<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, 1999 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, 1999, there were 20,896,563 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 March 31, 1999
(unaudited) and December 31, 1998 3
Consolidated Statements of Operations for the Three Months
Ended March 31, 1999 and 1998 (unaudited) 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 (unaudited) 6
Notes to Consolidated Financial Statements
March 31, 1999 and 1998 (unaudited) 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 18
SIGNATURE 19
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31
1999 December 31
Assets (unaudited) 1998
------------ ------------
<S> <C> <C>
Investments
Fixed maturities:
Bonds held to maturity, at amortized cost (fair
value: $49,560,910 - 1999, $60,978,145 - 1998) $ 48,661,244 59,788,233
Bonds available for sale, at fair value (Amortized cost:
$146,069,212 - 1999, $143,806,030 - 1998) 146,831,657 145,588,002
Certificates of deposit, at cost (which approximates
fair value) 595,000 595,000
Marketable securities, at fair value
(cost: $317,901 - 1999, $316,117 - 1998) 244,490 268,585
Short-term investments, at cost (which approximates
fair value) 13,762,786 4,749,139
------------ ------------
Total investments 210,095,177 210,988,959
Cash 5,245,411 3,982,059
Accrued investment income 3,431,922 4,224,230
Premiums receivable (net of allowance for doubtful
accounts: $81,000 - 1999 and 1998) 19,197,172 14,885,063
Reinsurance balances receivable 3,500,814 2,392,576
Ceded unpaid claims and claim adjustment expenses 34,595,137 35,030,001
Ceded unearned premiums 26,731,906 22,387,599
Deferred policy acquisition costs 12,147,105 11,320,142
Property and equipment (net of accumulated depreciation
and amortization: $8,260,820 - 1999, $8,175,798 - 1998) 6,738,423 6,716,636
Current Federal income taxes (note 1) 4,703,901 5,031,950
Deferred Federal income taxes (note 1) 7,074,602 6,669,093
Management contract 1,675,071 1,687,571
Other assets 3,032,195 3,216,611
Goodwill 16,885,471 17,057,772
------------ ------------
Total assets $355,054,307 345,590,262
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31
1999 December 31
Liabilities and Shareholders' Equity (unaudited) 1998
------------- -------------
<S> <C> <C>
Liabilities:
Unpaid claims and claim adjustment expenses $ 133,205,607 136,798,149
Unearned premiums 71,851,171 63,601,677
Commissions payable 3,927,034 4,279,431
Accounts payable 4,653,356 7,311,920
Reinsurance balances payable 6,361,076 1,327,997
Deferred revenue 1,942,935 1,935,290
Drafts payable 7,727,870 5,834,846
Note payable (note 3) 18,000,000 18,000,000
Dividends payable (note 4) 365,690 365,690
Other liabilities 437,118 651,364
------------- -------------
Total liabilities 248,471,857 240,106,364
------------- -------------
Shareholders' Equity (note 4):
Preferred stock ($100 par value, 10,000,000 shares
authorized, none issued) -- --
Common stock ($.10 par value, 250,000,000 shares
authorized, 21,740,657 issued at March 31, 1999
and December 31, 1998) 2,174,066 2,174,066
Additional paid-in capital 87,778,548 87,778,548
Accumulated other comprehensive income (note 1) 466,196 1,138,941
Retained earnings 23,858,165 22,086,868
Treasury stock (844,094 shares at March 31, 1999 and
December 31, 1998) (7,694,525) (7,694,525)
------------- -------------
Total shareholders' equity 106,582,450 105,483,898
------------- -------------
Total liabilities and shareholders' equity $ 355,054,307 345,590,262
============= =============
</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
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Revenues:
Premiums earned (note 2) $ 22,769,576 23,628,540
Net investment income 2,193,450 2,407,622
Net realized gains (note 1) 617,547 140,710
Insurance services 746,207 565,566
------------- -------------
Total revenues 26,326,780 26,742,438
------------- -------------
Expenses:
Claims and claim adjustment expenses
(note 2) 14,699,937 31,560,149
Commissions 5,602,478 5,905,330
Change in deferred policy acquisition costs (826,963) 1,029,839
Interest expense (note 3) 320,911 --
Amortization expense 172,301 --
Underwriting and operating expenses 3,925,763 3,934,616
------------- -------------
Total expenses 23,894,427 42,429,934
------------- -------------
Income (loss) before Federal income taxes 2,432,353 (15,687,496)
Federal income taxes:
Current expense (benefit) 328,210 (2,801,959)
Deferred benefit (32,847) (3,526,212)
------------- -------------
Total taxes 295,363 (6,328,171)
------------- -------------
