<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, 1999 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, 1999, there were 20,896,563 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, 1999
(unaudited) and December 31, 1998 3
Consolidated Statements of Operations for the Three Months
and Six Months Ended June 30, 1999 and 1998 (unaudited) 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998 (unaudited) 6
Notes to Consolidated Financial Statements
June 30, 1999 and 1998 (unaudited) 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 20
SIGNATURE 21
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30
1999 December 31
Assets (unaudited) 1998
-------------- --------------
<S> <C> <C>
Investments
Fixed maturities:
Bonds held to maturity, at amortized cost (fair
value: $45,104,105 - 1999, $60,978,145 - 1998) $ 44,690,191 59,788,233
Bonds available for sale, at fair value (Amortized cost:
$154,034,643 - 1999, $143,806,030 - 1998) 152,472,721 145,588,002
Certificates of deposit, at cost (which approximates
fair value) 595,000 595,000
Marketable securities, at fair value (cost: $338,860 - 1999,
$318,436 - 1998) 276,296 268,585
Short-term investments, at cost (which approximates
fair value) 6,331,608 4,749,139
-------------- --------------
Total investments 204,365,816 210,988,959
Cash 2,790,102 3,982,059
Accrued investment income 3,844,030 4,224,230
Premiums receivable (net of allowance for doubtful
accounts: $81,000 - 1999 and 1998) 22,628,345 14,885,063
Reinsurance balances receivable 4,097,861 2,392,576
Ceded unpaid claims and claim adjustment expenses 37,549,291 35,030,001
Ceded unearned premiums 26,264,954 22,387,599
Deferred policy acquisition costs 14,063,620 11,320,142
Property and equipment (net of accumulated depreciation
and amortization: $8,226,035 - 1999, $8,175,798 - 1998) 6,566,320 6,716,636
Current Federal income taxes (note 1) 4,949,083 5,031,950
Deferred Federal income taxes (note 1) 7,831,689 6,669,093
Management contract 1,662,571 1,687,571
Other assets 3,576,043 3,216,611
Goodwill (note 1) 16,682,764 17,057,772
-------------- --------------
Total assets $ 356,872,489 345,590,262
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30
1999 December 31
Liabilities and Shareholders' Equity (unaudited) 1998
--------------- ---------------
Liabilities:
<S> <C> <C>
Unpaid claims and claim adjustment expenses $ 132,768,926 136,798,149
Unearned premiums 80,144,688 63,601,677
Commissions payable 1,178,243 4,279,431
Accounts payable 4,536,167 7,311,920
Reinsurance balances payable 5,564,395 1,327,997
Deferred revenue 1,417,237 1,935,290
Drafts payable 6,022,741 5,834,846
Note payable (note 3) 18,000,000 18,000,000
Dividends payable (note 4) 365,690 365,690
Other liabilities 351,517 651,364
--------------- ---------------
Total liabilities 250,349,604 240,106,364
--------------- ---------------
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, 21,740,657 issued at June 30, 1999
and December 31, 1998) 2,174,066 2,174,066
Additional paid-in capital 87,778,548 87,778,548
Accumulated other comprehensive income (loss) (note 1) (1,055,916) 1,138,941
Retained earnings 25,320,712 22,086,868
Treasury stock (844,094 shares at June 30, 1999 and
December 31, 1998) (7,694,525) (7,694,525)
--------------- ---------------
Total shareholders' equity 106,522,885 105,483,898
--------------- ---------------
Total liabilities and shareholders' equity $ 356,872,489 345,590,262
=============== ===============
</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
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned (note 2) $ 26,483,282 23,145,612 49,252,858 46,774,152
Net investment income 2,293,499 2,561,501 4,486,949 4,969,123
Net realized gains (note 1) 41,352 173,157 658,899 313,867
Insurance services 412,403 651,654 1,158,610 1,217,220
------------ ------------ ------------ ------------
Total revenues 29,230,536 26,531,924 55,557,316 53,274,362
------------ ------------ ------------ ------------
Expenses:
Claims and claim adjustment expenses
(note 2) 17,078,584 22,136,341 31,778,521 53,696,490
Commissions 7,744,764 5,759,071 13,347,242 11,664,401
