<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, 1997 Commission File Number 1-9828
GAINSCO, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1617013
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Commerce Street Fort Worth, Texas 76102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (817) 336-2500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of September 30, 1997, there were 20,916,129 shares outstanding of the
registrant's Common Stock, $.10 par value.
<PAGE> 2
GAINSCO, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of September 30, 1997
(unaudited) and December 31, 1996 3
Consolidated Statements of Operations for the Three Months and
Nine Months Ended September 30, 1997 and 1996 (unaudited) 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and 1996 (unaudited) 6
Notes to Consolidated Financial Statements
September 30, 1997 and 1996 (unaudited) 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 17
SIGNATURE 18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30
1997 December 31
Assets (unaudited) 1996
------ ------------ -----------
<S> <C> <C>
Investments
Fixed maturities:
Bonds held to maturity, at amortized cost (fair
value: $98,364,146 - 1997, $105,725,155 - 1996) $ 97,615,176 104,930,347
Bonds available for sale, at fair value
(amortized cost: $108,909,666 - 1997, $76,879,562 - 1996) 109,857,397 77,643,677
Certificates of deposit, at cost (which approximates
fair value) 595,000 595,000
Short-term investments, at cost (which approximates
fair value) 9,202,651 20,662,282
------------ ------------
Total investments 217,270,224 203,831,306
Cash 773,699 1,044,740
Accrued investment income 4,107,102 4,308,185
Premiums receivable (net of allowance for doubtful
accounts: $81,000 - 1997, $101,000 - 1996) 10,569,282 15,824,543
Reinsurance balances receivable 870,667 2,156,326
Ceded unpaid claims and claim adjustment expenses 28,642,669 26,713,154
Ceded unearned premiums 20,350,452 16,280,013
Deferred policy acquisition costs 11,445,988 12,633,938
Property and equipment (net of accumulated depreciation
and amortization: $5,571,747 - 1997, $4,778,524 - 1996) 7,055,207 6,981,380
Current Federal income taxes recoverable (note 1) 1,137,066 424,148
Deferred Federal income taxes recoverable (note 1) 3,114,186 2,956,510
Management contract 1,750,070 1,787,570
Other assets 1,850,004 1,903,963
------------ ------------
Total assets $308,936,616 296,845,776
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30
1997 December 31
Liabilities and Shareholders' Equity (unaudited) 1996
- ------------------------------------ ------------ -----------
<S> <C> <C>
Liabilities:
Unpaid claims and claim adjustment expenses $ 115,878,991 105,691,588
Unearned premiums 64,330,869 65,255,153
Commissions payable 1,326,266 2,689,337
Accounts payable 4,622,077 4,670,947
Reinsurance balances payable 367,800 1,057,923
Deferred revenue 817,246 593,300
Drafts payable 4,566,757 6,219,044
Dividends payable (note 3) 313,743 316,312
Other liabilities 772,320 999,590
------------- -----------
Total liabilities 192,996,069 187,493,194
------------- -----------
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, 21,701,118 issued at September 30, 1997
and 21,670,369 issued at December 31, 1996) 2,170,112 2,167,037
Additional paid-in capital 87,697,754 87,610,379
Net unrealized gain on fixed maturities (note 1) 616,025 496,675
Retained earnings 32,658,787 24,517,265
Treasury stock (784,989 shares at September 30, 1997
and 582,962 shares at December 31, 1996) (7,202,131) (5,438,774)
------------- -----------
Total shareholders' equity 115,940,547 109,352,582
Total liabilities and shareholders' equity $ 308,936,616 296,845,776
============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30 ended September 30
------------------------------- -------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned (note 2) $ 25,171,706 26,922,178 76,799,876 79,554,048
Net investment income 2,488,573 2,352,286 7,183,069 6,756,243
Net realized gains (note 1) 177,075 158,736 213,561 355,212
Insurance services 646,873 634,115 1,932,514 1,822,812
------------ ------------ ------------ ------------
Total revenues 28,484,227 30,067,315 86,129,020 88,488,315
------------ ------------ ------------ ------------
Expenses:
Claims and claim adjustment expenses
(note 2) 17,681,193 16,167,382 46,003,584 42,985,948
Commissions 4,959,806 6,002,541 15,185,086 17,899,779
Change in deferred policy acquisition costs 582,810 (9,376) 1,187,950 (135,805)
Underwriting and operating expenses 4,029,910 3,840,050 12,425,518 11,765,751
------------ ------------ ------------ ------------
Total expenses 27,253,719 26,000,597 74,802,138 72,515,673
------------ ------------ ------------ ------------
Income before Federal income taxes 1,230,508 4,066,718 11,326,882 15,972,642
Federal income taxes:
Current expense (benefit) (13,978) 904,701 2,511,972 3,953,645
Deferred benefit (218,919) (135,570) (221,942) (67,943)
