<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, 2000 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, 2000, there were 20,980,913 shares of the registrant's Common
Stock, ($.10 par value) outstanding.
<PAGE> 2
GAINSCO, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Review Report 3
Consolidated Balance Sheets as of June 30, 2000 (unaudited) and
December 31, 1999 4
Consolidated Statements of Operations for the Three Months and
Six Months Ended June 30, 2000 and 1999 (unaudited) 6
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999 (unaudited) 7
Notes to Consolidated Financial Statements
June 30, 2000 and 1999 (unaudited) 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURE 22
</TABLE>
2
<PAGE> 3
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors and Shareholders of GAINSCO, INC.:
We have reviewed the accompanying condensed consolidated balance sheet of
GAINSCO, INC. and subsidiaries as of June 30, 2000 and the related condensed
consolidated statements of operations for the three months and six months ended
June 30, 2000 and 1999, and condensed consolidated statements of cash flows for
the six months ended June 30, 2000 and 1999. These condensed financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of GAINSCO, INC.
and subsidiaries as of December 31, 1999, and the related consolidated
statements of operations, statements of shareholders' equity and comprehensive
income, and statements of cash flows for the year then ended (not presented
herein); and in our report dated February 25, 2000, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
financial information set forth in the accompanying consolidated balance sheet
as of December 31, 1999, is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
KPMG LLP
Dallas, Texas
August 10, 2000
3
<PAGE> 4
PART 1. FINANCIAL INFORMATION
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30
2000 December 31
Assets (unaudited) 1999
------------ ------------
<S> <C> <C>
Investments
Fixed maturities:
Bonds available for sale, at fair value (amortized cost:
$196,033,330 - 2000, $200,415,218 - 1999) $195,221,067 197,077,075
Certificates of deposit, at cost (which approximates
fair value) 1,130,000 455,000
Common stock, at fair value (cost: $5,544,917 - 2000) 6,463,000 --
Equity investments, at fair value (cost: $2,265,726 - 2000,
$916,278 - 1999) 2,523,286 916,278
Marketable securities, at fair value (cost: $396,507 - 2000,
$372,179 - 1999) 290,610 254,051
Short-term investments, at cost (which approximates
fair value) 40,596,108 46,477,728
------------ ------------
Total investments 246,224,071 245,180,132
Cash 1,032,252 1,205,364
Accrued investment income 3,531,121 3,797,286
Premiums receivable (net of allowance for doubtful
accounts: $242,000 - 2000, $42,000 - 1999) 27,479,181 25,431,714
Reinsurance balances receivable 6,958,083 3,254,930
Ceded unpaid claims and claim adjustment expenses 37,157,543 37,299,327
Ceded unearned premiums 22,842,771 23,148,581
Deferred policy acquisition costs 14,932,900 14,927,673
Property and equipment (net of accumulated depreciation and
amortization: $9,664,821 - 2000, $8,605,454 - 1999) 7,029,551 6,855,250
Current Federal income taxes (note 1) 722,313 144,628
Deferred Federal income taxes (note 1) 8,058,941 8,401,714
Management contract 1,612,571 1,637,571
Other assets 7,046,892 6,012,424
Goodwill (note 1) 23,264,584 18,351,117
------------ ------------
Total assets $407,892,774 395,647,711
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30
2000 December 31
Liabilities and Shareholders' Equity (unaudited) 1999
------------- -------------
<S> <C> <C>
Liabilities
Unpaid claims and claim adjustment expenses $ 135,750,278 132,813,583
Unearned premiums 85,450,224 82,219,785
Commissions payable 1,529,578 1,629,787
Accounts payable 10,295,294 9,198,827
Reinsurance balances payable 10,339,999 7,899,550
Deferred revenue 1,567,360 1,227,863
Drafts payable 7,222,251 4,206,314
Note payable (note 3) 17,000,000 18,000,000
Dividends payable (note 4) 475,666 474,598
Other liabilities 170,979 278,829
------------- -------------
Total liabilities 269,801,629 257,949,136
------------- -------------
Shareholders' Equity (note 4)
Preferred stock ($100 par value, 10,000,000 shares authorized,
31,620 issued at June 30, 2000 and December 31, 1999) 3,162,000 3,162,000
Common stock ($.10 par value, 250,000,000 shares authorized, 21,825,007
issued at June 30, 2000 and 21,763,927 issued at
December 31, 1999) 2,182,501 2,176,393
Common stock warrants 2,040,000 2,040,000
Additional paid-in capital 112,980,864 112,674,842
Accumulated other comprehensive income (loss) (note 1) 169,264 (2,246,575)
Retained earnings 25,251,041 27,586,440
Treasury stock, at cost (844,094 shares at June 30, 2000 and
December 31, 1999) (7,694,525) (7,694,525)
------------- -------------
Total shareholders' equity 138,091,145 137,698,575
------------- -------------
Total liabilities and shareholders' equity $ 407,892,774 395,647,711
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months Six months
