<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, 1997 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, 1997, there were 20,997,947 shares outstanding of the
registrant's Common Stock, $.10 par value.
<PAGE> 2
GAINSCO, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of June 30, 1997
(unaudited) and December 31, 1996 3
Consolidated Statements of Operations for the
Three Months and Six Months Ended
June 30, 1997 and 1996 (unaudited) 5
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1997
and 1996 (unaudited) 6
Notes to Consolidated Financial Statements
June 30, 1997 and 1996 (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
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30
Assets 1997 December 31
------ (unaudited) 1996
------------ ------------
<S> <C> <C>
Investments
Fixed maturities:
Bonds held to maturity, at amortized cost (fair
value: $101,516,711 - 1997, $105,725,155 - 1996) $100,918,814 104,930,347
Bonds available for sale, at fair value (Amortized cost:
$103,696,768 - 1997, $76,879,562 - 1996) 104,349,613 77,643,677
Certificates of deposit, at cost (which approximates
fair value) 595,000 595,000
Short-term investments, at cost (which approximates
fair value) 3,128,876 20,662,282
------------ ------------
Total investments 208,992,303 203,831,306
Cash 330,121 1,044,740
Accrued investment income 4,796,964 4,308,185
Premiums receivable (net of allowance for doubtful
accounts: $101,000 - 1997 and 1996) 14,536,243 15,824,543
Reinsurance balances receivable 2,334,149 2,156,326
Ceded unpaid claims and claim adjustment expenses 27,223,318 26,713,154
Ceded unearned premiums 18,657,496 16,280,013
Deferred policy acquisition costs 12,028,798 12,633,938
Property and equipment (net of accumulated depreciation
and amortization: $5,296,878 - 1997, $4,778,524 -1996) 7,074,343 6,981,380
Current Federal income taxes -- 424,148
Deferred Federal income taxes recoverable (note 1) 2,998,477 2,956,510
Management contract 1,762,570 1,787,570
Other assets 1,801,395 1,903,963
------------ ------------
Total assets $302,536,177 296,845,776
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30
1997 December 31
Liabilities and Shareholders' Equity (unaudited) 1996
------------------------------------ -------------- ------------
<S> <C> <C>
Liabilities:
Unpaid claims and claim adjustment expenses $ 109,610,184 105,691,588
Unearned premiums 65,167,112 65,255,153
Commissions payable 903,314 2,689,337
Accounts payable 4,408,159 4,670,947
Reinsurance balances payable 901,812 1,057,923
Deferred revenue 830,728 593,300
Drafts payable 4,462,950 6,219,044
Dividends payable (note 3) 314,970 316,312
Other liabilities 522,830 999,590
Current Federal income taxes payable (note 1) 76,912 --
-------------- --------------
Total liabilities 187,198,971 187,493,194
-------------- --------------
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, 21,701,118 issued at June 30, 1997
and 21,670,369 issued at December 31, 1996) 2,170,112 2,167,037
Additional paid-in capital 87,697,754 87,610,379
Net unrealized gain on fixed maturities (note 1) 424,350 496,675
Retained earnings 31,509,126 24,517,265
Treasury stock (703,171 shares at June 30, 1997 and
582,962 shares at December 31, 1996) (6,464,136) (5,438,774)
-------------- --------------
Total shareholders' equity 115,337,206 109,352,582
-------------- --------------
Total liabilities and shareholders' equity
$ 302,536,177 296,845,776
============== ==============
</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
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned (note 2) $ 25,752,768 26,483,500 51,628,170 52,631,870
Net investment income 2,407,520 2,199,853 4,694,496 4,403,957
Net realized gains (losses) (note 1) (5,025) 141,495 36,486 196,476
Insurance services 694,610 635,462 1,285,641 1,188,697
------------ ------------ ------------ ------------
Total revenues 28,849,873 29,460,310 57,644,793 58,421,000
------------ ------------ ------------ ------------
Expenses:
Claims and claim adjustment expenses
(note 2) 13,114,755 13,502,580 28,322,391 26,818,566
Commissions 5,490,476 6,422,833 10,225,280 11,897,238
Change in deferred policy acquisition costs (137,495) (665,702) 605,140 (126,429)
Underwriting and operating expenses 4,511,250 4,071,203 8,395,608 7,925,701
