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UNITED STATES
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 September 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 November 12, 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 September 30, 2003 (unaudited) and
December 31, 2002 4
Consolidated Statements of Operations for the Three Months and Nine Months
Ended September 30, 2003 and 2002 (unaudited) 6
Consolidated Statements of Shareholders' Equity and Comprehensive
Income (Loss) for the Nine Months Ended September 30, 2003 (unaudited) and the
Twelve Months Ended December 31, 2002 7
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2003 and 2002 (unaudited) 8
Notes to Consolidated Financial Statements
September 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 35
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 36
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 36
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 36
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 36
ITEM 5. OTHER INFORMATION 36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 36
SIGNATURE 42
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 September 30, 2003, the related consolidated statements
of operations for the three - month and nine - month periods ended September 30,
2003 and 2002, and the related consolidated statements of shareholders' equity
and comprehensive income (loss), and cash flows for the nine-months ended
September 30, 2003 and 2002. These condensed 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 condensed 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 condensed 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 income (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 sheet as of December 31, 2002 and the accompanying
consolidated statement of shareholders' equity and comprehensive income (loss)
for the year ended December 31, 2002, is fairly presented, in all material
respects, in relation to the consolidated balance sheet and consolidated
statement of shareholders' equity and comprehensive income (loss) from which
they have been derived.
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
November 12, 2003
3
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30,
2003 December 31,
(unaudited) 2002
------------- ----
Assets
Investments:
Fixed maturities:
Bonds available for sale, at fair value (amortized cost: $50,975,920
- 2003, $59,019,871 - 2002) $ 54,456,628 62,657,328
Certificates of deposit, at fair value (cost: $983,102 - 2003,
$645,000 - 2002) 983,102 645,000
Common stock, at fair value (cost: $302,000 - 2003, $0 - 2002) 289,600 -
Short-term investments, at cost (which approximates fair value) 51,007,768 51,671,557
------------ -----------
Total investments 106,737,098 114,973,885
Cash 2,938,701 2,512,454
Accrued investment income 638,452 714,760
Premiums receivable (net of allowance for doubtful accounts: $275,000
- 2003 and 2002) 4,832,429 3,684,195
Reinsurance balances receivable (net of allowance for doubtful accounts:
$1,043,838 - 2003, $1,001,461 - 2002) (note 2) 19,501,545 31,622,971
Ceded unpaid claims and claim adjustment expenses (note 2) 40,012,700 46,802,114
Ceded unearned premiums (note 2) 1,717 178,572
Deferred policy acquisition costs 1,130,461 1,674,346
Property and equipment (net of accumulated depreciation and amortization:
$5,329,164 - 2003, $5,074,441 - 2002) 681,632 913,526
Current Federal income taxes (note 1) - 1,055,753
Deferred Federal income taxes (net of valuation allowance: $31,580,221
- 2003, $31,972,504 - 2002) (note 1) - -
Other assets 6,849,438 9,647,641
Goodwill (note 1) 609,000 609,000
------------ -----------
Total assets $183,933,173 214,389,217
============ ===========
See accompanying notes to consolidated financial statements.
4
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30,
2003 December 31,
(unaudited) 2002
------------ -----------
Liabilities and Shareholders' Equity
Liabilities
Unpaid claims and claim adjustment expenses $ 119,000,499 143,270,964
Unearned premiums 8,883,385 8,580,082
Commissions payable 3,025,231 6,110,340
Accounts payable 2,721,990 2,631,066
Reinsurance balances payable 304,291 -
Deferred revenue 2,540,146 4,451,261
Drafts payable 1,441,566 1,631,846
Note payable (note 3) - 3,700,000
Deferred Federal income taxes (note 1) 1,179,225 1,236,736
Other liabilities 468,325 171,708
------------- -----------
Total liabilities 139,564,658 171,784,003
------------- -----------
Redeemable convertible preferred stock - Series A ($1,000 stated value,
31,620 shares authorized, 31,620 issued at September 30, 2003 and
December 31, 2002) (note 4) 23,547,000 21,343,000
Redeemable convertible preferred stock - Series B ($1,000 stated value,
3,000 shares authorized, 3,000 issued at September 30, 2003 and
December 31, 2002) (note 4) 3,750,253 3,449,057
Redeemable preferred stock - Series C ($1,000 stated value,
3,000 shares authorized, 3,000 issued at September 30, 2003 and
December 31, 2002) (note 4) 3,840,254 3,566,057
------------- -----------
31,137,507 28,358,114
------------- -----------
Shareholders' Equity (note 4)
Common stock ($.10 par value, 250,000,000 shares authorized, 22,013,830 issued
at September 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) 2,289,083 2,400,722
Retained deficit (84,971,057) (84,066,604)
Treasury stock, at cost (844,094 shares at September 30, 2003 and
December 31, 2002) (7,694,525) (7,694,525)
------------- -----------
Total shareholders' equity 13,231,008 14,247,100
------------- -----------
Commitments and contingencies (note 6)
Total liabilities and shareholders' equity $ 183,933,173 214,389,217
============= ===========
See accompanying notes to consolidated financial statements.
