET LOSS" mean, for each Fiscal Year, the positive or
negative difference, as the case may be, between all items of Income for such
year and all items of Loss for such year; provided, that Net Income or Net Loss
for each Fiscal Year shall be computed by excluding from such computation any
item of Income or Loss specially allocated to a Partner under Section 4.2.
"ORGANIZATION COSTS" shall mean all actual out-of-pocket legal fees, costs
and expenses of the General Partner and all filing fees payable to governmental
entities associated with the formation of the Partnership.
"PARTNER" means the General Partner or the Limited Partner as the context
requires. Except where the context requires otherwise, a reference in this
Agreement to the "PARTNERS" shall mean all of the Partners of the Partnership at
the time of determination.
"PARTNERSHIP" has the meaning set forth in the first paragraph hereof.
"REVALUATION EVENT" means any of the following: (i) the acquisition of an
additional Interest by any new or existing Partner in exchange for more than a
de minimis Capital Contribution, (ii) a distribution to one or more Partners of
more than a de minimis amount of money or other property as consideration for
all or part of the Partner's Interest, or (iii) the liquidation of the
Partnership within the meaning of Treasury regulations Section
1.704-1(b)(2)(ii)(g); provided, that the General Partner may elect, in its
discretion, to treat other events as Revaluation Events or to treat any of the
above named events as not constituting Revaluation Events to the extent the
General Partner determines doing or not doing so better reflects the economic
interests of the Partners in the Partnership.
"SHARING RATIOS" means, initially, the ratio of each Partner's initial
Capital Contribution to the total initial Capital Contributions of all Partners,
as reflected on Schedule B hereto. Upon the occurrence of a Revaluation Event,
the Sharing Ratios shall be redetermined by the General Partner based on the
ratio of each Partner's Capital Account balance (as adjusted to reflect the
Revaluation Event) to the total Capital Account balances (as adjusted to reflect
the Revaluation Event) of all Partners.
"SUBSTITUTE LIMITED PARTNER" means an Assignee of a Limited Partner's
Interest that becomes a Limited Partner and succeeds, to the extent of the
Interest assigned, to the rights and powers and becomes subject to the
restrictions and liabilities of the assignor Limited Partner.
"VALUATION PARTNER" has the meaning set forth in Section 6.13(a).
1.2 TERMS DEFINED IN INVESTMENT MANAGEMENT AGREEMENT. Unless otherwise
defined in this Agreement or the context otherwise requires, terms used but not
otherwise defined in this Agreement shall have the meanings specified in the
Investment Management Agreement. The terms
5
<PAGE> 10
whose meaning is so incorporated by reference from the Investment Management
Agreement include without limitation:
Affiliate
Applicable Law
Associate
Confidential Information
GMSP Group
GMSP Principals
good faith
Governmental Authority
Person
Securities
ARTICLE II.
FORMATION
2.1 FORMATION, NAME AND PRINCIPAL OFFICE. The Partners hereby enter into
and form the Partnership for the limited purpose and scope set forth in this
Agreement. The Partnership shall be a limited partnership and, except as
provided herein, shall be governed by the Act. The name of the Partnership shall
be "GNA Investments I, L.P." The address of the principal office of the
Partnership shall be 777 Main Street, Suite 2250, Fort Worth, Texas 76102 or,
upon notice to the Limited Partner, at such other place as may be designated by
the General Partner.
2.2 OFFICE AND AGENT FOR SERVICE OF PROCESS. The Partnership shall have a
principal office located within the State of Texas at which shall be maintained
records and documents of the Partnership as required under Section 1.07 of the
Act. Unless otherwise designated by the General Partner as provided in the Act,
the registered agent for service of process on the Partnership shall be J.
Randall Chappel and the street address of the registered office of the
Partnership shall be 777 Main Street, Suite 2250, Fort Worth, Texas 76102.
2.3 PURPOSE OF THE PARTNERSHIP. The purpose of the Partnership shall be to
acquire, hold for investment, and distribute or otherwise dispose of Securities
which meet the Investment Criteria at the time of acquisition.
2.4 NAMES AND ADDRESSES OF THE PARTNERS. The name and address of each
Partner shall be set forth on Schedule B.
2.5 TERM OF THE PARTNERSHIP. The Partnership shall commence on the date of
admission of the Limited Partner pursuant to Section 3.1 and, unless the
Partnership is earlier dissolved pursuant to Article VIII, shall continue until
the close of business on the tenth (10th) anniversary of such date or until the
close of business on such later date as is provided for in a consent executed by
the General Partner and the Limited Partner.
6
<PAGE> 11
2.6 REQUIRED DOCUMENTS.
(a) Partnership Documents. The General Partner shall cause to be
filed, recorded or amended, as necessary, the Certificate of Limited Partnership
of the Partnership and any other documents required to be filed, recorded or
amended in connection with the formation or operation of the Partnership
pursuant to the laws of the State of Texas or any other jurisdiction in which
the Partnership's business is conducted.
(b) Other Documents. The Limited Partner shall execute and acknowledge
as requested by the General Partner such documents as may be necessary or
desirable to (i) comply with legal requirements applicable to the formation of
the Partnership or the operation of the Partnership's business, or (ii)
otherwise give effect to the terms of this Agreement.
(c) Special Power of Attorney. The Limited Partner hereby grants to
the General Partner a special power of attorney (with full rights of assignment)
irrevocably appointing the General Partner as the Limited Partner's
attorney-in-fact with power and authority to execute and acknowledge, in the
Limited Partner's name and on its behalf, any document described in Section
2.6(a) or (b). Such special power of attorney is coupled with an interest and
shall not be revoked by the death or disability of any Limited Partner.
ARTICLE III.
CAPITALIZATION
3.1 INITIAL CAPITAL CONTRIBUTION. Each Partner, immediately upon entering
into this Agreement, shall make the initial Capital Contribution specified for
that Partner on Schedule B.
3.2 ADDITIONAL CAPITAL CONTRIBUTIONS.
(a) General. Except as otherwise provided in Section 3.2(b) or any
nonvariable provision of the Act, no Partner shall be permitted or required to
make any additional Capital Contributions to the Partnership.
(b) Voluntary Additional Capital Contributions. If the General Partner
determines that the Partnership needs additional capital to acquire additional
Securities, for the payment of Partnership Expenses or for any other proper
Partnership purpose, the General Partner may so notify the Limited Partner and
permit voluntary additional Capital Contributions by the Limited Partner. The
General Partner shall make additional Capital Contributions from time to time to
the extent necessary to cause its aggregate Capital Contributions to equal 1.01%
of the aggregate Capital Contributions of the Limited Partner.
3.3 WITHDRAWAL AND RETURN ON CAPITAL. Except as otherwise specifically
provided in this Agreement, no Partner shall (i) have the right or power to
withdraw all or any portion of its Capital Contributions without the prior
consent of the General Partner or (ii) be entitled to receive
7
<PAGE> 12
any return on any portion of its Capital Contributions or Capital Account. Under
circumstances involving a return of any Capital Contribution, no Partner shall
have the right to receive property other than cash.
3.4 LOANS. No Partner shall be required to lend any money to the
Partnership or to guarantee any Partnership indebtedness. Any loan by a Partner
or an Affiliate or Associate of a Partner to the Partnership shall be on
commercially reasonable terms and shall bear interest at the Interest Rate.
Loans by a Partner to the Partnership shall not be considered Capital
Contributions.
3.5 LIMITATION OF LIABILITY. Except as otherwise provided by the Act or
Section 3.2, a Limited Partner shall have no liability as a Partner. A Partner
that receives a distribution (i) in violation of this Agreement or (ii) which is
required to be returned to the Partnership under the Act shall return the
distribution immediately upon demand therefor by the other Partner. A Partner
obligated to return property may, at its option, return cash equal to the Fair
Market Value of the property on the date of such return.
ARTICLE IV.
ALLOCATIONS
4.1 ALLOCATION OF NET INCOME AND NET LOSS. For each Fiscal Year or period
thereof, after first giving effect to the special allocations set forth in
Section 4.2, Net Income or Net Loss, as applicable, shall be allocated to the
Partners in proportion to their Sharing Ratios.
4.2 SPECIAL ALLOCATIONS. For each Fiscal Year or period thereof, the
following items of Income and Loss shall be specially allocated to the Partners
as follows, before allocations of Net Income or Net Loss are made pursuant to
Section 4.1:
(a) If a Partner unexpectedly receives any adjustment, allocation or
distribution described in Treasury regulations Section 1.704-1(b)(2)(ii)(d)(4),
(5) or (6), items of income and gain (including gross income) shall be specially
allocated to the Partner in an amount and manner sufficient to eliminate, to the
extent required by the Treasury regulations, the deficit balance in the
Partner's Capital Account as quickly as possible. This Section 4.2(a) shall be
interpreted consistently with Treasury regulations Section 1.704-1(b)(2)(ii)(d).
(b) To the extent an adjustment to the adjusted tax basis of any
Partnership asset under Code Sections 734(b) or 743(b) is required to be taken
into account in determining Capital Accounts under Treasury regulations Section
1.704-1(b)(2)(iv)(m), the amount of the Capital Account adjustment shall be
included in determining items of Income or Loss and treated as an item of gain
(if the adjustment increases the basis of the asset) or loss (if the adjustment
decreases the basis of the asset) and shall be specially allocated to the
Partners consistent with the manner in which their Capital Accounts are required
to be adjusted by such Treasury regulation.
8
<PAGE> 13
(c) To minimize any distortions in the manner that the Partners would
have shared distributions if the special allocations required by Section 4.2(a)
and Section 4.2(b) (the "REGULATORY ALLOCATIONS") had not been part of this
Agreement, the General Partner may specially allocate to the Partners offsetting
items of Income or Loss so that the net amounts allocated to each Partner
pursuant to Sections 4.1 and Section 4.2 will, to the extent possible, equal the
net amounts that would have been allocated to each Partner pursuant to Section
4.1 if the Regulatory Allocations had not been part of this Agreement.
4.3 OTHER ALLOCATION RULES.
(a) To reflect any varying Interests during a Fiscal Year, Net Income
and Net Loss and items of Income and Loss shall be determined by the General
Partner on a daily, monthly or other basis using any convention or method
permitted under Code Section 706 and the Treasury regulations thereunder.
(b) If the Partnership borrows money or property on a nonrecourse
basis, the General Partner, in consultation with the Partnership's tax advisors,
shall modify the allocation provisions of this Article IV to the minimum extent
necessary to ensure that allocations relating to such nonrecourse borrowing are
respected for federal income tax purposes while preserving the underlying
economic objectives of the Partners as reflected in this Agreement.
4.4 ALLOCATIONS FOR FEDERAL INCOME TAX PURPOSES.
(a) Subject to Section 4.4(b), for each Fiscal Year or period thereof,
all items of taxable income, gain, loss and deduction of the Partnership,
determined solely for federal income tax purposes, shall be allocated to the
Partners in the same manner as each correlative item of Income and Loss and Net
Income and Net Loss is allocated pursuant to the provisions of Sections 4.1, 4.2
and 4.3.
(b) In accordance with Code Section 704(c) and the Treasury
regulations thereunder, items of income, gain, loss and deduction with respect
to any Partnership asset with a Book Basis that differs from its adjusted tax
basis shall, solely for federal income tax purposes, be allocated among the
Partners so as to take account of such difference at the time it arose. Unless
otherwise approved by the Partners, such allocations shall be made utilizing the
"Traditional Method with Curative Allocations" set forth in Treasury regulations
Section 1.704-3(c).
(c) Allocations pursuant to this Section 4.4 are solely for federal
income tax purposes and shall not affect the determination of the Partners'
Capital Accounts.
4.5 WITHHOLDING TAXES. The Partnership shall withhold taxes from
distributions to, and allocations among, the Partners to the extent required by
law (as determined by the General Partner in its sole discretion). Any amount so
withheld by the Partnership with regard to a Partner shall be treated for
purposes of this Agreement as an amount actually distributed to such Partner in
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accordance with the provisions of Article V. An amount shall be considered
withheld by the Partnership if, and at the time, remitted to a Governmental
Authority without regard to whether such remittance occurs at the same time as
the distribution or allocation to which it relates; provided, that an amount
actually withheld from a specific distribution or designated by the General
Partner as withheld from a specific allocation shall be treated as if
distributed at the time such distribution or allocation occurs. To the extent
operation of the foregoing provisions of this Section 4.5 would create or
increase a deficit balance in a Partner's Capital Account, the amount of the
deemed distribution shall instead be treated as a loan by the Partnership to
such Partner, which loan shall bear interest at the Interest Rate.
ARTICLE V.
DISTRIBUTIONS
5.1 DISTRIBUTIONS.
(a) Operating Distributions. The General Partner may, from time to
time and in its sole discretion, cause the Partnership to distribute cash or
property (including Securities) to the Partners. All distributions pursuant to
this Section 5.1(a) shall be made to the Partners in proportion to their Sharing
Ratios.
(b) Liquidating Distributions. Notwithstanding the provisions of
Section 5.1(a), cash or property of the Partnership available for distribution
upon the dissolution of the Partnership (including cash or property received
upon the sale or other disposition of assets in anticipation of or in connection
with such dissolution) shall be distributed in accordance with the provisions of
Section 8.4.
(c) Limitation on Distributions. The General Partner shall use its
best efforts to ensure that no distribution shall be made to a Partner pursuant
to Section 5.1(a) or (b) if and to the extent that such distribution would:
(i) create or increase a deficit balance in a Partner's Capital
Account;
(ii) cause the Partnership to be insolvent; or
(iii) render the Limited Partner liable for a return of such
distribution under the Act.
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ARTICLE VI.
ADMINISTRATIVE PROVISIONS
6.1 RIGHTS OF THE LIMITED PARTNER.
(a) No Management. The Limited Partner shall take no part in the
management or control (within the meaning of the Act) of the Partnership's
business and shall have no right or authority to act for the Partnership or to
vote on Partnership matters other than as specifically set forth in this
Agreement or as required under the Act.
(b) Outside Activities. The Limited Partner may have business
interests and engage in business activities in addition to those relating to the
Partnership, including business interests and activities in direct competition
with the Partnership. Neither the Partnership nor any of the Partners have any
rights by virtue of this Agreement in any business venture of any other Partner.
(c) Return of Capital. The Limited Partner is not entitled to the
withdrawal or return of its Capital Contribution, except to the extent, if any,
that distributions are made pursuant to this Agreement or upon termination of
the Partnership.
(d) Information. In addition to other rights provided by this
Agreement, the Investment Management Agreement or by Applicable Law, the Limited
Partner has the following rights relating to the Partnership:
(i) The Limited Partner has the right to inspect and copy any of
the Partnership's books for a proper purpose related to its interest in the
Partnership whenever circumstances render it just and reasonable, but such
inspection and copying is at the Limited Partner's own expense.
(ii) The Limited Partner has the right for a proper purpose
related to such Person's interest in the Partnership to have on demand true and
full information of all things affecting the Partnership and a formal accounting
of Partnership affairs whenever circumstances render it just and reasonable, but
the furnishing of such information or conducting such accounting is at the
Limited Partner's own expense.
(iii) The Limited Partner has the right, upon notifying the
General Partner of a proper purpose related to the Limited Partner's interests
in the Partnership, to have furnished to it, at its expense, a copy of the names
and amounts in interest of all Partners as of the date specified in its written
request.
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(iv) The Limited Partner has the right to have, on demand and
without charge, true copies of: (i) this Agreement, the Certificate of Limited
Partnership and all amendments or restatements thereof; and (ii) any of the tax
returns of the Partnership.
6.2 MANAGEMENT BY THE GENERAL PARTNER. The General Partner shall devote
such time and attention, and shall diligently perform those duties as are
reasonably necessary to manage effectively the Partnership's business; provided,
that to the extent not inconsistent with the foregoing requirements of this
Section 6.2 or the Investment Management Agreement, the General Partner shall be
permitted to conduct other affairs as described in Section 6.5.
6.3 POWERS OF THE GENERAL PARTNER. Subject to the provisions of the Act,
this Agreement and the Investment Management Agreement, the General Partner
shall have the exclusive power to perform all acts associated with the
management and operation of the Partnership including, without limitation, the
right to:
(a) Receive, buy, sell, exchange, trade and otherwise deal in and with
Securities and other property of the Partnership;
(b) Acquire Securities on the basis of investment representations and
subject to transfer restrictions;
(c) Make all decisions with respect to the voting of Partnership
Securities;
(d) Cause the Partnership to enter into, make and perform such
contracts, agreements and other undertakings, and to do such other acts, as it
may deem necessary or advisable for, or as may be incidental to, the conduct of
the business of the Partnership;
(e) Open, conduct business regarding, draw checks or other payment
orders upon, and close cash, checking, custodial or similar accounts with banks
or brokers on behalf of the Partnership and pay the customary fees and charges
applicable to transactions in respect of all such accounts; and
(f) Assume and exercise all powers and responsibilities granted a
general partner by the laws of the State of Texas.
Without limitation upon the foregoing, any contract, agreement, deed, lease,
note or other document or instrument executed on behalf of the Partnership by
the General Partner shall be deemed to have been duly executed, the Limited
Partner's signature shall not be required in connection with the foregoing, and
third parties shall be entitled to rely upon the General Partner's authority
under the provisions of this sentence without otherwise ascertaining that the
requirements of this Agreement have been satisfied.
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6.4 LIMITATIONS ON POWERS OF THE GENERAL PARTNER. The General Partner,
without the prior consent of the Limited Partner, shall have no authority to:
(a) Perform any act in contravention of this Agreement or the
Investment Management Agreement or, subject to the provisions of Sections 6.5
and 6.6, any act which is detrimental to or incompatible with the business of
the Partnership;
(b) Possess Partnership property, or assign its General Partner's
rights in specific Partnership property, for other than a Partnership purpose;
(c) Admit a Person as an additional General Partner of the
Partnership;
(d) Receive any compensation or benefit from any issuer of any
Securities held by the Partnership or any of its Affiliates or Associates that
is not shared pro rata with the Partnership in accordance with the amount
invested, other than as specifically permitted pursuant to Section 6.5(b);
(e) Cause the Partnership to make any borrowings for the purpose of
acquiring or carrying Securities, provided that any Partner may advance funds to
the Partnership in accordance with Section 3.4 for the purpose of permitting the
Partnership to meet its obligations to pay Expenses;
(f) Invest any Partnership funds in Securities of an issuer in which
the General Partner or any member of the GMSP Group is an investor on a basis
different from that on which the Partnership invests;
(g) Cause the Partnership to enter into any agreement that would
commit the Partnership to purchase Securities that are not fully paid and
non-assessable at the time of purchase or that would commit the Partnership to
make future "follow-on" investments in issuers in addition to the Securities
acquired pursuant to a specific purchase agreement; or
(h) Commit the Partnership to pay any net profits interest or convey
any participation or other contingent interest in Partnership Securities to any
investment banker, broker, finder or other person on account of the
Partnership's investment in such Securities.
6.5 OTHER VENTURES.
(a) The Limited Partner (i) acknowledges that the General Partner and
its Affiliates, Associates, partners, officers, directors, agents and employees
are or may be involved in other financial, investment and professional
activities, including, but not limited to, management of other investment funds,
purchases and sales of Securities (including, without limitation, venture
capital and leveraged buy-out investment Securities), investment and management
counseling, and serving as officers, directors, advisors and agents of other
companies; and (ii) agrees that the General Partner
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and its Affiliates, Associates, partners, officers, directors, agents and
employees may engage for their own accounts and for the accounts of others in
any such ventures and activities as and to the full extent provided in this
Agreement and in Section 5 of the Investment Management Agreement.
(b) No provision of this Agreement or the Investment Management
Agreement shall be construed to preclude the partners, Affiliates or employees
of the General Partner from acting as a director or officer (or any similar
capacity) to any corporation, partnership, trust or other business entity in
which the Partnership has acquired Securities, or from receiving compensation or
profit therefor. In connection with the foregoing, the Partners contemplate that
partners, Affiliates or employees of the General Partner may serve on the board
of directors of companies in which the Partnership acquires Securities, and any
compensation received by such persons in connection with such service on the
board of directors of any such company, which compensation is consistent with
the compensation payable to other members of any such board of directors, will
not be payable to the Partnership or deemed a reduction from the fees payable to
the General Partner pursuant to the Investment Management Agreement and is
specifically authorized by the terms of this Agreement.