Change in deferred policy acquisition costs (1,916,515) 203,545 (2,743,478) 1,233,384
Interest expense (note 3) 292,256 -- 613,167 --
Amortization expense 172,196 -- 344,497 --
Underwriting and operating expenses 3,514,407 4,602,669 7,439,450 8,537,285
------------ ------------ ------------ ------------
Total expenses 26,885,692 32,701,626 50,779,399 75,131,560
------------ ------------ ------------ ------------
Income (loss) before Federal income taxes 2,344,844 (6,169,702) 4,777,917 (21,857,198)
Federal income taxes:
Current expense (benefit) 454,817 (1,163,032) 783,027 (3,964,991)
Deferred expense (benefit) 62,512 (1,236,957) 29,665 (4,763,169)
------------ ------------ ------------ ------------
Total taxes 517,329 (2,399,989) 812,692 (8,728,160)
------------ ------------ ------------ ------------
Net income (loss) $ 1,827,515 (3,769,713) 3,965,225 (13,129,038)
============ ============ ============ ============
Earnings (loss) per share:
Basic $ .09 (.18) .19 (.63)
============ ============ ============ ============
Diluted $ .09 (.18) .19 (.63)
============ ============ ============ ============
</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
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,965,225 (13,129,038)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization 2,046,848 2,471,421
Change in deferred Federal income taxes 29,665 (4,763,169)
Change in accrued investment income 380,200 477,476
Change in premiums receivable (7,743,282) 1,621,986
Change in reinsurance balances receivable (1,705,285) 1,289,675
Change in ceded unpaid claims and claim adjustment
expenses (2,519,290) (3,676,373)
Change in ceded unearned premiums (3,877,355) (2,093,338)
Change in deferred policy acquisition costs (2,743,478) 1,233,384
Change in other assets (359,432) (448,458)
Change in unpaid claims and claim adjustment
expenses (4,029,223) 27,114,334
Change in unearned premiums 16,543,011 (3,275,709)
Change in commissions payable (3,101,188) 129,996
Change in accounts payable (2,775,753) (506,474)
Change in reinsurance balances payable 4,236,398 1,940,871
Change in deferred revenue (518,053) 390,561
Change in drafts payable 187,895 (4,580,633)
Change in other liabilities (299,847) (14,504)
Change in current Federal income taxes 82,867 (3,964,991)
------------ ------------
Net cash provided by (used for) operating activities $ (2,200,077) 217,017
------------ ------------
</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
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from investing activities:
Bonds held to maturity:
Matured $ 14,620,000 18,991,745
Purchased -- (1,210,688)
Bonds available for sale:
Sold 16,048,827 14,283,646
Matured 4,231,042 1,020,000
Purchased (31,657,554) (16,210,764)
Certificates of deposit matured 200,000 290,000
Certificates of deposit purchased (200,000) (290,000)
Property and equipment disposed (purchased) 100,079 (273,848)
Marketable securities:
Purchased (20,424) --
Net change in short-term investments (1,582,469) (15,865,959)
------------ ------------
Net cash provided by investing activities 1,739,501 734,132
------------ ------------
Cash flows from financing activities:
Cash dividends paid (731,381) (730,299)
Proceeds from exercise of stock options -- 84,748
Treasury stock acquired -- (142,191)
------------ ------------
Net cash used for financing activities (731,381) (787,742)
------------ ------------
Net increase (decrease) in cash (1,191,957) 163,407
Cash at beginning of period 3,982,059 696,513
------------ ------------
Cash at end of period $ 2,790,102 859,920
============ ============
</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, 1999, the results of operations and
the statements of cash flows for the three months and six
months ended June 30, 1999 and 1998, on the basis of generally
accepted accounting principles. The December 31, 1998 balance
sheet included herein is derived from the consolidated
financial statements included in the Company's 1998 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, 1998 for
a description of all other accounting policies. Certain
reclassifications have been made to the 1998 amounts to
conform to the 1999 presentation.