5
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three months Nine months
ended September 30, ended September 30,
------------------- --------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues:
Net premiums earned (note 2) $7,997,943 14,053,467 24,525,559 48,370,267
Net investment income 781,165 1,017,682 2,409,075 3,373,923
Net realized gains (note 1) - 668,891 1,265,993 1,047,474
Other income 1,196,542 1,626,070 3,721,771 5,446,118
---------- ----------- ---------- ----------
Total revenues 9,975,650 17,366,110 31,922,398 58,237,782
---------- ----------- ---------- ----------
Expenses:
Claims and claims adjustment expenses (note 2) 5,035,616 14,233,805 17,389,831 46,919,778
Commissions 1,190,799 1,352,386 3,086,806 6,466,063
Change in deferred policy acquisition costs and
deferred ceding commission income (107,507) 255,011 543,885 835,980
Interest expense (note 3) 25,486 68,063 104,337 246,692
Underwriting and operating expenses 2,835,379 3,824,283 8,922,599 10,456,175
Goodwill impairment (note 1) - - - 2,859,507
---------- ----------- ---------- ----------
Total expenses 8,979,773 19,733,548 30,047,458 67,784,195
---------- ----------- ---------- ----------
Income (loss) before Federal income taxes 995,877 (2,367,438) 1,874,940 (9,546,413)
Federal income taxes:
Current benefit - (2,607,796) - (2,607,796)
Deferred expense - - - 1,844,946
---------- ----------- ---------- ----------
Total taxes - (2,607,796) - (762,850)
---------- ----------- ---------- ----------
Net income (loss) $ 995,877 240,358 1,874,940 (8,783,563)
========== =========== ========== ==========
Income (loss) per common share, basic and diluted (note 1):
Net income (loss) per common share $ .00 (.03) (.04) (.53)
========== =========== ========== ==========
See accompanying notes to consolidated financial statements.
6
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss)
Nine months ended
September 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) 1,874,940 1,874,940 (8,761,087) (8,761,087)
Accrued dividends - redeemable preferred stock
(note 4) (548,393) (670,774)
Accretion of discount on redeemable preferred
shares (2,231,000) (2,657,000)
------------ -----------
Balance at end of period (84,971,057) (84,066,604)
------------ -----------
Accumulated other comprehensive income (loss):
Balance at beginning of period $ 2,400,722 3,580,690
Unrealized loss on securities, net of
reclassification adjustment, net of tax (note 1) (111,639) (111,639) (1,179,968) (1,179,968)
------------ --------- ---------- ----------
Comprehensive income (loss) 1,763,301 (9,941,055)
========= ==========
Balance at end of period 2,289,083 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 $ 13,231,008 14,247,100
============ ===========
See accompanying notes to consolidated financial statements.
7
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30,
-------------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income (loss) $ 1,874,940 (8,783,563)
Adjustments to reconcile net income (loss) to cash used for operating
activities:
Depreciation and amortization 220,095 468,406
Goodwill impairment - 2,859,507
Impairment of other investments - 2,010,670
Gain on sale of building - (402,629)
Deferred Federal income tax expense - 1,844,946
Change in accrued investment income 76,308 1,203,860
Change in premiums receivable (1,148,234) 13,422,529
Change in reinsurance balances receivable 12,121,426 26,525,250
Change in ceded unpaid claims and claim adjustment expenses 6,789,414 5,700,205
Change in ceded unearned premiums 176,855 17,946,422
Change in deferred policy acquisition costs and deferred ceding
commission income 543,885 835,979
Change in other assets 2,798,203 (2,889,002)
Change in unpaid claims and claim adjustment expenses (24,270,465) (18,211,961)
Change in unearned premiums 303,303 (30,931,451)
Change in commissions payable (3,085,109) (399,691)
Change in accounts payable 90,924 (2,910,518)
Change in reinsurance balances payable 304,291 (7,774,187)
Change in deferred revenue (1,911,115) (3,746,619)
Change in drafts payable (190,280) (3,176,428)
Change in funds held under reinsurance agreements - (47,783,905)
Change in other liabilities 296,617 135,026
Change in current Federal income taxes 1,055,753 (2,607,796)
------------ -----------
Net cash used for operating activities $ (3,953,189) (56,664,950)
------------ -----------
See accompanying notes to consolidated financial statements. (continued)
8
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30,
-------------------------------
2003 2002
---- ----
Cash flows from investing activities:
Bonds available for sale:
Sold $ 12,584,721 81,458,046
Matured 6,371,000 4,052,000
Purchased (10,850,098) (23,582,188)
Common stock purchased (302,000) -
Other investments sold - 2,111,119
Certificates of deposit matured 392,035 475,000
Certificates of deposit purchased (730,137) (475,000)
Net change in short term investments 663,789 (5,170,502)
Sale of building - 4,720,420
Property and equipment (purchased) disposed (49,874) 430,409
------------ -----------
Net cash provided by investing activities 8,079,436 64,019,304
------------ -----------
Cash flows from financing activities:
Payments on note payable (3,700,000) (6,600,000)
------------ -----------
Net cash used for financing activities (3,700,000) (6,600,000)
------------ -----------
Net increase in cash 426,247 754,354
Cash at beginning of period 2,512,454 3,567,717
------------ -----------
Cash at end of period $ 2,938,701 4,322,071
============ ===========
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)
Certain disclosures have been condensed or omitted from these
financial statements. Accordingly, these financial statements
should be read with the consolidated financial statements
included in our 2002 annual report on Form 10-K.