ended June 30 ended June 30
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned (note 2) $ 38,860,176 26,483,282 75,563,923 49,252,858
Net investment income 3,569,848 2,293,499 6,510,929 4,486,949
Net realized gains (losses) (note 1) (693,885) 41,352 (1,781,340) 658,899
Insurance services 542,641 412,403 1,042,455 1,158,610
------------ ------------ ------------ ------------
Total revenues 42,278,780 29,230,536 81,335,967 55,557,316
------------ ------------ ------------ ------------
Expenses:
Claims and claims adjustment
expenses (note 2) 31,129,858 17,078,584 58,418,311 31,778,521
Commissions 7,453,681 7,744,764 16,185,240 13,347,242
Change in deferred policy
acquisition costs 646,407 (1,916,515) 7,527 (2,743,478)
Interest expense (note 3) 366,573 292,256 712,982 613,167
Amortization expense 236,348 172,196 469,060 344,497
Underwriting and operating expenses 4,372,209 3,514,407 8,136,361 7,439,450
------------ ------------ ------------ ------------
Total expenses 44,205,076 26,885,692 83,929,481 50,779,399
------------ ------------ ------------ ------------
Income (loss) before Federal
income taxes (1,926,296) 2,344,844 (2,593,514) 4,777,917
Federal income taxes:
Current expense (benefit) (336,439) 454,817 (451,771) 783,027
Deferred expense (benefit) (486,191) 62,512 (903,609) 29,665
------------ ------------ ------------ ------------
Total taxes (822,630) 517,329 (1,355,380) 812,692
------------ ------------ ------------ ------------
Net income (loss) $ (1,103,666) 1,827,515 (1,238,134) 3,965,225
============ ============ ============ ============
Earnings (loss) per share (note 1):
Basic $ (.06) .09 (.08) .19
============ ============ ============ ============
Diluted $ (.06) .09 (.08) .19
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30
----------------------------
2000 1999
----------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,238,134) 3,965,225
Adjustments to reconcile net income (loss) to cash
provided by (used for) operating activities:
Depreciation and amortization 1,805,446 2,046,848
Change in deferred Federal income taxes (903,609) 29,665
Change in accrued investment income 315,690 380,200
Change in premiums receivable (1,449,362) (7,743,282)
Change in reinsurance balances receivable (2,828,670) (1,705,285)
Change in ceded unpaid claims and claim adjustment expenses 567,310 (2,519,290)
Change in ceded unearned premiums 305,810 (3,877,355)
Change in deferred policy acquisition costs and deferred
ceding commission income 7,527 (2,743,478)
Change in other assets (784,262) (359,432)
Change in unpaid claims and claim adjustment expenses 1,427,228 (4,029,223)
Change in unearned premiums 3,085,926 16,543,011
Change in commissions payable (193,121) (3,101,188)
Change in accounts payable 554,095 (2,775,753)
Change in reinsurance balances payable 2,440,449 4,236,398
Change in deferred revenue 339,497 (518,053)
Change in drafts payable 3,015,937 187,895
Change in other liabilities (107,850) (299,847)
Change in current Federal income taxes (1,003,368) 82,867
----------- -----------
Net cash provided by (used for) operating activities $ 5,356,539 (2,200,077)
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements. (continued)
7
<PAGE> 8
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from investing activities:
Bonds held to maturity:
Matured $ -- 14,620,000
Bonds available for sale:
Sold 69,926,857 16,048,827
Matured 10,149,904 4,231,042
Purchased (74,040,221) (31,657,554)
Certificates of deposit matured 200,000 200,000
Certificates of deposit purchased (290,000) (200,000)
Common stock purchased (5,544,917) --
Equity investments purchased (1,349,448) --
Marketable securities purchased (1,215) (20,424)
Net change in short term investments 6,036,220 (1,582,469)
Property and equipment disposed (purchased) (346,334) 100,079
Net assets acquired through purchase of subsidiary
(net of cash acquired of $662,422) (8,460,810) --
------------ ------------
Net cash provided by (used for) investing activities (3,719,964) 1,739,501
------------ ------------
Cash flows from financing activities:
Payments on note payable (1,000,000) --
Proceeds from exercise of common stock options 139,508 --
Cash dividends paid (949,195) (731,381)
------------ ------------
Net cash used for financing activities (1,809,687) (731,381)
------------ ------------
Net decrease in cash (173,112) (1,191,957)
Cash at beginning of period 1,205,364 3,982,059
------------ ------------
Cash at end of period $ 1,032,252 2,790,102
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 9
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 (Company) as of June
30, 2000, the results of operations for the three months and six
months ended June 30, 2000 and 1999 and the statements of cash flows
for the six months ended June 30, 2000 and 1999, on the basis of
generally accepted accounting principles. The December 31, 1999
balance sheet included herein is derived from the consolidated
financial statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 1999.
