GAINSCO INC - 10-Q Quarterly Report

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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, 2002 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 August 8, 2002, there were 21,169,736 shares of the registrant's Common
Stock ($.10 par value) outstanding.

GAINSCO, INC. AND SUBSIDIARIES

INDEX

2

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, 2002 and the related condensed
consolidated statements of operations for the six months ended June 30, 2002 and
2001, and condensed consolidated statement of shareholders' equity and
comprehensive income for the six months ended June 30, 2002, and condensed
consolidated statements of cash flows for the six months ended June 30, 2002 and
2001. 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 auditing standards generally accepted in the United States of America, 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 of
America.

We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
GAINSCO, INC. and subsidiaries as of December 31, 2001, 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 March 18, 2002 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, 2001 and the accompanying consolidated statement of
shareholders' equity and comprehensive income for the year ended December 31,
2001, is fairly presented, in all material respects, in relation to the
consolidated balance sheet and consolidated statement of shareholders' equity
and comprehensive income from which they have been derived.

As discussed in Note 1(f) to the consolidated financial statements, effective
January 1, 2002, GAINSCO, INC. and subsidiaries adopted the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets".

KPMG LLP
Dallas, Texas
August 9, 2002

3

GAINSCO, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

See accompanying notes to consolidated financial statements.

4

GAINSCO, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

See accompanying notes to consolidated financial statements.

5

GAINSCO, INC. AND SUBSIDIARIES

Consolidated Statements of Operations
(Unaudited)

See accompanying notes to consolidated financial statements.

6

GAINSCO, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity and Comprehensive Income

(continued)

7

GAINSCO, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity and Comprehensive Income

See accompanying notes to consolidated financial statements.

8

GAINSCO, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
(Unaudited)

See accompanying notes to consolidated financial statements. (continued)

9

GAINSCO, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
(Unaudited)

See accompanying notes to consolidated financial statements.

10

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, 2002, the results of operations for the
three months and six months ended June 30, 2002 and 2001, the
statements of shareholders' equity and comprehensive income for
the six months ended June 30, 2002 and the twelve months ended
December 31, 2001 and the statements of cash flows for the six
months ended June 30, 2002 and 2001, on the basis of accounting
principles generally accepted in the United States of America. The
December 31, 2001 balance sheet and statement of shareholders'
equity and comprehensive income included herein are derived from
the consolidated financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.

The accompanying consolidated financial statements are prepared in
conformity with accounting principles generally accepted in the
United States of America. The preparation of financial statements
in conformity with accounting principles generally accepted in the
United States of America 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, 2001 for a description
of all other accounting policies.

On February 7, 2002, the Company announced its decision to
discontinue writing commercial lines insurance business due to
continued adverse claims development and unprofitable results.

(b) Investments

Bonds available for sale and other investments 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 following schedule summarizes the components of other
investments:

11

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(Unaudited)

The equity investments were predominately private equity
investments that were not traded in public markets and cost was
considered to approximate fair value. Cost was considered to
approximate fair value for the equity investments and the note
receivable because they were carried at the amount recoverable
from Goff Moore Strategic Partners, L.P. ("GMSP") under the put
option as discussed below. The Company held an embedded derivative
financial instrument in common stock warrants attached to the note
receivable. As of December 31, 2001, the exercise price of the
warrants was not determinable and, therefore, the warrants were
not recorded in the financial statements.

The agreement with GMSP provided an opportunity to convert the
equity investments and the note receivable with a cost of $4.2
million to cash as of November 2002, as follows: the Company could
at its option require GMSP to purchase these investments for $2.1
million, less any future cash received prior to November 2002 from
the investments. GMSP could at its option require the Company to
sell the equity investments and the note receivable to GMSP for
$4.2 million, less any future cash received prior to November 2002
from the investments. During the second quarter of 2001, the
Company recognized a permanent impairment of these investments and
wrote down the carrying value to the amount recoverable from GMSP
under the put option. This write down amounted to $2,176,231 and
was recorded as a realized capital loss in the Statement of
Operations. In February 2002, GMSP consented to the early exercise
of the Company's option, and the Company exercised its option to
require GMSP purchase the illiquid investments for approximately
$2.1 million.

The marketable securities were sold in the first quarter of 2002
for a small gain.

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.

The unrealized gains (losses) on investments at June 30, 2002 and
December 31, 2001 are set forth in the following table:

12

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(Unaudited)

Proceeds from the sale of bond securities totaled $1,252,823 and
$10,105,861 for the three months ended June 30, 2002 and 2001,
respectively, and $73,495,083 and $27,780,694 for the six months
ended June 30, 2002 and 2001, respectively. Proceeds from the sale
of common stocks totaled $0 and $4,682,256 for the three months
ended June 30, 2002 and 2001, respectively, and $0 and $6,027,392
for the six months ended June 30, 2002 and 2001, respectively.
There were no sales of other investments during the three months
ended June 30, 2002 or June 30, 2001, respectively. Proceeds from
the sale of other investments totaled $2,110,467 and $382,867 for
the six months ended June 30, 2002 and 2001, respectively.

Realized gains and losses on investments for the three months and
six months ended June 30, 2002 and 2001, respectively, are
presented in the following table:

During the first six months of 2002, the Company reduced the
carrying value of a non-rated commercial mortgage backed security
to $0 resulting in a write down of $2,010,670 as a result of a
significant increase in the default rate in January and February
of 2002 in the underlying commercial mortgage portfolio, which has
disrupted the cash flow stream sufficiently to make future cash
flows unpredictable. This write down was offset by net realized
gains of $2,389,253 recorded from the sale of various bond
securities. As of June 30, 2002, the Company does not own any
other securities of individual entities that are rated below B by
Standard & Poor's.

13

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(Unaudited)

(c) Federal Income Taxes

The Company and its subsidiaries file a consolidated Federal
income tax return. Deferred income tax items are accounted for
under the "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, net operating loss carry forwards
and the nondeductible portion of the change in unearned premiums.
The Company paid no Federal income taxes during the six months
ended June 30, 2002. The Company received Federal income tax
refunds totaling $250,000 during the six months ended June 30,
2001.

In assessing the realization of its deferred tax assets,
management considers whether it is more likely than not that a
portion or all of the deferred tax assets will be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
those temporary differences become deductible. Based upon
management's consideration of expected reversal of deferred tax
liabilities and projected future taxable income, management
believes it is more likely than not that the Company will not
realize the benefits of these deferred tax assets in the near
future. At June 30, 2002, the Company has established a valuation
allowance against its net deferred tax assets, exclusive of the
tax effect of unrealized gains, in the amount of $34,609,709. At
December 31, 2001 the valuation allowance was $31,534,712 and
included the tax effect on unrealized gains.

As of June 30, 2002, the Company has net operating loss carry
forwards for tax purposes of approximately $1,639,332, $30,985,
$23,531,349, $33,223,099 and $10,276,022 which, if not utilized,
will expire in 2018, 2019, 2020, 2021 and 2022, respectively. As
of June 30, 2002 the Company has capital loss (gain) carry
forwards of $983,964, ($1,103,331) and ($2,101,141) for tax
purposes which, if not utilized, will expire in 2005, 2006 and
2007, respectively.

14

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(Unaudited)

(d) Earnings Per Share

The following table sets forth the computation of basic and
diluted earnings per share:

15

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(Unaudited)

(e) Accumulated Other Comprehensive Income

The following schedule presents the components of other
comprehensive income:

The 2002 reclassification adjustment for amounts included in net
income for realized gains (losses) excludes the realized loss due
to the impairment of a fixed maturity because this amount was not
a component of accumulated other comprehensive income as of
December 31, 2001.

(f) Goodwill

Goodwill represents the excess of purchase price over fair value
of net assets acquired. In July 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 141, "Business Combinations" (Statement 141) and
Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" (Statement 142). Statement 141 requires
that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase
method business combinations completed after June 30, 2001.
Statement 141 also specifies criteria intangible assets acquired
in a purchase method business combination must meet to be
recognized and reported apart from goodwill, noting that any
purchase price allocable to an assembled workforce may not be
accounted for separately. Statement 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142
also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in
accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of."