(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.
The Company continued to exit the commercial lines business in
2003. As of September 30, 2003, 600 commercial claims
remained, compared to 681 at June 30, 2003 and 1,198 at
September 30, 2002.
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. 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 there can be no assurance that the Company
would be able to effect any such transaction or the terms
thereof.
Management continues in 2003 to implement actions intended to
enhance the profit potential of the Company's remaining active
insurance line, personal auto. The Company's personal auto
business is currently generating profits and the Company
believes that meaningful potential opportunities exist through
a geographic diversification strategy. The Company's
personal auto business is currently written entirely in the
state of Florida. In furtherance of the objective to diversify
its personal auto business to targeted territories, the
Company recently hired experienced managers for the states of
Texas and Arizona. Steps are now underway to implement this
market diversification strategy in late 2003 and 2004.
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, 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 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. Liberty's position is that they have no
obligation to make any of the $9 million contingent payments
under the agreement. The Company has fully reserved its
receivable due from
11
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 administrative expenses investments and
diversification of its personal auto business. 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.
(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 September 30,
2003 and December 31, 2002 are set forth in the following
table:
September 30, 2003 December 31, 2002
------------------ -----------------
Bonds available for sale:
Unrealized gain $ 3,480,708 3,637,457
Deferred tax expense (1,183,441) (1,236,735)
----------- ----------
Net unrealized gain $ 2,297,267 2,400,722
=========== ==========
Common stock investments:
Unrealized loss $ (12,400) -
Deferred tax benefit 4,216 -
----------- ----------
Net unrealized loss $ (8,184) -
=========== ==========
Proceeds from the sale of bond securities totaled $4,718 and
$7,962,963 for the three months ended September 30, 2003 and
2002, respectively and $12,584,721 and $81,458,046 for the
nine months ended September 30, 2003 and 2002, respectively.
There were no sales of common stocks for the three and nine
months ended September 30, 2003 and 2002. There were no sales
of other investments during the three months ended September
30, 2003 and 2002, respectively. Proceeds from the
sale of other investments totaled $0 and $2,111,119 for the
nine months ended September 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 nine months ended September 30, 2003 and 2002,
respectively, are presented in the following table:
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
------ ------- --------- ---------
Realized gains:
Bonds $ 267,830 1,266,828 3,127,733
Sale of building - 402,629 - 402,629
Other investments - (241) - -
------ ------- --------- ---------
Total realized gains - 670,218 1,266,828 3,530,362
------ ------- --------- ---------
Realized losses:
Bonds - - - 470,891
Other investments - 1,327 835 1,327
Impairment of bonds - - - 2,010,670
------ ------- --------- ---------
Total realized losses - 1,327 835 2,482,888
------ ------- --------- ---------
Net realized gains $ - 668,891 1,265,993 1,047,474
====== ======= ========= =========
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 nine months ended September 30, 2002. The Company
received Federal income tax refunds totaling $1,055,753 during
the nine months ended September 30, 2003.
In assessing the realization of its deferred tax assets,
management considers whether that it is more likely than not
that 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 fully 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 September
30, 2003 and December 31, 2002, in the amount of $31,580,221
and $31,972,504, respectively.
As of September 30, 2003, the Company has net operating loss
carry forwards for tax purposes of $1,639,333, $22,806,147,
$33,950,174, $11,510,301 and $4,079,449 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 September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
----------- ---------- ---------- -----------
Basic income (loss) per share:
Numerator:
Net income (loss) $ 995,877 240,358 1,874,940 (8,783,563)
Less: Preferred stock dividends 187,329 169,711 548,393 496,817
Accretion of discount on preferred
stock 768,000 675,000 2,231,000 1,960,000
----------- ---------- ---------- -----------
Net income (loss) to common shareholders $ 40,548 (604,353) (904,453) (11,240,380)
----------- ---------- ---------- -----------
Denominator:
Weighted average shares outstanding 21,169,736 21,169,736 21,169,736 21,169,736
----------- ---------- ---------- -----------
Basic income (loss) per common share $ .00 (.03) (.04) (.53)
=========== ========== ========== ===========
Diluted income (loss) per share:
Numerator:
Net income (loss) $ 995,877 240,358 1,874,940 (8,783,563)
Less: Preferred Stock dividends 187,329 169,711 548,393 496,817
Accretion of discount on preferred
stock 768,000 675,000 2,231,000 1,960,000
----------- ---------- ---------- -----------
Net income(loss) to common shareholders $ 40,548 (604,353) (904,453) (11,240,380)
----------- ---------- ---------- -----------
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 Income(loss) per common share * $ .00 (.03) (.04) (.53)
=========== ========== ========== ===========
* Potentially dilutive securities were considered for the dilutive per share
calculation but they proved to be anti-dilutive for all periods presented.
