Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended June 30, 2003 Commission File Number 1-9828
GAINSCO, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1617013
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1445 Ross Ave., Suite 5300, Dallas, Texas 75202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 647-0415
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of August 13, 2003 there were 21,169,736 shares of the registrant's Common
Stock ($.10 par value) outstanding.
GAINSCO, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Independent Accountants' Review Report 3
Consolidated Balance Sheets as of June 30, 2003 (unaudited) and
December 31, 2002 4
Consolidated Statements of Operations for the Three Months and Six Months
Ended June 30, 2003 and 2002 (unaudited) 6
Consolidated Statements of Shareholders' Equity and Comprehensive
Income (Loss) for the Six Months Ended June 30, 2003 (unaudited) and the
Twelve Months Ended December 31, 2002 7
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2003 and 2002 (unaudited) 8
Notes to Consolidated Financial Statements
June 30, 2003 and 2002 (unaudited) 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 34
ITEM 4. CONTROLS AND PROCEDURES 36
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 37
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 37
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 37
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 37
ITEM 5. OTHER INFORMATION 38
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 38
SIGNATURE 43
2
PART I. FINANCIAL INFORMATION
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Shareholders
GAINSCO, INC.:
We have reviewed the accompanying consolidated balance sheets of GAINSCO, INC.
and subsidiaries as of June 30, 2003, the related consolidated statements of
operations for the three - month and six - month periods ended June 30, 2003 and
2002, and the related consolidated statements of shareholders' equity and
comprehensive income (loss), and cash flows for the six-months ended June 30,
2003 and 2002. These consolidated financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheets of
GAINSCO, INC. and subsidiaries as of December 31, 2002, and the related
consolidated statements of operations, statements of shareholders' equity and
comprehensive loss, and statements of cash flows for the year then ended (not
presented herein); and in our report dated March 24, 2003, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the financial information set forth in the accompanying consolidated balance
sheets as of December 31, 2002 and the accompanying consolidated statement of
shareholders' equity and comprehensive loss for the year ended December 31,
2002, is fairly presented, in all material respects, in relation to the
consolidated balance sheets and consolidated statement of shareholders' equity
and comprehensive loss from which they have been derived.
As discussed in Note 1(h) to the consolidated financial statements, effective
January 1, 2002, GAINSCO, INC. and subsidiaries adopted the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets."
/s/ KPMG LLP
------------
KPMG LLP
Dallas, Texas
August 8, 2003
3
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30,
2003 December 31,
(unaudited) 2002
------------ -----------
Assets
Investments:
Fixed maturities:
Bonds available for sale, at fair value (amortized cost: $51,197,333
- 2003, $59,019,871 - 2002) $ 55,026,638 62,657,328
Certificates of deposit, at fair value (cost: $985,400 - 2003,
$645,000 - 2002)) 987,213 645,000
Common stock, at fair value (cost: $302,000 - 2003, $0 - 2002) 233,000 -
Short-term investments, at cost (which approximates fair value) 53,689,815 51,671,557
------------ ----------
Total investments 109,936,666 114,973,885
Cash 4,681,173 2,512,454
Accrued investment income 793,303 714,760
Premiums receivable (net of allowance for doubtful accounts: $275,000 -
2003 and 2002) 4,114,958 3,684,195
Reinsurance balances receivable (net of allowance for doubtful accounts:
$1,044,311 - 2003, $1,001,461 - 2002) (note 2) 21,116,353 31,622,971
Ceded unpaid claims and claim adjustment expenses (note 2) 39,213,291 46,802,114
Ceded unearned premiums (note 2) 6,562 178,572
Deferred policy acquisition costs 1,022,954 1,674,346
Property and equipment (net of accumulated depreciation and amortization:
$5,251,398 - 2003, $5,074,441 - 2002) 746,637 913,526
Current Federal income taxes (note 1) - 1,055,753
Deferred Federal income taxes (net of valuation allowance: $31,785,076
- 2003, $31,972,504 - 2002) (note 1) - -
Other assets 6,969,732 9,647,641
Goodwill (note 1) 609,000 609,000
------------ -----------
Total assets $189,210,629 214,389,217
============ ===========
See accompanying notes to consolidated financial statements.
4
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30,
2003 December 31,
(unaudited) 2002
------------- ------------
Liabilities and Shareholders' Equity
Liabilities
Unpaid claims and claim adjustment expenses $ 123,645,557 143,270,964
Unearned premiums 8,081,110 8,580,082
Commissions payable 3,041,943 6,110,340
Accounts payable 2,804,064 2,631,066
Reinsurance balances payable 258,994 -
Deferred revenue 2,897,229 4,451,261
Drafts payable 1,435,111 1,631,846
Note payable (note 3) 1,761,000 3,700,000
Deferred Federal income taxes (note 1) 1,279,120 1,236,736
Other liabilities 439,947 171,708
------------- -----------
Total liabilities 145,644,075 171,784,003
------------- -----------
Redeemable convertible preferred stock - Series A ($1,000 stated value,
31,620 shares authorized, 31,620 issued at June 30, 2003 and
December 31, 2002), liquidation value of $31,620,000 (note 4) 22,788,000 21,343,000
Redeemable convertible preferred stock - Series B ($1,000 stated value,
3,000 shares authorized, 3,000 issued at June 30, 2003 and
December 31, 2002), at liquidation value (note 4) 3,647,589 3,449,057
Redeemable preferred stock - Series C ($1,000 stated value,
3,000 shares authorized, 3,000 issued at June 30, 2003 and
December 31, 2002), at liquidation value (note 4) 3,746,589 3,566,057
------------- -----------
30,182,178 28,358,114
------------- -----------
Shareholders' Equity (note 4)
Common stock ($.10 par value, 250,000,000 shares authorized, 22,013,830 issued
at June 30, 2003 and December 31, 2002) 2,201,383 2,201,383
Common stock warrants 540,000 540,000
Additional paid-in capital 100,866,124 100,866,124
Accumulated other comprehensive income (note 1) 2,482,998 2,400,722
Retained deficit (85,011,604) (84,066,604)
Treasury stock, at cost (844,094 shares at June 30, 2003 and
December 31, 2002) (7,694,525) (7,694,525)
------------- -----------
Total shareholders' equity 13,384,376 14,247,100
------------- -----------
Commitments and contingencies (note 6)
Total liabilities and shareholders' equity $ 189,210,629 214,389,217
============= ===========
See accompanying notes to consolidated financial statements.
5
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three months Six months
ended June 30, ended June 30,
---------- ----------- ---------- ----------
2003 2002 2003 2002
---------- ----------- ---------- ----------
Revenues:
Net premiums earned (note 2) $7,837,960 16,874,644 16,527,616 34,316,800
Net investment income 782,904 1,063,048 1,627,910 2,356,241
Net realized gains (note 1) 514,939 16,042 1,265,993 378,583
Other income 1,168,487 2,472,623 2,525,229 3,820,048
---------- ----------- ---------- ----------
Total revenues 10,304,290 20,426,357 21,946,748 40,871,672
---------- ---------- ---------- ----------
Expenses:
Claims and claims adjustment expenses (note 2) 4,870,908 17,612,352 12,354,215 32,685,973
Commissions 850,071 1,551,209 1,896,007 5,113,677
Change in deferred policy acquisition costs and
deferred ceding commission income 643,877 1,111,975 651,392 580,969
Interest expense (note 3) 26,342 68,063 78,851 178,629
Underwriting and operating expenses 3,103,549 2,023,848 6,087,220 6,631,893
Goodwill impairment (note 1) - 2,859,507 - 2,859,507
---------- ----------- ---------- ----------
Total expenses 9,494,747 25,226,954 21,067,685 48,050,648
---------- ----------- ---------- ----------
Income (loss) before Federal income taxes 809,543 (4,800,597) 879,063 (7,178,976)
Federal income taxes:
Current benefit - - - -
Deferred expense (benefit) - - - 1,844,945
---------- ----------- ---------- ----------
Total taxes - - - 1,844,945
---------- ----------- ---------- ----------
Net income (loss) 809,543 (4,800,597) 879,063 (9,023,921)
========== =========== ========== ==========
Loss per common share, basic and diluted (note 1):
Net loss per common share (.01) (.27) (.04) (.50)
========== =========== ========== ==========
See accompanying notes to consolidated financial statements.
6
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss)
Six months ended
June 30, 2003 Twelve months ended
(unaudited) December 31, 2002
----------------------------- ---------------------------
Common stock:
Balance at beginning and at end of period $ 2,201,383 2,201,383
------------- ------------
Common stock warrants:
Balance at beginning and at end of period $ 540,000 540,000
------------- ------------
Additional paid-in capital:
Balance at beginning and at end of period $ 100,866,124 100,866,124
------------- ------------
Retained deficit:
Balance at beginning of period $ (84,066,604) (71,977,743)
Net income (loss) 879,063 879,063 (8,761,087) (8,761,087)
Accrued dividends - redeemable preferred stock
(note 4) (361,063) (670,774)
Accretion of discount on redeemable preferred
shares (1,463,000) (2,657,000)
------------- ------------
Balance at end of period (85,011,604) (84,066,604)
------------- ------------
Accumulated other comprehensive income (loss):
Balance at beginning of period $ 2,400,722 3,580,690
Unrealized gain (loss) on securities, net of
reclassification adjustment, net of tax (note 1) 82,276 82,276 (1,179,968) (1,179,968)
------------- ------- ------------ ----------
Comprehensive income (loss) 961,339 (9,941,055)
======= ==========
Balance at end of period 2,482,998 2,400,722
------------- ------------
Treasury stock:
Balance at beginning and at end of period (7,694,525) (7,694,525)
------------- ------------
Total shareholders' equity at end of period $ 13,384,376 14,247,100
============= ============
See accompanying notes to consolidated financial statements.
7
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended June 30,
--------------------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 879,063 (9,023,921)
Adjustments to reconcile net income (loss) to cash used for operating
activities:
Depreciation and amortization 134,316 248,663
Goodwill impairment - 2,859,507
Impairment of other investments - 2,010,670
Deferred Federal income tax expense (benefit) - 1,844,945
Change in accrued investment income (78,543) 1,093,998
Change in premiums receivable (430,763) 13,145,989
Change in reinsurance balances receivable 10,506,618 16,914,060
Change in ceded unpaid claims and claim adjustment expenses 7,588,823 1,258,965
Change in ceded unearned premiums 172,010 14,940,257
Change in deferred policy acquisition costs and deferred ceding
commission income 651,392 580,969
Change in other assets 2,677,909 (3,464,992)
Change in unpaid claims and claim adjustment expenses (19,625,407) (9,781,768)
Change in unearned premiums (498,972) (22,763,063)
Change in commissions payable (3,068,397) (624,454)
Change in accounts payable 172,998 (3,144,193)
Change in reinsurance balances payable 258,994 (7,324,409)
Change in deferred revenue (1,554,032) (2,868,118)
Change in drafts payable (196,735) (2,380,267)
Change in funds held under reinsurance agreements - (47,783,905)
Change in other liabilities 268,239 (8,128)
Change in current Federal income taxes 1,055,753 -
------------ ------------
Net cash used for operating activities $ (1,086,734) (54,269,195)
------------ ------------
See accompanying notes to consolidated financial statements. (continued)
8
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended June 30,
--------------------------------------
2003 2002
------------ ------------
Cash flows from investing activities:
Bonds available for sale:
Sold $ 12,955,003 73,495,083
Matured 2,946,000 2,452,000
Purchased (8,035,824) (23,582,188)
Common stock purchased (302,000) -
Other investments sold - 2,110,467
Certificates of deposit matured 392,035 390,000
Certificates of deposit purchased (732,435) (390,000)
Net change in short term investments (2,018,258) 5,208,108
Property and equipment disposed (purchased) (10,068) 413,078
------------ ------------
Net cash provided by investing activities 5,194,453 60,096,548
------------ ------------
Cash flows from financing activities:
Payments on note payable (1,939,000) (6,600,000)
------------ ------------
Net cash used for financing activities (1,939,000) (6,600,000)
------------ ------------
Net increase (decrease) in cash 2,168,719 (772,647)
Cash at beginning of period 2,512,454 3,567,717
------------ ------------
Cash at end of period $ 4,681,173 2,795,070
============ ============
See accompanying notes to consolidated financial statements.