The Company adopted the provisions of Statement 141 effective July
1, 2001 and Statement 142 effective January 1, 2002. The adoption
of Statement 141 had no impact on the consolidated financial
statements. The adoption of Statement 142 resulted in the Company
no longer amortizing the remaining goodwill. As of the date of
adoption, the Company had unamortized goodwill in the amount of
$3,468,507 that was subject to the transition provisions of
Statements 141 and 142.

16

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(Unaudited)

Statement 141 required, upon adoption of Statement 142, that the
Company evaluate its existing intangible assets and goodwill that
were acquired in a prior purchase business combination, and to
make any necessary reclassifications in order to conform with the
new criteria in Statement 141 for recognition apart from goodwill.
Upon adoption of Statement 142, the Company was required to
reassess the useful lives and residual values of all intangible
assets acquired in purchase business combinations, and make any
necessary amortization period adjustments by the end of the first
interim period after adoption. In addition, to the extent an
intangible asset is identified as having an indefinite useful
life, the Company was required to test the intangible asset for
impairment in accordance with the provisions of Statement 142
within the first interim period. The Company did not record any
impairments as a result of the adoption of Statement 142.

On January 7, 2000, the Company completed the acquisition of
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 approximately $6,000,000 with an
additional payment of $1,148,454 made in July, 2000 and additional
payments up to approximately $4,350,000 in cash possible over the
next several years based on a conversion goal and specific
profitability targets. The Company paid $1,566,081 in January of
2001 for the conversion goal.

The Company decided to no longer pursue a long-term geographic
expansion strategy in personal automobile beyond that of its core
operation in Florida, and sold Tri-State to Tri-State's president
for $935,000 in cash on August 31, 2001. The remaining goodwill
associated with the Tri-State acquisition of $5,086,283 was
recorded as goodwill impairment during the second quarter of 2001.
The Company recognized a capital loss for tax purposes of
$5,066,423 from this sale during the second quarter of 2001.

In December 2001, prior to the adoption of Statement 142, the
Company recorded an impairment of $13,360,603 on the goodwill
associated with the 1998 acquisition of the Lalande Group. As a
result of the decision to position the Company for an exit from
personal auto, the Company evaluated the related goodwill and
recorded an impairment of $2,859,507 in the second quarter of
2002. The remaining goodwill as of June 30, 2002 is $609,000 and
is related to the 1998 acquisition of the Lalande Group. Effective
in 2002, goodwill is no longer be amortized but will be subject to
an impairment test based on its estimated fair value. Therefore,
additional impairment losses could be recorded in future periods.

(g) Accounting Pronouncements

In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" (Statement 144), establishing financial
accounting and reporting for the impairment or disposal of
long-lived assets. Statement 144 is effective for fiscal years
beginning after December 15, 2001. The Company adopted the
provisions of Statement 144 effective January 1, 2002. Pursuant to
Statement 144 the discontinuance of commercial lines has not been
reported as discontinued operations. The adoption of Statement 144
had no other effect on the Company's financial position or results
of operation.

On July 30, 2002, the FASB issued SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities ("SFAS 146").
The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company
does not expect the adoption of SFAS 146 to have material effect
on its consolidated financial position or results of operations.

17

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(Unaudited)

(2) Reinsurance

The amounts deducted in the Consolidated Statements of Operations for
reinsurance ceded for the three months and six months ended June 30, 2002
and 2001, respectively, are set forth in the following table.

Claims ceded to the commercial automobile plans of Arkansas, California,
Louisiana, Mississippi and Pennsylvania are designated as "plan
servicing". There were no plan servicing premiums earned during the six
months ended June 30, 2002 and 2001, respectively.

There were no plan servicing or Florida business unearned premiums at
June 30, 2002 and December 31, 2001, respectively. 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, 2002 and December 31, 2001 were as follows:

18

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(Unaudited)

Effective December 31, 2000 the Company entered into a quota share
reinsurance agreement whereby the Company ceded 100% of its commercial
auto liability unearned premiums and 50% of all other commercial business
unearned premiums at December 31, 2000 to a non-affiliated reinsurer. For
policies with an effective date of January 1, 2001 through December 31,
2001, the Company entered into a quota share reinsurance agreement
whereby the Company ceded 21.03% of its commercial business to a
non-affiliated reinsurer. Also effective December 31, 2000, the Company
entered into a reserve reinsurance cover agreement with a non-affiliated
reinsurer. This agreement reinsures the Company's ultimate net aggregate
liability in excess of $32,500,000 up to an aggregate limit of
$57,150,000 for net commercial auto liability losses and loss adjustment
expense incurred but unpaid as of December 31, 2000. At June 30, 2002 and
December 31, 2001 a deferred reinsurance gain of $5,473,441 and
$7,937,531, respectively, has been recorded in deferred revenues. For the
second quarter and the first six months of 2002, $579,014 and $2,464,090
has been recorded in other income which represents the reserve
development under the reserve reinsurance cover agreement. No amounts
were recognized for the second quarter and the first six months of 2001
under the reserve reinsurance agreement. Since its inception at December
31, 2000 $3,576,559 has been recorded in other income which represents
the reserve development under the reserve reinsurance cover agreement.
The deferred gain item will be recognized in income in future periods
based upon the ratio of claims paid in the $57,150,000 layer to the total
of the layer. The Company established a reinsurance balance receivable
and a liability for funds held under reinsurance agreements for the
reserves transferred at December 31, 2001. Also in connection with this
agreement, the Company was required to maintain assets in a trust fund
with a fair value at least equal to the funds held liability. The trust
fund was established during the third quarter of 2001 and at December 31,
2001 the assets in the trust had a fair value of $49,553,698. Because the
Company's statutory policyholders' surplus fell below certain levels
specified in the agreement, the reinsurer had the option to direct the
trustee to transfer the assets of the trust to the reinsurer. In March of
2002, the reinsurer exercised this option and the trust assets were
transferred to the reinsurer. As a result, investments and funds held
under reinsurance agreements were reduced by approximately $44.0 million.
The Company recorded a realized gain of approximately $486,000 as a
result of this transfer. The reinsurer remains responsible for
reimbursing the Company for claim payments covered under this agreement.

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.

(3) Note Payable

In November 1998, the Company entered into a credit agreement with a
commercial bank pursuant to which it borrowed $18,000,000. Interest was
due monthly at an interest rate that approximated the 30-day London
Interbank Offered Rate (LIBOR) plus 175 basis points. Principal payments
of $500,000 were due each quarter with the balance of $10,500,000 due at
maturity of the note on October 1, 2003.

In March 2001, the credit agreement was amended, specific breaches of
covenants were waived, $2,500,000 in principal was prepaid and certain
terms were amended. Interest was due monthly at an interest rate that
approximates the 30-day LIBOR plus 250 basis points with an increase of
25 basis points each quarter beginning October 1, 2001 (4.89375% at
December 31, 2001). Principal payments of $500,000 were due each quarter
and were scheduled to increase to $750,000 beginning April 1, 2002, with
the balance of $6,500,000 due at maturity of the note on November 1,
2003.

On November 13, 2001, the credit agreement was further amended to change
certain covenants and to provide the following revised principal
amortization schedule: $200,000 upon effectiveness of the amendment on
November 13, 2001, $500,000 on January 2, 2002; and $1,000,000 on the
first day of each calendar quarter

19

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(Unaudited)

thereafter. The loan is scheduled to mature on November 1, 2003. A
$50,000 fee was paid to the bank for this amendment.

On February 27, 2002 the Company entered into an amendment to the credit
agreement which cured covenant breaches and provided for principal
prepayments. The Company prepaid $6,100,000 of the indebtedness
outstanding under the credit agreement on March 4, 2002. Several
covenants in the existing credit agreement were eliminated or modified by
the amendment and the interest rate was changed to a base rate (which
approximates prime) plus 175 basis points (6.50% at March 31, 2002). The
remaining $4,200,000 principal balance under the credit agreement is
payable in 2003.