Net income (loss) $ 2,136,990 (9,359,325)
============= =============
Earnings (loss) per share:
Basic .10 (.45)
============= =============
Diluted .10 (.45)
============= =============
</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
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,136,990 (9,359,325)
Adjustments to reconcile net income (loss) to cash provided
by (used for) operating activities:
Depreciation and amortization 1,115,402 1,265,590
Change in deferred Federal income taxes recoverable (32,847) (3,526,212)
Change in accrued investment income 792,308 733,703
Change in premiums receivable (4,312,109) 1,505,964
Change in reinsurance balances receivable (1,108,238) 11,546
Change in ceded unpaid claims and claim adjustment
expenses 434,864 (2,526,732)
Change in ceded unearned premiums (4,344,307) (529,135)
Change in deferred policy acquisition costs (826,963) 1,029,839
Change in other assets 184,416 (657,962)
Change in unpaid claims and claim adjustment
expenses (3,592,542) 22,966,395
Change in unearned premiums 8,249,494 (3,517,683)
Change in commissions payable (352,397) (6,184)
Change in accounts payable (2,658,564) (737,734)
Change in reinsurance balances payable 5,033,079 261,324
Change in deferred revenue 7,645 369,071
Change in drafts payable 1,893,024 (5,582,845)
Change in other liabilities (214,246) (402,581)
Change in current Federal income taxes 328,049 (2,801,959)
------------ ------------
Net cash provided by (used for) operating activities $ 2,733,058 (1,504,920)
------------ ------------
</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
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from investing activities: Bonds held to maturity:
Matured $ 10,870,000 7,830,046
Bonds available for sale:
Sold 11,064,735 7,004,524
Matured 1,711,042 1,020,000
Purchased (15,627,553) (8,254,441)
Property and equipment purchased (106,809) (94,083)
Marketable securities:
Purchased (1,784) --
Net change in short-term investments (9,013,647) (5,543,693)
------------ ------------
Net cash provided by (used for)
investing activities (1,104,016) 1,962,353
------------ ------------
Cash flows from financing activities:
Cash dividends paid (365,690) (365,300)
Treasury stock acquired -- (142,191)
------------ ------------
Net cash used for financing activities (365,690) (507,491)
------------ ------------
Net increase (decrease) in cash 1,263,352 (50,058)
Cash at beginning of period 3,982,059 696,513
------------ ------------
Cash at end of period $ 5,245,411 646,455
============ ============
</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, 1999, the results of operations and
the statements of cash flows for the three months ended March
31, 1999 and 1998, on the basis of generally accepted
accounting principles. The December 31, 1998 balance sheet
included herein is derived from the consolidated financial
statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
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, 1998 for
a description of all other accounting policies. Certain
reclassifications have been made to the 1998 amounts to
conform to the 1999 presentation.
(b) Investments
Bonds held to maturity are stated at amortized cost, bonds
available for sale and marketable securities are stated at
fair value with changes in fair value recorded as a component
of accumulated other comprehensive income. 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 $495,589 at March 31, 1999, net of the deferred tax
expense of $266,855, and an unrealized gain at December 31,
1998 of $1,158,282 net of the deferred tax expense of
$623,690. The marketable securities had an unrealized loss of
$57,584 at March 31, 1999, net of the deferred tax benefit of
$15,827, and an unrealized loss at December 31, 1998 of
$47,532.
Proceeds from the sale of bond securities totaled $11,064,735
and $7,004,524 for the three months ended March 31, 1999 and
1998, respectively. Realized gains were $617,547 and $149,189
for the three months ended March 31, 1999 and 1998,
respectively. Realized losses were $0 and $8,479 for the three
months ended March 31, 1999 and 1998, 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 liability method which provides for temporary
differences between the reporting of earnings for financial
statement purposes and for tax purposes, primarily deferred
policy acquisition costs, the discount on unpaid claims and
claim adjustment expenses and the nondeductible portion of the
change in unearned premiums. The Company paid no income taxes
during the three months ended March 31, 1999 and March 31,
1998.