9
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) Summary of Accounting Policies
(a) Basis of Consolidation
The accompanying consolidated financial statements include the
accounts of GAINSCO, INC. ("GNAC") and its wholly-owned
subsidiaries (collectively, the "Company"), General Agents
Insurance Company of America, Inc. ("General Agents"), General
Agents Premium Finance Company, Agents Processing Systems,
Inc., Risk Retention Administrators, Inc., GAINSCO Service
Corp. ("GSC"), Lalande Financial Group, Inc. ("Lalande"),
National Specialty Lines, Inc. ("NSL"), DLT Insurance
Adjusters, Inc. ("DLT") (Lalande, NSL and DLT collectively,
the "Lalande Group") and Midwest Casualty Insurance Company
("MCIC"). On March 31, 2003 MCIC was liquidated and all of its
assets, liabilities and equity were transferred to General
Agents. 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. All significant intercompany accounts
have been eliminated in consolidation.
Prior to December 2, 2002, GSC owned the management contract
controlling GAINSCO County Mutual Insurance Company ("GCM")
and prior to that time its accounts were included in the
accompanying consolidated financial statements. The management
contract of GCM was sold on December 2, 2002 to an
unaffiliated third party. See (b) "Nature of Operations."
Previously, while GCM was legally owned by its policyholders,
it was controlled, through a management contract, by GSC.
Inclusion of GCM's accounts in the Company's Consolidated
Financial Statements was in accordance with the criteria under
EITF 97-2. The term of the management contract was 25 years
when the Company acquired it in the fourth quarter of 1992. It
was only terminable by GCM for the Company's failure to comply
with its obligations under the management contract. The
Company had exclusive authority over all decision making
related to all operations of GCM, and the operations were
under the direction of the same officer group that managed the
insurance subsidiaries of the Company. The management contract
was unilaterally salable by the Company (subject to normal
regulatory approvals), which was done on December 2, 2002. The
Company had the right to receive the income of GCM through the
management contract as ongoing fees and the proceeds from the
sale of its interest in the management contract. Additionally,
GCM's insurance business was pooled with all of the other
insurance subsidiaries of the Company through an inter-company
quota share reinsurance agreement.
The accompanying consolidated financial statements are
prepared on the basis of accounting principals generally
accepted in the United States of America ("GAAP"). The
preparation of financial statements in conformity with GAAP
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.
During the second quarter of 2003 the Company reclassified the
revenues and expenses of the personal auto agency operation
because of its increasing materiality. This reclassification
was made for all periods presented and had no impact on net
income. The revenues of this operation are now presented as a
component of Other income and the expenses are presented as a
component of Underwriting and operating expenses. Previously
the revenues and expenses were netted and shown as a component
of Other income in 2002 and as a component of Commissions in
the first quarter of 2003.
10
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Reference is made to the Company's annual consolidated
financial statements for the year ended December 31, 2002 for
a description of all other accounting policies.
(b) Nature of Operations
On February 7, 2002, the Company announced its decision to
discontinue writing commercial lines insurance business due to
continued adverse claims development and unprofitable results.
As respects the Company's remaining active insurance line,
personal auto, management continues in 2003 to implement
actions intended to enhance the profit potential of this
business and its future strategic direction, which could
include the expansion, contraction, or disposition of the
business.
The Company anticipates a lengthy period of transition as it
evaluates opportunities. During the transition process, the
Company may consider the sale of additional subsidiaries
associated with its historical insurance business. The Company
intends to redeploy capital no longer required by its
discontinued insurance business, once it becomes available, to
pursue other opportunities in the future that offer a better
prospect for profitability. The Company believes that suitable
capital redeployment opportunities should be available after
the capital no longer required by its discontinued insurance
business becomes available, but cannot predict the amount of
capital that will ultimately be available for redeployment,
the timing or the nature of the opportunities that may be
available at the time capital becomes available. The
opportunities may be inside or outside of the insurance
business and could be in the financial services business. The
opportunities could require more capital than the Company has
available, which could result in the Company having to seek
such capital from other sources, but the Company has no
assurance that it would be able to effect any such transaction
or the terms thereof.
On December 2, 2002, the Company completed the sale and
transfer of the management contract controlling GCM to an
affiliate of Liberty Mutual Insurance Company ("Liberty"), for
a purchase price of up to $10 million, of which $1 million was
paid at closing and the balance is payable in contingent
payments through September 2009. The $9 million total of
contingent payments would be payable $3 million in September
2003 and $1 million each year thereafter through September
2009, but each payment is contingent on there being no
materially adverse change in the regulatory treatment of GCM
specifically, or county mutuals generally, from legislative or
regulatory administrative actions prior to the applicable
payment date.
In the session of the Texas Legislature ended June 2, 2003,
changes were made in the statutes governing the regulatory
treatment of county mutual insurance companies in Texas. These
changes prejudiced the rights of the Company to receive
contingent payments from Liberty, depending upon how the
statutory changes and the Company's agreement with Liberty are
interpreted. The Company contacted Liberty to discuss its
obligation to make the contingent payments in light of the
recent legislation, but has not yet received a response. The
Company has fully reserved its receivable due from Liberty
(representing the excess of the Company's cost basis in GCM
over the $1,000,000 received from Liberty at the closing of
the sale transaction) as potentially uncollectible because of
the recent changes in the statutes.
GNAC needs cash for principal and interest payments on its
bank note payable and administrative expenses. The primary
source of cash to meet these obligations is statutory
permitted dividends from its insurance subsidiaries. GNAC
expects to meet its obligations for 2003.
11
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(c) Investments
Bonds available for sale and common stock are stated at fair
value with changes in fair value recorded as a component of
comprehensive income. Short-term investments are stated at
cost.
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.
The unrealized gains (losses) on investments at June 30, 2003
and December 31, 2002 are set forth in the following table:
June 30, 2003 December 31, 2002
------------- -----------------
Bonds available for sale:
Unrealized gain $ 3,829,305 3,637,457
Deferred tax expense (1,301,964) (1,236,735)
----------- ----------
Net unrealized gain $ 2,527,341 2,400,722
=========== ==========
Common stock investments:
Unrealized loss $ (69,000) -
Deferred tax benefit 23,460 -
----------- ----------
Net unrealized loss $ (45,540) -
=========== ==========
Certificates of deposit:
Unrealized gain $ 1,813 -
Deferred tax expense (616) -
----------- ----------
Net unrealized gain $ 1,197 -
============ ==========
Proceeds from the sale of bond securities totaled $5,521,804
and $1,252,823 for the three months ended June 30, 2003 and
2002, respectively and $12,955,003 and $73,495,083 for the six
months ended June 30, 2003 and 2002, respectively. There were
no sales of common stocks for the three and six months ended
June 30, 2003 and 2002. There were no sales of other
investments during the three months ended June 30, 2003 or
June 30,2002, respectively. Proceeds from the sale of other
investments totaled $0 and $2,110,467 for the six months ended
June 30, 2003 and 2002, respectively.
12
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Realized gains and losses on investments for the three months
and six months ended June 30, 2003 and 2002, respectively, are
presented in the following table:
Three months ended June 30, Six months ended June 30,
--------------------------- ----------------------------
2003 2002 2003 2002
-------- ------ --------- ---------
Realized gains:
Bonds $515,774 16,042 1,266,828 2,859,903
Other investments - - - 241
-------- ------ --------- ---------
Total realized gains 515,774 16,042 1,266,828 2,860,144
-------- ------ --------- ---------
Realized losses:
Bonds - - - 470,891
Other investments 835 - 835 -
Impairment of bonds - - - 2,010,670
-------- ------ --------- ---------
Total realized losses 835 - 835 2,481,561
-------- ------ --------- ---------
Net realized gains $514,939 16,042 1,265,993 378,583
======== ====== ========= =========
During the first six months of 2002, the Company reduced the
carrying value of a non-rated commercial mortgage backed
security to $0 resulting in a write down of $2,010,670 as a
result of a significant increase in the default rate in
January and February of 2002 in the underlying commercial
mortgage portfolio, which has disrupted the cash flow stream
sufficiently to make future cash flows unpredictable. This
write down was offset by net realized gains of $2,373,211
recorded from the sale of various bond securities.
In August 2002, the Company entered into an amendment to its
Investment Management Agreements with Goff Moore Strategic
Partners, L.P. ("GMSP"). The amendment reduces, effective as
of October 1, 2002, the minimum aggregate monthly payment owed
by the Company to GMSP from $75,000 to $63,195 (with respect
to each calendar month from October 2002 through September
2003), $53,750 (with respect to each calendar month from
October 2003 through September 2004) and $45,417 (with respect
to each calendar month after September 2004). The amendment
also changes the date upon which either party to each of the
Investment Management Agreements can terminate the agreement
at its sole option from October 4, 2002 to September 30, 2005.
The amendment was approved by each of the required applicable
state insurance departments.
(d) Federal 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, net operating loss carry
forwards and the nondeductible portion of the change in
unearned premiums. The Company paid no Federal income taxes
during the six months ended June 30, 2002. The Company
received Federal income tax refunds totaling $1,055,753 during
the six months ended June 30, 2003.
In assessing the realization of its deferred tax assets,
management considers whether that 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
13
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 not realize the benefits of these deferred tax
assets in the near future. The Company has established a
valuation allowance against its net deferred tax assets,
exclusive of the tax effect of unrealized gains at June 30,
2003 and December 31, 2002, in the amount of $31,785,076 and
$31,972,504, respectively.
As of June 30, 2003, the Company has net operating loss carry
forwards for tax purposes of $1,639,332, $22,806,147,
$33,950,174, $9,302,952 and $1,809,992 which, if not utilized,
will expire in 2018, 2020, 2021, 2022 and 2023, respectively.