The Company recorded interest expense of $68,063 and $222,240 for the
three months ended June 30, 2002 and 2001, respectively, and $178,629 and
$511,884 for the six months ended June 30, 2002 and 2001, respectively.
The Company paid interest expense of $72,027 and $242,036 for the three
months ended June 30, 2002 and 2001, respectively, and $199,487 and
$563,134 for the six months ended June 30, 2002 and 2001. The Company
made unscheduled principal prepayments of $2,500,000, $500,000 and
$200,000 in the first, third and fourth quarters of 2001, respectively,
and scheduled principal payments of $500,000 in January, April, July and
October of 2001 and in January 2002.

(4) Redeemable Preferred Stock and Shareholders' Equity

The Company has authorized 250,000,000 shares of common stock, par value
$.10 per share (the "Common Stock"). Of the authorized shares of Common
Stock, 22,013,830 were issued as of June 30, 2002 and December 31, 2001,
respectively, and 21,169,736 were outstanding as of June 30, 2002 and
December 31, 2001, respectively. The Company also has 10,000,000 shares
of preferred stock with $100 par value authorized per share of which none
were issued and outstanding as of June 30, 2002 and December 31, 2001,
respectively. As a result of the transactions discussed below, the
Company has three series of redeemable preferred stock outstanding which
have mezzanine presentation because they are redeemable at the option of
the holder.

On October 4, 1999 the Company sold to Goff Moore Strategic Partners,
L.P. ("GMSP"), for an aggregate purchase price of $31,620,000 (i) 31,620
shares of Series A Preferred Stock, which are convertible into 6,200,000
shares of Common Stock at a conversion price of $5.10 per share, (ii) the
Series A Warrant to purchase an aggregate of 1,550,000 shares of Common
Stock at an exercise price of $6.375 per share and expiring October 4,
2004 and (iii) the Series B Warrant to purchase an aggregate of 1,550,000
shares of Common Stock at an exercise of $8.50 per share and expiring
October 4, 2006. As a result of the value attributable to the Common
Stock purchase warrants issued with the Series A Preferred Stock, the
Series A Preferred Stock was issued at a discount which is being
amortized over a five year period using the effective interest method.
Proceeds were allocated based upon the relative fair values of the Series
A Preferred Stock, and the Series A Warrants and the Series B Warrants.
The Series A Warrants and the Series B Warrants are anti-dilutive.

On March 23, 2001, the Company consummated another transaction (the "2001
GMSP Transaction") with GMSP pursuant to which, among other things, the
Company issued shares of its newly created Series C Preferred Stock to
GMSP in exchange for an aggregate purchase price of $3.0 million in cash.

20

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(Unaudited)

The annual dividend rate on the Series C Preferred Stock is 10% during
the first three years and 20% thereafter. Unpaid dividends are cumulative
and compounded. The Series C Preferred Stock is redeemable at the
Company's option after five years and at the option of the majority
holders after six years at a price of $1,000 per share plus accrued and
unpaid dividends. The Series C Preferred Stock is not convertible into
Common Stock.

The agreement with GMSP in connection with the 2001 GMSP Transaction was
conditioned upon the following changes in the securities currently held
by GMSP. The exercise prices of the Series A Warrant and the Series B
Warrant held by GMSP were amended to equal $2.25 and $2.5875 per share,
respectively. Each of these warrants provides for the purchase of
1,550,000 million shares of Common Stock, subject to adjustment. Further,
the Company is required to redeem the outstanding shares of its Series A
Preferred Stock on January 1, 2006, subject to certain conditions, at a
price of $1,000 per share plus accrued and unpaid dividends. Any Series A
Preferred Stock unredeemed for any reason after that date would accrue
interest, payable quarterly at a rate equal to eight percent per year
with any unpaid interest compounded annually.

On March 23, 2001, the Company consummated a transaction with Robert W.
Stallings (the "Stallings Transaction") pursuant to which, among other
things, the Company issued shares of its newly created Series B Preferred
Stock and a warrant to purchase an aggregate of 1,050,000 shares of
Common Stock at $2.25 per share and expiring March 23, 2006 in exchange
for an aggregate purchase price of $3.0 million in cash. The annual
dividend provisions and the redemption provisions of the Series B
Preferred Stock are the same as those for the Series C Preferred Stock.
The Series B Preferred Stock is convertible into Common Stock at $2.25
per share. Subject to adjustment for certain events, the Series B
Preferred Stock is convertible into a maximum of 1,333,333 shares of
Common Stock.

The 2001 GMSP Transaction and the Stallings Transaction results in all
preferred stock being redeemable. The discount on the preferred stock is
being amortized over the period until redemption using the effective
interest method. At June 30, 2002 and December 31, 2001, there was
$11,766,000 and $13,051,000, respectively, in unaccreted discount on the
preferred stock and $788,450 and $461,344, respectively, in accrued
dividends on the Series B and Series C Preferred Stock.

As of June 30, 2002 there were 609,712 options outstanding to purchase
common stock ("options") at an average exercise price of $8.83 per share
that had been granted to officers and directors of the Company under the
1995 Stock Option Plan; 432,195 options, at an average exercise price of
$5.58 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 exercise price of $5.75 per share, that had been
granted to Glenn W. Anderson under an employment agreement.

Cash dividends of $478,971 ($.0175 per share) were paid during the first
quarter of 2001. The Board of Directors discontinued quarterly dividends
on the common stock in February 2001.

The Company's Common Stock commenced trading on the OTC Bulletin Board on
April 15, 2002 under the ticker symbol "GNAC". The OTC Bulletin Board is
a regulated quotation service that displays real-time quotes, last sale
prices, and volume information in over-the-counter equity securities.

The New York Stock Exchange ("NYSE") suspended trading of the Company's
Common Stock prior to the opening on April 15, 2002. This action was
taken by the NYSE because the Company had fallen below the

21

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(Unaudited)

NYSE's continued listing standards with regard to market
capitalization, stockholders' equity and the price of the Common Stock.

(5) Segment reporting

On February 7, 2002, the Company announced its decision to discontinue
writing commercial lines insurance business due to continued adverse
claims development and unprofitable results.

During 2001 the Company made operating decisions and assessed performance
for the commercial lines segment and the personal lines segment. The
commercial lines segment wrote 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 has elected not to 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 ended June 30, 2002 and 2001:

22

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(Unaudited)

23

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(Unaudited)

(6) Subsequent Events

On August 12, 2002, the Company announced its decision to put itself in a
position to exit its remaining active insurance business, personal auto,
in as orderly and productive a fashion as possible. To this end, and as
the current primary focus, the Company is seeking to sell its Miami,
Florida-based personal auto operation, the Lalande Group. In June 2002,
the company entered into a letter of intent with an unaffiliated third
party which contemplates a purchase price principally based upon the
direct premiums earned during a multi-year period following the
transaction (but no payments at closing) and sets forth numerous
conditions to closing, including regulatory and third party consents. The
letter of intent does not create an obligation by any party to enter into
a transaction, but generally prohibits the Company from soliciting or
engaging in discussions or negotiations with any other potential
purchaser until August 30, 2002. Preliminary due diligence investigation
by the potential purchaser is underway, although negotiations with
respect to definitive documentation have not commenced and there can be
no assurance that a definitive agreement concerning a sale will be
entered into or that any sale will be consummated. If a transaction is
not consummated on terms acceptable to the Company, the Company will
continue to evaluate the full range of options with respect to
accomplishing its goal of putting itself in a position to exit the
personal auto business.