Therefore, diluted income(loss) per share is reported the same as basic
income(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 September 30,
-----------------------------------------------------------------------
2003 2002
------------------------------- ------------------------------
As reported Proforma As reported Proforma
----------- -------- ----------- --------
Net income $ 995,877 927,199 240,358 157,691
Less: Preferred stock
dividends 187,329 187,329 169,711 169,711
Less: Accretion of
discount on preferred
stock 768,000 768,000 675,000 675,000
---------- -------- --------- --------
Net income (loss)
available to common
shareholders $ 40,548 (28,130) (604,353) (687,020)
---------- -------- ========= ========
Basic income (loss) per
common share $ .00 .00 (.03) (.03)
========== ======== ========= ========
Diluted income (loss) per
common share $ .00 .00 (.03) (.03)
========== ======== ========= ========
Nine months ended September 30,
----------------------------------------------------------------------
2003 2002
------------------------------- -------------------------------
As reported Proforma As reported Proforma
----------- ---------- ----------- -----------
Net income (loss) $1,874,940 1,668,906 (8,783,563) (9,031,566)
Less: Preferred stock
dividends 548,393 548,393 496,817 496,817
Less: Accretion of
discount on preferred
stock 2,231,000 2,231,000 1,960,000 1,960,000
---------- ----------- ----------- -----------
Net loss available to
common shareholders $ (904,453) (1,110,487) (11,240,380) (11,488,383)
========== =========== =========== ===========
Basic loss per common share $ (.04) (.05) (.53) (.54)
========== =========== =========== ===========
Diluted loss per common
share $ (.04) (.05) (.53) (.54)
========== =========== =========== ===========
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 Nine months ended
September 30, September 30,
--------------------------- --------------------------
2003 2002 2003 2002
---------- ------- --------- ----------
Unrealized gains (losses) on securities:
Unrealized holding gain (loss) during
period $ (293,809) 974,670 1,096,844 923,405
Less: Reclassification adjustment for
amounts included in net income for
realized gains - - 1,265,993 2,373,211
---------- ------- --------- ----------
Other comprehensive income (loss)
before Federal income taxes (293,809) 974,670 (169,149) (1,449,806)
Federal income tax (benefit) expense (99,895) 330,736 (57,510) (493,610)
---------- ------- --------- ----------
Other comprehensive income (loss) $ (193,914) 643,934 (111,639) (956,196)
========== ======= ========= ==========
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 September 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" (Statement 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
Statement 150's definition, and therefore are not subject to
the accounting treatment under paragraph 9 of Statement 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 the acquiring company in the
change in control, the Company will pay Mr. Johnston an amount
equal to his
17
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 nine months ended September 30,
2003 and 2002, respectively, are set forth in the following table.
Three months ended Nine months ended
September 30, September 30,
------------------------------- ------------------------------
2003 2002 2003 2002
---------- --------- --------- ----------
Premiums earned - all other $ (2,498) 2,548,227 87,131 16,774,969
Premiums earned - Florida business $ - (1,895) - (7,830)
Premiums earned - fronting
arrangements $ 2,507 3,144,393 140,571 12,715,831
Claims and claim adjustment
expenses - all other $3,903,455 2,160,247 2,088,581 16,474,093
Claims and claim adjustment
expenses - Florida business $ - 18,807 (556,574) 369,147
Claims and claim adjustment
expenses - Plan servicing $ (73) (357,876) 2,809 (473,132)
Claims and claim adjustment
expenses - fronting arrangements $ (246,950) 1,407,815 (545,573) 9,427,557
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
September 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 September 30, 2003 and December 31, 2002 were as
follows:
2003 2002
---------- ---------
Unearned premiums - fronting arrangements $ 282 106,145
Unpaid claims and claim adjustment expenses - Florida business $ - 556,574
Unpaid claims and claim adjustment expenses - plan servicing $ 117,639 184,320
Unpaid claims and claim adjustment expenses - fronting arrangements $1,060,586 2,032,541
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.