6.6 DUTIES WITH RESPECT TO INVESTMENT DECISIONS.
(a) The Limited Partner recognizes that the Partnership will
participate with the General Partner as a co-investor in the acquisition of
certain Securities to the extent that the General Partner determines in its sole
discretion, provided that the General Partner shall have no obligation to offer
to the Partnership any particular co-investment opportunity in each Security
acquired by the General Partner that otherwise satisfies the Investment
Criteria. In the event that the General Partner does permit the Partnership to
co-invest with the General Partner, the amount of any such co-investment will be
set by the General Partner in its sole discretion, and the decision of the
General Partner shall be final. The terms of any co-investment by the
Partnership shall be on terms identical to or substantially similar and no less
favorable in any material respect than the terms of the investment made by the
General Partner. No such decisions by the General Partner shall be considered a
breach of this Agreement or its fiduciary duties to the Limited Partner or a
breach of the Investment Management Agreement. Furthermore, to the extent that
any decisions made pursuant to this Section 6.6(a) are deemed to involve an
actual or potential conflict of interest, such conflict of interest is hereby
specifically authorized pursuant to Section 5(b) of the Investment Management
Agreement.
(b) The Limited Partner recognizes that decisions concerning
investments and potential investments that meet the Investment Criteria involve
the exercise of judgment, are highly speculative and could involve the complete
loss of the Partnership's investment, and agrees that Investment Management
Agreement, as specifically modified by this Agreement, establishes the
parameters of the General Partner's duties and responsibilities with respect
thereto.
(c) The Partners also recognize that the General Partner in its sole
discretion may offer co-investment opportunities to its partners, its designated
Affiliates and/or any other person that the General Partner shall determine in
its sole discretion in the same manner as the Partnership will co-invest with
the General Partner. It is the intention of the General Partner to so offer
co-investment
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opportunities, when practicable and feasible, with respect to each investment
made by the Partnership, provided that the General Partner shall be under no
obligation to do so. The amount of any such co-investment will be set by the
General Partner in its sole discretion, subject to acceptance by the potential
investor.
6.7 PAYMENT OF ORGANIZATION COSTS AND EXPENSES.
(a) The Partnership shall pay, or shall reimburse the General Partner
or any Affiliate thereof for its payment of, Organization Costs.
(b) The Partnership shall pay, or shall reimburse the General Partner
or any Affiliate thereof for its payment of, all Expenses.
(c) To the extent any Expenses or other costs are attributable to any
of the Partnership and other co-investors (including the General Partner
investing for its own account), such costs shall be allocated among such
entities based on their respective (i) interests in such Securities if such
Expenses are attributable to such Securities, or (ii) aggregate amounts of
capital agreed to be contributed and/or loaned to them by their respective
partners and Affiliates if such costs are not attributable to any specific
acquisition of Securities.
(d) Other than the compensation payable pursuant to Section 4 of the
Investment Management Agreement (as described in Section 6.8 below) and for the
payment of Expenses described in above in this Section 6.7, the General Partner
shall not be entitled to any other payments from the Partnership or the Limited
Partner for its services as the General Partner of the Partnership.
6.8 PARTNER COMPENSATION. No Partner shall be entitled to any compensation
for services provided by such Partner to, or for the benefit of, the
Partnership, except that the General Partner may receive and retain compensation
as provided in the Investment Management Agreement, and the Limited Partner's
Sharing Ratio of Securities acquired by the Partnership shall be taken into
consideration in calculating the compensation payable to the General Partner
pursuant to Section 4 of the Investment Management Agreement as if such
Securities were owned directly by the Limited Partner.
6.9 FILING OF TAX RETURNS. The General Partner shall prepare and file, or
cause to be prepared and filed, a federal information tax return in compliance
with Code Section 6031 and all other returns or reports required to be filed by
the Partnership by any foreign, federal, state and local tax authorities.
6.10 TAX MATTERS PARTNER.
(a) General. The General Partner is hereby designated the "tax matters
partner" of the Partnership within the meaning of Code Section 6231(a)(7).
Except as specifically provided in the Code and the regulations issued
thereunder, the General Partner in its sole discretion shall have
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exclusive authority to act for or on behalf of the Partnership with regard to
tax matters, including, without limitation, the authority to make (or decline to
make) any available tax elections.
(b) Notice of Inconsistent Treatment of Partnership Item. No Partner
shall file a notice with the Internal Revenue Service under Code Section 6222(b)
in connection with such Partner's intention to treat an item on such Partner's
federal income tax return in a manner which is inconsistent with the treatment
of such item on the Partnership's federal income tax return unless such Partner
has, not less than thirty (30) days prior to the filing of such notice, provided
the General Partner with a copy of the notice and thereafter in a timely manner
provides such other information related thereto as the General Partner shall
reasonably request.
(c) Notice of Settlement Agreement. Any Partner entering into a
settlement agreement with the Secretary of the Treasury which concerns a
Partnership item shall notify the other Partner of such settlement agreement and
its terms within sixty (60) days from the date thereof.
6.11 RECORDS AND FINANCIAL STATEMENTS.
(a) The General Partner shall cause the Partnership to maintain or
cause to be maintained true and proper books, records, reports, and accounts in
which shall be entered all transactions of the Partnership. Such books, records,
reports and accounts shall be located at the principal place of business of the
Partnership and shall be available to any Partner for inspection and copying
during reasonable business hours.
(b) The books and records of the Partnership may in the Limited
Partner's discretion and at its expense be audited annually by an independent
accounting firm selected by the Limited Partner from time to time. For purposes
of determining and maintaining the Partners' Capital Accounts, the books of
account of the Partnership shall be maintained in accordance with federal income
tax principles (adjusted as provided in this Agreement) and the accrual method
of accounting. Additionally, the General Partner shall cause the Partnership's
financial books and records to be maintained in compliance with GAAP.
(c) Within a reasonable time after each Fiscal Year, a copy of the
following shall be mailed or otherwise furnished to each Partner and shall
include (i) a balance sheet of the Partnership, (ii) income and cash flow
statements of the Partnership, (iii) a statement of changes in the Partners'
Capital Account balances from the last day of the prior Fiscal Year, and (iv) if
applicable, the report of the results of the examination by the Partnership's
independent auditors .
(d) Upon completion of any valuation of the Partnership's assets in
accordance with the provisions of Section 6.13, the Valuation Partner shall
furnish to each Partner a statement showing (i) the net worth of the Partnership
and the Fair Market Value of each Partnership asset and (ii) the Capital Account
balance of such Partner.
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(e) The General Partner shall keep or cause to be kept the following
records at the principal office of the Partnership or make them available at
that office within five days after the date of receipt of a written request
therefor pursuant to Section 6.1:
(i) a current list that states (w) the name and mailing address
of each Partner, separately identifying in alphabetical order each general
partner and limited partner; (x) the last known street address of the business
or residence of each general partner; (y) the percentage or other interest in
the Partnership owned by each partner; and (z) the names of the partners who are
members of each specified class or group established pursuant to this Agreement;
(ii) copies of the Partnership's federal, state, and local
information or income tax returns for each of the Partnership's six most recent
tax years;
(iii) a copy of this Agreement and the Certificate of Limited
Partnership, all amendments or restatements, executed copies of any powers of
attorney under which this Agreement, the Certificate of Limited Partnership, and
all amendments or restatements to this Agreement and the Certificate have been
executed, and copies of any document that creates, in the manner provided by
this Agreement, classes or groups of partners;
(iv) a written statement of: (x) the amount of the cash
contribution and a description and statement of the agreed value of any other
contribution made by each Partner, and the amount of the cash contribution and a
description and statement of the agreed value of any other contribution that the
Partner has agreed to make in the future as an additional contribution; and (y)
the date on which each Partner in the Partnership became a Partner; and
(v) books and records of account of the Partnership.
Any records maintained by the Partnership in the regular course of its business
may be kept on, or be in the form of, punch cards, magnetic tape, photographs,
micrographics, computer disks, or any other information storage device, if the
records so kept are convertible into clearly legible written form within a
reasonable period of time. The names, the business, residence, or mailing
addresses, and the capital contributions to the Partnership of the Partners are
as shown on the books and records of the Partnership.
6.12 TAX REPORTS TO PARTNERS. Within ninety (90) days after the end of each
Fiscal Year, the Partnership shall prepare and mail, or cause to be prepared and
mailed, to each Partner and, to the extent necessary, to each former Partner (or
its legal representative), a report setting forth in sufficient detail
information which will enable the Partner or former Partner (or its legal
representative) to prepare their respective federal income tax returns in
accordance with the laws, rules and regulations then prevailing.
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6.13 VALUATION OF PARTNERSHIP ASSETS.
(a) The General Partner (or the Liquidator, if appropriate, either
being the "VALUATION PARTNER") shall value the Partnership's assets upon (i) the
occurrence of any Revaluation Event and (ii) whenever otherwise required by this
Agreement or determined by the Valuation Partner in its sole discretion.
(b) In determining the value of Partnership property or a Partner's
Interest, or in any accounting among the Partners:
(i) No value shall be placed on the goodwill, going concern
value, name, records, files, statistical data or similar assets of the
Partnership not normally reflected in the Partnership's accounting records, but
there shall be taken into consideration any items of income earned but not yet
received, expenses incurred but not yet paid, liabilities fixed or contingent,
and prepaid expenses to the extent not otherwise reflected in the books of
account as well as the Fair Market Value of options or commitments to purchase
or sell Securities pursuant to agreements entered into on or prior to the
valuation date; and
(ii) Securities held by the Partnership shall be valued at their
Fair Market Value as defined in the Investment Management Agreement.
6.14 CONFIDENTIALITY. The Partners acknowledge and agree that all
Confidential Information provided to or by them in respect of the Partnership
shall be kept confidential as provided in Section 11 of the Investment
Management Agreement.
ARTICLE VII.
TRANSFER OF A PARTNERSHIP INTEREST; WITHDRAWALS
7.1 TRANSFERS BY THE LIMITED PARTNER.
(a) The Limited Partner may transfer its Interest only with the prior
consent of the General Partner, which consent shall not unreasonably be
withheld.
(b) No Assignee of the Limited Partner shall become a Substitute
Limited Partner without the consent of the General Partner, which consent shall
not unreasonably be withheld.
(c) Notwithstanding any other provision hereof, any successor to all
or a portion of the Limited Partner's Interest shall be bound by the provisions
of this Agreement. Prior to recognizing any transfer in accordance with this
Article VII, the General Partner may require the transferring Limited Partner to
execute and acknowledge an instrument of assignment in form and substance
reasonably satisfactory to the General Partner and may require the Assignee to
execute an amendment to this Agreement and to assume all obligations of the
assigning Limited Partner. An Assignee who is not a Partner at the time of the
transfer shall be entitled to the allocations and
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distributions attributable to the Interest assigned to it and to transfer and
assign such Interest in accordance with the terms of this Agreement; provided,
that such Assignee shall not be entitled to the other rights of a Limited
Partner unless and until such Assignee becomes a Substitute Limited Partner.
Notwithstanding the foregoing, the Partnership and the General Partner shall
incur no liability for allocations and distributions made in good faith to the
transferring Limited Partner until a written instrument of assignment (as
approved by the General Partner) has been received by the Partnership and
recorded on its books and the effective date of the assignment has passed.
7.2 WITHDRAWAL BY A LIMITED PARTNER.
(a) The Interest of a Limited Partner may not be withdrawn from the
Partnership in whole or in part, other than with the consent of the General
Partner, which consent shall not unreasonably be withheld.
(b) In the event of the withdrawal of the Limited Partner, the General
Partner, with the approval of the Limited Partner which shall not unreasonably
be withheld, shall provide for payment to the withdrawing Limited Partner for
its withdrawn Interest by either of the following alternatives:
(i) The General Partner may cause the Partnership to distribute
to the withdrawing Limited Partner an amount equal to any positive balance in
the withdrawing Limited Partner's Capital Account. The General Partner may cause
the Partnership to make the distribution in respect of any portion of the
Interest of a withdrawing Limited Partner in cash or in kind; provided, that
unless the withdrawing Limited Partner otherwise consents, the withdrawing
Limited Partner shall not be required to receive an in kind distribution of any
asset which exceeds the portion of such asset that would have been distributed
to the withdrawing Limited Partner if the Partnership had dissolved on the
effective date of the withdrawal and undivided interests in all Partnership
assets were distributed to the Partners pro rata in proportion to their
respective interest in the liquidation proceeds under Section. 8.4. If a
distribution is to be made in kind and if such distribution cannot be made in
full because of restrictions on the transfer of Securities or for any other
reason, the distribution may be delayed until an effective transfer and
distribution may be made, and Securities for transfer in respect of the
withdrawing Limited Partner's Interest shall be designated as such. The
designated Securities may nevertheless be sold by the General Partner, provided
that the General Partner remits the cash proceeds therefrom to the withdrawing
Limited Partner.
(ii) The General Partner may sell the Interest of the withdrawing
Limited Partner for cash and remit the proceeds of such sale to the withdrawing
Limited Partner. The sale price for the Interest of the withdrawing Limited
Partner shall be an amount equal to the lesser of: (1) the withdrawing Limited
Partner's positive Capital Account balance, if any; or (2) the withdrawing
Limited Partner's aggregate Capital Contributions.
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(iii) If only a portion of the Limited Partner's Interest is
withdrawn, payment under the foregoing provisions of this Section 7.2(b) shall
be adjusted to provide for payment only in connection with such withdrawn
Interest.
7.3 TRANSFERS BY THE GENERAL PARTNER. The General Partner shall not
transfer its Interest as General Partner without the prior consent of the
Limited Partner, which consent may be granted or withheld in the Limited
Partners's sole discretion.
7.4. WITHDRAWAL BY THE GENERAL PARTNER. The General Partner may withdraw as
a General Partner at any time upon thirty (30) days' prior written notice to the
Limited Partner.
ARTICLE VIII
DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP
8.1 DISSOLUTION EVENTS. The Partnership shall be dissolved only upon the
occurrence of any of the following events:
(a) Expiration of the Partnership term as provided in Section 2.5;
(b) the agreement of the General Partner and the Limited Partner to
dissolve the Partnership;
(c) the Bankruptcy, dissolution, termination of existence or
occurrence of any other event of withdrawal of a General Partner within the
meaning of Section 4.02 of the Act, unless (i) there remains at least one
General Partner that continues the Partnership's business, or (ii) within ninety
(90) days after the event of withdrawal, the Limited Partner agrees in writing
to continue the Partnership's business and to the appointment, effective as of
the date of the event of withdrawal, of one or more new General Partners; or
(d) the entry of a decree of judicial dissolution under Section 8.02
of the Act.
8.2 CONVERSION OF GENERAL PARTNER INTEREST TO A LIMITED PARTNER INTEREST.
Unless otherwise determined by the Limited Partner, if the Partnership is
continued and not wound up on the occurrence of an event of withdrawal of a
General Partner within the meaning of Section 4.02 of the Act, the Interest of
the withdrawn General Partner shall automatically be converted to a Limited
Partner Interest effective as of the date of the event of withdrawal; provided,
that this Section 8.2 shall not be construed to preclude or to be in lieu of any
cause of action the Partnership or the other Partner may have as a result of a
General Partner's wrongful withdrawal.
8.3 WINDING UP OF THE PARTNERSHIP. Upon the occurrence of an event of
dissolution, the Partnership shall continue solely for the purposes of winding
up its business and affairs in an orderly manner, liquidating its assets and
satisfying the claims of its creditors and Partners, and no Partner shall take
any action that is inconsistent with such. To the extent consistent with the
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foregoing, this Agreement shall continue in effect until the Partnership's
property has been distributed or applied in satisfaction of Partnership
liabilities and a certificate of cancellation has been filed for the Partnership
pursuant to the Act. The General Partner or, if the General Partner has
withdrawn, a liquidator or liquidating committee appointed by the Limited
Partner (in either case, the "LIQUIDATOR") shall be responsible for winding up
the Partnership. The Liquidator shall cause the Partnership's property to be
liquidated as promptly as is consistent with obtaining the Fair Market Value
thereof; provided, that (a) the Liquidator may distribute any assets of the
Partnership in kind and subject to any indebtedness secured thereby (except that
in kind distributions shall be subject to the provisions of Section 7.2(b)(i)),
and (b) the Liquidator may, in its sole and absolute discretion, retain and
distribute as collected any deferred payment obligation owed to the Partnership.
The Liquidator shall have all of the powers of the General Partner to the extent
consistent with the Liquidator's obligations and shall be entitled to the
benefit of the provisions of Article IX during the winding up.
8.4 APPLICATION OF PROCEEDS OF LIQUIDATION. During or upon completion of
the winding up, the proceeds of liquidation and other assets of the Partnership
shall be applied and distributed in one or more installments in the following
order and priority:
(a) to the payment, or provision for payment, of the Expenses of
winding up;
(b) to the payment, or provision for payment, of creditors of the
Partnership (including Partners other than in respect of distributions) in the
order of priority provided by law;
(c) to the establishment of any reserves deemed necessary or
appropriate by the Liquidator to provide for contingent or unforeseen
liabilities of the Partnership; and
(d) the balance (including reductions in reserves established pursuant
to Section 8.4(c)) shall be distributed to the Partners in accordance with the
positive balances of their Capital Accounts, determined after taking into
account all Capital Account adjustments for the current and all prior periods.
8.5 RESTORATION OBLIGATION. No Partner shall have an obligation to restore
any deficit balance in its Capital Account.
8.6 TIMING OF LIQUIDATING DISTRIBUTIONS. To the extent reasonably
practicable, the distributions described in Section 8.4(d), if any, shall be
made to the Partners before the end of the taxable year in which the Partnership
is liquidated (within the meaning of Treasury regulations Section
1.704-1(b)(2)(iv)(g)(3)) or, if later, within ninety (90) days after the date of
such liquidation.
8.7 LIQUIDATING TRUST. In the discretion of the Liquidator, all or any
proportionate part of the distributions that would otherwise be made to the
Partners pursuant to Section 8.4(d) may be distributed to a trust established by
the Liquidator for the benefit of the Partners and for the purposes of
liquidating Partnership assets, collecting amounts owed to the Partnership or
paying any
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contingent or unforeseen obligations of the Partnership. The assets of such
trust shall be distributed to the Partners from time to time, in the reasonable
discretion of the trustee (who may or may not be the Liquidator or an Affiliate
of the Liquidator), in the same proportions as the amounts distributed to such
trust by the Partnership would otherwise have been distributed to them pursuant
to Section 8.4(d).
ARTICLE IX.
LIABILITY AND INDEMNIFICATION OF THE GENERAL PARTNER
9.1 LIABILITY.
(a) The liability of the General Partner, its officers, directors and
employees, and other members of the GMSP Group in respect of their actions under
this Agreement shall be limited as and to the extent provided in Section 9 of
the Investment Management Agreement.
(b) All debts and obligations of the Partnership shall be paid or
discharged first with the assets of the Partnership (including Capital
Contributions from the Partners), and the General Partner shall not be obligated
to pay or discharge any such debt or obligation with its personal assets unless
the General Partner is required to do so pursuant to the Act or other applicable
law and to the extent that the documents creating such debts or obligations do
not otherwise release the General Partner from such obligation.
9.2 INDEMNIFICATION. The Partnership shall indemnify and hold harmless the
General Partner and the GMSP Principals in respect of their actions under this
Agreement as and to the extent provided in the Investment Management Agreement.
ARTICLE X.
GENERAL PROVISIONS
10.1 SPECIAL MEETINGS. Subject to the provisions of the Act and subject to
the right of any Partner to waive notice of any meeting, the General Partner may
call a special meeting of all Partners at any reasonable time upon not less than
ten (10) nor more than sixty (60) days notice.
