<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 September 30, 1996 Commission File Number 1-9828
GAINSCO, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1617013
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Commerce Street Fort Worth, Texas 76102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (817) 336-2500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of September 30, 1996, there were 21,451,273 shares outstanding of the
registrant's Common Stock, $.10 par value.
<PAGE> 2
GAINSCO, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of September 30, 1996
(unaudited) and December 31, 1995 3
Consolidated Statements of Operations for the Three Months
and Nine Months Ended September 30, 1996 and 1995 (unaudited) 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1996 and 1995 (unaudited) 6
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 (unaudited) 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 16
SIGNATURE 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30
1996 December 31
Assets (unaudited) 1995
------ ------------ ------------
<S> <C> <C>
Investments
Fixed maturities:
Bonds held to maturity, at amortized cost (fair
value: $95,886,623 - 1996, $98,421,877 - 1995) $ 95,623,946 97,301,350
Bonds available for sale, at fair value
(amortized cost: $76,479,569 - 1996, $77,478,359 - 1995) 76,915,527 79,130,048
Certificates of deposit, at cost (which approximates
fair value) 595,000 620,000
Short-term investments, at cost (which approximates
fair value) 28,475,453 5,975,412
------------ ------------
Total investments 201,609,926 183,026,810
Cash 1,525,199 1,774,608
Accrued investment income 3,467,187 4,539,236
Premiums receivable (net of allowance for doubtful
accounts: $101,000 - 1996 and 1995) 14,196,285 15,913,734
Reinsurance balances receivable 2,514,987 3,505,818
Ceded unpaid claims and claim adjustment expenses 26,442,190 24,650,606
Ceded unearned premiums 13,238,220 6,008,187
Deferred policy acquisition costs 12,250,486 12,114,681
Property and equipment (net of accumulated depreciation
and amortization: $4,525,695 - 1996, $3,812,976 - 1995) 6,329,059 6,561,792
Current Federal income taxes recoverable 866,283 --
Deferred Federal income taxes recoverable (note 1) 3,072,163 2,578,714
Management contract 1,800,070 1,837,570
Other assets 2,086,426 1,643,853
------------ ------------
Total assets $289,398,481 264,155,609
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30
1996 December 31
Liabilities and Shareholders' Equity (unaudited) 1995
------------------------------------ ------------- -------------
<S> <C> <C>
Liabilities:
Unpaid claims and claim adjustment expenses $ 105,113,909 95,011,463
Unearned premiums 60,833,363 53,525,323
Commissions payable 2,400,227 2,207,353
Accounts payable 4,716,107 4,635,715
Reinsurance balances payable 1,862,793 1,817,056
Deferred revenue 653,418 492,393
Drafts payable 3,474,513 2,569,265
Note payable -- 1,750,000
Dividends payable (note 3) 321,770 269,066
Other liabilities 1,062,930 1,388,098
Current Federal income taxes payable (note 1) -- 1,047,981
------------- -------------
Total liabilities 180,439,030 164,713,713
------------- -------------
Shareholders' Equity (note 3):
Preferred stock ($100 par value, 10,000,000 shares
authorized, none issued) -- --
Common stock ($.10 par value, 250,000,000 shares
authorized, 21,665,935 issued at September 30, 1996
and 21,637,481 issued at December 31, 1995) 2,166,594 2,163,748
Additional paid-in capital 87,601,318 87,543,175
Net unrealized gain on fixed maturities (note 1) 283,373 1,073,597
Retained earnings 20,900,950 9,673,968
Treasury stock (214,662 shares at September 30, 1996
and 112,260 shares at December 31, 1995) (1,992,784) (1,012,592)
------------- -------------
Total shareholders' equity 108,959,451 99,441,896
------------- -------------
Total liabilities and shareholders' equity $ 289,398,481 264,155,609
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months Nine Months
ended September 30 ended September 30
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned (note 2) $ 26,922,178 24,959,370 79,554,048 70,675,438
Net investment income 2,352,286 2,161,328 6,756,243 6,084,154
Net realized gains (note 1) 158,736 18,239 355,212 54,648
Insurance services 634,115 596,699 1,822,812 1,652,058
------------ ------------ ------------ ------------
Total revenues 30,067,315 27,735,636 88,488,315 78,466,298