On August 12, 2002, the Company entered into a definitive acquisition
agreement to sell and transfer a management contract controlling GAINSCO
County Mutual Insurance Company ("GCM") to Berkeley Management
Corporation ("Berkeley"), an affiliate of Liberty Mutual Insurance
Company ("Liberty"), for a purchase price of up to $10.0 million, of
which $1.0 million is payable upon closing and the balance in contingent
payments through September 2009. The $9.0 million total of future
payments would be payable $3 million in September 2003 and $1 million
each year thereafter through September 2009 and each payment is
contingent on there being no materially adverse change in the regulatory
treatment of GCM specifically, or county mutuals generally, from
legislative or regulatory administrative actions prior to the applicable
payment date. Additionally, the Company may receive from GCM
approximately $3 million of principal and interest in redemption of the
GCM surplus debenture held by the

24

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(Unaudited)

Company. The obligation of Berkeley to make the contingent payments in
accordance with the acquisition agreement is guaranteed by Liberty.
Pursuant to a 100% quota share reinsurance agreement (the "GAIC
Reinsurance Agreement") to be entered into at closing among GCM and
GAINSCO's subsidiaries, General Agents Insurance Company of America, Inc.
("GAIC") and MGA Agency, Inc., and certain other arrangements, the
Company will retain all assets and liabilities associated with GCM's
past, present and runoff commercial insurance business. The Company makes
a number representations, warranties and covenants in the acquisition
agreement and generally indemnifies Berkeley and Liberty for any losses
incurred resulting from (i) breaches of representations, warranties or
covenants of the Company; (ii) employee benefit plan obligations of GCM
relating to pre-closing periods; (iii) tax obligations of GCM relating to
pre-closing periods; (iv) all liabilities of GCM, to the extent that they
result from conditions or circumstances arising or events occurring
before the Closing, subject to certain exceptions; (v) all insurance
claims, liabilities and obligations of GCM that are not reinsured
pursuant to the GAIC Reinsurance Agreement or certain insurance fronting
programs between GCM and Metropolitan Property & Casualty Insurance
Company and Omni Insurance Company, respectively; and (vi) any and all
insurance claims, liabilities and obligations of GAIC under the GAIC
Reinsurance Agreement. GCM does not have any employees or employee
benefit plans. The closing of the transaction is subject to receipt of
regulatory approvals from the Texas, Oklahoma and North Dakota
Departments of Insurance and to approval by GAINSCO's bank and other
conditions. The Company ultimately expects to record a gain from this
transaction.

The Company expects to sell the office building at 500 Commerce Street in
Fort Worth, Texas housing the Company's principal executive offices to an
unaffiliated third party for $5 million on August 30, 2002, subject to
customary closing conditions. The Company expects to record a gain from
this transaction. As a result of this anticipated sale of its office
building, the Company was required to seek new office space to house its
principal executive offices and operations. In August 2002, the Company
expects to enter into an office lease for approximately 8,352 square feet
of space in Fountain Place, 1445 Ross Avenue, Suite 5300, Dallas, Texas,
to house the Company's executive offices and which address will be the
Company's new registered address. The lease is expected to be for a term
of four years, although the Company expects to have the right to
terminate the lease at its option at the end of 2005. The annual rental
expense is expected to equal to approximately $175,500. The lessor is
Crescent Real Estate Funding X, L.P., an affiliate of Crescent Real
Estate Equities Company, a Texas real estate investment trust f/k/a
Crescent Real Estate Equities, Inc. ("Crescent"). Robert W. Stallings,
GAINSCO's Chairman of the Board, became a member of the Board of Trust
Managers of Crescent in May 2002 and John C. Goff, a member of GAINSCO's
Board, is the Chief Executive Officer and Vice Chairman of the Board of
Trust Managers of Crescent. Mr. Goff is deemed to be the beneficial owner
of 3,630,248 common shares of Crescent, comprising 3.4% of the beneficial
ownership of such shares. Mr. Stallings is deemed to be the beneficial
owner of 22,000 common shares of Crescent, comprising less than 1% of the
beneficial ownership of such shares. The management of the Company
believes that the terms of the Company's lease with Crescent are no less
favorable to GAINSCO than those offered to other tenants by Crescent or
than GAINSCO could obtain for comparable space from unaffiliated parties.

In July 2002, the Company also entered an office lease with an
unaffiliated third party for 10,577 square feet of space at 5400 Airport
Freeway, Suite A, Fort Worth, Texas, to house the Company's insurance
operations. The lease is for a term of five years, although the Company
may terminate the lease at its option after the expiration of three
years. The annual base rental expense is equal to $105,770.

25

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(Unaudited)

Because of their importance to the Company, in August 2002 the Company
entered into executive severance agreements with three senior executives,
Richard M. Buxton, Daniel J. Coots and Rick Laabs. The agreements
generally provide that the Company shall pay the executive, upon
termination of the employment of the executive by the Company without
cause or by the executive with good reason during the term of the
agreement, a lump sum severance amount equal to the base annual salary of
the executive as of the date that the executive's employment with the
Company ends. The current base annual salaries of Mssrs. Buxton, Coots
and Laabs are $170,000, $155,000 and $150,000, respectively. The
executive severance agreements do not supersede the change in control
agreement or any other severance agreement the employee may have with the
Company.

The Company entered into Retention Incentive Agreements with sixteen of
its officers and other employees (none of whom are among the five most
highly compensated employees of the Company as of the most recent proxy
statement sent to shareholders). Each of the Retention Incentive
Agreements generally requires that the Company pay the applicable
employee an amount based upon the employee's annual base salary, less
amounts owed by the Company to the employee pursuant to any change in
control or severance agreements the employee may have with the Company.
The Company's obligation to make payments under each Retention Incentive
Agreement is conditioned upon the employee remaining in the employ of the
Company through a specified date, unless terminated earlier by the
Company without cause or by the employee with good reason. The Company
could be obligated to make up to an aggregate of approximately $ 793,000
in payments under the Retention Incentive Agreements.

In August 2002, the Company entered into an amendment to its Investment
Management Agreements with Goff Moore Strategic Partners, L.P. ("GMSP")
(See "Transactions with Goff Moore Strategic Partners, L.P. - 1999 GMSP
Transaction"). The amendment reduces, effective as of October 1, 2002,
the minimum aggregate monthly payment owed by the Company to GMSP from
$75,000 to $63,195 (with respect to each calendar month from October 2002
through September 2003), $53,750 (with respect to each calendar month
from October 2003 through September 2004), and $45,417 (with respect to
each calendar month after September 2004). The amendment also changes the
date upon which either party to each of the investment management
agreements can terminate the agreement at its sole option from October 4,
2002 to September 30, 2005. The amendment becomes effective with respect
to each of the Company's respective insurance subsidiaries only after
required approval from the applicable state insurance department has been
received.

26

GAINSCO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations

BUSINESS OPERATIONS

Discontinuance of Commercial Lines

On February 7, 2002, the Company announced its decision to cease writing
its primary line of business, commercial insurance, due to continued
adverse claims development and unprofitable results. As a result of this
decision, approximately $68.5 million of unprofitable commercial business
premium is being eliminated over the course of 2002 and 2003, with
continuing reductions in the cost structure of the Company. At the end of
the second quarter of 2002, the Company had approximately 1,115 claims
outstanding related to its past writings of commercial insurance. Due to
the long tail nature of these claims, the Company anticipates it will
take a substantial number of years to complete an orderly adjustment and
settlement process with regard to these claims, and any additional claims
it receives in the future from its past business writings.

Changes in Personal Lines

On August 12, 2002, the Company announced its decision to put itself in a
position to exit its remaining active insurance business, personal auto,
in as orderly and productive a fashion as possible. To this end, and as
the current primary focus, the Company is seeking to sell its Miami,
Florida-based personal auto operation, the Lalande Group. In June 2002,
the company entered into a letter of intent with an unaffiliated third
party which contemplates a purchase price principally based upon the
direct premiums earned during a multi-year period following the
transaction (but no payments at closing) and sets forth numerous
conditions to closing, including regulatory and third party consents. The
letter of intent does not create an obligation by any party to enter into
a transaction, but generally prohibits the Company from soliciting or
engaging in discussions or negotiations with any other potential
purchaser until August 30, 2002. Preliminary due diligence investigation
by the potential purchaser is underway, although negotiations with
respect to definitive documentation have not commenced and there can be
no assurance that a definitive agreement concerning a sale will be
entered into or that any sale will be consummated. If a transaction is
not consummated on terms acceptable to the Company, the Company will
continue to evaluate the full range of options with respect to
accomplishing its goal of putting itself in a position to exit the
personal auto business. Also, as a result of this process, the Company
evaluated the related goodwill and recorded an impairment of
approximately $2.9 million during the second quarter 2002. The remaining
goodwill as of June 30, 2002 is $.6 million dollars and is related to the
1998 acquisition of the Lalande Group.

