<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended June 30, 1996 Commission File Number 1-9828
GAINSCO, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1617013
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Commerce Street Fort Worth, Texas 76102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (817) 336-2500
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 twelve (12) months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of June 30, 1996, there were 21,529,675 shares outstanding of the
registrant's Common Stock, $.10 par value.
<PAGE> 2
GAINSCO, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of June 30, 1996
(unaudited) and December 31, 1995 3
Consolidated Statements of Operations for the Three Months
and Six Months Ended June 30, 1996 and 1995 (unaudited) 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1996 and 1995 (unaudited) 6
Notes to Consolidated Financial Statements
June 30, 1996 and 1995 (unaudited) 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 16
SIGNATURE 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30
1996 December 31
Assets (unaudited) 1995
------ ----------- ----
<S> <C> <C>
Investments
Fixed maturities:
Bonds held to maturity, at amortized cost (fair
value: $96,806,730 - 1996, $98,421,877 - 1995) $ 97,365,975 97,301,350
Bonds available for sale, at fair value (Amortized cost:
$79,368,342 - 1996, $77,478,359 - 1995) 80,393,301 79,130,048
Certificates of deposit, at cost (which approximates
fair value) 620,000 620,000
Short-term investments, at cost (which approximates
fair value) 14,556,260 5,975,412
------------ ------------
Total investments 192,935,536 183,026,810
Cash 1,541,530 1,774,608
Accrued investment income 4,482,106 4,539,236
Premiums receivable (net of allowance for doubtful
accounts: $101,000 - 1996, $101,000 - 1995) 16,437,352 15,913,734
Reinsurance balances receivable 2,941,045 3,505,818
Ceded unpaid claims and claim adjustment expenses 27,392,476 24,650,606
Ceded unearned premiums 11,478,320 6,008,187
Deferred policy acquisition costs 12,241,110 12,114,681
Property and equipment (net of accumulated depreciation
and amortization: $4,283,371 - 1996, $3,812,976 -
1995) 6,525,386 6,561,792
Deferred Federal income taxes recoverable (note 1) 2,730,442 2,578,714
Management contract 1,812,570 1,837,570
Other assets 1,836,109 1,643,853
------------ ------------
Total assets $282,353,982 264,155,609
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30
1996 December 31
Liabilities and Shareholders' Equity (unaudited) 1995
- ------------------------------------ ----------- --------------
<S> <C> <C>
Liabilities:
Unpaid claims and claim adjustment expenses $ 102,891,461 95,011,463
Unearned premiums 59,364,700 53,525,323
Commissions payable 1,422,461 2,207,353
Accounts payable 4,428,383 4,635,715
Reinsurance balances payable 1,822,952 1,817,056
Deferred revenue 764,044 492,393
Drafts payable 2,805,725 2,569,265
Note payable - 1,750,000
Dividends payable (note 3) 269,122 269,066
Other liabilities 1,062,112 1,388,098
Current Federal income taxes payable (note 1) 227,788 1,047,981
------------- ------------
175,058,748 164,713,713
------------- ------------
Total liabilities
Shareholders' Equity (note 4):
Preferred stock ($100 par value, 10,000,000 shares
authorized, none issued) - -
Common stock ($.10 par value, 250,000,000 shares
authorized, 21,641,935 issued at June 30, 1996
and 21,637,481 issued at December 31, 1995) 2,164,194 2,163,748
Additional paid-in capital 87,552,276 87,543,175
Net unrealized gain on fixed maturities (note 1) 666,223 1,073,597
Retained earnings 17,925,133 9,673,968
Treasury stock (112,260 shares at June 30, 1996 and
December 31, 1995) (1,012,592) (1,012,592)
------------- ------------
Total shareholders' equity 107,295,234 99,441,896
------------- ------------
Total liabilities and shareholders' equity
$ 282,353,982 264,155,609
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months Six Months
ended June 30 ended June 30
----------------------------- ---------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned (note 2) $ 26,483,500 23,298,827 52,631,870 45,716,068
Net investment income 2,199,853 2,008,624 4,403,957 3,922,826
Net realized gains (note 1) 141,495 36,409 196,476 36,409
Insurance services 635,462 576,423 1,188,697 1,055,359
------------ ----------- ----------- -----------