------------ ------------ ------------ ------------
Total taxes (232,897) 769,131 2,290,030 3,885,702
------------ ------------ ------------ ------------
Net income $ 1,463,405 3,297,587 9,036,852 12,086,940
============ ============ ============ ============
Net income per share .07 .15 .42 .55
=== === === ===
</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
-------------------------------
1997 1996
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,036,852 12,086,940
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 3,630,837 3,537,060
Change in deferred Federal income taxes recoverable (221,942) (67,943)
Change in accrued investment income 201,083 1,072,049
Change in premiums receivable 5,255,261 1,717,449
Change in reinsurance balances receivable 1,285,659 990,831
Change in ceded unpaid claims and claim adjustment
expenses (1,929,515) (1,791,584)
Change in ceded unearned premiums (4,070,439) (7,230,033)
Change in deferred policy acquisition costs 1,187,950 (135,805)
Change in management contract 37,500 37,500
Change in other assets 53,959 (442,573)
Change in unpaid claims and claim adjustment
expenses 10,187,403 10,102,446
Change in unearned premiums (924,284) 7,308,040
Change in commissions payable (1,363,071) 192,874
Change in accounts payable (48,870) 80,392
Change in reinsurance balances payable (690,123) 45,737
Change in deferred revenue 223,946 161,025
Change in drafts payable (1,652,287) 905,248
Change in other liabilities (227,270) (325,168)
Change in current Federal income taxes
recoverable/payable (663,028) (1,914,264)
------------ ------------
Net cash provided by operating activities $ 19,309,621 26,330,221
------------ ------------
</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
--------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from investing activities:
Bonds held to maturity:
Matured $ 16,562,231 10,635,056
Purchased (3,434,617) (10,776,687)
Bonds available for sale:
Sold 22,137,930 23,804,205
Matured 5,760,110 7,879,440
Purchased (68,578,203) (31,690,160)
Certificates of deposit matured 370,000 400,000
Certificates of deposit purchased (370,000) (375,000)
Property and equipment purchased (867,050) (479,986)
Net change in short-term investments 11,459,631 (22,500,041)
------------ ------------
Net cash used for investing activities (16,959,968) (23,103,173)
------------ ------------
Cash flows from financing activities:
Payment on note payable -- (1,750,000)
Cash dividends paid (947,787) (807,254)
Proceeds from exercise of stock options 90,450 60,989
Treasury stock acquired (1,763,357) (980,192)
------------ ------------
Net cash used by financing activities (2,620,694) (3,476,457)
------------ ------------
Net decrease in cash (271,041) (249,409)
Cash at beginning of period 1,044,740 1,774,608
------------ ------------
Cash at end of period $ 773,699 1,525,199
============ ============
</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, 1997, the results of operations
and the statements of cash flows for the three months and nine
months ended September 30, 1997 and 1996, on the basis of
generally accepted accounting principles. The December 31,
1996 balance sheet included herein is derived from the
consolidated financial statements included in the Company's
1996 Annual Report to Shareholders.
The accompanying consolidated financial statements are
prepared in conformity with generally accepted accounting
principles. The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Reference is made to the Company's annual consolidated
financial statements for the year ended December 31, 1996 for
a description of all other accounting policies.
(b) Investments
Bonds are stated at amortized cost, bonds available for sale
are stated at fair value. Short-term investments are stated
at cost. The "specific identification" method is used to
determine costs of investments sold. Since investments not
available for sale are generally held until maturity or
recovery of fair value, provisions for possible losses are
recorded only when the values have experienced impairment
considered "other than temporary". The bonds available for
sale had an unrealized gain of $616,025 at September 30,
1997, net of the deferred tax expense of $331,706, and an
unrealized gain at December 31, 1996 of $496,675 net of the
deferred tax expense of $267,440.
Proceeds from the sale of bond securities totalled $8,845,390
and $13,516,622 for the three months ended September 30, 1997
and 1996, respectively, and $22,137,930 and $23,804,205 for
the nine months ended September 30, 1997 and 1996,
respectively. Realized gains were $183,409 and $163,782 for
the three months ended September 30, 1997 and 1996,
respectively, and $251,198 and $373,814 for the nine months
ended September 30, 1997 and 1996, respectively. Realized
losses were $6,334 and $5,046 for the three months ended
September 30, 1997 and 1996, respectively, and $37,637 and
$18,602 for the nine months ended September 30, 1997 and 1996,
respectively.