(b) 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 accumulated other comprehensive income. 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 held until maturity,
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
loss of $1,015,249 at June 30, 1999, net of the deferred tax
benefit of $546,673 and an unrealized gain at December 31,
1998 of $1,158,282 net of the deferred tax expense of
$623,690. The marketable securities had an unrealized loss of
$40,667 at June 30, 1999, net of the deferred tax benefit of
$21,898, and an unrealized loss at December 31, 1998 of
$47,532.
Proceeds from the sale of bond securities totaled $4,984,092
and $7,279,122 for the three months ended June 30, 1999 and
1998, respectively, and $16,048,827 and $14,283,646 for the
six months ended June 30, 1999 and 1998, respectively.
Realized gains were $41,352 and $175,744 for the three months
ended June 30, 1999 and 1998, respectively, and $658,899 and
$324,933
8
<PAGE> 9
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
for the six months ended June 30, 1999 and 1998, respectively.
Realized losses were $0 and $2,587 for the three months ended
June 30, 1999 and 1998, respectively, and $0 and $11,066 for
the six months ended June 30, 1999 and 1998, respectively.
(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 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
$161 and $700,161 during the three months and six months ended
June 30, 1999, respectively. The Company paid no income taxes
during the 1998 periods.
(d) Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
Three months Six months
ended June 30 ended June 30
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 1,827,515 (3,769,713) 3,965,225 (13,129,038)
----------- ----------- ----------- -----------
Denominator:
Denominator for basic
earnings per share-
weighted average shares 20,896,563 20,869,448 20,896,563 20,868,323
Effect of dilutive securities:
Employee stock options 186,935 194,053 201,121 195,303
----------- ----------- ----------- -----------
Denominator for diluted
earnings per share-
weighted average shares
and assumed conversions 21,083,498 21,063,501 21,097,684 21,063,626
=========== =========== =========== ===========
Basic earnings (loss) per share $ .09 (.18) .19 (.63)
=========== =========== =========== ===========
Diluted earnings (loss) per share $ .09 (.18) .19 (.63)
=========== =========== =========== ===========
</TABLE>
9
<PAGE> 10
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(e) Accumulated 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. The
other comprehensive income amounts included in accumulated
comprehensive income consisted of net unrealized gains
(losses) on fixed maturities and marketable securities of
$(1,055,916) and $1,138,941 at June 30, 1999 and December 31,
1998, respectively. Total comprehensive income (loss)
consisting of net income (loss) and the changes in unrealized
gains (losses) on fixed maturities and marketable securities
was $1,237,795 and $(3,849,264) for the three months ended
June 30, 1999 and June 30, 1998, respectively, and $1,770,368
and $(13,465,666) for the six months ended June 30, 1999 and
June 30, 1998, respectively.
(f) 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.
(2) Reinsurance
The amounts deducted in the Consolidated Statements of Operations for
reinsurance ceded for the three months and six months ended June 30,
1999 and 1998, 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".
<TABLE>
<CAPTION>
Three months Six months
ended June 30 ended June 30
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Premiums earned $ 2,656,592 395,614 3,573,387 796,594
Premiums earned -
plan servicing $ 302,790 997,250 883,280 1,867,975
Premiums earned -
fronting arrangements $ 14,444,905 9,525,593 25,415,975 18,638,163
Claims and claim
adjustment expenses $ 4,139,653 674,647 6,004,417 2,250,310
Claims and claim
adjustment expenses -
plan servicing $ 481,842 1,360,262 2,466,883 2,869,900
Claims and claim
adjustment expenses -
fronting arrangements $ 10,775,929 6,734,636 18,933,246 16,034,669
</TABLE>
10
<PAGE> 11
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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, 1999 and December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Unearned premiums -
plan servicing $ 116,652 1,139,560
Unearned premiums -
fronting arrangements $19,284,080 20,194,814
Unpaid claims and claim
adjustment expenses -
plan servicing $ 8,424,670 9,380,484
Unpaid claims and claim
adjustment expenses -
fronting arrangements $14,667,681 13,927,694
</TABLE>
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-(Excellent)" or better by A.M. Best Company and/or the Company is
adequately collateralized on existing and anticipated claim recoveries.
