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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d) of
The Securities Exchange Act of 1934
For the fiscal year ended Commission file number 1-9828
December 31, 1998
GAINSCO, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1617013
(State of Incorporation) (I.R.S. Employer
Identification No.)
500 Commerce Street
Fort Worth, Texas 76102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (817) 336-2500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock ($.10 par value) The New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
--- ---
The aggregate market value of the voting stock held by non-affiliates of the
registrant (20,314,021 shares) as of the close of the business on February 28,
1999 was $101,570,105 (based on the closing sale price of $5.00 per share).
As of February 28, 1999, there were 20,896,563 shares of the registrant's $.10
Par Value Common Stock outstanding.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Documents incorporated by reference:
Document Form 10-K Part
-------- --------------
Exhibits to Form 10-K Annual Reports filed with the SEC for fiscal years ended
December 31, 1988, 1990, 1991, 1992, 1993, 1994, 1995, 1996 and 1997 IV
Exhibits to Form S-1's filed with the SEC and effective November 6,
1986 (No. 33-7846) and November 14, 1988 (No. 33-25226) IV
Exhibits to Form 8-K's filed with the SEC and dated May 5, 1998 and August 26, 1998 IV
Exhibits to Form 10-Q Quarterly report filed with the SEC for the quarter ended June 30, 1998 IV
Exhibits to Form 10-Q/A Amendment filed with the SEC and dated June 16, 1998 IV
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PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION
GAINSCO, INC. is a holding company, the only operations of which are to
provide administrative and financial services for its wholly-owned
subsidiaries. The term "Company" as used in this document includes GAINSCO,
INC. and its subsidiaries, unless the context otherwise requires. The Company
was incorporated in Texas on October 11, 1978. It completed its initial public
offering on November 14, 1986.
The Company is a property and casualty insurance company concentrating its
efforts on certain specialty and nonstandard markets within the commercial
auto, auto garage, general liability, property and personal nonstandard auto
insurance lines. The Company's insurance operations are conducted through three
insurance companies: General Agents Insurance Company of America, Inc., an
Oklahoma corporation; MGA Insurance Company, Inc., a Texas corporation; and
GAINSCO County Mutual Insurance Company, a Texas chartered company. The Company
is approved to write insurance in 48 states and the District of Columbia on a
non-admitted basis and in 44 states and the District of Columbia on an admitted
basis. The Company markets its commercial lines of insurance through 180
non-affiliated general agency offices and its personal line of insurance
through approximately 800 non-affiliated retail agencies. Approximately 72% of
the Company's gross premiums written during 1998 resulted from risks located in
Arkansas, California, Florida, Georgia, Louisiana, Pennsylvania, Tennessee and
Texas.
The Company's lines of insurance are written on certain classes and types
of risks which are not generally insured by many of the standard companies,
although such companies have been competing in this market more frequently in
recent years. The strategy of the Company is to identify various types of risks
where it can price its coverages profitably and competitively. This strategy
results in changes in product mix and product design from time to time. For a
description of the product lines presently written by the Company, see
"Business-Product Lines." The Company sets its policy premiums by applying its
own judgment after consideration of the risks involved and the competition.
Part of its analysis includes the review of historical premium rate and loss
cost information as compiled and reported by independent rating bureaus.
Through GAINSCO County Mutual Insurance Company, the Company has fronting
agreements with two non-affiliated insurance companies. The business written
under these agreements is ceded 100% to reinsurers rated "A-(Excellent)" or
better by A.M. Best Company (Best's), and 100% of the liabilities are fully
collateralized with pledged investment grade securities or letters of credit.
RECENT DEVELOPMENTS
Servicing Arrangements Cancellations. Through MGA Insurance Company, Inc.,
a wholly-owned subsidiary, the Company has earned fee revenues by acting as a
servicing carrier for the Commercial Automobile Insurance Procedures of
Arkansas, California, Louisiana, and Mississippi and the Commercial Assignment
Procedure of Pennsylvania. These servicing carrier agreements were canceled by
the Company
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effective December 31, 1998 and the servicing carrier operation is currently in
run-off.
Strategic Alternatives. On August 28, 1998, the Company announced that its
Board of Directors had determined to commence pursuit of additional strategic
alternatives to maximize shareholder value, including a possible sale of the
Company, and had engaged Wasserstein Perella & Co., Inc. to assist in the
process. This process is continuing.
Lalande Acquisition. On October 23, 1998, the Company completed the
acquisition of the Lalande Financial Group, Inc. ("Lalande Group"), a
privately-owned Miami, Florida-based operation specializing in underwriting,
servicing and claims adjusting in the nonstandard personal automobile insurance
market in Florida. The Lalande Group includes National Specialty Lines, Inc.
("NSL") and De La Torre Insurance Adjusters, Inc. ("DLT"). NSL is a managing
general agency which markets nonstandard personal auto insurance through
approximately 800 retail agencies in Florida. DLT is an automobile claims
adjusting firm that provides claim services on NSL produced business and to
outside parties. The purchase price was $18 million in cash to be paid at
closing plus up to an additional $22 million in cash to be paid over
approximately five years contingent upon the performance of the Lalande Group.
APS Disposition. On March 9, 1999, the Company announced the signing of an
agreement for sale of substantially all of the assets of Agents Processing
Systems, Inc. ("APS"), its wholly-owed subsidiary engaged in marketing computer
software related to general agency operations. The sale is expected to be
completed in April 1999. The purchaser is to acquire all rights to the APS
software products, assignment of the APS customer contracts and other
miscellaneous assets for a nominal amount of cash, assumption of contract
obligations, a fixed number of software use licenses and development work on an
electronic data interchange project.
PRODUCT LINES
The Company's principal products serve certain specialty markets within the
commercial auto, auto garage, general liability, property and personal
nonstandard auto insurance lines. The following table sets forth, for each
product line, gross premiums written (before ceding any amounts to reinsurers),
percentage of gross premiums written for the periods indicated and the number
of policies in force at the end of each period.
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Years ended December 31
----------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------ ------------------------
(Dollar amounts in thousands)
Gross Premiums Written:
Commercial auto $ 50,037 55% 56,704 57% 62,328 57%
Auto garage 19,974 22% 23,279 23% 26,871 24%
General liability 17,046 19% 17,829 18% 19,744 18%
Property 1,721 2% 1,267 1% 1,056 1%
Personal auto 891 -% 690 1% - -%
Other lines 1,493 2% 7 -% 1 -%
---------- ---------- ---------- ---------- ---------- ----------
Total $ 91,162 100% 99,776 100% 110,000 100%
========== ========== ========== ========== ========== ==========
Policies in Force (End of Period) 38,939 35,962 35,903
Commercial Auto The commercial auto coverage underwritten by the Company
includes risks associated with local haulers of specialized freight,
tradespersons' vehicles and trucking companies. Liability and physical damage
coverages for these risks are currently limited to $1,000,000 per accident and
$100,000 per unit, respectively.
Auto Garage The Company's auto garage product line includes garage
liability, garage keepers' legal liability and dealers' open lot coverages. The
maximum limit on these coverages is $1,000,000. The Company targets its
coverage to used car dealers, recreational vehicle dealers, automobile repair
shops and wrecker/towing risks.
General Liability The Company underwrites general liability insurance with
liability limits up to $1,000,000 for small businesses such as car washes,
janitorial services, small contractors, apartment buildings, rental dwellings
and retail stores.
Personal Auto The Company's personal auto product line is in the
nonstandard Florida market and is primarily written with minimum liability
limits on an admitted basis.
Property The Company underwrites commercial property coverages which
include fire, extended coverage, vandalism and malicious mischief for
commercial establishments with limits up to $5,000,000 per risk. Limits in
excess of $300,000 are reinsured under property excess per risk treaties, see
"Business-Reinsurance".
Other Lines The Company underwrites other property and casualty coverages,
the largest of which is mobile home risks.
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REINSURANCE
The Company purchases reinsurance in order to reduce its liability on
individual risks and to protect against catastrophe claims. A reinsurance
transaction takes place when an insurance company transfers, or "cedes", to
another insurer a portion or all of its exposure. The reinsurer assumes the
exposure in return for a portion or all of the premium. The ceding of insurance
does not legally discharge the insurer from its primary liability for the full
amount of the policies, and the ceding company is required to pay the claim if
the reinsurer fails to meet its obligations under the reinsurance agreement.
The Company writes commercial casualty policy limits of $1,000,000. For
policies with an effective date occurring from 1992 through 1994, the Company
has excess reinsurance for 100% of casualty claims exceeding $300,000 up to the
$1,000,000 policy limits, resulting in a maximum net claim retention per risk
of $300,000 for such policies. For policies with an effective date occurring in
1995 or after, the Company has excess reinsurance for 100% of casualty claims
exceeding $500,000 up to the $1,000,000 policy limits, which results in a
maximum net claim retention per risk of $500,000 under those policies.
Excess casualty reinsurance carried by the Company includes
"extra-contractual obligations" coverage. This coverage protects the Company
against claims arising out of certain legal liability theories not directly
based on the terms and conditions of the Company's policies of insurance.
Extra-contractual obligation claims are covered 90% under the excess casualty
reinsurance treaty up to its respective limits.
The Company is operating under excess casualty reinsurance treaties with
four reinsurance companies, each of which reinsures a given percentage of ceded
risks. The Company's excess reinsurance is provided in varying amounts by these
reinsurers which are rated "A (Excellent)" or better by A. M. Best Company.
See "Business-Rating." The following table identifies each such reinsurer and
sets forth the percentage of the coverage assumed by each of them:
Percentage of Risk Reinsured
----------------------------
1999 1998 1997
------- ------ --------
Excess Reinsurer
Dorinco Reinsurance Company 35% 35% 50%
First Excess and Reinsurance Corporation 35% -- --
Great Lakes American Reinsurance Company -- -- 40%
Liberty Mutual Insurance Company 20% 20% --
PMA Reinsurance Corporation -- 35% --
Republic Western Insurance Company 10% 10% 10%
--- --- ---
100% 100% 100%
=== === ===
The Company carries catastrophe property reinsurance to protect it against
catastrophe occurrences for 95% of the property claims which exceed $500,000
but do not exceed $8,000,000 for a single catastrophe. The Company also carries
property excess per risk reinsurance which covers property claims exceeding
$300,000 up to $5,000,000 net loss each risk. From time to time the Company
makes use of facultative reinsurance to cede unusual risks on a negotiated
basis.
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Since 1995, the Company has had reinsurance fronting arrangements with
non-affiliated insurance companies. The Company retains no portion as the
business written under these agreements is 100% ceded. Although these cessions
are made to authorized reinsurers rated "A- (Excellent)" or better by Best's,
the agreements require that collateral (in the form of trust agreements and/or
letters of credit) be maintained to assure payment of the unearned premiums and
unpaid claims and claim adjustment expenses relating to the risks insured under
these fronting arrangements.
The Company has signed contracts in force for its reinsurance treaties for
all years through 1998. The Company has written confirmations from reinsurers
for 1999 regarding the basic terms and provisions under which they will assume
the Company's risks, but, as of the date hereof, formal reinsurance treaty
contracts with these reinsurers have not been executed. It is customary in the
industry for insurance companies and reinsurers to operate under such
commitments pending the execution of formal reinsurance treaties. No assurance
can be given that such reinsurance treaties will be executed or, if executed,
that the terms and provisions thereof will not be modified.
MARKETING AND DISTRIBUTION
The Company markets its commercial lines insurance products through 180
non-affiliated general agency offices, commonly referred to as wholesale
agents. These general agents each represent several insurance companies, some
of which may compete with the Company. The general agents solicit business from
independent local agents or brokers, commonly referred to as retail agents, who
are in direct contact with insurance buyers.
The Company has elected to utilize general agents to market its insurance
products in order to avoid the fixed costs of a branch office system. These
general agents have experience in the specialty lines of coverages in which the
Company concentrates and, in many instances, a long business history with
members of the Company's management. The Company requires that its general
agents have a specified level of errors and omissions insurance coverage, which
indirectly protects the Company against certain negligence on the part of
general agents. The Company reviews its appointed agencies for financial
solvency and liquidity levels. The Company has errors and omissions insurance
coverage to protect against negligence on the part of its employees.
The Company has developed underwriting manuals to be used by its general
agents. The general agents are authorized to bind the Company to provide
insurance if the risks and terms involved in the particular coverage are within
the underwriting guidelines set forth in the Company's underwriting manuals.
The manuals stipulate minimum rates to be charged for the various classes of
coverage offered.
The general agents are compensated on a commission basis which varies by
line of business. In addition, the general agency contracts between the Company
and its general agents contain profit contingency inducements designed to
reward those general agents with superior claim ratios who write certain
minimum levels of premium with the Company. The general agents also retain a
portion of the payment made by the insured as policy fee in connection with the
issuance of some of the Company's non-admitted policies.
Certain coverages, such as auto liability, may only be written in some
states by companies with the authority to write insurance on an admitted basis
in such states. The Company currently is approved to write insurance
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on an admitted basis in 44 states and the District of Columbia.
Personal nonstandard auto is marketed through approximately 800
non-affiliated retail agencies which are compensated on a commission basis. The
retail agents may represent several insurance companies and they are in direct
contact with the insurance buyer. This business is written on an admitted
basis.
UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
The Company maintains reserves for the payment of claims and claim
adjustment expenses for both reported and unreported claims. Claim reserves are
estimates, at a given point in time, of amounts that the Company expects to pay
on incurred claims based on facts and circumstances then known. The amount of
claim reserves for reported claims is primarily based upon a case-by-case
evaluation of the type of claim involved, the circumstances surrounding the
claim, and the policy provisions relating to the type of claim. The amount of
claim reserves for unreported claims and case reserve development is determined
on the basis of historical information and anticipated future conditions by
lines of insurance and actuarial review. Reserves for claim adjustment expenses
are intended to cover the ultimate costs of settling claims, including
investigation and defense of lawsuits resulting from such claims. Inflation is
implicitly reflected in the reserving process through analysis of cost trends
and review of historical reserve results.
The process of establishing claim reserves is an imprecise science and
reflects significant judgmental factors. In many liability cases, significant
periods of time, ranging up to several years or more, may elapse between the
occurrence of an insured claim and the settlement of the claim. Some judicial
decisions and legislative actions broaden liability and policy definitions and
increase the severity of claim payments. As a result of this and other societal
and economic developments, the uncertainties inherent in estimating ultimate
claim costs on the basis of past experience have increased significantly,
further complicating the already difficult claim reserving process.
Ultimate liability may be greater or lower than current reserves. Reserves
are monitored by the Company using new information on reported claims and a
variety of statistical techniques. The reserves are reviewed annually by an
independent actuarial firm. The Company does not discount to present value that
portion of its claim reserves expected to be paid in future periods.
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The following table sets forth the changes in unpaid claims and claim
adjustment expenses, net of reinsurance cessions, as shown in the Company's
consolidated financial statements for the periods indicated:
As of and for the
years ended December 31
--------------------------------
1998 1997 1996
-------- -------- --------
(Amounts in thousands)
Unpaid claims and claim adjustment expenses,
beginning of period $113,227 105,691 95,011
Less: Ceded unpaid claims and claim adjustment
expenses, beginning of period 29,524 26,713 24,650
-------- -------- --------
Net unpaid claims and claim adjustment expenses,
beginning of period 83,703 78,978 70,361
-------- -------- --------
Net claims and claim adjustment expenses
incurred related to:
Current period 59,635 53,969 53,037
Prior periods 26,718 8,117 5,342
-------- -------- --------
Total net claims and claim adjustment expenses
incurred 86,353 62,086 58,379
-------- -------- --------
Net claim and claim adjustment expenses paid
related to:
Current period 19,693 17,807 17,178
Prior periods 48,595 39,554 32,584
-------- -------- --------
Total net claim and claim adjustment expenses
paid 68,288 57,361 49,762
-------- -------- --------
Net unpaid claims and claim adjustment expenses,
end of period 101,768 83,703 78,978
Plus: Ceded unpaid claims and claim adjustment
expenses, end of period 35,030 29,524 26,713
-------- -------- --------
Unpaid claims and claim adjustment expenses,
end of period $136,798 113,227 105,691
======== ======= =======
For 1998 the unfavorable development in claims and claim adjustment expenses
incurred was primarily the result of unanticipated unfavorable development for
commercial auto claims for the 1997, 1996 and 1995 accident years. For 1997 and
1996 the unfavorable development in claims and claim adjustment expenses
incurred was largely a result of claim reserve increases recorded for
commercial auto claims in Kentucky for the 1996 and 1995 accident years and
adverse development in claim adjustment expense reserves for commercial auto in
the 1996, 1995 and 1994 accident years.
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The following table sets forth, as of December 31, 1998, 1997, and 1996,
differences between the amount of net unpaid claims and claim adjustment
expenses reported in the Company's statements, prepared in accordance with
statutory accounting principles ("SAP"), and filed with the various state
insurance departments, and those reported in the consolidated financial
statements prepared in accordance with generally accepted accounting principles
("GAAP"):
As of December 31
-------------------------------------
1998 1997 1996
--------- ------ ------
(Amounts in thousands)
Net unpaid claims and claim adjustment
expenses reported on a SAP basis $ 102,404 84,406 79,976
Adjustments:
Estimated recovery for salvage and subrogation (636) (703) (998)
--------- ------ ------
Net unpaid claims and claim adjustment
expenses reported on a GAAP basis $ 101,768 83,703 78,978
========= ====== ======
The following table represents the development of GAAP balance sheet
reserves for the years ended December 31, 1988 through 1998. The top line of
the table shows the reserves for unpaid claims and claim adjustment expenses
for the current and all prior years as recorded at the balance sheet date for
each of the indicated years. The reserves represent the estimated amount of
claims and claim adjustment expenses for claims arising in the current and all
prior years that are unpaid at the balance sheet date, including claims that
have been incurred but not yet reported to the Company.