10.2 ENTIRE AGREEMENT. This Agreement and the Investment Management
Agreement contain the entire understanding among the Partners and supersede any
prior written or oral agreement between them respecting the Partnership. There
are no representations, agreements, arrangements, or understandings, oral or
written, among the Partners relating to the Partnership which are not fully
expressed in this Agreement or the Investment Management Agreement.
10.3 AMENDMENTS. This Agreement is subject to amendment only with the
consent of the General Partner and the Limited Partner.
22
<PAGE> 27
10.4 GOVERNING LAW. All questions with respect to the interpretation of
this Agreement and the rights and liabilities of the Partners shall be governed
by the laws of the State of Texas without regard to conflict of laws principles.
10.5 SEVERABILITY. If any one or more of the provisions of this Agreement
is determined to be invalid or unenforceable, such provision or provisions shall
be deemed severable from the remainder of this Agreement and shall not cause the
invalidity or unenforceability of the remainder of this Agreement.
10.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and when so executed, all of such counterparts shall constitute a
single instrument binding upon all parties notwithstanding the fact that all
parties are not signatory to the original or to the same counterpart.
10.7 SURVIVAL OF RIGHTS. Subject to the restrictions against unauthorized
assignment or transfer set forth in this Agreement, the provisions of this
Agreement shall inure to the benefit of and be binding upon each Partner and
such Partner's heirs, devised, legatees, personal representatives, successors,
and assigns.
10.8 NOTICES. Any notice required or permitted to be given under this
Agreement or the Act shall be in writing and shall be deemed duly given when as
provided in Section 13 of the Investment Management Agreement.
10.9 CONSENTS. All consents, agreements and approvals provided for or
permitted by this Agreement shall be in writing and signed copies thereof shall
be retained with the books of the Partnership.
10.10 NO PARTITION. Except as otherwise permitted by this Agreement, no
Partner shall have the right, and each Partner does hereby agree that it shall
not seek, to cause a partition of the Partnership's property whether by court
action or otherwise.
10.11 REPRESENTATIONS BY LIMITED PARTNER. The Limited Partner hereby
represents and warrants that, with respect to its Interest: (i) it is acquiring
or has acquired such Interest for purposes of investment only, for its own
account, and not with a view to resell or distribute the same or any part
thereof; and (ii) no other Person has any interest in such Interest or in the
rights of the Limited Partner under this Agreement. The Limited Partner also
represents and warrants to the Partnership and the other Partners that it
acknowledges that the Securities that may be purchased by the Partnership will
be speculative in nature and that it has the business and financial knowledge
and experience necessary to acquire its Interest in the amount of its Capital
Contributions to the Partnership on the terms contemplated herein and that it
has the ability to bear the risks of such investment (including the risk of
sustaining a complete loss of all such Capital Contributions) without the need
for the investor protections provided by the registration requirements of the
Securities Act of 1933, as amended.
23
<PAGE> 28
* * * * *
[Signature Pages to Follow]
24
<PAGE> 29
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
GENERAL PARTNER:
GOFF MOORE STRATEGIC PARTNERS, L.P.
By: GMSP Operating Partners, L.P., its general partner
By: GMSP, L.L.C., its general partner
By:/s/ John C. Goff
-----------------------------------------------
John C. Goff, Managing Principal
By:/s/ J. Randall Chappel
-----------------------------------------------
J. Randall Chappel, Principal
LIMITED PARTNER:
GAINSCO, INC.
By: /s/ Glenn W. Anderson
---------------------------------------------------
Glenn W. Anderson, President
25
<PAGE> 30
SCHEDULE A
INVESTMENT CRITERIA
The General Partner shall seek investments for the Partnership in issuers
related in any manner to the technology industry.
The Partnership will invest in the Securities of issuers only in the event
that the General Partner is also acquiring Securities of such issuers for its
own account in the same transaction.
The Partnership shall not invest more that $400,000 in Securities of any
particular issuer.
Partnership investments will be highly speculative with a view towards
generating high rates of return.
The Partnership expects to invest in Securities in private transactions
exempt from the registration requirements of the Securities Act of 1933, as
amended. Such Securities will typically have significant restrictions on
transfer, including restrictions imposed by contract and applicable securities
laws.
Partnership investments will be made in issuers in various stages in the
venture capital financing process, including seed, early or late round
financings.
26
<PAGE> 31
SCHEDULE B
<TABLE>
<CAPTION>
INITIAL CAPITAL SHARING RATIOS
--------------- --------------
CONTRIBUTION
---------------
<S> <C> <C>
GENERAL PARTNER:
Goff Moore Strategic Partners, L.P. $ 20,200 1%
777 Main Street, Suite 2250
Fort Worth, Texas 76102
LIMITED PARTNER:
GAINSCO, INC. 2,000,000 99%
500 Commerce Street
Fort Worth, Texas 76102-5439
========== ===
Total Initial General and $2,020,200 100%
Limited Partner Contributions
</TABLE>
<PAGE> 1
[CLIENTSOFT LOGO]
EXHIBIT 10.16
CLIENTSOFT INC.
8 SKYLINE DRIVE
HAWTHORNE, NY 10532
PROFESSIONAL SERVICE AGREEMENT
- --------------------------------------------------------------------------------
CUSTOMER: GAINSCO, INC. CONTACT: RICK LAABS SENIOR VICE-PRESIDENT
INFORMATION TECHNOLOGIES
Address: 500 Commerce Street, Fort Worth, Texas 76102
This Agreement is made and effective as of the 22nd day of October, 1999 (the
"Effective Date"), by and between ClientSoft Inc. a Delaware Company
("ClientSoft"), with offices at 8 Skyline Drive, Hawthorne, NY 10532 and the
Customer.
WHEREAS, Customer desires ClientSoft to provide certain professional services to
the Customer; and
WHEREAS, ClientSoft has agreed to provide professional services to the Customer
as hereinafter more particularly described and subject to and in accordance with
the terms and conditions hereinafter appearing.
NOW THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, ClientSoft and Customer hereby agree as follows:
1. PROFESSIONAL SERVICES AND TERM
a. ClientSoft will provide certain professional services ("Professional
Services," as more fully described on Exhibit A annexed hereto) to
assist Customer in connection with the Customer's use of
ClientSoft's products and solutions. The Customer is solely
responsible for determining its objectives and obtaining its desired
results from the Professional Services to be provided by ClientSoft
pursuant to this Agreement. Exhibit A annexed hereto sets forth the
fees to be paid by Customer to ClientSoft for the Professional
Services to be provided in accordance with the provisions of this
Agreement.
b. ClientSoft will endeavor to provide the Professional Services on a
timely basis, subject to the availability of qualified personnel and
the difficulty and scope of the Professional Services.
c. ClientSoft may assign, reassign and substitute personnel at any time
and may provide the same or similar services to any other third party.
d. The Professional Services to be rendered to the Customer shall, except
as otherwise agreed to by the parties, be rendered at a location
specified by ClientSoft.
e. The term of this Agreement shall commence upon the date first above
written and shall terminate (unless sooner terminated pursuant to the
provisions of Section 7.a. or Section 8.b. of this Agreement) upon the
date of payment by the Customer to ClientSoft of all fees and expenses
due to ClientSoft pursuant to the terms of this Agreement.
f. ClientSoft personnel shall consist of ClientSoft employees and
consultants engaged by ClientSoft for the design of solutions and
performance of Professional Services.
2. RIGHTS IN WORK PRODUCT/PERSONNEL
a. Any customer-specific documentation, designs or plans developed by
ClientSoft personnel solely in connection with and unique to the
performance of Professional Services under this Agreement shall be the
exclusive property of Customer.
b. The Customer acknowledges and agrees that, except as is expressly
provided in Section 2.a. above, no right, title or interest whatsoever
(express or implied) in or to any documentation, ideas, concepts, know
how, data processing or other techniques used or developed by
ClientSoft personnel (either alone or jointly with the Customer) in
connection with the performance of the Professional Services hereunder
is transferred or granted by ClientSoft to Customer.
c. During the term of this Agreement and for a period of twelve (12)
months thereafter, neither party shall, without the prior written
approval of the other party, solicit the services of or make an offer
of employment to any person who is or was, as the case may be, an
employee or consultant of the other party during the term of this
Agreement. In case of breach, the parties agree to liquidated damages
of $50,000 per person.
3. INDUSTRY STANDARDS/DISCLAIMER OF WARRANTY
a. ClientSoft will provide the Professional Services to Customer in a
good and workmanlike manner in accordance with normal industry
standards.
b. EXCEPT AS OTHERWISE EXPRESSLY STATED IN THIS AGREEMENT, CLIENTSOFT
MAKES AND THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, BY OPERATION
OF LAW OR OTHERWISE, INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTY
OF FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE SOLUTIONS,
PROFESSIONAL SERVICES AND/OR THE WORK PRODUCT PROVIDED BY CLIENTSOFT
TO CUSTOMER HEREUNDER.
4. CUSTOMER RESPONSIBILITIES
Customer shall:
a. Assist ClientSoft personnel engaged in the performance of the
Professional Services in the clarification and understanding of any
matter relating to the Solution and Professional Services which the
Customer requires ClientSoft to perform under this Agreement, as the
same are described in Exhibit A hereto.
b. Provide ClientSoft with the name of Customer's employee who has been
designated by the Customer as the "Project Manager" and who has
authority to make decisions on behalf of the Customer with respect to
matters relating to the Solution and Professional Services to be
provided hereunder. Such Project Coordinator shall be familiar with
the objectives to be realized by the Customer in connection with the
Solution and Professional Services.
c. Provide to ClientSoft's personnel, for such periods of time and at
such times as are reasonably required by ClientSoft, access to and use
of any of Customer's systems and/or equipment, including without
limitation Customer's computer system and/or communications network,
which is required to enable the performance by ClientSoft of the
Professional Services.
d. Make available to ClientSoft personnel such office space, computer
equipment, customer systems access, furniture and use of a
telephone(s) as may be required by ClientSoft to facilitate
ClientSoft's performance at the Customer's facility, as deemed
appropriate by ClientSoft.
5. PAYMENT
a. ClientSoft shall invoice Customer at the end of each phase (if on a
fixed based contract) or month (if on a time materials basis) for all
Professional Services performed by ClientSoft during such month in
accordance with Exhibit A annexed hereto. ClientSoft's invoice shall
reflect the number of work days expended by ClientSoft with respect to
the creation of the solution or Professional Services to be provided
pursuant to this Agreement. In addition, ClientSoft's invoice shall
reflect any travel, living and accommodation charges which have been
incurred by ClientSoft personnel in providing solution development
and/or Professional Services at a Customer facility which is located
outside of a fifty (50) mile radius of the ClientSoft facility at
which such ClientSoft personnel are based.
b. In the event that Customer requires any or all Professional Services
to be performed on a Saturday, Sunday or public holiday observed by
ClientSoft, the applicable hourly or other rates (as set forth in
Exhibit A) charged by ClientSoft to the Customer shall be subject to
an overtime premium of fifty (50%) percent of the applicable rate
charged by ClientSoft pursuant to Exhibit A.
c. Customer shall make payment of all invoices rendered by ClientSoft to
Customer, pursuant to this Section 5, within thirty (30) days of the
date of each invoice. Customer agrees to pay a late payment charge
computed and payable monthly at the rate of one and one half (1 1/2%)
percent per month or the maximum late payment charge permitted by law,
whichever is less, on any
1
<PAGE> 2
d. amounts which are not paid by the Customer within the aforesaid
thirty (30) day payment period and reasonable attorney costs incurred
in the collection process.
e. Customer will pay any taxes ClientSoft becomes obligated to pay by
virtue of this Agreement, exclusive of taxes based upon the net income
of ClientSoft.
6. LIMITATION OF LIABILITY
a. ClientSoft shall not be liable for any indirect, consequential,
incidental or special damages sustained by the Customer in connection
with or arising out of this Agreement, even if ClientSoft knew or
should have known of the possibility of such damages.
b. ClientSoft's entire liability and Customer's sole and exclusive remedy
for direct damages from any cause relating to or arising out of this
Agreement, regardless of the form of action, whether in contract or in
tort (including negligence) or otherwise, shall not exceed in the
aggregate the lesser of Ten Thousand ($10,000) Dollars or the charges
actually paid by the Customer pursuant to this Agreement for the
Professional Services which are the subject matter of or directly
related to the causes of action asserted.
7. TERMINATION
a. This Agreement may be terminated by either party in the event of
a material breach by the other party of any of its obligations under
this Agreement which material breach has not been cured within sixty
(60) days of the date of receipt of written notice of such breach given
by the non-breaching party to the other party. Any such written notice
shall set forth with particularity the nature of any such material
breach.
b. Upon the termination of this Agreement pursuant to the provisions of
Section 7.a. above or Section 8.b. of this Agreement, neither party
shall have any further liability to the other pursuant to this
Agreement except that the Customer shall remain liable to ClientSoft
for any and all payments due to ClientSoft hereunder with respect to
solutions provided or Professional Services performed by ClientSoft up
to such date of termination, together with any and all expenses
associated therewith which are to be reimbursed by Customer to
ClientSoft in accordance with the provisions of Section 5 above.
8. CIRCUMSTANCES BEYOND CONTROL OF THE PARTIES
a. In the event of any circumstance, occurrence, act or omission arising
at any time which is beyond the control of ClientSoft or the Customer
and which has a material effect on the performance by either party of
any of its obligations pursuant to this Agreement, the parties agree
that the performance of the affected obligation(s) shall be suspended
until such time as the circumstance, occurrence, act or omission (which
is preventing the performance of such obligation) no longer affects the
performance of the particular obligation(s) and the agreed upon period
for performance of such obligation(s) shall be extended by a period
equal to the period during which such suspension of performance was in
effect.
b. Either party may terminate this Agreement upon written notice to the
other party, in the event that the performance of any obligation (to be
performed by either party hereunder) is suspended, pursuant to the
provisions of Section 8.a. above, for a period of ninety (90) days or
longer.
9. GENERAL
a. This Agreement, together with Exhibits A annexed hereto, which are
incorporated into and made a part of this Agreement, constitutes the
entire agreement between the parties with regard to the subject matter
hereof and supersedes all prior oral and written agreements,
understandings, representations, proposals or communications, of
whatsoever kind, between the parties with respect to the subject matter
of this Agreement.
b. No modifications or amendments to this Agreement and no waiver of any
provision of this Agreement shall be valid unless made in writing and
signed by duly authorized representatives of the parties hereto.
c. Customer shall not assign any of its rights or delegate any of its
duties under the terms of this Agreement without the prior written
consent of ClientSoft.
d. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
e. The parties hereto acknowledge and agree that Sections 2, 3, 5, 6 and 9
shall survive the termination of this Agreement.
f. In performing the Professional Services set forth in Exhibits A
hereto, ClientSoft is acting as an independent contractor and not as an
employee, agent or representative of the Customer. ClientSoft has no
authority to transact any business in the name of or for the account of
the Customer or to otherwise obligate the Customer in any manner.
g. Except as otherwise provided in this Agreement, all notices or other
communications hereunder shall be deemed to have been duly given when
made in writing and delivered in person or deposited in the U.S. mail,
postage prepaid, certified mail, return receipt requested, and
addressed to the Participant as shown above and to ClientSoft as
follows: ClientSoft Inc., 8 Skyline Drive, Hawthorne, NY 10532, Attn:
Vice Pres. - Professional Services, with a copy (which shall not
constitute notice) to Corporate Secretary at the same address.
h. Neither ClientSoft or the Customer shall disclose the terms of this
Agreement or publish any information concerning the same without the
prior written consent of the other.
i. The failure of either party, in one or more instances, to insist upon
the performance of any term or condition or to exercise any right or
remedy available to such party, shall not be construed as a waiver by
such party of the right to insist upon the performance or exercise of
any right or remedy now available or which may arise in the future.
j. The unenforceability of any provision hereof shall not affect the
remaining provisions of this Agreement, but rather such provision shall
be served and the remainder of this Agreement shall remain in full
force and effect.
k. This Agreement may be executed in any number of counterpart copies,
each of which shall be deemed an original, but which together shall
constitute a single instrument.
l. All paragraph headings and captions used herein are for the
convenience of the parties only and shall not be part of the text, or
affect the meaning of this Agreement.
m. Each of the parties hereto acknowledges to the other that it has had
the opportunity to have this agreement reviewed by counsel of its
choice and has had the opportunity to obtain the assistance of such
counsel in the negotiation, preparation, execution and deliver thereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their respective duly authorized representatives.
GAINSCO, INC. CLIENTSOFT, INC.
By: /s/ RICK LAABS 12/22/99 By: /s/ ROBERT C. EVELYN 12/22/99
------------------------------ -------------------------------
Authorized Signatory Date Authorized Signatory Date
Rick Laabs Robert C. Evelyn
------------------------------ -------------------------------
Type or Print Name Type or Print Name
Title: Sr. Vice President - IT Title: SVP Technology
------------------------------ -------------------------------
<PAGE> 3
EXHIBIT A
STATEMENT OF WORK NUMBER 99075
CONTRACTED PROFESSIONAL SERVICES
The following is a Statement of Work between ClientSoft Inc., ("ClientSoft") and
Gainsco, Inc. ("Gainsco"). This Statement of Work states all of the rights and
responsibilities of, and supersedes all prior oral and written communications,
between ClientSoft and Gainsco regarding the Professional Services described
below (the "Project"). This Statement of Work supplements and is subject to the
terms and conditions contained in the Professional Services Agreement between
ClientSoft and Gainsco dated December 22, 1999 (the "Agreement"). This Agreement
shall be the controlling document for any subsequent Statements of Work executed
via its Change Control Process.
I. PERSONNEL
ClientSoft and Gainsco will appoint representatives to the following positions:
A. ClientSoft Project Executive - ClientSoft will appoint a Project Executive
who will be responsible for overall management of the Project. The Project
Executive will work with ClientSoft and Gainsco personnel to perform
Project reviews, accomplish the tasks outlined in this Statement of Work,
manage day-to-day project activities, and serve as ClientSoft's single
point of contact with respect to interfacing with Gainsco on project
issues. Sales related issues remain the responsibility of the ClientSoft
Account Manager.
B. Gainsco Project Executive - Gainsco will designate a Project Executive who
will regularly available to meet with Gainsco and ClientSoft personnel on
all matters pertaining to the Project. This individual will procure, manage
and Gainsco's resources as defined in this Statement of Work. The Gainsco
Project Executive will have the authority to signoff on each deliverable
and completion criteria defined for each phase and task defined below.
C. ClientSoft Resources - ClientSoft will make appropriate personnel available
as needed to complete this project.
D. Gainsco Resources - Gainsco will make appropriate personnel available as
needed to complete this project. HQ required resources will include at
least one individual from identified departments to participate as
necessary to meet project objectives. Required resources include at least
one end-user representative, representing a cross-section of the user
population covered by this project.
E. The current Project Executives assigned by each party are:
Gainsco -- Rick Laabs, Senior Vice President Information Technologies
ClientSoft -- Carlos Rivera, Asst. Vice President of Development
In the event the Project Executive cannot execute a Change Request, the
Change Request can be executed by an officer of the respective company.
B-0
<PAGE> 4
II. PROJECT SCOPE
Based on the initial results from the current scoping engagements for Phase II,
Umbrella Policies, and Change Requests to these contracts, ClientSoft agrees to
provide Gainsco with a block of professional services resources to be utilized
January 1, 2000 -- December 31, 2000. Gainsco shall use this block of resources
for the performance of services that shall be defined by specific Statements of
Work for each project that must be approved and accepted by Gainsco and
ClientSoft.
These resources will be utilized for, but not limited to, the Phase II and
Umbrella projects. Detailed Statements of Work will be provided to Gainsco for
approval for each project or Change Request. The value of each Statement of
Work/Change Request accepted by Gainsco shall be deducted from the value of this
agreement. The total value of the Statements of Work or Change Requests may be
less than or exceed the value of this agreement.
Any remaining value of this agreement may be transferred to any Joint Venture or
Application Service Provider agreements made between ClientSoft and Gainsco.