(e) Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share:
Three months ended June 30, Six months ended June 30,
--------------------------- ----------------------------
2003 2002 2003 2002
---------- ----------- ---------- ----------
Basic loss per share:
Numerator:
Net income (loss) $ 809,543 (4,800,597) 879,063 (9,023,921)
Less: Preferred stock dividends 182,760 165,572 361,063 327,106
Accretion of discount on preferred stock 743,000 653,000 1,463,000 1,285,000
---------- ----------- ---------- ----------
Net loss to common shareholders $ (116,217) (5,619,169) (945,000) (10,636,027)
---------- ----------- ---------- ----------
Denominator:
Weighted average shares outstanding 21,169,736 21,169,736 21,169,736 21,169,736
---------- ----------- ---------- ----------
Basic loss per common share $ (.01) (.27) (.04) (.50)
========== =========== ========== ==========
Diluted loss per share:
Numerator:
Net income (loss) $ 809,543 (4,800,597) 879,063 (9,023,921)
---------- ----------- ---------- ----------
Denominator:
Weighted average shares outstanding 21,169,736 21,169,736 21,169,736 21,169,736
Effect of dilutive securities:
Convertible preferred stock - - - -
---------- ----------- ---------- ----------
Weighted average shares and assumed
conversions 21,169,736 21,169,736 21,169,736 21,169,736
---------- ----------- ---------- ----------
Diluted loss per common share * $ (.01) (.27) (.04) (.50)
========== =========== ========== ==========
* The effects of common stock equivalents and convertible preferred stock are
antidilutive for the three and six months ended June 30, 2003 and 2002,
respectively, due to the net loss for the periods; therefore, diluted loss per
share is reported the same as basic loss per share.
14
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(f) 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 "Accounting
for Stock Issued to Employees". There have been no options
granted since 2000.
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:
Three months ended June 30,
----------------------------------------------------------
2003 2002
-------------------------- --------------------------
As reported Proforma As reported Proforma
----------- -------- ----------- ----------
Net income (loss) $ 809,543 744,801 (4,800,597) (4,883,265)
Less: Preferred stock 182,760 182,760 165,572 165,572
Less: Accretion of
discount on preferred stock 743,000 743,000 653,000 653,000
---------- -------- ---------- ----------
Net loss available to
common shareholders $ (116,217) (180,959) (5,619,169) (5,701,837)
========== ======== ========== ==========
Basic loss per common share $ (.01) (.01) (.27) (.27)
========== ======== ========== ==========
Diluted loss per common
share $ (.01) (.01) (.27) (.27)
========== ======== ========== ==========
Six months ended June 30,
----------------------------------------------------------
2003 2002
-------------------------- --------------------------
As reported Proforma As reported Proforma
----------- -------- ----------- ----------
Net income (loss) $ 879,063 741,706 (9,023,921) (9,189,257)
Less: Preferred stock 361,063 361,063 327,106 327,106
Less: Accretion of
discount on preferred stock 1,463,000 1,463,000 1,285,000 1,285,000
----------- ---------- ----------- -----------
Net loss available to
common shareholders $ (945,000) (1,082,357) (10,636,027) (10,801,363)
=========== ========== =========== ===========
Basic loss per common share
$ (.04) (.05) (.50) (.51)
=========== ========== =========== ===========
Diluted loss per common
share $ (.04) (.05) (.50) (.51)
=========== ========== =========== ===========
15
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(g) Accumulated Other Comprehensive Income (Loss)
The following schedule presents the components of other
comprehensive income (loss):
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---------- ------- --------- -----------
Unrealized gains (losses) on securities:
Unrealized holding gain (loss) during period $1,030,860 786,964 1,390,653 (51,265)
Less: Reclassification adjustment for
amounts included in net income for
realized gains 514,939 - 1,265,993 2,373,211
---------- ------- --------- -----------
Other comprehensive income (loss)
before Federal income taxes 515,921 786,964 124,660 (2,424,476)
Federal income tax benefit 175,412 267,568 42,384 (824,346)
---------- ------- --------- -----------
Other comprehensive income (loss) $ 340,509 519,396 82,276 (1,600,130)
========== ======= ========= ===========
The 2002 reclassification adjustment for amounts included in
net income for realized gains excludes the realized loss due
to the impairment of a fixed maturity because this amount was
not a component of accumulated other comprehensive income as
of December 31, 2001.
(h) Goodwill
Goodwill as of June 30, 2003 and as of December 31, 2002 is
$609,000 and is related to the 1998 acquisition of the Lalande
Group and reflects a value no less than the estimated fair
valuation of combined agency and claims handling operations of
this type in the personal auto marketplace. Effective in 2002,
goodwill is no longer amortized but will be subject to an
impairment test based on its estimated fair value. Therefore,
additional impairment losses could be recorded in future
periods.
(i) Accounting Pronouncements
In June 2002, the FASB issued Statement of Financial
Accounting Standards No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (Statement 146). The
provisions of Statement 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The
adoption of Statement 146 did not have a material effect on
the Company's consolidated financial position or result of
operations.
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to
Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34." This
Interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about
its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of
the obligation undertaken. The initial recognition and
measurement provisions of the Interpretation are applicable to
guarantees issued or modified after December 31, 2002 and are
not expected to have a material effect of the Company's
financial statements.
16
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51." This Interpretation addresses
the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. The Interpretation
applies immediately to variable interests in variable interest
entities obtained after January 31, 2003. The application of
this Interpretation is not expected to have a material effect
on the Company's financial statements.
In May 2003, the Financial Accounting Standards Board issued
Statement No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity" (SFAS 150). This statement does not have an impact on
the current accounting by the Company as all of the Company's
series of Preferred Stock are not considered "mandatory
redeemable financial instruments" based on SFAS 150's
definition, and therefore are not subject to the accounting
treatment under paragraph 9 of SFAS 150. All three series of
Preferred Stock are currently classified as temporary equity
pursuant to SEC ASR 268 and EITF Topic No. D-98. Rule 5-02.28
of SEC Regulation S-X requires preferred securities that are
redeemable for cash or other assets to be classified outside
of permanent equity if they are redeemable (1) at a fixed or
determinable price on a fixed or determinable date; (2) at the
option of the holder; or, (3) upon the occurrence of an event
that is not solely within the control of the issuer.
(j) Benefit Plans
Because of their importance to the Company, in August 2002 the
Company entered into executive severance agreements with two
senior executives, Richard M. Buxton and Daniel J. Coots. The
agreements generally provide that the Company shall pay the
executive, upon termination of the employment of the executive
by the Company without cause or by the executive with good
reason during the term of the agreement, a lump sum severance
amount equal to the base annual salary of the executive as of
the date that the executive's employment with the Company
ends. The current base annual salaries of Mssrs. Buxton and
Coots are $170,000 and $155,000, respectively. The executive
severance agreements do not supersede the change in control
agreements or any other severance agreements the employees may
have with the Company.
The Company entered into retention incentive agreements with
twenty of its employees, three of whom are officers of the
Company. Each of the retention incentive agreements generally
requires that the Company pay the applicable employee an
amount based upon the employee's annual base salary, less
amounts owed by the Company to the employee pursuant to any
change in control or severance agreements the employee may
have with the Company. The Company's obligation to make
payments under each retention incentive agreement is
conditioned upon the employee remaining in the employ of the
Company through a specified date, unless terminated earlier by
the Company without cause or by the employee with good reason.
The Company could be obligated to make up to an aggregate of
approximately $1,076,000 in payments under these retention
incentive agreements. Other than Jackiben N. Wisdom (who was
not one of the five most highly compensated employees of the
Company at the time he entered into his retention incentive
agreement), none of the five most highly compensated employees
of the Company are parties to the retention incentive
agreements.
In May 2003, Michael S. Johnston, the President - Personal
Lines Division of the Company, entered into an Executive
Severance Agreement with the Company. This agreement generally
provides that if Mr. Johnston resigns his employment with the
Company for good reason or if the Company terminates Mr.
Johnston without cause or in connection with a change in
control of National Specialty Lines, Inc. and DLT Insurance
Adjusters, Inc. and Mr. Johnston is not offered employment
with comparable compensation with
17
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
the acquiring company in the change in control, the Company
will pay Mr. Johnston an amount equal to his annual base
salary at the time of termination or resignation. Also
pursuant to this agreement, the Company and Mr. Johnston each
mutually released the other from obligations under the stock
purchase agreement and employment contract between the Company
and Mr. Johnston and generally from any and all other claims
that each otherwise may have had against the other.
(2) Reinsurance
The amounts deducted in the Consolidated Statements of Operations for
reinsurance ceded for the three and six months ended June 30, 2003 and
2002, respectively, are set forth in the following table.
Three months ended June 30, Six months ended June 30,
----------------------------------- ---------------------------
2003 2002 2003 2002
----------- --------- ---------- ----------
Premiums earned - all other $ 29,486 5,095,899 89,629 14,226,739
Premiums earned - Florida business $ 2,719 - (5,936)
Premiums earned - fronting
arrangements $ 56,567 4,576,475 138,064 9,571,438
Claims and claim adjustment
expenses - all other $ (809,741) 6,389,374 (1,815,874) 14,313,846
Claims and claim adjustment expenses
- - Florida business $ - 140,566 (556,574) 350,340
Claims and claim adjustment
expenses - Plan servicing $ (146) 226,471 2,882 (115,256)
Claims and claim adjustment
expenses - fronting arrangements $ (118,570) 4,597,199 (298,623) 8,019,742
Claims ceded to the commercial automobile plans of Arkansas,
California, Louisiana, Mississippi and Pennsylvania are designated as
"plan servicing".
There were no plan servicing or Florida business unearned premiums at
June 30, 2003 and December 31, 2002, respectively. 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 as of
June 30, 2003 and December 31, 2002 were as follows:
2003 2002
----------- ---------
Unearned premiums - fronting arrangements $ 2,868 106,145
Unpaid claims and claim adjustment expenses - Florida business $ - 556,574
Unpaid claims and claim adjustment expenses - plan servicing $ 118,725 184,320
Unpaid claims and claim adjustment expenses - fronting $ 1,402,126 2,032,541
arrangements
Effective December 31, 2000 the Company entered into a quota share
reinsurance agreement whereby the Company ceded 100% of its commercial
auto liability unearned premiums and 50% of all other commercial
business unearned premiums at December 31, 2000 to a non-affiliated
reinsurer. For policies with an effective date of January 1, 2001
through December 31, 2001, the Company entered into a quota share
reinsurance agreement whereby the Company ceded 20% of its commercial
business to a non-affiliated reinsurer. Also effective December 31,
2000, the Company entered into a reserve reinsurance cover agreement
with a non-affiliated reinsurer.
18
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
This agreement reinsures the Company's ultimate net aggregate liability
in excess of $32,500,000 up to an aggregate limit of $89,650,000 for
net commercial auto liability losses and loss adjustment expense
incurred but unpaid as of December 31, 2000. At June 30, 2003 and
December 31, 2002 a deferred reinsurance gain of $2,897,229 and
$3,855,062, has been recorded in deferred revenues. For the second
quarter and the first six months of 2003, $436,239 and $957,833,
respectively, were recorded in other income. For the second quarter and
the first six months of 2002, $579,014, and $2,464,090 were recorded in
other income. Since its inception at December 31, 2000, $6,152,771 has
been recorded in other income, which represents the reserve development
under the reserve reinsurance cover agreement. The deferred gain item
will be recognized in income in future periods based upon the ratio of
claims paid in the $57,150,000 layer to the total of the layer. The
reinsurer remains responsible for reimbursing the Company for claim
payments covered under this agreement.