------------ ------------ ------------ ------------
Total expenses 22,978,986 23,330,914 47,548,419 46,515,076
------------ ------------ ------------ ------------
Income before Federal income taxes 5,870,887 6,129,396 10,096,374 11,905,924
Federal income taxes:
Current expense 1,525,119 1,726,838 2,525,950 3,048,944
Deferred expense (benefit) (63,642) (112,280) (3,023) 67,627
------------ ------------ ------------ ------------
Total taxes 1,461,477 1,614,558 2,522,927 3,116,571
------------ ------------ ------------ ------------
Net income $ 4,409,410 4,514,838 7,573,447 8,789,353
============ ============ ============ ============
Net income per share .21 .21 .36 .40
============ ============ ============ ============
</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
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,573,447 8,789,353
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 2,412,293 2,382,854
Change in deferred Federal income taxes recoverable (3,023) 67,627
Change in accrued investment income (488,779) 57,130
Change in premiums receivable 1,288,300 (523,618)
Change in reinsurance balances receivable (177,823) 564,773
Change in ceded unpaid claims and claim adjustment
expenses (510,164) (2,741,870)
Change in ceded unearned premiums (2,377,483) (5,470,133)
Change in deferred policy acquisition costs 605,140 (126,429)
Change in management contract 25,000 25,000
Change in other assets 102,568 (192,256)
Change in unpaid claims and claim adjustment
expenses 3,918,596 7,879,998
Change in unearned premiums (88,041) 5,839,377
Change in commissions payable (1,786,023) (784,892)
Change in accounts payable (262,788) (207,332)
Change in reinsurance balances payable (156,111) 5,896
Change in deferred revenue 237,428 271,651
Change in drafts payable (1,756,094) 236,460
Change in other liabilities (476,760) (325,986)
Change in current Federal income taxes payable 550,950 (820,193)
------------ ------------
Net cash provided by operating activities $ 8,630,633 14,927,410
------------ ------------
</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
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from investing activities:
Bonds held to maturity:
Matured $ 6,285,369 5,160,056
Purchased (1,572,422) (6,658,645)
Bonds available for sale:
Sold 13,292,540 10,287,583
Matured 3,778,959 4,236,100
Purchased (46,484,058) (16,892,160)
Certificates of deposit matured 200,000 200,000
Certificates of deposit purchased (200,000) (200,000)
Property and equipment purchased (611,317) (433,989)
Net change in short-term investments 17,533,406 (8,580,848)
------------ ------------
Net cash used for investing activities (7,777,523) (12,881,903)
------------ ------------
Cash flows from financing activities:
Payment on note payable -- (1,750,000)
Cash dividends paid (632,817) (538,132)
Proceeds from exercise of stock options 90,450 9,547
Treasury stock acquired (1,025,362) --
------------ ------------
Net cash used by financing activities (1,567,729) (2,278,585)
------------ ------------
Net decrease in cash (714,619) (233,078)
Cash at beginning of period 1,044,740 1,774,608
------------ ------------
Cash at end of period $ 330,121 1,541,530
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(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, 1997, the results of operations and
the statements of cash flows for the three months and six
months ended June 30, 1997 and 1996, on the basis of generally
accepted accounting principles. The December 31, 1996 balance
sheet included herein is derived from the consolidated
financial statements included in the Company's 1996 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, 1996 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 $424,350 at June 30, 1997, net
of the deferred tax expense of $228,495, and an unrealized
gain at December 31, 1996 of $496,675 net of the deferred tax
expense of $267,440.
Proceeds from the sale of bond securities $7,385,963 and
$6,432,879 for the three months ended June 30, 1997 and 1996,
respectively, and $13,292,540 and $10,287,583 for the six
months ended June 30, 1997 and 1996, respectively. Realized
gains were $16,905 and $155,051 for the three months ended
June 30, 1997 and 1996, respectively, and $67,789 and $210,032
for the six months ended June 30, 1997 and 1996, respectively.