The upper portion of the following table shows the net cumulative amount
paid with respect to the previously recorded liability as of the end of each
succeeding year. The lower portion of the table shows the reestimated amount of
the previously recorded net unpaid claims and claim adjustment expenses based
on experience as of the end of each succeeding year, including net cumulative
payments made since the end of the respective year. For example, the 1994
liability for net claims and claim adjustment expenses reestimated four years
later (as of December 31, 1998) was $67,442,000 of which $62,389,000 has been
paid, leaving a net reserve of $5,053,000 for claims and claim adjustment
expenses in 1994 and prior years remaining unpaid as of December 31, 1998.
"Net cumulative redundancy (deficiency)" represents the change in the
estimate from the original balance sheet date to the date of the current
estimate. For example, the 1994 net unpaid claims and claim adjustment expenses
indicates a $6,685,000 net deficiency from December 31, 1994 to December 31,
1998 (four years later). Conditions and trends that have affected development
of liability in the past may or may not necessarily occur in the future.
Accordingly, it may or may not be appropriate to extrapolate future
redundancies or deficiencies based on this table.
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As of and for the years ended December 31
--------------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------
(Amounts in thousands)
Unpaid claims & claim
adjustment expenses:
Gross 29,538 35,744 45,214 53,148 66,517 72,656 80,729 95,011 105,691 113,227 136,798
Ceded 15,005 15,695 16,308 15,105 16,594 16,701 19,972 24,650 26,713 29,524 35,030
Net ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------
14,533 20,049 28,906 38,043 49,923 55,955 60,757 70,361 78,978 83,703 101,768
Net cumulative paid as
of:
One year later 4,902 7,545 10,251 15,037 22,470 24,090 24,730 32,584 39,554 48,595
Two years later 8,660 12,340 18,145 26,819 37,032 39,182 41,874 56,605 70,185
Three years later 10,642 16,413 23,255 33,879 45,884 48,688 55,338 73,349
Four years later 12,606 19,085 26,171 37,292 51,082 54,428 62,389
Five years later 13,815 20,633 26,970 39,999 54,092 57,628
Six years later 14,249 21,020 28,399 41,143 55,828
Seven years later 14,140 21,700 28,734 42,020
Eight years later 14,632 21,871 28,806
Nine years later 14,752 21,830
Ten years later 14,682
Net unpaid claims and
claim adjustment
expenses reestimated
as of:
One year later 13,645 20,060 28,354 38,528 54,150 59,573 61,157 75,703 87,095 110,421
Two years later 13,694 20,566 28,479 42,235 57,223 59,922 62,296 80,356 104,588
Three years later 14,024 21,214 30,035 43,217 57,459 59,247 63,871 88,867
Four years later 14,675 22,431 30,129 42,493 56,832 58,414 67,442
Five years later 15,248 22,332 29,022 42,191 56,337 59,735
Six years later 15,174 22,034 29,073 41,984 56,721
Seven years later 14,572 21,965 28,908 42,356
Eight years later 14,753 21,950 28,828
Nine years later 14,782 21,872
Ten years later 14,719
Net
cumulative
redundancy
(deficiency) (186) (1,823) (78) (4,313) (6,798) (3,780) (6,685) (18,506) (25,610) (26,718)
The Company has an indicated deficiency of approximately 32% of net unpaid
claims and claim adjustment expenses ("C & CAE") for the 1997 year for reasons
mentioned previously. Net unpaid C & CAE at December 31, 1998 was approximately
$101,768,000, which the Company believes is adequate.
OPERATING RATIOS
CLAIMS, EXPENSE AND COMBINED RATIOS: Claims and expense ratios are
traditionally used to interpret the underwriting experience of property and
casualty insurance companies.
Statutory Accounting Principles (SAP) Basis - Claims and claim adjustment
expenses are stated as a percentage of premiums earned because claims may occur
over the life of a particular insurance policy. Underwriting expenses on a SAP
basis are stated as a percentage of net premiums written rather than premiums
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earned because most underwriting expenses are incurred when policies are
written and are not spread over the policy period. Underwriting profit margin
is achieved when the combined ratio is less than 100%. The Company's claims,
expense and combined ratios and the property and casualty industry's claims,
expense and combined ratios, both on a SAP basis, are shown in the following
table:
Years ended December 31
-------------------------------------------
1998 1997 1996 1995 1994
----- ---- ----- ----- -----
COMPANY RATIOS
Claims Ratio 95.9% 60.0% 54.3% 48.7% 47.9%
Expense Ratio 37.9% 34.4% 34.5% 34.2% 34.4%
Combined Ratio 133.8% 94.4% 88.8% 82.9% 82.3%
INDUSTRY RATIOS (1)
Claims Ratio 76.2% 72.8% 78.4% 78.9% 81.1%
Expense Ratio 27.3% 27.1% 26.3% 26.1% 26.0%
Combined Ratio 103.5% 99.9% 104.7% 105.0% 107.1%
===== ==== ===== ===== =====
- --------------
(1) The property and casualty industry as a whole, not companies with
comparable lines of coverage, was used in the calculation of these ratios
by Best's. Ratios for 1998 are estimated.
The unfavorable variance to the industry with regard to the claims ratio
in 1998 is largely related to unanticipated unfavorable claim development
recorded in 1998 on the 1997, 1996 and 1995 accident years for the commercial
auto liability line. For 1998, the increase in the unfavorable variance to the
industry with regard to the expense ratio is largely because of downward
adjustments in reinsurance commission income as a result of the unanticipated
unfavorable claim development in 1998. For 1998 and prior years, the
unfavorable variance to the industry with regard to the expense ratios is
because of the specific lines that the Company writes and the profit
contingency inducements. The Company's commission expense ratio is higher than
the average of the overall industry on a net premiums written basis.
It should be noted that the Company ratios in the table above relate only
to insurance operations. The holding company provides administrative and
financial services for its wholly-owned subsidiaries. The allocation of the
holding company's expenses solely to its insurance companies would have an
impact on their results of operations and would also affect the ratios
presented. As such, expenses related to the strategic alternatives review
process are not included in these ratios.
Generally Accepted Accounting Principles (GAAP) Basis - Claims and claim
adjustment expenses are stated as a percentage of premiums earned as they are
on a SAP basis. However, earned premiums include net policy fees earned whereas
on a SAP basis policy fees earned are recorded on a gross basis. The GAAP
expense ratio is based on premiums earned and includes the change in policy
acquisition costs and underwriting expenses. Other differences include the
treatment of the allowance for doubtful accounts. The following table presents
the Company's claims, expense and combined ratios on a GAAP basis:
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Years ended December 31
------------------------------------------
1998 1997 1996 1995 1994
----- ---- ---- ---- ----
Claims Ratio 93.7% 60.7% 54.7% 49.8% 48.8%
Expense Ratio 39.0% 33.7% 33.8% 33.1% 34.4%
----- ---- ---- ---- ----
Combined Ratio 132.7% 94.4% 88.5% 82.9% 83.2%
===== ==== ==== ==== ====
It should be noted that the Company ratios in the table above relate only
to insurance operations. The holding company provides administrative and
financial services for its wholly-owned subsidiaries. The allocation of the
holding company's expenses solely to its insurance companies would have an
impact on their results of operations and would also affect the ratios
presented. As such, expenses related to the strategic alternatives review
process are not included in these ratios.
PREMIUM TO SURPLUS RATIO: The following table shows, for the periods
indicated, the Company's statutory ratios of statutory net premiums written to
statutory policyholders' surplus. While there is no statutory requirement which
establishes a permissible net premiums written to surplus ratio, guidelines
established by the National Association of Insurance Commissioners ("NAIC")
provide that this ratio should be no greater than 3 to 1.
As of and for the years ended December 31
-------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- ------ ------- ------- ------
(Dollar amounts in thousands)
Net premiums written $ 87,040 98,858 109,227 108,689 91,170
Policyholders' surplus $ 71,826 78,496 59,012 50,140 42,350
Ratio 1.21 to 1 1.26 to 1 1.85 to 1 2.17 to 1 2.15 to 1
INVESTMENTS
The Company's investment portfolio is under the direction of the Board of
Directors acting through its Investment Committee. The Investment Committee
establishes the Company's investment policy, which is to maximize after-tax
yield while maintaining safety of capital together with adequate liquidity for
insurance operations. The investment portfolio consists primarily of fixed
maturity tax-exempt municipal bonds and United States Government securities. As
of December 31, 1998 and 1997, the Company had no non-performing fixed maturity
securities. The Company does not actively trade its bonds, however, it does
classify certain bond securities as available for sale.
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The following table sets forth, for the periods indicated, the Company's
investment results before income tax effects:
As of and for the years ended December 31
------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollar amounts in thousands)
Average investments (1) $213,896 209,121 192,221 170,881 148,688
Investment income 9,803 9,731 9,161 8,157 6,868
Return on average investments (2) 4.6% 4.7% 4.8% 4.8% 4.6%
Taxable equivalent return
on average investments 6.2% 6.5% 6.6% 6.6% 6.4%
Net realized gains 693 327 472 108 135
Net unrealized gains (losses) (3) $2,925 2,422 1,559 2,772 (1,829)
(1) Average investments is the average of beginning and ending investments at
amortized cost, computed on an annual basis.
(2) Includes taxable and tax-exempt securities.
(3) Includes net unrealized gains (losses) for total investments.
The following table sets forth the composition of the investment portfolio
of the Company.
As of December 31
--------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- ---------------------
(Dollar amounts in thousands)
Amortized Fair Amortized Fair Amortized Fair
Type of Investment Cost Value Cost Value Cost Value
--------- ------- --------- ------- --------- -------
Fixed Maturities:
Bonds held to maturity:
U.S. government securities $ 5,668 5,887 5,404 5,476 7,731 7,748
Tax-exempt state and
municipal bonds 54,120 55,091 84,330 85,052 97,199 97,977
Bonds available for sale:
U.S. government securities 13,734 13,969 27,322 27,404 -- --
Tax-exempt state and
municipal bonds 130,072 131,619 94,700 96,246 76,880 77,644
Certificates of deposit 595 595 595 595 595 595
Marketable securities 316 269 -- -- -- --
--------- ------- ------- ------- ------- -------
204,505 207,430 212,351 214,773 182,405 183,964
--------- ------- ------- ------- ------- -------
Short-term investments 4,749 4,749 2,823 2,823 20,662 20,662
--------- ------- ------- ------- ------- -------
Total investments $ 209,254 212,179 215,174 217,596 203,067 204,626
========= ======= ======= ======= ======= =======
13
14
The maturity distribution of the Company's investments in fixed maturities
is as follows:
As of December 31
--------------------------------------------
1998 1997
-------------------- ---------------------
(Dollar amounts in thousands)
Amortized Amortized
Cost Percent Cost Percent
--------- ------- --------- -------
Within 1 year $ 31,335 15.3% $ 35,142 16.6%
Beyond 1 year but within 5 years 123,550 60.5% 140,571 66.2%
Beyond 5 years but within 10 years 46,692 22.9% 30,608 14.4%
Beyond 10 years but within 20 years 2,612 1.3% 6,030 2.8%
-------- ----- -------- -----
$204,189 100.0% $212,351 100.0%
======== ===== ======== =====
RATING
Best's insurance reports, property-casualty, has currently assigned an "A
(Excellent)" pooled rating to the Company. Best's ratings are based on an
analysis of the financial condition and operation of an insurance company as
they relate to the industry in general. Best's generally reviews its ratings on
a quarterly basis.
GOVERNMENT REGULATION
The Company's insurance companies are subject to varied governmental
regulation in the states in which they conduct business. Such regulation is
vested in state agencies having broad administrative power dealing with all
aspects of the Company's business and is concerned primarily with the
protection of policyholders rather than shareholders.
The Company is also subject to statutes governing insurance holding company
systems in the states of Oklahoma and Texas. These statutes require the Company
to file periodic information with the state regulatory authorities, including
information concerning its capital structure, ownership, financial condition
and general business operation. These statutes also limit certain transactions
between the Company and its insurance companies, including the amount of
dividends which may be declared and paid by the insurance companies (see note 7
to the consolidated financial statements). Additionally, the Texas statutes
restrict the ability of any one person to acquire 10% or more of the Company's
voting securities without prior regulatory approval while the Oklahoma statute
restricts the ability of any one person to acquire 15% or more of the Company's
voting securities without prior regulatory approval.
COMPETITION
The property and casualty insurance industry is highly competitive. The
Company underwrites lines of insurance on risks not generally insured by many
of the large standard property and casualty insurers. However, few barriers
exist to prevent property and casualty insurance companies from entering into
the Company's segments of the industry. To the extent this occurs, the Company
can be at a competitive disadvantage because many of these companies have
substantially greater financial and other resources and can offer a broader
variety of specialty risk coverages. The Company believes that its principal
competitive advantages are; 1) expertise in its product lines which facilitates
underwriting selection and pricing and 2) service in underwriting and claims
handling which provides its agents with a competitive advantage and a stable
market.
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EMPLOYEES
As of December 31, 1998, the Company employed 140 persons, of which 11 were
officers, 122 were staff and administrative personnel, and 7 were part-time
employees. The Company is not a party to any collective bargaining agreement.
The Company believes that its relations with its employees are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the executive officers of the Company as of February
28, 1999 is set forth below:
Name Age Position with the Company
---- --- -------------------------
Glenn W. Anderson 46 President, Chief Executive Officer and Director
Daniel J. Coots 47 Senior Vice President, Treasurer, Chief Financial Officer and
Director
J. Landis Graham 44 Senior Vice President
Carolyn E. Ray 46 Senior Vice President
Richard M. Buxton 50 Vice President
Richard A. Laabs 43 Vice President
Joseph W. Pitts 35 Vice President
Sam Rosen 63 Secretary and Director
Mr. Glenn W. Anderson has served as President, Chief Executive Officer and
Director of the Company since April 1998. From 1996 to April 1998, Mr. Anderson
served as Executive Vice President of USF&G. From 1993 to 1996, Mr. Anderson
held the position of Senior Vice President with USF&G. Mr. Anderson has been
engaged in the property and casualty business since 1975.
Mr. Daniel J. Coots has served as Vice President, Treasurer and Chief
Financial Officer of the Company since 1987. In 1991 Mr. Coots was promoted to
Senior Vice President. Mr. Coots has been engaged in the property and casualty
insurance business since 1983.
Mr. J. Landis Graham has served as Vice President of the Company since
September of 1993. Mr. Graham was promoted to Senior Vice President in 1998.
From 1988 to 1993, Mr. Graham was with Maryland Casualty Company in the
position of Claim Manager. Mr. Graham has been engaged in the property and
casualty insurance business since 1976.
Ms. Carolyn E. Ray has served as Vice President of the Company since 1986.
Ms. Ray was promoted to Senior Vice President in 1998. From 1984 to 1985, Ms.
Ray served as Assistant Vice President of the Company. Ms. Ray has been engaged
in the property and casualty insurance business since 1976.
Mr. Richard M. Buxton has served as Vice President of the Company since
December of 1996. From 1986 to 1996 Mr. Buxton was with KN Energy, Inc. in the
position of Vice President of Strategic Planning and Financial Services.
15
16
Mr. Richard A. Laabs has served as Vice President of the Company since
June of 1996. From August of 1995 to May of 1996, Mr. Laabs served as Assistant
Vice President of the Company. From 1990 to 1995, Mr. Laabs was with Scottsdale
Insurance Company in the position of Senior Information Systems Services
Director. Mr. Laabs has been engaged in the property and casualty insurance
business since 1978.
Mr. Joseph W. Pitts has served as Vice President of the Company since
August of 1997. From 1992 to 1997, Mr. Pitts was with USAA in the position of
Actuary and Manager. Mr. Pitts has been engaged in the property and casualty
business since 1988.
Mr. Sam Rosen has served as the Secretary and a Director of the Company
since 1983. Mr. Rosen is a partner with the law firm of Shannon, Gracey,
Ratliff & Miller, L.L.P. He has been a partner in that firm or its predecessors
since 1966.
ITEM 2. PROPERTIES
The Company owns its corporate offices which provide approximately 35,000
square feet of office space and additional parking. Future expansion will be
possible by converting the parking area into office space.
The Company owns a 3.28 acre tract of land in Fort Worth, Texas and all
improvements located thereon, including a 10,000 square foot office building.
The Company currently has this property under lease.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in the proceedings styled William Steiner v.
Joseph D. Macchia, Joel C. Puckett, Daniel J. Coots and GAINSCO, INC., filed in
the United States District Court for the Northern District of Texas, Fort Worth
Division. In that case, the plaintiff asserts claims on behalf of a putative
class of persons who purchased the Company's common stock between August 6,
1997 and July 16, 1998, inclusive. The plaintiff asserts claims under section
10(b) and 20(a) of the Securities Exchange Act of 1934, alleging that the
Company's financial results did not reflect the Company's true financial
position and results of operations in accordance with generally accepted
accounting principles in that they understated reserves for claims and claim
adjustment expenses. The Company believes that it has meritorious defenses to
plaintiff's claims and intends to vigorously defend the action.
In the normal course of its operations, the Company has been named as
defendant in various legal actions seeking payments for claims denied by the
Company and other monetary damages. In the opinion of the Company's management
the ultimate liability, if any, resulting from the disposition of these claims
will not have a material adverse effect on the Company's consolidated financial
position or results of operations. The Company's management believes that
unpaid claims and claim adjustment expenses are adequate to cover liabilities
from claims which arise in the normal course of its insurance business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS.