III. SCHEDULE OF SERVICES
ClientSoft shall begin work at a mutually agreed upon date upon the acceptance
of the specific Statements of Work for each project. These Statements of Work
will be executed and processed in accordance with the Change Control Process
listed in this document.
IV. CLIENTSOFT'S RESPONSIBILITIES
A. ClientSoft will assign a Project Executive, allocate appropriate
resources, and use reasonable efforts to avoid project delays.
B. ClientSoft will perform the Services described in the Statements of
Work resulting from this contract.
C. ClientSoft will provide Gainsco with a detailed Statement of Work for
each project. Gainsco and ClientSoft will mutually agree on the
Statement of Work prior to project commencement.
V. GAINSCO'S RESPONSIBILITIES
A. Gainsco will participate in Project Updates, if any, with ClientSoft
in accordance with the timeframes as set forth in "Schedule 1 to
Exhibit A - Project Update/Communications" annexed hereto.
B. Gainsco will assign a Project Executive, allocate appropriate
resources, and use its reasonable efforts to avoid Project delays.
VI. KEY ASSUMPTIONS
The following are key assumptions made by ClientSoft of Gainsco and this
project.
1. Any Statement of Work developed will be signed by all parties, and
attached to this Agreement as an appendix prior to application
development.
2. The ClientSoft and Gainsco Project Executives, shall be the sole point
of contact between parties for issues related to this Agreement.
B-1
<PAGE> 5
VII. VALUE OF SERVICES
ClientSoft will provide Gainsco with a block of Professional Services to perform
tasks identified in specific Statements of Work for Phase II, Umbrella, and
other projects. The value of this block of services is:
1. VALUE OF PROFESSIONAL SERVICES
<TABLE>
<S> <C>
PROFESSIONAL SERVICES
Block of Professional Services 1,000,000
PROJECT TOTAL 1,000,000
</TABLE>
2. INVOICING
ClientSoft will invoice Gainsco in accordance with the payment schedules that
accompany the Change Request and detailed Statements of Work approved and
accepted by Gainsco and ClientSoft.
Additional ClientSoft Professional Services requested by Customer that are not
included in or exceed the scope of this Statement of Work or Change Request to
this Statement of Work, and which are agreed to by both parties, shall be priced
separately based on time and resource requirements (subject to increase in
accordance with Sections 5(b) and 5(c) of the Agreement). These additional
services may also be added to the scope of this agreement via the Change Control
Process.
Customer shall pay ClientSoft's reasonable expenses, which are incurred by
ClientSoft for travel, lodging, meals, and cost of materials and equipment
(i.e., printed materials, etc.).
VIII. CHANGE CONTROL PROCESS
The "Change Control Process" governs changes to the Project scope and
deliverables during the life of the Project. The purpose of this process is to
coordinate and properly document the development, installation and evaluation of
new features and functionality during the Project. The process will apply to new
Project components and to enhancements of existing Project components. The
Change Control Process will be implemented from the start of the Project and
will continue throughout the Project's duration.
A. The Project Manager of the requesting party will submit a written
Change Request to the Project Manager for the other party in the
format identified in "Schedule 2 to Exhibit A - Change Request Form"
annexed hereto.
B. Both ClientSoft and Gainsco will review the proposed Change Request
and either approve it for further study or reject it. The amount and
payment of the costs of further study, if any, will be agreed upon by
both ClientSoft and Gainsco. The results of the study will be used to
determine the effect that the implementation of the Change Request
will have on the Project cost and schedule.
C. Once the parties have evaluated the Change Request, and have agreed to
the change and the terms and conditions for the change, ClientSoft and
Gainsco will complete and sign a "Change Request Evaluation Response
Form" in the format identified in "Schedule 3 to Exhibit A" annexed
hereto and setting forth the change and agreed terms and conditions.
B-2
<PAGE> 6
SCHEDULE 1 TO EXHIBIT A
PROJECT UPDATE/COMMUNICATIONS
ClientSoft and Gainsco acknowledge that regular communication among and between
the parties is essential to be Project's successful completion. The parties
agree that, in addition to normal, day-to-day communication, Project Updates
will be held:
________ Twice Weekly (insert days of week meetings will be held on
regularly
________ Weekly, every (insert day of week for regular update
________ Bi-weekly, every other (insert day of week for regular update)
at: ________ (insert start time of regular update)
via ___________ on-site meeting held at______________________(insert location)
_______ teleconference, which will be initiated by _______ (identify party)
The expected duration of each Project Update is estimated to be _________
hours/minutes.
Both ClientSoft and Gainsco's Project Managers will determine, and be
responsible for the attendance of, the appropriate participants for each Project
Update.
The ClientSoft Project manager will issue minutes of each Project Update within
two (2) business days of the update. The minutes will include: attendee list,
status of previously opened items, list new items including person(s)
responsible for resolution, and summary of the Project's overall status. Other
items will be added as appropriate.
Other meetings, correspondence, etc. will occur as necessary during the course
of the Project. The regular Project Update is not intended to eliminate or
replace other forms of communication between the parties.
B-3
<PAGE> 7
SCHEDULE 2 TO EXHIBIT A
CHANGE REQUEST FORM
CONTRACTED PROFESSIONAL SERVICES
Requester Name:
--------------------------------------------
Requester Company Name:
------------------------------------
Date Requested:
--------------------------------------------
Response Requested By:
-------------------------------------
Change Requested:
------------------------------------------
(Provide a detailed description of the change requested, the area of the
project plan/schedule being modified, and the benefits of making the change.)
Change Request Received:
Gainsco, Inc.: ClientSoft Inc.
Signed: Signed:
------------------------------- -------------------------------
By: By:
----------------------------------- -----------------------------------
Title: Title:
-------------------------------- --------------------------------
Date: Date:
--------------------------------- ---------------------------------
Change Request No.:
-------------------
B-4
<PAGE> 8
SCHEDULE 3 TO EXHIBIT A
CHANGE REQUEST
EVALUATION RESPONSE FORM
Change Request No.:
----------------------------------------
Requester Name:
--------------------------------------------
Review Date:
-------------
Request No. has been:
--------------
accepted with changes
--------
accepted with modification (see below)
--------
rejected
--------
Modifications to Change Requested:
(Insert any changes that are made to the original Change Request. Ensure that,
whether or not modified, the Change Request as accepted identifies, in detail,
the changes to the Project scope, deliverables, schedule and costs.)
Schedule Revision:
(Insert new dates or attach revised project plan/schedule, which show the
impact of the Change Request, if any.)
Cost Revision:
(Define any additional costs to be incurred as a result of proposed changes.
Include in responsible parties, payment due date and any additional
deliverables or modifications to acceptance criteria)
Responsible Project Manager/Executive:
------------------------
Change Request Agreed and Accepted:
Gainsco, Inc.: ClientSoft Inc.
By: By:
----------------------------------- -----------------------------------
Title: Title:
-------------------------------- --------------------------------
Date: Date:
--------------------------------- ---------------------------------
B-5
<PAGE> 9
[MOVES AUTO PHASE II AND UMBRELLA UNDER CONTROL OF MASTER SOW 99075]
SCHEDULE 2 TO EXHIBIT A
CHANGE REQUEST FORM
CONTRACTED PROFESSIONAL SERVICES
Requester Name: Carlos Rivera
--------------------------------------------
Requester Company Name: ClientSoft
------------------------------------
Date Requested: 12/22/99
--------------------------------------------
Response Requested By: 12/22/99
-------------------------------------
Change Requested:
------------------------------------------
FOR PROJECT CONTROL PURPOSES WE ARE REQUESTING THAT STATEMENTS OF WORK #99054
AND 99055 BE ADDED UNDER THE CONTROL OF STATEMENT OF WORK #99075. THE ORIGINAL
CONTRACT VALUE FOR SOW 99054 & 99055 WILL NOT BE REFLECTED IN SOW 99075. ANY
ADDITIONAL CHANGE REQUESTS TO SOW 99054 & 99055 SHALL BE HANDLED IN ACCORDANCE
AND UNDER THE CONTROL OF SOW 99075.
Change Request Received: 12/22/99
Gainsco, Inc.: ClientSoft Inc.
Signed: /s/ RICK LAABS Signed: /s/ CARLOS A. RIVERA
------------------------------- -------------------------------
By: Rick Laabs By: Carlos A. Rivera
----------------------------------- -----------------------------------
Title: Sr. Vice President - II Title: AVP Development
-------------------------------- --------------------------------
Date: 12/22/99 Date: 12/22/99
--------------------------------- ---------------------------------
Change Request No.: 99075-1
-------------------
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<PAGE> 10
SCHEDULE 3 TO EXHIBIT A
CHANGE REQUEST
EVALUATION RESPONSE FORM
Change Request No.: 99075-1
----------------------------------------
Requester Name: Carlos Rivera
--------------------------------------------
Review Date: 12/22/99
-----------------------------------------------
Request No. 99075-1 has been:
---------
X accepted with changes
--------
accepted with modification (see below)
--------
rejected
--------
Modifications to Change Requested:
NO MODIFICATION TO BE ADDED.
Schedule Revision:
THIS CHANGE REQUEST WILL HAVE NO IMPACT ON SCHEDULE.
Cost Revision:
THIS CHANGE REQUEST HAS ZERO ($0) COST ASSOCIATED WITH ITS ACCEPTANCE.
Responsible Project Manager/Executive: Carlos Rivera and Rick Laabs
------------------------------
Change Request Agreed and Accepted:
Gainsco, Inc.: ClientSoft Inc.
Signed: /s/ RICK LAABS Signed: /s/ CARLOS A. RIVERA
------------------------------- -------------------------------
By: Rick Laabs By: Carlos A. Rivera
----------------------------------- -----------------------------------
Title: Sr. Vice President - II Title: AVP Development
-------------------------------- --------------------------------
Date: 12/22/99 Date: 12/22/99
--------------------------------- ---------------------------------
B-1
<PAGE> 11
[CLIENTSOFT LOGO]
EXHIBIT 10.16
CLIENTSOFT INC.
8 SKYLINE DRIVE
HAWTHORNE, NY 10532
PROFESSIONAL SERVICE AGREEMENT
- --------------------------------------------------------------------------------
CUSTOMER: GAINSCO, INC. CONTACT: RICK LAABS SENIOR VICE-PRESIDENT
INFORMATION SERVICES
Address: 500 Commerce Street, Fort Worth, Texas 76102
This Agreement is made and effective as of the 22nd day of October, 1999 (the
"Effective Date"), by and between ClientSoft Inc. a Delaware Company
("ClientSoft"), with offices at 8 Skyline Drive, Hawthorne, NY 10532 and the
Customer.
WHEREAS, Customer desires ClientSoft to provide certain professional services to
the Customer; and
WHEREAS, ClientSoft has agreed to provide professional services to the Customer
as hereinafter more particularly described and subject to and in accordance with
the terms and conditions hereinafter appearing.
NOW THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, ClientSoft and Customer hereby agree as follows:
1. PROFESSIONAL SERVICES AND TERM
a. ClientSoft will provide certain professional services ("Professional
Services,") as more fully described on Exhibit A annexed hereto) to
assist Customer in connection with the Customer's use of ClientSoft's
products and solutions. The Customer is solely responsible for
determining its objectives and obtaining its desired results from the
Professional Services to be provided by ClientSoft pursuant to this
Agreement. Exhibit A annexed hereto sets forth the fees to be paid by
Customer to ClientSoft for the Professional Services to be provided in
accordance with the provisions of this Agreement.
b. ClientSoft will endeavor to provide the Professional Services on a
timely basis, subject to the availability of qualified personnel and
the difficulty and scope of the Professional Services.
c. ClientSoft may assign, reassign and substitute personnel at any time
and may provide the same or similar services to any other third party.
d. The Professional Services to be rendered to the Customer shall, except
as otherwise agreed to by the parties, be rendered at a location
specified by ClientSoft.
e. The term of this Agreement shall commence upon the date first above
written and shall terminate (unless sooner terminated pursuant to the
provisions of Section 7.a. or Section 8.b. of this Agreement) upon the
date of payment by the Customer to ClientSoft of all fees and expenses
due to ClientSoft pursuant to the terms of this Agreement.
f. ClientSoft personnel shall consist of ClientSoft employees and
consultants engaged by ClientSoft for the design of solutions and
performance of Professional Services.
2. RIGHTS IN WORK PRODUCT/PERSONNEL
a. Any customer-specific documentation, designs or plans developed by
ClientSoft personnel solely in connection with and unique to the
performance of Professional Services under this Agreement shall be the
exclusive property of Customer.
b. The Customer acknowledges and agrees that, except as is expressly
provided in Section 2.a. above, no right, title or interest whatsoever
(express or implied) in or to any documentation, ideas, concepts, know
how, data processing or other techniques used or developed by
ClientSoft personnel (either alone or jointly with the Customer) in
connection with the performance of the Professional Services hereunder
is transferred or granted by ClientSoft to Customer.
c. During the term of this Agreement and for a period of twelve (12)
months thereafter, neither party shall, without the prior written
approval of the other party, solicit the services of or make an offer
of employment to any person who is or was, as the case may be, an
employee or consultant of the other party during the term of this
Agreement. In case of breach, the parties agree to liquidated damages
of $50,000 per person.
3. INDUSTRY STANDARDS/DISCLAIMER OF WARRANTY
a. ClientSoft will provide the Professional Services to Customer in a
good and workmanlike manner in accordance with normal industry
standards.
b. EXCEPT AS OTHERWISE EXPRESSLY STATED IN THIS AGREEMENT, CLIENTSOFT
MAKES AND THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, BY OPERATION
OF LAW OR OTHERWISE, INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTY
OF FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE SOLUTIONS,
PROFESSIONAL SERVICES AND/OR THE WORK PRODUCT PROVIDED BY CLIENTSOFT
TO CUSTOMER HEREUNDER.
4. CUSTOMER RESPONSIBILITIES
Customer shall:
a. Assist ClientSoft personnel engaged in the performance of the
Professional Services in the clarification and understanding of any
matter relating to the Solution and Professional Services which the
Customer requires ClientSoft to perform under this Agreement, as the
same are described in Exhibit A hereto.
b. Provide ClientSoft with the name of Customer's employee who has been
designated by the Customer as the "Project Manager" and who has
authority to make decisions on behalf of the Customer with respect to
matters relating to the Solution and Professional Services to be
provided hereunder. Such Project Coordinator shall be familiar with
the objectives to be realized by the Customer in connection with the
Solution and Professional Services.
c. Provide to ClientSoft's personnel, for such periods of time and at
such times as are reasonably required by ClientSoft, access to and use
of any of Customer's systems and/or equipment, including without
limitation Customer's computer system and/or communications network,
which is required to enable the performance by ClientSoft of the
Professional Services.
d. Make available to ClientSoft personnel such office space, computer
equipment, customer systems access, furniture and use of a
telephone(s) as may be required by ClientSoft to facilitate
ClientSoft's performance at the Customer's facility, as deemed
appropriate by ClientSoft.
5. PAYMENT
a. ClientSoft shall invoice Customer at the end of each phase (if on a
fixed based contract) or month (if on a time and materials basis) for
all Professional Services performed by ClientSoft during such month in
accordance with Exhibit A annexed hereto. ClientSoft's invoice shall
reflect the number of work days expended by ClientSoft with respect to
the creation of the solution or Professional Services to be provided
pursuant to this Agreement. In addition, ClientSoft's invoice shall
reflect any travel, living and accommodation charges which have been
incurred by ClientSoft personnel in providing solution development
and/or Professional Services at a Customer facility which is located
outside of a fifty (50) mile radius of the ClientSoft facility at
which such ClientSoft personnel are based.
b. In the event that Customer requires any or all Professional Services
to be performed on a Saturday, Sunday or public holiday observed by
ClientSoft, the applicable hourly or other rates (as set forth in
Exhibit A) charged by ClientSoft to the Customer shall be subject to
an overtime premium of fifty (50%) percent of the applicable rate
charged by ClientSoft pursuant to Exhibit A.
c. Customer shall make payment of all invoices rendered by ClientSoft to
Customer, pursuant to this Section 5, within thirty (30) days of the
date of each invoice. Customer agrees to pay a late payment charge
computed and payable monthly at the rate of one and one half (1 1/2%)
percent per month or the maximum late payment charge permitted by law,
whichever is less, on any
1
<PAGE> 12
d. amounts which are not paid by the Customer within the aforesaid
thirty (30) day payment period and reasonable attorney costs incurred
in the collection process.
e. Customer will pay any taxes ClientSoft becomes obligated to pay by
virtue of this Agreement, exclusive of taxes based upon the net income
of ClientSoft.
6. LIMITATION OF LIABILITY
a. ClientSoft shall not be liable for any indirect, consequential,
incidental or special damages sustained by the Customer in connection
with or arising out of this Agreement, even if ClientSoft knew or
should have known of the possibility of such damages.
b. ClientSoft's entire liability and Customer's sole and exclusive remedy
for direct damages from any cause relating to or arising out of this
Agreement, regardless of the form of action, whether in contract or in
tort (including negligence) or otherwise, shall not exceed in the
aggregate the lesser of Ten Thousand ($10,000) Dollars or the charges
actually paid by the Customer pursuant to this Agreement for the
Professional Services which are the subject matter of or directly
related to the causes of action asserted.
7. TERMINATION
a. This Agreement may be terminated by either party in the event of
a material breach by the other party of any of its obligations under
this Agreement which material breach has not been cured within sixty
(60) days of the date of receipt of written notice of such breach given
by the non-breaching party to the other party. Any such written notice
shall set forth with particularity the nature of any such material
breach.
b. Upon the termination of this Agreement pursuant to the provisions of
Section 7.a. above or Section 8.b. of this Agreement, neither party
shall have any further liability to the other pursuant to this
Agreement except that the Customer shall remain liable to ClientSoft
for any and all payments due to ClientSoft hereunder with respect to
solutions provided or Professional Services performed by ClientSoft up
to such date of termination, together with any and all expenses
associated therewith which are to be reimbursed by Customer to
ClientSoft in accordance with the provisions of Section 5 above.
8. CIRCUMSTANCES BEYOND CONTROL OF THE PARTIES
a. In the event of any circumstance, occurrence, act or omission arising
at any time which is beyond the control of ClientSoft or the Customer
and which has a material effect on the performance by either party of
any of its obligations pursuant to this Agreement, the parties agree
that the performance of the affected obligation(s) shall be suspended
until such time as the circumstance, occurrence, act or omission (which
is preventing the performance of such obligation) no longer affects the
performance of the particular obligation(s) and the agreed upon period
for performance of such obligation(s) shall be extended by a period
equal to the period during which such suspension of performance was in
effect.
b. Either party may terminate this Agreement upon written notice to the
other party, in the event that the performance of any obligation (to be
performed by either party hereunder) is suspended, pursuant to the
provisions of Section 8.a. above, for a period of ninety (90) days or
longer.