Redeployment of Capital

The Company anticipates a lengthy period of transition as it exits from
its insurance business. During the transition process, the Company may
consider the sale of additional subsidiaries associated with that
business. Ultimately, the Company intends to redeploy the capital now
required by its insurance business, once it becomes available, to pursue
other opportunities in the future that offer a better prospect for
profitability. The Company believes that suitable capital redeployment
opportunities should be available after its insurance capital becomes
available, but cannot predict the amount of capital that will ultimately
be available for redeployment, the timing or the nature of the
opportunities that may be available at the time capital becomes
available. The opportunities may be outside of the insurance business and
could be in the financial services business.

27

Sale of GAINSCO County Mutual

On August 12, 2002, the Company entered into a definitive acquisition
agreement to sell and transfer a management contract controlling GAINSCO
County Mutual Insurance Company ("GCM") to Berkeley Management
Corporation ("Berkeley"), an affiliate of Liberty Mutual Insurance
Company ("Liberty"), for a purchase price of up to $10.0 million, of
which $1.0 million is payable upon closing and the balance in contingent
payments through September 2009. The $9.0 million total of future
payments would be payable $3 million in September 2003 and $1 million
each year thereafter through September 2009 and each payment is
contingent on there being no materially adverse change in the regulatory
treatment of GCM specifically, or county mutuals generally, from
legislative or regulatory administrative actions prior to the applicable
payment date. Additionally, the Company may receive from GCM
approximately $3 million of principal and interest in redemption of the
GCM surplus debenture held by the Company. The obligation of Berkeley to
make the contingent payments in accordance with the acquisition agreement
is guaranteed by Liberty. Pursuant to a 100% quota share reinsurance
agreement (the "GAIC Reinsurance Agreement") to be entered into at
closing among GCM and GAINSCO's subsidiaries, General Agents Insurance
Company of America, Inc. ("GAIC") and MGA Agency, Inc., and certain other
arrangements, the Company will retain all assets and liabilities
associated with GCM's past, present and runoff commercial insurance
business. The Company makes a number of representations, warranties and
covenants in the acquisition agreement and generally indemnifies Berkeley
and Liberty for any losses incurred resulting from (i) breaches of
representations, warranties or covenants of the Company; (ii) employee
benefit plan obligations of GCM relating to pre-closing periods; (iii)
tax obligations of GCM relating to pre-closing periods; (iv) all
liabilities of GCM, to the extent that they result from conditions or
circumstances arising or events occurring before the Closing, subject to
certain exceptions; (v) all insurance claims, liabilities and obligations
of GCM that are not reinsured pursuant to the GAIC Reinsurance Agreement
or certain insurance fronting programs between GCM and Metropolitan
Property & Casualty Insurance Company and Omni Insurance Company,
respectively; and (vi) any and all insurance claims, liabilities and
obligations of GAIC under the GAIC Reinsurance Agreement. GCM does not
have any employees or employee benefit plans. The closing of the
transaction is subject to receipt of regulatory approvals from the Texas,
Oklahoma and North Dakota Departments of Insurance and to approval by
GAINSCO's bank and other conditions. The Company ultimately expects to
record a gain from this transaction.

Sale of Office Building; New Office Leases

The Company expects to sell the office building at 500 Commerce Street in
Fort Worth, Texas housing the Company's principal executive offices to an
unaffiliated third party for $5 million on August 30, 2002, subject to
customary closing conditions. The Company expects to record a gain from
this transaction. As a result of this anticipated sale of its office
building, the Company was required to seek new office space to house its
principal executive offices and operations. In August 2002, the Company
expects to enter into an office lease for approximately 8,352 square feet
of space in Fountain Place, 1445 Ross Avenue, Suite 5300, Dallas, Texas,
to house the Company's executive offices and which address will be the
Company's new registered address. The lease is expected to be for a term
of four years, although the Company expects to have the right to
terminate the lease at its option at the end of 2005. The annual rental
expense is expected to equal to approximately $175,500. The lessor is
Crescent Real Estate Funding X, L.P., an affiliate of Crescent Real
Estate Equities Company, a Texas real estate investment trust f/k/a
Crescent Real Estate Equities, Inc. ("Crescent"). Robert W. Stallings,
GAINSCO's Chairman of the Board, became a member of the Board of Trust
Managers of Crescent in May 2002 and John C. Goff, a member of GAINSCO's
Board, is the Chief Executive Officer and Vice Chairman of the Board of
Trust Managers of Crescent. Mr. Goff is deemed to be the beneficial owner
of 3,630,248 common shares of Crescent, comprising 3.4% of the beneficial
ownership of such shares. Mr. Stallings is deemed to be the beneficial
owner of 22,000 common shares of Crescent, comprising less than 1% of the
beneficial ownership of such shares. The management of the Company
believes that the terms of the Company's lease with Crescent are no less
favorable to GAINSCO

28

than those offered to other tenants by Crescent or than GAINSCO could
obtain for comparable space from unaffiliated parties.

In July 2002, the Company also entered an office lease with an
unaffiliated third party for 10,577 square feet of space at 5400 Airport
Freeway, Suite A, Fort Worth, Texas, to house the Company's insurance
operations. The lease is for a term of five years, although the Company
may terminate the lease at its option after the expiration of three
years. The annual base rental expense is equal to $105,770.

Executive Severance Agreements

Because of their importance to the Company, in August 2002 the Company
entered into executive severance agreements with three senior executives,
Richard M. Buxton, Daniel J. Coots and Rick Laabs. The agreements
generally provide that the Company shall pay the executive, upon
termination of the employment of the executive by the Company without
cause or by the executive with good reason during the term of the
agreement, a lump sum severance amount equal to the base annual salary of
the executive as of the date that the executive's employment with the
Company ends. The current base annual salaries of Mssrs. Buxton, Coots
and Laabs are $170,000, $155,000 and $150,000, respectively. The
executive severance agreements do not supersede the change in control
agreements or any other severance agreements the employees may have with
the Company.

Retention Incentive Agreements

The Company entered into Retention Incentive Agreements with sixteen of
its officers and other employees (none of whom are among the five most
highly compensated employees of the Company as of the most recent proxy
statement sent to shareholders). Each of the Retention Incentive
Agreements generally requires that the Company pay the applicable
employee an amount based upon the employee's annual base salary, less
amounts owed by the Company to the employee pursuant to any change in
control or severance agreements the employee may have with the Company.
The Company's obligation to make payments under each Retention Incentive
Agreement is conditioned upon the employee remaining in the employ of the
Company through a specified date, unless terminated earlier by the
Company without cause or by the employee with good reason. The Company
could be obligated to make up to an aggregate of approximately $ 793,000
in payments under the Retention Incentive Agreements.

Amendment to Investment Management Agreements

In August 2002, the Company entered into an amendment to its Investment
Management Agreements with Goff Moore Strategic Partners, L.P. ("GMSP")
(See "Transactions with Goff Moore Strategic Partners, L.P. - 1999 GMSP
Transaction"). The amendment reduces, effective as of October 1, 2002,
the minimum aggregate monthly payment owed by the Company to GMSP from
$75,000 to $63,195 (with respect to each calendar month from October 2002
through September 2003), $53,750 (with respect to each calendar month
from October 2003 through September 2004), and $45,417 (with respect to
each calendar month after September 2004). The amendment also changes the
date upon which either party to each of the investment management
agreements can terminate the agreement at its sole option from October 4,
2002 to September 30, 2005. The amendment becomes effective with respect
to each of the Company's respective insurance subsidiaries only after
required approval from the applicable state insurance department has been
received.