(3) Note Payable
In December of 1998, the Company made 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 (6.6675% and 6.7842% at June 30, 1999 and December 31,
1998, respectively). 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 $292,256 and $613,167 for the three months and six
months ended June 30, 1999, respectively. The Company paid interest of
$296,789 and $714,931 for the three months and six months ended June
30, 1999.
(4) Shareholders' Equity
As of June 30, 1999 there were 294,777 options outstanding to purchase
common stock (options), at an average exercise price of $2.47 per
share, that had been granted to officers and directors of the Company
under the 1990 Stock Option Plan, 661,930 options, at an average
exercise price of $8.74 per share, that had been granted to officers
and directors of the Company under the 1995 Stock Option Plan, and
11
<PAGE> 12
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
579,710 options at an average exercise price of $5.75 per share that
had been granted to Glenn W. Anderson under an employment agreement.
As of December 31, 1998, the Company had purchased 844,094 shares of
its common stock at a cost of $7,694,525. The Company has no plans to
purchase additional shares.
The Company's policy is to pay a quarterly cash dividend of $.0175 per
share every quarter until further action is taken by the Board of
Directors. A cash dividend of $365,690 was paid on July 15, 1999.
(5) Segment Reporting
The Company makes operating decisions and assesses performance for the
commercial lines segment and the personal lines segment. The commercial
lines segment writes primarily commercial auto, auto garage, general
liability and property. The personal lines segment writes personal auto
and mobile home coverages.
The Company considers many factors including the nature of the
insurance product and distribution strategies in determining how to
aggregate operating segments.
The following tables present a summary of segment income (loss) before
Federal income taxes for the quarters ending June 30, 1999 and 1998 and
the six months ending June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Quarter ending June 30, 1999
----------------------------
Commercial Personal
Lines Lines Other Total
---------- ---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Gross premiums written $ 25,665 10,185 -- 35,850
========== ========== ========== ==========
Premiums earned $ 22,716 4,216 -- 26,483
Net investment income 2,165 129 -- 2,294
Net realized gains -- -- 41 41
Insurance services -- 178 235 413
Expenses (21,720) (4,165) (537) (26,422)
---------- ----------
Underwriting income 3,161 358
Interest expense -- (292) -- (292)
Amortization expense -- (172) -- (172)
---------- ---------- ---------- ----------
Income (loss) before
Federal income taxes $ 3,161 (106) (261) 2,345
========== ========== ========== ==========
Combined ratio 95.6% 98.8% 97.7%
========== ========== ==========
</TABLE>
12
<PAGE> 13
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
<TABLE>
<CAPTION>
Quarter ending June 30, 1998
-----------------------------
Commercial Personal
Lines Lines Other Total
------------ ------------ ------------ ------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Gross premiums written $ 22,224 -- -- 22,224
============ ============ ============ ============
Premiums earned $ 23,145 -- -- 23,145
Net investment income 2,561 -- -- 2,561
Net realized gains -- -- 173 173
Insurance services -- -- 653 653
Expenses (31,502) -- (1,200) (32,702)
------------ ------------
Underwriting income (loss) (5,796) --
Interest expense -- -- -- --
Amortization expense -- -- -- --
------------ ------------ ------------ ------------
Income (loss) before $ (5,796) -- (374) (6,170)
============ ============ ============ ============
Federal income taxes
Combined ratio 136.1% -- 136.1%
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Six months ending June 30, 1999
-------------------------------
Commercial Personal
Lines Lines Other Total
------------ ------------ ------------ ------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Gross premiums written $ 45,459 17,510 -- 62,969
============ ============ ============ ============
Premiums earned $ 44,172 5,682 -- 49,253
Net investment income 4,294 193 -- 4,487
Net realized gains -- -- 659 659
Insurance services -- 718 440 1,158
Expenses (42,579) (5,720) (1,523) (49,822)
------------ ------------
Underwriting income 5,887 873
Interest expense -- (613) -- (613)
Amortization expense -- (344) -- (344)
------------ ------------ ------------ ------------
Income (loss) before
Federal income taxes $ 5,887 (84) (424) 4,778
============ ============ ============ ============
Combined ratio 96.4% 100.7% 98.0%
============ ============ ============
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
Six months ending June 30, 1998
-------------------------------
Commercial Personal
Lines Lines Other Total
------------ ------------ ------------ ------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Gross premiums written $ 42,296 -- -- 42,296
============ ============ ============ ============
Premiums earned $ 46,774 -- -- 46,774
Net investment income 4,969 -- -- 4,969
Net realized gains -- -- 314 314
Insurance services -- -- 1,217 1,217
Expenses (73,038) -- (2,093) (75,131)
------------ ------------
Underwriting income (loss) (21,295) --
Interest expense -- -- -- --
Amortization expense -- -- -- --
------------ ------------ ------------ ------------
Income (loss) before
Federal income taxes $ (21.295) -- (562) (21,857)
============ ============ ============ ============
Combined ratio 156.2% -- 156.2%
============ ============ ============
</TABLE>
(6) Recent Development
On June 29, 1999 the Company announced it had entered into agreements
creating a strategic capital alliance with Goff Moore Strategic
Partners, L.P. ("GMSP") of Fort Worth, Texas.