The Company does not have catastrophe reinsurance for business written
in 2003 because of the exit from commercial lines and because the cost
for coverage for the personal auto lines was determined to be excessive
in relation to the evaluation of risks to be retained.
The Company remains directly liable to its policyholders for all policy
obligations and the reinsuring companies are obligated to the Company
to the extent of the reinsured portion of the risks.
(3) Note Payable
In November 1998, the Company entered into a credit agreement with a
commercial bank pursuant to which it borrowed $18,000,000. Interest was
due monthly at an interest rate that approximated the 30-day London
Interbank Offered Rate (LIBOR) plus 175 basis points. Principal
payments of $500,000 were due each quarter with the balance of
$10,500,000 due at maturity of the note on October 1, 2003.
In March 2001, the credit agreement was amended, specific breaches of
covenants were waived, $2,500,000 in principal was prepaid and certain
terms were amended. Interest was due monthly at an interest rate that
approximates the 30-day LIBOR plus 250 basis points with an increase of
25 basis points each quarter beginning October 1, 2001. Principal
payments of $500,000 were due each quarter and were scheduled to
increase to $750,000 beginning April 1, 2002, with the balance of
$6,500,000 due at maturity of the note on November 1, 2003.
On November 13, 2001, the credit agreement was further amended to
change certain covenants and to provide the following revised principal
amortization schedule: $200,000 upon effectiveness of the amendment on
November 13, 2001; $500,000 on January 2, 2002; and $1,000,000 on the
first day of each calendar quarter thereafter. A $50,000 fee was paid
to the bank for this amendment.
On February 27, 2002 the Company entered into an amendment to the
credit agreement which cured covenant breaches and provided for
principal prepayments. The Company prepaid $6,100,000 of the
indebtedness outstanding under the credit agreement on March 4, 2002.
Several covenants in the existing credit agreement were eliminated or
modified by the amendment and the interest rate was changed to a base
rate (which approximates prime) plus 175 basis points (5.75% at June
30, 2003). The Company paid $500,000 of the indebtedness outstanding
under the credit agreement in December 2002 as a result of the sale of
GCM. On March 24, 2003 the Company paid $1,939,000 of the indebtedness
outstanding under the credit agreement, as a result of the dividend
received from General Agents of $3,878,000. The principal amortization
schedule was amended such that the remaining $1,761,000 principal
balance under the credit agreement is payable in November 2003.
19
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The Company recorded interest expense of $26,342 and $68,063 for the
three months ended June 30, 2003 and 2002, respectively, and $78,851
and $178,629 for the six months ended June 30, 2003 and 2002,
respectively. The Company paid interest expense of $26,342 and $72,027
for the three months ended June 30, 2003 and 2002, respectively, and
$78,851 and $199,487 for the six months ended June 30, 2003 and 2002,
respectively. The Company made a scheduled principal payment of
$500,000 in January 2002 and unscheduled principal prepayments of
$500,000 and $1,939,000 in December 2002 and March 2003, respectively.
(4) Redeemable Preferred Stock and Shareholders' Equity
The Company has authorized 250,000,000 shares of common stock, par
value $.10 per share (the "Common Stock"). Of the authorized shares of
Common Stock, 22,013,830 were issued as of June 30, 2003 and December
31, 2002, respectively, and 21,169,736 were outstanding as of June 30,
2003 and December 31, 2002, respectively.
On October 4, 1999 GNAC sold to GMSP, for an aggregate purchase price
of $31,620,000 (i) 31,620 shares of Series A Preferred Stock, which are
convertible into 6,200,000 shares of Common Stock at a conversion price
of $5.10 per share and, should the Company pay dividends on its Common
Stock, the Series A Preferred Stock would be entitled to dividends as
if converted into Common Stock, (ii) 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 with an expiration of October 2004 and (iii) the
Series B Warrant to purchase an aggregate of 1,550,000 shares of Common
Stock at an exercise of $8.50 per share with an expiration date of
October 2006. As a result of the value attributable to the Common Stock
purchase warrants issued with the Series A Preferred Stock, the Series
A Preferred Stock was issued at a discount which is being amortized
over a five-year period using the effective interest method. Proceeds
were allocated based upon the relative fair values of the Series A
Preferred Stock, and the Series A Warrants and the Series B Warrants.
The Series A Warrants and the Series B Warrants are anti-dilutive.
On March 23, 2001, GNAC consummated a transaction with GMSP pursuant to
which, among other things, the Company issued shares of its newly
created Series C Preferred Stock to GMSP in exchange for an aggregate
purchase price of $3,000,000 in cash.
The annual dividend rate on the Series C Preferred Stock is 10% until
March 23, 2004 and 20% thereafter. Unpaid dividends are cumulative and
compounded. The Series C Preferred Stock is redeemable at GNAC's option
after March 23, 2006 and at the option of the majority holders after
March 23, 2007 at a price of $1,000 per share ($3,000,000) plus accrued
and unpaid dividends. The Series C Preferred Stock is not convertible
into Common Stock.
The agreement with GMSP was conditioned upon the following changes in
the securities currently held by GMSP. The exercise prices of the
Series A Warrant and the Series B Warrant held by GMSP were amended to
equal $2.25 and $2.5875 per share, respectively. Each of these warrants
provides for the purchase of 1,550,000 shares of Common Stock, subject
to adjustment. Further, GNAC is required to redeem the outstanding
shares of its Series A Preferred Stock on January 1, 2006, subject to
certain conditions at a price of $1,000 per share ($31,620,000) plus
unpaid dividends, if any. Any Series A Preferred Stock unredeemed for
any reason after that date would accrue interest, payable quarterly, at
a rate equal to eight percent per year with any unpaid interest
compounded annually.
20
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
On March 23, 2001, GNAC consummated a transaction with Robert W.
Stallings pursuant to which, among other things, GNAC issued shares of
its newly created Series B Preferred Stock and a Warrant to purchase an
aggregate of 1,050,000 shares of Common Stock at $2.25 per share in
exchange for an aggregate purchase price of $3,000,000 in cash. The
annual dividend provisions and the redemption provisions of the Series
B Preferred Stock are the same as those for the Series C Preferred
Stock. The Series B Preferred Stock is convertible into Common Stock at
$2.25 per share. Subject to adjustment for certain events, the Series B
Preferred Stock is convertible into a maximum of 1,333,333 shares of
Common Stock. The Warrant expires in March 2006.
The transaction dated March 23, 2001 results in all preferred stock
being redeemable. The discount on the preferred stock is being
amortized over the period until redemption using the effective interest
method. At June 30, 2003 and December 31, 2002, respectively, there was
$8,931,000 and $10,394,000 in unaccreted discount on the Series A and
Series B Preferred Stock, and $1,493,178 and $1,132,118 in accrued
dividends on the Series B and Series C Preferred Stock.
As of June 30, 2003 there were 385,693 options outstanding to purchase
common stock ("options") at an average exercise price of $9.38 per
share that had been granted to officers and directors of the Company
under the Company's 1995 Stock Option Plan and 340,275 options, at an
average exercise price of $5.60 per share, that had been granted to
officers, directors and employees of the Company under the Company's
1998 Long-Term Incentive Plan.
(5) Segment Reporting
On February 7, 2002, the Company announced its decision to discontinue
writing commercial lines insurance business due to continued adverse
claims development and unprofitable results. Previously the Company
made operating decisions and assessed performance for the commercial
lines segment and the personal lines segment. The commercial lines
segment wrote 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 Company has elected not to allocate assets to the commercial lines
or personal lines segments for management reporting purposes.
21
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The following tables present a summary of segment profit (loss) for the
three and six months ended June 30, 2003 and 2002. Certain
reclassifications were made to the 2002 data for consistency with 2003
(see Note 1(a)):
Three months ended June 30, 2003
------------------------------------------------------------
Commercial Personal
Lines Lines Other Total
---------- -------- ----- ------
(Amounts in thousands)
Gross premiums written $ 41 7,132 - 7,173
========== ====== ==== ======
Net premiums earned $ 80 7,758 - 7,838
Net investment income 251 517 15 783
Other income 460 708 - 1,168
Expenses (2,515) (6,168) (785) (9,468)
Net realized gains - - 515 515
Interest expense - - (26) (26)
---------- ------ ---- ------
Income (loss) before Federal income taxes (1,724) 2,815 (281) 810
========== ====== ==== ======
Combined ratio (GAAP) basis 3138.2% 79.5% -% 102.2%
========== ====== ==== ======
Three months ended June 30, 2002
------------------------------------------------------------
Commercial Personal
Lines Lines Other Total
---------- -------- ----- ------
(Amounts in thousands)
Gross premiums written $ 2,994 5,787 - 8,781
========== ====== ==== ======
Net premiums earned $ 8,856 8,019 - 16,875
Net investment income 576 466 21 1,063
Other income 2,107 366 - 2,473
Expenses (12,046) (9,804) (450) (22,300)
Net realized gains - - 16 16
Interest expense - - (68) (68)
Goodwill impairment - (2,859) - (2,859)
---------- ------ ---- ------
Loss before Federal income taxes $ (507) (3,812) (481) (4,800)
========== ====== ==== ======
Combined ratio (GAAP) basis 136.0% 122.3% -% 126.0%
========== ====== ==== ======
22
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Six months ended June 30, 2003
------------------------------------------------------------
Commercial Personal
Lines Lines Other Total
---------- -------- ----- ------
(Amounts in thousands)
Gross premiums written $ 64 16,158 - 16,222
========== ======= ====== =======
Net premiums earned $ 773 15,755 - 16,528
Net investment income 614 989 25 1,628
Other income 1,122 1,403 - 2,525
Expenses (5,183) (14,506) (1,300) (20,989)
Net realized gains - - 1,266 1,266
Interest expense - (79) (79)
---------- ------- ------ -------
Income (loss) before Federal income taxes $ (2,674) 3,641 (88) 879
========== ======= ====== =======
Combined ratio (GAAP) basis 670.8% 92.1% -% 111.1%
========== ======= ====== =======
Six months ended June 30, 2002
------------------------------------------------------------
Commercial Personal
Lines Lines Other Total
---------- -------- ----- ------
(Amounts in thousands)
Gross premiums written $ 12,673 15,761 - 28,434
========== ======= ====== =======
Net premiums earned $ 19,560 14,757 - 34,317
Net investment income 1,105 1,228 24 2,356
Other income 2,833 937 - 3,820
Expenses (26,455) (17,701) (858) (45,013)
Net realized gains - - 379 379
Interest expense - - (179) (179)
Goodwill impairment - (2,859) - (2,859)
---------- ------- ------ -------
Loss before Federal income taxes $ (2,907) (3,638) (634) (7,179)
========== ======= ====== =======
Combined ratio (GAAP) basis 135.2% 119.9% -% 124.8%
========== ======= ====== =======
23
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The following tables provide additional detail of segment revenue
components by product line for the three and six months ended June 30,
2003 and 2002.