29

Tri-State Acquisition and Sale

On January 7, 2000, the Company expanded its personal lines business
conducted through the Lalande Group through the acquisition of Tri-State,
an insurance operation specializing in underwriting, servicing and claims
handling of nonstandard personal auto insurance in Minnesota, North
Dakota and South Dakota. Tri-State owned and operated a managing general
agency, a motor vehicle driving records service company and an insurance
subsidiary, Midwest Casualty Insurance Company ("MCIC") that had
policyholders' surplus of approximately $3,034,000. The purchase price
consideration consisted of $6,000,000 in cash at closing plus additional
cash payments of $1,200,000 and $1,600,000 paid in July 2000 and January
2001, respectively. On August 31, 2001, the Company sold all of the stock
of Tri-State to Herbert A. Hill for a cash price of $935,000. Mr. Hill is
the President and a former owner of Tri-State. The Company retained MCIC,
which had policyholders' surplus of approximately $3,078,000 at December
31, 2001 and $2,846,000 at June 30, 2002.

Other Transactions with Goff Moore Strategic Partners, L.P.

1999 GMSP Transaction. On October 4, 1999, the Company sold to GMSP, for
an aggregate purchase price of $31,620,000, (i) 31,620 shares of Series A
Preferred Stock, which are convertible into 6,200,000 shares of Common
Stock at a conversion price of $5.10 per share (subject to adjustment for
certain events), (ii) the Series A Warrant to purchase an aggregate of
1,550,000 shares of Common Stock at an exercise price of $6.375 per share
and expiring October 4, 2004 and (iii) the Series B Warrant to purchase
an aggregate of 1,550,000 shares of Common Stock at an exercise of $8.50
per share and expiring October 4, 2006. At closing the Company and its
insurance company subsidiaries entered into Investment Management
Agreements with GMSP, pursuant to which GMSP manages their respective
investment portfolios. Completion of these transactions (the "1999 GMSP
Transaction") concluded the strategic alternatives review process that
the Company initiated in 1998. Proceeds from the 1999 GMSP Transaction
were available for acquisitions, investments and other corporate
purposes.

2001 GMSP Transaction. On March 23, 2001, the Company consummated a
transaction with GMSP (the "2001 GMSP Transaction") pursuant to which,
among other things, the Company issued shares of its newly created Series
C Preferred Stock to GMSP in exchange for an aggregate purchase price of
$3.0 million in cash.

The annual dividend rate on the Series C Preferred Stock is 10% during
the first three years and 20% thereafter. Unpaid dividends are cumulative
and compounded. The Series C Preferred Stock is redeemable at the
Company's option after five years and at the option of the majority
holders after six years at a price of $1,000 per share plus accrued and
unpaid dividends. The Series C Preferred Stock is not convertible into
Common Stock.

The agreement with GMSP in connection with the 2001 GMSP Transaction was
conditioned upon the following changes in the securities currently held
by GMSP. The exercise prices of the Series A Warrant and the Series B
Warrant held by GMSP were amended to $2.25 per share and $2.5875 per
share, respectively. Each of these warrants provides for the purchase of
1,550,000 million shares of Common Stock, subject to adjustment. Further,
the Company is required to redeem the outstanding shares of its Series A
Preferred Stock on January 1, 2006, subject to certain conditions, at a
price of $1,000 per share plus accrued and unpaid dividends. Any Series A
Preferred Stock unredeemed for any reason after that date would accrue
interest, payable quarterly at a rate equal to eight percent per year
with any unpaid interest compounded annually. The Series A Preferred
Stock is convertible into 6,200,000 shares of Common Stock at a
conversion price of $5.10 per share.

The agreement with GMSP provided an opportunity to convert the Company's
illiquid investments with a cost of $4.2 million to cash as of November
2002, as follows: the Company could at its option require GMSP to
purchase the illiquid investments for $2.1 million, less any future cash
received prior to November 2002 from the investments. GMSP could at its
option require the Company to sell the illiquid investments to GMSP for
$4.2 million, less any future cash received prior to November 2002 from
the investments. During the second quarter of 2001, the

30

Company recognized a permanent impairment of these investments and wrote
down the carrying value to the amount recoverable from GMSP under the put
option. In February 2002, GMSP consented to the early exercise of the
Company's option, and the Company exercised its option to require GMSP
purchase the illiquid investments for approximately $2.1 million.

Transactions with Robert W. Stallings

On March 23, 2001, the Company consummated a transaction with Mr.
Stallings (the "Stallings Transaction") pursuant to which, among other
things, the Company issued shares of its newly created Series B Preferred
Stock and a warrant to purchase an aggregate of 1,050,000 shares of
Common Stock at $2.25 per share and expiring March 23, 2006 in exchange
for an aggregate purchase price of $3.0 million in cash. The annual
dividend provisions and the redemption provisions of the Series B
Preferred Stock are the same as those for the Series C Preferred Stock.
The Series B Preferred Stock is convertible into Common Stock at $2.25
per share. Subject to adjustment for certain events, the Series B
Preferred Stock is convertible into a maximum of 1,333,333 shares of
Common Stock. Mr. Stallings was elected non-executive Vice Chairman of
the Board and a director of the Company. On September 6, 2001, Mr.
Stallings was elected non-executive Chairman of the Board of Directors of
the Company.

Reinsurance Transactions

Effective December 31, 2000, the Company entered into a quota share
reinsurance agreement whereby the Company ceded 100% of its commercial
auto liability unearned premiums and 50% of all other commercial business
unearned premiums at December 31, 2000 to a non-affiliated reinsurer. For
policies with an effective date of January 1, 2001 through December 31,
2001, the Company entered into a quota share reinsurance agreement
whereby the Company ceded 21.03% of its commercial business to a
non-affiliated reinsurer. Also effective December 31, 2000, the Company
entered into a reserve reinsurance cover agreement with a non-affiliated
reinsurer. This agreement reinsures the Company's ultimate net aggregate
liability in excess of $32,500,000 up to an aggregate limit of
$89,650,000 for net commercial auto liability losses and loss adjustment
expense incurred but unpaid as of December 31, 2000. The Company
established a reinsurance balance receivable and a liability for funds
held under reinsurance agreements for the reserves transferred at
December 31, 2001. Also in connection with this agreement, the Company
was required to maintain assets in a trust fund with a fair value at
least equal to the funds held liability. The trust fund was established
during the third quarter of 2001 and at December 31, 2001 the assets in
the trust had a fair value of $49,553,698. Because the Company's
statutory policyholders' surplus fell below certain levels specified in
the agreement, the reinsurer had the option to direct the trustee to
transfer the assets of the trust to the reinsurer. In March of 2002, the
reinsurer exercised this option and the trust assets were transferred to
the reinsurer. As a result, investments and funds held under reinsurance
agreements were reduced by approximately $44,000,000. The Company
recorded a realized gain of approximately $486,000 as a result of the
transfer. The reinsurer continues to be responsible for reimbursing the
Company for claim payments covered under this agreement

RESULTS OF OPERATIONS

Gross premiums written for the second quarter of 2002 were $8,781,050
versus $29,127,370 for the comparable 2001 period representing a 70%
decrease. Commercial lines decreased 82% as a result of the Company's
decision to discontinue writing commercial lines business. Personal lines
decreased 53% as a result of the decision to discontinue writing all
personal lines other than Florida personal auto. For the first six months
of 2002 gross premiums written have decreased 58% from the comparable
2001 period which is primarily attributed to the decision to discontinue
writing commercial lines and all personal lines other than Florida
personal auto.

31

The following table compares the major product lines between the periods
for gross premiums written.