------------ ------------ ------------ ------------
Expenses:
Claims and claim adjustment expenses
(note 2) 16,167,382 12,873,460 42,985,948 37,176,123
Commissions 6,002,541 5,988,556 17,899,779 15,841,620
Change in deferred policy acquisition costs (9,376) (525,104) (135,805) (1,572,804)
Underwriting and operating expenses 3,840,050 3,913,511 11,765,751 11,144,454
------------ ------------ ------------ ------------
Total expenses 26,000,597 22,250,423 72,515,673 62,589,393
------------ ------------ ------------ ------------
Income before Federal income taxes 4,066,718 5,485,213 15,972,642 15,876,905
Federal income taxes:
Current expense 904,701 1,497,266 3,953,645 3,923,001
Deferred expense (benefit) (135,570) (95,295) (67,943) 98,394
------------ ------------ ------------ ------------
Total taxes 769,131 1,401,971 3,885,702 4,021,395
------------ ------------ ------------ ------------
Net income $ 3,297,587 4,083,242 12,086,940 11,855,510
============ ============ ============ ============
Net income per share .15 .19 .55 .54
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months ended September 30
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,086,940 11,855,510
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 3,537,060 2,918,102
Change in deferred Federal income taxes recoverable (67,943) 98,394
Change in accrued investment income 1,072,049 709,631
Change in premiums receivable 1,717,449 (839,063)
Change in reinsurance balances receivable 990,831 1,413,411
Change in ceded unpaid claims and claim adjustment
expenses (1,791,584) (6,463,651)
Change in ceded unearned premiums (7,230,033) 2,185,166
Change in deferred policy acquisition costs (135,805) (1,572,804)
Change in management contract 37,500 37,500
Change in other assets (442,573) (130,303)
Change in unpaid claims and claim adjustment
expenses 10,102,446 13,720,968
Change in unearned premiums 7,308,040 3,681,709
Change in commissions payable 192,874 (638,230)
Change in accounts payable 80,392 93,340
Change in reinsurance balances payable 45,737 (1,284,412)
Change in deferred revenue 161,025 186,052
Change in drafts payable 905,248 (2,126,921)
Change in other liabilities (325,168) (212,192)
Change in current Federal income taxes payable (1,914,264) 92,015
------------ ------------
Net cash provided by operating activities $ 26,330,221 23,724,222
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
(continued)
6
<PAGE> 7
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months ended September 30
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from investing activities:
Bonds held to maturity:
Matured $ 10,635,056 39,966,950
Purchased (10,776,687) (31,708,371)
Bonds available for sale:
Sold 23,804,205 5,166,863
Matured 7,879,440 3,506,400
Purchased (31,690,160) (39,917,034)
Certificates of deposit matured 400,000 395,000
Certificates of deposit purchased (375,000) (395,000)
Property and equipment purchased (479,986) (612,942)
Net change in short-term investments (22,500,041) 2,449,996
------------ ------------
Net cash used for investing activities (23,103,173) (21,148,138)
------------ ------------
Cash flows from financing activities:
Payment on note payable (1,750,000) (1,750,000)
Cash dividends paid (807,254) (604,853)
Proceeds from exercise of stock options 60,989 7,130
Payment for fractional shares resulting from
stock dividend -- (3,259)
Treasury stock acquired (980,192) --
------------ ------------
Net cash used by financing activities (3,476,457) (2,350,982)
------------ ------------
Net increase (decrease) in cash (249,409) 225,102
Cash at beginning of period 1,774,608 520,515
------------ ------------
Cash at end of period $ 1,525,199 745,617
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) Summary of Accounting Policies
(a) Basis of Consolidation
In the opinion of management, the accompanying consolidated
financial statements contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the
financial position of GAINSCO, INC. and subsidiaries (the
"Company") as of September 30, 1996, the results of operations
and the statements of cash flows for the three months and nine
months ended September 30, 1996 and 1995, on the basis of
generally accepted accounting principles. The December 31, 1995
balance sheet included herein is derived from the consolidated
financial statements included in the Company's 1995 Annual Report
to Shareholders.