Total revenues 29,460,310 25,920,283 58,421,000 50,730,662
------------ ----------- ----------- -----------
Expenses:
Claims and claim adjustment expenses
(note 2) 13,502,580 12,854,110 26,818,566 24,302,663
Commissions 6,422,833 4,808,732 11,897,238 9,853,064
Change in deferred policy acquisition costs (665,702) (592,098) (126,429) (1,047,700)
Underwriting and operating expenses 4,071,203 3,694,827 7,925,701 7,230,943
------------ ----------- ----------- -----------
Total expenses 23,330,914 20,765,571 46,515,076 40,338,970
------------ ----------- ----------- -----------
Income before Federal income taxes 6,129,396 5,154,712 11,905,924 10,391,692
Federal income taxes:
Current expense 1,726,838 1,272,223 3,048,944 2,425,735
Deferred expense (benefit) (112,280) 3,620 67,627 193,689
------------ ----------- ----------- -----------
Total taxes 1,614,558 1,275,843 3,116,571 2,619,424
------------ ----------- ----------- -----------
Net income $ 4,514,838 3,878,869 8,789,353 7,772,268
============ =========== =========== ===========
Net income per share .21 .18 .40 .36
=== === === ===
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months ended June 30
----------------------------------
1996 1995
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,789,353 7,772,268
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 2,382,855 2,094,027
Change in deferred Federal income taxes recoverable 67,627 193,689
Change in accrued investment income 57,130 262,516
Change in premiums receivable (523,618) (935,611)
Change in reinsurance balances receivable 564,773 (101,895)
Change in ceded unpaid claims and claim adjustment
expenses (2,741,870) (4,132,628)
Change in ceded unearned premiums (5,470,133) 2,003,827
Change in deferred policy acquisition costs (126,429) (1,047,700)
Change in management contract 25,000 25,000
Change in other assets (192,256) (205,512)
Change in unpaid claims and claim adjustment
expenses 7,879,998 9,377,784
Change in unearned premiums 5,839,377 1,532,444
Change in commissions payable (784,892) (1,101,625)
Change in accounts payable (207,332) (658,825)
Change in reinsurance balances payable 5,896 (1,881,790)
Change in deferred revenue 271,651 205,525
Change in drafts payable 236,460 (1,517,515)
Change in other liabilities (325,986) (444,996)
Change in current Federal income taxes payable (820,193) (175,251)
------------ -----------
Net cash provided by operating activities $ 14,927,411 11,263,732
------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
(continued)
6
<PAGE> 7
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months ended June 30
------------------------------------
1996 1995
-------------- -------------
<S> <C> <C>
Cash flows from investing activities:
Bonds held to maturity:
Matured $ 5,160,056 28,104,400
Purchased (6,658,645) (6,148,325)
Bonds available for sale:
Sold 10,287,583 4,102,961
Matured 4,236,100 -
Purchased (16,892,160) (26,781,404)
Certificates of deposit matured 200,000 200,000
Certificates of deposit purchased (200,000) (200,000)
Property and equipment purchased (433,989) (510,492)
Net change in short-term investments (8,580,848) (7,265,169)
------------ ------------
Net cash used for investing activities (12,881,904) (8,498,029)
------------ ------------
Cash flows from financing activities:
Payment on note payable (1,750,000) (1,750,000)
Cash dividends paid (538,132) (399,974)
Proceeds from exercise of stock options 9,547 7,130
Payment for fractional shares resulting from
stock dividend - (3,259)
------------ ------------
Net cash used by financing activities (2,278,585) (2,146,103)
------------ ------------
Net increase (decrease) in cash (233,078) 619,600
Cash at beginning of period 1,774,608 520,515
------------ ------------
Cash at end of period $ 1,541,530 1,140,115
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
(1) Summary of Accounting Policies
(a) Basis of Consolidation
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial
position of GAINSCO, INC. and subsidiaries (the "Company") as of June
30, 1996, the results of operations and the statements of cash flows
for the three months and six months ended June 30, 1996 and 1995, on
the basis of generally accepted accounting principles. The December
31, 1995 balance sheet included herein is derived from the
consolidated financial statements included in the Company's 1995
Annual Report to Shareholders.