(d) Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Numerator:
Net income (loss) $ 2,136,990 (9,359,325)
------------ ------------
Denominator:
Denominator for basic
earnings per share-
weighted average shares 20,896,563 20,864,374
Effect of dilutive securities:
Employee stock options 165,153 234,106
------------ ------------
Denominator for diluted
earnings per share-
weighted average shares
and assumed conversions 21,061,716 21,098,480
============ ============
Basic earnings (loss) per share $ .10 $ (.45)
============ ============
Diluted earnings (loss) per share $ .10 $ (.45)
============ ============
</TABLE>
(e) Accumulated Other 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
9
<PAGE> 10
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 net unrealized
gains on fixed maturities and marketable securities of
$466,196 and $1,138,941 at March 31, 1999 and December 31,
1998, respectively. Total comprehensive income (loss)
consisting of net income (loss) and the changes in unrealized
gains on fixed maturities and marketable securities was
$1,464,245 and $(9,616,402) for the three months ended March
31, 1999 and March 31, 1998, respectively.
(2) Reinsurance
The amounts deducted in the Consolidated Statements of Operations for
reinsurance ceded for the three months ended March 31, 1999 and 1998,
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
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Premiums earned 554,392 400,980
Premiums earned - plan
servicing 580,490 870,724
Premiums earned -
fronting arrangements 10,971,070 9,112,570
Claims and claim
adjustment expenses 1,864,764 1,575,663
Claims and claim
adjustment expenses -
plan servicing 1,985,041 1,509,638
Claims and claim
adjustment expenses -
fronting arrangements 8,157,317 9,300,032
</TABLE>
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
10
<PAGE> 11
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
arrangements as of March 31, 1999 and December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Unearned premiums $ 459,189 1,139,560
Unearned premiums -
fronting arrangements $ 21,852,126 20,194,814
Unpaid claims and claim
adjustment expenses $ 10,089,111 9,380,484
Unpaid claims and claim
adjustment expenses -
fronting arrangements $ 13,231,331 13,927,694
</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.
(3) Note Payable
In December of 1998, the Company made a note payable for $18,000,000
with a commercial bank. Interest is due monthly at an interest rate
that approximates the 90-day London Interbank Offered Rate (LIBOR) plus
175 basis points (6.6872% and 6.7842% at March 31, 1999 and December
31, 1998, respectively). Principal payments of $500,000 are to be paid
each quarter beginning January 1, 2000 with the balance of $10,500,000
due at maturity of the note on October 1, 2003. The Company recorded
interest expense of $320,911 for the three months ended March 31, 1999.
The Company paid interest of $418,142 for the three months ended March
31, 1999.
(4) Shareholders' Equity
As of March 31, 1999 there were 294,777 options outstanding to purchase
common stock (options), at an average exercise price of $2.47 per
share, that had been granted to officers and directors of the Company
under the 1990 Stock Option Plan, 681,153 options at an average
exercise price of $8.67 per share, that had been granted to officers
and directors of the Company under the 1995 Stock Option Plan and
579,710 options at an average exercise price of $5.75 per share that
had been granted to Glenn W. Anderson under an employment agreement.
11
<PAGE> 12
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
As of December 31, 1998, the Company had purchased 844,094 shares of
its common stock at a cost of $7,694,525. 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 $365,690 was paid on April 15, 1999.
(5) Segment Reporting
The Company makes operating decisions and assesses performance for the
commercial lines segment and the personal lines segment. The commercial
lines segment writes primarily commercial auto, auto garage and general
liability. The personal lines segment writes private passenger auto
only.
The Company considers many factors including the nature of the
insurance product and distribution strategies in determining how to
aggregate operating segments.
The Company does not allocate assets to the commercial lines or
personal lines segments for management reporting purposes.