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, 1999 for a description of
all other accounting policies.
(b) Investments
Bonds available for sale, common stock, equity investments and
marketable securities are stated at fair value with changes in fair
value recorded as a component of comprehensive income. Short-term
investments are stated at cost.
The equity investments are predominately private equity investments
that are not traded in public markets and cost is considered to
approximate fair value. In the fourth quarter of 1999 all bonds
classified as held to maturity were transferred to the available for
sale classification and adjusted to fair value. The amortized cost at
the date of transfer for these bonds was $41,069,988 and the fair
value was $41,036,014 resulting in an unrealized loss before Federal
income taxes of $33,974. The Company made this change since it no
longer invests in bonds with the intent of holding them to maturity.
The "specific identification" method is used to determine costs of
investments sold. Provisions for possible losses are recorded only
when the values have experienced impairment considered "other than
temporary" by a charge to realized losses resulting in a new cost
basis of the investment.
9
<PAGE> 10
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The unrealized gains (losses) on investments at June 30, 2000 and
December 31, 1999 are set forth in the following table:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Bonds available for sale:
Unrealized loss $ (812,263) (3,338,143)
Deferred tax benefit (275,517) (1,168,350)
---------- ----------
Net unrealized loss $ (536,746) (2,169,793)
========== ==========
Common stock investments:
Unrealized gain $ 918,083 --
Deferred tax expense 312,148 --
---------- ----------
Net unrealized gain $ 605,935 --
========== ==========
Equity investments:
Unrealized gain $ 257,560 --
Deferred tax expense 87,570 --
---------- ----------
Net unrealized gain $ 169,990 --
========== ==========
Marketable securities:
Unrealized loss $ (105,897) (118,128)
Deferred tax benefit (35,982) (41,346)
---------- ----------
Net unrealized loss $ (69,915) (76,782)
========== ==========
</TABLE>
Proceeds from the sale of bond securities totaled $28,487,516 and
$4,984,092 for the three months ended June 30, 2000 and 1999,
respectively, and $69,926,857 and $16,048,827 for the six months ended
June 30, 2000 and 1999, respectively. Realized gains were $0 and
$41,352 for the three months ended June 30, 2000 and 1999,
respectively and $14,098 and $658,899 for the six months ended June
30, 2000 and 1999, respectively. Realized losses were $693,885 and $0
for the three months ended June 30, 2000 and 1999, respectively and
$1,795,438 and $0 for the six months ended June 30, 2000 and 1999,
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
asset and 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 $250,000 and $161 during the three months ended
June 30, 2000 and 1999, respectively and $280,000 and $700,161 during
the six months ended June 30, 2000 and 1999, respectively.