8
<PAGE> 9
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(c) Federal Income Taxes
The Company and its subsidiaries file a consolidated Federal
income tax return. Deferred income tax items are accounted for
under the deferred method which provides for timing
differences between the reporting of earnings for financial
statement purposes and for tax purposes, primarily deferred
policy acquisition costs, the discount on unpaid claims and
claim adjustment expenses and the nondeductible portion of the
change in unearned premiums. The Company paid income taxes of
$1,200,000 and $1,998,772 during the three months ended
September 30, 1997 and 1996, respectively and $3,175,000 and
$5,867,909 during the nine months ended September 30, 1997 and
1996, respectively.
(d) Earnings Per Share
The computation of earnings per share, as adjusted, is based
on the weighted average number of common shares outstanding,
including common stock equivalents. For the three months ended
September 30, 1997 and 1996, the weighted average number of
common shares outstanding was 20,941,011 and 21,437,073,
respectively, and common stock equivalents were 265,052 and
276,977, respectively. For the nine months ended September 30,
1997 and 1996, the weighted average number of common shares
outstanding was 21,027,843 and 21,499,668, respectively, and
common stock equivalents were 265,052 and 298,088,
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, 1997 and 1996, 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
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Premiums earned $ 437,469 456,185 1,257,830 1,411,581
Premiums earned -
plan servicing $ 1,019,691 1,059,240 3,066,549 3,693,839
Premiums earned -
fronting arrangements $ 8,781,263 5,392,453 23,926,462 10,381,917
Claims and claim
adjustment expenses $ 196,734 (1,412,083) (979,324) 522,355
Claims and claim
adjustment expenses -
plan servicing $ 897,735 1,432,032 3,616,849 5,898,509
Claims and claim
adjustment expenses -
fronting arrangements $ 6,292,816 3,313,091 17,728,959 6,362,343
</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, 1997 and December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Unearned premiums $ 1,997,949 2,511,928
Unearned premiums - $17,897,592 8,468,680
fronting arrangements
Unpaid claims and claim
adjustment expenses $10,897,586 10,853,311
Unpaid claims and claim
adjustment expenses -
fronting arrangements $ 8,099,154 1,473,407
</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, 1997 there were 337,640 options, at an average
exercise price of $2.49 per share, that have been granted to officers
and directors of the Company under the 1990 Stock Option Plan and
1,016,804 options, at an average exercise price of $10.25 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 purchase of up to
500,000 shares of the Company's common stock. In November 1996, the
Board of Directors authorized the purchase of an additional 500,000
shares of the Company's common stock. As of December 31, 1996, the
11
<PAGE> 12
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Company had purchased 470,702 shares at a cost of $4,426,182. During
the first nine months of 1997, the Company purchased 202,027 shares at
a cost of $1,763,357.
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 $313,743 was paid on October 13, 1997.
12
<PAGE> 13
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 1997 were approximately
$23,055,000 versus $27,065,000 for the comparable 1996 period representing a 15%
decrease. For the first nine months of 1997 gross premiums written have
decreased 10% from the comparable 1996 period. The following table presents, for
each major product line, gross premiums written for the periods indicated:
<TABLE>
<CAPTION>
Three months Nine months
ended September 30 ended September 30
----------------------------------------- ----------------------------------------
1997 1996 1997 1996
------------------ ------------------ ------------------ ------------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial auto $11,947 52% $14,948 55% $41,182 56% $45,192 56%
Auto garage 6,089 26% 6,574 24% 17,417 24% 20,227 25%
General liability 4,353 19% 5,256 20% 12,973 18% 14,745 18%
Other lines 666 3% 287 1% 1,441 2% 729 1%
------- --- ------- --- ------- --- ------- ---
Total $23,055 100% $27,065 100% $73,013 100% $80,893 100%
======= === ======= === ======= === ======= ===
</TABLE>
For the third quarter of 1997 COMMERCIAL AUTO is down 20%, AUTO GARAGE is down
7% and GENERAL LIABILITY is down 17%. The cancellation of the Kentucky coal
truck program and the taxi programs in Connecticut and New Jersey accounts for
the majority of the 15% decrease in the quarter. For the first nine months of
1997 COMMERCIAL AUTO is down 9%, AUTO GARAGE is down 14% and GENERAL LIABILITY
is down 12%. The reasons for the overall quarterly decrease apply to commercial
auto for the first nine months as well. Increased competition in the
Pennsylvania market also contributed to the decrease in commercial auto. Auto
garage is down largely because of competition in Connecticut, Missouri,
Pennsylvania and Virginia. The decrease in general liability is largely due to
actions taken earlier in the year in California in the general contractors class
of business. For the first nine months of 1997, gross premium written
percentages by state/product line are as follows: Texas commercial auto (22%),
Kentucky commercial auto (7%), Texas general liability (6%), Pennsylvania
commercial auto (6%), and Florida garage (5%) with no other state/product line
comprising 5% or more. Premiums earned decreased 7% and 4% for the three months
and nine months ended September 30, 1997, respectively, as a result of the
decrease in premiums written.