The accompanying consolidated financial statements are prepared
in conformity with generally accepted accounting principles. The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reference is made to the Company's annual consolidated financial
statements for the year ended December 31, 1995 for a description
of all other accounting policies.
(b) Investments
Bonds are stated at amortized cost, bonds available for sale are
stated at fair value. Short-term investments are stated at cost.
The "specific identification" method is used to determine costs
of investments sold. Since investments not available for sale
are generally held until maturity or recovery of fair value,
provisions for possible losses are recorded only when the values
have experienced impairment considered "other than temporary".
The bonds available for sale had an unrealized gain of $283,373
at September 30, 1996, net of the deferred tax expense of
$152,585, and an unrealized gain at December 31, 1995 of
$1,073,597 net of the deferred tax expense of $578,091.
Proceeds from the sale of debt securities totalled $13,516,622
and $23,804,205 for the three months and nine months ended
September 30, 1996, respectively and $1,063,901 and $5,166,863
for the three months and nine months ended September 30, 1995,
respectively. Realized gains were $163,782 and $373,814 for the
three months and nine months ended September 30, 1996,
respectively and $18,239 and $54,648 for the three months and
nine
8
<PAGE> 9
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
months ended September 30, 1995, respectively. Realized losses
were $5,046 and $18,602 for the three months and nine months
ended September 30, 1996, respectively. There were no realized
losses for the three months or nine months ended September 30,
1995.
(c) Federal Income Taxes
The Company and its subsidiaries file a consolidated Federal
income tax return. Deferred income tax items are accounted for
under the deferred method which provides for timing differences
between the reporting of earnings for financial statement
purposes and for tax purposes, primarily deferred policy
acquisition costs, the discount on unpaid claims and claim
adjustment expenses and the nondeductible portion of the change
in unearned premiums. The Company paid income taxes of
$1,998,772 and $1,230,000 during the three months ended September
30, 1996 and 1995, respectively and $5,867,909 and $3,830,986
during the nine months ended September 30, 1996 and 1995,
respectively.
(d) Earnings Per Share
The computation of earnings per share, as adjusted, is based on
the weighted average number of common shares outstanding,
including common stock equivalents. For the three months ended
September 30, 1996 and 1995, the weighted average number of
common shares outstanding was 21,437,073 and 21,511,922
respectively, and common stock equivalents were 276,977 and
297,765, respectively. For the nine months ended September 30,
1996 and 1995, the weighted average number of common shares
outstanding was 21,499,668 and 21,511,657 respectively, and
common stock equivalents were 298,088 and 294,322, respectively.
9
<PAGE> 10
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 nine months ended September
30, 1996 and 1995, 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 Nine months
ended September 30 ended September 30
---------------------------- ---------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Premiums earned $ 456,185 1,007,841 1,411,581 4,203,109
Premiums earned -
plan servicing $ 1,059,240 1,681,748 3,693,839 4,152,016
Premiums earned -
fronting arrangements $ 5,392,453 3,585 10,381,917 3,585
Claims and claim
adjustment expenses $ (1,412,083) 1,545,433 522,355 12,540,164
Claims and claim
adjustment expenses -
plan servicing $ 1,432,032 2,023,926 5,898,509 4,717,436
Claims and claim
adjustment expenses -
fronting arrangements $ 3,313,091 15,641 6,362,343 15,641
</TABLE>
10
<PAGE> 11
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The amounts included in the Consolidated Balance Sheets for reinsurance
ceded to the commercial automobile plans of Arkansas, California,
Louisiana, Mississippi and Pennsylvania, and the fronting arrangements
as of September 30, 1996 and December 31, 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Unearned premiums $ 2,381,015 3,019,485
Unearned premiums -
fronting arrangements $ 10,381,364 251,773
Unpaid claims and claim
adjustment expenses $ 11,490,453 10,204,228
Unpaid claims and claim
adjustment expenses -
fronting arrangements $ 2,675,719 15,472
</TABLE>
The Company remains directly liable to its policyholders for all policy
obligations and the reinsuring companies are obligated to the Company to
the extent of the reinsured portion of the risks. The Company does not
have a provision for uncollectible reinsurance and does not feel one is
warranted since all of the reinsurers on its treaties are rated "A" or
better by A.M. Best Company and/or the Company is adequately
collateralized on existing and anticipated claim recoveries.