Under terms of the agreements, GMSP will invest $31.6 million in
GAINSCO in exchange for an approximately 23% ownership stake in the
Company in the form of convertible preferred stock. GMSP's ownership
can be increased to up to 35%, principally through exercise of warrants
tied to long-term stock price appreciation, as well as through
additional open market purchases of stock. As part of the alliance,
GMSP, under separate agreements, will manage GAINSCO's insurance and
holding company investment portfolios, which will initially total
approximately $240 million, including this investment.
Proceeds from the investment will be used primarily for holding company
investments and insurance-related acquisitions, as well as capital
management activities, including possible share buybacks on an
opportunistic basis.
The transaction is subject to shareholder and standard regulatory
approvals. A special meeting of shareholders has been set for
September 21, 1999, for shareholders of record on August 13, 1999.
14
<PAGE> 15
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 1999 were $35,849,609 versus
$22,223,801 for the comparable 1998 period representing a 61% increase of which
43 percentage points were attributable to personal auto writings and 13
percentage points were attributable to core commercial writings. For the first
six months of 1999 gross premiums written have increased 49% from the comparable
1998 period, personal auto writings accounted for 39 percentage points and core
commercial writings accounted for 4 percentage points. 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
-------------------------------------- --------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial auto $15,242 43% $12,130 55% $26,331 42% $23,815 56%
Auto garage 4,971 14% 5,411 24% 8,583 14% 9,847 23%
General liability 4,587 13% 4,355 20% 8,229 13% 8,018 19%
Personal auto 9,536 27% -- --% 16,622 26% -- --%
Other lines 1,514 3% 328 1% 3,204 5% 616 2%
------- ------- ------- ------- ------- ------- ------- -------
Total $35,850 100% $22,224 100% $62,969 100% $42,296 100%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
For the second quarter of 1999 COMMERCIAL AUTO is up 26%, AUTO GARAGE is down 8%
and GENERAL LIABILITY is up 5%. For the first six months of 1999 COMMERCIAL AUTO
is up 11%, AUTO GARAGE is down 13% and GENERAL LIABILITY is up 3%. PERSONAL AUTO
is largely Florida personal auto which comes from the acquisition of the Lalande
Group in the fourth quarter of 1998. Commercial auto is up largely because of
increased market activity in certain classes of business. Auto garage is down
largely because of continued intense competition most notably in Florida.
General liability is up because of marketing efforts and commission enhancements
the Company has implemented to grow this line of business. For the first six
months of 1999, gross premium written percentages by state/product line are as
follows: Florida personal auto (26%), Texas commercial auto (19%), and Texas
general liability (6%) with no other state/product line comprising 5% or more.
The persistency rate is currently at 41%. Premiums earned increased 14% and 5%
for the three months and six months ended June 30, 1999, respectively, as a
result of the increase in premiums written.
Net investment income decreased 10% for the second quarter and first six months
of 1999 as a result of a decrease in the portfolio from June 30, 1998 and
because the reinvestment of maturities have been at lower yields. At June 30,
1999, 82% of the Company's investments were in investment grade tax-exempt bonds
with an average maturity of 3.3 years. On a taxable equivalent basis the return
on average investments is 5.9% for 1999 and 6.2% for 1998. The Company has the
ability to hold its bond securities until their maturity date. At June 30, 1999,
approximately 13% of the Company's investments were in U.S. Treasury securities
and 3% were in short-term money market funds.