The Company's Common Stock is listed on the New York Stock Exchange
(Symbol: GNA). The following table sets forth for the fiscal periods indicated
the high and low closing sales prices per share of the Common Stock as reported
by the American Stock Exchange, as adjusted for stock dividends through July
30, 1996 and by the New York Stock Exchange from July 31, 1996 through December
31, 1998. The prices reported reflect actual sales transactions on these
exchanges.
High Low
---- ---
1996 First Quarter 11 3/4 9 3/4
1996 Second Quarter 11 5/8 9 7/8
1996 Third Quarter 10 3/4 9 3/8
1996 Fourth Quarter 10 3/4 8 3/4
1997 First Quarter 9 7/8 8 7/8
1997 Second Quarter 9 3/8 8 1/8
1997 Third Quarter 9 7/8 8 7/8
1997 Fourth Quarter 10 1/16 8 1/8
1998 First Quarter 8 11/16 7 7/8
1998 Second Quarter 9 7/8 6
1998 Third Quarter 7 15/16 5 15/16
1998 Fourth Quarter 7 1/8 5 15/16
Cash dividends of $.0125 per share were paid to shareholders of record on
March 29 and June 28, 1996. Cash dividends of $.015 per share were paid to
shareholders of record on September 30 and December 31, 1996 and March 31, June
30 and September 30, 1997. Cash dividends of $.0175 per share were paid to
shareholders of record on December 31, 1997, March 31, June 30 and September
30, 1998. On February 24, 1999, the Company declared a $.0175 per share cash
dividend payable to shareholders of record on March 31, 1999. The Company
depends on cash flow from cash dividends paid by its subsidiaries for dividend
payments on its Common Stock.
The Company purchased 243,932 and 470,702 shares of its Common Stock during
1997 and 1996, respectively. Additionally, a total of 17,200 shares were
purchased in January and February of 1998. The Company has not purchased shares
of its stock since February 1998 and has no plans to purchase additional
shares.
As of February 28, 1999, there were 370 shareholders of record of the
Company's Common Stock.
17
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for, and as of the
end of each of the years ended December 31, have been derived from the
consolidated financial statements of the Company which have been audited by
KPMG LLP, independent certified public accountants. The consolidated balance
sheets as of December 31, 1998 and 1997, and the consolidated statements of
operations, shareholders' equity and comprehensive income and cash flows for
each of the years in the three-year period ended December 31, 1998, and the
report thereon are included elsewhere in this document. The information
presented below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," consolidated
financial statements and the notes thereto, and the other financial information
included herein.
Years ended December 31
--------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(Amounts in thousands, except per share data)
Income Data:
Gross premiums written (1) $ 91,162 99,776 110,000 108,072 98,164
Ceded premiums written 2,603 1,637 1,749 1,968 8,710
--------- --------- --------- --------- ---------
Net premiums written 88,559 98,139 108,251 106,104 89,454
Decrease (increase) in unearned premiums 3,644 4,117 (1,458) (8,849) (5,059)
--------- --------- --------- --------- ---------
Net premiums earned 92,203 102,256 106,793 97,255 84,395
Net investment income 9,803 9,731 9,161 8,157 6,868
Net realized gains 693 327 472 108 135
Insurance services 2,927 2,631 2,379 2,183 2,056
--------- --------- --------- --------- ---------
Total revenues 105,626 114,945 118,805 107,703 93,454
--------- --------- --------- --------- ---------
Claims and claim adjustment expenses 86,353 62,086 58,379 48,465 41,189
Policy acquisition costs 23,619 22,552 23,828 19,679 17,392
Underwriting and operating expenses 16,934 15,545 15,499 15,579 14,505
--------- --------- --------- --------- ---------
Total expenses 126,906 100,183 97,706 83,723 73,086
--------- --------- --------- --------- ---------
Income (loss) before income taxes (21,280) 14,762 21,099 23,980 20,368
Income tax expense (benefit) (9,617) 2,838 5,079 6,352 5,199
--------- --------- --------- --------- ---------
Net income (loss) (2) $ (11,663) 11,924 16,020 17,628 15,169
========= ====== ======= ======= =========
Earnings (loss) per share (3):
Basic $ (.56) .57 .75 .82 .71
========= ========= ========= ========= =========
Diluted $ (.56) .56 .74 .81 .70
========= ========= ========= ========= =========
GAAP operating ratios:
Claims ratio 93.7% 60.7% 54.7% 49.8% 48.8%
Expense ratio 39.0% 33.7% 33.8% 33.1% 34.4%
--------- --------- --------- --------- ---------
Combined ratio 132.7% 94.4% 88.5% 82.9% 83.2%
========= ========= ========= ========= =========
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As of December 31
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
Balance Sheet Data:
Investments $210,989 216,802 203,831 183,027 160,300
Premiums receivable 14,885 14,250 15,825 15,914 12,262
Ceded unpaid claims and claim
adjustment expenses 35,030 29,524 26,713 24,650 19,972
Ceded unearned premiums 22,388 19,146 16,280 6,008 5,977
Deferred policy acquisition costs 11,320 11,618 12,634 12,115 9,831
Property and equipment 6,717 6,941 6,981 6,562 6,336
Goodwill 17,058 -- -- -- --
Total assets 345,590 313,685 296,846 264,156 230,576
Unpaid claims and claim
adjustment expenses 136,798 113,227 105,692 95,011 80,729
Unearned premiums 63,602 64,005 65,255 53,525 44,645
Note payable 18,000 -- -- 1,750 3,500
Total liabilities 240,106 195,123 187,493 164,714 149,029
Shareholders' equity 105,484 118,562 109,353 99,442 81,547
Shareholders' equity per share (4) $ 5.05 5.68 5.19 4.62 3.79
- ------------------------
(1) Excludes premiums of $47,588,000 in 1998, $40,136,000 in 1997,
$31,603,000 in 1996, $8,893,000 in 1995 and $5,056,000 in 1994
from the Company's fronting arrangements and the commercial
automobile plans of Arkansas, California, Louisiana, Mississippi,
and Pennsylvania under which the Company is a servicing carrier.
(2) Includes after tax net realized gains of $457,000, $212,000,
$307,000, $70,000 and $87,000 for 1998, 1997, 1996, 1995 and 1994,
respectively.
(3) All years retroactively adjusted for stock dividends and stock
splits effected as stock dividends as follows: two 5% in 1995 and
two 5% in 1994.
(4) Based on number of shares outstanding at the end of each year,
retroactively adjusted for stock dividends and stock splits
effected as stock dividends.
19
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BUSINESS OPERATIONS
The Company recorded a net loss in 1998 of $11,662,564, or $.56 per share
(basic), compared to net income for 1997 of $11,923,526, or $.56 per share
(diluted), and net income of $16,019,567, or $.74 per share (diluted), for
1996. The Company recorded a GAAP combined ratio of 132.7% in 1998.
On August 28, 1998, the Company announced that its Board of Directors had
determined to commence pursuit of additional strategic alternatives to maximize
shareholder value, including a possible sale of the Company, and had engaged
Wasserstein Perella & Co., Inc. to assist in the process. This process is
continuing.
On October 23, 1998, the Company completed the acquisition of the Lalande
Financial Group, Inc. ("Lalande Group"). The Lalande Group includes National
Specialty Lines, Inc. ("NSL") and De La Torre Insurance Adjusters, Inc.
("DLT"). NSL is a managing general agency which markets nonstandard personal
auto insurance through approximately 800 retail agencies in Florida. DLT is an
automobile claims adjusting firm that provides claim services on NSL produced
business and to outside parties. The purchase price was for $18 million in cash
paid at closing plus up to an additional $22 million in cash to be paid over
approximately five years contingent upon the operating performance of the
Lalande Group.
On March 9, 1999, the Company announced the signing of an agreement for
sale of the assets of Agents Processing Systems, Inc. ("APS"), its wholly-owed
subsidiary engaged in marketing a computer software package related to general
agency operations. The sale is expected to be completed in April 1999. The
purchaser is to acquire all rights to the APS software products, assignment of
the APS customer contracts and other miscellaneous assets for a nominal amount
of cash, assumption of contract obligations, a fixed number of software use
licenses and development work on an electronic data interchange project. The
Company anticipates a small write-off as a result of this transaction.
The discussion below primarily relates to the Company's insurance
operations, although the selected consolidated financial data appearing
elsewhere is on a consolidated basis. The revenue item "Insurance services"
includes revenues from the computer software, the plan servicing, the premium
finance and the fronting reinsurance operations. The expense item "Underwriting
and operating expenses" includes the operating expenses of these operations.
RESULTS OF OPERATIONS
Gross premiums written in 1998 of $91,162,086 were 9% below the $99,775,854
recorded in 1997, largely because of the run-off of discontinued classes and
continued pricing pressure from competition. In 1997, gross premiums written
decreased 9% from the 1996 level. In 1997, the run-off of the Kentucky coal
truck program and a taxi program in New Jersey contributed 3 percentage points
(points) of decrease while increased competition in the Florida, Georgia,
Pennsylvania and Virginia markets contributed another 4 points of decrease in
1997. The following table compares the major product lines between the years
for gross premiums written:
20
21
1998 1997 1996
-------------------- -------------------- --------------------
(Amounts in thousands)
Commercial auto $ 50,037 55% $ 56,704 57% $ 62,328 57%
Auto garage 19,974 22% 23,279 23% 26,871 24%
General liability 17,046 19% 17,829 18% 19,744 18%
Property 1,721 2% 1,267 1% 1,056 1%
Personal auto 891 --% 690 1% -- --%
Other lines 1,493 2% 7 --% 1 --%
-------- --- -------- --- -------- ---
Total $ 91,162 100% $ 99,776 100% $110,000 100%
COMMERCIAL AUTO was down 12% in 1998 from 1997 and down 9% in 1997 from
1996. In 1998 the continued run-off of the Kentucky commercial auto business
accounted for the majority of the unfavorable variance. Additionally, the
decision to exit certain other unprofitable classes contributed to the
decrease. In 1997, Kentucky contributed 4 points of decrease with Georgia, New
Jersey, Pennsylvania and Virginia accounting for the remaining 5 points of
decrease. A decision was made during 1997 to discontinue writing Kentucky coal
truck risks and a New Jersey taxi cab program because of adverse claim results.
In Georgia, Pennsylvania and Virginia competition had dramatically intensified
with regard to pricing and additional writers. The AUTO GARAGE product line
decreased 14% in 1998 and 13% in 1997. Continued pricing pressure and new
entrants to the market account for the decreases in both years. The GENERAL
LIABILITY line decreased 4% in 1998 after a decrease of 10% in 1997. For 1998
continued pricing pressure and competitors entering the market produced the
decrease. California and Florida accounted for 6 points and 2 points of the
1997 decrease, respectively. An underwriting decision was made in California to
not renew large general contractors. In Florida, increased competition from new
and existing companies contributed to the decrease. OTHER LINES increased in
1998 primarily as a result of mobile home business the Company began writing in
1998.
For 1998, gross premiums written percentages by significant state/product
line are as follows: Texas commercial auto (22%), Texas general liability (7%),
Pennsylvania commercial auto (5%), and Florida auto garage (5%), with no other
individual state/product line comprising 5% or more. The persistency rate
remained at 46% for both years. Premiums earned decreased 10% in 1998 to
$92,203,393 and decreased 4% in 1997 to $102,255,979 as a direct result of the
level of premiums written.
Net investment income increased 1% in 1998 over 1997 and increased 6% in
1997 over 1996. The increase in 1997 was the result of growth in the portfolio
due to continued positive cash flows from operations. The return on average
investments for 1998 is 4.6% versus 4.7% in 1997 and 4.8% in 1996. Inflation
can cause interest rates to increase, which would cause the Company's interest
income to increase. The Company achieves a higher after tax net income by
investing predominantly in tax-exempt securities as compared to taxable fixed
income securities. At December 31, 1998, 88% of the Company's investments were
in investment grade tax-exempt bonds with an average maturity of approximately
3.8 years. On a taxable equivalent basis the return on average investments was
6.2% in 1998, 6.5% in 1997 and 6.6% in 1996. The Company has the ability to
hold its fixed maturity securities until their maturity date. The Company does
not actively trade its bonds; however, it does classify certain bond securities
as available for sale. At December 31, 1998, approximately 9% of the Company's
investments were in U.S. Treasury securities and 2% were in short-term money
market funds. The Company does not have any non-performing fixed maturity
securities.
21
22
The Company recorded net realized capital gains of $692,510 in 1998 versus
$326,905 in 1997 and $471,956 in 1996. All of these gains were generated from
the bonds available for sale category of the fixed maturity portfolio.
Insurance services revenues increased $296,268 from 1997 to 1998 following
an increase of $252,165 in 1997 from 1996. The table below presents the
components.
1998 1997 1996
---------- --------- ---------
Plan servicing $ 978,670 1,048,835 1,187,656
Fee income 732,506 608,287 343,266
Computer software 604,387 657,592 473,499
Premium finance 137,445 286,347 345,679
Lalande Group 459,616 -- --
Other 14,963 30,258 29,054
---------- --------- ---------
Total $2,927,587 2,631,319 2,379,154
========== ========== ==========
Plan servicing revenues from commercial automobile plans decreased 7% in
1998 from 1997 following an 12% decrease in 1997. Written premiums decreased 4%
in 1998 and 14% in 1997 as a result of decreases in the Louisiana and
Pennsylvania plans. The Company terminated its servicing carrier agreements
effective December 31, 1998 and this operation is in run-off.
Fee income increased $124,219 in 1998 over 1997 and $265,021 in 1997 over
1996 as a result of continued growth from the fronting accounts.
Revenues in the APS computer software operation decreased 8% in 1998 from
1997 and increased 39% in 1997 from 1996. The Company has announced an agreement
for the sale of the APS operation and expects to close in April 1999.
Revenues from the premium finance operation are down 52% in 1998 from 1997
and down 17% in 1997 from the 1996 level. The Company decided in the second
quarter of 1998 to exit the premium finance business for commercial lines but
will continue to offer interest free payment plans for the Company's insurance
operations.
Revenues in the Lalande Group are from automobile claim adjusting services
and agency commissions on business from outside parties generated since the
acquisition.
Claims and claim adjustment expenses ("C & CAE") increased $24,267,337 in
1998 over 1997 and $3,706,923 in 1997 over 1996. The C & CAE ratio was 93.7% in
1998, 60.7% in 1997 and 54.7% in 1996. For 1998 the increase in the C & CAE
ratio of 33 percentage points is the result of unanticipated unfavorable
development in C & CAE incurred from the 1997, 1996 and 1995 accident years for
commercial auto liability. The Company reduced outstanding claim counts 30% in
1998 from the 1997 level. The increase in the C & CAE ratio of 6 percentage
points in 1997 is the result of claim reserve increases recorded for commercial
auto claims in Kentucky from the 1995 and 1996 accident years and adverse
development in claim adjustment expense reserves for commercial auto in the
1994, 1995 and 1996 accident years. While the Company writes a material amount
of business in areas where catastrophes have recently occurred, the gross and
net claims incurred from these events were immaterial because the Company
primarily writes liability coverages. With regard to environmental and product
liability claims, the Company has an immaterial amount of exposure. The Company
does not provide environmental impairment coverage and excludes pollution and
asbestos related
22
23
coverages in its policies. The Company's premium writings for product liability
coverages are immaterial. Inflation impacts the Company by causing higher claim
settlements than may have originally been estimated. Inflation is implicitly
reflected in the reserving process through analysis of cost trends and review
of historical reserve results.
The increase in commissions from 1997 to 1998 is primarily due to a
decrease in commission income of approximately $3,318,000 as a result of
reducing previously accrued reinsurance commission income due to adverse
development in C & CAE incurred. The reinsurance commission income had been
accrued in prior years based on a lower expected ultimate C & CAE ratio. The
decrease in commissions from 1996 to 1997 is related to the decrease in gross
premiums written. The ratio of commissions to premiums earned was 25% for 1998
versus 21% for 1997 and 23% for 1996. The increase in 1998 is a result of the
decrease in reinsurance commission income. The decrease in 1997 was related to
the decrease in the commission expense rate in 1997 because of lower contingent
commissions resulting from higher C & CAE ratios.
The change in deferred policy acquisition costs and deferred ceding
commission income ("DAC") resulted in a net decrease to income of $297,994 and
$1,015,802 for 1998 and 1997, respectively, and a net increase to income of
$519,257 for 1996. The change in the amount of the increase or decrease in DAC
between the comparable periods is directly related to the rate at which
unearned premiums are growing or declining as a result of premium writings.
Since DAC (asset) is a function of unearned premiums (liability), an increase
in the growth rate of net unearned premiums would correspondingly result in an
increase in the growth rate of DAC and vice versa.
Underwriting and operating expenses were up 9% in 1998 over 1997 and up
slightly in 1997 from 1996. The increase in 1998 included approximately $2
million in non-recurring expenses associated with a reduction in force, legal
fees and consulting fees.
For 1998 the Company generated a current tax benefit as a result of the
loss from operations. The large increase in the deferred tax benefit is mainly
the result of the large increase to C & CAE reserves. The effective tax benefit
rate for 1998 of 45% is above the Federal statutory rate largely because of
tax-exempt interest income. The effective tax rate of the Company was 19% in
1997 and 24% in 1996. The lower rate in 1997 is largely the result of
tax-exempt net investment income representing a larger portion of income than
in 1996. For the Company, the fresh start adjustment (tax benefit) was
immaterial for all years presented. A reconciliation between income taxes
computed at the Federal statutory rates and the provision for income taxes is
included in Note 6 of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of the Company's liquidity are funds generated from
insurance premiums, net investment income and maturing investments. The
short-term investments and cash are intended to provide adequate funds to pay
claims without selling fixed maturity investments. At December 31, 1998, the
Company held short-term investments and cash of $8,731,198 which the Company
believes is adequate liquidity for the payment of claims and other short-term
commitments.