18
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Effective December 31, 2000, the Company entered into a reserve
reinsurance cover agreement with a non-affiliated reinsurer. 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 September 30, 2003 and December
31, 2002 a deferred reinsurance gain of $2,540,146 and $3,855,062, has
been recorded in deferred revenues. For the third quarter and the first
nine months of 2003, $357,083 and $1,314,916, respectively, were
recorded in other income. For the third quarter and the first nine
months of 2002, $922,618 and $3,386,708 were recorded in other income.
Since its inception at December 31, 2000, $6,509,854 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.
19
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(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. After
various amendments and prepayments of principal, in September 2003 the
Company paid the entire balance on the note payable of $1,761,000 and
terminated the credit agreement. As a result to this prepayment, the
Company no longer has outstanding any indebtedness for money borrowed.
The Company recorded interest expense of $25,486 and $68,063 for the
three months ended September 30, 2003 and 2002, respectively, and
$104,337 and $246,692 for the nine months ended September 30, 2003 and
2002, respectively. The Company paid interest expense of $25,486 and
$91,249 for the three months ended September 30, 2003 and 2002,
respectively, and $104,337 and $290,736 for the nine months ended
September 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, $1,939,000 and $1,761,000 in December 2002,
March 2003 and September 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 September 30, 2003 and
December 31, 2002, respectively, and 21,169,736 were outstanding as of
September 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
20
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
accrue interest, payable quarterly, at a rate equal to eight percent
per year with any unpaid interest compounded annually.
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 September 30, 2003 and December 31, 2002, respectively,
there was $8,163,000 and $10,394,000 in unaccreted discount on the
Series A and Series B Preferred Stock, and $1,680,507 and $1,132,118 in
accrued dividends on the Series B and Series C Preferred Stock.
As of September 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 339,875 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.
In 1988, the Company distribute one common stock purchase right on
each outstanding share of Common Stock pursuant to a Rights plan
adopted by the Board of Directors. The rights were not exercisable
until the occurrence of certain events defined in the Rights Plan, and
had an exercise price of $70. All of the rights distributed under the
Rights Plan expired unexercised on May 25, 2003.
(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. Expenses in the commercial lines segment
includes claims and claims adjustment expenses incurred as well as
operating expenses associated with the run-off of this business which
include actuarial reserve analysis, statistical reporting, policy
administration, collections and reinsurance accounting.
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 nine months ended September 30, 2003 and 2002. Certain
reclassifications were made to the 2002 data for consistency with 2003
(see Note 1(a)):
Three months ended September 30, 2003
----------------------------------------------------
Commercial Personal
Lines Lines Other Total
---------- -------- ----- --------
(Amounts in thousands)
Gross premiums written $ (28) 8,828 - 8,800
========== ======= ===== ========
Net premiums earned $ 11 7,987 - 7,998
Net investment income (15) 781 15 781
Other income 387 809 - 1,196
Expenses (1,625) (6,671) (658) (8,954)
Net realized gains - - - -
Interest expense - - (25) (25)
---------- ------- ----- --------
Income (loss) before Federal income taxes (1,242) 2,906 (668) 996
========== ======= ===== ========
Combined ratio (GAAP basis) 14,665.1% 83.5% -% 97.9%
========== ======= ===== ========
Three months ended September 30, 2002
---------------------------------------------------
Commercial Personal
Lines Lines Other Total
---------- -------- ----- --------
(Amounts in thousands)
Gross premiums written $ (608) 9,551 - 8,943
========== ======== ===== ========
Net premiums earned $ 5,116 8,937 - 14,053
Net investment income 715 286 17 1,018
Other income 1,102 518 6 1,626
Expenses (9,090) (10,204) (371) (19,665)
Net realized gains - - 669 669
Interest expense - - (68) (68)
Goodwill impairment - - - -
---------- -------- ----- --------
Income (loss) before Federal income
taxes $ (2,157) (463) 253 (2,367)
========== ======== ===== ========
Combined ratio (GAAP basis) 177.7% 114.2% -% 132.8%
========== ======== ===== ========
22
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Nine months ended September 30, 2003
---------------------------------------------------
Commercial Personal
Lines Lines Other Total
---------- -------- ----- -------
(Amounts in thousands)
Gross premiums written $ 36 24,986 - 25,022
========== ======== ====== =======
Net premiums earned $ 784 23,742 - 24,526
Net investment income 600 1,769 40 2,409
Other income 1,509 2,212 - 3,721
Expenses (6,808) (21,177) (1,958) (29,943)
Net realized gains - - 1,266 1,266
Interest expense - (104) (104)
---------- -------- ------ -------
Income (loss) before Federal income taxes $ (3,915) 6,546 (756) 1,875
========== ======== ====== =======
Combined ratio (GAAP basis) 868.6% 89.2% -% 106.8%
========== ======== ====== =======
Nine months ended September 30, 2002
---------------------------------------------------
Commercial Personal
Lines Lines Other Total
---------- -------- ----- -------
(Amounts in thousands)
Gross premiums written $ 12,065 25,312 - 37,377
========== ======== ====== =======
Net premiums earned $ 24,676 23,694 - 48,370
Net investment income 1,820 1,514 40 3,374
Other income 3,985 1,455 6 5,446
Expenses (35,545) (27,904) (1,229) (64,678)
Net realized gains - - 1,048 1,048
Interest expense - - (247) (247)
Goodwill impairment - (2,859) - (2,859)
---------- -------- ------ -------
Loss before Federal income taxes $ (5,064) (4,100) (382) (9,546)
========== ======== ====== =======
Combined ratio (GAAP basis) 144.0% 117.8% -% 127.0%
========== ======== ====== =======
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 nine months ended
September 30, 2003 and 2002.