9. GENERAL
a. This Agreement, together with Exhibits A annexed hereto, which are
incorporated into and made a part of this Agreement, constitutes the
entire agreement between the parties with regard to the subject matter
hereof and supersedes all prior oral and written agreements,
understandings, representations, proposals or communications, of
whatsoever kind, between the parties with respect to the subject matter
of this Agreement.
b. No modifications or amendments to this Agreement and no waiver of any
provision of this Agreement shall be valid unless made in writing and
signed by duly authorized representatives of the parties hereto.
c. Customer shall not assign any of its rights or delegate any of its
duties under the terms of this Agreement without the prior written
consent of ClientSoft.
d. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
e. The parties hereto acknowledge and agree that Sections 2, 3, 5, 6 and 9
shall survive the termination of this Agreement.
f. In performing the Professional Services set forth in Exhibits A
hereto, ClientSoft is acting as an independent contractor and not as an
employee, agent or representative of the Customer. ClientSoft has no
authority to transact any business in the name of or for the account of
the Customer or to otherwise obligate the Customer in any manner.
g. Except as otherwise provided in this Agreement, all notices or other
communications hereunder shall be deemed to have been duly given when
made in writing and delivered in person or deposited in the U.S. mail,
postage prepaid, certified mail, return receipt requested, and
addressed to the Participant as shown above and to ClientSoft as
follows: ClientSoft Inc., 8 Skyline Drive, Hawthorne, NY 10532, Attn:
Vice Pres. - Professional Services, with a copy (which shall not
constitute notice) to Corporate Secretary at the same address.
h. Neither ClientSoft or the Customer shall disclose the terms of this
Agreement or publish any information concerning the same without the
prior written consent of the other.
i. The failure of either party, in one or more instances, to insist upon
the performance of any term or condition or to exercise any right or
remedy available to such party, shall not be construed as a waiver by
such party of the right to insist upon the performance or exercise of
any right or remedy now available or which may arise in the future.
j. The unenforceability of any provision hereof shall not affect the
remaining provisions of this Agreement, but rather such provision shall
be served and the remainder of this Agreement shall remain in full
force and effect.
k. This Agreement may be executed in any number of counterpart copies,
each of which shall be deemed an original, but which together shall
constitute a single instrument.
l. All paragraph headings and captions used herein are for the
convenience of the parties only and shall not be part of the text, or
affect the meaning of this Agreement.
m. Each of the parties hereto acknowledges to the other that it has had
the opportunity to have this agreement reviewed by counsel of its
choice and has had the opportunity to obtain the assistance of such
counsel in the negotiation, preparation, execution and deliver thereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their respective duly authorized representatives.
GAINSCO, INC. CLIENTSOFT, INC.
By: /s/ RICK A. LAABS 11/16/99 By:
------------------------------ -------------------------------
Authorized Signatory Date Authorized Signatory Date
Rick A. Laabs
------------------------------ -------------------------------
Type or Print Name Type or Print Name
Title: Sr. Vice President - IT Title:
------------------------------ -------------------------------
<PAGE> 13
EXHIBIT A
STATEMENT OF WORK NUMBER 99055
eXoro PHASE II SCOPE DEVELOPMENT
The following is a Statement of Work between ClientSoft Inc., ("ClientSoft") and
Gainsco, Inc. ("Gainsco"). This Statement of Work states all of the rights and
responsibilities of, and supersedes all prior oral and written communications,
between ClientSoft and Gainsco regarding the Scope Development project described
below (the "Project"). This Statement of Work supplements and is subject to the
terms and conditions contained in the Professional Services Agreement between
ClientSoft and Gainsco dated October 22, 1999 (the "Agreement").
I. PERSONNEL
ClientSoft and Gainsco will appoint representatives to the following positions:
A. ClientSoft Project Manager - ClientSoft will appoint a Project Manager
who will be responsible for overall management of the Project. The
Project Manager will work with ClientSoft and Gainsco personnel to
perform Project reviews, accomplish the tasks outlined in this
Statement of Work, manage day-to-day project activities, and serve as
ClientSoft's single point of contact with respect to interfacing with
Gainsco on project issues. Sales related issues remain the
responsibility of the ClientSoft Account Manager.
B. Gainsco Project Manager - Gainsco will designate a Project Manager who
will regularly available to meet with Gainsco and ClientSoft personnel
on all matters pertaining to the Project. This individual will
procure, manage and Gainsco's resources as defined in this Statement
of Work. The Gainsco Project Manager will have the authority to
signoff on each deliverable and completion criteria defined for each
phase and task defined below.
C. ClientSoft Resources - ClientSoft will make appropriate personnel
available as needed to complete this project.
D. Gainsco Resources - Gainsco will make appropriate personnel available
as needed to complete this project. HQ required resources will include
at least one individual from identified departments to participate in
the Validate Process Logic Flow and Application Design as necessary to
meet project objectives. Required resources include at least one
end-user representative, representing a cross-section of the user
population covered by this project.
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<PAGE> 14
II. PROJECT SCOPE
This Statement of Work (SOW) defines the scope of tasks to be accomplished by
ClientSoft for development of a Scope Document. Over a three to four week
period, ClientSoft will conduct a series of meetings to collect information
relevant to a requirement definition to identify and develop application scope
for the system implementation.
The deliverable of this activity (discussed in detail below) will be documented
process detailing the application flow that maps the ClientBuilder functions and
how they integrate to Gainsco's system, including a Graphical User Interface
Prototype (proposed screen layouts). The final output of this short engagement
is a fixed-price proposal to complete development of the prototype into a
finished system. This document will also include a description of the proposed
rollout and testing phases. Upon acceptance of the developed proposal,
ClientSoft and Gainsco will be free to engage the project as described in the
proposal.
SCOPE DEVELOPMENT
The deliverables from this work include (Italics identify deliverables &
completion criteria):
1. DOCUMENTATION OF THE `AS-IS' PROCESS FLOW
This task performs the following:
o Applies a simple processing mapping tool and modified Process
mapping techniques, to document the `AS-IS' process. Special
attention is paid to identify bottlenecks and process issues,
which can become targets for process improvement.
o Based on significant interaction in a series of intense process
oriented meetings and interviews, ClientSoft consultants work
with the End-User and IT representatives to document existing
processes. It is imperative that the End-User representatives
understand the flow of the Gainsco system and be able to answer
questions as to process flow, screen content, data element usage
and navigation. Significant input will be required from the
End-User and IT representatives to ensure that bottlenecks and
process improvement opportunities are fully understood. This
directly affects the benefits derived.
DELIVERABLE: Documented AS-IS process flow
COMPLETION CRITERIA: This task is complete when the AS-IS process flow
has been document and verified by the Gainsco Project Manager.
EXCEPTIONS: The pricing for the project is based upon the specific
number of screens identified by Gainsco (up to 5O screens). Additional
screens identified during the scope development or subsequent phases
will require additional effort to document and will increase the price
of the contract and time of delivery.
2. COLLECT/ANALYZE/DOCUMENT SCREEN IMAGES AND DATA ELEMENTS
This task performs the following:
COLLECT GAINSCO SCREENS
o Gainsco will provide ClientSoft with the proper Access, User ID
& Password and End-User representative to walk through and
document each screen in the Gainsco system. Analysis will focus
on how the current system behaves, a general description of what
is required to duplicate that behavior (either using mainframe or
local server files), and what mainframe field or fields must be
updated as a result of the end state of each control.
DOCUMENT DATA ELEMENTS AND CONTROLS
o Working with the appropriate Gainsco IT and End-User
representatives, the ClientSoft consultant will document the data
elements and controls (action fields, command lines and `PF'
keys) on each screen. These will be cross-referenced in the
design document for the Graphical User Interface Prototype.
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<PAGE> 15
o Screen edits and usability features are extremely important to
identify at this juncture. When a user does not key all of the
data required for a screen to commit, a `screen edit' is
displayed. The goal is to ensure that one of these screen edits
does not interrupt the flow of processing and that it is handled
gracefully. Usability features are especially important to
evaluate in situations where cryptic codes are used and should be
replaced with more readable text.
PERFORM ANALYSIS
o The collected screen images and data elements and controls are
analyzed and the `As-Is' process document created from the
material gathered. Each screen image is numbered along with each
significant control to allow clearer discussion of process flow,
specific data elements and screen flow and their impact on the
complexity of the solution in the `To-Be' process development.
o In addition to the `As-Is' process flow, documentation will
include pages describing each screen and further broken down into
paragraphs explaining each control's behavior and end state
relationship to host screens. This information is critical to
understanding how the ClientBuilder code must react to changes in
the mainframe. Failure to identify mainframe functions (PF keys,
pop-up windows, navigation requirements, etc) will create `holes'
in the process flow, which will surface once actual coding, and
acceptance testing begins. Such omissions in the requirements
gathering process will create change request situations, which
could affect deliverable timeframes and increase project costs.
o It is imperative that the End-User representative understands the
flow of the Gainsco system and is able to answer questions as to
screen content, data element usage and navigation. During this
process, it is important to note where process flow is impacted
by the current system. Identification of bottlenecks and process
improvement opportunities are critical at this juncture.
STAGE REVIEW
o A stage review meeting is scheduled to review the `As-Is'
documentation to ensure completeness and accuracy. This is a
critical juncture in the process and requires signoff by the
Gainsco project manager prior to further analysis.
DELIVERABLE: Gainsco screens collected in the CSD, Data elements
documented
COMPLETION CRITERIA: This task is complete when the Gainsco screens
have been collected in the CSD and the Data Element documented and the
stage acceptance form is signed by the Gainsco Project Manager.
EXCEPTIONS: The pricing for this project is based upon the specific
number of screens identified by Gainsco (up to 50 screens). Additional
screens identified during the scope development or subsequent phases
will require additional effort to document and will increase the price
of the contract and time of delivery.
3. DEVELOP `TO-BE' PROCESS IMPROVEMENTS
This task performs the following:
CREATE IMPROVED PROCESS
o Applies a simple processing mapping tool and modified process
mapping techniques, to create the `To-Be' process from the
documented `As-Is' process. Special attention is paid to the
identified bottlenecks and process issues, which are targets for
process improvement.
o Based on significant interaction, ClientSoft consultants work
with the End-User and IT representatives to create process
improvements. It is imperative that the End-User representatives
understand the flow of the Gainsco system and be able to answer
questions as to process flow, screen content, data element usage
and navigation. Significant input will be required from the
End-User and IT representatives to ensure that bottleneck
elimination and process improvement opportunities are fully
realized.
DELIVERABLE: Gainsco 'To-Be' process defined.
COMPLETION CRITERIA: This task is complete when the Gainsco `To-Be'
process has been defined and the phase acceptance form is signed by
the Gainsco Project Manager.
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<PAGE> 16
EXCEPTIONS: The pricing for the project is based upon the specific
number of screens identified by Gainsco (up to 5O screens). Additional
screens identified during the scope development or subsequent phases
will require additional effort to document and will increase the price
of the contract and time of delivery.
4. DEVELOP `TO-BE' GRAPHICAL USER INTERFACE PROTOTYPE
From a usability and complexity of development perspective, this task
is the most critical. Herein the flow of the system, its functions and
capabilities from the End-User perspective is created and approved.
Errors or omissions in function or feature will create a change
control situation, which could affect the timeframe and cost of the
project. This task performs the following:
CREATE GRAPHICAL USER INTERFACE PROTOTYPE
o Using basic GUI graphical objects, which are supported by
ClientBuilder, the ClientSoft consultant will work with the
End-User and IT representatives to create the Graphical User
Interface Prototype. Though possibly missing icons, colors of the
final product and other minor GUI features (spinning icons, etc),
the prototype will be roughly equivalent to the final delivered
product. The key task accomplished in this phase is to correctly
identify how the `To-Be' GUI interface will work. Special
attention to where the data elements on the GUI screens come from
and how they behave must be documented (i.e. some GUI screens may
required data from multiple host screens).
o Again, it is imperative that the End-User representatives
understand the flow of the Gainsco system and be able to answer
questions as to process flow, screen content, data element usage
and navigation. Significant input will be required from the
End-User and IT representatives to ensure that bottlenecks and
process improvement opportunities are fully realized.
DOCUMENT PROTOTYPE DATA ELEMENTS AND CONTROLS
o Working with the appropriate Gainsco IT and End-User
representatives, the ClientSoft consultant will document the GUI
data elements and controls (click boxes, drop down lists and so
forth) on each screen. These will be cross-referenced in the
design document against the host fields documented in the `As-Is'
process.
o Screen edits and usability features are extremely important to
identify at this juncture. When a user does not key all of the
data required for a screen to commit, a `screen edit' is
displayed. The goal is to ensure that one of these screen edits
does not interrupt the flow of processing and that it is handled
gracefully. Usability features are especially important to
evaluate in situations where cryptic codes are used and should be
replaced with more readable text.
PERFORM ANALYSIS
o The collected screen images and data elements and controls are
analyzed and the Graphical User Interface Prototype document
created from the material gathered. Each screen image is numbered
along with each significant control and cross-referenced to the
host screens to allow clearer discussion of process flow,
specific data elements and screen flow and their impact on the
complexity of the solution in the `To-Be' process development.
o In addition to the `To-Be' GUI prototype, documentation will
include pages describing each GUI screen and further broken down
into paragraphs explaining each control's behavior and end state
relationship to host screens. This information is critical to
understanding how the ClientBuilder code must react to changes in
the mainframe. Failure to identify prototype functions (check
boxes, drop down lists, navigation requirements, etc) will create
`holes' in the process flow which will surface once actual coding
and acceptance testing begins. Such omissions in the requirements
gathering process will create change request situations, which
could affect deliverable timeframes and increase project costs.
o It is imperative that the End-User representative understands the
flow of the desired Gainsco process relative to the existing
system and is able to answer questions as to screen content, data
element usage and navigation. During this process, it is
important to note where process flow will be positively impacted
by the `To-Be' system. Solutions to bottlenecks and estimates of
positive process improvement impacts over the `As-Is' system are
important to identify for financial justification of the proposed
system.
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<PAGE> 17
STAGE REVIEW
o A stage review meeting is scheduled to review the `As-Is'
documentation to ensure completeness and accuracy. This is a
critical juncture in the process and requires signoff by the
Gainsco project manager prior to further analysis.
DELIVERABLE: Gainsco Prototype defined.
COMPLETION CRITERIA: This task is complete when the Gainsco Prototype
has been defined and the phase acceptance form is signed by the
Gainsco Project Manager.
EXCEPTIONS: The pricing for the project is based upon the specific
number of screens identified by Gainsco (up to 50 screens). Additional
screens identified during the scope development or subsequent phases
will require additional effort to document and will increase the price
of the contract and time of delivery.
5. DEVELOP FIXED PRICE PROPOSAL
This task performs the following:
Using the material developed in Tasks 1-4, the ClientSoft team will
create a fixed-price proposal to develop the Gainsco solution. NOTE:
This task is performed off-site and concludes the work effort for this
scope development project.
This will include (but is not limited to) the following areas:
PHASE I: MOBILIZATION AND PROJECT SETUP
o Development Server Installation Tasks -- These are tasks
associated with the installation of the development servers
required to support the solution.
o Development Workstation Installation Tasks -- These are tasks
associated with the installation of the development workstations
required to support the solution.
o Acceptance Test Plan -- A significant portion of mobilization is
the development of test data and the acceptance test plan.
ClientSoft consultants work with the End-User and IT
representatives to ensure that a comprehensive acceptance test
plan is built and readied for implementation at the appropriate
time.
PHASE II: DEVELOPMENT
o Describes in detail, stage limited functional releases of the
software developed by ClientSoft. ClientSoft consultants will
begin the integration of ClientBuilder to the Gainsco system
based on the specifications developed in the application scope
document described in the deliverables to this project.
o Any changes to the application scope will require a written
request detailing the changes requested and any additional costs
if applicable, signed by all parties.
PHASE III: TESTING & ROLLOUT
o Application testing and rollout. After the ClientBuilder
application is integrated with the PDS back-end and the agent
front-end according to the specification of the application scope
document, the application testing and rollout phase will
commence. Phase III represents 25% of the project deliverables.
OUT OF SCOPE WORK
o The fixed-price proposal will specifically identify items
required for successful implementation of this project which are
out of scope and provided for by Gainsco. Failure to provide
these functions could adversely affect this project and Gainsco
holds ClientSoft harmless in that event.
DELIVERABLE: Gainsco Fixed Price Proposal
COMPLETION CRITERIA: This task is complete when the Gainsco
Fixed-Price Proposal has been defined and the phase acceptance form is
signed by the Gainsco Project Manager.
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<PAGE> 18
EXCEPTIONS: The pricing for the project is based upon the specific
number of screens identified by Gainsco (up to 50 screens). Additional
screens identified during the scope development or subsequent phases
will require additional effort to document and will increase the price
of the contract and time of delivery.
III. SCHEDULE OF SERVICES
ClientSoft shall begin work at a mutually agreed upon date upon the acceptance
of this Statement of Work.
IV. CLIENTSOFT'S RESPONSIBILITIES
A. ClientSoft will assign a Project Manager, allocate appropriate
resources, and use reasonable efforts to avoid project delay.
B. ClientSoft will perform the Services described in this Statement of
Work for the Project.
C. ClientSoft shall provide at its own cost and expense the following
software. ClientBuilder Software used to collect and document the host
screens.
V. GAINSCO'S RESPONSIBILITIES
A. Gainsco will participate in Project Updates, if any, with ClientSoft
in accordance with the timeframes as set forth in "Schedule 1 to
Exhibit A - Project Update/Communications" annexed hereto.
B. Gainsco will assign a Project Manager, allocate appropriate resources,
and use its reasonable efforts to avoid Project delays.
C. Gainsco shall provide at its own cost and expense the following
Hardware and software:
1. Developer Workstation:
Prior to the start of the project, Gainsco will provide the necessary
developer workstation and network Host connectivity necessary for
completing this project. A minimum developer workstation is a Win95,
Win98 or WinNT computer with 128 megs of Ram and approximately 1.0GB
of free disk space. The workstation must have network access and
terminal emulation to the Host.
VI. KEY ASSUMPTIONS
The following are key assumptions made by ClientSoft of Gainsco and this
project.
1. The application and functions will be documented (scope
document), signed by all parties, and attached to this Agreement
as an appendix prior to application development.
2. ClientSoft and Gainsco will assign a Project Manager, who will be
the primary point of contact between parties prior to the
commencement of this project.
3. Gainsco shall make available to ClientSoft the required hardware
(as defined in Gainsco's Responsibilities) at Gainsco's
additional cost and expense before the contract start date.
4. Gainsco shall make available to ClientSoft the required software
(as defined in Gainsco's Responsibilities) at Gainsco's
additional cost and expense before contract start date.
B-5
<PAGE> 19
VII. PAYMENT
The prices to be paid to ClientSoft by Gainsco for the Services provided in
accordance with this Statement of Work are as follows:
1. SCHEDULE OF CHARGES
<TABLE>
<S> <C>
PROFESSIONAL SERVICES
Scope Development 25,000
PROJECT TOTAL 25,000
</TABLE>
2. INVOICING
ClientSoft will invoice Gainsco as follows:
Acceptance of Scope Document and signoff of project: 100%
Additional ClientSoft Professional Services requested by Customer that are not
included in or exceed the scope of this Statement of Work and which are agreed
to by both parties, shall be priced separately based on time and resource
requirements (subject to increase in accordance with Sections 5(b) and 5(c) of
the Agreement):
Customer shall pay ClientSoft's reasonable expenses, which are incurred by
ClientSoft for travel, lodging, meals and cost of materials and equipment (i.e.,
printed materials, etc.).
VIII. CHANGE CONTROL PROCESS
The "Change Control Process" governs changes to the Project scope and
deliverables during the life of the Project. The purpose of this process is to
coordinate and properly document the development, installation and evaluation of
new features and functionality during the Project. The process will apply to new
Project components and to enhancements of existing Project components. The
Change Control Process will be implemented from the start of the Project and
will continue throughout the Project's duration.
A. The Project Manager of the requesting party will submit a written
Change Request to the Project Manager for the other party in the
format identified in "Schedule 2 to Exhibit A - Change Request Form"
annexed hereto.
B. Both ClientSoft and Gainsco will review the proposed Change Request
and either approve it for further study or reject it. The amount and
payment of the costs of further study, if any, will be agreed upon by
both ClientSoft and Gainsco. The results of the study will be used to
determine the effect that the implementation of the Change Request
will have on the Project cost and schedule.
D. Once the parties have evaluated the Change Request, and have agreed to
the change and the terms and conditions for the change, ClientSoft and
Gainsco will complete and sign a "Change Request Evaluation Response
Form" in the format identified in "Schedule 3 to Exhibit A" annexed
hereto and setting forth the change and agreed terms and conditions.
B-6
<PAGE> 20
IX. ACCEPTANCE CRITERIA
A Deliverable will be considered accepted when each of the Completion Criteria
has been met (see Project Scope). Gainsco's Project Manager will complete an
acceptance form, in the format of "Schedule 4 to Exhibit A - Deliverable
Acceptance Form" annexed hereto, for each Deliverable and provide such form to
the ClientSoft Project Manager. The Project will be considered accepted when all
of the Completion Criteria have been met. Gainsco's Project Manager will
complete a Project acceptance form, in the format of "Schedule 5 to Exhibit A -
Project Completion and Evaluation Summary" annexed hereto, and provide such form
to the ClientSoft Project Manager.