With regard to long term liquidity, the average duration of the investment
portfolio is approximately 3 years. The fair value of the fixed maturity
portfolio at December 31, 1998 was $2,971,884 above amortized cost. With regard
to the availability of funds to the holding company, see Note 7 of Notes to
Consolidated Financial Statements for restrictions on the payment of dividends
by the insurance companies. Various insurance departments of states in which
the Company operates require the deposit of funds to protect policyholders
within those states. At December 31, 1998 and 1997, the balance on deposit for
the benefit of such policyholders totaled approximately $14,115,000 and
$12,965,000, respectively.
23
24
The decrease in investments is primarily attributable to negative cash
flows from operating activities which is the result of the large amount of
claim payments made during 1998. Ceded unpaid claims and claim adjustment
expenses as well as ceded unearned premiums increased largely as a result of
the increase in fronting reinsurance activity mentioned previously. Deferred
Federal income taxes increased for reasons mentioned previously. Goodwill has
been recorded in conjunction with the Lalande Group purchase made in the fourth
quarter of 1998.
Unpaid claims and claim adjustment expenses increased largely as a result
of unanticipated unfavorable claim and claim adjustment expense development
from prior accident years, as well as material increases from plan servicing
and fronting accounts. Unearned premiums decreased because of the decrease in
premiums written, offset to some extent by an increase in fronting accounts.
Accounts payable decreased because of the decrease in payables contingent upon
profitability. Drafts payable decreased because a large amount of drafts were
issued in the fourth quarter of 1997 this did not recur in the fourth quarter
of 1998. The note payable resulted from the Lalande Group acquisition mentioned
previously.
The unrealized gains or losses on fixed maturities available for sale are
presented, net of tax, as a separate component of shareholders' equity entitled
Accumulated Other Comprehensive Income. The net unrealized gain on the fixed
maturities classified as held to maturity was $1,189,912 at December 31, 1998.
The Company purchased 17,200 shares of its common stock during 1998 at a
cost of $142,191, or $8.27 per share, which accounts for the increase in
Treasury stock.
The Company is not aware of any current recommendations by the regulatory
authorities, which if implemented, would have a material effect on the
Company's liquidity, capital resources or results of operations. The Company's
statutory capital exceeds the benchmark capital level under the Risk Based
Capital formula for its major insurance companies.
YEAR 2000 READINESS
Y2K Problem A "Year 2000 problem" exists worldwide because many existing
computer programs use only the last 2 digits to refer to a year. Therefore,
these computer programs do not properly recognize a year that begins with "20"
instead of the familiar "19". If not corrected, many computer applications
could fail or create erroneous results. In addition to the two-digit portion of
the problem, other date issues can generate erroneous results. These include
Year 2000 being a leap year and the use of Gregorian date of 9999 or the use of
Julian date 9999 in a date field to alert the program to perform special
handling, while Gregorian September 9, 1999 and Julian April 9, 1999 are actual
dates.
Company (Excluding Lalande) Readiness The Company began addressing its Year
2000 readiness in 1996, excluding the Lalande Group whose acquisition by the
Company was completed on October 23, 1998. The Company appointed a Year 2000
team involving personnel from all business units responsible for implementing
the project, while the department Vice Presidents formed the Year 2000 steering
committee. The project scope encompassed information technology, including
hardware and software whether developed internally or externally, building
systems, vendors, banks, agents, reinsurers and the Company's exposure relating
to policy coverage.
The Company has completed the assessment phase, the strategy phase, the
analysis phase and the planning phase for its hardware and software systems,
non-information technology equipment and strategic business relationships. The
Company believes that it has completed the remediation and testing phase of all
mission critical systems and all hardware. The Company is either in the
remediation or testing phase of its non-mission critical software. The Company
anticipates that its non-mission critical software will be compliant by June
30,
24
25
1999. The foregoing readiness analysis does not apply to software for certain
discontinued operations which are in a runoff phase.
During 1998 the Company contracted with a major consulting vendor to
perform due diligence assessment and testing of its Year 2000 project. While
assessing the Company's readiness, the vendor identified some programs that
required additional remediation and re-testing. The Company believes that it
has corrected all the identified non-conforming programs.
The Company has performed a written survey of all strategic business
partners including producers, general agents, material vendors, reinsurers,
reinsurance intermediaries, utilities, telecommunications services, web hosting
providers, Internet service providers, hardware providers, software providers
and financial institutions. The Company is monitoring the progress of the
partners, which if impaired by a Year 2000 problem, would have a material
impact on the Company. The Company is developing contingency plans in the event
that a material business partner is not Year 2000 ready. However, there can be
no assurance that all material business partners will be Year 2000 ready and
such could have a material effect on the Company's financial position.
A comprehensive review was performed by the Company of the insurance
policies written by it and its underwriting guides to determine Year 2000
exposure. The Company made a decision to exclude Year 2000 exposures from all
insurance policies written by it and began adding exclusions in November 1997.
The Company believes Year 2000 liabilities are not fortuitous in nature and
would not be covered under its insurance policies. The Company believes that
its coverage exposure with respect to Year 2000 losses will not be material.
However, changes in social and legal trends may establish coverage unintended
for Year 2000 exposures by re-interpreting insurance contracts and exclusions.
Litigation with respect to Year 2000 claims and the attendant costs are to be
expected. It is impossible to predict what exposure insurance companies may
bear for the Year 2000 losses.
The Company is establishing contingency plans for hardware and software
failures with respect to the Year 2000 problem. Since the Company's mission
critical systems and hardware are believed to be Year 2000 compliant and have
been assessed by an outside vendor, the Company does not expect any material
Year 2000 failures. The Company believes that it has reviewed all material
business partners' readiness, and has been advised that their mission critical
systems and software are believed to be Year 2000 compliant. If, in the event
the Company becomes aware of a strategic partner's failure to be prepared, the
Company will evaluate using another vendor.
Lalande Readiness The Lalande Group has been addressing its Year 2000
readiness since 1997. As of December 31, 1998, Lalande's mission critical
systems are believed to be Year 2000 compliant. The Company expects that
Lalande's non-mission critical systems will be Year 2000 compliant by September
30, 1999.
Costs The Company estimates that its costs of addressing the Year 2000
problem will aggregate approximately $880,000, including modifying or replacing
software and other systems, hiring Year 2000 solution providers and internal
assessment, remediation and testing. Of this amount, approximately $435,000 was
expensed prior to 1998, approximately $375,000 was expensed in the twelve
months ended December 31, 1998 and approximately $70,000 remains to be
expended. These costs are being funded by internally generated funds.
FORWARD LOOKING STATEMENTS
Statements made in this report that are not strictly historical may be
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that all forward-looking
statements involve certain risks and uncertainties that could cause actual
results to differ materially from those contained in the forward-looking
statements. Important factors include, but are not limited to, (a)
25
26
heightened competition, including price competition from existing competitors,
from newly formed competitors and from the entry into the Company's markets of
standard insurance companies which historically have not competed in the
Company's specialty markets, (b) overcapitalization of the insurance industry,
(c) contraction of the markets for the Company's various lines of business, (d)
development and performance of new specialty programs, (e) the ongoing level of
claims and claims-related expenses, (f) adequacy of claim reserves, (g) the
ability to complete value-adding acquisitions, (h) the ability of the Company to
fully integrate the recently acquired Lalande Group and its customers and
managers into the Company's business, (i) the ability to consummate the APS
asset sale on the agreed terms, (j) the results of the pursuit by the Board of
Directors of additional strategic alternatives to maximize shareholder values,
(k) effects of Year 2000 problems encountered by the Company and those with whom
it deals, and (l) general economic conditions and fluctuations in interest
rates.
26
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of economic losses due to adverse changes in
the estimated fair value of a financial instrument as the result of changes in
equity prices, interest rates, foreign exchange rates and commodity prices. The
Company's consolidated balance sheets include assets whose estimated fair
values are subject to market risk. The primary market risk to the Company is
interest rate risk associated with investments in fixed maturities. The Company
has no foreign exchange or commodity risk, and its exposure to equity risk is
immaterial.
INTEREST RATE RISK
The Company's fixed maturity investments are subject to interest rate
risk. Increases and decreases in interest rates typically result in decreases
and increases in the fair value of these investments.
Most of the Company's investable assets come from premiums paid by
policyholders. These funds are invested predominately in high quality, U.S.
government and municipal bonds with relatively short durations. The fixed
maturity portfolio has an average duration of 3.4 years and an average rating
of "AAA." 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 which limit the maximum duration and maturity
of the fixed maturity portfolio.
The Company utilizes the modified duration method to estimate the
effect of interest rate risk on the fair values of its fixed maturity
portfolio. The usefulness of this method is to a degree limited, as it is
unable to accurately incorporate the full complexity of market interactions.
The table below summarizes the Company's interest rate risk and shows
the effect of a hypothetical change in interest rates as of December 31, 1998.
The selected hypothetical changes do not indicate what could be the potential
best or worst case scenarios (dollars in thousands):
Estimated Estimated Hypothetical
Estimated Change in Fair Value After Percentage Increase
Fair Value at Interest Rates Hypothetical Change (Decrease) in
December 31, 1998 (bp=basis points) in Interest Rates Shareholders' Equity
----------------- ----------------- ------------------- ---------------------
U.S. Treasury securities $ 25,200 200 BP Decrease $ 26,395 .7
(including short-term 100 BP Decrease 25,797 .4
investments) 100 BP Increase 24,603 (.4)
200 BP Increase 24,005 (.7)
Obligations of states, $ 186,710 200 BP Decrease $199,616 7.7
municipalities and 100 BP Decrease 193,163 4.0
political subdivisions 100 BP Increase 180,257 (4.0)
200 BP Increase 173,804 (7.7)
Total fixed maturity $ 211,910 200 BP Decrease $226,023 8.5
investments (including 100 BP Decrease 218,967 4.3
short-term investments) 100 BP Increase 204,854 (4.3)
200 BP Increase 197,797 (8.5)
27
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated Financial Statements are on pages 36 through 63:
Page
----
Report of Management 36
Independent Auditors' Report 37
Consolidated Balance Sheets as of December 31, 1998 and 1997 38-39
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997, and 1996 40
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the Years Ended December 31, 1998, 1997, and 1996 41-42
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997, and 1996 43-44
Notes to Consolidated Financial Statements December 31,
1998, 1997, and 1996 45-63
The following Consolidated Financial Statements Schedules are on pages 64
through 75:
Schedule Page
-------- ----
Independent Auditors' Report on
Supplementary Information 64
I Summary of Investments 65
II Condensed Financial Information of the Registrant 66-72
III Supplementary Insurance Information 73
IV Reinsurance 74
VI Supplemental Information 75
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
28
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with regard to Executive Officers
is included in Part 1 of this report under the heading "Executive Officers of
the Registrant".
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Items 11, 12 and 13 will be supplied by a
Schedule 14A filing or an amendment to this report.
29
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents filed as part of the report:
1. The following financial statements filed under Part II, Item 8:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity and Comprehensive
Income for the Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements, December 31, 1998, 1997 and
1996
2. The following Consolidated Financial Statement Schedules are filed under
Part II, Item 8:
Schedule Description
-------- -----------
I Summary of Investments
II Condensed Financial Information of the
Registrant
III Supplementary Insurance Information
IV Reinsurance
VI Supplemental Information
3. The following Exhibits:
Exhibit No.
3.1 Restated Articles of Incorporation of Registrant
(Exhibit 3.1)(1)
30
31
3.2 Articles of Amendment to the Articles of
Incorporation dated June 9, 1988 (Exhibit 3.2)(2)
3.6 Articles of Amendment to Articles of Incorporation
effective August 13, 1993 (Exhibit 3.6)(7)
3.7 Bylaws of Registrant as amended through May 1, 1998
(Exhibit 99.3) (12)
4.2 Rights Agreement, dated as of March 3, 1988,
between the Registrant and Team Bank/Fort Worth,
N.A. (incorporated by reference to Exhibit 1 to the
Registrant's Current Report on Form 8-K filed with
the Securities and Exchange Commission on March 15,
1988) (Exhibit 4.2)(3)
4.3 Amendment No. 1 dated as of March 5, 1990 to Rights
Agreement dated as of March 3, 1988 between
GAINSCO, INC. and Team Bank as Rights Agent
(Exhibit 4.2)(5)
4.4 Amendment No. 2 dated as of May 25, 1993 to Rights
Agreement between GAINSCO, INC. and Society
National Bank (successor to Team Bank (formerly
Texas American Bank/Fort Worth, N.A.)), as Rights
Agent (Exhibit 4.4)(7)
4.6 Revised Form of Common Stock Certificate (Exhibit
4.6) (10)
10.16 1990 Stock Option Plan of the Registrant (Exhibit
10.16)(4)
10.23 Surplus Debenture issued by GAINSCO County Mutual
Insurance Company. (Exhibit 10.23)(6)
10.24 Management Contract between GAINSCO County Mutual
Insurance Company and GAINSCO Service Corp.
(Exhibit 10.24)(6)
10.25 Certificate of Authority and accompanying
Commissioner's Order granting Certificate of
Authority, allowing for charter amendments and
extension of charter (Exhibit 10.25)(6)
10.27 Amendment to Surplus Debenture issued by GAINSCO
County Mutual Insurance Company (Exhibit 10.27)(7)
10.28 Agreement dated August 26, 1994 appointing
Continental Stock Transfer & Trust Company transfer
agent and registrar (Exhibit 10.28)(8).
10.29 Amendment No. 3 to Rights Agreement and appointment
of Continental Stock Transfer & Trust Company as
Successor Rights Agent, made September 30, 1994
(Exhibit 10.29)(8).
10.31 1995 Stock Option Plan of the Registrant (Exhibit
10.31) (9)
31
32
10.36 Form of Change of Control Agreements (Exhibit
10.36) (6) (11)
10.37 Employment Agreement dated April 25, 1998 between
Glenn W. Anderson and the Registrant (Exhibit 99.5)
(13).
10.38 Change of Control Agreement for Glenn W. Anderson
(Exhibit 99.7) (13).
10.39 Replacement Non-Qualified Stock Option Agreement
dated July 24, 1998 between Glenn W. Anderson and
the Registrant (Exhibit 99.6) (14).
10.40 GAINSCO, INC. 1998 Long Term Incentive Plan
(Exhibit 99.8) (14).
10.41 Stock Purchase Agreement by and among GAINSCO,
INC., Carlos De la Torre, Rosa De la Torre,
National Specialty Lines, Inc., De La Torre
Insurance Adjusters, Inc., and Lalande Financial
Group, Inc. dated August 17, 1998 relating to
acquisition of Lalande Group (Exhibit 99.6) (15).
10.42 Stock Purchase Agreement by and among GAINSCO,
INC., McRae B. Johnston, National Specialty Lines,
Inc., and Lalande Financial Group, Inc. dated
August 17, 1998 relating to acquisition of Lalande
Group (Exhibit 99.7) (15).
10.43 Stock Purchase Agreement by and among GAINSCO,
INC., Michael Johnston and National Specialty
Lines, Inc. dated August 17, 1998 relating to
acquisition of Lalande Group (Exhibit 99.8) (15).
10.44 Stock Purchase Agreement by and among GAINSCO,
INC., Ralph Mayoral and De La Torre Insurance
Adjusters, Inc. dated August 17, 1998 relating to
acquisition of Lalande Group (Exhibit 99.9) (15).
10.45 Employment Agreement by and among De La Torre
Insurance Adjusters, Inc., Carlos De la Torre and
GAINSCO, INC. (Exhibit 99.10) (15).
10.46 Employment Agreement by and among National
Specialty Lines, Inc., McRae B. Johnston and
GAINSCO, INC. dated August 17, 1998 (Exhibit 99.11)
(15).
10.47 Employment Agreement by and among National
Specialty Lines, Inc., Michael Johnston and
GAINSCO, INC. dated August 17, 1998 (Exhibit 99.12)
(15).
10.48 Employment Agreement by and among De La Torre
Insurance Adjusters, Inc., Ralph Mayoral and
GAINSCO, INC. dated August 17, 1998 (Exhibit 99.13)
(15).
10.49 Asset Purchase Agreement dated March 9, 1999
between the Registrant, Agents Processing Systems,
Inc. and Insurance Business Solutions Incorporated
(16).
32
33
11 (Not required to be filed as an Exhibit. See
footnote (1)(m) on page 51 of this 10-K Report for
information called for by number 11 of the Exhibit
Table to Item 601 of SK)
22.2 Subsidiaries of Registrant (16)
24.2 Consent of KPMG LLP to incorporation by reference
(16)
25.1 Powers of Attorney (16)
27 Financial Data Schedule (16)
- ------------------
(1) Incorporated by reference to the Exhibit shown in
parenthesis filed in Registration Statement No.
33-7846 on Form S-1, and amendments thereto, filed
by the Company with the Securities and Exchange
Commission and effective November 6, 1986.
(2) Incorporated by reference to the Exhibit shown in
parenthesis filed in Registration 33-25226 on Form
S-1, and amendments thereto, filed by the Company
with the Securities and Exchange Commission and
effective November 14, 1988.
(3) Incorporated by reference to the Exhibit shown in
parenthesis filed in the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31,
1988.
(4) Incorporated by reference to the Exhibit shown in
parenthesis filed in the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31,
1990.
(5) Incorporated by reference to the Exhibit shown in
parenthesis filed in the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31,
1991.
(6) Incorporated by reference to the Exhibit shown in
parenthesis filed in the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31,
1992.