10
<PAGE> 11
(d) Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30 Six months ended June 30
---------------------------- ---------------------------
2000 1999 2000 1999
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Basic earning (loss) per share:
Numerator:
Net income (loss) $ (1,103,666) 1,827,515 (1,238,134) 3,965,225
Less: Preferred stock dividends 108,500 -- 217,000 --
Accretion of discount on preferred stock 86,395 -- 172,621 --
------------ ---------- ----------- ----------
Net income (loss) available to common
shareholders $ (1,298,561) 1,827,515 (1,627,755) 3,965,225
------------ ---------- ----------- ----------
Denominator:
Weighted average shares outstanding 20,935,103 20,896,563 20,928,559 20,896,563
------------ ---------- ----------- ----------
Basic earnings (loss) per share $ (.06) .09 (.08) .19
============ ========== =========== ==========
Diluted earnings (loss) per share:
Numerator:
Net income (loss) (1,103,666) 1,827,515 (1,238,134) 3,965,225
------------ ---------- ----------- ----------
Denominator:
Weighted average shares outstanding 20,935,103 20,896,563 20,928,559 20,896,563
Effect of dilutive securities:
Employee stock options 122,758 186,935 111,707 201,121
Convertible preferred stock 6,200,000 -- 6,200,000 --
------------ ---------- ----------- ----------
Weighted average shares and assumed
conversions 27,257,861 21,083,498 27,240,666 21,097,684
------------ ---------- ----------- ----------
Diluted earnings (loss) per share $ (.06)* $ .09 $ (.08)* $ .19
============ ========== =========== ==========
</TABLE>
* The effects of common stock equivalents and convertible preferred
stock are antidilutive for the three months and six months ended 2000
due to the net loss for the periods; therefore, diluted earnings per
share is reported the same as basic earnings per share.
(e) Accumulated Other Comprehensive Income
The other comprehensive loss amounts included in accumulated
comprehensive income (loss) consisted of net unrealized gains (losses)
on fixed maturities, common stock, equity investments and marketable
securities of $169,264 and $(2,246,575) at June 30, 2000 and December
31, 1999, respectively. Total comprehensive income consisting of net
income (loss) and the changes in unrealized gains (losses) on fixed
maturities, common stock, equity investments and marketable securities
was $278,930 and $1,237,795 for the three months ended June 30, 2000
and 1999, respectively and $1,177,705 and $1,770,368 for the six
months ended June 30, 2000 and 1999, 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 25 years which is the expected period to be benefited. The
11
<PAGE> 12
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Company will periodically review the recoverability of goodwill based
on an assessment of undiscounted cash flows of future operations to
ensure it is appropriately valued.
On January 7, 2000 the Company completed the acquisition of Tri-State
Ltd. (Tri-State), an insurance operation specializing primarily in
underwriting, servicing and claims handling of nonstandard personal
auto insurance in Minnesota, North Dakota and South Dakota. The
purchase price was for approximately $6,000,000 with additional
payments of $1,148,454 made in July, 2000 and up to approximately
$4,350,000 in cash over the next several years based on a conversion
goal and specific profitability targets.
(2) Reinsurance
The amounts deducted in the Consolidated Statements of Operations for
reinsurance ceded for the three months and six months ended June 30, 2000
and 1999, 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 ended June 30 Six months ended June 30
--------------------------- -------------------------
2000 1999 2000 1999
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Premiums earned $ 2,308,494 639,581 3,624,803 1,067,751
Premiums earned - Florida business $ 4,484,214 2,017,011 9,265,964 2,505,636
Premiums earned - plan servicing $ -- 302,790 -- 883,280
Premiums earned - fronting
arrangements $ 7,344,492 14,444,905 15,906,959 25,415,975
Claims and claim adjustment expenses $ 3,424,066 2,770,086 4,551,493 4,016,227
Claims and claim adjustment expenses -
Florida business $ 4,049,011 1,369,567 7,734,009 1,988,190
Claims and claim adjustment expenses -
plan servicing $ (155,490) 481,842 980,279 2,466,883
Claims and claim adjustment expenses -
fronting arrangements $ 6,646,846 10,775,929 12,902,804 18,933,246
</TABLE>
The amounts included in the Consolidated Balance Sheets for reinsurance
ceded under fronting arrangements and reinsurance ceded to the commercial
automobile plans of Arkansas, California, Louisiana, Mississippi and
Pennsylvania as of June 30, 2000 and December 31, 1999 were as follows:
12
<PAGE> 13
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
Unearned premiums - Florida business $ 6,246,610 7,817,052
Unearned premiums - plan servicing $ -- --
Unearned premiums - fronting arrangements $ 9,803,040 14,263,364
Unpaid claims and claim adjustment expenses - Florida business $ 3,944,331 2,651,273
Unpaid claims and claim adjustment expenses - plan servicing $ 6,644,945 8,094,763
Unpaid claims and claim adjustment expenses - fronting arrangements $11,743,964 13,575,089
</TABLE>
Effective April 1, 2000 the Company entered into a quota share reinsurance
agreement whereby it cedes 40% of the non standard personal auto business
in Florida to a non-affiliated reinsurer.