The Company has not and does not intend to utilize retrospectively rated
reinsurance contracts with indefinite renewal terms. This form of
reinsurance is commonly known as a "funded cover". Under a funded cover
reinsurance arrangement, an insurance company essentially deposits money
with a reinsurer to help cover future losses and records the "deposit"
as an expense instead of as an asset; or, the insurance company can
borrow from a reinsurer recording the "loan" as income instead of as a
liability with the future "loan" payments recorded as expense as the
payments are made over time.
(3) Shareholders' Equity
As of September 30, 1996 there were 372,823 options, at an average
exercise price of $2.52 per share, that have been granted to officers
and directors of the Company under the 1990 Stock Option Plan and
929,876 options, at an average exercise price of $10.625 per share, that
had been granted to officers and directors of the Company under the 1995
Stock Option Plan.
In July 1996, the Board of Directors authorized the repurchase of up to
500,000 shares of the Company's common stock. During the third quarter
of 1996 the Company purchased 102,402 shares at a cost of $980,192.
The Company's policy is to pay a quarterly cash dividend of $.015 per
share every quarter until further action is taken by the Board of
Directors. A cash dividend of $321,770 was paid on October 15, 1996.
11
<PAGE> 12
GAINSCO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Gross premiums written for the third quarter of 1996 were approximately
$27,065,000 versus $27,772,000 for the comparable 1995 period representing a 3%
decrease. For the first nine months of 1996 gross premiums written have
increased 4% from the comparable 1995 period. The following table presents,
for each major product line, gross premiums written for the periods indicated:
<TABLE>
<CAPTION>
Three months Nine months
ended September 30 ended September 30
------------------------------ ------------------------------
1996 1995 1996 1995
-------------- ------------- ------------- -------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial auto $14,948 55% $15,290 55% $45,192 56% $44,690 57%
Auto garage 6,574 24% 6,964 25% 20,227 25% 18,645 24%
General liability 5,256 20% 5,210 19% 14,745 18% 13,796 18%
Other lines 287 1% 308 1% 729 1% 927 1%
------- --- ------- --- ------- --- ------- ---
Total $27,065 100% $27,772 100% $80,893 100% $78,058 100%
======= === ======= === ======= === ======= ===
</TABLE>
For the third quarter of 1996 COMMERCIAL AUTO is down 2%, AUTO GARAGE is down
6% and GENERAL LIABILITY is up 1%. Continued intense competition in the Texas
market account for the majority of the decreases. For the first nine months of
1996 COMMERCIAL AUTO is up 1%, AUTO GARAGE is up 9% and GENERAL LIABILITY is up
7%. For the first nine months of 1996, gross premium written percentages by
state/product line are as follows: Texas commercial auto (20%), Kentucky
commercial auto (8%), Pennsylvania commercial auto (7%), Texas general
liability (6%), and Florida garage (5%) with no other state/product line
comprising 5% or more. Premiums earned increased 8% and 13% for the three
months and nine months ended September 30, 1996.
Net investment income increased 9% from the third quarter of 1995 and increased
11% from the first nine months of 1995 as a result of growth in the portfolio
attributable to positive cash flows. Because of the Company's profitable
underwriting results the highest after tax income is achieved by investing
predominantly in tax-exempt securities. At September 30, 1996, 82% of the
Company's investments were in investment grade tax-exempt bonds with an average
maturity of approximately 3 years. Since the majority of the Company's
investments are tax-exempt, the yields appear lower than those of the industry;
however, the industry as a whole has a significantly greater percentage of its
investments in taxable securities with substantially longer maturities. On a
taxable equivalent basis the return on average investments is 6.5% for 1996 and
1995. The Company has the ability to hold its bond securities until their
maturity date. The Company does not actively trade its bonds, however, it does
classify certain bond securities as available for sale. At September 30, 1996,
approximately 4% of the Company's investments
12
<PAGE> 13
were in U.S. Treasury securities and 14% were in short-term money market funds.
The Company has not invested and does not intend to invest in derivatives or
high-yield ("junk") securities, nor equity securities in issuers of "junk" debt
securities. The Company does not have any non-performing fixed maturity
securities.