Three months ended June 30, 2003
------------------------------------------------------------
Commercial Personal
Lines Lines Other Total
---------- -------- ----- ------
(Dollar amounts in thousands)
Gross premiums written:
Commercial auto $ 11 - - 11
General liability 39 - - 39
Personal auto - 7,131 - 7,131
Other (9) 1 - (8)
---------- ----- ---- -----
Total gross premiums written $ 41 7,132 - 7,173
========== ===== ==== =====
Net premiums earned:
Commercial auto $ 44 - - 44
General liability 49 - - 49
Personal auto - 7,757 - 7,757
Other (13) 1 - (12)
---------- ----- ---- -----
Total net premiums earned $ 80 7,758 - 7,838
========== ===== ==== =====
Three months ended June 30, 2002
------------------------------------------------------------
Commercial Personal
Lines Lines Other Total
---------- -------- ----- ------
(Dollar amounts in thousands)
Gross premiums written:
Commercial auto $ 1,931 - - 1,931
General liability 906 - - 906
Personal auto - 5,770 - 5,770
Other 157 17 - 174
---------- ----- ---- ------
Total gross premiums written $ 2,994 5,787 - 8,781
========== ===== ==== ======
Net premiums earned:
Commercial auto $ 5,357 - - 5,357
General liability 2,973 - - 2,973
Personal auto - 7,875 - 7,875
Other 526 144 - 670
---------- ----- ---- ------
Total net premiums earned $ 8,856 8,019 - 16,875
========== ===== ==== ======
24
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Six months ended June 30, 2003
------------------------------------------------------------
Commercial Personal
Lines Lines Other Total
---------- -------- ----- ------
(Dollar amounts in thousands)
Gross premiums written:
Commercial auto $ 2 - - 2
General liability 63 - - 63
Personal auto - 16,171 - 16,171
Other (1) (13) - (14)
---------- ------ ---- ------
Total gross premiums written $ 64 16,158 - 16,222
========== ====== ==== ======
Net premiums earned:
Commercial auto $ 441 - - 441
General liability 309 - - 309
Personal auto - 15,759 - 15,759
Other 23 (4) - 19
---------- ------ ---- ------
Total net premiums earned $ 773 15,755 - 16,528
========== ====== ==== ======
Six months ended June 30, 2003
------------------------------------------------------------
Commercial Personal
Lines Lines Other Total
---------- -------- ----- ------
(Dollar amounts in thousands)
Gross premiums written:
Commercial auto $ 7,242 - - 7,242
General liability 4,722 - - 4,722
Personal auto - 15,396 - 15,396
Other 709 365 - 1,074
---------- ------ ---- ------
Total gross premiums written $ 12,673 15,761 - 28,434
========== ====== ==== ======
Net premiums earned:
Commercial auto $ 11,717 - - 11,717
General liability 6,549 - - 6,549
Personal auto - 14,284 - 14,284
Other 1,294 473 - 1,767
---------- ------ ---- ------
Total net premiums earned $ 19,560 14,757 - 34,317
========== ====== ==== ======
(6) Commitments and Contingencies
Securities litigation has been filed in United States District Court,
Southern District of Florida against the Company and two of its
officers (one of whom is also a director). The plaintiffs seek class
certification for the litigation and principally allege violations of
securities laws in respect of the Company's previously acquired and
disposed of Tri-State, Ltd. subsidiary and seek an unspecified amount
of damages. The Company believes the allegations are without merit and
intends to vigorously defend the proceedings.
25
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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.
26
GAINSCO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
BUSINESS OPERATIONS
Discontinuance of Commercial Lines
On February 7, 2002, the Company announced its decision to cease
writing its primary line of business, commercial insurance, due to
continued adverse claims development and unprofitable results. The
Company notified all of its commercial lines agents of its intent to
cancel their agency contracts and notified all states, where required
by statute, of its intent to cease writing commercial lines of
insurance in their state. The discontinuance of writing commercial
lines has resulted in the Company ceasing to be approved to write
insurance in a number of states.
At June 30, 2003, the Company had 60 commercial lines policies in force
which will expire during 2003. Concurrently, the Company continued to
settle and reduce its inventory of commercial lines claims. At June 30,
2003, there were 681 claims associated with our overall runoff book
outstanding, compared to 1,322 a year earlier. Due to the long tail
nature of these claims, the Company anticipates it will take a
substantial number of years to complete an orderly adjustment and
settlement process with regard to existing claims and any additional
claims it receives in the future from its past business writings. In
the course of reducing its employee count, in the first quarter of 2003
the Company outsourced certain of its information technology operations
related to the run-off of its commercial lines to an unaffiliated third
party provider with which Richard A. Laabs, a former senior executive
of the Company, and three other former employees of the Company are
affiliated.
As respects the Company's remaining active insurance line, personal
auto, management continues in 2003 to implement actions intended to
enhance the profit potential of this business and its future strategic
direction, which could include the expansion, contraction, or
disposition of the business.
Redeployment of Capital
The Company anticipates a lengthy period of transition as it evaluates
opportunities. During the transition process, the Company may consider
the sale of additional subsidiaries associated with its historical
insurance business. The Company intends to redeploy capital no longer
required by its discontinuance insurance business, once it becomes
available, to pursue other opportunities in the future that offer a
better prospect for profitability. The Company believes that suitable
capital redeployment opportunities should be available after the
capital no longer required by its discontinuance insurance business
becomes available, but cannot predict the amount of capital that will
ultimately be available for redeployment, the timing or the nature of
the opportunities that may be available at the time capital becomes
available. The opportunities may be inside or outside of the insurance
business and could be in the financial services business. The
opportunities could require more capital than the Company has
available, which could result in the Company having to seek such
capital from other sources, but the Company has no assurance that it
would be able to effect any such transaction or the terms thereof.
Sale of GAINSCO County Mutual Insurance Company
On December 2, 2002, the Company completed the sale and transfer of the
management contract controlling GAINSCO County Mutual Insurance Company
("GCM") to an affiliate of Liberty Mutual Insurance Company
("Liberty"), for a purchase price of up to $10 million, of which $1
million was paid at closing and the balance is payable in contingent
payments through September 2009. The $9 million total of contingent
payments would be payable $3 million in September 2003 and $1 million
each year thereafter through September 2009, but each
27
payment is contingent on there being no materially adverse change in
the regulatory treatment of GCM specifically, or county mutuals
generally, from legislative or regulatory administrative actions prior
to the applicable payment date.
In the session of the Texas Legislature ended June 2, 2003, changes
were made in the statutes governing the regulatory treatment of county
mutual insurance companies in Texas. These changes prejudice the rights
of the Company to receive contingent payments from Liberty, depending
upon how the statutory changes and the Company's agreement with Liberty
are interpreted. The Company contacted Liberty to discuss its
obligation to make the contingent payments in light of the recent
legislation, but has not yet received a response. The Company has fully
reserved its receivable due from Liberty (representing the excess of
the Company's cost basis in GCM over the $1,000,000 received from
Liberty at the closing of the sale transaction) as potentially
uncollectible because of the recent changes in the statutes.
RESULTS OF OPERATIONS
Gross premiums written for the second quarter of 2003 were $7,172,614
versus $8,781,050 for the comparable 2002 period representing an 18%
decrease. For the first six months of 2003 gross premiums written have
decreased 43% from the comparable 2002 period. Commercial lines
accounts for the majority of the decrease as a result of the Company's
decision in the first quarter of 2002 to discontinue writing commercial
lines due to continued adverse claims development and unprofitable
results.
The following table compares the major lines between the periods for
gross premiums written.
Three months ended June 30, Six months ended June 30,
-------------------------------------------- ----------------------------------------------
2003 2002 2003 2002
------------------ ----------------- ------------------- ------------------
(Amounts in thousands)
Commercial lines $ 41 .6% 2,994 34.1% $ 64 .4% 12,673 44.6%
Personal lines 7,132 99.4% 5,787 65.9% 16,158 99.6% 15,761 55.4%
------ ----- ----- ----- ------- ----- ------ -----
Total $7,173 100.0% 8,781 100.0% $16,222 100.0% 28,434 100.0%
====== ===== ===== ===== ======= ===== ====== =====
Personal auto, which is included in Personal lines, is the only line of
insurance currently marketed by the Company. Personal auto gross
premiums written increased 24% and 5% for the second quarter and first
six months of 2003 versus the comparable 2002 periods, respectively.
Personal auto continued to produce profitable results in the second
quarter of 2003.
Net premiums earned decreased 54% and 52% for the second quarter and
first six months of 2003 versus the comparable 2002 periods,
respectively, primarily as a result of discontinuance of commercial
lines mentioned previously.
Net investment income decreased 26% and 31% for the second quarter and
first six months of 2003 versus the comparable 2002 periods,
respectively. These decreases were primarily due to the decease in
investments and short-term investments comprising a significantly
greater portion of investments in the 2003 periods versus the 2002
periods.
In the second quarter of 2003 and the first six months of 2003, the
Company recognized net realized gains of $514,939 and $1,265,993,
respectively, compared to $16,042 and $378,583 of net realized gains
for the respective 2002 periods. Variability in the timing of realized
investment gains is to be expected. Net realized gains in the first six
months of 2002 were partially offset by $2,010,670 of losses related to
the write down of a non-rated commercial mortgage backed security. This
security was deemed by management to have declined in value that was
other than temporary. There was a significant increase in the default
rate in the underlying commercial mortgage portfolio, which had
disrupted the cash flow stream sufficiently to make future cash flows
unpredictable.
28
During the second quarter of 2003 the Company reclassified the revenues
and expenses of the personal auto agency operation because of its
increasing materiality. This reclassification was made for all periods
presented and had no impact on net income. The revenues of this
operation are now presented as a component of Other income and the
expenses are presented as a component of Underwriting and operating
expenses. Previously the revenues and expenses were netted and shown as
a component of Other income in 2002 and as a component of Commissions
in the first quarter of 2003. The decrease in Other income for the
second quarter and first six months of 2003 when compared to the
comparable 2002 periods was primarily related to a lower amount of
amortization of deferred reinsurance recoveries from claim payments
under the reserve reinsurance cover agreement in the 2003 periods than
in the 2002 periods. Amortization is based upon claims recovered from
the reinsurer in relation to the amount of the reinsured layer under
the reserve reinsurance cover agreement.
Claims and claims adjustment expenses ("C & CAE") decreased $12,741,444
and $20,331,758 in the second quarter and first six months of 2003 from
the comparable 2002 periods, respectively. The C & CAE ratio was 62.2%
in the second quarter of 2003 versus 104.4% in the second quarter of
2002. The C & CAE ratio was 74.8% in the first six months of 2003
versus 95.3% in the first six months of 2002. The decrease in the C &
CAE ratios was primarily due to a decrease in ultimate expected
liabilities in the personal auto line for the 2002 and 2003 accident
years, offset by an increase in ultimate expected liabilities for the
commercial general liability line.
The ratio of commissions plus the change in deferred policy acquisition
costs and deferred ceding commission income to net premiums earned was
19% and 16% for the second quarter of 2003 and 2002, respectively. The
increase in the ratio was related to an adjustment that reduced
deferred commission expense for personal auto during the second quarter
of 2003. This ratio was 15% and 17% for the first six months of 2003
and 2002, respectively. The decrease in the ratio was primarily related
to the shift in the mix of business to personal auto, which has lower
acquisition expenses than commercial lines.
Commissions are comprised of commission expenses (which vary with gross
premiums written), offset by commission income (which varies with ceded
premium written). Commission expenses are paid to agents to produce the
business for the Company. Commission income is received by the Company
from reinsurers as compensation to the Company for business the Company
cedes to the reinsurers. Commissions decreased in 2003 as a result of
the decrease in gross premiums written discussed previously.