(7) Incorporated by reference to the Exhibit shown in
parenthesis filed in the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31,
1993.
(8) Incorporated by reference to the Exhibit shown in
parenthesis filed in the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31,
1994.
33
34
(9) Incorporated by reference to the Exhibit shown in
parenthesis filed in the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31,
1995.
(10) Incorporated by reference to the Exhibit shown in
parenthesis filed in the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31,
1996.
(11) Incorporated by reference to the Exhibit shown in
parenthesis filed in the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31,
1997.
(12) Incorporated by reference to the Exhibit shown in
parenthesis filed in the Registrant's Current
Report on Form 8-K dated May 5, 1998.
(13) Incorporated by reference to the Exhibit shown in
parenthesis filed in the Registrant's Form 10-Q/A
Amendment dated June 16, 1998.
(14) Incorporated by reference to the Exhibit shown in
parenthesis filed in the Registrant's Form 10-Q
Report for quarter ended June 30, 1998.
(15) Incorporated by reference to the Exhibit shown in
parenthesis filed in the Registrant's Current
Report on Form 8-K dated August 26, 1998.
(16) Filed herewith (see Exhibit Index).
(b) Reports on Form 8-K
During the last quarter of the fiscal year ended December 31, 1998, no
reports on Form 8-K have been filed by the Company.
(c) Exhibits required by Item 601 of Regulation SK
The exhibits listed in Item 14(a) 3 of this Report, and not
incorporated by reference to a separate file are filed herewith.
34
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
GAINSCO, INC.
(Registrant)
/s/ Glenn W. Anderson
- ---------------------------------
By: Glenn W. Anderson, President
Date: 03/30/99
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
Joel C. Puckett* Chairman of the Board 3/30/99
- ------------------------------
Joel C. Puckett
/s/ Glenn W. Anderson President and Chief 3/30/99
- ------------------------------ Executive Officer
Glenn W. Anderson
/s/ Daniel J. Coots Senior Vice President and 3/30/99
- ------------------------------ Chief Financial Officer
Daniel J. Coots
/s/ Sam Rosen Secretary and Director 3/30/99
- ------------------------------
Sam Rosen
John C. Goff* Director 3/30/99
- ------------------------------
John C. Goff
Robert J. McGee, Jr.* Director 3/30/99
- ------------------------------
Robert J. McGee
Harden H. Wiedemann* Director 3/30/99
- ------------------------------
Harden H. Wiedemann
John H. Williams* Director 3/30/99
- ------------------------------
John H. Williams
*By: /s/ Glenn W. Anderson
-------------------------
Glenn W. Anderson,
Attorney in-fact
Under Power of Attorney
Subsequent to the filing of the Annual Report on this Form, an
Annual Report to Security Holders covering the Registrant's last fiscal year
and a Proxy Statement and Form of Proxy will be sent to more than ten of the
Registrant's security holders with respect to the Annual Meeting.
35
36
REPORT OF MANAGEMENT
The accompanying consolidated financial statements were prepared by
the Company, which is responsible for their integrity and objectivity. The
statements have been prepared in conformity with generally accepted accounting
principles and include some amounts that are based upon the Company's best
estimates and judgement. Financial information presented elsewhere in this
report is consistent with the accompanying consolidated financial statements.
The accounting systems and controls of the Company are designed to
provide reasonable assurance that transactions are executed in accordance with
management's criteria, that the financial records are reliable for preparing
financial statements and maintaining accountability for assets, and that assets
are safeguarded against claims from unauthorized use or disposition.
The Company's consolidated financial statements have been audited by
KPMG LLP, independent auditors. The auditors have full access to each member of
management in conducting their audits.
The Audit Committee of the Board of Directors, comprised solely of
directors from outside of the Company, meets regularly with management and the
independent auditors to review the work and procedures of each. The auditors
have free access to the Audit Committee, without management being present, to
discuss the results of their work as well as the adequacy of the Company's
accounting controls and the quality of the Company's financial reporting. The
Board of Directors, upon recommendation of the Audit Committee, appoints the
independent auditors, subject to shareholder approval.
Glenn W. Anderson
President
and Chief Executive Officer
Daniel J. Coots
Senior Vice President and
Chief Financial Officer
36
37
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
GAINSCO, INC.:
We have audited the consolidated balance sheets of GAINSCO, INC. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity and comprehensive income and
cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GAINSCO, INC. and
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1998, in conformity with generally accepted accounting principles.
We have also previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets of GAINSCO, INC. and subsidiaries as
of December 31, 1996, 1995 and 1994, and the related consolidated statements of
operations, shareholders' equity and cash flows for the years ended December 31,
1995 and 1994, and we expressed unqualified opinions on those consolidated
financial statements.
In our opinion, the information set forth in the selected consolidated
financial data for each of the years in the five-year period ended December 31,
1998, appearing on pages 18 and 19, is fairly presented, in all material
respects, in relation to the consolidated financial statements from which it
has been derived.
KPMG LLP
Dallas, Texas
February 19, 1999
37
38
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
Assets 1998 1997
------------ -----------
Investments (note 2):
Fixed maturities:
Bonds held to maturity, at amortized cost (fair value:
$60,978,145 - 1998, $90,527,669 - 1997) $ 59,788,233 89,733,503
Bonds available for sale, at fair value (amortized cost:
$143,806,030 - 1998, $122,022,184 - 1997) 145,588,002 123,650,289
Certificates of deposit, at cost (which approximates
fair value) 595,000 595,000
Marketable securities, at fair value (cost: $316,117 - 1998,
$0 - 1997) 268,585 --
Short-term investments, at cost (which approximates
fair value) 4,749,139 2,823,393
------------ ------------
Total investments 210,988,959 216,802,185
Cash 3,982,059 696,513
Accrued investment income 4,224,230 4,714,828
Premiums receivable (net of allowance for doubtful
accounts: $81,000 - 1998, $81,000 - 1997) (note 1) 14,885,063 14,249,890
Reinsurance balances receivable 2,392,576 2,604,511
Ceded unpaid claims and claim adjustment expenses (note 1) 35,030,001 29,524,026
Ceded unearned premiums 22,387,599 19,146,272
Deferred policy acquisition costs (note 1) 11,320,142 11,618,136
Property and equipment (net of accumulated depreciation
and amortization: $8,175,798 - 1998, $5,710,365 - 1997)
(note 1) 6,716,636 6,941,232
Current Federal income taxes (note 1) 5,031,950 796,631
Deferred Federal income taxes (notes 1 and 6) 6,669,093 2,676,555
Management contract 1,687,571 1,737,570
Other assets 3,216,611 2,176,957
Goodwill (notes 1 and 9) 17,057,772 --
------------ ------------
Total assets $345,590,262 313,685,306
============ ============
See accompanying notes to consolidated financial statements.
38
39
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
Liabilities and Shareholders' Equity
1998 1997
------------- -------------
Liabilities:
Unpaid claims and claim adjustment expenses
(notes 1 and 5) $ 136,798,149 113,227,009
Unearned premiums (notes 1 and 5) 63,601,677 64,004,507
Commissions payable 4,279,431 2,207,421
Accounts payable 7,311,920 3,542,075
Reinsurance balances payable 1,327,997 745,805
Deferred revenue 1,935,290 635,807
Drafts payable 5,834,846 9,393,375
Note payable (note 4) 18,000,000 --
Dividends payable (note 7) 365,690 365,300
Other liabilities 651,364 1,001,747
------------- -------------
Total liabilities 240,106,364 195,123,046
------------- -------------
Shareholders' Equity (note 7):
Preferred stock ($100 par value, 10,000,000 shares
authorized, none issued) -- --
Common stock ($.10 par value, 250,000,000 shares
authorized, 21,740,657 issued at December 31, 1998 and
21,701,118 issued at December 31, 1997) 2,174,066 2,170,112
Additional paid-in capital 87,778,548 87,697,754
Accumulated other comprehensive income (notes 2 and 3) 1,138,941 1,058,268
Retained earnings 22,086,868 35,188,460
Treasury stock, at cost (844,094 shares in 1998 and 826,894
shares in 1997) (note 1) (7,694,525) (7,552,334)
------------- -------------
Total shareholders' equity 105,483,898 118,562,260
------------- -------------
Commitments and contingencies (notes 5, 8, 9, and 10)
Total liabilities and shareholders' equity $ 345,590,262 313,685,306
============= =============
See accompanying notes to consolidated financial statements.
39
40
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------- ---------- ----------
Revenues:
Net premiums earned (note 5) $ 92,203,393 102,255,979 106,792,928
Net investment income (note 2) 9,802,702 9,731,132 9,160,518
Net realized gains (note 1) 692,510 326,905 471,956
Insurance services 2,927,587 2,631,319 2,379,154
------------- ------------- -------------
105,626,192 114,945,335 118,804,556
------------- ------------- -------------
Expenses:
Claims and claim adjustment expenses
(notes 1 and 5) 86,352,980 62,085,643 58,378,720
Commissions 23,321,414 21,536,034 24,347,250
Change in deferred policy
acquisition costs and deferred
ceding commission income (note 1) 297,994 1,015,802 (519,257)
Underwriting and operating expenses 16,933,893 15,546,068 15,499,641
------------- ------------- -------------
126,906,281 100,183,547 97,706,354
------------- ------------- -------------
Income (loss) before Federal income taxes (21,280,089) 14,761,788 21,098,202
Federal income taxes (note 6):
Current expense (benefit) (5,571,134) 2,860,704 5,145,780
Deferred benefit (4,046,391) (22,442) (67,145)
------------- ------------- -------------
(9,617,525) 2,838,262 5,078,635
------------- ------------- -------------
Net income (loss) $ (11,662,564) 11,923,526 16,019,567
============= ============= =============
Earnings (loss) per share (notes 1 and 7):
Basic $ (.56) .57 .75
============= ============= =============
Diluted $ (.56) .56 .74
============= ============= =============
See accompanying notes to consolidated financial statements.
40
41
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Years ended December 31, 1998, 1997, and 1996
1998 1997 1996
----------- ---------- ----------
Common stock:
Balance at beginning of year $ 2,170,112 2,167,037 2,163,748
Exercise of options to purchase shares
(39,539 in 1998, 30,749 in 1997 and
32,888 in 1996) 3,954 3,075 3,289
----------- ---------- ----------
Balance at end of year 2,174,066 2,170,112 2,167,037
----------- ---------- ----------
Additional paid-in capital:
Balance at beginning of year 87,697,754 87,610,379 87,543,175
Exercise of options to purchase shares
(39,539 in 1998, 30,749 in 1997 and
32,888 in 1996) 80,794 87,375 67,204
----------- ---------- ----------
Balance at end of year $87,778,548 87,697,754 87,610,379
----------- ---------- ----------
41
42
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Years ended December 31, 1998, 1997, and 1996
1998 1997 1996
------------ ----------- -----------
Retained earnings:
Balance at beginning of year $ 35,188,460 24,517,265 9,673,968
Net income (loss) for year (11,662,564) (11,662,564) 11,923,526 11,923,526 16,019,567 16,019,567
Cash dividends (note 7) (1,462,070) (1,310,518) (1,176,270)
Tax benefit on non-qualified
stock options exercised 23,042 58,187 --
------------ ----------- -----------
Balance at end of year 22,086,868 35,188,460 24,517,265
------------ ----------- -----------
Accumulated other comprehensive
income:
Balance at beginning of year 1,058,268 496,675 1,073,597
Unrealized gains (losses) on
securities, net of reclassification
adjustment, net of tax (note 3) 80,673 80,673 561,593 561,593 (576,922) (576,922)
------------ ----------- ----------- ---------- ----------- ----------
Comprehensive income (loss) (11,581,891) 12,485,119 15,442,645
=========== ========== ==========
Balance at end of year 1,138,941 1,058,268 496,675
------------ ----------- -----------
Treasury stock:
Balance at beginning of year (7,552,334) (5,438,774) (1,012,592)
Change during year (142,191) (2,113,560) (4,426,182)
------------ ----------- -----------
Balance at end of year (7,694,525) (7,552,334) (5,438,774)
------------ ----------- -----------
Total shareholders' equity at end
of year $105,483,898 118,562,260 109,352,582
============ =========== ===========
See accompanying notes to consolidated financial statements.
42
43
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ---------- ----------
Cash flows from operating activities:
Net income (loss) $(11,662,564) 11,923,526 16,019,567
Adjustments to reconcile net income (loss) to cash
provided by/(used for) operating activities:
Depreciation and amortization 4,744,084 4,756,982 4,720,625
Change in deferred Federal income taxes (4,046,391) (22,442) (67,145)
Change in accrued investment income 490,598 (406,643) 231,051
Change in premiums receivable 187,021 1,574,653 89,191
Change in reinsurance balances receivable 211,935 (448,185) 1,349,492
Change in ceded unpaid claims and claim
adjustment expenses 5,505,975) (2,810,872) (2,062,548)
Change in ceded unearned premiums (3,241,327) (2,866,259) (10,271,826)
Change in deferred policy acquisition costs
and deferred ceding commission income 297,994 1,015,802 (519,257)
Change in management contract 50,000 50,000 50,000
Change in other assets (440,620) (272,994) (260,110)
Change in unpaid claims and claim
adjustment expenses 23,571,140 7,535,421 10,680,125
Change in unearned premiums (402,830) (1,250,646) 11,729,830
Change in commissions payable 2,072,010 (481,916) 481,984
Change in accounts payable (2,140,412) (1,128,872) 35,232
Change in reinsurance balances payable 582,192 (312,118) (759,133)
Change in deferred revenue (369,872) 42,507 100,907
Change in drafts payable (3,558,529) 3,174,331 3,649,779
Change in other liabilities (371,359) 2,157 (388,508)
Change in current Federal income taxes 4,212,277 (314,296) (1,472,129)
------------ ---------- ----------
Net cash provided by/(used for) operating
activities $ (3,745,182) 19,760,136 33,337,127
------------ ---------- ----------
(continued)
43
44
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ---------- ----------
Cash flows from investing activities:
Bonds held to maturity:
Matured $ 30,636,243 16,594,930 10,831,897
Purchased (2,253,813) (3,434,618) (19,694,034)
Bonds available for sale:
Sold 46,326,098 37,694,342 38,403,636
Matured 1,520,000 7,544,426 8,179,440
Purchased (71,425,415) (92,169,999) (48,506,215)
Certificates of deposit matured 595,000 420,000 450,000
Certificates of deposit purchased (595,000) (420,000) (425,000)
Property and equipment purchased (504,229) (891,693) (1,385,136)
Marketable securities sold 28,191 -- --
Net change in short-term investments (1,312,442) 17,838,889 (14,686,870)
Net assets acquired through purchase
of subsidiary, net of cash acquired of
$ 5,865,515 (12,464,783) -- --
------------ ---------- ----------
Net cash provided by/(used for) investing
activities (9,450,150) (16,823,723) (26,832,282)
------------ ---------- ----------
Cash flows from financing activities:
Proceeds from (payments on) notes payable 18,000,000 -- (1,750,000)
Cash dividends paid (1,461,679) (1,261,530) (1,129,024)
Proceeds from exercise of common stock
options 84,748 90,450 70,493
Treasury stock acquired (142,191) (2,113,560) (4,426,182)
------------ ---------- ----------
Net cash provided by/(used for) financing
activities 16,480,878 (3,284,640) (7,234,713)
------------ ---------- ----------
Net increase (decrease) in cash 3,285,546 (348,227) (729,868)
Cash at beginning of year 696,513 1,044,740 1,774,608
------------ ---------- ----------
Cash at end of year $ 3,982,059 696,513 1,044,740
============ ========== ==========
See accompanying notes to consolidated financial statements.
44
45
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(1) SUMMARY OF ACCOUNTING POLICIES
(a) Basis of Consolidation
The accompanying consolidated financial statements include
the accounts of GAINSCO, INC. (the Company) and its
wholly-owned subsidiaries, General Agents Insurance Company
of America, Inc. (General Agents), General Agents Premium
Finance Company (GAPFCO), Agents Processing Systems, Inc.,
Risk Retention Administrators, Inc., GAINSCO Service Corp.
(GSC), Lalande Financial Group, Inc. (Lalande Group),
National Specialty Lines, Inc. (NSL) and De La Torre
Insurance Adjusters, Inc. (DLT). General Agents has one
wholly-owned subsidiary, MGA Insurance Company, Inc. (MGAI)
which, in turn, owns 100% of MGA Agency, Inc. GSC has one
wholly-owned subsidiary, MGA Premium Finance Company. GSC
controls the management contract and charter of GAINSCO
County Mutual Insurance Company (GCM) and its accounts have
been included in the accompanying consolidated financial
statements. All significant intercompany accounts have been
eliminated in consolidation.
The accompanying consolidated financial statements are
prepared in conformity with generally accepted accounting
principles. The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(b) Nature of Operations
The Company is predominantly a property and casualty
insurance company concentrating its efforts on certain
specialty markets within the commercial auto, auto garage,
general liability, property and personal nonstandard auto
insurance lines. The Company is approved to write insurance
in 48 states and the District of Columbia on a non-admitted
basis and in 44 states and the District of Columbia on an
admitted basis. The Company markets its commercial lines of
insurance through 180 non-affiliated general agents' offices
and its personal line nonstandard auto is marketed through
approximately 800 non-affiliated retail agencies.
Approximately 72% of the Company's gross premiums written
during 1998 resulted from risks located in Arkansas,
California, Florida, Georgia, Louisiana, Pennsylvania,
Tennessee and Texas.