Realized losses were $21,930 and $13,556 for the three months
ended June 30, 1997 and 1996, respectively, and $31,303 and
$13,556 for the six months ended June 30, 1997 and 1996,
respectively.
8
<PAGE> 9
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(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
$1,975,000 and $2,987,200 during the three months ended June
30, 1997 and 1996, respectively and $1,975,000 and $3,869,137
during the six months ended June 30, 1997 and 1996,
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, 1997 and 1996, the weighted average number of
common shares outstanding was 21,035,609 and 21,528,190,
respectively, and common stock equivalents were 243,510 and
298,360, respectively. For the six months ended June 30, 1997
and 1996, the weighted average number of common shares
outstanding was 21,065,057 and 21,526,494, respectively, and
common stock equivalents were 244,749 and 299,518,
respectively.
(2) Reinsurance
The amounts deducted in the Consolidated Statements of Operations for
reinsurance ceded for the three months and six months ended June 30,
1997 and 1996, 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
--------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Premiums earned $ 412,795 452,256 820,361 955,396
Premiums earned -
plan servicing $ 955,541 1,195,108 2,046,858 2,634,599
Premiums earned -
fronting arrangements $ 7,958,356 3,210,703 15,145,199 4,989,464
Claims and claim
adjustment expenses $ 118,894 669,932 (1,176,058) 1,934,438
Claims and claim
adjustment expenses -
plan servicing $ 1,695,341 2,111,528 2,719,114 4,466,477
Claims and claim
adjustment expenses -
fronting arrangements $ 6,759,954 1,673,400 11,436,143 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, 1997
and December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Unearned premiums $ 1,799,619 2,511,928
Unearned premiums -
fronting arrangements $16,377,793 8,468,680
Unpaid claims and claim
adjustment expenses $10,460,869 10,853,311
Unpaid claims and claim
adjustment expenses -
fronting arrangements $ 7,139,399 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, 1997 there were 337,640 options, at an average exercise
price of $2.49 per share, that had been granted to officers and
directors of the Company under the 1990 Stock Option Plan and 940,648
options, at an average exercise price of $10.36 per share, that had
been granted to officers and directors of the Company under the 1995
Stock Option Plan.
In July 1996, the Board of Directors authorized the repurchase of up
to 500,000 shares of the Company's common stock. In November 1996,
the Board of Directors authorized the repurchase of an additional
500,000 shares of the Company's common stock. As of December 31,
1996, the Company had purchased 470,702 shares at a cost of
$4,426,182. During the first six months of 1997, the Company
purchased 120,209 shares at a cost of $1,025,362.
The Company's policy is to pay a quarterly cash dividend of $.015 per
share every quarter until further action is taken by the Board of
Directors. A cash dividend of $314,970 was paid on July 15, 1997.
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 1997 were approximately
$26,938,000 versus $29,240,000 for the comparable 1996 period representing an
8% decrease. For the first six months of 1997 gross premiums written have
decreased 7% from the comparable 1996 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
------------------------------------------ ------------------------------------------
1997 1996 1997 1996
------------------- ------------------- ------------------- -------------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial auto $ 15,477 57% $ 16,201 55% $ 29,235 59% $ 30,244 56%
Auto garage 6,216 23% 7,150 25% 11,328 23% 13,638 25%
General 4,749 18% 5,651 19% 8,620 17% 9,489 18%
liability
Other lines 496 2% 238 1% 775 1% 456 1%
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 26,938 100% $ 29,240 100% $ 49,958 100% $ 53,827 100%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
For the second quarter of 1997 COMMERCIAL AUTO is down 4%, AUTO GARAGE is down
13% and GENERAL LIABILITY is down 16%. For the first six months of 1997
COMMERCIAL AUTO is down 3%, AUTO GARAGE is down 17% and GENERAL LIABILITY is
down 9%. Auto garage is down largely because of competition in Florida,
Missouri, Pennsylvania, Texas and Virginia. General liability is down because
of the general contractors class in California on which the Company took
underwriting action in the past twelve months. This has been offset somewhat
with a 9% increase in Texas business due to underwriting changes made in the
past twelve months. For the first six months of 1997, gross premium written
percentages by state/product line are as follows: Texas commercial auto (22%),
Kentucky commercial auto (8%), Texas general liability (6%), Pennsylvania
commercial auto (6%), and Florida garage (5%) with no other state/product line
comprising 5% or more. Premiums earned decreased 3% and 2% for the three
months and six months ended June 30, 1997, respectively, as a result of the
decrease in premiums written.