12
<PAGE> 13
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The following tables present a summary of segment profit (loss) for the quarters
ending March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Quarter ending March 31, 1999
-----------------------------
Commercial Personal
Lines Lines Other Total
---------- ---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Earned premiums $ 21,456 1,314 -- 22,770
Net investment income -- -- 2,193 2,193
Net realized gains -- -- 618 618
Insurance services -- -- 746 746
Expenses (20,969) (1,445) (988) (23,402)
---------- ----------
Underwriting profit (loss) 487 (131)
Interest expense -- (321) -- (321)
Amortization expense -- (172) -- (172)
---------- ---------- ---------- ----------
Profit (loss) $ 487 (624) 2,569 2,432
========== ========== ========== ==========
Combined ratio 100.4% 107.7% 97.6%
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Quarter ending March 31, 1999
-----------------------------
Commercial Personal
Lines Lines Other Total
---------- ---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Earned premiums $ 23,629 -- -- 23,629
Net investment income -- -- 2,408 2,408
Net realized gains -- -- 141 141
Insurance services -- -- 566 566
Expenses (41,536) -- (895) (42,431)
---------- ----------
Underwriting profit (loss) (17,907) --
Interest expense -- -- -- --
Amortization expense -- -- -- --
---------- ---------- ---------- ----------
Profit (loss) $ (17,907) -- 2,220 (15,687)
========== ========== ========== ==========
Combined ratio 182.3% -- 182.3%
========== ========== ==========
</TABLE>
(6) Subsequent Event
On April 1, 1999, the Company completed the sale of the assets of Agents
Processing Systems, Inc. A write-off of approximately two cents per share
associated with this transaction was accrued in the first quarter of 1999.
13
<PAGE> 14
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 1999 were $27,118,929 versus
$20,072,134 for the comparable period of 1998 representing an increase of 35%
that was attributable to personal auto writings. The following table presents,
for each major product line, gross premiums written for the periods indicated.
<TABLE>
<CAPTION>
Three months
ended March 31
--------------------------------------------------
1999 1998
----------------------- -----------------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Commercial auto $ 11,089 41% $ 11,685 58%
Auto garage 3,612 13% 4,436 22%
General liability 3,642 14% 3,663 18%
Personal auto 7,086 26% --
Other lines 1,690 6% 288 2%
---------- ---------- ---------- ----------
Total $ 27,119 100% $ 20,072 100%
========== ========== ========== ==========
</TABLE>
COMMERCIAL AUTO is down 5% for the first quarter of 1999 largely due to the
Company's exiting of certain unprofitable classes. AUTO GARAGE is down 19% in
the first quarter of 1999 because of continued intense competition most notably
in Florida. GENERAL LIABILITY is down 1% for the first quarter of 1999. PERSONAL
AUTO is largely Florida personal auto which comes from the fourth quarter 1998
acquisition of the Lalande Group. For the first quarter of 1999, gross premium
written percentages by state/product line are as follows: Florida personal auto
(26%), Texas commercial auto (20%) and Texas general liability (6%), with no
other state/product line comprising 5% or more. Premiums earned decreased 4% as
a result of the decrease in premiums written for the major product lines of the
core business.
Net investment income decreased 9% in the first quarter of 1999 as a result of a
decrease in the portfolio from March 31, 1998 and because the reinvestment of
maturities has been at lower yields. At March 31, 1999, 84% of the Company's
investments were in investment grade tax-exempt bonds with an average maturity
of approximately 3.6 years. Since the majority of the Company's investments are
tax-exempt, the yields appear lower than those of the industry. On a taxable
equivalent basis the return on average investments is 5.8% for 1999 and 6.1% for
1998. The Company has the ability to hold its bond securities until their
maturity date. At March 31, 1999, 8% of the Company's investments were in U.S.
Treasury securities and 6% were in short-term money market funds.
The Company recorded net realized capital gains of $617,547 during the first
quarter of 1999 versus $140,710 for the comparable 1998 period. These gains were
generated from the bonds available for sale category of the fixed maturity
portfolio.
14
<PAGE> 15
Insurance service revenues in the first quarter of 1999 were $180,641 above the
first quarter of 1998 largely due to claim adjusting fees earned from outside
parties through the Lalande Group.
Claims and claim adjustment expenses (C & CAE) decreased 53% to $14,699,937 in
the first quarter of 1999 from the first quarter of 1998. The C & CAE ratio was
64.6% for the first quarter of 1999 versus 133.6% for the first quarter of 1998.
The first quarter of 1998 included approximately $16,700,000 in unfavorable
development from prior accident years, whereas the first quarter of 1999 had
favorable development from prior accident years of approximately $356,000.
The ratio of commissions to gross premiums written is 20.7% and 29.4% for the
first quarter of 1999 and 1998, respectively. Commissions in the 1998 period
were higher due to a decrease in commission income of approximately $1,644,000
as a result of reducing previously accrued reinsurance commission income due to
adverse development in C & CAE incurred.