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.
Reference is made to the Company's annual consolidated financial
statements for the year ended December 31, 1995 for a description of
all other accounting policies.
(b) Investments
Bonds are stated at amortized cost, bonds available for sale are
stated at fair value. Short-term investments are stated at cost. The
"specific identification" method is used to determine costs of
investments sold. Since investments not available for sale are
generally held until maturity or recovery of fair value, provisions
for possible losses are recorded only when the values have experienced
impairment considered "other than temporary". The bonds available for
sale had an unrealized gain of $666,223 at June 30, 1996, net of the
deferred tax expense of $358,736, and an unrealized gain at December
31, 1995 of $1,073,597 net of the deferred tax expense of $578,091.
Proceeds from the sale of debt securities totalled $9,655,183 for the
three months ended June 30, 1996 and $10,287,583 for the six months
ended June 30, 1996 and $4,102,961 for the three and six months ended
June 30, 1995. Realized gains were $155,051 for the three months
ended June 30, 1996 and $210,032 for the six months ended June 30,
1996 and $36,409 for the three months and six months ended June 30,
1995. Realized losses were $13,556 for the three months and six
months ended June 30, 1996. There were no realized
8
<PAGE> 9
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
losses for the three months or six months ended June 30, 1995.
(c) Federal Income Taxes
The Company and its subsidiaries file a consolidated Federal income
tax return. Deferred income tax items are accounted for under the
deferred method which provides for timing 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 $3,869,137 and $2,600,986 during the six months ended June
30, 1996 and 1995, respectively and $2,987,200 and $2,525,000 during
the three months ended June 30, 1996 and 1995, respectively.
(d) Earnings Per Share
The computation of earnings per share, as adjusted, is based on the
weighted average number of common shares outstanding, including common
stock equivalents. For the three months ended June 30, 1996 and 1995,
the weighted average number of common shares outstanding was
21,528,190 and 21,511,922 respectively, and common stock equivalents
were 298,360 and 303,462, respectively. For the six months ended June
30, 1996 and 1995, the weighted average number of common shares
outstanding was 21,526,494 and 21,511,543 respectively, and common
stock equivalents were 299,518 and 301,016, respectively. All
computations were made after giving retroactive effect to the stock
dividends and stock splits granted to shareholders.
(2) Reinsurance
The amounts deducted in the Consolidated Statements of Operations for
reinsurance ceded for the three months and six months ended June 30, 1996
and 1995, respectively, are set forth in the following table.
9
<PAGE> 10
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Premiums and claims ceded to the commercial automobile plans of Arkansas,
California, Louisiana, Mississippi and Pennsylvania are designated as "plan
servicing".