45
46
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(c) Investments
Bonds held to maturity are stated at amortized cost, bonds
available for sale and marketable securities are stated at
fair value with changes in fair value recorded as a component
of comprehensive income. 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. Proceeds from the sale of bond securities totalled
$46,326,098, $37,694,342 and $38,403,636 in 1998, 1997 and
1996, respectively. The realized gains were $721,404, $384,184
and $516,997 in 1998, 1997 and 1996, respectively. The
realized losses were $28,894, $57,279 and $45,041 in 1998,
1997 and 1996, respectively.
(d) Financial Instruments
For premiums receivable, which include premium finance notes
receivable, and all other accounts (except investments)
defined as financial instruments in Financial Accounting
Standards Board (FASB) Statement 107, "Disclosures About Fair
Values of Financial Instruments," the carrying amount
approximates fair value due to the short-term nature of these
instruments. The carrying amount of notes payable
approximates fair value due to the variable interest rate on
the note. These balances are disclosed on the face of the
balance sheets.
Fair values for investments, disclosed in note 2, were
obtained from independent brokers and published valuation
guides.
(e) Deferred Policy Acquisition Costs and Deferred Ceding
Commission Income
Policy acquisition costs, principally commissions, marketing
and underwriting expenses, are deferred and charged to
operations over periods in which the related premiums are
earned. Ceding commission income, which is realized on a
written basis, is deferred and recognized over periods in
which the premiums are earned. Deferred ceding commission
income is netted against deferred policy acquisition costs.
The marketing expenses are predominately salaries, salary
related expenses and travel expenses of the Company's
marketing representatives who actively solicit business from
the independent general agents. The Company does not utilize
investment income when assessing recoverability of deferred
policy acquisition costs.
46
47
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The change in the resulting deferred asset is charged
(credited) to operations. Information relating to these net
deferred amounts, as of and for the years ended December 31,
1998, 1997 and 1996 is summarized as follows:
1998 1997 1996
------------- ------------- -------------
Asset balance, beginning of
period $ 11,618,136 12,633,938 12,114,681
------------- ------------- -------------
Deferred commissions 19,709,462 19,912,479 21,932,779
Deferred marketing and
underwriting expenses 4,747,538 5,335,856 5,854,088
Deferred ceding
commission income (373,435) (85,152) (76,765)
Amortization (24,381,559) (26,178,985) (27,190,845)
------------- ------------- -------------
Net change (297,994) (1,015,802) 519,257
------------- ------------- -------------
Asset balance, end of period $ 11,320,142 11,618,136 12,633,938
============= ============= =============
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated
useful lives of the respective assets (30 years for buildings
and primarily 5 years for furniture, equipment and software).
The following schedule summarizes the components of property
and equipment:
As of December 31
----------------------------
1998 1997
------------ ------------
Land $ 865,383 865,383
Buildings 6,289,065 6,265,159
Furniture and equipment 5,232,279 3,239,458
Software 2,505,707 2,281,597
Accumulated depreciation and
amortization (8,175,798) (5,710,365)
----------- ------------
$ 6,716,636 6,941,232
=========== ============
47
48
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(g) Software Costs
The Company capitalizes certain costs of developing computer
software intended for resale. Costs relating to programs for
internal use are recorded in property and equipment and are
amortized using the straight-line method over five years or
the estimated useful life, whichever is shorter. The deferred
cost is also reduced by incidental sales of programs
developed for internal use.
(h) Goodwill
Goodwill, which represents the excess of purchase price over
fair value of net assets acquired, is amortized on a
straight-line basis over the expected periods to be
benefited, 25 years. The Company will periodically review the
recoverability of goodwill based on an assessment of future
operations to ensure it is appropriately valued.
(i) Treasury Stock
The Company records treasury stock in accordance with the
"cost method" described in Accounting Principles Board Opinion
(APB) 6. The Company held 844,094 shares and 826,894 shares
as treasury stock at December 31, 1998 and 1997,
respectively, with a cost basis of $9.12 and $9.13 per share,
respectively.
(j) Premium Revenues
Premiums are recognized as earned on a pro rata basis over
the period the Company is at risk under the related policy.
Unearned premiums represent the portion of premiums written
which are applicable to the unexpired terms of policies in
force.
(k) Claims and Claim Adjustment Expenses
Claims and claim adjustment expenses, less related
reinsurance, are provided for as claims are incurred. The
provision for unpaid claims and claim adjustment expenses
includes: (1) the accumulation of individual case estimates
for claims and claim adjustment expenses reported prior to
the close of the accounting period; (2) estimates for
unreported claims based on past experience modified for
current trends; and (3) estimates of expenses for
investigating and adjusting claims based on past experience.
Liabilities for unpaid claims and claim adjustment expenses
are based on estimates of ultimate cost of settlement.
Changes in claim estimates resulting from the review process
and differences between estimates and ultimate payments are
reflected in expense for the year in which the revision of
these estimates first become known.
48
49
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The process of establishing claim reserves is an imprecise
science and reflects significant judgmental factors. In many
liability cases, significant periods of time, ranging up to
several years or more, may elapse between the occurrence of
an insured claim and the settlement of the claim. Some
judicial decisions and legislative actions broaden liability
and policy definitions and increase the severity of claim
payments. As a result of this and other societal and economic
developments, the uncertainties inherent in estimating
ultimate claim costs on the basis of past experience have
increased significantly, further complicating the already
difficult claim reserving process.
Ultimate liability may be greater or lower than current
reserves. Reserves are monitored by the Company using new
information on reported claims and a variety of statistical
techniques. The reserves are reviewed annually by an
independent actuarial firm. The Company does not discount to
present value that portion of its claim reserves expected to
be paid in future periods.
49
50
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The following table sets forth the changes in unpaid claims and claim
adjustment expenses, net of reinsurance cessions, as shown in the
Company's consolidated financial statements for the periods indicated:
As of and for the
years ended December 31
------------------------------------------
1998 1997 1996
------------ ------------ ------------
(Amounts in thousands)
Unpaid claims and claim adjustment
expenses, beginning of period $ 113,227 105,691 95,011
Less: Ceded unpaid claims and claim
adjustment expenses, beginning of period 29,524 26,713 24,650
------------ ------------ ------------
Net unpaid claims and claim adjustment
expenses, beginning of period 83,703 78,978 70,361
------------ ------------ ------------
Net claims and claim adjustment
expenses incurred related to:
Current period 59,635 53,969 53,037
Prior periods 26,718 8,117 5,342
------------ ------------ ------------
Total net claims and claim adjustment
expenses incurred 86,353 62,086 58,379
------------ ------------ ------------
Net claim and claim adjustment expenses
paid related to:
Current period 19,693 17,807 17,178
Prior periods 48,595 39,554 32,584
------------ ------------ ------------
Total net claim and claim adjustment
expenses paid 68,288 57,361 49,762
------------ ------------ ------------
Net unpaid claims and claim adjustment
expenses, end of period 101,768 83,703 78,978
Plus: Ceded unpaid claims and claim
adjustment expenses, end of period 35,030 29,524 26,713
------------ ------------ ------------
Unpaid claims and claim adjustment expenses,
end of period $ 136,798 113,227 105,691
============ ============ ============
50
51
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
For 1998 the unfavorable development in claims and claim
adjustment expenses was primarily the result of unanticipated
unfavorable development in commercial auto liability for the
1997, 1996 and 1995 accident years. The development in net
claims and claim adjustment expenses incurred for 1997 and
1996 was largely a result of claim reserve increases recorded
for commercial auto claims in Kentucky for the 1996 and 1995
accident years and adverse development in claim adjustment
expense reserves for commercial auto in the 1996, 1995 and
1994 accident years.
(l) Income Taxes
The Company and its subsidiaries file a consolidated Federal
income tax return. Deferred income tax items are accounted
for under the liability method which provides for temporary
differences between the reporting of earnings for financial
statement purposes and for tax purposes, primarily deferred
policy acquisition costs, the discount on unpaid claims and
claim adjustment expenses and the nondeductible portion of
the change in unearned premiums. The Company paid income
taxes of $0, $3,175,000 and $6,617,909 during 1998, 1997 and
1996, respectively.
(m) Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share:
1998 1997 1996
------------ ------------ ------------
Numerator:
Net income (loss) $(11,662,564) 11,923,526 16,019,567
------------ ------------ ------------
Denominator:
Denominator for basic
earnings per share-
weighted average shares 20,881,357 20,996,386 21,441,389
Effect of dilutive securities:
Employee stock options 355,329 248,863 280,274
------------ ------------ ------------
Denominator for diluted
earnings per share-
weighted average shares
and assumed conversions 21,236,686 21,245,249 21,721,663
============ ============ ============
Basic earnings per share $ (.56) $ .57 $ .75
============ ============ ============
Diluted earnings per share $ (.56) $ .56 $ .74
============ ============ ============
51
52
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(n) Stock-Based Compensation
In October 1995, the FASB issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (Statement 123). Statement 123 defines a fair
value based method of accounting for an employee stock option
or similar equity instrument. Under Statement 123, the
Company elects to measure compensation costs using the
intrinsic value based method of accounting prescribed by APB
25.
(o) Accounting Pronouncements
In February 1997, the FASB issued Statement 128, "Earnings
Per Share". The Statement was effective for financial
statements issued for periods ending after December 15, 1997.
Earnings per share for prior years presented in these
financial statements have been restated to comply with
Statement 128.
Effective January 1, 1998, the Company adopted FASB Statement
130, Reporting Comprehensive Income. Statement 130
establishes standards for reporting and presentation of
comprehensive income and its components in a full set of
financial statements. Comprehensive income consists of net
income and net unrealized gains (losses) on securities and is
presented in the consolidated statements of stockholder's
equity and comprehensive income. The Statement requires only
additional disclosures in the consolidated financial
statements, it does not affect the Company's financial
position or results of operations. Prior year financial
statements have been reclassified to conform to the
requirements of Statement 130.
Effective January 1, 1998, the Company adopted FASB Statement
131, "Disclosures about Segments of an Enterprise and Related
Information" which establishes standards for the way that
public business enterprises report information about
operating segments in annual financial statements and
requires that those enterprises report selected information
about operating segments in interim financial reports.
Statement 131 also establishes standards for related
disclosures about products and services, geographic areas,
and major customers. The Company makes operating decisions
and assesses performance for the commercial lines segment and
the personal lines segment. In 1998, the personal lines
segment was not material.
In February, 1998, the FASB issued Statement 132, "Employers'
Disclosures about Pensions and Other Postretirement
Benefits". The Statement was effective for fiscal years
beginning after December 15, 1997. The Company has no benefit
plans falling within the scope of Statement 132.
52
53
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(2) INVESTMENTS
The following schedule summarizes the components of net investment
income:
Years ended December 31
--------------------------------------------
Investment income on: 1998 1997 1996
------------ ------------ ------------
Fixed maturities $ 9,109,856 9,218,089 8,331,441
Short-term investments 896,940 782,051 1,055,481
------------ ------------ ------------
10,006,796 10,000,140 9,386,922
Investment expenses (204,094) (269,008) (226,404)
------------ ------------ ------------
Net investment income $ 9,802,702 9,731,132 9,160,518
============ ============ ============
The following schedule summarizes the amortized cost and estimated
fair values of investments in debt securities:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
(Amounts in thousands)
Fixed maturities:
Bonds held to maturity:
US Government securities-1998 $5,668 235 (16) 5,887
US Government securities-1997 5,404 79 (7) 5,476
Tax-exempt state & municipal bonds-1998 54,120 972 (1) 55,091
Tax-exempt state & municipal bonds-1997 84,330 855 (133) 85,052
Bonds available for sale:
US Government securities-1998 13,734 235 -- 13,969
US Government securities-1997 27,322 83 (1) 27,404
Tax-exempt state & municipal bonds-1998 130,072 1,787 (240) 131,619
Tax-exempt state & municipal bonds-1997 94,700 1,580 (34) 96,246
Certificates of deposit - 1998 595 -- -- 595
Certificates of deposit - 1997 595 -- -- 595
Total Fixed maturities-1998 $ 204,189 3,229 (257) 207,161
Total Fixed maturities-1997 212,351 2,597 (175) 214,773
53
54
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The amortized cost and estimated fair value of debt securities at
December 31, 1998 and 1997, by maturity, are shown below.
1998 1997
--------------------------- ---------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ------------ ------------
(Amounts in thousands)
Due in one year or less $ 31,335 31,489 35,142 35,187
Due after one year but within five years 123,550 125,323 140,571 141,871
Due after five years but within ten years 46,692 47,734 30,608 31,527
Due after ten years but within twenty
years 2,612 2,615 6,030 6,188
------------ ------------ ------------ ------------
$ 204,189 207,161 212,351 214,773
============ ============ ============ ============
Investments of $14,115,000 and $12,965,000, at December 31, 1998 and
1997, respectively, were on deposit with various regulatory bodies as
required by law.
(3) ACCUMULATED OTHER COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (Statement 130).
Statement 130 requires that a company include in accumulated
comprehensive income certain amounts which were previously recorded
directly to shareholders' equity.
54
55
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The following schedule presents the components of other comprehensive
income:
Years ended December 31
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
Unrealized gains on securities:
Unrealized holding gains (losses)
during period 825,494 1,202,911 (400,702)
Reclassification
adjustment for amounts
included in net income (690,968) (338,921) (486,871)
------------ ------------ ------------
Other comprehensive
income (loss) before
Federal income tax 134,526 863,990 (887,573)
Federal income tax expense (benefit) 53,853 302,397 (310,651)
------------ ------------ ------------
Other comprehensive income (loss) $ 80,673 561,593 (576,922)
============ ============ ============
(4) NOTE PAYABLE
In December of 1998, the Company obtained a note payable for
$18,000,000 with a commercial bank. Interest is due monthly at an
interest rate that approximates the 90-day London Interbank Offered
Rate (LIBOR) plus 175 basis points (6.7842% at December 31, 1998).
Principal payments of $500,000 are to be paid each quarter beginning
January 1, 2000 with the balance of $10,500,000 due at maturity of the
note on October 1, 2003. The Company recorded interest expense of
$101,763 during 1998. The Company paid no interest during 1998. Funds
were used to make the Lalande Financial Group, Inc. acquisition (see
note 9).
(5) REINSURANCE
In 1998, 1997 and 1996, General Agents and MGAI (the Insurers) wrote
casualty policy limits of $1,000,000. For policies with an effective
date occurring in 1995 or after, the Insurers have excess reinsurance
for 100% of casualty claims exceeding $500,000 up to the $1,000,000
policy limits. The Company's excess reinsurance is provided in varying
amounts by three reinsurers rated "A- (Excellent)" or better by A. M.
Best Company.
The Company carries catastrophe property reinsurance to protect it
against catastrophe occurrences for 95% of the property claims which
exceed $500,000 but do not exceed $8,000,000 for a single
55
56
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
catastrophe. The Company also carries property excess per risk
reinsurance which covers property claims exceeding $300,000 up to
$5,000,000 net loss each risk. From time to time the Company makes use
of facultative reinsurance to cede unusual risks on a negotiated
basis.
GCM has entered into fronting arrangements with non-affiliated
insurance companies. GCM retains no portion as the business written
under these agreements is 100% ceded. Although these cessions are made
to authorized reinsurers rated "A- (Excellent)" or better by A. M.
Best Company, the agreements require that collateral (in the form of
trust agreements and/or letters of credit) be maintained to assure
payment of the unearned premiums and unpaid claims and claim
adjustment expenses relating to the risks insured under these fronting
arrangements. The balances in such accounts as of December 31, 1998
and 1997 total $33,707,000 and $29,943,000, respectively.
The amounts deducted in the consolidated financial statements for
reinsurance ceded as of and for the years ended December 31, 1998,
1997, and 1996 respectively, are set forth in the following table.
Premiums and claims ceded to the commercial automobile plans of
Arkansas, California, Louisiana, Mississippi and Pennsylvania are
designated as "plan servicing".
1998 1997 1996
------------ ------------ ------------
Premiums earned $ 1,982,459 1,709,053 1,929,455
Premiums earned - plan
servicing $ 3,767,180 4,090,774 4,760,785
Premiums earned - fronting
arrangements $ 41,199,644 33,106,441 16,081,808
Claims and claim adjustment
expenses $ 5,346,960 2,200,182 (206,429)
Claims and claim adjustment
expenses - plan servicing $ 4,429,621 4,569,993 6,886,339
Claim and claim adjustment
expenses - fronting
arrangements $ 34,992,635 24,616,491 11,317,277
56
57
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The amounts included in the Consolidated Balance Sheets for
reinsurance ceded under fronting arrangements and reinsurance ceded to
the commercial automobile plans of Arkansas, California, Louisiana,
Mississippi, and Pennsylvania were as follows:
1998 1997 1996
------------ ----------- ----------
Unearned premiums - plan
servicing $ 1,139,560 1,552,654 2,149,286
Unearned premiums -
fronting arrangements $ 20,194,814 17,160,782 13,625,619
Unpaid claims and claim
adjustment expenses - plan
servicing $ 9,380,484 9,431,814 11,012,699
Unpaid claims and claim
adjustment expenses -
fronting arrangements $ 13,927,694 8,623,890 4,321,085
The Insurers remain directly liable to their policyholders for all
policy obligations and the reinsuring companies are obligated to the
Insurers to the extent of the reinsured portion of the risks.
The Insurers, for years prior to 1993, utilized reinsurance
arrangements with various non-affiliated admitted insurance companies,
whereby the Insurers underwrote the coverage and assumed the policies
100% from the companies. Beginning in 1993, the business generated from
these arrangements was in a run-off position. These arrangements
require that the Insurers maintain escrow accounts to assure payment of
the unearned premiums and unpaid claims and claim adjustment expenses
relating to risks insured through such arrangements and assumed by the
Insurers. As of December 31, 1998, 1997, and 1996, the balance in such
escrow accounts totalled $0, $0 and $1,100,000, respectively. For 1998,
1997 and 1996, the premiums earned by assumption were $0, and the
assumed unpaid claims and claim adjustment expenses were $360,000,
$810,000 and $1,845,000, respectively.