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 o the reinsurers on its working treaties are rate "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 entered into a note payable for
$18,000,000 with a commercial bank. Interest is due monthly at an interest
rate that approximates the 30-day London Interbank Offered Rate (LIBOR)
plus 175 basis points (8.39% and 7.34375% at June 30, 2000 and December 31,
1999, respectively). Beginning in January 2000, principal payments of
$500,000 are paid each quarter with the balance of $10,500,000 due at
maturity of the note on October 1, 2003. The Company recorded interest
expense of $366,573 and $292,256 for the three months ended June 30, 2000
and 1999, respectively and $712,982 and $613,167 for the six months ended
June 30, 2000 and 1999, respectively. The Company paid interest of $239,176
and 296,789 for the three months ended June 30, 2000 and 1999, respectively
and $586,200 and $714,931 for the six months ended June 30, 2000 and 1999,
respectively. The Company made principal payments of $500,000 in January,
April and July 2000.
(4) Shareholders' Equity
As of June 30, 2000 there were 210,427 options outstanding to purchase
common stock (options), at an average exercise price of $2.76 per share,
that had been granted to officers and directors of the Company under the
1990 Stock Option Plan, 713,930 options, at an average exercise price of
$8.54 per share, that
13
<PAGE> 14
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
had been granted to officers and directors of the Company under the 1995
Stock Option Plan, 518,505 options, at an average exercise price of $5.57
per share, that had been granted to officers, directors and employees of
the Company under the 1998 Long-Term Incentive Plan and 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.
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. Dividends on preferred shares are paid as if those shares had
been converted to common shares. A cash dividend of $475,666 was paid on
July 14, 2000.
(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, garage, general liability
and property. The personal lines segment writes primarily nonstandard
personal auto coverages.
The Company considers many factors including the nature of the insurance
product and distribution strategies in determining how to aggregate
operating segments.
The Company does not allocate assets to the commercial lines or personal
lines segments for management reporting purposes.
The following tables present a summary of segment profit (loss) for the
three months and six months ending June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three months ended June 30, 2000
------------------------------------------------------
Commercial Personal
Lines Lines Other Total
--------- -------- ----- -------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Gross premiums written $ 32,646 11,906 -- 44,552
======== ======= ==== =======
Premiums earned $ 27,489 11,371 -- 38,860
Net investment income 1,802 1,472 296 3,570
Insurance services -- 358 185 543
Expenses (30,974) (12,197) (431) (43,602)
-------- ------- ---- -------
Operating income (loss) (1,683) 1,004 50 (629)
Net realized losses -- -- (694) (694)
Interest expense -- (367) -- (367)
Amortization expense -- (236) -- (236)
-------- ------- ---- -------
Income (loss) before Federal income taxes $ (1,683) 401 (644) (1,926)
======== ======= ==== =======
</TABLE>
14
<PAGE> 15
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
<TABLE>
<CAPTION>
Three months ended 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 $ 22,267 4,216 -- 26,483
Net investment income 2,165 129 -- 2,294
Insurance services -- 178 235 413
Expenses (21,720) (4,165) (537) (26,422)
-------- ------- ---- -------
Operating income (loss) 2,712 358 (302) 2,768
Net realized gains -- -- 41 41
Interest expense -- (292) -- (292)
Amortization expense -- (172) -- (172)
-------- ------- ---- -------
Income (loss) before Federal income taxes $ 2,712 (106) (261) 2,345
======== ======= ==== =======
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 2000
-------------------------------------------------------
Commercial Personal
Lines Lines Other Total
---------- -------- ----- -------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Gross premiums written $ 60,563 27,743 -- 88,306
======== ======= ====== =======
Premiums earned $ 53,445 22,119 -- 75,564
Net investment income 3,793 2,075 643 6,511
Insurance services -- 666 376 1,042
Expenses (58,505) (23,394) (849) (82,748)
-------- ------- ------ -------
Operating income (loss) (1,267) 1,466 170 369
Net realized losses -- -- (1,781) (1,781)
Interest expense -- (713) -- (713)
Amortization expense -- (469) -- (469)
-------- ------- ------ -------
Income (loss) before Federal income taxes $ (1,267) 284 (1,611) (2,594)
======== ======= ====== =======
</TABLE>
15
<PAGE> 16
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
<TABLE>
<CAPTION>
Six months ended 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 $ 43,571 5,682 -- 49,253
Net investment income 4,294 193 -- 4,487
Insurance services -- 718 440 1,158
Expenses (42,579) (5,720) (1,523) (49,822)
-------- ------- ------ -------
Operating income (loss) 5,286 873 (1,083) 5,076
Net realized gains -- -- 659 659
Interest expense -- (613) -- (613)
Amortization expense -- (344) -- (344)
-------- ------- ------ -------
Income (loss) before Federal income taxes $ 5,286 (84) (424) 4,778
======== ======= ====== =======
</TABLE>
16
<PAGE> 17
GAINSCO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Business Operation
On January 7, 2000 the Company completed the acquisition of Tri-State Ltd.
