<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 March 31, 1998 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 March 31, 1998, there were 20,857,024 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 March 31, 1998
(unaudited) and December 31, 1997 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 1998 and 1997 (unaudited) 5
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1998 and 1997 (unaudited) 6
Notes to Consolidated Financial Statements
March 31, 1998 and 1997 (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>
March 31
1998 December 31
Assets (unaudited) 1997
------ ------------ -----------
<S> <C> <C>
Investments
Fixed maturities:
Bonds held to maturity, at amortized cost (fair
value: $82,510,321 - 1998, $90,527,669 - 1997) $ 81,576,165 89,733,503
Bonds available for sale, at fair value (Amortized cost:
$121,646,141 - 1998, $122,022,184 - 1997) 122,878,742 123,650,289
Certificates of deposit, at cost (which approximates
fair value) 595,000 595,000
Short-term investments, at cost (which approximates
fair value) 8,367,086 2,823,393
------------ -----------
Total investments 213,416,993 216,802,185
Cash 646,455 696,513
Accrued investment income 3,981,125 4,714,828
Premiums receivable (net of allowance for doubtful
accounts: $81,000 - 1998 and 1997) 12,743,926 14,249,890
Reinsurance balances receivable 2,592,965 2,604,511
Ceded unpaid claims and claim adjustment expenses 32,050,758 29,524,026
Ceded unearned premiums 19,675,407 19,146,272
Deferred policy acquisition costs 10,588,297 11,618,136
Property and equipment (net of accumulated depreciation
and amortization: $6,030,203 - 1998, $5,710,365 - 1997) 6,715,477 6,941,232
Current Federal income taxes recoverable (note 1) 3,598,590 796,631
Deferred Federal income taxes recoverable (note 1) 6,341,194 2,676,555
Management contract 1,725,070 1,737,570
Other assets 2,834,919 2,176,957
------------ -----------
Total assets $316,911,176 313,685,306
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31
1998 December 31
Liabilities and Shareholders' Equity (unaudited) 1997
- ------------------------------------ ------------ -----------
<S> <C> <C>
Liabilities:
Unpaid claims and claim adjustment expenses $136,193,404 113,227,009
Unearned premiums 60,486,824 64,004,507
Commissions payable 2,201,237 2,207,421
Accounts payable 2,804,341 3,542,075
Reinsurance balances payable 1,007,129 745,805
Deferred revenue 1,004,878 635,807
Drafts payable 3,810,530 9,393,375
Dividends payable (note 3) 364,999 365,300
Other liabilities 599,166 1,001,747
------------ -----------
Total liabilities 208,472,508 195,123,046
------------ -----------
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 March 31, 1998
and 21,701,118 issued at December 31, 1997) 2,170,112 2,170,112
Additional paid-in capital 87,697,754 87,697,754
Accumulated other comprehensive income (note 1) 801,191 1,058,268
Retained earnings 25,464,136 35,188,460
Treasury stock (844,094 shares at March 31, 1998 and
826,894 shares at December 31, 1997) (7,694,525) (7,552,334)
------------ -----------
Total shareholders' equity 108,438,668 118,562,260
------------ -----------
Total liabilities and shareholders' equity $316,911,176 313,685,306
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended March 31
-----------------------------
1998 1997
------------ -----------
Revenues:
<S> <C> <C>
Premiums earned (note 2) $ 23,628,540 25,875,402
Net investment income 2,407,622 2,286,976
Net realized gains (note 1) 140,710 41,511
Insurance services 565,566 591,031
------------ -----------
Total revenues 26,742,438 28,794,920
------------ -----------
Expenses:
Claims and claim adjustment expenses
(note 2) 31,560,149 15,207,636
Commissions 5,905,330 4,734,804
Change in deferred policy acquisition costs 1,029,839 742,635
Underwriting and operating expenses 3,934,616 3,884,358
------------ -----------
Total expenses 42,429,934 24,569,433
------------ -----------
Income (loss) before Federal income taxes (15,687,496) 4,225,487
Federal income taxes:
Current expense (benefit) (2,801,959) 1,000,831
Deferred expense (benefit) (3,526,212) 60,619
------------ -----------
Total taxes (6,328,171) 1,061,450
------------ -----------
Net income (loss) $ (9,359,325) 3,164,037
============ ===========
Earnings per share:
Basic (.45) .15
============ ===========
Diluted (.44) .15
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended March 31