Change in deferred policy acquisition costs ("DPAC") and deferred
ceding commission income ("DCCI") represents the change during the
period in the asset "Deferred policy acquisition cost." This asset item
is comprised of commission expenses, premium taxes and certain
marketing and underwriting expenses, which are deferred, offset by
commission income received from reinsurers, which is also deferred.
This net asset DPAC is amortized into the results of operations through
"Change in deferred policy acquisition costs and deferred ceding
commission income," as the underlying gross premiums written and ceded
premiums written are earned.
Interest expense from the note payable decreased in the second quarter
and first six months of 2003 from the comparable 2002 periods primarily
due to the decrease in the outstanding note payable balance as a result
of principal payments.
As mentioned previously, Underwriting and operating expenses now
include the operating expenses of the personal auto agency operation.
During the second quarter of 2002 the Company received funds on a past
due ceded paid claim that had been previously reserved as potentially
uncollectible. The decrease in the reserve for reinsurance recoverables
recorded during the second quarter of 2002 accounts for the increase in
Underwriting and operating expenses from the second quarter of 2002 to
the second quarter of 2003. Underwriting and operating expenses for the
first six months of 2003 are below the comparable 2002 period primarily
as a result cost reductions implemented in 2002.
29
In the second quarter of 2002 the Company evaluated goodwill and
recorded an impairment of $2,859,507. The remaining goodwill as of June
30, 2003 is $609,000 and is related to the 1998 acquisition of the
Lalande Group.
LIQUIDITY AND CAPITAL RESOURCES
Parent Company
GAINSCO, INC. ("GNAC") is a holding company that provides
administrative and financial services for its wholly owned
subsidiaries. GNAC needs cash for: (1) principal and interest on its
bank note payable, (2) administrative expenses, and (3) investments.
The primary sources of cash to meet these obligations are statutory
permitted dividend payments from General Agents Insurance Company of
America, Inc. ("General Agents"), a wholly owned subsidiary. Statutes
in Oklahoma restrict the payment of dividends by General Agents to the
available surplus funds derived from their realized net profits. The
maximum amount of cash dividends that General Agents 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
10% of policyholders' surplus as of the previous December 31. On March
20, 2003 General Agents paid dividends to GNAC of $3,878,000. Based on
its surplus amounts at December 31, 2003 and generally without prior
regulatory approval, in March 2004 General Agents may declare dividends
to GNAC of up to the greater of net income for the 12-month period
ended December 31, 2003 or 10% of policyholders' surplus as of December
31, 2003. GNAC expects to meet its obligations for 2003.
The Company had Federal income tax loss carry forward tax benefits at
June 30, 2003 of $23,632,923 that could be applied against any future
taxes on earnings of the Company, subject to certain limitations. Thus,
the Company does not currently require funds to satisfy Federal income
tax obligations.
GNAC entered into an amendment dated as of February 27, 2002 to its
bank credit agreement which cured GNAC's covenant breaches and provided
for additional principal prepayments. Pursuant to the amendment, GNAC
prepaid $6,100,000 of the indebtedness outstanding under the credit
agreement. Several covenants in the existing credit agreement were
eliminated or modified by the amendment and the interest rate was
changed to a base rate (which approximates prime) plus 175 basis
points. The major financial covenant of the amended credit agreement
requires the statutory surplus of General Agents to be at a minimum of
three times the unpaid principal balance. General Agents' statutory
surplus at June 30, 2003 was approximately $39,995,000, which is
approximately $34,712,000 above the minimum threshold. The remaining
$1,761,000 principal balance under the credit agreement is payable in
November 2003, which GNAC intends to fund with short-term investments.
The credit agreement, among other things, precludes payment of
dividends on common or preferred stock and restricts the kinds of
investments that GNAC may make.
Subject to bank credit agreement restrictions, GNAC may also obtain
cash through the sale of subsidiaries or assets and through the
issuance of common or preferred stock. The bank credit agreement
generally requires a note prepayment in the event of the sale by GNAC
of any subsidiary or assets (except certain ordinary course of business
sales), or any issuance of stock (subject to certain exceptions), equal
to 50% of the proceeds received.
The Company will be in a lengthy period of transition as it evaluates
opportunities. During the transition process, the Company may consider
the sale of additional subsidiaries associated with that business.
Subsidiaries, Principally Insurance Operations
The primary sources of the insurance subsidiaries' 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 the fixed maturity
investments. The Company has short-term investments and cash that the
Company believes are adequate liquidity for the payment of claims and
other short-term commitments.
30
With regard to long term liquidity, the average maturity of the
investment portfolio is approximately 2 years. The fair value of the
fixed maturity portfolio at June 30, 2003 was $3,831,118 above
amortized cost.
Net cash used for operating activities was $1,086,734 for the first six
months of 2003 versus $54,269,195 in net cash used for operating
activities for first six months of 2002. The decrease in net cash used
for operating activities was primarily related to the nonaffiliated
reinsurer for the reserve reinsurance cover agreement taking possession
of investments, in March 2002, which collateralized the Company's
liability (Funds held under reinsurance agreements) to this reinsurer.
Also contributing to the cash used in the 2002 period was the
significant decrease in commercial lines writings as a result of
exiting this line of insurance.
Investments and cash together decreased primarily due to the principal
payment on the Note payable. Reinsurance balances receivable decreased
primarily due to paid C & CAE recoveries received from the commercial
quota share treaty and a decrease in ceded unpaid C & CAE under the
reserve reinsurance cover agreement. Ceded unpaid claims and claim
adjustment expenses decreased primarily as a result of the decrease in
unpaid claims and claim adjustment expenses with regard to commercial
claims subject to the commercial quota share treaty. Current Federal
income taxes decreased as a result of the Company receiving a refund in
January 2003 for previously paid taxes. Other assets decreased as a
result of contingent commission settlements made with the commercial
quota share reinsurers during the second quarter of 2003.
Unpaid claims and claims adjustment expenses decreased primarily due to
the run-off of commercial business. This amount represents management's
best estimate, as derived from actuarial analysis and was set equal to
the selected reserve estimate as established by our outside actuary.
Management has reviewed and discussed the results of the actuarial
analysis with the actuary and believes the reserve estimate selected by
the actuary to be the best estimate of reserves at this time.
As of June 30, 2003, in respect of its commercial lines, the Company
had $71,903,065 in reserves for unpaid claims and claim adjustment
expenses net of ceded unpaid claims and claim adjustment expense. This
balance has not been reduced for the ceded unpaid C & CAE of
$17,925,306 under the reserve reinsurance cover agreement that is
included in Reinsurance balances receivable. Historically, the Company
has experienced significant volatility in its reserve projections for
its commercial lines. This volatility has been primarily attributable
to its commercial automobile and general liability product lines. On
February 7, 2002, the Company announced it had decided to discontinue
writing commercial lines insurance due to continued adverse claims
development and unprofitable results. As of June 30, 2003 only 60
commercial policies remain in force and they will expire in 2003.
Concurrently, the Company has been settling and reducing its remaining
inventory of commercial claims. See "BUSINESS OPERATIONS -
Discontinuance of Commercial Lines." As of June 30, 2003, 681
commercial claims remained, compared with 1,322 claims a year earlier.
The average commercial lines claim at June 30, 2003 was approximately
$105,585 per claim. For the claims remaining the Company increased the
ultimate expected liabilities during the second quarter of 2003 due to
higher than expected claim activity that occurred during the second
quarter of 2003.
As of June 30, 2003, in respect of its personal lines, the Company had
$12,529,201 in unpaid claims and claim adjustment expenses net of ceded
unpaid claims and claim adjustment expense. Personal lines claims
generally are shorter in duration than the Company's commercial lines
claims. At June 30, 2003, the Company had 2,092 personal auto claims.
The average personal auto claim at June 30, 2003 was approximately
$5,866 per claim. For the second quarter the Company decreased the
ultimate expected liabilities due to lower than expected claim activity
that occurred during the second quarter of 2003.
The Company considers the unpaid claims and claim adjustment expenses
to be adequate; they are set to equal the selected reserve estimate
determined by an outside actuarial firm.
Commissions payable decreased primarily as a result of contingent
commission settlements made with the commercial quota reinsurers during
the second quarter of 2003, as previously mentioned. Deferred revenue
decreased primarily as a result of reinsurance recoveries under the
reserve reinsurance cover agreement. The note payable decreased due to
a prepayment made during the first quarter of 2003.
31
Preferred Stock
As a result of the March 23, 2001 transactions with Goff Moore
Strategic Partners, L.P. and Robert W. Stallings, the Company has three
series of redeemable Preferred Stock, which are classified as mezzanine
financing. The Series A Preferred Stock was previously classified in
shareholders' equity because it was not subject to mandatory
redemption. The Company is required to redeem the Series A Preferred
Stock on January 1, 2006 at a price of $31,620,000 plus unpaid
dividends, if any. As of June 30, 2003, there were no accrued but
unpaid dividends in respect of the Series A Preferred Stock. The Series
B and Series C Preferred Stock are redeemable at the Company's option
in March 2006 and at the option of the majority holders in March 2007
at a price of $3,000,000 each plus accrued dividends. The Series B and
the Series C Preferred Stock each include accrued dividends in the
amount of $746,589 as of June 30, 2003. At June 30, 2003, $8,931,000
has yet to be charged to Retained deficit related to the accretion of
the discount on the Series A and Series B Preferred Stock.
Accumulated other comprehensive income of $2,482,998 was recorded at
June 30, 2003 primarily as a result of the unrealized gains on bonds
available for sale, net of tax.
The increase in Retained deficit of $945,000 is attributable to the
accretion of discount on the Series A and Series B Preferred Stock of
$1,463,000, and the accrual of dividends on the Series B and Series C
Preferred Stock of $361,063, offset by net income of $879,063.
Accounting for Preferred Stock
In May 2003, the Financial Accounting Standards Board issued Statement
No. 150 "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" (SFAS 150). This
statement does not have an impact on the current accounting by the
Company as all of the Company's series of Preferred Stock are not
considered "mandatory redeemable financial instruments" based on SFAS
150's definition, and therefore are not subject to the accounting
treatment under paragraph 9 of SFAS 150. All three series of Preferred
Stock are currently classified as temporary equity pursuant to SEC ASR
268 and EITF Topic No. D-98. Rule 5-02.28 of SEC Regulation S-X
requires preferred securities that are redeemable for cash or other
assets to be classified outside of permanent equity if they are
redeemable (1) at a fixed or determinable price on a fixed or
determinable date; (2) at the option of the holder; or, (3) upon the
occurrence of an event that is not solely within the control of the
issuer.
Regulatory Capital
The Company is not aware of any current recommendations by regulatory
authorities, which if implemented, would have a material adverse 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 insurance companies that
are subject to Risk Based Capital requirements. Risk Based Capital is a
method for establishing the minimum amount of capital appropriate for
an insurance company to support its overall business operations in
consideration of its size and risk profile.
Off-Balance Sheet Transactions and Related Matters
There are no off-balance sheet transactions, arrangements, obligations
(including contingent obligations), or other relationships of the
Company with unconsolidated entities or other persons that have, or may
have, a material effect on financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources of the Company.