Agreed and Accepted:
Gainsco, Inc: ClientSoft Inc.
By: /s/ [ILLEGIBLE] By:
-------------------------------- -------------------------------------
Title: Sr. Vice President Title:
----------------------------- ----------------------------------
Date: 11/16/99 Date:
------------------------------ -----------------------------------
B-7
<PAGE> 21
SCHEDULE 1 TO EXHIBIT A
PROJECT UPDATE/COMMUNICATIONS
ClientSoft and Gainsco acknowledge that regular communication among and between
the parties is essential to be Project's successful completion. The parties
agree that, in addition to normal, day-to-day communication, Project Updates
will be held:
[X] Twice Weekly (insert days of week meetings will be held on regularly)
[X] Weekly, every (insert day of week for regular update)
[ ] Bi-weekly, every other (insert day of week for regular update)
at 10:00 (insert start time of regular update) Thursdays
via_____ on-site meeting held at__________________________(insert location)
[ ] teleconference, which will be initiated by ClientSoft (identify party)
The expected duration of each Project Update is estimated to be 1 hours/minutes.
Both ClientSoft and Gainsco's Project Managers will determine, and be
responsible for the attendance of, the appropriate participants for each Project
Update.
The ClientSoft Project manager will issue minutes of each Project Update within
two (2) business days of the update. The minutes will include: attendee list,
status of previously opened items, list new items including person(s)
responsible for resolution, and summary of the Project's overall status. Other
items will be added as appropriate.
Other meetings, correspondence, etc. will occur as necessary during the course
of the Project. The regular Project Update is not intended to eliminate or
replace other forms of communication between the parties.
B-8
<PAGE> 22
SCHEDULE 2 TO EXHIBIT A
CHANGE REQUEST FORM
GAINSCO SCOPE DEVELOPMENT
Requester Name:
--------------------------------------------
Requester Company Name:
------------------------------------
Date Requested:
--------------------------------------------
Response Requested By:
-------------------------------------
Change Requested:
------------------------------------------
(Provide a detailed description of the change requested, the area of the
project plan/schedule being modified, and the benefits of making the change.)
Change Request Received:
Gainsco, Inc.: ClientSoft Inc.
Signed: Signed:
------------------------------- -------------------------------
By: By:
----------------------------------- -----------------------------------
Title: Title:
-------------------------------- --------------------------------
Date: Date:
--------------------------------- ---------------------------------
Change Request No.:
-------------------
B-9
<PAGE> 23
SCHEDULE 3 TO EXHIBIT A
CHANGE REQUEST
EVALUATION RESPONSE FORM
Change Request No.:
----------------------------------------
Requester Name:
--------------------------------------------
Review Date:
-----------------------------------------------
Request No. has been:
---------
accepted without changes
--------
accepted with modification (see below)
--------
rejected
--------
Modifications to Change Request:
(Insert any changes that are made to the original Change Request. Ensure that,
whether or not modified, the Change Request as accepted identifies, in detail,
the changes to the Project scope, deliverables, schedule and costs.)
Schedule Revision:
(Insert new dates or attach revised project plan/schedule, which show the
impact of the Change Request, if any.)
Cost Revision:
(Define any additional costs to be incurred as a result of proposed changes.
Include in responsible parties, payment due date and any additional
deliverables or modifications to acceptance criteria)
Change Request Agreed and Accepted:
Gainsco, Inc.: ClientSoft Inc.
By: By:
----------------------------------- -----------------------------------
Title: Title:
-------------------------------- --------------------------------
Date: Date:
--------------------------------- ---------------------------------
B-10
<PAGE> 24
SCHEDULE 4 TO EXHIBIT A
DELIVERABLE ACCEPTANCE FORM
Statement of Work Number 99138 - Scope Document Development
Delivery Date:
----------------------------------------------------------------
Service(s) Provided:
----------------------------------------------------------
- ------------------------------------------------------------------------------
ClientSoft Project Manager:
---------------------------------------------------
<TABLE>
<CAPTION>
===============================================================================
Project Deliverable Acceptance Criteria Completion Date Amount Due
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
===============================================================================
</TABLE>
* Identify the appropriate project deliverables from section II Project Scope
which apply to this phase.
ClientSoft has met the milestones identified above and satisfactorily proved
all related deliverables.
Gainsco Corporation:
Accepted By:
------------------------------------------------------------------
Name (print):
-----------------------------------------------------------------
Title:
------------------------------------------------------------------------
Date:
-------------------------------------------------------------------------
B-11
<PAGE> 25
SCHEDULE 5 TO EXHIBIT A
PROJECT COMPLETION AND EVALUATION SUMMARY
Project Name: eXORO PHASE II SCOPE DEVELOPMENT
Project Description:
To collect requirements and develop a fixed cost project estimate.
Dates of Services:
-----------------------
ClientSoft Project Manager: tbd
Please take a few moments to help us serve you better by answering a few
questions about our Services. Your opinion will help us deliver the service
quality you expect. The information above is needed to compile service specific
statistics.
For each of the following questions, using a 1-7 scale, please rate the level
of satisfaction you have had by checking the appropriate box.
Satisfaction Rating
(1 = extremely dissatisfied, 7 = extremely satisfied, N/A = area does not apply)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1. Professionalism of ClientSoft personnel, who provided Services to you on N/A (1) (2) (3) (4) (5) (6) (7)
this project, (i.e., attitude, interpersonal skills, ethical standards, etc.)?
2. ClientSoft's ability to provide Services when requested? N/A (1) (2) (3) (4) (5) (6) (7)
3. ClientSoft's level of technical knowledge about the Products and Systems N/A (1) (2) (3) (4) (5) (6) (7)
related to your needs?
4. ClientSoft's knowledge of your industry and business environment? N/A (1) (2) (3) (4) (5) (6) (7)
5. ClientSoft's ability to complete the Services you contracted for within the N/A (1) (2) (3) (4) (5) (6) (7)
established time frame?
6. ClientSoft's communication of plans, schedules and progress for the N/A (1) (2) (3) (4) (5) (6) (7)
Service(s) provided?
7. ClientSoft's accessibility and installation support when not on-site? N/A (1) (2) (3) (4) (5) (6) (7)
8. ClientSoft's written documentation (i.e., reports, procedure manuals, custom N/A (1) (2) (3) (4) (5) (6) (7)
program documentation)?
9. ClientSoft's ability to train your personnel as per the Statement of Work? N/A (1) (2) (3) (4) (5) (6) (7)
10. Overall, how do you rate ClientSoft's Services? N/A (1) (2) (3) (4) (5) (6) (7)
</TABLE>
B-12
<PAGE> 26
What is the most important thing we can do to improve your satisfaction with
ClientSoft in the future?
(PROVIDE AS MUCH INFORMATION AS YOU FEEL APPROPRIATE)
Gainsco Scope Development project is accepted as meeting the Deliverables as
defined in the Statement of Work between ClientSoft and Gainsco, dated October
22, 1999.
Agreed and Signed:
Gainsco, Inc.:
By:
----------------------------
Title:
-------------------------
Date:
--------------------------
B-13
<PAGE> 27
[CLIENTSOFT LOGO]
CLIENTSOFT INC.
8 SKYLINE DRIVE
HAWTHORNE, NY 10532
PROFESSIONAL SERVICE AGREEMENT
- --------------------------------------------------------------------------------
CUSTOMER: GAINSCO, INC. CONTACT: RICK LAABS SENIOR VICE-PRESIDENT
INFORMATION SERVICES
Address: 500 Commerce Street, Fort Worth, Texas 76102
This Agreement is made and effective as of the 22nd day of October, 1999 (the
"Effective Date"), by and between ClientSoft Inc. a Delaware Company
("ClientSoft), with offices at 8 Skyline Drive, Hawthorne, NY 10532 and the
Customer.
WHEREAS, Customer desires ClientSoft to provide certain professional services to
the Customer; and
WHEREAS, ClientSoft has agreed to provide professional services to the Customer
as hereinafter more particularly described and subject to and in accordance with
the terms and conditions hereinafter appearing.
NOW THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, ClientSoft and Customer hereby agree as follows:
1. PROFESSIONAL SERVICES AND TERM
a. ClientSoft will provide certain professional services ("Professional
Services," as more fully described on Exhibit A annexed hereto) to
assist Customer in connection with the Customer's use of
ClientSoft's products and solutions. The Customer is solely
responsible for determining its objectives and obtaining its desired
results from the Professional Services to be provided by ClientSoft
pursuant to this Agreement. Exhibit A annexed hereto sets forth the
fees to be paid by Customer to ClientSoft for the Professional
Services to be provided in accordance with the provisions of this
Agreement.
b. ClientSoft will endeavor to provide the Professional Services on a
timely basis, subject to the availability of qualified personnel and
the difficulty and scope of the Professional Services.
c. ClientSoft may assign, reassign and substitute personnel at any time
and may provide the same or similar services to any other third party.
d. The Professional Services to be rendered to the Customer shall, except
as otherwise agreed to by the parties, be rendered at a location
specified by ClientSoft.
e. The term of this Agreement shall commence upon the date first above
written and shall terminate (unless sooner terminated pursuant to the
provisions of Section 7.a. or Section 8.b. of this Agreement) upon the
date of payment by the Customer to ClientSoft of all fees and expenses
due to ClientSoft pursuant to the terms of this Agreement.
f. ClientSoft personnel shall consist of ClientSoft employees and
consultants engaged by ClientSoft for the design of solutions and
performance of Professional Services.
2. RIGHTS IN WORK PRODUCT/PERSONNEL
a. Any customer-specific documentation, designs or plans developed by
ClientSoft personnel solely in connection with and unique to the
performance of Professional Services under this Agreement shall be the
exclusive property of Customer.
b. The Customer acknowledges and agrees that, except as is expressly
provided in Section 2.a. above, no right, title or interest whatsoever
(express or implied) in or to any documentation, ideas, concepts, know
how, data processing or other techniques used or developed by
ClientSoft personnel (either alone or jointly with the Customer) in
connection with the performance of the Professional Services hereunder
is transferred or granted by ClientSoft to Customer.
c. During the term of this Agreement and for a period of twelve (12)
months thereafter, neither party shall, without the prior written
approval of the other party, solicit the services of or make an offer
of employment to any person who is or was, as the case may be, an
employee or consultant of the other party during the term of this
Agreement. In case of breach, the parties agree to liquidated damages
of $50,000 per person.
3. INDUSTRY STANDARDS/DISCLAIMER OF WARRANTY
a. ClientSoft will provide the Professional Services to Customer in a
good and workmanlike manner in accordance with normal industry
standards.
b. EXCEPT AS OTHERWISE EXPRESSLY STATED IN THIS AGREEMENT, CLIENTSOFT
MAKES AND THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, BY OPERATION
OF LAW OR OTHERWISE, INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTY
OF FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE SOLUTIONS,
PROFESSIONAL SERVICES AND/OR THE WORK PRODUCT PROVIDED BY CLIENTSOFT
TO CUSTOMER HEREUNDER.
4. CUSTOMER RESPONSIBILITIES
Customer shall:
a. Assist ClientSoft personnel engaged in the performance of the
Professional Services in the clarification and understanding of any
matter relating to the Solution and Professional Services which the
Customer requires ClientSoft to perform under this Agreement, as the
same are described in Exhibit A hereto.
b. Provide ClientSoft with the name of Customer's employee who has been
designated by the Customer as the "Project Manager" and who has
authority to make decisions on behalf of the Customer with respect to
matters relating to the Solution and Professional Services to be
provided hereunder. Such Project Coordinator shall be familiar with
the objectives to be realized by the Customer in connection with the
Solution and Professional Services.
c. Provide to ClientSoft's personnel, for such periods of time and at
such times as are reasonably required by ClientSoft, access to and use
of any of Customer's system and/or equipment, including without
limitation Customer's computer system and/or communications network,
which is required to enable the performance by ClientSoft of the
Professional Services.
d. Make available to ClientSoft personnel such office space, computer
equipment, customer systems access, furniture and use of a
telephone(s) as may be required by ClientSoft to
facilitate ClientSoft's performance at the Customer's facility, as
deemed appropriate by ClientSoft.
5. PAYMENT
a. ClientSoft shall invoice Customer at the end of each phase (if on a
fixed based contract) or month (if on a time and materials basis) for
all Professional Services performed by ClientSoft during such month in
accordance with Exhibit A annexed hereto. ClientSoft's invoice shall
reflect the number of work days expended by ClientSoft with respect to
the creation of the solution or Professional Services to be provided
pursuant to this Agreement. In addition, ClientSoft's invoice shall
reflect any travel, living and accommodation charges which have been
incurred by ClientSoft personnel in providing solution development
and/or Professional Services at a Customer facility which is located
outside of a fifty (50) mile radius of the ClientSoft facility at
which such ClientSoft personnel are based.
b. In the event that Customer requires any or all Professional Services
to be performed on a Saturday, Sunday or public holiday observed by
ClientSoft, the applicable hourly or other rates (as set forth in
Exhibit A) charged by ClientSoft to the Customer shall be subject to
an overtime premium of fifty (50%) percent of the applicable rate
charged by ClientSoft pursuant to Exhibit A.
c. Customer shall make payment of all invoices rendered by ClientSoft to
Customer, pursuant to this Section 5, within thirty (30) days of the
date of each invoice. Customer agrees to pay a late payment charge
computed and payable monthly at the rate of one and one half (1 1/2%)
percent per month or the maximum late payment charge permitted by law,
whichever is less, on any
1
<PAGE> 28
d. amounts which are not paid by the Customer within the aforesaid
thirty (30) day payment period and reasonable attorney costs incurred
in the collection process.
e. Customer will pay any taxes ClientSoft becomes obligated to pay by
virtue of this Agreement, exclusive of taxes based upon the net income
of ClientSoft.
6. LIMITATION OF LIABILITY
a. ClientSoft shall not be liable for any indirect, consequential,
incidental or special damages sustained by the Customer in connection
with or arising out of this Agreement, even if ClientSoft knew or
should have known of the possibility of such damages.
b. ClientSoft's entire liability and Customer's sole and exclusive remedy
for direct damages from any cause relating to or arising out of this
Agreement, regardless of the form of action, whether in contract or in
tort (including negligence) or otherwise, shall not exceed in the
aggregate the lesser of Ten Thousand ($10,000) Dollars or the charges
actually paid by the Customer pursuant to this Agreement for the
Professional Services which are the subject matter of or directly
related to the causes of action asserted.
7. TERMINATION
a. This Agreement may be terminated by either party in the event of
a material breach by the other party of any of its obligations under
this Agreement which material breach has not been cured within sixty
(60) days of the date of receipt of written notice of such breach given
by the non-breaching party to the other party. Any such written notice
shall set forth with particularity the nature of any such material
breach.
b. Upon the termination of this Agreement pursuant to the provisions of
Section 7.a. above or Section 8.b. of this Agreement, neither party
shall have any further liability to the other pursuant to this
Agreement except that the Customer shall remain liable to ClientSoft
for any and all payments due to ClientSoft hereunder with respect to
solutions provided or Professional Services performed by ClientSoft up
to such date of termination, together with any and all expenses
associated therewith which are to be reimbursed by Customer to
ClientSoft in accordance with the provisions of Section 5 above.
8. CIRCUMSTANCES BEYOND CONTROL OF THE PARTIES
a. In the event of any circumstance, occurrence, act or omission arising
at any time which is beyond the control of ClientSoft or the Customer
and which has a material effect on the performance by either party of
any of its obligations pursuant to this Agreement, the parties agree
that the performance of the affected obligation(s) shall be suspended
until such time as the circumstance, occurrence, act or omission (which
is preventing the performance of such obligation) no longer affects the
performance of the particular obligation(s) and the agreed upon period
for performance of such obligation(s) shall be extended by a period
equal to the period during which such suspension of performance was in
effect.
b. Either party may terminate this Agreement upon written notice to the
other party, in the event that the performance of any obligation (to be
performed by either party hereunder) is suspended, pursuant to the
provisions of Section 8.a. above, for a period of ninety (90) days or
longer.
9. GENERAL
a. This Agreement, together with Exhibits A annexed hereto, which are
incorporated into and made a part of this Agreement, constitutes the
entire agreement between the parties with regard to the subject matter
hereof and supersedes all prior oral and written agreements,
understandings, representations, proposals or communications, of
whatsoever kind, between the parties with respect to the subject matter
of this Agreement.
b. No modifications or amendments to this Agreement and no waiver of any
provision of this Agreement shall be valid unless made in writing and
signed by duly authorized representatives of the parties hereto.
c. Customer shall not assign any of its rights or delegate any of its
duties under the terms of this Agreement without the prior written
consent of ClientSoft.
d. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
e. The parties hereto acknowledge and agree that Sections 2, 3, 5, 6 and 9
shall survive the termination of this Agreement.
f. In performing the Professional Services set forth in Exhibits A
hereto, ClientSoft is acting as an independent contractor and not as an
employee, agent or representative of the Customer. ClientSoft has no
authority to transact any business in the name of or for the account of
the Customer or to otherwise obligate the Customer in any manner.
g. Except as otherwise provided in this Agreement, all notices or other
communications hereunder shall be deemed to have been duly given when
made in writing and delivered in person or deposited in the U.S. mail,
postage prepaid, certified mail, return receipt requested, and
addressed to the Participant as shown above and to ClientSoft as
follows: ClientSoft Inc., 8 Skyline Drive, Hawthorne, NY 10532, Attn:
Vice Pres. - Professional Services, with a copy (which shall not
constitute notice) to Corporate Secretary at the same address.
h. Neither ClientSoft or the Customer shall disclose the terms of this
Agreement or publish any information concerning the same without the
prior written consent of the other.
i. The failure of either party, in one or more instances, to insist upon
the performance of any term or condition or to exercise any right or
remedy available to such party, shall not be construed as a waiver by
such party of the right to insist upon the performance or exercise of
any right or remedy now available or which may arise in the future.
j. The unenforceability of any provision hereof shall not affect the
remaining provisions of this Agreement, but rather such provision shall
be served and the remainder of this Agreement shall remain in full
force and effect.
k. This Agreement may be executed in any number of counterpart copies,
each of which shall be deemed an original, but which together shall
constitute a single instrument.
l. All paragraph headings and captions used herein are for the
convenience of the parties only and shall not be part of the text, or
affect the meaning of this Agreement.
m. Each of the parties hereto acknowledges to the other that it has had
the opportunity to have this agreement reviewed by counsel of its
choice and has had the opportunity to obtain the assistance of such
counsel in the negotiation, preparation, execution and deliver thereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their respective duly authorized representatives.
GAINSCO, INC. CLIENTSOFT, INC.
By: /s/ RICK A. LAABS 12/22/99 By:
------------------------------ -------------------------------
Authorized Signatory Date Authorized Signatory Date
Rick A. Laabs
------------------------------ -------------------------------
Type or Print Name Type or Print Name
Title: Sr. Vice President - IT Title:
------------------------------ -------------------------------
<PAGE> 29
EXHIBIT A
STATEMENT OF WORK NUMBER 99054
UMBRELLA POLICY SCOPE DEVELOPMENT
The following is a Statement of Work between ClientSoft Inc., ("ClientSoft") and
Gainsco, Inc. ("Gainsco"). This Statement of Work states all of the rights and
responsibilities of, and supersedes all prior oral and written communications,
between ClientSoft and Gainsco regarding the Scope Development project described
below (the "Project"). This Statement of Work supplements and is subject to the
terms and conditions contained in the Professional Services Agreement between
ClientSoft and Gainsco dated October 22, 1999 (the "Agreement").
I. PERSONNEL
ClientSoft and Gainsco will appoint representatives to the following positions:
A. ClientSoft Project Manager - ClientSoft will appoint a Project Manager
who will be responsible for overall management of the Project. The
Project Manager will work with ClientSoft and Gainsco personnel to
perform Project reviews, accomplish the tasks outlined in this
Statement of Work, manage day-to-day project activities, and serve as
ClientSoft's single point of contact with respect to interfacing with
Gainsco on project issues. Sales related issues remain the
responsibility of the ClientSoft Account Manager.