Net investment income increased 9% from the second quarter of 1996 and
increased 7% from the first six months of 1996 as a result of growth in the
portfolio attributable to positive cash flows. Because of the Company's
profitable underwriting results the optimal after tax income is achieved by
investing predominantly in tax-exempt securities. At June 30, 1997, 89% of the
Company's investments were in investment grade tax-exempt bonds with an average
maturity of 3.25 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 6.3%
12
<PAGE> 13
for 1997 and 6.6% for 1996. 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 for sale.
At June 30, 1997, approximately 9% of the Company's investments were in U.S.
Treasury securities and 2% 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 net realized capital losses of $5,025 during the second
quarter of 1997 versus net realized capital gains of $141,495 for the
comparable 1996 period, which brings net realized capital gains for the six
months to $36,486 versus $196,476 for the same period in 1996. All of the
gains were generated from the bonds available for sale category of the fixed
maturity portfolio.
Insurance services revenues increased $59,148 in the second quarter of 1997
from the second quarter of 1996. For the first six months of 1997 an increase
of $96,944 has been recorded from the comparable 1996 period. The following
table presents the components:
<TABLE>
<CAPTION>
Three months Six months
ended June 30 ended June 30
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Plan servicing $ 251,761 314,613 521,074 662,090
Fee income 152,420 62,823 294,636 95,580
Computer software 209,334 158,432 302,172 239,314
Premium finance 69,204 91,039 148,998 174,793
Other income 11,891 8,555 18,761 16,920
---------- ---------- ---------- ----------
Total $ 694,610 635,462 1,285,641 1,188,697
========== ========== ========== ==========
</TABLE>
Plan servicing revenues from commercial automobile plans decreased $62,853 in
the second quarter of 1997 when compared to the second quarter of 1996 and are
$141,016 below the comparable six month period of 1996. Plan servicing written
premiums are 27% behind last year on a six month comparative basis as a result
of decreases in the larger plans. The Company is continuing to pursue
management contracts with other states to administer their commercial
automobile plans.
Fee income increased $89,597 and $199,056 for the second quarter and six months
ended 1997, respectively. This is a result of significant growth in the
fronting reinsurance operation.
Revenues in the computer software operation are up 32% and 26% for the second
quarter and six months ended 1997, respectively, versus the comparable 1996
periods as a result of several system sales during the second quarter of 1997.
Revenues are expected to show moderate increases for the year.
Revenues from the premium finance operation are down 24% in the second quarter
of 1997 from the second quarter of 1996 and are down 15% for the first six
months of 1997. Through the first six months
13
<PAGE> 14
of 1997 amounts financed are $762,000 (25%) below the comparable 1996 period.
The decrease is primarily attributable to certain taxicab programs that have
been put into run-off for underwriting reasons. Premium finance notes
receivable were approximately $1,920,000 at June 30, 1997 versus $2,397,000 at
June 30, 1996 and the average annualized return is at 13%.
Claims and claim adjustment expenses (C & CAE) decreased $387,825 in the second
quarter of 1997 from the second quarter of 1996. The C & CAE ratio was 50.9%
in the second quarter of 1997 versus 51.0% in 1996 for the comparable period.
C & CAE have increased $1,503,825 for the first six months of 1997 over the
comparable 1996 period. The C & CAE ratio was 54.9% for the first six months
of 1997 and 51.0% for the comparable 1996 period.
The ratio of commissions to gross premiums written was 20% for the second
quarter of 1997 versus 22% for the comparable 1996 period and it was 20% for
the first six months of 1997 as compared to 22% for the comparable 1996 period.