(Tri-State), an insurance operation specializing primarily in underwriting,
servicing and claims handling of nonstandard personal auto insurance in
Minnesota, North Dakota and South Dakota. The purchase price was for
approximately $6,000,000 with additional payments of $1,148,454 made in July,
2000 and up to approximately $4,350,000 in cash over the next several years
based on a conversion goal and specific profitability targets.
Results of Operations
Gross premiums written for the second quarter of 2000 were $44,551,885 versus
$35,849,609 for the comparable 1999 period representing a 24% increase of which
5 percentage points (points) were attributable to personal lines and 19 points
were attributable to commercial lines. For the first six months of 2000 gross
premiums written have increased 40% from the comparable 1999 period with
personal lines accounting for 16 points and commercial lines accounting for 24
points of increase. The following table compares the major product lines between
the periods for gross premiums written.
<TABLE>
<CAPTION>
Three months ended June 30 Six months ended June 30
------------------------------------ ------------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial lines $32,646 73% $25,665 72% $60,563 69% $45,459 72%
Personal lines 11,906 27 10,185 28 27,743 31 17,510 28
------- --- ------- --- ------- --- ------- ---
Total $44,552 100% $35,850 100% $88,306 100% $62,969 100%
======= === ======= === ======= === ======= ===
</TABLE>
COMMERCIAL LINES are up 27% for the second quarter of 2000 versus the comparable
1999 period and were up 33% for the first six months of 2000 versus the
comparable 1999 period. Commercial auto contributed 9 points of the increase for
the second quarter and 14 points for the first six months with California,
Florida and Georgia accounting for the majority of the increase. The general
liability line contributed 17 points to the increase for the second quarter and
18 points for the first six months increase with California, Florida and Texas
representing the majority of the growth. PERSONAL LINES are up 17% for the
second quarter of 2000 versus the comparable 1999 period and are up 58% for the
first six months of 2000 versus the comparable 1999 period. This is primarily
attributable to growth in nonstandard personal auto writings in Florida. For the
first six months of 2000, gross premium percentages by significant product line
are as follows: commercial auto (37%), personal auto (30%), general liability
(18%) and garage (9%), with no other product line comprising 5% or more.
Effective April 1, 2000 the Company entered into a quota share reinsurance
agreement whereby it cedes 40% of its non standard personal auto writings in
Florida. Net premiums written for the second quarter of 2000 were up 7% over the
comparable 1999 period and they were up 28% for the first six months of 2000
versus the comparable 1999 period. Premiums earned increased 47% and 53% for the
three months and six months ended June 30, 2000, respectively as a result of the
increase in premiums written for those periods.
17
<PAGE> 18
Net investment income increased 56% and 45% for the three months and six months
ended June 30, 2000, respectively, over the comparable 1999 periods. In the
fourth quarter of 1999 Goff Moore Strategic Partners, L.P. (GMSP) invested
approximately $30 million in the Company and took over management of the
Company's investments. During the first six months of 2000 approximately $69.9
million in bond securities were sold for a pre-tax loss of $1,781,340 and the
proceeds were reinvested in bond securities with an average taxable equivalent
yield increase of more than 150 basis points over the bond securities that were
sold. The increase in investments and the increase in yield on the proceeds
reinvested from the sales of bonds account for the increase in investment
income. This strategy is expected to result in net realized losses for the year.
The impact on book value is anticipated to be significantly less than the impact
on earnings because the Company classifies its bond securities as available for
sale so they have been recorded on the balance sheet at fair value. The scope
and results of the investment redeployment will depend upon interest rates and
timing of specific transactions.