Three months ended September 30, 2003
--------------------------------------------------
Commercial Personal
Lines Lines Other Total
---------- -------- ----- -----
(Dollar amounts in thousands)
Gross premiums written:
Commercial auto $ (11) - - (11)
General liability (17) - - (17)
Personal auto - 8,828 - 8,828
Other - - - -
---------- ------- ----- -----
Total gross premiums written $ (28) 8,828 - 8,800
========== ======= ===== =====
Net premiums earned:
Commercial auto $ 24 - - 24
General liability (13) - - (13)
Personal auto - 7,987 - 7,987
Other - - - -
---------- ------- ----- -----
Total net premiums earned $ 11 7,987 - 7,998
========== ======= ===== =====
Three months ended September 30, 2002
----------------------------------------------------
Commercial Personal
Lines Lines Other Total
---------- -------- ----- ------
(Dollar amounts in thousands)
Gross premiums written:
Commercial auto $ (362) - - (362)
General liability (57) - - (57)
Personal auto - 9,437 - 9,437
Other (189) 114 - (75)
---------- -------- ----- ------
Total gross premiums written $ (608) 9,551 - 8,943
========== ======== ===== ======
Net premiums earned:
Commercial auto $ 3,079 - - 3,079
General liability 2,175 - - 2,175
Personal auto - 8,867 - 8,867
Other (138) 70 - (68)
---------- -------- ----- ------
Total net premiums earned $ 5,116 8,937 - 14,053
========== ======== ===== ======
24
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Nine months ended September 30, 2003
----------------------------------------------------
Commercial Personal
Lines Lines Other Total
---------- -------- ----- ------
(Dollar amounts in thousands)
Gross premiums written:
Commercial auto $ (9) - - (9)
General liability 46 - - 46
Personal auto - 24,999 - 24,999
Other (1) (13) - (14)
---------- -------- ----- ------
Total gross premiums written $ 36 24,986 - 25,022
========== ======== ===== ======
Net premiums earned:
Commercial auto $ 465 - - 465
General liability 296 - - 296
Personal auto - 23,746 - 23,746
Other 23 (4) - 19
---------- -------- ----- ------
Total net premiums earned $ 784 23,742 - 24,526
========== ======== ===== ======
Nine months ended September 30, 2002
----------------------------------------------------
Commercial Personal
Lines Lines Other Total
---------- -------- ----- ------
(Dollar amounts in thousands)
Gross premiums written:
Commercial auto $ 6,880 - - 6,880
General liability 4,665 - - 4,665
Personal auto - 24,833 - 24,833
Other 520 479 - 999
---------- -------- ----- ------
Total gross premiums written $ 12,065 25,312 - 37,377
========== ======== ===== ======
Net premiums earned:
Commercial auto $ 14,796 - - 14,796
General liability 8,724 - - 8,724
Personal auto - 23,151 - 23,151
Other 1,156 543 - 1,699
---------- -------- ----- ------
Total net premiums earned $ 24,676 23,694 - 48,370
========== ======== ===== ======
25
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(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.
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.
(7) Subsequent Event
The Company commuted several reinsurance agreements with a troubled
reinsurer during October, 2003. The Company received approximately $2.7
million dollars in cash in conjunction with this commutation. In the
fourth quarter approximately $1.8 million will be recorded as net
premiums earned and $.9 million will be recorded as a reduction of
underwriting and operating expenses. As part of the actuarial reserve
review at December 31, 2003, additional claim and claims adjustment
expenses will be recorded because of the additional risk the Company
assumed from the commutation of the reinsurer's exposure.
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 September 30, 2003, the Company had 42 commercial lines policies in
force. Concurrently, the Company continued to settle and reduce its
inventory of commercial lines claims. At September 30, 2003, there were
600 claims associated with our overall runoff book outstanding,
compared to 1,198 a year earlier and 681 at June 30, 2003. 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.
Redeployment of Capital
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. 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
there can be no assurance that the company would be able to effect any
such transaction or the terms thereof.