The change in deferred policy acquisition costs (DAC) resulted in a net increase
to income of $826,963 for the first quarter of 1999 versus a net decrease of
$1,029,839 for the first quarter of 1998. 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 growing or declining 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 27% and 26% at March 31, 1999 and
1998, respectively.
Underwriting and operating expenses decreased slightly in the first quarter of
1999 from the first quarter of 1998, as a result of the reduction in staff
implemented in the second quarter of 1998.
The effective tax rate of 12% for the first quarter of 1999 is the result of
tax-exempt investment income comprising the majority of income before taxes. In
the first quarter of 1998 the large increase in C & CAE reserves accounted for
the tax benefit in that 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, 1999 the
Company held short-term investments and cash of $19,008,197 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 3.3 years which closely matches the average payout
period of claims. The fair value of the fixed maturity portfolio at March 31,
1999 was $1,662,111 above amortized cost.
Accrued investment income is lower at March, 1999, than it was at December,
1998, because the semi-annual interest payment dates of the securities in the
portfolio are skewed toward January and July. The increase in premiums
receivable is a result of a larger level of premium writings in the first
quarter of 1999 than in the fourth quarter of 1998. Reinsurance balances
receivable increased in the first quarter of 1999 largely because of two large
claims which settled during the period and were in excess of the Company's
retention. Ceded unearned premiums increased because of the increase in personal
auto writings and fronting accounts. Deferred policy acquisition costs (DAC)
increased as a direct result of the increase in unearned premiums. DAC was 27%
of net unearned premiums at March 31, 1999 and at December 31, 1998.
15
<PAGE> 16
Unpaid claims and claim adjustment expenses decreased largely as a result of the
amount of claims closed from prior accident years which resulted in the number
of outstanding claims decreasing 12% in the first quarter of 1999. Unearned
premiums increased primarily as a result of the increase in gross premiums
written in the personal auto line. The decrease in accounts payable was largely
due to a decrease in premiums payable to outside insurers from the agency
operation. This personal auto business was written on the Company's policies
during the first quarter of 1999 and the balance due to outside insurers
decreased. Reinsurance balances payable increased due to the increase in
personal auto writings and fronting accounts. Drafts payable increased because
of the large amount of claims that were closed during the first quarter of 1999,
as mentioned previously.
Accumulated other comprehensive income of $466,196 was recorded at March 31,
1999 as a result of the net unrealized gains on the bonds available for sale and
marketable securities.
The Company is not aware of any current recommendations by regulatory
authorities, which if implemented, would have a material effect on the Company's
liquidity, capital resources or results of operations.
Year 2000 Readiness
Y2K Problem A "Year 2000 problem" exists worldwide because many existing
computer programs use only the last 2 digits to refer to a year. Therefore,
these computer programs do not properly recognize a year that begins with "20"
instead of the familiar "19". If not corrected, many computer applications could
fail or create erroneous results. In addition to the two-digit portion of the
problem, other date issues can generate erroneous results. These include Year
2000 being a leap year and the use of Gregorian date of 9999 or the use of
Julian date 9999 in a date field to alert the program to perform special
handling, while Gregorian September 9, 1999 and Julian April 9, 1999 are actual
dates.
Company (Excluding Lalande) Readiness The Company began addressing its Year 2000
readiness in 1996, excluding the Lalande Group whose acquisition by the Company
was completed on October 23, 1998. The Company appointed a Year 2000 team
involving personnel from all business units responsible for implementing the
project, while the department Vice Presidents formed the Year 2000 steering
committee. The project scope encompassed information technology, including
hardware and software whether developed internally or externally, building
systems, vendors, banks, agents, reinsurers and the Company's exposure relating
to policy coverage.
The Company has completed the assessment phase, the strategy phase, the analysis
phase and the planning phase for its hardware and software systems,
non-information technology equipment and strategic business relationships. The
Company believes that it has completed the remediation and testing phase of all
mission critical systems and all hardware. The Company is either in the
remediation or testing phase of its non-mission critical software. The Company
anticipates that its non-mission critical software will be compliant by June 30,
1999. The foregoing readiness analysis does not apply to software for certain
discontinued operations which are in a runoff phase.