B. Gainsco Project Manager - Gainsco will designate a Project Manager who
will regularly available to meet with Gainsco and ClientSoft personnel
on all matters pertaining to the Project. This individual will
procure, manage and Gainsco's resources as defined in this Statement
of Work. The Gainsco Project Manager will have the authority to
signoff on each deliverable and completion criteria defined for each
phase and task defined below.
C. ClientSoft Resources - ClientSoft will make appropriate personnel
available as needed to complete this project.
D. Gainsco Resources - Gainsco will make appropriate personnel available
as needed to complete this project. HQ required resources will include
at least one individual from identified departments to participate in
the Validate Process Logic Flow and Application Design as necessary to
meet project objectives. Required resources include at least one
end-user representative, representing a cross-section of the user
population covered by this project.
B-0
<PAGE> 30
II. PROJECT SCOPE
This Statement of Work (SOW) defines the scope of tasks to be accomplished by
ClientSoft for development of a Scope Document. Over a three to four week
period, ClientSoft will conduct a series of meetings to collect information
relevant to a requirement definition to identify and develop application scope
for the system implementation.
The deliverable of this activity (discussed in detail below) will be documented
process detailing the application flow that maps the ClientBuilder functions and
how they integrate to Gainsco's system, including a Graphical User Interface
Prototype (proposed screen layouts). The final output of this short engagement
is a fixed-price proposal to complete development of the prototype into a
finished system. This document will also include a description of the proposed
rollout and testing phases. Upon acceptance of the developed proposal,
ClientSoft and Gainsco will be free to engage the project as described in the
proposal.
SCOPE DEVELOPMENT
The deliverables from this work include (Italics identify deliverables &
completion criteria):
1. DOCUMENTATION OF THE `AS-IS' PROCESS FLOW
This task performs the following:
o Applies a simple processing mapping tool and modified Process
mapping techniques, to document the `AS-IS' process. Special
attention is paid to identify bottlenecks and process issues,
which can become targets for process improvement.
o Based on significant interaction in a series of intense process
oriented meetings and interviews, ClientSoft consultants work
with the End-User and IT representatives to document existing
processes. It is imperative that the End-User representatives
understand the flow of the Gainsco system and be able to answer
questions as to process flow, screen content, data element usage
and navigation. Significant input will be required from the
End-User and IT representatives to ensure that bottlenecks and
process improvement opportunities are fully understood. This
directly affects the benefits derived.
DELIVERABLE: Documented AS-IS process flow
COMPLETION CRITERIA: This task is complete when the AS-IS process flow
has been document and verified by the Gainsco Project Manager.
EXCEPTIONS: The pricing for the project is based upon the specific
number of screens identified by Gainsco (up to 50 screens). Additional
screens identified during the scope development or subsequent phases
will require additional effort to document and will increase the price
of the contract and time of delivery.
2. COLLECT/ANALYZE/DOCUMENT SCREEN IMAGES AND DATA ELEMENTS
This task performs the following:
COLLECT GAINSCO SCREENS
o (Gainsco will provide ClientSoft with the proper Access, User ID
& Password and End-User representative to walk through and
document each screen in the Gainsco system. Analysis will focus
on how the current system behaves, a general description of what
is required to duplicate that behavior (either using mainframe or
local server files), and what mainframe field or fields must be
updated as a result of the end state of each control.
DOCUMENT DATA ELEMENTS AND CONTROLS
o Working with the appropriate Gainsco IT and End-User
representatives, the ClientSoft consultant will document the data
elements and controls (action fields, command lines and `PF'
keys) on each screen. These will be cross-referenced in the
design document for the Graphical User Interface Prototype.
B-1
<PAGE> 31
o Screen edits and usability features are extremely important to
identify at this juncture. When a user does not key all of the
data required for a screen to commit, a `screen edit' is
displayed. The goal is to ensure that one of these screen edits
does not interrupt the flow of processing and that it is handled
gracefully. Usability features are especially important to
evaluate in situations where cryptic codes are used and should be
replaced with more readable text.
PERFORM ANALYSIS
o The collected screen images and data elements and controls are
analyzed and the `As-Is' process document created from the
material gathered. Each screen image is numbered along with each
significant control to allow clearer discussion of process flow,
specific data elements and screen flow and their impact on the
complexity of the solution in the `To-Be' process development.
o In addition to the `As-Is' process flow, documentation will
include pages describing each screen and further broken down into
paragraphs explaining each control's behavior and end state
relationship to host screens. This information is critical to
understanding how the ClientBuilder code must react to changes in
the mainframe. Failure to identify mainframe functions (PF keys,
pop-up windows, navigation requirements, etc) will create `holes'
in the process flow, which will surface once actual coding, and
acceptance testing begins. Such omissions in the requirements
gathering process will create change request situations, which
could affect deliverable timeframes and increase project costs.
o It is imperative that the End-User representative understands the
flow of the Gainsco system and is able to answer questions as to
screen content, data element usage and navigation. During this
process, it is important to note where process flow is impacted
by the current system. Identification of bottlenecks and process
improvement opportunities are critical at this juncture.
STAGE REVIEW
o A stage review meeting is scheduled to review the `As-Is'
documentation to ensure completeness and accuracy. This is a
critical juncture in the process and requires signoff by the
Gainsco project manager prior to further analysis.
DELIVERABLE: Gainsco screens collected in the CSD, Data elements
documented
COMPLETION CRITERIA: This task is complete when the Gainsco screens
have been collected in the CSD and the Data Element documented and the
stage acceptance form is signed by the Gainsco Project Manager.
EXCEPTIONS: The pricing for this project is based upon the specific
number of screens identified by Gainsco (up to 50 screens). Additional
screens identified during the scope development or subsequent phases
will require additional effort to document and will increase the price
of the contract and time of delivery.
3. DEVELOP `TO-BE' PROCESS IMPROVEMENTS
This task performs the following:
CREATE IMPROVED PROCESS
o Applies a simple processing mapping tool and modified process
mapping techniques, to create the `To-Be' process from the
documented `As-Is' process. Special attention is paid to the
identified bottlenecks and process issues, which are targets for
process improvement.
o Based on significant interaction, ClientSoft consultants work
with the End-User and IT representatives to create process
improvements. It is imperative that the End-User representatives
understand the flow of the Gainsco system and be able to answer
questions as to process flow, screen content, data element usage
and navigation. Significant input will be required from the
End-User and IT representatives to ensure that bottleneck
elimination and process improvement opportunities are fully
realized.
DELIVERABLE: Gainsco `To-Be' process defined.
COMPLETION CRITERIA: This task is complete when the Gainsco `To-Be'
process has been defined and the phase acceptance form is signed by
the Gainsco Project Manager.
B-2
<PAGE> 32
EXCEPTIONS: The pricing for the project is based upon the specific
number of screens identified by Gainsco (up to 50 screens). Additional
screens identified during the scope development or subsequent phases
will require additional effort to document and will increase the price
of the contract and time of delivery.
4. DEVELOP `TO-BE' GRAPHICAL USER INTERFACE PROTOTYPE
From a usability and complexity of development perspective, this task
is the most critical. Herein the flow of the system, its functions and
capabilities from the End-User perspective is created and approved.
Errors or omissions in function or feature will create a change
control situation, which could affect the timeframe and cost of the
project. This task performs the following:
CREATE GRAPHICAL USER INTERFACE PROTOTYPE
o Using basic GUI graphical objects, which are supported by
ClientBuilder, the ClientSoft consultant will work with the
End-User and IT representatives to create the Graphical User
Interface Prototype. Though possibly missing icons, colors of the
final product and other minor GUI features (spinning icons, etc),
the prototype will be roughly equivalent to the final delivered
product. The key task accomplished in this phase is to correctly
identify how the `To-Be' GUI interface will work. Special
attention to where the data elements on the GUI screens come from
and how they behave must be documented (i.e. some GUI screens may
required data from multiple host screens).
o Again, it is imperative that the End-User representatives
understand the flow of the Gainsco system and be able to answer
questions as to process flow, screen content, data element usage
and navigation. Significant input will be required from the
End-User and IT representatives to ensure that bottlenecks and
process improvement opportunities are fully realized.
DOCUMENT PROTOTYPE DATA ELEMENTS AND CONTROLS
o Working with the appropriate Gainsco IT and End-User
representatives, the ClientSoft consultant will document the GUI
data elements and controls (click boxes, drop down lists and so
forth) on each screen. These will be cross-referenced in the
design document against the host fields documented in the `As-Is'
process.
o Screen edits and usability features are extremely important to
identify at this juncture. When a user does not key all of the
data required for a screen to commit, a `screen edit' is
displayed. The goal is to ensure that one of these screen edits
does not interrupt the flow of processing and that it is handled
gracefully. Usability features are especially important to
evaluate in situations where cryptic codes are used and should be
replaced with more readable text.
PERFORM ANALYSIS
o The collected screen images and data elements and controls are
analyzed and the Graphical User Interface Prototype document
created from the material gathered. Each screen image is numbered
along with each significant control and cross-referenced to the
host screens to allow clearer discussion of process flow,
specific data elements and screen flow and their impact on the
complexity of the solution in the `To-Be' process development.
o In addition to the `To-Be' GUI prototype, documentation will
include pages describing each GUI screen and further broken down
into paragraphs explaining each control's behavior and end state
relationship to host screens. This information is critical to
understanding how the ClientBuilder code must react to changes in
the mainframe. Failure to identify prototype functions (check
boxes, drop down lists, navigation requirements, etc) will create
`holes' in the process flow which will surface once actual coding
and acceptance testing begins. Such omissions in the requirements
gathering process will create change request situations, which
could affect deliverable timeframes and increase project costs.
o It is imperative that the End-User representative understands the
flow of the desired Gainsco process relative to the existing
system and is able to answer questions as to screen content, data
element usage and navigation. During this process, it is
important to note where process flow will be positively impacted
by the `To-Be' system. Solutions to bottlenecks and estimates of
positive process improvement impacts over the `As-Is' system are
important to identify for financial justification of the proposed
system.
B-3
<PAGE> 33
STAGE REVIEW
o A stage review meeting is scheduled to review the `As-Is'
documentation to ensure completeness and accuracy. This is a
critical juncture in the process and requires signoff by the
Gainsco project manager prior to further analysis.
DELIVERABLE: Gainsco Prototype defined.
COMPLETION CRITERIA: This task is complete when the Gainsco Prototype
has been defined and the phase acceptance form is signed by the
Gainsco Project Manager.
EXCEPTIONS: The pricing for the project is based upon the specific
number of screens identified by Gainsco (up to 50 screens). Additional
screens identified during the scope development or subsequent phases
will require additional effort to document and will increase the price
of the contract and time of delivery.
5. DEVELOP FIXED PRICE PROPOSAL
This task performs the following:
Using the material developed in Tasks 1-4, the ClientSoft team will
create a fixed-price proposal to develop the Gainsco solution. NOTE:
This task is performed off-site and concludes the work effort for this
scope development project.
This will include (but is not limited to) the following areas:
PHASE I: MOBILIZATION AND PROJECT SETUP
o Development Server Installation Tasks -- These are tasks
associated with the installation of the development servers
required to support the solution.
o Development Workstation Installation Tasks -- These are tasks
associated with the installation of the development workstations
required to support the solution.
o Acceptance Test Plan -- A significant portion of mobilization is
the development of test data and the acceptance test plan.
ClientSoft consultants work with the End-User and IT
representatives to ensure that a comprehensive acceptance test
plan is built and readied for implementation at the appropriate
time.
PHASE II: DEVELOPMENT
o Describes in detail, stage limited functional releases of the
software developed by ClientSoft. ClientSoft consultants will
begin the integration of ClientBuilder to the Gainsco system
based on the specifications developed in the application scope
document described in the deliverables to this project.
o Any changes to the application scope will require a written
request detailing the changes requested and any additional costs
if applicable, signed by all parties.
PHASE III: TESTING & ROLLOUT
o Application testing and rollout. After the ClientBuilder
application is integrated with the PDS back-end and the agent
front-end according to the specification of the application scope
document, the application testing and rollout phase will
commence. Phase III represents 25% of the project deliverables.
OUT OF SCOPE WORK
o The fixed-price proposal will specifically identify items
required for successful implementation of this project which are
out of scope and provided for by Gainsco. Failure to provide
these functions could adversely affect this project and Gainsco
holds ClientSoft harmless in that event.
DELIVERABLE: Gainsco Fixed Price Proposal
COMPLETION CRITERIA: This task is complete when the Gainsco
Fixed-Price Proposal has been defined and the phase acceptance form is
signed by the Gainsco Project Manager.
B-4
<PAGE> 34
EXCEPTIONS: The pricing for the project is based upon the specific
number of screens identified by Gainsco (up to 50 screens). Additional
screens identified during the scope development or subsequent phases
will require additional effort to document and will increase the price
of the contract and time of delivery.
III. SCHEDULE OF SERVICES
ClientSoft shall begin work at a mutually agreed upon date upon the acceptance
of this Statement of Work.
IV. CLIENTSOFT'S RESPONSIBILITIES
A. ClientSoft will assign a Project Manager, allocate appropriate
resources, and use reasonable efforts to avoid project delay.
B. ClientSoft will perform the Services described in this Statement of
Work for the Project.
C. ClientSoft shall provide at its own cost and expense the following
software. ClientBuilder Software used to collect and document the host
screens.
V. GAINSCO'S RESPONSIBILITIES
A. Gainsco will participate in Project Updates, if any, with ClientSoft
in accordance with the timeframes as set forth in "Schedule 1 to
Exhibit A - Project Update/Communications" annexed hereto.
B. Gainsco will assign a Project Manager, allocate appropriate resources,
and use its reasonable efforts to avoid Project delays.
C. Gainsco shall provide at its own cost and expense the following
Hardware and software:
1. Developer Workstation:
Prior to the start of the project, Gainsco will provide the necessary
developer workstation and network Host connectivity necessary for
completing this project. A minimum developer workstation is a Win95,
Win98 or WinNT computer with 128 megs of Ram and approximately 1.0GB
of free disk space. The workstation must have network access and
terminal emulation to the Host.
VI. KEY ASSUMPTIONS
The following are key assumptions made by ClientSoft of Gainsco and this
project.
1. The application and functions will be documented (scope
document), signed by all parties, and attached to this Agreement
as an appendix prior to application development.
2. ClientSoft and Gainsco will assign a Project Manager, who will be
the primary point of contact between parties prior to the
commencement of this project.
3. Gainsco shall make available to ClientSoft the required hardware
(as defined in Gainsco's Responsibilities) at Gainsco's
additional cost and expense before the contract start date.
4. Gainsco shall make available to ClientSoft the required software
(as defined in Gainsco's Responsibilities) at Gainsco's
additional cost and expense before contract start date.
B-5
<PAGE> 35
VII. PAYMENT
The prices to be paid to ClientSoft by Gainsco for the Services provided in
accordance with this Statement of Work are as follows:
1. SCHEDULE OF CHARGES
<TABLE>
<S> <C>
- ------------------------------------------------------------------
PROFESSIONAL SERVICES
- ------------------------------------------------------------------
Scope Development 25,000
- ------------------------------------------------------------------
PROJECT TOTAL 25,000
- ------------------------------------------------------------------
</TABLE>
2. INVOICING
ClientSoft will invoice Gainsco as follows:
Acceptance of Scope Document and signoff of project: 100%
Additional ClientSoft Professional Services requested by Customer that are not
included in or exceed the scope of this Statement of Work and which are agreed
to by both parties, shall be priced separately based on time and resource
requirements (subject to increase in accordance with Sections 5(b) and 5(c) of
the Agreement):
Customer shall pay ClientSoft's reasonable expenses, which are incurred by
ClientSoft for travel, lodging, meals and cost of materials and equipment (i.e.,
printed materials, etc.).
VIII. CHANGE CONTROL PROCESS
The "Change Control Process" governs changes to the Project scope and
deliverables during the life of the Project. The purpose of this process is to
coordinate and properly document the development, installation and evaluation of
new features and functionality during the Project. The process will apply to new
Project components and to enhancements of existing Project components. The
Change Control Process will be implemented from the start of the Project and
will continue throughout the Project's duration.
A. The Project Manager of the requesting party will submit a written
Change Request to the Project Manager for the other party in the
format identified in "Schedule 2 to Exhibit A - Change Request Form"
annexed hereto.
B. Both ClientSoft and Gainsco will review the proposed Change Request
and either approve it for further study or reject it. The amount and
payment of the costs of further study, if any, will be agreed upon by
both ClientSoft and Gainsco. The results of the study will be used to
determine the effect that the implementation of the Change Request
will have on the Project cost and schedule.
D. Once the parties have evaluated the Change Request, and have agreed to
the change and the terms and conditions for the change, ClientSoft and
Gainsco will complete and sign a "Change Request Evaluation Response
Form" in the format identified in "Schedule 3 to Exhibit A" annexed
hereto and setting forth the change and agreed terms and conditions.
B-6
<PAGE> 36
IX. ACCEPTANCE CRITERIA
A Deliverable will be considered accepted when each of the Completion Criteria
has been met (see Project Scope). Gainsco's Project Manager will complete an
acceptance form, in the format of "Schedule 4 to Exhibit A - Deliverable
Acceptance Form" annexed hereto, for each Deliverable and provide such form to
the ClientSoft Project Manager. The Project will be considered accepted when all
of the Completion Criteria have been met. Gainsco's Project Manager will
complete a Project acceptance form, in the format of "Schedule 5 to Exhibit A -
Project Completion and Evaluation Summary" annexed hereto, and provide such form
to the ClientSoft Project Manager.
Agreed and Accepted:
Gainsco, Inc: ClientSoft Inc.
By: By:
-------------------------------- -------------------------------------
Title: Title:
----------------------------- ----------------------------------
Date: Date:
------------------------------ -----------------------------------
B-7
<PAGE> 37
SCHEDULE 1 TO EXHIBIT A
PROJECT UPDATE/COMMUNICATIONS
ClientSoft and Gainsco acknowledge that regular communication among and between
the parties is essential to be Project's successful completion. The parties
agree that, in addition to normal, day-to-day communication, Project Updates
will be held:
[ ] Twice Weekly (insert days of week meetings will be held on regularly
[X] Weekly, every (insert day of week for regular update)
[ ] Bi-weekly, every other (insert day of week for regular update)
at 10:00 AM EST ON THURSDAYS (insert start time of regular update)
via_____ on-site meeting held at__________________________(insert location)
[X] teleconference, which will be initiated by ClientSoft (identify party)
The expected duration of each Project Update is estimated to be 1 hour.
Both ClientSoft and Gainsco's Project Managers will determine, and be
responsible for the attendance of, the appropriate participants for each Project
Update.
The ClientSoft Project manager will issue minutes of each Project Update within
two (2) business days of the update. The minutes will include: attendee list,
status of previously opened items, list new items including person(s)
responsible for resolution, and summary of the Project's overall status. Other
items will be added as appropriate.
Other meetings, correspondence, etc. will occur as necessary during the course
of the Project. The regular Project Update is not intended to eliminate or
replace other forms of communication between the parties.
B-8
<PAGE> 38
SCHEDULE 2 TO EXHIBIT A
CHANGE REQUEST FORM
GAINSCO SCOPE DEVELOPMENT
Requester Name:
--------------------------------------------
Requester Company Name:
------------------------------------
Date Requested:
--------------------------------------------
Response Requested By:
-------------------------------------
Change Requested:
(Provide a detailed description of the change requested, the area of the
project plan/schedule being modified, and the benefits of making the change.)
Change Request Received:
Gainsco, Inc.: ClientSoft Inc.