Insurance service revenues increased in the second quarter of 2000 from the
comparable 1999 period primarily as a result of an increase in agency revenues.
For the first six months of 2000 revenues are below the comparable 1999 period
as a result of a decrease in claim adjusting revenues.
Claims and claims adjustment expenses (C & CAE) increased $14,051,274 in the
second quarter of 2000 from the comparable 1999 period. The C & CAE ratio was
80.1% in the second quarter of 2000 and 64.5% in the second quarter of 1999. C &
CAE have increased 84% to $58,418,311 for the first six months of 2000 from the
comparable 1999 period. The C & CAE ratio was 77.3% for the first six months of
2000 and 64.5% for the first six months of 1999. The ratios in 2000 were
adversely impacted by increased severity in the current accident year for
commercial auto and reserve increases in personal auto because of the current
litigious trends in personal injury protection coverages.
The ratio of commissions to net premiums written was 20% for the second quarter
of 2000 versus 22% for the comparable 1999 period and 21% for the first six
months of 2000 as compared to 22% for the comparable 1999 period. The change in
deferred policy acquisition costs net of deferred ceding commission income
resulted in a net decrease to income of $646,407 in the second quarter of 2000
and a net increase to income of $1,916,515 for the comparable 1999 period. A net
decrease of $7,527 was recorded for the first six months of 2000 compared to a
net increase of $2,743,478 for the first six months of 1999. The net decrease
for the 2000 periods is primarily related to an increase in deferred ceding
commission income as a result of the quota share reinsurance treaty the Company
entered into beginning in the second quarter of 2000. The ratio of commissions
and change in deferred policy acquisition costs to premiums earned was 21% for
the second quarter of 2000 versus 22% for the comparable 1999 period and 21% for
the first six months of 2000 as compared to 22% for the comparable 1999 period.
Interest expense from the note payable increased due to the general increase in
interest rates from the comparable 1999 period. Amortization expense increased
in the second quarter and first six months of 2000 versus the comparable 1999
periods as a result of the amortization of additional goodwill recorded on the
Lalande earnout accrued in the fourth quarter of 1999 and the Tri-State
acquisition completed in January 2000.
Underwriting and operating expenses were up 24% in the second quarter of 2000
from the comparable 1999 period and were up 9% for the first six months of 2000
from the comparable 1999 period primarily as a result of bad debt reserve
increases, travel expense and state insurance department fees.
The Company generated a tax benefit for the second quarter and first six months
of 2000 as a result of the loss recorded during these periods.
18
<PAGE> 19
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. The Company has
short-term investments and cash that the Company believes is adequate liquidity
for the payment claims and other short-term commitments. This amount is large
because the funds received from GMSP in October 1999 have not been fully
invested in bonds, stocks and alternative investments.
With regard to long term liquidity, the average maturity of the investment
portfolio is approximately 4 years. The fair value of the fixed maturity
portfolio at June 30, 2000 was $812,263 below amortized cost.
Premiums receivable increased primarily as a result of the growth in premiums
written. Reinsurance balances receivable increased primarily due to an increase
in paid loss recoverables from personal auto claims and from commercial excess
casualty claims. Ceded unearned premiums decreased primarily as a result of a
decrease in fronting business. Other assets increased primarily as a result of
prepaid items in the agency operation. Goodwill increased primarily because of
the Tri-State acquisition.
Unpaid claims and claims adjustment expenses increased primarily due to claim
reserve increases in the commercial auto and personal auto lines mentioned
previously. Unearned premiums increased primarily because of the increase in
premiums written mentioned previously. Accounts payable increased primarily
because of the accrual for a book value adjustment and conversion payout on the
Tri-State acquisition. Reinsurance balances payable increased primarily because
of the quota share treaty on the Florida non standard personal auto writings.
Drafts payable increased primarily because of an increase in paid claims. The
note payable decreased due to principal repayments made in the first and second
quarters of 2000.
General Agents Insurance Company of America, Inc. (General Agents), a wholly
owned subsidiary of the Company, sustained operating losses in the six month
period ended June 30, 2000 because of the C & CAE experience discussed
previously. As a result, General Agents may not have the level of statutory
earnings for the year ending December 31, 2000 required by the Company's bank
loan agreement. The Company has apprized the bank of the situation and will
seek appropriate covenant relief.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of economic losses due to adverse changes in the
estimated fair value of a financial instrument as the result of changes in
equity prices, interest rates, foreign exchange rates and commodity prices. The
Company's consolidated balance sheets include assets whose estimated fair values
are subject to market risk. The primary market risk to the Company is interest
rate risk associated with investments in fixed maturities. The Company has no
foreign exchange or commodity risk, and its exposure to equity risk is small.