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(9,359,325) 3,164,037
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 1,253,090 1,217,568
Change in deferred Federal income taxes recoverable (3,526,212) 60,619
Change in accrued investment income 733,703 743,821
Change in premiums receivable 1,505,964 1,422,188
Change in reinsurance balances receivable 11,546 (1,011,019)
Change in ceded unpaid claims and claim adjustment
expenses (2,526,732) 1,495,858
Change in ceded unearned premiums (529,135) (3,344,093)
Change in deferred policy acquisition costs 1,029,839 742,635
Change in management contract 12,500 12,500
Change in other assets (657,962) (741,390)
Change in unpaid claims and claim adjustment
expenses 22,966,395 1,214,113
Change in unearned premiums (3,517,683) 114,821
Change in commissions payable (6,184) (2,485,619)
Change in accounts payable (737,734) (1,088,408)
Change in reinsurance balances payable 261,324 2,092,815
Change in deferred revenue 369,071 370,203
Change in drafts payable (5,582,845) (1,312,286)
Change in other liabilities (402,581) (562,221)
Change in current Federal income taxes (2,801,959) 1,000,831
----------- ----------
Net cash provided by (used for) operating activities $(1,504,920) 3,106,973
----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
(continued)
6
<PAGE> 7
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended March 31
----------------------------
1998 1997
------------ -----------
<S> <C> <C>
Cash flows from investing activities:
Bonds held to maturity:
Matured $ 7,830,046 $ 432,052
Bonds available for sale:
Sold 7,004,524 5,906,577
Matured 1,020,000 4,932,129
Purchased (8,254,441) (11,030,559)
Property and equipment purchased (94,083) (296,754)
Net change in short-term investments (5,543,693) (20,912)
------------ -----------
Net cash provided by (used for)
investing activities 1,962,353 (77,467)
------------ -----------
Cash flows from financing activities:
Cash dividends paid (365,300) (316,312)
Proceeds from exercise of stock options -- 42,753
Treasury stock acquired (142,191) (62,349)
------------ -----------
Net cash used for financing activities (507,491) (335,908)
------------ -----------
Net increase (decrease) in cash (50,058) 2,693,598
Cash at beginning of period 696,513 1,044,740
------------ -----------
Cash at end of period $ 646,455 $ 3,738,338
============ ===========
</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 March 31, 1998, the results of operations and
the statements of cash flows for the three months ended March 31,
1998 and 1997, on the basis of generally accepted accounting
principles. The December 31, 1997 balance sheet included herein
is derived from the consolidated financial statements included in
the Company's 1997 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, 1997 for a description
of all other accounting policies. Certain reclassifications have
been made to the 1997 amounts to conform to the 1998
presentation.
(b) Investments
Bonds held to maturity 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 held until maturity,
provisions for possible losses are recorded only when the values
have experienced impairment considered "other than temporary".
The bonds available for sale had an unrealized gain of $801,191
at March 31, 1998, net of the deferred tax expense of $431,410,
and an unrealized gain at December 31, 1997 of $1,058,268 net of
the deferred tax expense of $569,837.
Proceeds from the sale of bond securities totaled $7,004,524 and
$5,906,577 for the three months ended March 31, 1998 and 1997,
respectively. Realized gains were $149,189 and $50,884 for the
three months ended March 31, 1998 and 1997, respectively.
Realized losses were $8,479 and $9,373 for the three months ended
March 31, 1998 and 1997, respectively.
(c) Federal Income Taxes
The Company and its subsidiaries file a consolidated Federal
income tax return. Deferred income tax items are accounted for
under the deferred method which provides for timing
8
<PAGE> 9
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 no income taxes during the three months ended March 31,
1998 and March 31, 1997.
(d) Earnings Per Share
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement 128, "Earnings Per Share". The Statement was effective
for financial statements issued for periods ending after December 15,
1997 and was implemented by the Company in the fourth quarter of 1997.