<TABLE>
<CAPTION>
Three months Six months
ended June 30 ended June 30
----------------------------- -------------------------------
1996 1995 1996 1995
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Premiums earned $ 452,256 1,415,700 955,396 3,195,268
Premiums earned -
plan servicing $ 1,195,108 1,226,998 2,634,599 2,470,268
Premiums earned -
fronting arrangements $ 3,210,703 - 4,989,464 -
Claims and claim
adjustment expenses $ 669,932 6,605,176 1,934,438 10,399,804
Claims and claim
adjustment expenses -
plan servicing $ 2,111,528 1,028,035 4,466,477 1,935,552
Claims and claim
adjustment expenses -
fronting arrangements $ 1,673,400 - 3,049,252 -
</TABLE>
The amounts included in the Consolidated Balance Sheets for reinsurance
ceded to the commercial automobile plans of Arkansas, California,
Louisiana, Mississippi and Pennsylvania, and the fronting arrangements as
of June 30, 1996 and December 31, 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Unearned premiums $ 2,511,928 2,674,804
Unearned premiums -
fronting arrangements $ 8,468,680 -
Unpaid claims and claim
adjustment expenses $ 10,853,311 9,066,308
Unpaid claims and claim
adjustment expenses -
fronting arrangements $ 1,473,407 -
</TABLE>
10
<PAGE> 11
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The Company remains directly liable to its policyholders for all policy
obligations and the reinsuring companies are obligated to the Company to
the extent of the reinsured portion of the risks. The Company does not
have a provision for uncollectible reinsurance and does not feel one is
warranted since all of the reinsurers on its treaties are rated "A" or
better by A.M. Best Company and/or the Company is adequately collateralized
on existing and anticipated claim recoveries.
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 as the payments are
made over time.
(3) Shareholders' Equity
As of June 30, 1996 there were 396,823 options, at an average exercise
price of $2.61 per share, that had been granted to officers and directors
of the Company under the 1990 Stock Option Plan and 929,876 options, at an
average exercise price of $10.625 per share, that had been granted to
officers and directors of the Company under the 1995 Stock Option Plan.
The Company's policy is to pay a quarterly cash dividend of $.0125 per
share every quarter until further action is taken by the Board of
Directors. A cash dividend of $269,122 was paid on July 15, 1996.
11
<PAGE> 12
GAINSCO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Gross premiums written for the second quarter of 1996 were approximately
$29,240,000 versus $25,762,000 for the comparable 1995 period representing a
14% increase. For the first six months of 1996 gross premiums written have
increased 7% from the comparable 1995 period. The following table presents,
for each major product line, gross premiums written for the periods indicated:
<TABLE>
<CAPTION>
Three months Six months
ended June 30 ended June 30
----------------------------------------- -------------------------------------------
1996 1995 1996 1995
---------------- ---------------- ---------------- ----------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial auto $ 16,201 55% $ 14,922 58% $ 30,244 56% $ 29,400 59%
Auto garage 7,150 25% 6,092 24% 13,638 25% 11,681 23%
General liability 5,651 19% 4,451 17% 9,489 18% 8,586 17%
Other lines 238 1% 297 1% 456 1% 620 1%
-------- ---- -------- ---- -------- --- -------- ---
Total $ 29,240 100% $ 25,762 100% $ 53,827 100% $ 50,287 100%
======== ==== ======== ==== ======== === ======== ===
</TABLE>
For the second quarter of 1996 COMMERCIAL AUTO is up 9%, AUTO GARAGE is up 17%
and GENERAL LIABILITY is up 27%. For the first six months of 1996 COMMERCIAL
AUTO is up 3%, AUTO GARAGE is up 17% and GENERAL LIABILITY is up 11%. All of
the major states, except Texas and Virginia, have recorded increases for the
first six months of 1996 over the comparable 1995 period. For the first six
months of 1996, gross premium written percentages by state/product line are as
follows: Texas commercial auto (21%), Kentucky commercial auto (8%),
Pennsylvania commercial auto (7%), Texas general liability (5%), and Florida
garage (5%) with no other state/product line comprising 5% or more. Premiums
earned increased 14% and 15% for the three months and six months ended June 30,
1996, respectively, as a result of increased premium writings.