32
Shareholders' Equity Assuming Redemption of Preferred Stock
At June 30, 2003, total assets less total liabilities of the Company
was $43,566,554 and there were outstanding three series of Preferred
Stock with an aggregate liquidation value of $39,113,178 ($37,620,000
stated value plus accrued dividends of $1,493,178). Based on the
foregoing, the Shareholders' Equity assuming the redemption of all
series of the Preferred Stock at June 30, 2003, would be $4,453,376
($0.21 per common share). The amount ultimately available to the
shareholders would vary with changes in the assets and liabilities of
the Company.
Legal Proceedings
Securities litigation has been filed in United States District Court,
Southern District of Florida against the Company and two of its
officers (one of whom is also a director). The plaintiffs seek class
certification for the litigation and principally allege violations of
securities laws in respect of the Company's previously acquired and
disposed of Tri-State, Ltd. subsidiary and seek an unspecified amount
of damages. The Company believes the allegations are without merit and
intends to vigorously defend the proceedings.
In the normal course of its operations, the Company has been named as
defendant in various legal actions seeking payments for claims denied
by the Company and other monetary damages. In the opinion of the
Company's management the ultimate liability, if any, resulting from the
disposition of these claims will not have a material adverse effect on
the Company's consolidated financial position or results of operations.
The Company's management believes that unpaid claims and claim
adjustment expenses are adequate to cover liabilities from claims that
arise in the normal course of its insurance business.
33
GAINSCO, INC. AND SUBSIDIARIES
Quantitative and Qualitative Disclosures
About Market Risk
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, commodity or equity risk.
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 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.
FORWARD LOOKING STATEMENTS
Statements made in this report that are qualified with words such as
"continued to pursue," "expect," "intended to enhance," etc., are
forward-looking statements. 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) the Company's ability to effect the successful exit from
unprofitable lines and businesses that the Company believes cannot be
counted on to produce future profit, (b) heightened competition from
existing competitors and new competitor entrants into the Company's
markets, (c) the extent to which market conditions firm up, the
acceptance of higher prices in the market place and the Company's
ability to realize and sustain higher rates, (d) contraction of the
markets for the Company's business, (e) acceptability of the Company's
A.M. Best rating to its end markets, (f) the Company's ability to meet
its obligations under its capital and debt agreements, (g) the ongoing
level of claims and claims-related expenses and the adequacy of claim
reserves, (h) the outcome of pending litigation, (i) the effectiveness
of investment strategies implemented by the Company's investment
manager, (j) continued justification of recoverability of goodwill in
the future, (k) the availability of reinsurance and the ability to
collect reinsurance recoverables, (l) the Company's ability to invest
in new endeavors that are successful, (m) the limitation on the
Company's ability to use net operating loss carryforwards as a result
of constraints caused by ownership changes within the meaning of
Internal Revenue Code Section 382, (n) the ability of the Company to
34
realize contingent acquisition payments in connection with its sale of
the management contract controlling GAINSCO County Mutual Insurance
Company, which was prejudiced by legislation passed in the session of
the Texas Legislature ended June 2, 2003, and (o) 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. Please refer to the Company's recent SEC filings
for further information regarding factors that could affect the
Company's results.
35
GAINSCO, INC. AND SUBSIDIARIES
Controls and Procedures
CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in its
Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to the Company's
management, including the Company's Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. Management necessarily applied its judgment in
assessing the costs and benefits of such controls and procedures,
which, by their nature, can provide only reasonable assurance regarding
management's control objectives.
The Company carried out an evaluation, under the supervision and with
the participation of its management, including its Chief Executive
Officer and Chief Financial Officer, on the effectiveness of the design
and operation of its disclosure controls and procedures pursuant to
Exchange Act Rules 13a-15 and 15d-15 as of June 30, 2003. Based upon
that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's Exchange Act
reports.
While the Company believes that its existing disclosure controls and
procedures have been effective to accomplish their objectives, the
Company intends to continue to examine, refine and formulize its
disclosure controls and procedures and to monitor ongoing developments
in this area.
36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Securities litigation has been filed in United States District
Court, Southern District of Florida against the Company and two
of its officers (one of whom is also a director). The
plaintiffs seek class certification for the litigation and
principally allege violations of securities laws in respect of
the Company's previously acquired and disposed of Tri-State,
Ltd. subsidiary and seek an unspecified amount of damages. The
Company believes the allegations are without merit and intends
to vigorously defend the proceedings.
In the normal course of its operations, the Company has been
named as defendant in various legal actions seeking payments
for claims denied by the Company and other monetary damages. In
the opinion of the Company's management, the ultimate liability
if any, resulting from the disposition of these claims will not
have a material adverse effect on the Company's consolidated
financial position or results of operations. The Company's
management believes that unpaid claims and claim adjustment
expenses are adequate to cover liabilities from claims that
arise in the normal course of its insurance business.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
An Annual Meeting of Shareholders of the Company was held on
May 19, 2003 in Dallas, 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,
2003. The results of the voting were as follows:
Election of Directors For Withheld
- --------------------- ---------- ---------
Glenn W. Anderson 26,046,800 1,531,965
Hugh M. Balloch 26,049,211 1,529,554
John C. Goff 24,682,958 2,625,807
Joel C. Puckett 24,427,827 3,150,938
Sam Rosen 23,738,694 3,840,071
Robert W. Stallings 26,046,781 1,531,984
Harden H. Wiedemann 24,894,611 2,729,154
John H. Williams 24,848,031 2,730,734
Ratification of appointment of independent auditors:
Abstentions and Brokers
-----------------------
For Against Non-Votes
- ---------- --------- ---------
26,318,629 1,260,010 126
37
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*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].
*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 September 6, 2001. [Exhibit
3.5, Form 8-K dated August 31, 2001].
*3.6 Statement of Resolution Establishing and Designating Series B
Convertible Redeemable Preferred Stock of Registrant as filed with the
Secretary of State of the State of Texas on March 22, 2001. [Exhibit
99.19, Form 8-K/A dated March 30, 2001].
*3.7 Statement of Resolution Establishing and Designating Series C
Redeemable Preferred Stock of Registrant as filed with the Secretary of
State of the State of Texas on March 22, 2001. [Exhibit 99.20, Form
8-K/A dated March 30, 2001].
*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].
38
*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 dated August 10, 1998].
*10.4 Forms of Change of Control Agreements [Exhibit 10.4, Form 10-K dated
March 29, 2002].
*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
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, Amendment No. 2 thereto dated March 23,
2001, Amendment No.3 thereto dated November 13, 2001, and Amendment No.
4 thereto dated February 27, 2002. [Exhibits 10.50 to 10.53, Form
10-K/A dated March 30, 1999; Exhibit 99.22, Form 8-K dated October 4,
1999; Exhibit 99.24, Form 8-K/A dated March 30, 2001, Exhibit 10.23,
Form 10-Q dated November 13, 2001, Exhibit 10.9, Form 8-K dated
February 27, 2002].
*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].
39
*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. [Exhibit 10.11,
Form 10-K dated March 30, 2000].
*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].
*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, N.A.
[Exhibit 10.14, Form 10-K dated March 30, 2000].
*10.15 Agreement of Limited Partnership of GNA Investments I, L.P. dated as of
November 30, 1999 between Registrant and GMSP [Exhibit 10.15, Form 10-K
dated March 30, 2000].
*10.16 Professional Service Agreement dated as of October 22, 1999 between
Registrant and ClientSoft, Inc. [Exhibit 10.16, Form 10-K dated March
30, 2000].
*10.17 First Amendment to Stock Purchase Agreement dated May 16, 2000 among
Registrant, Tri-State, Ltd., Herbert A. Hill and Alan E. Heidt [Exhibit
10.14, Form 10-Q dated August 11, 2000].
*10.18 GAINSCO, INC. 401(k) Plan and related Adoption Agreement [Exhibit 99.1
to Registration Statement on Form S-8, effective April 12, 2000].
*10.19 Securities Purchase Agreement dated as of February 26, 2001 between
Registrant and GMSP (including exhibits) and related First Amendment to
Securities Purchase Agreement, letter regarding redemption of
Registrant's outstanding Series A Convertible Preferred Stock, First
Amendment to Series A Common Stock Purchase Warrant, and First
Amendment to Series B Common Stock Purchase Warrant [Exhibit 2.1, Form
8-K dated March 2, 2001; Exhibits 2.2, 2.8, 99.21 and 99.22, Form 8-K/A
dated March 30, 2001].
*10.20 Securities Purchase Agreement dated as of February 26, 2001 between
Registrant and Robert W. Stallings ("Stallings") (including exhibits)
and related First Amendment to Securities Purchase Agreement,
Assignment and Assumption Agreement between Stallings and ING Pilgrim
Capital Corporation, LLC, Amendment to Assignment and Assumption
Agreement, letter dated March 23, 2001 from Stallings to Registrant,
and Common Stock Purchase Warrant [Exhibit 2.2, Form 8-K dated March 2,
2001; Exhibits 2.4 to 2.7 and 99.23, Form 8-K/A dated March 30, 2001].
*10.21 Consulting Agreement dated as of February 26, 2001 between Registrant
and Stallings [Exhibit 99.15, Form 8-K dated March 2, 2001].
40
*10.22 Agreement dated March 23, 2001 among Registrant, GAINSCO Service Corp.,
GMSP, Stallings and Bank One, N.A. [Exhibit 99.25, Form 8-K/A dated
March 30, 2001].
*10.23 Letter agreement dated February 27, 2002 between the Registrant and
GMSP pursuant to which the Registrant exercised its right to put
certain illiquid investments to GMSP for $2,087,354.27 pursuant to
Section 6.9 of the Securities Purchase Agreement dated February 26,
2001 between the Registrant and GMSP, as amended [Exhibit 10.24, Form
8-K/A dated February 27, 2002].
*10.24 Agreement of Sale and Purchase dated March 7, 2002 between General
Agents Insurance Company of America, Inc. and Turonian Corp. [Exhibit
10.24, Form 10-K dated March 29, 2002].
*10.25 First Amendment to Investment Management Agreements dated August 9,
2002 among Goff Moore Strategic Partners, L.P., the Registrant, General
Agents Insurance Company of America, Inc., MGA Insurance Company, Inc.,
GAINSCO County Mutual Insurance Company and Midwest Casualty Insurance
Company [Exhibit 10.25, Form 10-Q dated August 14, 2002].
*10.26 Acquisition Agreement dated August 12, 2002 among the Registrant,
GAINSCO Service Corp., GAINSCO County Mutual Insurance Company,
Berkeley Management Corporation and Liberty Mutual Insurance Company
[Exhibit 10.26, Form 10-Q dated August 14, 2002].
*10.27 Commercial Lease Agreement dated July 31, 2002 between JaGee Real
Properties, L.P. and General Agents Insurance Company of America, Inc.
[Exhibit 10.27, Form 10-Q dated August 14, 2002].
*10.28 Form of Executive Severance Agreement between GAINSCO Service Corp. and
each of Richard M. Buxton, Richard A. Laabs and Daniel J. Coots
[Exhibit 10.28, Form 10-Q dated August 14, 2002].
