In the session of the Texas Legislature ended June 2, 2003, changes were made in the statutes governing the regulatory treatment of county mutual insurance companies in Texas. These changes prejudice the rights of the Company to receive contingent payments from Liberty, depending upon how the statutory changes and the Company’s agreement with Liberty are interpreted. The Company contacted Liberty to discuss its obligation to make the contingent payments in light of the recent legislation. Liberty’s position is that they have no obligation to make any of the $9 million contingent payments under the agreement. The Company has fully reserved its receivable due from Liberty of $484,967 (representing the excess of the Company’s cost basis in GCM over the $1,000,000 received from Liberty at the closing of the sale transaction) as potentially uncollectible because of the statutory changes in 2003.
Net premiums earned increased 14% in 2004 primarily due to growth from nonstandard personal auto in Florida. The 43% decrease in 2003 was primarily the result of discontinuing the writing of commercial lines in 2002.
Recapitalization Transactions. In the recapitalization which closed on January 21, 2005, of the 31,620 shares of Series A Preferred Stock held by GMSP and called in 2001 for redemption on January 1, 2006 at a redemption price of approximately $31.6 million, 13,500 shares (redemption value of $13.5 million) were exchanged for 19,125,612 shares of Common Stock. The remaining 18,120 shares of Series A Preferred Stock (which had been called for redemption in 2006 and have a redemption value of approximately $18.1 million) became redeemable at the option of the holders on January 1, 2011, and became entitled to receive cash dividends at the rate of 6% per annum until January 1, 2006 and 10% per annum thereafter until redemption. Those remaining 18,120 shares of Series A Preferred Stock remain convertible into 3,552,941 shares of Common Stock at $5.10 per share, continue to be entitled to vote on an as-converted basis, and remain redeemable at the option of the Company commencing June 30, 2005 at a price equal to stated value plus accrued dividends. The Company received an option to purchase all of the Series C Preferred Stock from GMSP, which the Company exercised on January 21, 2005 as part of the recapitalization for approximately $3.4 million from the proceeds of the sale of Common Stock in the recapitalization. The expiration date of GMSP’s Series B Warrant to purchase 1,550,000 shares of Common Stock for $2.5875 per share was extended to January 1, 2011. The investment management agreements of the Company and its insurance company subsidiaries with GMSP were terminated, as were the agreements entered into between the Company and GMSP in connection with their 1999 and 2001 transactions.
• Nonrecurring non-cash compensation expense of $330,000 on grant of 200,000 shares of Common Stock to Mr. Anderson at fair value of $1.65 per share (the actual market price per share at grant date).
As a result of losses in prior years, as of December 31, 2004 the Company has net operating loss carryforwards for tax purposes aggregating $72,200,837. These net operating loss carryforwards of $1,124,708, $22,806,147, $33,950,174, $13,686,532 and $633,276, if not utilized, will expire in 2018, 2020, 2021, 2022 and 2023, respectively. The tax benefit of the net operating loss carryforwards is $72,200,837, which is calculated by applying the Federal statutory income tax rate of 34% against the net operating loss carryforwards of $24,548,285.
As of December 31, 2004, in respect of its nonstandard personal auto line, the Company had $13,760,551 in unpaid C & CAE. These claims generally are shorter tailed than the Company’s commercial and runoff lines claims. At December 31, 2004, the Company had 1,568 nonstandard personal auto claims. The average nonstandard personal auto claim at December 31, 2004 was approximately $8,776 per claim, at December 31, 2003 the average nonstandard personal auto claim was approximately $8,522.