Net investment income increased 10% from the second quarter of 1995 and
increased 12% from the first six months of 1995 as a result of growth in the
portfolio attributable to positive cash flows. Because of the Company's
profitable underwriting results the highest after tax income is achieved by
investing predominantly in tax-exempt securities. At June 30, 1996, 87% of the
Company's investments were in investment grade tax-exempt bonds with an average
maturity of approximately 3 years. Since the majority of the Company's
investments are tax-exempt, the yields appear lower than those of the industry;
however, the industry as a whole has a significantly greater percentage of its
investments in taxable securities with substantially longer maturities. On a
taxable equivalent basis the return on average investments is 6.6% for 1996 and
1995. The Company has the ability to hold its bond securities until their
maturity date. The Company does not actively trade its bonds, however, it does
classify certain bond securities as available
12
<PAGE> 13
for sale. At June 30, 1996, approximately 5% of the Company's investments were
in U.S. Treasury securities and 8% were in short-term money market funds. The
Company has not invested and does not intend to invest in derivatives or high-
yield ("junk") securities, nor equity securities in issuers of "junk" debt
securities. The Company does not have any non-performing fixed maturity
securities.
The Company recorded realized capital gains of $141,495 during the second
quarter of 1996 versus $36,409 for the comparable 1995 period, which brings
realized capital gains for the six months to $196,476 versus $36,409 for the
same period in 1995. All of these gains were generated from the bonds
available for sale category of the fixed maturity portfolio.
Insurance services revenues increased $59,039 in the second quarter of 1996
from the second quarter of 1995. For the first six months of 1996 an increase
of $133,338 has been recorded from the comparable 1995 period. The following
table presents the components:
<TABLE>
<CAPTION>
Three months Six months
ended June 30 ended June 30
--------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Computer software $ 158,432 196,879 239,314 293,432
Premium finance 91,039 70,132 174,793 123,669
Plan servicing 314,613 300,414 662,090 623,304
Other income 71,378 8,998 112,500 14,954
--------- -------- --------- ----------
Total $ 635,462 576,423 1,188,697 1,055,359
========= ======== ========= =========
</TABLE>
Revenues in the computer software operation are down 20% and 18% for the second
quarter and six months ended 1996, respectively, versus the comparable 1995
periods as a result of the second quarter of 1995 being a large installation
quarter. Revenues are expected to show moderate increases for the year.
Revenues from the premium finance operation are up 30% in the second quarter of
1996 over the second quarter of 1995 and are up 41% for the first six months of
1996. Through the first six months of 1996 amounts financed are $591,000 (24%)
above the comparable 1995 period. Premium finance notes receivable were
approximately $2,397,000 at June 30, 1996 versus $1,588,000 at June 30, 1995
and the average annualized return is at 16%.
Plan servicing revenues from commercial automobile plans increased $14,199 in
the second quarter of 1996 when compared to the second quarter of 1995 and are
$38,786 above the comparable six month period of 1995. Written premiums are
12% behind last year on a six month comparative basis as a result of decreases
in the Louisiana and Pennsylvania plans. The Company is continuing to pursue
management contracts with other states to administer their commercial
automobile plans.
Other income increased $62,380 and $97,546 in the second quarter and first six
months of 1996, respectively, over the comparable 1995 periods as a result of
fronting fee income from the Company's three fronting reinsurance arrangements.
13
<PAGE> 14
Claims and claim adjustment expenses (C & CAE) increased $648,470 in the second
quarter of 1996 from the second quarter of 1995. The C & CAE ratio was 51.0%
in the second quarter of 1996 versus 55.2% in 1995 for the comparable period.
C & CAE have increased $2,515,903 for the first six months of 1996 over the
comparable 1995 period. The C & CAE ratio was 51.0% for the first six months
of 1996 and 53.2% for the comparable 1995 period. Five separate hailstorms
which occurred during the second quarter of 1995 accounted for approximately
$884,000 in claims or 3.8 points of the second quarter C & CAE ratio and 1.9
points of the six month C & CAE ratio. The frequency and magnitude of these
storms was very unusual.
The ratio of commissions to gross premiums written was 22% for the second
quarter of 1996 versus 19% for the comparable 1995 period and was 22% for the
first six months of 1996 as compared to 20% for the comparable 1995 period.
Commissions increased in both of the 1996 periods over the 1995 periods because
in the 1995 periods commission income was being earned and recorded against
commission expense. This commission income was generated from a 5% quota-share
reinsurance treaty that was commuted at the end of 1995. The ratio of
commissions to premiums earned is higher in the 1996 periods than in the 1995
periods for the same reason.