COMMERCIAL LINES accounted for 48 percentage points ("points") of the
decrease in gross premiums written for the second quarter of 2002 and 38
points of the decrease for the first six months of 2002 versus the
comparable 2001 periods. Commercial auto contributed 27 points of the
decrease for the second quarter and 21 points of the decrease for the
first six months of 2002 versus the comparable 2001 periods. General
liability contributed 18 points of the decrease for the second quarter
and 15 points of the decrease for the first six months of 2002 versus the
comparable 2001 periods. The GAAP combined ratio for the commercial lines
segment was 135.2 % in the first six months of 2002 versus 163.2% for the
first six months of 2001. The Company decided to discontinue writing
commercial lines during the first quarter of 2002.

PERSONAL LINES accounted for 22 points of the decrease for the second
quarter of 2002 and 20 points of the decrease for the first six months of
2002 versus the comparable 2001 periods. Personal auto writings account
for 17 points of the decrease for the second quarter and 15 points of the
decrease for the first six months of 2002 versus the comparable 2001
periods. Umbrella liability writings account for 4 points of the decrease
second quarter and 4 points of the decrease for the first six months of
2002 versus the comparable 2001 periods. The GAAP combined ratio for the
personal lines segment was 111.0% for the first six months of 2002 versus
109.4% for the first six months of 2001. The Company decided in the
second quarter of 2002 to put itself in a position to exit personal auto
through a possible sale of the Lalande Group.

For the first six months of 2002, gross premium percentages by
significant product line were as follows: personal auto (54%), commercial
auto (26%) and commercial general liability (17%). Net premiums earned
decreased 2% for the second quarter and increased 2% for the first six
months of 2002 versus the comparable 2001 periods.

Net investment income decreased 62% and 56% for the second quarter and
first six months of 2002 versus the comparable 2001 periods,
respectively. These decreases were primarily due to the decline in
investments as a result of negative cash flows from operations and the
general decline in interest rates.

During the first six months of 2002, the Company reduced the carrying
value of a non-rated commercial mortgage backed security to $0 resulting
in a write down of $2,010,670 (recorded as a realized loss in the
statement of operations) as a result of a significant increase in the
default rate in the underlying commercial mortgage portfolio, which has
disrupted the cash flow stream sufficiently to make future cash flows
unpredictable. This write-down was offset by net realized gains of
$2,389,253 recorded from the sale of various bond securities.

Insurance services revenues increased $2,486,357 and $2,958,711 in the
second quarter and first six months of 2002 over the comparable 2001
periods, respectively primarily as a result of amortization of deferred
reinsurance recoveries from reserve development under the reserve
reinsurance cover agreement mentioned previously. For the second quarter
and the first six months of 2002, $579,014 and $2,464,090 has been
recorded in other income which represents the reserve development under
the reserve reinsurance cover agreement. No amounts were recognized for
the second quarter and the first six months of 2001 under the reserve
reinsurance agreement. Amortization is based upon claims recovered from
the reinsurer in relation to the amount of the reinsured layer under the
reserve reinsurance cover agreement.

32

Claims and claims adjustment expenses ("C & CAE") increased $1,128,173
and $1,188,477 in the second quarter and first six months of 2002 from
the comparable 2001 periods. The C & CAE ratio was 104.4% in the second
quarter of 2002 versus 96.1% in the second quarter of 2001. The C & CAE
ratio was 95.2% in the first six months of 2002 versus 93.2% in the first
six months of 2001. The increase in the C & CAE ratio in the second
quarter of 2002 was primarily due to prior period reserve development in
commercial general liability.

The ratio of commissions plus the change in deferred policy acquisition
costs and deferred ceding commission income to net premiums earned was
18% for the second quarter of 2002 versus 21% for the second quarter of
2001. This ratio was 19% for the first six months of 2002 and 2001. The
decrease in the ratio for the second quarter was primarily due to a
change in the mix of business due to the exiting of commercial lines

Interest expense from the note payable decreased in the second quarter
and first six months of 2002 from the comparable 2001 periods primarily
due to the decrease in the outstanding note payable balance as a result
of principal payments. There is no amortization expense in the 2002
periods due to the adoption of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (see Note 1(f)
of Notes to Financial Statements).

Underwriting and operating expenses were down 80% and 48% in the second
quarter and first six months of 2002 from the comparable 2001 periods,
respectively, primarily as a result of cost reductions implemented in the
second half of 2001 and in the current periods. A decrease in the reserve
for reinsurance recoverables during the second quarter of 2002 also
contributed to the decrease. This decrease was the result of a recovery
on a past due ceded paid claim.

As a result of the decision to position the Company for an exit from
personal auto, as previously discussed, the Company evaluated the related
goodwill and recorded an impairment of $2,859,507 in the second quarter
of 2002. The remaining goodwill as of June 30, 2002 is $609,000 and is
related to the 1998 acquisition of the Lalande Group.

LIQUIDITY AND CAPITAL RESOURCES

Parent Company

GAINSCO, INC. ("GNA") is a holding company that provides administrative
and financial services for its wholly owned subsidiaries. GNA needs cash
for: (1) principal and interest on its bank note payable, (2)
administrative expenses, and (3) investments. The primary sources of cash
to meet these obligations are statutory permitted payments from its
insurance subsidiaries, including (1) dividend payments, (2) surplus
debenture interest payments, and (3) tax sharing payments. Statutes in
Oklahoma and North Dakota restrict the payment of dividends by the
insurance company subsidiaries to the available surplus funds derived
from their realized net profits. The maximum amount of cash dividends
that each subsidiary may declare without regulatory approval in any
12-month period is the greater of net income for the 12-month period
ended the previous December 31 or ten percent (10%) of policyholders'
surplus as of the previous December 31. On February 28, 2002, General
Agents (the Oklahoma subsidiary) paid dividends to GNA of $7,238,000.
Generally without prior regulatory approval, on or after March 2003,
General Agents may declare dividends to GNA of up to the greater of net
income for the 12-month period ended December 31, 2002 or ten percent
(10%) of policyholders' surplus as of December 31, 2002. In 2002 MCIC
(the North Dakota subsidiary) may declare dividends to GNA of up to
approximately $300,000. GNA believes the cash dividends from its
insurance subsidiaries should be sufficient to meet its expected
obligations for 2002.

The Company had Federal income tax loss carry forward tax benefits at
June 30, 2002 of $22,603,000 that could be applied against any future
earnings of the Company, subject to certain limitations. Thus, the
Company does not currently require funds to satisfy Federal income tax
obligations.

33

GNA entered into an amendment dated as of February 27, 2002 to its bank
credit agreement which cured GNA's covenant breaches and provided for
additional principal prepayments. Pursuant to the amendment, GNA prepaid
$6,100,000 of the indebtedness outstanding under the credit agreement.
Several covenants in the existing credit agreement were eliminated or
modified by the amendment and the interest rate was changed to a base
rate (which approximates prime) plus 175 basis points. The major
financial covenant of the amended credit agreement requires the statutory
surplus of General Agents to be at a minimum of the lesser of $20,000,000
or five times the unpaid principal balance. General Agents' statutory
surplus at June 30, 2002 was $32,598,697, which is 63% above the minimum
threshold. The remaining $4,200,000 principal balance under the credit
agreement is payable in 2003 which the Company intends to fund with
dividends from General Agents and short term investments. The credit
agreement, among other things, precludes payment of dividends on common
or preferred stock and restricts the kinds of investments that GNA may
make.

Subject to bank credit agreement restrictions, GNA may also obtain cash
through the sale of subsidiaries or assets and through the issuance of
common or preferred stock. The bank credit agreement generally requires a
note prepayment in the event of the sale of GNA of any subsidiary or
assets (except certain ordinary course of business sales), or any
issuance of stock, equal to 50% of the proceeds received.

The Company will be in a lengthy period of transition as it exits from
its insurance business. During the transition process, the Company may
consider the sale of additional subsidiaries associated with that
business. See "Business Transactions - Changes in Personal Lines" and
"Business Transactions - Sale of GAINSCO County Mutual" above.