15
<PAGE> 16
The Company recorded net realized capital gains of $41,352 during the second
quarter of 1999 versus $173,157 for the comparable 1998 period, which brings net
realized capital gains for the six months to $658,899 versus $313,867 for the
same period in 1998. All of the gains were generated from the bonds available
for sale category of the fixed maturity portfolio.
Insurance services revenues decreased $239,251 in the second quarter of 1999
from the second quarter of 1998. For the first six months of 1999 a decrease of
$58,610 has been recorded from the comparable 1998 period. These decreases are
attributable to the run-off of the plan servicing and premium finance operations
and the discontinuance of the computer software operation. These decreases are
offset to some extent by claim adjusting fees earned from outside parties
through the Lalande group.
Claims and claim adjustment expenses (C & CAE) decreased 23% to $17,078,584 in
the second quarter of 1999 from the second quarter of 1998. The second quarter
of 1998 included approximately $6,400,000 in unfavorable development from prior
accident years. The C & CAE ratio was 64.5% in the second quarter of 1999 versus
95.6% in 1998 for the comparable period. C & CAE have decreased 41% to
$31,778,521 for the first six months of 1999 from the comparable 1999 period.
The first six months of 1998 included approximately $23,100,000 in unfavorable
development from prior accident years versus the first six months of 1999. The C
& CAE ratio was 64.5% for the first six months of 1999 and 114.8% for the
comparable 1998 period.
The ratio of commissions to gross premiums written was 22% for the second
quarter of 1999 versus 26% for the comparable 1998 period and it was 21% for the
first six months of 1999 as compared to 28% for the comparable 1998 period.
Commissions were higher in the 1998 periods compared to 1999 periods primarily
due to a decrease in commission income of approximately $897,000 for the second
quarter of 1998 and $2,564,000 for the first six months of 1998 as a result of
reducing previously accrued reinsurance commission. Reinsurance commissions were
reduced due to a higher expected ultimate C & CAE ratio. The ratio of
commissions to premiums earned is higher in the 1999 periods than in the 1998
periods largely due to the increase in gross premiums written.
The change in deferred policy acquisition costs (DAC) resulted in a net increase
to income of $1,916,515 for the second quarter of 1999 versus a net decrease of
$203,545 in the second quarter of 1998. A net increase of $2,743,478 was
recorded for the first six months of 1999 versus a net decrease of $1,233,384 in
the comparable 1998 period. The change in the amount of the increase or decrease
in DAC between comparable periods is directly related to the rate at which
unearned premiums are growing or declining as a result of the growth rate of
premium writings. Since DAC (asset) is a function of unearned premiums
(liability) the change in unearned premiums correlates to the change in DAC. The
ratio of DAC to net unearned premiums was 26% at June 30, 1999 and 1998,
respectively.
Interest expense is from the note payable and amortization expense relates to
the goodwill recorded. The note payable and goodwill were recorded in
conjunction with the Lalande acquisition that was made in the fourth quarter of
1998.
Underwriting and operating expenses decreased 24% in the second quarter of 1999
from 1998 and decreased 13% for the first six months of 1999 from 1998,
primarily as a result of legal fees, consulting fees and costs associated with a
reduction in force which occurred in 1998.
The effective tax rates of 22% for the second quarter of 1999 and 17% for the
first six months of 1999 are largely the result of tax-exempt income comprising
a major portion of income before taxes. The large increase
16
<PAGE> 17
in C & CAE reserves accounted for the majority of tax benefit in the second
quarter and first six months of 1998.
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, 1999 the
Company held short-term investments and cash of $9,121,710 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 3.3 years which approximates the average payout
period of claims. The fair value of the fixed maturity portfolio at June 30,
1999 was $1,148,008 below amortized cost.
Investments decreased as a result of net cash used for operating activities.