Personal Lines
Management continues in 2003 to implement actions intended to enhance
the profit potential of the company's remaining active insurance line,
personal auto. The Company's personal auto business is currently
generating profits and the Company believes the meaningful potential
opportunities exist through a geographic diversification strategy. The
Company's personal automobile business is currently written entirely in
the state of Florida. In furtherance of the objective to diversify its
nonstandard auto business to targeted territories, the Company recently
hired experienced managers for the state of Texas and Arizona. Steps
are now underway to implement this market diversification strategy in
late 2003 and 2004.
27
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, 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 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. Liberty's position is that they have no obligation to make
any of the $9 million contingent payments under the agreement. 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 third quarter of 2003 were $8,800,308
versus $8,942,489 for the comparable 2002 period, representing a 2%
decrease. For the first nine months of 2003 gross premiums written have
decreased 33% from the comparable 2002 period. Commercial lines
accounts for the majority of the decrease for the nine month comparison
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 September 30, Nine months ended September 30,
------------------------------------- -------------------------------------
2003 2002 2003 2002
---------------- -------------- ----------------- -----------------
(Amounts in thousands)
Commercial lines $ (28) (.3)% (608) (6.8)% $ 36 .1% 12,065 32.3%
Personal lines 8,828 100.3% 9,551 106.8% 24,986 99.9% 25,312 67.7%
------- ----- ----- ----- ------- ----- ------ -----
Total $ 8,800 100.0% 8,943 100.0% $25,022 100.0% 37,377 100.0%
======= ===== ===== ===== ======= ===== ====== =====
Personal auto, which is included in Personal lines, is the only line of
insurance currently marketed by the Company. Personal auto gross
premiums written decreased 7% for the third quarter comparison but
increased 1% for the first nine months comparison. Personal auto
continued to produce profitable results in the third quarter of 2003.
Net premiums earned decreased 43% and 49% for the third quarter and
first nine months of 2003 versus the comparable 2002 periods,
respectively, primarily as a result of discontinuance of commercial
lines mentioned previously.
Net investment income decreased 23% and 29% for the third quarter and
first nine months of 2003 versus the comparable 2002 periods,
respectively. These decreases were primarily due to the decease in
investments and because short-term investments comprised a
significantly greater portion of investments in the 2003 periods versus
the 2002 periods.
28
In the third quarter of 2003 and the first nine months of 2003, the
Company recognized net realized gains of $0 and $1,265,993,
respectively, compared to $668,891 and $1,047,474 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
nine 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.
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
third quarter and first nine 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 $9,198,189
and $29,529,947 in the third quarter and first nine months of 2003 from
the comparable 2002 periods, respectively. The C & CAE ratio was 63.0%
in the third quarter of 2003 versus 101.3% in the third quarter of
2002. The C & CAE ratio was 70.9% in the first nine months of 2003
versus 97.0% in the first nine 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 2003 accident year,
offset by an increase in ultimate expected liabilities for the
commercial general liability line in the 2001 accident year.
The ratio of commissions plus the change in deferred policy acquisition
costs and deferred ceding commission income to net premiums earned was
14% for the third quarter of 2003 and 11% for the third quarter of
2002. This ratio was 15% for the first nine months of 2003 and 2002.
The third quarter of 2002 was low because of commission adjustments
from the runoff of the commercial business.
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 and deferred ceding
commission income 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 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 third quarter
and first nine 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.
Underwriting and operating expenses for the 2003 periods are below the
comparable 2002 periods 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
September 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 administrative expenses investments
and diversification of its personal auto business. 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
September 30, 2003 of $25,155,037 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.
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.
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 September 30, 2003 was $3,480,708 above
amortized cost.
Net cash used for operating activities was $3,953,189 for the first
nine months of 2003 versus $56,664,950 in net cash used for operating
activities for first nine 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 commercial claim
payments and the retirement of 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
30
in unpaid claims and claim adjustment expenses with regard to commercial claims
subject to the commercial quota share treaty. 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 an outside actuarial firm. 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 September 30, 2003, in respect of its commercial lines, the Company had
$66,738,984 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 $15,409,954 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 September 30, 2003 only 42 commercial policies
remain in force. Concurrently, the Company has been settling and reducing its
remaining inventory of commercial claims. See "BUSINESS OPERATIONS -
Discontinuance of Commercial Lines." As of September 30, 2003, 600 commercial
claims remained, compared with 1,198 claims a year earlier. The average
commercial lines claim at September 30, 2003 was approximately $111,232 per
claim. For the claims remaining the Company increased the ultimate expected
liabilities during the third quarter of 2003 due to higher than expected claim
activity that occurred during the third quarter of 2003.
As of September 30, 2003, in respect of its personal lines, the Company had
$12,248,816 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 September 30, 2003,
the Company had 2,098 personal auto claims. The average personal auto claim at
September 30, 2003 was approximately $5,838 per claim. For the third quarter the
Company decreased the ultimate expected liabilities due to lower than expected
claim activity that occurred during the third 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.
Note payable decreased due to a prepayment made during the first quarter of 2003
and its retirement in September 2003.