Commissions decreased in both of the 1997 periods from the 1996 periods as a
result of lower contingent commissions. The ratio of commissions to premiums
earned is lower in the 1997 periods than in the 1996 periods for the same
reason.
The change in deferred policy acquisition costs resulted in a net increase to
income of $137,495 for the second quarter of 1997 versus a net increase of
$665,702 in the second quarter of 1996. A net decrease of $605,140 was
recorded for the first six months of 1997 versus a net increase of $126,429 in
the comparable 1996 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, 1997 and 1996.
Underwriting and operating expenses were up 11% in the second quarter of 1997
over 1996 and are up 6% for the first six months of 1997 over 1996, primarily
as a result of increases in personnel costs resulting from additional staffing
and annual merit increases in 1997 and the takedown of bad debt reserves in
1996 which did not occur in 1997.
For the first six months of 1997, net income was 14% below the comparable 1996
period. The GAAP combined ratio for the insurance operations was 88.2% for the
first six months of 1997 versus 85.3% for the first six months of 1996.
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, 1997 the
Company held short-term investments and cash of $3,458,997 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 3 years. The fair value of the fixed maturity portfolio at June
30, 1997 was $1,250,742 above amortized cost.
The increase in investments and cash is attributable to the positive cash flows
generated from operating activities. Short-term investments decreased during
the second quarter of 1997 as a result of the Company
14
<PAGE> 15
shifting these funds into Bonds available for sale. Premiums receivable
decreased as a result of the lower level of premium writings in the second
quarter of 1997 than in the fourth quarter of 1996. Ceded unearned premiums
have increased primarily because of the increase in fronting reinsurance.
Unpaid claims and claim adjustment expenses have increased largely as a result
of the increase in fronting reinsurance. Commissions payable have decreased as
a result of the annual contingent commission payments to the general agents in
the first quarter of 1997. Drafts payable decreased because a large amount of
drafts were issued late in the fourth quarter of 1996 and were cleared in 1997.
The Company's liquidity position remains strong as a result of cash flows from
underwriting and investment activities.
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 4. Submission of Matters to a Vote of Security Holders.
The Corporation's Annual Meeting was held on May 12, 1997, in Fort
Worth, Texas. At the Annual Meeting, shareholders elected directors
for the ensuing year and ratified the selection by the Board of
Directors of KPMG Peat Marwick LLP as the Company's independent
auditors for the year ending December 31, 1997. The results of the
meeting were as follows:
<TABLE>
<CAPTION>
Election of Directors For Withheld
--------------------- --- --------
<S> <C> <C>
Joseph D. Macchia 18,584,992 84,830
Jack L. Johnson 18,586,492 83,330
Joel C. Puckett 18,556,905 112,917
Sam Rosen 18,580,818 89,004
Harden H. Wiedemann 18,557,584 112,238
John H. Williams 18,557,049 112,773
John C. Goff 18,561,910 107,912
Robert J. McGee 18,561,808 108,014
Daniel J. Coots 18,585,592 84,230
</TABLE>
Ratification of Selection of Auditors:
<TABLE>
<CAPTION>
Abstentions and Brokers
-----------------------
For Against Non-Votes
--- ------- ---------
<S> <C> <C>
18,617,563 34,876 17,383
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
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 8, 1997
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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 104,349,613
<DEBT-CARRYING-VALUE> 100,918,814
<DEBT-MARKET-VALUE> 101,516,711
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 208,992,303
<CASH> 330,121
<RECOVER-REINSURE> 2,334,149
<DEFERRED-ACQUISITION> 12,028,798
<TOTAL-ASSETS> 302,536,177
<POLICY-LOSSES> 109,610,184
<UNEARNED-PREMIUMS> 65,167,112
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,170,112
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 302,536,177
51,628,170
<INVESTMENT-INCOME> 4,694,496
<INVESTMENT-GAINS> 36,486
<OTHER-INCOME> 1,285,641
<BENEFITS> 28,322,391
<UNDERWRITING-AMORTIZATION> 605,140
<UNDERWRITING-OTHER> 8,395,608
<INCOME-PRETAX> 10,096,374
<INCOME-TAX> 2,522,927
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,573,447
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