This resulted primarily from the high level of prior accident year claims in
the core commercial lines that were closed and paid during the first six months
of 1999 and the cash settlement of reinsurance balances payable. The decline of
fair value in bonds available for sale as a result of the general increase in
interest rates also contributed to the decrease in investments. The increase in
premiums receivable is a result of a larger level of premium writings in the
second quarter of 1999 than in the fourth quarter of 1998. Reinsurance balances
receivable increased primarily because of larger claim recoverables due from
the commercial auto plans. Ceded unpaid claims and claim adjustment expenses
increased due to an increase in claims in excess of the Company's retention.
Ceded unearned premiums increased because of the increase in personal auto
writings. Deferred policy acquisition costs (DAC) increased as a direct result
of the increase in unearned premiums. DAC was 26% and 27% of net unearned
premiums at June 30, 1999 and at December 31, 1998, respectively. The decrease
in deferred Federal income taxes recoverable is primarily related to the
decrease in unpaid claims and claim adjustment expense.
Unpaid claims and claim adjustment expenses decreased largely as a result of the
amount of prior accident year claims in the core commercial lines that were
closed during the first six months of 1999. This resulted in the number
of outstanding claims decreasing 11% in the first six months of 1999. Unearned
premiums increased as a result of the growth in gross premiums written discussed
previously. Commissions payable decreased as a result of settling balances with
reinsurers during the quarter. The decrease in accounts payable was largely due
to a decrease in premiums payable to outside insurers from the personal auto
operation. The increase in reinsurance balances payable is largely attributable
to the increase in personal auto writings.
An accumulated other comprehensive loss of $1,055,916 was recorded at June 30,
1999 as a result of the net unrealized losses on the bonds available for sale as
a result of the general increase in interest rates.
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.
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.
17
<PAGE> 18
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
September 30, 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 reinterpreting 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 Lalande has been addressing its Year 2000 readiness since
1997. As of June 30, 1999, 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.
18
<PAGE> 19
Costs The Company estimates that its costs of addressing the Year 2000 problem
will aggregate approximately $940,000, including modifying or replacing software
and other systems, hiring Year 2000 solution providers and internal assessment,
remediation and testing. Of this amount, approximately $870,000 has been
expensed 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) 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 newly acquired companies and their customers and managers into
the Company's business, (i) the ability of the Company to satisfy the conditions
to closing of the proposed GMSP transaction and subsequently, the timely and
effective investment of the transaction proceeds, and the implementation of new
strategies for the investment of the Company's securities portfolios, (j)
effects of Year 2000 problems encountered by the Company and those with whom it
deals, and (k) general economic conditions including fluctuations in interest
rates.
19
<PAGE> 20
PART II. OTHER INFORMATION
GAINSCO, INC. AND SUBSIDIARIES
Item 1. 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 sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, alleging principally that the Company
did not establish adequate reserves for claims and claim adjustment
expenses in its financial statements and, therefore, they did not
reflect the Company's true financial position and results of operations
in accordance with generally accepted accounting principles. 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.
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.
20
<PAGE> 21
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 12, 1999
By /s/ DANIEL J. COOTS
------------------------------------
Daniel J. Coots
Senior Vice President, Treasurer and
Chief Financial Officer
21
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 152,472,721
<DEBT-CARRYING-VALUE> 44,690,191
<DEBT-MARKET-VALUE> 45,104,105
<EQUITIES> 276,296
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 204,365,816
<CASH> 2,790,102
<RECOVER-REINSURE> 4,097,861
<DEFERRED-ACQUISITION> 14,063,620
<TOTAL-ASSETS> 356,872,489
<POLICY-LOSSES> 132,768,926
<UNEARNED-PREMIUMS> 80,144,688
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 18,000,000
0
0
<COMMON> 2,174,066
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 356,872,489
49,252,858
<INVESTMENT-INCOME> 4,486,949
<INVESTMENT-GAINS> 658,899
<OTHER-INCOME> 1,158,610
<BENEFITS> 31,778,521
<UNDERWRITING-AMORTIZATION> (2,743,478)
<UNDERWRITING-OTHER> 7,439,450
<INCOME-PRETAX> 4,777,917
<INCOME-TAX> 812,692
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,965,225
<EPS-BASIC> .19
<EPS-DILUTED> .19
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