*10.29 Representative Forms of Retention Incentive Agreement [Exhibit 10.30,
Form 10-Q dated August 14, 2002].
*10.30 Acquisition Agreement dated August 12, 2002 among the Registrant,
GAINSCO Service Corp., Berkeley Management Corporation, Liberty Mutual
Insurance Company, and GAINSCO County Mutual Insurance Company and
Amendment to Acquisition Agreement dated December 2, 2002 among the
Registrant, GAINSCO Service Corp., Berkeley Management Corporation,
Liberty Mutual Insurance Company, and GAINSCO County Mutual Insurance
Company [Exhibit 10.26, Form 10-Q dated August 14, 2002 and Exhibit
10.32, Form 8-K filed December 5, 2002].
*10.31 Office Lease dated August 19, 2002 between Crescent Real Estate Funding
X, L.P. and the Registrant [Exhibit 10.31, Form 10-Q dated November 14,
2002].
*10.32 Separation Agreement and Release dated December 17, 2002 between McRae
B. Johnston and MGA Insurance Company, Inc.; Separation Agreement and
Release dated December 17, 2002 among McRae B. Johnston, Registrant,
National Specialty Lines, Inc., Lalande Financial Group, Inc., DLT
Insurance Adjusters, Inc. and Midwest Casualty Insurance Company;
Consulting Agreement dated December 17, 2002 between McRae B. Johnston
and MGA Insurance Company, Inc.; and Form of Separation
41
Agreement and Release entered into as of March 1, 2003 between McRae B.
Johnston and MGA Insurance Company, Inc. [Exhibit 10.33, Form 8-K filed
December 17, 2002; Exhibit 10.34, Form 8-K filed December 17, 2002;
Exhibit 10.35, Form 8-K filed December 17, 2002; and Exhibit 10.36,
Form 8-K filed December 17, 2002].
*10.33 Executive Severance Agreement dated May 8, 2003 among Michael Johnston,
Registrant, National Specialty Lines, Inc., Lalande Financial Group,
Inc., DLT Insurance Adjusters, Inc. and MGA Insurance Company, Inc. (1)
15. Awareness Letter of KPMG LLP (1)
31.1 Section 302 Certification - Chief Executive Officer (1)
31.2 Section 302 Certification - Chief Financial Officer (1)
32.1 Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes- Oxley Act of 2002 - Chief Executive
Officer (2)
32.2 Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes- Oxley Act of 2002 - Chief Financial
Officer (2)
99.1 Press Release dated August 13, 2003. (1)
* 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.
(1) Filed herewith.
(2) Furnished (but not filed) herewith.
(b) Reports on Form 8-K
None
42
SIGNATURE
Pursuant to the requirements 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 to sign on behalf of the Registrant as
well as in his capacity as Chief Financial Officer.
GAINSCO, INC.
Date: August 14, 2003 By: /s/ Daniel J. Coots
-----------------------------------------
Daniel J. Coots
Senior Vice President, Treasurer and
Chief Financial Officer
43
INDEX OF EXHIBITS
Exhibit No. Description
- ---------- -----------
*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].
*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 September 6, 2001.
[Exhibit 3.5, Form 8-K dated August 31, 2001].
*3.6 Statement of Resolution Establishing and Designating Series B
Convertible Redeemable Preferred Stock of Registrant as filed
with the Secretary of State of the State of Texas on March 22,
2001. [Exhibit 99.19, Form 8-K/A dated March 30, 2001].
*3.7 Statement of Resolution Establishing and Designating Series C
Redeemable Preferred Stock of Registrant as filed with the
Secretary of State of the State of Texas on March 22, 2001.
[Exhibit 99.20, Form 8-K/A dated March 30, 2001].
*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].
44
Exhibit No. Description
- ---------- -----------
*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 dated August 10, 1998].
*10.4 Forms of Change of Control Agreements [Exhibit 10.4, Form 10-K
dated March 29, 2002].
*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 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].
45
Exhibit No. Description
- ---------- -----------
*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,
Amendment No. 2 thereto dated March 23, 2001, Amendment No.3
thereto dated November 13, 2001, and Amendment No. 4 thereto
dated February 27, 2002. [Exhibits 10.50 to 10.53, Form 10-K/A
dated March 30, 1999; Exhibit 99.22, Form 8-K dated October 4,
1999; Exhibit 99.24, Form 8-K/A dated March 30, 2001, Exhibit
10.23, Form 10-Q dated November 13, 2001, Exhibit 10.9, Form 8-K
dated February 27, 2002].
*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. [Exhibit 10.11, Form 10-K dated March 30, 2000].
*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].
*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, N.A. [Exhibit 10.14, Form 10-K dated March 30,
2000].
*10.15 Agreement of Limited Partnership of GNA Investments I, L.P. dated
as of November 30, 1999 between Registrant and GMSP [Exhibit
10.15, Form 10-K dated March 30, 2000].
*10.16 Professional Service Agreement dated as of October 22, 1999
between Registrant and ClientSoft, Inc. [Exhibit 10.16, Form 10-K
dated March 30, 2000].
46
Exhibit No. Description
- ---------- -----------
*10.17 First Amendment to Stock Purchase Agreement dated May 16, 2000
among Registrant, Tri-State, Ltd., Herbert A. Hill and Alan E.
Heidt [Exhibit 10.14, Form 10-Q dated August 11, 2000].
*10.18 GAINSCO, INC. 401(k) Plan and related Adoption Agreement [Exhibit
99.1 to Registration Statement on Form S-8, effective April 12,
2000].
*10.19 Securities Purchase Agreement dated as of February 26, 2001
between Registrant and GMSP (including exhibits) and related
First Amendment to Securities Purchase Agreement, letter
regarding redemption of Registrant's outstanding Series A
Convertible Preferred Stock, First Amendment to Series A Common
Stock Purchase Warrant, and First Amendment to Series B Common
Stock Purchase Warrant [Exhibit 2.1, Form 8-K dated March 2,
2001; Exhibits 2.2, 2.8, 99.21 and 99.22, Form 8-K/A dated March
30, 2001].
*10.20 Securities Purchase Agreement dated as of February 26, 2001
between Registrant and Robert W. Stallings ("Stallings")
(including exhibits) and related First Amendment to Securities
Purchase Agreement, Assignment and Assumption Agreement between
Stallings and ING Pilgrim Capital Corporation, LLC, Amendment to
Assignment and Assumption Agreement, letter dated March 23, 2001
from Stallings to Registrant, and Common Stock Purchase Warrant
[Exhibit 2.2, Form 8-K dated March 2, 2001; Exhibits 2.4 to 2.7
and 99.23, Form 8-K/A dated March 30, 2001].
*10.21 Consulting Agreement dated as of February 26, 2001 between
Registrant and Stallings [Exhibit 99.15, Form 8-K dated March 2,
2001].
*10.22 Agreement dated March 23, 2001 among Registrant, GAINSCO Service
Corp., GMSP, Stallings and Bank One, N.A. [Exhibit 99.25, Form
8-K/A dated March 30, 2001].
*10.23 Letter agreement dated February 27, 2002 between the Registrant
and GMSP pursuant to which the Registrant exercised its right to
put certain illiquid investments to GMSP for $2,087,354.27
pursuant to Section 6.9 of the Securities Purchase Agreement
dated February 26, 2001 between the Registrant and GMSP, as
amended [Exhibit 10.24, Form 8-K/A dated February 27, 2002].
*10.24 Agreement of Sale and Purchase dated March 7, 2002 between
General Agents Insurance Company of America, Inc. and Turonian
Corp. [Exhibit 10.24, Form 10-K dated March 29, 2002].
*10.25 First Amendment to Investment Management Agreements dated August
9, 2002 among Goff Moore Strategic Partners, L.P., the
Registrant, General Agents Insurance Company of America, Inc.,
MGA Insurance Company, Inc., GAINSCO County Mutual Insurance
Company and Midwest Casualty Insurance Company [Exhibit 10.25,
Form 10-Q dated August 14, 2002].
47
Exhibit No. Description
- ---------- -----------
*10.26 Acquisition Agreement dated August 12, 2002 among the Registrant,
GAINSCO Service Corp., GAINSCO County Mutual Insurance Company,
Berkeley Management Corporation and Liberty Mutual Insurance
Company [Exhibit 10.26, Form 10-Q dated August 14, 2002].
*10.27 Commercial Lease Agreement dated July 31, 2002 between JaGee Real
Properties, L.P. and General Agents Insurance Company of America,
Inc. [Exhibit 10.27, Form 10-Q dated August 14, 2002].
*10.28 Form of Executive Severance Agreement between GAINSCO Service
Corp. and each of Richard M. Buxton, Richard A. Laabs and Daniel
J. Coots [Exhibit 10.28, Form 10-Q dated August 14, 2002].
*10.29 Representative Forms of Retention Incentive Agreement [Exhibit
10.30, Form 10-Q dated August 14, 2002].
*10.30 Acquisition Agreement dated August 12, 2002 among the Registrant,
GAINSCO Service Corp., Berkeley Management Corporation, Liberty
Mutual Insurance Company, and GAINSCO County Mutual Insurance
Company and Amendment to Acquisition Agreement dated December 2,
2002 among the Registrant, GAINSCO Service Corp., Berkeley
Management Corporation, Liberty Mutual Insurance Company, and
GAINSCO County Mutual Insurance Company [Exhibit 10.26, Form 10-Q
dated August 14, 2002 and Exhibit 10.32, Form 8-K filed December
5, 2002].
*10.31 Office Lease dated August 19, 2002 between Crescent Real Estate
Funding X, L.P. and the Registrant [Exhibit 10.31, Form 10-Q
dated November 14, 2002].
*10.32 Separation Agreement and Release dated December 17, 2002 between
McRae B. Johnston and MGA Insurance Company, Inc.; Separation
Agreement and Release dated December 17, 2002 among McRae B.
Johnston, Registrant, National Specialty Lines, Inc., Lalande
Financial Group, Inc., DLT Insurance Adjusters, Inc. and Midwest
Casualty Insurance Company; Consulting Agreement dated December
17, 2002 between McRae B. Johnston and MGA Insurance Company,
Inc.; and Form of Separation Agreement and Release entered into
as of March 1, 2003 between McRae B. Johnston and MGA Insurance
Company, Inc. [Exhibit 10.33, Form 8-K filed December 17, 2002;
Exhibit 10.34, Form 8-K filed December 17, 2002; Exhibit 10.35,
Form 8-K filed December 17, 2002; and Exhibit 10.36, Form 8-K
filed December 17, 2002].
*10.33 Executive Severance Agreement dated May 8, 2003 among Michael
Johnston, Registrant, National Specialty Lines, Inc., Lalande
Financial Group, Inc., DLT Insurance Adjusters, Inc. and MGA
Insurance Company, Inc. (1)
15. Awareness Letter of KPMG LLP (1)
31.1 Section 302 Certification - Chief Executive Officer (1)
31.2 Section 302 Certification - Chief Financial Officer (1)
48
Exhibit No. Description
- ---------- -----------
32.1 Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief
Executive Officer (2)
32.2 Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief
Financial Officer (2)
99.1 Press Release dated August 13, 2003. (1)
* 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.
(1) Filed herewith.
(2) Furnished (but not filed) herewith.
49