The Company recorded net realized capital gains of $158,736 during the third
quarter of 1996 versus $18,239 for the comparable 1995 period, which brings net
realized capital gains for the nine months to $355,212 versus $54,648 for the
same period in 1995. All of these gains were generated from the bonds
available for sale category of the fixed maturity portfolio.
Insurance services revenues increased $37,416 in the third quarter of 1996 from
the third quarter of 1995. For the first nine months of 1996 an increase of
$170,754 has been recorded from the comparable 1995 period. The following
table presents the components:
<TABLE>
<CAPTION>
Three months Nine months
ended September 30 ended September 30
---------------------- ----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Computer software $ 123,373 89,373 362,687 382,805
Premium finance 87,271 74,573 262,064 198,242
Plan servicing 271,129 421,627 933,219 1,044,931
Other income 152,342 11,126 264,842 26,080
--------- --------- --------- ---------
Total $ 634,115 596,699 1,822,812 1,652,058
========= ========= ========= =========
</TABLE>
Revenues in the computer software operation are up 38% for the third quarter
but are down 5% for the nine months ended 1996 versus the comparable 1995
periods. Revenues are expected to show moderate increases for the year.
Revenues from the premium finance operation are up 17% in the third quarter of
1996 over the third quarter of 1995 and are up 32% for the first nine months of
1996. Through the first nine months of 1996 amounts financed are $1,262,000
(35%) above the comparable 1995 period. Premium finance notes receivable were
approximately $2,053,000 at September 30, 1996 versus $1,571,000 at September
30, 1995 and the average annualized return is at 15%.
Plan servicing revenues from commercial automobile plans decreased $150,498 in
the third quarter of 1996 when compared to the third quarter of 1995 and are
$111,712 below the comparable nine month period of 1995. Written premiums are
30% behind last year on a nine month comparative basis as a result of decreases
in the three largest state plans. The Company continues to pursue management
contracts with other states to administer their commercial automobile plans.
Other income increased $141,216 and $238,762 in the third quarter and first
nine months of 1996, respectively, over the comparable 1995 periods as a result
of fronting fee income from the Company's three fronting reinsurance
arrangements.
13
<PAGE> 14
Claims and claim adjustment expenses (C & CAE) increased $3,293,922 in the
third quarter of 1996 from the third quarter of 1995. The C & CAE ratio was
60.0% in the third quarter of 1996 versus 51.6% in 1995 for the comparable
period. C & CAE have increased $5,809,825 for the first nine months of 1996
over the comparable 1995 period. The C & CAE ratio was 54.0% for the first
nine months of 1996 and 52.6% for the comparable 1995 period. The increase in
the claim ratio for the 1996 periods when compared to the 1995 periods is in
large part attributable to unfavorable results on several large commercial auto
claim cases during the third quarter of 1996.
The ratio of commissions to gross premiums written was 22% for the third
quarter of 1996 and 1995 period. For the first nine months of 1996 the ratio
was 22% versus 20% in the 1995 period. Net commission income was approximately
$1,500,000 higher in the first nine months of 1995 than in the comparable 1996
period. This significantly larger offset to commission expense in the 1995
period accounts for the increase in the commission ratio in 1996. This
commission income was generated from a 5% quota-share reinsurance treaty that
was commuted at the end of 1995 and from the excess casualty treaty for 1995.
The ratio of commissions to premiums earned is lower in the third quarter of
1996 versus the comparable 1995 period because the decrease in written premiums
caused a slower growth rate in commissions despite an 8% growth in earned
premiums. For the first nine months of 1996 and 1995, this ratio is consistent
between the periods.
The change in deferred policy acquisition costs resulted in a net increase to
income of $9,376 for the third quarter of 1996 versus a net increase of
$525,104 for the third quarter of 1995. A net increase of $135,805 was
recorded for the first nine months of 1996 versus a net increase of $1,572,804
for the comparable 1995 period. The change in the amount of the increase in
DAC between comparable periods is directly related to the rate at which
unearned premiums are growing as a result of the growth rate of premium
writings. Since DAC (asset) is a function of unearned premiums (liability) the
change in DAC correlates to the change in unearned premiums. The ratio of DAC
to net unearned premiums was 26% at September 30, 1996 and 1995.