Earnings per share for prior periods presented in these financial
statements have been restated to comply with Statement 128.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Numerator:
Net income (loss) $ (9,359,325) 3,164,037
------------ ------------
Denominator:
Denominator for basic
earnings per share-
weighted average shares 20,864,374 21,087,144
Effect of dilutive securities:
Employee stock options 234,106 249,225
------------ ------------
Denominator for diluted
earnings per share-
weighted average shares
and assumed conversions 21,098,480 21,336,369
============ ============
Basic earnings per share $ (.45) $ .15
============ ============
Diluted earnings per share $ (.44) $ .15
============ ============
</TABLE>
(e) Accumulated Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (Statement 130).
Statement 130 requires that a company include in accumulated
comprehensive income certain amounts which were previously recorded
directly to shareholders' equity. The other comprehensive income
amounts included in accumulated comprehensive income consisted of
9
<PAGE> 10
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
net unrealized gains on fixed maturities of $801,191 and
$1,058,268 at March 31, 1998 and 1997, respectively.
(2) Reinsurance
The amounts deducted in the Consolidated Statements of Operations for
reinsurance ceded for the three months ended March 31, 1998 and 1997,
respectively, are set forth in the following table.
Premiums and claims ceded to the commercial automobile plans of
Arkansas, California, Louisiana, Mississippi and Pennsylvania are
designated as "plan servicing".
<TABLE>
<CAPTION>
Three months
ended March 31
------------------------------
1998 1997
----------- ----------
<S> <C> <C>
Premiums earned $ 400,980 407,566
Premiums earned - plan
servicing $ 870,724 1,091,317
Premiums earned -
fronting arrangements $ 9,112,570 7,186,843
Claims and claim
adjustment expenses $ 1,575,663 (1,294,952)
Claims and claim
adjustment expenses -
plan servicing $ 1,509,638 1,023,773
Claims and claim
adjustment expenses -
fronting arrangements $ 9,300,032 4,676,189
</TABLE>
The amounts included in the Consolidated Balance Sheets for reinsurance
ceded to the commercial automobile plans of Arkansas,
10
<PAGE> 11
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
California, Louisiana, Mississippi and Pennsylvania and the fronting
arrangements as of March 31, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Unearned premiums $ 1,652,239 1,552,654
Unearned premiums -
fronting arrangements $ 17,500,901 17,160,782
Unpaid claims and claim
adjustment expenses $ 9,344,670 9,431,814
Unpaid claims and claim
adjustment expenses -
fronting arrangements $ 11,211,804 8,623,890
</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 working treaties are rated
"A- (Excellent)" or better by A. M. Best Company and/or the Company is
adequately collateralized on existing and anticipated claim recoveries.
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 March 31, 1998 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 1,040,863
options at an average exercise price of $10.22 per share, that have been
granted to officers and directors of the Company under the 1995 Stock
Option Plan.
As of December 31, 1997, the Company had purchased 714,634 shares at a
cost of $6,539,742. During the first quarter of 1998, the Company
purchased 17,200 shares at a cost of $142,191. The Company has no plans
to purchase additional shares.
The Company's policy is to pay a quarterly cash dividend of $.0175 per
share every quarter until further action is taken by the Board of
Directors. A cash dividend of $364,999 was paid on April 15, 1998.
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 first quarter of 1998 were approximately
$20,072,000 versus $23,020,000 for the comparable period of 1997 representing a
decrease of 13% that was largely attributable to continued intense competition.
The following table presents, for each major product line, gross premiums
written for the periods indicated.
<TABLE>
<CAPTION>
Three months
ended March 31
--------------------------------------------------
1998 1997
-------------------- ----------------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Commercial auto $ 11,685 58% $ 13,758 60%
Auto garage 4,436 22% 5,112 22%
General liability 3,663 18% 3,871 17%
Other lines 288 2% 279 1%
-------- --- -------- ---
Total $ 20,072 100% $ 23,020 100%
======== === ======== ===
</TABLE>
COMMERCIAL AUTO is down 15% for the first quarter of 1998 largely due to the
run-off of the Kentucky coal truck business. AUTO GARAGE is down 13% in the
first quarter of 1998 because of continued intense competition in Kentucky and
Pennsylvania. GENERAL LIABILITY is down 5% for the first quarter of 1998
primarily as a result of continuing competition in the larger states. For the
first quarter of 1998, gross premium written percentages by state/product line
are as follows: Texas commercial auto (25%), Texas general liability (7%),
Kentucky commercial auto (6%), Pennsylvania commercial auto (6%), and Florida
auto garage (6%) with no other state/product line comprising 5% or more. The
persistency rate increased from 44% to 45% in 1998. Premiums earned decreased 9%
as a result of the decrease in premiums written.