Signed: Signed:
------------------------------- -------------------------------
By: By:
----------------------------------- -----------------------------------
Title: Title:
-------------------------------- --------------------------------
Date: Date:
--------------------------------- ---------------------------------
Change Request No.:
-------------------
B-9
<PAGE> 39
SCHEDULE 3 TO EXHIBIT A
CHANGE REQUEST
EVALUATION RESPONSE FORM
Change Request No.:
----------------------------------------
Requester Name:
--------------------------------------------
Review Date:
-----------------------------------------------
Request No. has been:
---------
accepted without changes
--------
accepted with modification (see below)
--------
rejected
--------
Modifications to Change Request:
(Insert any changes that are made to the original Change Request. Ensure that,
whether or not modified, the Change Request as accepted identifies, in detail,
the changes to the Project scope, deliverables, schedule and costs.)
Schedule Revision:
(Insert new dates or attach revised project plan/schedule, which show the
impact of the Change Request, if any.)
Cost Revision:
(Define any additional costs to be incurred as a result of proposed changes.
Include in responsible parties, payment due date and any additional
deliverables or modifications to acceptance criteria)
Change Request Agreed and Accepted:
Gainsco, Inc.: ClientSoft Inc.,
By: By:
----------------------------------- -----------------------------------
Title: Title:
-------------------------------- --------------------------------
Date: Date:
--------------------------------- ---------------------------------
B-10
<PAGE> 40
SCHEDULE 4 TO EXHIBIT A
DELIVERABLE ACCEPTANCE FORM
Statement of Work Number 99138 - Scope Document Development
Delivery Date:
----------------------------------------------------------------
Service(s) Provided:
----------------------------------------------------------
- ------------------------------------------------------------------------------
ClientSoft Project Manager:
---------------------------------------------------
<TABLE>
<CAPTION>
===============================================================================
Project Deliverable Acceptance Criteria Completion Date Amount Due
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
===============================================================================
</TABLE>
* Identify the appropriate project deliverables from section II Project Scope
which apply to this phase.
ClientSoft has met the milestones identified above and satisfactorily proved
all related deliverables.
Gainsco Corporation:
Accepted By:
------------------------------------------------------------------
Name (print):
-----------------------------------------------------------------
Title:
------------------------------------------------------------------------
Date:
-------------------------------------------------------------------------
B-11
<PAGE> 41
SCHEDULE 5 TO EXHIBIT A
PROJECT COMPLETION AND EVALUATION SUMMARY
Project Name: UMBRELLA POLICY SCOPE DEVELOPMENT
Project Description:
To collect requirements and develop a fixed cost project estimate.
Dates of Services:
-----------------------
ClientSoft Project Manager: tbd
Please take a few moments to help us serve you better by answering a few
questions about our Services. Your opinion will help us deliver the service
quality you expect. The information above is needed to compile service specific
statistics.
For each of the following questions, using a 1-7 scale, please rate the level
of satisfaction you have had by checking the appropriate box.
Satisfaction Rating
(1 = extremely dissatisfied, 7 = extremely satisfied, N/A = area does not apply)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1. Professionalism of ClientSoft personnel, who provided Services to you on N/A (1) (2) (3) (4) (5) (6) (7)
this project, (i.e., attitude, interpersonal skills, ethical standards, etc.)?
2. ClientSoft's ability to provide Services when requested? N/A (1) (2) (3) (4) (5) (6) (7)
3. ClientSoft's level of technical knowledge about the Products and Systems N/A (1) (2) (3) (4) (5) (6) (7)
related to your needs?
4. ClientSoft's knowledge of your industry and business environment? N/A (1) (2) (3) (4) (5) (6) (7)
5. ClientSoft's ability to complete the Services you contracted for within the N/A (1) (2) (3) (4) (5) (6) (7)
established time frame?
6. ClientSoft's communication of plans, schedules and progress for the N/A (1) (2) (3) (4) (5) (6) (7)
Service(s) provided?
7. ClientSoft's accessibility and installation support when not on-site? N/A (1) (2) (3) (4) (5) (6) (7)
8. ClientSoft's written documentation (i.e., reports, procedure manuals, custom N/A (1) (2) (3) (4) (5) (6) (7)
program documentation)?
9. ClientSoft's ability to train your personnel as per the Statement of Work? N/A (1) (2) (3) (4) (5) (6) (7)
10. Overall, how do you rate ClientSoft's Services? N/A (1) (2) (3) (4) (5) (6) (7)
</TABLE>
B-12
<PAGE> 42
What is the most important thing we can do to improve your satisfaction with
ClientSoft in the future?
(PROVIDE AS MUCH INFORMATION AS YOU FEEL APPROPRIATE)
Gainsco Scope Development project is accepted as meeting the Deliverables as
defined in the Statement of Work between ClientSoft and Gainsco, dated October
22, 1999.
Agreed and Signed:
Gainsco, Inc.:
By:
----------------------------
Title:
-------------------------
Date:
--------------------------
B-13
<PAGE> 1
EXHIBIT 21
[FLOWCHART]
* GAINSCO Service Corp. owns the charter and management contract thereby
giving it 100% control of GAINSCO County Mutual Insurance Company.
* Goff Moore Strategic Partners, L.P. organizational chart attached.
* Goff Moore Strategic Partners L.P. owns approximately 34% of the
outstanding Common Stock of the Applicant on a fully converted basis
consisting of (a) 6,200,000 shares of Common Stock which GMSP may acquire
upon conversion of 31,620 shares of the Series A Preferred Stock, (b)
3,100,000 shares of Common Stock issuable upon exercise of presently
exercisable warrants to purchase shares of Common Stock, and (c) 1,064,000
shares of Common Stock.
<PAGE> 1
Exhibit 23
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 25, 2000, relating to the consolidated balance sheets of GAINSCO, INC.
and subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity and comprehensive income, and
cash flows for each of the years in the three-year period ended December 31,
1999, and all related schedules, which reports appear in the December 31, 1999
annual report on Form 10-K of GAINSCO, INC.
KPMG LLP
Dallas, Texas
March 30, 2000
<PAGE> 1
EXHIBIT 24
SPECIAL POWER OF ATTORNEY
The undersigned hereby appoints Glenn W. Anderson, Daniel J. Coots and
Joel C. Puckett, and each of them (with full power in each to act alone), as
attorneys and agents for the undersigned, with full power of substitution, for
and in the name, place and stead of the undersigned, to sign, in my capacity as
a director or officer of GAINSCO, INC., a Texas corporation ("GNA"), and file
with the Securities and Exchange Commission ("SEC") under the Securities Act of
1933 or the Securities Exchange Act of 1934, as the case may be, GNA's Annual
Report on Form 10-K for its fiscal year ended December 31, 1999 and one or more
Form S-8 Registration Statements covering GNA's 1998 Long-Term Incentive Plan,
1995 Stock Option Plan, 1990 Stock Option Plan, Profit Sharing Plan and Trust,
401(k) Plan, any Nonqualified Stock Option Agreement between GNA and Glenn W.
Anderson or any other employee, officer, director or consultant of GNA or any
of its subsidiaries, and any other employee benefit and stock option plans that
GNA or any of its subsidiaries may have heretofore adopted or may hereafter
adopt, including any and all amendments (including pre-effective and
post-effective amendments to filings heretofore or hereafter made) and exhibits
to said filings and any and all applications, instruments and other documents
to be filed with the SEC or any state regulatory agency pertaining to the
registration of securities of GNA, with full power and authority to do and
perform any and all acts and things whatever that they or he may deem requisite
or desirable in their or his sole discretion in the premises as fully and to
all intents and purposes as the undersigned might or could do in person, and to
file copies of this power of attorney with the SEC or any such agency or body.
The power and authority hereby granted shall continue until revoked by a
written instrument of revocation delivered to the President of GNA.
Witness my hand this _______ day of March 2000.
By: /s/ HARDEN WIEDEMANN
----------------------------
<PAGE> 2
EXHIBIT 24
SPECIAL POWER OF ATTORNEY
The undersigned hereby appoints Glenn W. Anderson, Daniel J. Coots and
Joel C. Puckett, and each of them (with full power in each to act alone), as
attorneys and agents for the undersigned, with full power of substitution, for
and in the name, place and stead of the undersigned, to sign, in my capacity as
a director or officer of GAINSCO, INC., a Texas corporation ("GNA"), and file
with the Securities and Exchange Commission ("SEC") under the Securities Act of
1933 or the Securities Exchange Act of 1934, as the case may be, GNA's Annual
Report on Form 10-K for its fiscal year ended December 31, 1999 and one or more
Form S-8 Registration Statements covering GNA's 1998 Long-Term Incentive Plan,
1995 Stock Option Plan, 1990 Stock Option Plan, Profit Sharing Plan and Trust,
401(k) Plan, any Nonqualified Stock Option Agreement between GNA and Glenn W.
Anderson or any other employee, officer, director or consultant of GNA or any
of its subsidiaries, and any other employee benefit and stock option plans that
GNA or any of its subsidiaries may have heretofore adopted or may hereafter
adopt, including any and all amendments (including pre-effective and
post-effective amendments to filings heretofore or hereafter made) and exhibits
to said filings and any and all applications, instruments and other documents
to be filed with the SEC or any state regulatory agency pertaining to the
registration of securities of GNA, with full power and authority to do and
perform any and all acts and things whatever that they or he may deem requisite
or desirable in their or his sole discretion in the premises as fully and to
all intents and purposes as the undersigned might or could do in person, and to
file copies of this power of attorney with the SEC or any such agency or body.
The power and authority hereby granted shall continue until revoked by a
written instrument of revocation delivered to the President of GNA.
Witness my hand this 10th day of March 2000.
By: /s/ JOHN C. GOFF
----------------------------
<PAGE> 3
EXHIBIT 24
SPECIAL POWER OF ATTORNEY
The undersigned hereby appoints Glenn W. Anderson, Daniel J. Coots and
Joel C. Puckett, and each of them (with full power in each to act alone), as
attorneys and agents for the undersigned, with full power of substitution, for
and in the name, place and stead of the undersigned, to sign, in my capacity as
a director or officer of GAINSCO, INC., a Texas corporation ("GNA"), and file
with the Securities and Exchange Commission ("SEC") under the Securities Act of
1933 or the Securities Exchange Act of 1934, as the case may be, GNA's Annual
Report on Form 10-K for its fiscal year ended December 31, 1999 and one or more
Form S-8 Registration Statements covering GNA's 1998 Long-Term Incentive Plan,
1995 Stock Option Plan, 1990 Stock Option Plan, Profit Sharing Plan and Trust,
401(k) Plan, any Nonqualified Stock Option Agreement between GNA and Glenn W.
Anderson or any other employee, officer, director or consultant of GNA or any
of its subsidiaries, and any other employee benefit and stock option plans that
GNA or any of its subsidiaries may have heretofore adopted or may hereafter
adopt, including any and all amendments (including pre-effective and
post-effective amendments to filings heretofore or hereafter made) and exhibits
to said filings and any and all applications, instruments and other documents
to be filed with the SEC or any state regulatory agency pertaining to the
registration of securities of GNA, with full power and authority to do and
perform any and all acts and things whatever that they or he may deem requisite
or desirable in their or his sole discretion in the premises as fully and to
all intents and purposes as the undersigned might or could do in person, and to
file copies of this power of attorney with the SEC or any such agency or body.
The power and authority hereby granted shall continue until revoked by a
written instrument of revocation delivered to the President of GNA.
Witness my hand this 16th day of March 2000.
By: /s/ ROBERT J. MCGEE, JR.
----------------------------
<PAGE> 4
EXHIBIT 24
SPECIAL POWER OF ATTORNEY
The undersigned hereby appoints Glenn W. Anderson, Daniel J. Coots and
Joel C. Puckett, and each of them (with full power in each to act alone), as
attorneys and agents for the undersigned, with full power of substitution, for
and in the name, place and stead of the undersigned, to sign, in my capacity as
a director or officer of GAINSCO, INC., a Texas corporation ("GNA"), and file
with the Securities and Exchange Commission ("SEC") under the Securities Act of
1933 or the Securities Exchange Act of 1934, as the case may be, GNA's Annual
Report on Form 10-K for its fiscal year ended December 31, 1999 and one or more
Form S-8 Registration Statements covering GNA's 1998 Long-Term Incentive Plan,
1995 Stock Option Plan, 1990 Stock Option Plan, Profit Sharing Plan and Trust,
401(k) Plan, any Nonqualified Stock Option Agreement between GNA and Glenn W.
Anderson or any other employee, officer, director or consultant of GNA or any
of its subsidiaries, and any other employee benefit and stock option plans that
GNA or any of its subsidiaries may have heretofore adopted or may hereafter
adopt, including any and all amendments (including pre-effective and
post-effective amendments to filings heretofore or hereafter made) and exhibits
to said filings and any and all applications, instruments and other documents
to be filed with the SEC or any state regulatory agency pertaining to the
registration of securities of GNA, with full power and authority to do and
perform any and all acts and things whatever that they or he may deem requisite
or desirable in their or his sole discretion in the premises as fully and to
all intents and purposes as the undersigned might or could do in person, and to
file copies of this power of attorney with the SEC or any such agency or body.
The power and authority hereby granted shall continue until revoked by a
written instrument of revocation delivered to the President of GNA.
Witness my hand this 8th day of March 2000.
By: /s/ SAM ROSEN
----------------------------
<PAGE> 5
EXHIBIT 24
SPECIAL POWER OF ATTORNEY
The undersigned hereby appoints Glenn W. Anderson, Daniel J. Coots and
Joel C. Puckett, and each of them (with full power in each to act alone), as
attorneys and agents for the undersigned, with full power of substitution, for
and in the name, place and stead of the undersigned, to sign, in my capacity as
a director or officer of GAINSCO, INC., a Texas corporation ("GNA"), and file
with the Securities and Exchange Commission ("SEC") under the Securities Act of
1933 or the Securities Exchange Act of 1934, as the case may be, GNA's Annual
Report on Form 10-K for its fiscal year ended December 31, 1999 and one or more
Form S-8 Registration Statements covering GNA's 1998 Long-Term Incentive Plan,
1995 Stock Option Plan, 1990 Stock Option Plan, Profit Sharing Plan and Trust,
401(k) Plan, any Nonqualified Stock Option Agreement between GNA and Glenn W.
Anderson or any other employee, officer, director or consultant of GNA or any
of its subsidiaries, and any other employee benefit and stock option plans that
GNA or any of its subsidiaries may have heretofore adopted or may hereafter
adopt, including any and all amendments (including pre-effective and
post-effective amendments to filings heretofore or hereafter made) and exhibits
to said filings and any and all applications, instruments and other documents
to be filed with the SEC or any state regulatory agency pertaining to the
registration of securities of GNA, with full power and authority to do and
perform any and all acts and things whatever that they or he may deem requisite
or desirable in their or his sole discretion in the premises as fully and to
all intents and purposes as the undersigned might or could do in person, and to
file copies of this power of attorney with the SEC or any such agency or body.
The power and authority hereby granted shall continue until revoked by a
written instrument of revocation delivered to the President of GNA.
Witness my hand this 9th day of March 2000.
By: /s/ JOHN WILLIAMS
----------------------------
<PAGE> 6
EXHIBIT 24
SPECIAL POWER OF ATTORNEY
The undersigned hereby appoints Glenn W. Anderson, Daniel J. Coots and
Joel C. Puckett, and each of them (with full power in each to act alone), as
attorneys and agents for the undersigned, with full power of substitution, for
and in the name, place and stead of the undersigned, to sign, in my capacity as
a director or officer of GAINSCO, INC., a Texas corporation ("GNA"), and file
with the Securities and Exchange Commission ("SEC") under the Securities Act of
1933 or the Securities Exchange Act of 1934, as the case may be, GNA's Annual
Report on Form 10-K for its fiscal year ended December 31, 1999 and one or more
Form S-8 Registration Statements covering GNA's 1998 Long-Term Incentive Plan,
1995 Stock Option Plan, 1990 Stock Option Plan, Profit Sharing Plan and Trust,
401(k) Plan, any Nonqualified Stock Option Agreement between GNA and Glenn W.
Anderson or any other employee, officer, director or consultant of GNA or any
of its subsidiaries, and any other employee benefit and stock option plans that
GNA or any of its subsidiaries may have heretofore adopted or may hereafter
adopt, including any and all amendments (including pre-effective and
post-effective amendments to filings heretofore or hereafter made) and exhibits
to said filings and any and all applications, instruments and other documents
to be filed with the SEC or any state regulatory agency pertaining to the
registration of securities of GNA, with full power and authority to do and
perform any and all acts and things whatever that they or he may deem requisite
or desirable in their or his sole discretion in the premises as fully and to
all intents and purposes as the undersigned might or could do in person, and to
file copies of this power of attorney with the SEC or any such agency or body.
The power and authority hereby granted shall continue until revoked by a
written instrument of revocation delivered to the President of GNA.
Witness my hand this 9th day of March 2000.
By: /s/ JOEL C. PUCKETT
----------------------------
<PAGE> 7
EXHIBIT 24
SPECIAL POWER OF ATTORNEY
The undersigned hereby appoints Glenn W. Anderson, Daniel J. Coots and
Joel C. Puckett, and each of them (with full power in each to act alone), as
attorneys and agents for the undersigned, with full power of substitution, for
and in the name, place and stead of the undersigned, to sign, in my capacity as
a director or officer of GAINSCO, INC., a Texas corporation ("GNA"), and file
with the Securities and Exchange Commission ("SEC") under the Securities Act of
1933 or the Securities Exchange Act of 1934, as the case may be, GNA's Annual
Report on Form 10-K for its fiscal year ended December 31, 1999 and one or more
Form S-8 Registration Statements covering GNA's 1998 Long-Term Incentive Plan,
1995 Stock Option Plan, 1990 Stock Option Plan, Profit Sharing Plan and Trust,
401(k) Plan, any Nonqualified Stock Option Agreement between GNA and Glenn W.
Anderson or any other employee, officer, director or consultant of GNA or
any of its subsidiaries, and any other employee benefit and stock option plans
that GNA or any of its subsidiaries may have heretofore adopted or may
hereafter adopt, including any and all amendments (including pre-effective and
post-effective amendments to filings heretofore or hereafter made) and exhibits
to said filings and any and all applications, instruments and other documents
to be filed with the SEC or any state regulatory agency pertaining to the
registration of securities of GNA, with full power and authority to do and
perform any and all acts and things whatever that they or he may deem requisite
or desirable in their or his sole discretion in the premises as fully and to
all intents and purposes as the undersigned might or could do in person, and to
file copies of this power of attorney with the SEC or any such agency or body.
The power and authority hereby granted shall continue until revoked by a
written instrument of revocation delivered to the President of GNA.
Witness my hand this ___ day of March 2000.
By: /s/ J. RANDALL CHAPPEL
-------------------------
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS OF GAINSCO, INC. AND SUBSIDIARIES AS OF DECEMBER 31,
1999, AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS, SHAREHOLDERS'
EQUITY AND COMPREHENSIVE INCOME AND CASH FLOWS FOR THE YEAR ENDING DECEMBER 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 197,077,075
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,170,329
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 245,180,132
<CASH> 1,205,364
<RECOVER-REINSURE> 3,254,930
<DEFERRED-ACQUISITION> 14,927,673
<TOTAL-ASSETS> 395,647,711
<POLICY-LOSSES> 132,813,583
<UNEARNED-PREMIUMS> 82,219,785
<POLICY-OTHER> 4,206,314
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 18,000,000
0
3,162,000
<COMMON> 2,176,393
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 395,647,711
113,280,292
<INVESTMENT-INCOME> 9,722,213
<INVESTMENT-GAINS> 605,606
<OTHER-INCOME> 1,848,590
<BENEFITS> 76,349,044
<UNDERWRITING-AMORTIZATION> (3,607,531)
<UNDERWRITING-OTHER> 14,524,068
<INCOME-PRETAX> 8,341,300
<INCOME-TAX> 1,214,163
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,127,137
<EPS-BASIC> .34
<EPS-DILUTED> .32
<RESERVE-OPEN> 101,768,000
<PROVISION-CURRENT> 75,976,000
<PROVISION-PRIOR> 373,000
<PAYMENTS-CURRENT> 32,651,000
<PAYMENTS-PRIOR> 49,951,000
<RESERVE-CLOSE> 95,515,000
<CUMULATIVE-DEFICIENCY> (373,000)
</TABLE>