Interest Rate Risk
The Company's fixed maturity investments are subject to interest rate risk.
Increases and decreases in interest rates typically result in decreases and
increases in the fair value of these investments.
Most of the Company's investable assets come from premiums paid by
policyholders. These funds are invested predominately in investment grade bonds.
The fixed maturity portfolio is exposed to interest rate fluctuations; as
interest rates rise, fair values decline and as interest rates fall, fair values
rise. The changes in the fair value of the fixed maturity portfolio are
presented as a component of shareholders' equity in accumulated other
comprehensive income, net of taxes.
The effective duration of the fixed maturity portfolio is managed with
consideration given to the estimated duration of the Company's liabilities. The
Company has investment policies that limit the maximum duration and maturity of
the fixed maturity portfolio.
19
<PAGE> 20
The Company uses the modified duration method to estimate the effect of interest
rate risk on the fair values of its fixed maturity portfolio. The usefulness of
this method is to a degree limited, as it is unable to accurately incorporate
the full complexity of market transactions.
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 important factors,
representing certain risks and uncertainties, could cause actual results to
differ materially from those contained in the forward-looking statements. These
factors include, but are not limited to, (a) heightened competition from
existing competitors and new competitor entrants into the Company's markets, (b)
changes in the markets for the Company's various lines of business, (c)
development and performance of new specialty programs, (d) the ongoing level of
claims and claims-related expenses, (e) adequacy of claim reserves, (f) the
ability to complete value-adding acquisitions and fully integrate newly acquired
companies and their customers and managers into the Company, as well as, the
ability to implement growth strategies which can achieve incremental value, (g)
the effectiveness of the deployment of the Company's bond portfolio and other
investment strategies implemented by the Company's investment manger, and (h)
general economic conditions including fluctuations in interest rates. A
forward-looking statement is relevant as of the date the statement in made. The
Company undertakes no obligation to update any forward-looking statements to
reflect events or circumstances arising after the date on which the statements
are made.
20
<PAGE> 21
PART II. OTHER INFORMATION
GAINSCO, INC. AND SUBSIDIARIES
Item 1. Legal Proceedings
GAINSCO, INC. (GNA) was named a defendant in the proceedings styled
William Steiner v. Joseph D. Macchia, Joel C. Puckett, Daniel J. Coots
and GAINSCO, INC., filed on August 25, 1998 in the United States
District Court for the Northern District of Texas, Fort Worth Division
(Trial Court). In that case, the plaintiff asserted claims on behalf
of a putative class of persons who purchased GNA's common stock
between August 6, 1997 and July 16, 1998, inclusive. The plaintiff
asserted claims for damages under sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, alleging that GNA's financial results
did not reflect GNA's true financial position and results of
operations in accordance with generally accepted accounting principles
in that they understated reserves for claims and claim adjustment
expenses. On March 31, 2000 the Trial Court dismissed plaintiff's
amended class action complaint for failure to state a claim upon which
relief can be granted and dismissed as moot the plaintiff's request
for class certification. The plaintiff did not appeal the Trial
Court's decision, which has become final and non-appealable.
In the normal course of its operations, GNA and its subsidiaries
(Company) have 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.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.14 First Amendment dated as of May 16, 2000 to Stock Purchase
Agreement dated as of November 17, 1999 among Registrant,
Tri-State, Ltd., Herbert A. Hill and Alan E. Heidt.
15. Awareness Letter of KPMG LLP
27. Financial Data Schedule for the period ended June 30, 2000
(b) Reports on Form 8-K
No Form 8-K Report was filed by Registrant during its quarter ended
June 30, 2000.
21
<PAGE> 22
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 11, 2000 By: /s/ Daniel J. Coots
-------------------------------
Daniel J. Coots
Senior Vice President,
Treasurer and Chief
Financial Officer
22
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.14 First Amendment dated as of May 16, 2000 to Stock Purchase
Agreement dated as of November 17, 1999 among Registrant,
Tri-State, Ltd., Herbert A. Hill and Alan E. Heidt.
15 Awareness Letter of KPMG LLP
27 Financial Data Schedule for the period ended June 30, 2000
</TABLE>