Net investment income increased 5% in the first quarter of 1998 as a result of
growth in the portfolio from March 31, 1997. At March 31, 1998, 80% 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 6.1% for 1998 and
6.3% for 1997. 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 March 31, 1998,
16% 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 in equity
securities of "junk" debt issuers. The Company does not have any non-performing
fixed maturity securities.
12
<PAGE> 13
The Company recorded net realized capital gains of $140,710 during the first
quarter of 1998 versus $41,511 for the comparable 1997 period. All of these
gains were generated from the bonds available for sale category of the fixed
maturity portfolio.
Insurance service revenues in the first quarter of 1998 were $25,465 below the
first quarter of 1997. The following table presents the components.
<TABLE>
<CAPTION>
Three months
ended March 31
----------------------------
1998 1997
------------ -----------
<S> <C> <C>
Plan servicing $ 229,680 269,313
Fee income 161,630 142,216
Computer software 118,437 92,838
Premium finance 53,020 79,794
Other income 2,799 6,870
------------ -----------
Total $ 565,566 591,031
============ ===========
</TABLE>
Plan servicing revenues from commercial automobile plans decreased 15% from the
comparable 1997 period with the Pennsylvania plan accounting for most of the
decrease. The Company is continuing to pursue management contracts with other
states to administer their commercial automobile plans and is attempting to
increase its participation in existing plans. Fee income increased 14% in the
fronting operation. Revenues in the computer software operation are 28% above
the comparable 1997 period and are expected to show moderate increases for the
year. Revenues from the premium finance operation in the first quarter of 1998
are 34% below the comparable 1997 period as a result of the decision to offer an
interest free payment plan on the policies of the affiliated insurance
companies.
Claims and claim adjustment expenses (C & CAE) increased 108% to $31,560,149 in
the first quarter of 1998 from the first quarter of 1997. This included
approximately $16,700,000 in development from prior accident years. The C & CAE
ratio was 133.6% in the first quarter of 1998 versus 58.8% in the first quarter
of 1997. The increase in the C & CAE ratio was the result of unfavorable claim
development from prior accident years which surfaced in the first quarter of
1998, unfavorable claim adjustment expense development from prior accident
years and implementation of a more conservative reserving approach for the
current accident year. The unfavorable claim development on prior years was
primarily attributable to large claims (in excess of $100,000) for both
commercial auto and general liability. The unfavorable claim adjustment expense
development from prior years is related to increasing trends in expenses due to
the Company's reliance on outside claim adjusters and legal support. The
Company has increased its internal claims staff and is striving to reduce its
reliance on outside support. During the first quarter of 1998 outstanding
claims were reduced approximately 15%.
The ratio of commissions to gross premiums written is 29.4% and 20.6% for the
first quarter of 1998 and 1997, respectively. Commissions increased in the 1998
period from the 1997 period primarily due to a decrease in commission income of
approximately $1,644,000 as a result of reducing previously accrued reinsurance
commission. The reinsurance commission had been accrued based on a lower
ultimate C & CAE ratio.
13
<PAGE> 14
The change in deferred policy acquisition costs (DAC) resulted in a net decrease
to income of $1,029,839 and $742,635 for the first quarter of 1998 and 1997,
respectively. The change in the amount of the increase or decrease in DAC
between comparable periods is directly related to the rate at which unearned
premiums are increasing or decreasing as a result of premium writings. Since DAC
(asset) is a function of unearned premiums (liability) the change in unearned
premiums correlates to the change in DAC. The ratio of DAC to net unearned
premiums was 26% at March 31, 1998 and 1997, respectively.
Underwriting and operating expenses increased slightly in the first quarter of
1998 from the first quarter of 1997, as a result of a decrease in contingent
compensation largely offsetting expected increases in the other expenses. The
ratio to operating revenues increased to 16.3% in the first quarter of 1998 from
14.7% in the first quarter of 1997 primarily due to the decrease in earned
premiums.