The change in deferred policy acquisition costs resulted in a net increase to
income of $665,702 for the second quarter of 1996 versus a net increase of
$592,098 in the second quarter of 1995. A net increase of $126,429 was
recorded for the first six months of 1996 versus a net increase of $1,047,700
in the comparable 1995 period. The change in the amount of the increase in DAC
between comparable periods is directly related to the rate at which unearned
premiums are growing as a result of the growth rate of premium writings. Since
DAC (asset) is a function of unearned premiums (liability) the change in DAC
correlates to the change in unearned premiums. The ratio of DAC to net
unearned premiums was 26% at June 30, 1996 and 1995.
Underwriting and operating expenses were up 10% in 1996 over the comparable
quarter and comparable six month period of 1995, primarily as a result of
increases in personnel costs resulting from additional staffing and annual
merit increases. Expenses are in a 15-15.5% range as a percent of revenues,
(excluding investment income and realized gains), for all periods presented.
For the first six months of 1996, net income was 13% above the comparable 1995
period. The GAAP combined ratio for the insurance operations was 85.3% for the
first six months of 1996 versus 84.4% for the first six months of 1995.
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 the fixed maturity investments. At June 30, 1996 the
Company held short-term investments and cash of $16,097,790 which 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 2.7 years. The fair value of the fixed maturity portfolio at June
30, 1996 was $465,714 above amortized cost.
The increase in investments and cash is attributable to the positive cash flows
generated from operating activities. Ceded unpaid claims and claim adjustment
expenses have increased largely as a result of an
14
<PAGE> 15
increase in CAIP claims and claims from the fronting reinsurance arrangements
which are fully collectible from the respective reinsurers. Ceded unearned
premiums have increased primarily because of the increase in fronting
reinsurance.
Unpaid claims and claim adjustment expenses have increased as a result of the
Company's growth in writings. Unearned premiums increased due to the increase
in fronting reinsurance mentioned previously. Commissions payable have
decreased as a result of the annual contingent commission payments to the
general agents in the first quarter of 1996. The note payable was repaid
during the second quarter (see note 3 of Notes to Consolidated Financial
Statements). The Company's liquidity position remains strong as a result of
cash flows from underwriting and investment activities.
Net unrealized gains on fixed maturities of $666,223 were recorded during the
first six months of 1996 as a result of an increase in the fair value of the
bonds available for sale.
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.
15
<PAGE> 16
PART II. OTHER INFORMATION
GAINSCO, INC. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 -- Financial Data Schedule.
The statement re computation of per share earnings is included in
the notes to consolidated financial statements.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized to sign on behalf of the Registrant as
well as in his capacity as Chief Financial Officer.
GAINSCO, INC.
Date: August 9, 1996
By /s/ Daniel J. Coots .
----------------------------------
Daniel J. Coots
Senior Vice President, Treasurer and
Chief Financial Officer
17
<PAGE> 18
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 80,393,301
<DEBT-CARRYING-VALUE> 97,365,975
<DEBT-MARKET-VALUE> 96,806,730
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 192,935,536
<CASH> 1,541,530
<RECOVER-REINSURE> 2,941,045
<DEFERRED-ACQUISITION> 12,241,110
<TOTAL-ASSETS> 282,353,982
<POLICY-LOSSES> 102,891,461
<UNEARNED-PREMIUMS> 59,364,700
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 2,164,194
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 282,353,982
52,631,870
<INVESTMENT-INCOME> 4,403,957
<INVESTMENT-GAINS> 196,476
<OTHER-INCOME> 1,188,697
<BENEFITS> 26,818,566
<UNDERWRITING-AMORTIZATION> (126,429)
<UNDERWRITING-OTHER> 7,925,701
<INCOME-PRETAX> 11,905,924
<INCOME-TAX> 3,116,571
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,789,353
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