Subsidiaries, Principally Insurance Operations

The primary sources of the insurance subsidiaries' 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 are adequate liquidity for the payment of claims and
other short-term commitments.

With regard to long term liquidity, the average maturity of the
investment portfolio is 2.5 years. The fair value of the fixed maturity
portfolio at June 30, 2002 was $3,001,837 above amortized cost.

Investments decreased primarily due to a nonaffiliated reinsurer
exercising its option, during the first quarter of 2002, to take
possession of approximately $44,000,000 in investments, mentioned
previously. The remaining decrease is attributable to principal payments
on the Note payable of $6,600,000 and negative cash flows from
operations.

Premiums receivable decreased primarily as a result of the Company's
decision to discontinue writing commercial lines business. Reinsurance
balances receivable decreased primarily due recoveries received under the
reserve reinsurance cover agreement. Ceded unearned premiums decreased
primarily as a result of the decrease in ceded unearned premiums from the
2000 commercial quota share reinsurance agreements. Other assets
increased primarily as a result of funds put on deposit with a
nonaffiliated reinsurer in the second quarter to collateralize balances
due to the reinsurer.

Unpaid claims and claims adjustment expenses decreased primarily due to
the run-off of commercial business. Unearned premiums decreased because
of the decrease in writings. Accounts payable decreased primarily due to
the payment of premiums to a non-affiliated insurer on business produced
by the personal auto agency. Reinsurance balances payable decreased
primarily due to settlements made during the first six months of 2002
from various quota share reinsurance agreements for the 2001 year. The
note payable decreased primarily due to a

34

prepayment of $6,100,000 made during the first quarter of 2002 in
conjunction with an amendment to the credit agreement (see Note (3) of
Notes to Consolidated Financial Statements). Funds held under reinsurance
agreements were eliminated due to a non-affiliated reinsurer's decision
to take possession of investments, mentioned previously, which reduced
the Company's liability to this non-affiliated reinsurer.

Accumulated other comprehensive income of $1,980,560 was recorded at June
30, 2002 as a result of the unrealized gains on bonds available for sale.
The increase in retained deficit is primarily attributable to the net
loss recorded during the first six months of 2002.

The tragic events of September 11, 2001 did not impact the Company's
financial results for the first six months of 2002.

Regulatory Scrutiny

Because of the continued period of transition and diminished capital
levels, the Company is experiencing increased scrutiny from the principal
state insurance departments which regulate the Company. The increased
scrutiny the Company is experiencing is resulting in requests from
regulators for additional information concerning the adequacy of the
Company's loss reserves and other matters. The Company is in the process
of providing the requested information. The enhanced regulatory scrutiny
may have an adverse impact on the ability of the Company to receive
approval from these insurance departments with respect to the Company's
proposed transactions which require such approval, including the sale of
GCM and future actions that the Company may seek to take in the course of
exiting its insurance business and redeploying its capital. Also impacted
could be certain internal matters, such as changes in pooling and
reinsurance arrangements and the amount of dividends which the insurance
subsidiaries may declare and pay to the holding company.

Liquidation Value

At June 30, 2002, total assets less total liabilities (excluding
redeemable preferred stock) of the Company was $41,922,221, and there
were outstanding three series of preferred stock with an aggregate
liquidation value of $38,408,450 ($37,620,000 stated value plus accrued
dividends of $788,450). In the event of a liquidation of the Company
(which is not contemplated) based upon consolidated shareholders' equity
at June 30, 2002, there would be $3,513,771 available for distribution to
the holders of the common stock ($.17 per common share) after the payment
of creditors and the liquidation value of the preferred stock. The amount
ultimately available to the shareholders would vary with changes in the
assets and liabilities of the Company.

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, commodity or equity
risk.

35

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 are in the portfolios of the
insurance company subsidiaries and come from premiums paid by
policyholders. These funds are invested predominately in high quality
bonds with relatively short durations. 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.

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) the
Company's ability to effect the successful exit from unprofitable lines
and businesses that the Company believes cannot be counted on to produce
future profit, (b) heightened competition from existing competitors and
new competitor entrants into the Company's markets, (c) the extent to
which market conditions firm up, the acceptance of higher prices in the
market place and the Company's ability to realize and sustain higher
rates, (d) contraction of the markets for the Company's business, (e) the
Company's ability to secure an A.M. Best rating acceptable to its end
markets and meet its obligations under its capital and debt agreements,
(f) the ongoing level of claims and claims-related expenses and the
adequacy of claim reserves, (g) the effectiveness of investment
strategies implemented by the Company's investment manager, (h) continued
justification of recoverability of goodwill in the future, (i) the
availability of reinsurance and the ability to collect reinsurance
recoverables, (j) the Company's ability to invest in new endeavors that
are successful, (k) the limitation on the Company's ability to use net
operating loss carry forwards as a result of constraints caused by
ownership changes within the meaning of Internal Revenue Code Section
382, (l) the Company's ability to consummate the sale of the Company's
management agreement with GAINSCO County Mutual Insurance Company, (m)
the Company's ability to negotiate and consummate a sale of the Lalande
Group on satisfactory terms, and (n) general economic conditions
including fluctuations in interest rates. A forward-looking statement is
relevant as of the date the statement is 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.

36

PART II. OTHER INFORMATION

GAINSCO, INC. AND SUBSIDIARIES

Item 1. Legal Proceedings

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.

Item 2. Changes in Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

An Annual Meeting of Shareholders of the Company was held on
June 6, 2002 in Fort Worth, Texas. At the Annual Meeting,
shareholders elected directors for the ensuing year and until
their successors are duly elected and qualified, and ratified
the selection by the Board of Directors of KPMG LLP as the
Company's independent auditors for the year ending December 31,
2002. The results of the voting were as follows:

Ratification of appointment of independent auditors:

37

PART II. OTHER INFORMATION

GAINSCO, INC. AND SUBSIDIARIES

Item 5. Other Information

Joseph W. Pitts, who served as Vice President of the Company since
August of 1997 and Senior Vice President since 1999, resigned in July,
2002. The Company has retained Tillinghast-Towers Perrin, an
independent actuarial firm that previously had been engaged to review
the Company's reserves, to assist in setting the reserve levels.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

10.25 First Amendment to Investment Management Agreements dated August
9, 2002 among Goff Moore Strategic Partners, L.P., the Registrant,
General Agents Insurance Company of America, Inc., MGA Insurance
Company, Inc., GAINSCO County Mutual Insurance Company and Midwest
Casualty Insurance Company

10.26 Acquisition Agreement dated August 12, 2002 among the Registrant,
GAINSCO Service Corp., GAINSCO County Mutual Insurance Company,
Berkeley Management Corporation and Liberty Mutual Insurance
Company

10.27 Commercial Lease Agreement dated July 31, 2002 between JaGee Real
Properties, L.P. and General Agents Insurance Company of America,
Inc.

10.28 Form of Executive Severance Agreement between GAINSCO Service
Corp. and each of Richard M. Buxton, Richard A. Laabs and Daniel
J. Coots.

10.29 Letter of Intent dated June 28, 2002 among the Registrant,
National Specialty Lines, Inc., DLT Insurance Adjusters, Inc.,
Lalande Financial Group, Inc. and an unaffiliated third party*

10.30 Representative Forms of Retention Incentive Agreement

15. Awareness Letter of KPMG LLP

99.1 Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief
Executive Officer

99.2 Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief
Financial Officer

(b) Reports on Form 8-K

None

* Certain portions of this exhibit are omitted pursuant to a request for
confidential treatment made in accordance with Rule 24b-2 of the Securities
Exchange Act of 1934, as amended.

38

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 13, 2002 By: /s/ Daniel J. Coots
----------------------------------------
Daniel J. Coots
Senior Vice President, Treasurer and
Chief Financial Officer

39

INDEX TO EXHIBITS

* Certain portions of this exhibit are omitted pursuant to a request for
confidential treatment made in accordance with Rule 24b-2 of the Securities
Exchange Act of 1934, as amended.