The Company generated a current tax benefit in the first quarter of 1998 as a
result of the loss recorded during the period. The deferred tax benefit is the
result of the tax discounting of the large increase to C & CAE reserves
recorded during the period.
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 March 31, 1998 the
Company held short-term investments and cash of $9,013,541 which the Company
believes is adequate liquidity for the payment of claims and other short-term
commitments.
With regard to long term liquidity, the average duration of the investment
portfolio is approximately 3 years which closely matches the average payout
period of claims. The fair value of the fixed maturity portfolio at March 31,
1998 was $2,166,757 above amortized cost.
Investments decreased because cash was needed in operations as a result of the
decrease in premiums written and the high level of claims and claim adjustment
expenses paid during the period. Accrued investment income is lower at March,
1998, than it was at December, 1997, because the semi-annual interest payment
dates of the securities in the portfolio are skewed toward January and July. The
decrease in premiums receivable is a result of a larger level of premium
writings in the fourth quarter of 1997 than in the first quarter of 1998. Ceded
unpaid claims and claim adjustment expenses increased due to increases in the
fronting reinsurance operation. Ceded unearned premiums increased because of the
fronting reinsurance operation. Deferred policy acquisition costs (DAC)
decreased as a direct result of the decrease in unearned premiums. DAC was 26%
of net unearned premiums at March 31, 1998 and at December 31, 1997. Current
Federal income taxes recoverable increased as a result of the loss recorded
during the first quarter of 1998. Deferred Federal income taxes recoverable
increased for the reasons mentioned previously.
Unpaid claims and claim adjustment expenses increased as a result of
unfavorable claim and claim adjustment expense development from prior accident
years and a more conservative reserving approach for the current accident year.
Unearned premiums decreased as a result of the decline in gross premiums
written. The decrease in accounts payable relates to annual contingent
incentive payments which were paid during the first quarter of 1998. Drafts
payable decreased because an unusually large amount of drafts were issued late
in the fourth quarter of 1997 and cleared or reversed during the first quarter
of 1998.
14
<PAGE> 15
Accumulated other comprehensive income of $801,191 was recorded at March 31,
1998 as a result of the net unrealized gains on the bonds available for sale.
The Company purchased 17,200 shares of its common stock during the first quarter
of 1998 at a cost of $142,191 or $8.27 per share which accounts for the increase
in Treasury stock. The Company has no plans to purchase additional shares.
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.
Forward Looking Statements
This Form 10-Q Report contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that all forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from those contained in the
forward-looking statements. Important factors include, but are not limited to,
(i) heightened competition, including price competition from existing
competitors, from newly formed competitors and from the entry into the Company's
markets of standard insurance companies which historically have not competed in
the Company's specialty markets, (ii) contraction of the markets for the
Company's various lines of business, (iii) development and performance of new
specialty programs, (iv) the ongoing level of claims and claims-related
expenses, (v) adequacy of claim reserves, and (vi) general economic conditions.
15
<PAGE> 16
PART II. OTHER INFORMATION
GAINSCO, INC. AND SUBSIDIARIES
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The statement re computation of per share earnings is included
in the notes to consolidated financial statements.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
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: May 13, 1998
By /s/ Daniel J. Coots
------------------------------------
Daniel J. Coots
Senior Vice President, Treasurer and
Chief Financial Officer
17
<PAGE> 18
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
------- -------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 122,878,742
<DEBT-CARRYING-VALUE> 81,576,165
<DEBT-MARKET-VALUE> 82,510,321
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 213,416,993
<CASH> 646,455
<RECOVER-REINSURE> 2,592,965
<DEFERRED-ACQUISITION> 10,588,297
<TOTAL-ASSETS> 316,911,176
<POLICY-LOSSES> 136,193,404
<UNEARNED-PREMIUMS> 60,486,824
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,170,112
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 108,438,668
23,628,540
<INVESTMENT-INCOME> 2,407,622
<INVESTMENT-GAINS> 140,710
<OTHER-INCOME> 565,566
<BENEFITS> 31,560,149
<UNDERWRITING-AMORTIZATION> 1,029,839
<UNDERWRITING-OTHER> 3,934,616
<INCOME-PRETAX> (15,687,496)
<INCOME-TAX> (6,328,171)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,359,325)
<EPS-PRIMARY> (.45)
<EPS-DILUTED> (.44)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