Net investment income increased 6% from the third quarter of 1996 and increased
6% from the first nine months of 1996 as a result of growth in the portfolio
attributable to positive cash flows. Because of the Company's profitable
underwriting results the highest after tax income is achieved by investing
predominantly in tax-exempt securities. At September 30, 1997, 86% of the
Company's investments were in investment grade tax-exempt bonds with an average
maturity of approximately 3.3 years. Since the
13
<PAGE> 14
majority of the Company's investments are tax-exempt, the yields appear lower
than those of the industry; however, the industry as a whole has a significantly
greater percentage of its investments in taxable securities with substantially
longer maturities. On a taxable equivalent basis the return on average
investments is 6.3% for 1997 and 6.5% for 1996. The Company has the ability to
hold its bond securities until their maturity date. The Company does not
actively trade its bonds, however, it does classify certain bond securities as
available for sale. At September 30, 1997, approximately 10% of the Company's
investments were in U.S. Treasury securities and 4% 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 $177,075 during the third
quarter of 1997 versus $158,736 for the comparable 1996 period, which brings net
realized capital gains for the nine months to $213,561 versus $355,212 for the
same period in 1996. All of these gains were generated from the bonds available
for sale category of the fixed maturity portfolio.
Insurance services revenues increased $12,758 in the third quarter of 1997 from
the third quarter of 1996. For the first nine months of 1997 an increase of
$109,702 has been recorded from the comparable 1996 period. The following table
presents the components:
<TABLE>
<CAPTION>
Three months Nine months
ended September 30 ended September 30
----------------------- -----------------------
1997 1996 1997 1996
--------- ------- --------- ---------
<S> <C> <C> <C> <C>
Plan servicing $ 265,018 271,129 786,092 933,219
Fee income 150,827 146,955 445,463 242,535
Computer software 146,564 123,373 448,736 362,687
Premium finance 76,251 87,271 225,249 262,064
Other income 8,213 5,387 26,974 22,307
--------- ------- --------- ---------
Total $ 646,873 634,115 1,932,514 1,822,812
========= ======= ========= =========
</TABLE>
Plan servicing revenues from commercial automobile plans decreased $6,111 in the
third quarter of 1997 when compared to the third quarter of 1996 and are
$147,127 below the comparable nine month period of 1996. Written premiums are
10% below last year on a nine month comparative basis as a result of decreases
in the Louisiana and Pennsylvania plans, the California plan is up 15% for the
year. The Company continues to pursue management contracts with other states to
administer their commercial automobile plans.
Fee income increased $3,872 and $202,928 for the third quarter and nine months
ended 1997, respectively, as a result of continued growth in the fronting
reinsurance operation.
Revenues in the computer software operation are up 19% for the third quarter and
are up 24% for the nine
14
<PAGE> 15
months ended 1997 versus the comparable 1996 periods as a result of continued
increases in systems sales. Revenues are expected to show increases for the
year.
Revenues from the premium finance operation are down 13% in the third quarter of
1997 from the third quarter of 1996 and are down 14% for the first nine months
of 1997. Through the first nine months of 1997 amounts financed are $960,000
(23%) below the comparable 1996 period. The decrease is primarily attributable
to certain taxicab programs that have been put into run-off for underwriting
reasons. Premium finance notes receivable were approximately $1,739,000 at
September 30, 1997 versus $2,053,000 at September 30, 1996 and the average
annualized return is at 14%.
Claims and claim adjustment expenses (C & CAE) increased $1,513,811 in the third
quarter of 1997 from the third quarter of 1996. The C & CAE ratio was 70.2% in
the third quarter of 1997 versus 60.0% in 1996 for the comparable period. The
increase in the claim ratio is due to a claim reserve increase of approximately
$2,600,000 recorded during the third quarter of 1997 for commercial auto claims
in Kentucky from the 1995 and 1996 accident years pertaining to a coal truck
program the Company has terminated. C & CAE have increased $3,017,636 for the
first nine months of 1997 over the comparable 1996 period. The C & CAE ratio was
59.9% for the first nine months of 1997 and 54.0% for the comparable 1996
period.