Underwriting and operating expenses were down 2% in the third quarter of 1996
from the third quarter of 1995 as a result of accrued expense reductions
recorded in the third quarter of 1996. These expenses were up 6% in 1996 over
the comparable nine month period of 1995, primarily as a result of increases in
personnel costs resulting from additional staffing and annual merit increases.
Expenses are in a 14-14.5% range as a percent of operating revenues, (premiums
earned and insurance services revenues), for the 1996 periods. The decrease
from the 15% level for the 1995 periods is due to the increased growth rate in
operating revenues.
In the third quarter of 1996, the lower effective tax rate of 19% versus 26%
for the comparable 1995 quarter is largely the result of tax-exempt net
investment income being a larger portion of income in the 1996 quarter than in
the 1995 quarter. For the first nine months of 1996 the effective tax rate is
24% versus 25% for the comparable 1995 period for the same reason.
For the first nine months of 1996, net income was 2% above the comparable 1995
period. The GAAP combined ratio for the insurance operations was 88.0% for the
first nine months of 1996 versus 84.9% for the first nine months of 1995.
14
<PAGE> 15
Liquidity and Capital Resources
The primary sources of the Company's liquidity are funds generated from
insurance premiums, net investment income and maturing investments. The short-
term investments and cash are intended to provide adequate funds to pay claims
without selling the fixed maturity investments. At September 30, 1996 the
Company held short-term investments and cash of $30,000,652 which is adequate
liquidity for the payment of claims and other short-term commitments.
With regard to long term liquidity, the average duration of the investment
portfolio is 2.6 years. The fair value of the fixed maturity portfolio at
September 30, 1996 was $698,635 above amortized cost.
The increase in investments and cash is attributable to the positive cash flows
generated from operating activities. Premiums receivable decreased due to
premiums written for the third quarter of 1996 being below the fourth quarter
of 1995. Ceded unpaid claims and claim adjustment expenses have increased
largely as a result of an increase in CAIP claims and claims from the fronting
reinsurance arrangements which are fully collectible from the respective
reinsurers. Ceded unearned premiums have increased primarily because of the
increase in fronting reinsurance.
Unpaid claims and claim adjustment expenses have increased as a result of the
Company's growth in writings and as a result of increases in claims from CAIP
and the fronting reinsurance arrangements, both of which are 100% ceded.
Unearned premiums increased due to the increase in fronting reinsurance
mentioned previously. The note payable was repaid during the second quarter.
The Company's liquidity position remains strong as a result of cash flows from
underwriting and investment activities.
Net unrealized gains on fixed maturities of $283,373 were recorded during the
first nine months of 1996 as a result of an increase in the fair value of the
bonds available for sale.
The Company is not aware of any current recommendations by the regulatory
authorities, which if implemented, would have a material effect on the
Company's liquidity, capital resources or results of operations.
15
<PAGE> 16
PART II. OTHER INFORMATION
GAINSCO, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The statement re computation of per share earnings is
included in the ntoes to consolidated financial
statements.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized to sign on behalf of the Registrant as
well as in his capacity as Chief Financial Officer.
GAINSCO, INC.
Date: November 13, 1996
By /s/ Daniel J. Coots
----------------------------------
Daniel J. Coots
Senior Vice President and
Chief Financial Officer
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 - Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 76,915,527
<DEBT-CARRYING-VALUE> 95,623,946
<DEBT-MARKET-VALUE> 95,886,623
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 201,609,926
<CASH> 1,525,199
<RECOVER-REINSURE> 2,514,987
<DEFERRED-ACQUISITION> 12,250,486
<TOTAL-ASSETS> 289,398,481
<POLICY-LOSSES> 105,113,909
<UNEARNED-PREMIUMS> 60,833,363
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,166,594
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 289,398,481
79,554,048
<INVESTMENT-INCOME> 6,756,243
<INVESTMENT-GAINS> 355,212
<OTHER-INCOME> 1,822,812
<BENEFITS> 42,985,948
<UNDERWRITING-AMORTIZATION> (135,805)
<UNDERWRITING-OTHER> 11,765,751
<INCOME-PRETAX> 15,972,642
<INCOME-TAX> 3,885,702
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,086,940
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