The Company has not and does not intend to utilize retrospectively
rated reinsurance contracts with indefinite renewal terms. This form
of reinsurance is commonly known as a "funded cover". Under a funded
cover reinsurance arrangement, an insurance company essentially
deposits money with a reinsurer to help cover future losses and
records the "deposit" as an expense instead of as an asset; or, the
insurance company can borrow from a reinsurer recording the "loan" as
income instead of as a liability with the future "loan" payments
recorded as expense when the payments are made.
57
58
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(6) FEDERAL INCOME TAXES
In the accompanying consolidated statements of operations, the
provisions for Federal income tax as a percent of related pretax
income differ from the Federal statutory income tax rate. A
reconciliation of income tax expense using the Federal statutory rates
to actual income tax expense follows:
1998 1997 1996
------------ ------------ ------------
Income tax expense (benefit)
at 35% $ (7,448,031) 5,166,625 7,384,371
Tax-exempt interest income (2,182,650) (2,486,582) (2,308,364)
Building rehabilitation tax
credit -- (41,984) (77,102)
Other, net 13,156 200,203 79,730
------------ ------------ ------------
Income tax expense (benefit) $ (9,617,525) 2,838,262 5,078,635
============ ============ ============
The FASB issued Statement 109 "Accounting for Income Taxes" which
changed the Company's method of accounting for income taxes. Under APB
11, the primary objective was to match the tax expense with pre-tax
operating income on the statement of operations. Under Statement 109,
the primary objective is to establish deferred tax assets and
liabilities for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and
liabilities at enacted tax rates expected to be in effect when such
amounts are realized or settled. As a consequence, the portion of the
tax expense which is a result of the change in the deferred tax asset
or liability may not always be consistent with the income reported on
the statement of operations. In the Company's opinion, there will be
adequate earnings in future years to recover its deferred tax asset
and as such, the Company has not established a valuation allowance.
The following table represents the tax effect of temporary differences
giving rise to the net deferred tax asset established under Statement
109.
As of December 31
---------------------------
1998 1997
------------ ------------
Deferred tax assets:
Unpaid claims and claim adjustment expenses $ 4,987,915 4,375,152
Unearned premiums 2,936,508 3,158,477
Deferred service fee income 226,703 214,164
Alternative minimum tax credit 2,478,259 --
Net operating loss 1,083,983 --
Other 36,045 34,026
------------ ------------
Total deferred tax assets 11,749,413 7,781,819
------------ ------------
Deferred tax liabilities:
Deferred policy acquisition costs and deferred ceding commission income 3,968,311 4,086,944
Unrealized gains on investments 623,690 569,837
Depreciation and amortization 402,565 386,463
Capitalized software 84,160 56,248
Other 1,594 5,772
------------ ------------
Total deferred tax liabilities 5,080,320 5,105,264
------------ ------------
Net deferred tax assets $ 6,669,093 2,676,555
============ ============
In assessing the realization of its deferred tax assets, management
considers whether it is more likely than not that a portion or all of
the deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Based upon management's consideration of expected reversal
of deferred tax liabilities and projected future taxable income,
management believes it is more likely than not that the Company will
realize the benefits of these deferred tax assets.
As of December 31, 1998, the Company has net operating loss
carryforwards of approximately $3,097,094 for tax return purposes
which, if not utilized, will expire in 2018.
58
59
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(7) SHAREHOLDERS' EQUITY
The Company has 250,000,000 shares of authorized $.10 par value common
stock. Of the authorized shares, 21,740,657 and 21,701,118 were issued
as of December 31, 1998 and 1997, respectively and 20,896,563 and
20,874,224 were outstanding as of December 31, 1998 and 1997,
respectively. The Company also has 10,000,000 shares of preferred
stock with $100 par value authorized of which no shares have been
issued. The Board of Directors can designate the relative rights and
preferences of the authorized preferred stock to be issued.
In 1991, the Company adopted a policy to pay a quarterly cash dividend
of $.01 per share on its common stock every quarter until further
action by the Board of Directors. The Board of Directors increased the
cash dividend to: $.0125 per share in November 1995, $.015 per share
in August 1996, and $.0175 per share in November 1997.
The amount of consolidated statutory shareholder's equity or
policyholders' surplus of General Agents and MGAI was $69,825,964,
$76,495,883 and $57,011,890 at December 31, 1998, 1997 and 1996,
respectively, and the amount of consolidated statutory net income
(loss) was $(13,682,598), $14,155,450 and $15,829,108 for the years
ended 1998, 1997, and 1996, respectively. The amount of policyholders'
surplus of GCM was $2,000,000, $2,000,000 and $2,000,001 at December
31, 1998, 1997 and 1996, respectively, and the amount of statutory net
income (loss) was $(340,460), $44,569 and $115,563 for the years ended
December 31, 1998, 1997 and 1996, respectively. The Company's
statutory capital significantly exceeds the benchmark capital level
under the Risk Based Capital formula for its major insurance
companies.
Statutes in Texas and Oklahoma restrict the payment of dividends by
the insurance company subsidiaries to the available surplus funds
derived from their realized net profits. The maximum amount of cash
dividends that each subsidiary may declare without regulatory approval
in any 12-month period is the greater of net income for the 12-month
period ended the previous December 31 or ten percent (10%) of
policyholders' surplus as of the previous December 31. In 1999 General
Agents (the Oklahoma subsidiary) can pay dividends of up to $6,982,596
without regulatory approval and MGAI (the Texas subsidiary) can pay
dividends of up to $1,985,721 without regulatory approval.
In 1988, the Board of Directors declared, pursuant to a Rights Plan, a
dividend distribution of one common share purchase right on each
outstanding share of $.10 par value common stock. The dividend
distribution was made on March 18, 1988, payable to shareholders of
record on that date. In 1993, the Board of Directors amended the
Rights Plan and extended the expiration date of these rights from
March 18, 1998 to May 25, 2003. Each right, as amended during 1993,
has an exercise price of $70. The rights are not exercisable until the
Distribution Date (as defined in the Rights Plan). The Rights Plan
provides, among other things, that if any person or group (other than
the Company, one of its subsidiaries or an employee benefit plan of
the Company or a subsidiary) acquires 20% or more of the Company's
common stock (except pursuant to an offer for all outstanding common
stock which the Continuing Directors (as defined in the Rights Plan)
have determined to be in the best interests of the Company and its
shareholders), if a 20% holder engages in certain self-dealing
transactions or if a holder of 15% or more of the Company's common
stock is declared an Adverse Person (as defined in the Rights Plan) by
the Board of Directors, each holder of a right (other than the 20%
holder or the Adverse Person, whose rights
59
60
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
would become null and void) would have the right to receive, upon
exercise of the right, common stock having a market value of two times
the exercise price of the right. The Company is able to redeem rights
under certain conditions set forth in the Rights Plan. If, following a
public announcement that a person has acquired 20% or more of the
common stock, the Company is acquired in a merger (other than a merger
which follows an offer approved by the Continuing Directors as defined
in the Rights Plan) or other business combination transaction or if
50% of the assets or earning power of the Company is sold, each right
(except rights which have previously become null and void as described
above), will entitle its holder to purchase, at the right's
then-current exercise price, shares of the acquiring Company's common
stock having a market value of two times the exercise price of the
right.
(8) BENEFIT PLANS
At December 31, 1998, the Company had three plans under which options
could be granted: the 1990 Stock Option Plan (90 Plan), the 1995 Stock
Option Plan (95 Plan) and the 1998 Long-Term Incentive Plan (98 Plan).
Under the 90 Plan, all options available have been granted and are
fully vested. Any unexercised options will expire in the year 2000.
The 95 Plan was approved by the shareholders on May 10, 1996 and
1,071,000 shares are reserved for issuance under this plan. Options
granted under the 95 Plan have a maximum ten year term and are
exercisable at the rate of 20% immediately upon grant and 20% on each
of the first four anniversaries of the grant date. The 98 Plan was
approved by the shareholders on July 17, 1998, and the aggregate
number of shares of common stock which may be issued under the 98 Plan
is limited to 1,000,000. Under the 98 Plan, stock options (including
incentive stock options and non-qualified stock options), stock
appreciation rights and restricted stock awards may be made. No awards
were outstanding under the 98 Plan at December 31, 1998. Options for
579,710 shares were granted to Glenn W. Anderson at an exercise price
$5.75 per share. The exercise price of each outstanding option equals
the market price of the Company's stock on the date of grant.
A summary of the status of the Company's outstanding options as of
December 31, 1998 and 1997, and changes during the years ended
December 31, 1998 and 1997 is presented below:
1998 1997
------------------------------- ---------------------------
Underlying Weighted Average Underlying Weighted
Shares Exercise Price Shares Average
Options ---------- ---------------- ---------- Exercise Price
------- --------------
Outstanding, beginning of period 1,352,713 $ 8.32 1,352,786 $ 8.38
Granted 835,814 $ 5.93 158,425 $ 8.60
Exercised (39,539) $ 2.14 (30,749) $ 2.94
Forfeited (608,348) $ 10.36 (127,749) $ 10.63
---------- ----------
Outstanding, end of period 1,540,640 $ 6.42 1,352,713 $ 8.32
========== ==========
Options exercisable at end of period 1,238,104 711,978
Weighted-average fair value of
options granted during the period $ 1.96 $ 4.82
60
61
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The following table summarizes information for the stock options
outstanding at December 31, 1998:
Options Outstanding Options Exercisable
------------------- -------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
$ 2 to 9 1,188,801 4.65 years $ 5.18 1,027,001 $ 4.93
$ 9 to 11 351,839 7.36 years $ 10.63 211,103 $ 10.63
---------- ----------
$ 2 to 11 1,540,640 5.27 years $ 6.42 1,238,104 $ 5.90
========== ==========
During 1998 options previously granted to officers under the 95 Plan
were exchanged for options of a lesser amount with an exercise price
equal to the market price of the Company's stock on the date of
exchange.
The Company applies APB 25 and related Interpretations in accounting
for its plans. Accordingly, no compensation cost has been recognized
for its stock option plans. Had compensation cost been determined
consistent with Statement 123 for the options granted, the Company's
net income and earnings per share would have been the pro forma
amounts indicated below:
Year ended Year ended
---------- ----------
December 31, 1998 December 31, 1997
----------------- -----------------
Net income (loss) As reported $ (11,662,564) $ 11,923,526
Pro forma $ (12,139,335) $ 11,368,790
Basic earnings (loss) per
share As reported $ (.56) $ .57
Pro forma $ (.58) $ .54
Diluted earnings (loss) per
share As reported $ (.56) $ .56
Pro forma $ (.58) $ .54
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions for 1998 and 1997, respectively: expected volatility of
32.6% and 33.6%, risk free interest rates of 5.04% and 5.88%, expected
dividend yields of 1.2% and .74% and an expected life of 7.5 years for
both periods presented.
61
62
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The Company has a profit sharing and trust plan for the benefit of its
eligible employees. The annual contributions amounted to $0, $396,838,
and $578,107 for 1998, 1997 and 1996, respectively.
The Company has an incentive compensation plan under which all full
time employees with at least six months of service participate.
Factors applicable to the incentive compensation plan are: Company's
net income level, individual performance, employee's salary and level.
(9) BUSINESS ACQUISITION
On October 23, 1998, the Company completed the acquisition of the
Lalande Financial Group, Inc. (Lalande Group). The Lalande Group
includes National Specialty Lines, Inc. (NSL) and De La Torre
Insurance Adjusters, Inc. (DLT). NSL is a managing general agency
which markets nonstandard personal auto insurance through
approximately 800 retail agencies in Florida. DLT is an automobile
claims adjusting firm that provides claim services on NSL produced
business and to outside parties. The purchase price was for $18
million in cash paid at closing plus up to an additional $22 million
in cash to be paid over approximately five years contingent upon the
performance of the Lalande Group. The purchase was financed with a
commercial bank borrowing of $18 million (note 4). The transaction
resulted in goodwill of approximately $17.2 million which is being
amortized on a straight line basis over 25 years. The acquisition was
accounted for as a purchase and the results of operations since the
acquisition date have been consolidated.
The pro forma unaudited results of operations for the years ended
December 31, 1998 and 1997, assuming the purchase of the Lalande Group
has been consummated on January 1, 1997, are presented below:
1998 1997
--------- ---------
(Amounts in thousands,
except per share data)
Revenues $ 112,039 122,724
Net income (loss) $ (12,285) 10,857
Basic earnings (loss) per share $ (0.59) 0.52
Diluted earnings (loss) per share $ (0.59) 0.51
(10) CONTINGENCIES
The Company is a defendant in the proceedings styled William Steiner
v. Joseph D. Macchia, Joel C. Puckett, Daniel J. Coots and GAINSCO,
INC., filed in the United States District Court for the Northern
District of Texas, Fort Worth Division. In that case, the plaintiff
asserts claims on behalf of a putative class of persons who purchased
the Company's common stock between August 6, 1997 and July 16, 1998,
inclusive. The plaintiff asserts claims under sections 10(b) and 20(a)
of the Securities Exchange Act of 1934, alleging that the Company's
financial results did not reflect the Company's true financial
position and results of operations in accordance with generally
accepted accounting principles in that they understated reserves for
claims and claim adjustment expenses. The Company believes that it has
meritorious defenses to plaintiff's claims and intends to vigorously
defend the action.
In the normal course of its operations, the Company has been named as
defendant in various legal actions seeking payments for claims denied
by the Company and other monetary damages. The Company's management
believes that unpaid claims and claim adjustment expenses are adequate
to cover possible liability from lawsuits which arise in the normal
course of its insurance business. In the opinion of the Company's
management the ultimate liability, if any, resulting from the
disposition of all claims will not have a material adverse effect on
the Company's consolidated financial position or results of
operations. The Company does not have any financial instruments where
there is off-balance-sheet-risk of accounting loss due to credit or
market risk. There is credit risk in the premiums receivable and
reinsurance balances receivable of the Company. At December 31, 1998
and 1997 the Company did not have a premiums receivable balance nor a
reinsurance balance receivable from any one entity that was material
with regard to shareholders' equity.
62
63
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(11) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table contains selected unaudited consolidated financial
data for each quarter (in thousands, except per share data):
1998 Quarter 1997 Quarter
--------------------------------------- --------------------------------------
Fourth Third Second First Fourth Third Second First
------ ----- ------ ----- ------ ----- ------ -----
Gross premiums
written $ 26,144 22,722 22,224 20,072 26,763 23,055 26,938 23,020
Total revenues $ 25,980 26,373 26,532 26,742 28,816 28,484 28,850 28,795
Total expenses $ 26,764 25,012 32,702 42,429 25,381 27,253 22,980 24,570
Net income (loss) $ 69 1,397 (3,770) (9,359) 2,887 1,464 4,409 3,164
Earnings (loss) per
share:
Basic $ .00 .07 (.18) (.45) .14 .07 .21 .15
Diluted $ .00 .07 (.18) (.45) .14 .07 .21 .15
Common share
prices (a)
High 7 5/16 8 1/16 9 7/8 8 13/16 10 3/16 9 15/16 9 3/8 10
Low 5 7/8 5 3/4 6 7 7/8 8 8 1/2 8 1/8 8 3/4
(a) As reported by the New York Stock Exchange.
63
64
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION
The Board of Directors and Shareholders
GAINSCO, INC:
Under date of February 19, 1999, we reported on the consolidated balance sheets
of GAINSCO, INC. and subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of operations, shareholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 1998. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
financial statement schedules as listed in the accompanying index. These
financial statement schedules are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
KPMG LLP
Dallas, Texas
February 19, 1999
64
65
Schedule I
GAINSCO, INC. AND SUBSIDIARIES
Summary of Investments - Other
Than Investments in Related Parties
(Amounts in thousands)
As of December 31
---------------------------------------------------------------------------
1998 1997 1996
----------------------- ----------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Type of Investment Cost Value Cost Value Cost Value
---------- ---------- ---------- ---------- ---------- ----------
Fixed Maturities:
Bonds held to maturity:
U.S. government
securities $ 5,668 5,887 5,404 5,476 7,731 7,748
Tax exempt state and
municipal bonds 54,120 55,091 84,330 85,052 97,199 97,977
Bonds available for sale:
U.S. government
securities 13,734 13,969 27,322 27,404 -- --
Tax exempt state
and municipal bonds 130,072 131,619 94,700 96,246 76,880 77,644
595 595 595 595 595 595
Certificates of deposit
316 269 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Marketable securities
204,505 207,430 212,351 214,773 182,405 183,964
---------- ---------- ---------- ---------- ---------- ----------
Short-term investments 4,749 4,749 2,823 2,823 20,662 20,662
---------- ---------- ---------- ---------- ---------- ----------
Total investments $ 209,254 212,179 215,174 217,596 203,067 204,626
========== ========== ========== ========== ========== ==========
See accompanying independent auditors' report on supplementary information.