The ratio of commissions to gross premiums written was 22% for the third quarter
of 1997 and 1996. For the first nine months of 1997 the ratio was 21% versus 22%
in the 1996 period. The commission ratio is lower in the 1997 period because of
lower contingent commissions due to higher claim ratios. The ratio of
commissions to premiums earned is lower in the 1997 periods versus the
comparable 1996 periods for the same reason.
The change in deferred policy acquisition costs resulted in a net decrease to
income of $582,810 for the third quarter of 1997 versus a net increase of $9,376
for the third quarter of 1996. A net decrease of $1,187,950 was recorded for the
first nine months of 1997 versus a net increase of $135,805 for the comparable
1996 period. The increase or decrease in the amount of the change in DAC between
comparable periods is directly related to the rate at which unearned premiums
are increasing or decreasing as a result of the rate of growth or decline in
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, 1997 and 1996.
Underwriting and operating expenses were up 5% in the third quarter of 1997 from
the third quarter of 1996 and are up 6% in 1997 over the comparable nine month
period of 1996, primarily as a result of the takedown of expense reserves in
1996 that did not recur in 1997.
Unfavorable underwriting results during the third quarter of 1997 resulted in
tax benefits for this quarter and lowered the effective tax rate for the first
nine months of 1997 to 20% from 24% in the comparable 1996 period.
For the first nine months of 1997, net income was 25% below the comparable 1996
period. The GAAP combined ratio for the insurance operations was 93.5% for the
first nine months of 1997 versus 88.0% for the first nine months of 1996.
15
<PAGE> 16
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, 1997 the
Company held short-term investments and cash of $9,976,350 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 2.9 years. The fair value of the fixed maturity portfolio at
September 30, 1997 was $1,696,701 above amortized cost.
The increase in investments is attributable to the positive cash flows generated
from operating activities. Premiums receivable decreased due to premiums written
for the third quarter of 1997 being below the fourth quarter of 1996.
Reinsurance balances receivable have decreased due to balances due from the CAIP
plans decreasing. Ceded unpaid claims and claim adjustment expenses have
increased largely as a result of an increase in the fronting reinsurance
program. Ceded unearned premiums have increased primarily because of the
increase in fronting reinsurance. Deferred policy acquisition costs have
decreased due to the decrease in unearned premiums. Current Federal income taxes
recoverable have increased as a result of the estimated tax payment made during
the third quarter based upon annualizing the six months of 1997 results.
Unpaid claims and claim adjustment expenses have increased as a result of the
reserve increases mentioned previously and as a result of increases in claims
from the fronting reinsurance programs. Unearned premiums increased due to the
increase in fronting reinsurance. Commissions payable have decreased as a result
of the annual contingent commission payments to the general agents in the first
quarter of 1997. Reinsurance balances payable have decreased due to the decrease
in writings in the plan servicing operation. Drafts payable have decreased
because of the large amount of drafts issued late in the fourth quarter of 1996,
that cleared in 1997. 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 $616,025 were recorded during the
first nine months of 1997 as a result of an increase in the fair value of the
bonds available for sale.
The Company's purchase of 202,027 shares of its common stock during 1997
accounts for the increase in Treasury stock.
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.
16
<PAGE> 17
PART II. OTHER INFORMATION
GAINSCO, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27 Financial Data Schedule
The statement re computation of per share earnings is
included in the notes to consolidated financial statements.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
17
<PAGE> 18
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 12, 1997
By /s/ Daniel J. Coots
--------------------------
Daniel J. Coots
Senior Vice President and
Chief Financial Officer
18
<PAGE> 19
EXHIBIT INDEX
<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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 109,857,397
<DEBT-CARRYING-VALUE> 97,615,176
<DEBT-MARKET-VALUE> 98,364,146
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 217,270,224
<CASH> 773,699
<RECOVER-REINSURE> 870,667
<DEFERRED-ACQUISITION> 11,445,988
<TOTAL-ASSETS> 308,936,616
<POLICY-LOSSES> 115,878,991
<UNEARNED-PREMIUMS> 64,330,869
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,170,112
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 308,936,616
76,799,876
<INVESTMENT-INCOME> 7,183,069
<INVESTMENT-GAINS> 213,561
<OTHER-INCOME> 1,932,514
<BENEFITS> 46,003,584
<UNDERWRITING-AMORTIZATION> 1,187,950
<UNDERWRITING-OTHER> 12,425,518
<INCOME-PRETAX> 11,326,882
<INCOME-TAX> 2,290,030
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,036,852
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