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
31
amount of $840,254 as of September 30, 2003. At September 30, 2003, $8,163,000
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 $2,289,083 was recorded at September
30, 2003 primarily as a result of the unrealized gains on bonds available for
sale, net of tax.
The increase in Retained deficit of $904,453 is attributable to the accretion of
discount on the Series A and Series B Preferred Stock of $2,231,000, and the
accrual of dividends on the Series B and Series C Preferred Stock of $548,393,
offset by net income of $1,874,940.
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.
Shareholders' Equity Assuming Redemption of Preferred Stock
At September 30, 2003, total assets less total liabilities of the Company was
$44,368,515 and there were outstanding three series of Preferred Stock with an
aggregate liquidation value of $39,300,507 ($37,620,000 stated value plus
accrued dividends of $1,680,507). Based on the foregoing, the Shareholders'
Equity assuming the redemption of all series of the Preferred Stock at September
30, 2003 would be $5,068,008 ($0.24 per common share). The amount ultimately
available to the shareholders would vary with changes in the assets and
liabilities of the Company.
32
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
its commercial lines business, (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 in respect of its redeemable preferred stock, (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 recoverable,
(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 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. In addition, the actual emergence of losses and loss expenses
may vary, perhaps materially, from the Company's estimate thereof, because (a)
estimates of loss and loss expense liabilities are subject to large potential
errors of estimation as the ultimate disposition of claims incurred prior to the
financial statement date, whether reported or not, is subject to the outcome of
events that have not yet occurred (e.g., jury decisions, court interpretations,
legislative changes, subsequent damage to property, changes in the medical
condition of claimants, public attitudes and social/economic conditions such as
inflation) and (b) estimates of future costs are subject to the inherent
limitation on the ability to predict the aggregate course of future events. 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.
34
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 the end of the period covered by this report. 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 document its disclosure controls and procedures
and to monitor ongoing developments in this area.
35
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.
None.
Item 5. Other Information
On November 12, 2003, the Company reported its third quarter earnings
for 2003. A copy of the press release is furnished herewith as Exhibit
99.1.
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].
36
*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 Form of Common Stock Certificate [Exhibit 4.6, Form
10-K dated March 28, 1997].
*4.2 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].
37
*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 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].
*10.9 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].
*10.10 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].
*10.11 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].
*10.12 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].
38
*10.13 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].
10.14 GAINSCO, INC. 401(k) Plan and related Adoption
Agreement.(1)
*10.15 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].
*10.16 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].
*10.17 Consulting Agreement dated as of February 26, 2001
between Registrant and Stallings [Exhibit 99.15, Form
8-K dated March 2, 2001].
*10.18 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].
*10.19 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].
*10.20 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].
*10.21 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].
*10.22 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].
39
*10.23 Form of Executive Severance Agreement between GAINSCO
Service Corp. and each of Richard M. Buxton and
Daniel J. Coots [Exhibit 10.28, Form 10-Q dated
August 14, 2002].
*10.24 Representative Forms of Retention Incentive Agreement
[Exhibit 10.30, Form 10-Q dated August 14, 2002].
*10.25 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].
*10.26 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].
*10.27 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].
*10.28 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.
15.1 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 November 12, 2003. (2)
* 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.
40
(2) Furnished (but not filed) herewith.
(b) Reports on Form 8-K
None
41
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: November 14, 2003 By: /s/ Daniel J. Coots
----------------------------------------
Daniel J. Coots
Senior Vice President, Treasurer and
Chief Financial Officer
42
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].
43
Exhibit No. Description
- ----------- -----------
*4.1 Form of Common Stock Certificate [Exhibit 4.6, Form 10-K
dated March 28, 1997].
*4.2 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].
44
Exhibit No. Description
- ----------- -----------
*10.8 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].
*10.9 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].
*10.10 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].
*10.11 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].
*10.12 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].
45
Exhibit No. Description
- ----------- -----------
10.13 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].
10.14 GAINSCO, INC. 401(k) Plan and related Adoption Agreement.(1)
*10.15 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].
*10.16 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].
*10.17 Consulting Agreement dated as of February 26, 2001 between
Registrant and Stallings [Exhibit 99.15, Form 8-K dated March
2, 2001].
*10.18 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].
*10.19 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].
*10.20 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].
46
Exhibit No. Description
- ----------- -----------
*10.21 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].
*10.22 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].
*10.23 Form of Executive Severance Agreement between GAINSCO Service
Corp. and each of Richard M. Buxton and Daniel J. Coots
[Exhibit 10.28, Form 10-Q dated August 14, 2002].
*10.24 Representative Forms of Retention Incentive Agreement
[Exhibit 10.30, Form 10-Q dated August 14, 2002].
*10.25 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].
*10.26 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].
*10.27 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].
*10.28 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.
15.1 Awareness Letter of KPMG LLP.
47
Exhibit No. Description
- ----------- -----------
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 November 12, 2003.(2)
* 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.
48