65
66
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Balance Sheets
December 31, 1998 and 1997
Assets 1998 1997
------------- -------------
Investments in subsidiaries $ 104,547,799 117,359,673
Cash 1,178 1,614
Net receivables from subsidiaries 2,121,291 1,308,015
Short-term investments 43,538 83,475
Other assets 125,218 191,716
Goodwill 17,057,772 --
------------- -------------
Total assets 123,896,796 118,944,493
============= =============
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable $ 47,208 16,933
Note payable 18,000,000 --
Dividends payable 365,690 365,300
------------- -------------
Total liabilities 18,412,898 382,233
------------- -------------
Shareholders' equity:
Preferred stock ($100 par value, 10,000,000
shares authorized, none issued) -- --
Common stock ($.10 par value, 250,000,000
shares authorized, 21,740,657 issued at
December 31, 1998 and 21,701,118 issued at 2,174,066 2,170,112
December 31, 1997) 87,778,548 87,697,754
Additional paid-in capital 1,138,941 1,058,268
Accumulated other comprehensive income 22,086,868 35,188,460
Retained earnings
Treasury stock, at cost (844,094 shares in 1998 and (7,694,525) (7,552,334)
------------- -------------
826,894 shares in 1997) 105,483,898 118,562,260
------------- -------------
Total shareholders' equity
Total liabilities and shareholders' equity $ 123,896,796 118,944,493
============= =============
See accompanying notes to condensed financial statements.
See accompanying independent auditors' report on supplementary information.
66
67
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Statements of Operations
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
Revenues - dividend income $ 3,900,000 3,700,000 9,900,000
Investment income 2,255 3,779 --
Expenses - operating expenses (2,342,404) (1,367,178) (1,191,222)
------------ ------------ ------------
Operating income before
Federal income tax benefit 1,559,851 2,336,601 8,708,778
Federal income taxes:
Current benefit (354,324) (455,679) (467,559)
Deferred benefit (439,874) -- --
------------ ------------ ------------
(794,198) (455,679) (467,559)
------------ ------------ ------------
Income before equity in undistributed
income of subsidiaries 2,354,049 2,792,280 9,176,337
Equity in undistributed income (loss) of
subsidiaries (14,016,613) 9,131,246 6,843,230
------------ ------------ ------------
Net income (loss) $(11,662,564) 11,923,526 16,019,567
============ ============ ============
Earnings (loss) per share:
Basic $ (.56) .57 .75
============ ============ ============
Diluted $ (.56) .56 .74
============ ============ ============
See accompanying notes to condensed financial statements.
See accompanying independent auditors' report on supplementary information.
67
68
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Statements of Shareholders' Equity and Comprehensive Income
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
Common Stock:
Balance at beginning of year $ 2,170,112 2,167,037 2,163,748
Exercise of options to purchase
shares (39,539 in 1998, 30,749
in 1997 and 32,888 in 1996) 3,954 3,075 3,289
------------ ------------ ------------
Balance at end of year 2,174,066 2,170,112 2,167,037
------------ ------------ ------------
Additional paid-in capital:
Balance at beginning of year 87,697,754 87,610,379 87,543,175
Exercise of options to purchase
shares (39,539 in 1998, 30,749
in 1997 and 32,888 in 1996) 80,794 87,375 67,204
------------ ------------ ------------
Balance at end of year $ 87,778,548 87,697,754 87,610,379
------------ ------------ ------------
(continued)
68
69
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Statements of Shareholders' Equity and Comprehensive Income
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
Retained earnings:
Balance at beginning of year $ 35,188,460 24,517,265 9,673,968
Net income (loss) for year (11,662,564) (11,662,564) 11,923,526 11,923,526 16,019,567 16,019,567
Cash dividends (1,462,070) (1,310,518) (1,176,270)
Tax benefit on non-qualified
stock options exercised 23,042 58,187 --
------------ ------------ ------------
Balance at end of year 22,086,868 35,188,460 24,517,265
------------ ------------ ------------
Accumulated other comprehensive
income:
Balance at beginning of year 1,058,268 496,675 1,073,597
Unrealized gains (losses) on
securities, net of reclassification
adjustment, net of tax 80,673 80,673 561,593 561,593 (576,922) (576,922)
------------ ----------- ------------ ------------ ------------ ------------
Comprehensive income (loss) (11,581,891) 12,485,119 15,442,645
=========== ============ ============
Balance at end of year 1,138,941 1,058,268 496,675
------------ ------------ ------------
Treasury stock:
Balance at beginning of year (7,552,334) (5,438,774) (1,012,592)
Change during year (142,191) (2,113,560) (4,426,182)
------------ ------------ ------------
Balance at end of year (7,694,525) (7,552,334) (5,438,774)
------------ ------------ ------------
Total shareholders' equity at end
of year $105,483,898 118,562,260 109,352,582
============ ============ ============
See accompanying notes to condensed financial statements.
See accompanying independent auditors' report on supplementary information.
70
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $(11,662,564) 11,923,526 16,019,567
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation and amortization 171,502 -- --
Change in investments in subsidiaries -- (5,390,712) --
Change in net receivables from subsidiaries (813,276) 5,981,096 (3,593,152)
Change in other assets 66,498 (32,224) (95,992)
Change in accounts payable 30,275 11,046 5,887
Change in other liabilities -- -- (900)
Equity in (income) loss of subsidiaries 14,016,612 (9,131,246) (6,843,230)
------------ ------------ ------------
Net cash provided by/(used for)
operating activities 1,809,047 3,361,486 5,492,180
------------ ------------ ------------
Cash flows from investing activities:
Net change in short-term investments 39,937 (83,475) --
Purchase of subsidiary (18,330,298) -- --
------------ ------------ ------------
Net cash used for investing
activities $(18,290,361) (83,475) --
------------ ------------ ------------
(continued)
71
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from (payments on) notes
payable $ 18,000,000 -- --
Cash dividends paid (1,461,679) (1,261,530) (1,129,024)
Proceeds from exercise of common
stock options 84,748 90,450 70,493
Treasury stock acquired (142,191) (2,113,560) (4,426,182)
------------ ------------ ------------
Net cash provided by/(used for)
financing activities 16,480,878 (3,284,640) (5,484,713)
------------ ------------ ------------
Net increase (decrease) in cash (436) (6,629) 7,467
Cash at beginning of year 1,614 8,243 776
------------ ------------ ------------
Cash at end of year $ 1,178 1,614 8,243
============ ============ ============
See accompanying notes to condensed financial statements.
See accompanying independent auditors' report on supplementary information.
71
72
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)
Notes to Condensed Financial Statements
December 31, 1998, 1997 and 1996
(1) GENERAL
The accompanying condensed financial statements should be
read in conjunction with the notes to the consolidated
financial statements for the years ended December 31, 1998,
1997 and 1996 included elsewhere in this Annual Report.
(2) RELATED PARTIES
During 1997, the Company made a capital contribution to
GAINSCO Service Corp. by forgiving an intercompany debt in
the amount of $5,390,712. The Company acquired the net assets
of the Lalande Group of $1,101,024 in October 1998 through a
100% purchase.
The following table presents the components of the Net
receivables from subsidiaries at December 31, 1998 and 1997:
Name of Subsidiary 1998 1997
--------- ---------
Agents Processing Systems, Inc. $ 883,224 883,224
GAINSCO Service Corp. 425,593 218,287
General Agents Insurance
Company of America, Inc. 812,474 206,504
--------- ---------
Net receivables from subsidiaries 2,121,291 1,308,015
========= =========
See accompanying independent auditors' report on supplementary information.
72
73
Schedule III
GAINSCO, INC. AND SUBSIDIARIES
Supplementary Insurance Information
Years ended December, 1998, 1997 and 1996
(Amounts in thousands)
Other
Reserves policy Amortization
Deferred for claims claims of deferred Other
policy and and Net Net Claims policy operating Net
acquisition claim Unearned benefits premiums investment & claim acquisition costs and premiums
Segment costs expenses premiums payable earned income expenses costs (1) expenses written
----------- -------- -------- -------- -------- ---------- -------- -------- --------- -------
Year ended December 31, 1998
Property and casualty insurance $11,320 136,798 63,602 5,835 92,203 9,803 86,353 (24,382) 40,255 88,559
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total $11,320 136,798 63,602 5,835 92,203 9,803 86,353 (24,382) 40,255 88,559
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Year ended December 31, 1997
Property and casualty insurance $11,618 113,227 64,005 9,393 102,256 9,731 62,086 (26,179) 37,082 98,139
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total $11,618 113,227 64,005 9,393 102,256 9,731 62,086 (26,179) 37,082 98,139
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Year ended December 31, 1996
Property and casualty insurance $12,634 105,691 65,255 6,219 106,793 9,161 58,379 (27,191) 39,847 108,251
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total $12,634 105,691 65,255 6,219 106,793 9,161 58,379 (27,191) 39,847 108,251
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
(1) Net of the amortization of deferred ceding commission income.
See accompanying independent auditors' report on supplementary information.
74
Schedule IV
GAINSCO, INC. AND SUBSIDIARIES
Reinsurance
Years ended December 31, 1998, 1997 and 1996
(Amounts in thousands, except percentages)
Percentage
Ceded to Assumed from of amount
Direct other other Net assumed
amount companies companies amount to net
---------- ---------- ---------- ---------- ----------
Year ended December 31, 1998:
Premiums earned:
Property and casualty $ 134,733 -- -- 134,733
Reinsurance -- (43,221) 691 (42,530)
---------- ---------- ---------- ----------
Total $ 134,733 (43,221) 691 92,203 0.7%
========== ========== ========== ========== ==========
Year ended December 31, 1997:
Premiums earned:
Property and casualty $ 137,071 -- -- 137,071
Reinsurance -- (34,815) -- (34,815)
---------- ---------- ---------- ----------
Total $ 137,071 (34,815) -- 102,256 -- %
========== ========== ========== ========== ==========
Year ended December 31, 1996:
Premiums earned:
Property and casualty $ 125,112 -- -- 125,112
Reinsurance -- (18,319) -- (18,319)
---------- ---------- ---------- ----------
Total $ 125,112 (18,319) -- 106,793 -- %
========== ========== ========== ========== ==========
See accompanying independent auditors' report on supplementary information.
74
75
Schedule VI
GAINSCO, INC. AND SUBSIDIARIES
Supplemental Information
Years ended December 31, 1998, 1997 and 1996
(Amounts in thousands)
Column A Column B Column C Column D Column E Column F
------------ ------------ ------------ ------------ ------------ ------------
Reserves
for unpaid Discount
Deferred claims if any,
Affiliation policy and claim deducted
with acquisition adjustment in Unearned Net earned
registrant costs expenses Column C premiums premiums
------------ ------------ ------------ ------------ ------------ ------------
Year ended December 31, 1998
Property and casualty insurance $ -- 11,320 136,798 -- 63,602 92,203
------------ ------------ ------------ ------------ ------------ ------------
Total $ -- 11,320 136,798 -- 63,602 92,203
============ ============ ============ ============ ============ ============
Year ended December 31, 1997
Property and casualty insurance $ -- 11,618 113,227 -- 64,005 102,256
------------ ------------ ------------ ------------ ------------ ------------
Total $ -- 11,618 113,227 -- 64,005 102,256
============ ============ ============ ============ ============ ============
Year ended December 31, 1996
Property and casualty insurance $ -- 12,634 105,691 -- 65,255 106,793
------------ ------------ ------------ ------------ ------------ ------------
Total $ -- 12,634 105,691 -- 65,255 106,793
============ ============ ============ ============ ============ ============
Column H Column I Column J Column K Column L
------------ ------------ ------------ ------------ ------------
Claim
and claim
adjustment
expenses Amortization Paid
incurred of deferred claims
Net related to: policy and claim Net
investment Current Prior acquisition adjustment premiums
income year years costs (1) expenses written
------------ ------------ ------------ ------------ ------------ ------------
Year ended December 31, 1998
Property and casualty insurance 9,803 59,635 26,718 (24,382) 68,288 88,559
------------ ------------ ------------ ------------ ------------ ------------
Total 9,803 59,635 26,718 (24,382) 68,288 88,559
============ ============ ============ ============ ============ ============
Year ended December 31, 1997
Property and casualty insurance 9,731 53,969 8,117 (26,179) 57,361 98,139
------------ ------------ ------------ ------------ ------------ ------------
Total 9,731 53,969 8,117 (26,179) 57,361 98,139
============ ============ ============ ============ ============ ============
Year ended December 31, 1996
Property and casualty insurance 9,161 53,037 5,342 (27,191) 49,762 108,251
------------ ------------ ------------ ------------ ------------ ------------
Total 9,161 53,037 5,342 (27,191) 49,762 108,251
============ ============ ============ ============ ============ ============
(1) Net of the amortization of deferred ceding commission income.
See accompanying independent auditors' report on supplementary information.
76
EXHIBIT INDEX
Sequentially
Exhibit Number Description No. Page
- -------------- ----------- --------
3.1 Restated Articles of Incorporation of Registrant (Exhibit
3.1)(1)
3.2 Articles of Amendment to the Articles of Incorporation dated
June 9, 1988 (Exhibit 3.2)(2)
3.6 Articles of Amendment to Articles of Incorporation effective
August 13, 1993 (Exhibit 3.6)(7)
3.7 Bylaws of Registrant as amended through May 1, 1998 (Exhibit
99.3) (12)
4.2 Rights Agreement, dated as of March 3, 1988, between the
Registrant and Team Bank/Fort Worth, N.A. (incorporated by
reference to Exhibit 1 to the Registrant's Current Report on
Form 8-K filed with the Securities and Exchange Commission on
March 15, 1988)(Exhibit 4.2)(3)
4.3 Amendment No. 1 dated as of March 5, 1990 to Rights Agreement
dated as of March 3, 1988 between GAINSCO, INC. and Team Bank
as Rights Agent (Exhibit 4.2)(5)
4.4 Amendment No. 2 dated as of May 25, 1993 to Rights Agreement
between GAINSCO, INC. and Society National Bank (successor to
Team Bank (formerly Texas American Bank/Fort Worth, N.A.)),
as Rights Agent (Exhibit 4.4)(7)
4.6 Revised Form of Common Stock Certificate (Exhibit 4.6) (10)
10.16 1990 Stock Option Plan of the Registrant (Exhibit 10.16)(4)
10.23 Surplus Debenture issued by GAINSCO County Mutual Insurance
Company. (Exhibit 10.23)(6)
10.24 Management Contract between GAINSCO County Mutual Insurance
Company and GAINSCO Service Corp. (Exhibit 10.24)(6)
10.25 Certificate of Authority and accompanying Commissioner's
Order granting Certificate of Authority, allowing for charter
amendments and extension of charter (Exhibit 10.25)(6)
10.27 Amendment to Surplus Debenture issued by GAINSCO County
Mutual Insurance Company (Exhibit 10.27)(7)
10.28 Agreement dated August 26, 1994 appointing Continental Stock
Transfer & Trust Company transfer agent and registrar
(Exhibit 10.28)(8).
77
Sequentially
Exhibit Number Description No. Page
- -------------- ----------- --------
10.29 Amendment No. 3 to Rights Agreement and appointment of
Continental Stock Transfer & Trust Company as Successor
Rights Agent, made September 30, 1994 (Exhibit 10.29)(8).
10.31 1995 Stock Option Plan of the Registrant (Exhibit 10.31) (9)
10.36 Form of Change of Control Agreements (Exhibit 10.36) (6) (11)
10.37 Employment Agreement dated April 25, 1998 between Glenn W.
Anderson and the Registrant (Exhibit 99.5) (13).
10.38 Change of Control Agreement for Glenn W. Anderson (Exhibit
99.7) (13).
10.39 Replacement Non-Qualified Stock Option Agreement dated July
24, 1998 between Glenn W. Anderson and the Registrant
(Exhibit 99.6) (14).
10.40 GAINSCO, INC. 1998 Long Term Incentive Plan (Exhibit 99.8)
(14).
10.41 Stock Purchase Agreement by and among GAINSCO, INC., Carlos
De la Torre, Rosa De la Torre, National Specialty Lines,
Inc., De La Torre Insurance Adjusters, Inc., and Lalande
Financial Group, Inc. dated August 17, 1998 relating to
acquisition of Lalande Group (Exhibit 99.6) (15).
10.42 Stock Purchase Agreement by and among GAINSCO, INC., McRae B.
Johnston, National Specialty Lines, Inc., and Lalande
Financial Group, Inc. dated August 17, 1998 relating to
acquisition of Lalande Group (Exhibit 99.7) (15).
10.43 Stock Purchase Agreement by and among GAINSCO, INC., Michael
Johnston and National Specialty Lines, Inc. dated August 17,
1998 relating to acquisition of Lalande Group (Exhibit 99.8)
(15).
10.44 Stock Purchase Agreement by and among GAINSCO, INC., Ralph
Mayoral and De La Torre Insurance Adjusters, Inc. dated
August 17, 1998 relating to acquisition of Lalande Group
(Exhibit 99.9) (15).
10.45 Employment Agreement by and among De La Torre Insurance
Adjusters, Inc., Carlos De la Torre and GAINSCO, INC.
(Exhibit 99.10) (15).
78
Sequentially
Exhibit Number Description No. Page
- -------------- ----------- --------
10.46 Employment Agreement by and among National Specialty Lines,
Inc., McRae B. Johnston and GAINSCO, INC. dated August 17,
1998 (Exhibit 99.11) (15).
10.47 Employment Agreement by and among National Specialty Lines,
Inc., Michael Johnston and GAINSCO, INC. dated August 17,
1998 (Exhibit 99.12) (15).
10.48 Employment Agreement by and among De La Torre Insurance
Adjusters, Inc., Ralph Mayoral and GAINSCO, INC. dated August
17, 1998 (Exhibit 99.13) (15).
10.49 Asset Purchase Agreement dated March 9, 1999 between the
Registrant, Agents Processing Systems, Inc. and Insurance
Business Solutions Incorporated (16).
11 (Not required to be filed as an Exhibit. See footnote (1)(m)
on page 51 of this 10-K Report for information called for by
number 11 of the Exhibit Table to Item 601 of SK)
22.2 Subsidiaries of Registrant (16)
24.2 Consent of KPMG LLP to incorporation by reference (16)
25.1 Powers of Attorney (16)
27 Financial Data Schedule (16)