During 1998 the Company contracted with a major consulting vendor to perform due
diligence assessment and testing of its Year 2000 project. While assessing the
Company's readiness, the vendor identified some programs that required
additional remediation and re-testing. The Company believes that it has
corrected all the identified non-conforming programs.
The Company has performed a written survey of all strategic business partners
including producers, general agents, material vendors, reinsurers, reinsurance
intermediaries, utilities, telecommunications services, web
16
<PAGE> 17
hosting providers, Internet service providers, hardware providers, software
providers and financial institutions. The Company is monitoring the progress of
the partners, which if impaired by a Year 2000 problem, would have a material
impact on the Company. The Company is developing contingency plans in the event
that a material business partner is not Year 2000 ready. However, there can be
no assurance that all material business partners will be Year 2000 ready and
such could have a material effect on the Company's financial position.
A comprehensive review was performed by the Company of the insurance policies
written by it and its underwriting guides to determine Year 2000 exposure. The
Company made a decision to exclude Year 2000 exposures from all insurance
policies written by it and began adding exclusions in November 1997. The Company
believes Year 2000 liabilities are not fortuitous in nature and would not be
covered under its insurance policies. The Company believes that its coverage
exposure with respect to Year 2000 losses will not be material. However, changes
in social and legal trends may establish coverage unintended for Year 2000
exposures by reinterpreting insurance contracts and exclusions. Litigation with
respect to Year 2000 claims and the attendant costs are to be expected. It is
impossible to predict what exposure insurance companies may bear for the Year
2000 losses.
The Company is establishing contingency plans for hardware and software failures
with respect to the Year 2000 problem. Since the Company's mission critical
systems and hardware are believed to be Year 2000 compliant and have been
assessed by an outside vendor, the Company does not expect any material Year
2000 failures. The Company believes that it has reviewed all material business
partners' readiness, and has been advised that their mission critical systems
and software are believed to be Year 2000 compliant. If, in the event the
Company becomes aware of a strategic partner's failure to be prepared, the
Company will evaluate using another vendor.
Lalande Readiness Lalande has been addressing its Year 2000 readiness since
1997. As of March 31, 1999, Lalande's mission critical systems are believed to
be Year 2000 compliant. The Company expects that Lalande's non-mission critical
systems will be Year 2000 compliant by September 30, 1999.
Costs The Company estimates that its costs of addressing the Year 2000 problem
will aggregate approximately $880,000, including modifying or replacing software
and other systems, hiring Year 2000 solution providers and internal assessment,
remediation and testing. Of this amount, approximately $810,000 has been
expensed and approximately $70,000 remains to be expended. These costs are being
funded by internally generated funds.
Forward Looking Statements
Statements made in this report that are not strictly historical may be
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that 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, (a) 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, (b) overcapitalization of the insurance industry, (c)
contraction of the markets for the Company's various lines of business, (d)
development and performance of new specialty programs, (e) the ongoing level of
claims and claims-related expenses, (f) adequacy of claim reserves, (g) the
ability to complete value-adding acquisitions, (h) the ability of the Company to
fully integrate the recently acquired Lalande Group and its customers and
managers into the Company's business, (i) the results of the pursuit by the
Board of Directors of additional strategic alternatives to maximize shareholder
values, (j) effects of Year 2000 problems encountered by the Company and those
with whom it deals, and (k) general economic conditions including fluctuations
in interest rates.
17
<PAGE> 18
PART II. OTHER INFORMATION
GAINSCO, INC. AND SUBSIDIARIES
Item 1. Legal Proceedings
The Company is a defendant in the proceedings styled William Steiner
v. Joseph D. Macchia, Joel C. Puckett, Daniel J. Coots and GAINSCO,
INC., filed in the United States District Court for the Northern
District of Texas, Fort Worth Division. In that case, the plaintiff
asserts claims on behalf of a putative class of persons who purchased
the Company's common stock between August 6, 1997 and July 16, 1998,
inclusive. The plaintiff asserts claims under sections 10(b) and 20(a)
of the Securities Exchange Act of 1934, alleging principally that the
Company did not establish adequate reserves for claims and claim
adjustment expenses in its financial statements and, therefore, they
did not reflect the Company's true financial position and results of
operations in accordance with generally accepted accounting
principles. The Company believes that it has meritorious defenses to
plaintiff's claims and intends to vigorously defend the action.
In the normal course of its operations, the Company has been named as
defendant in various legal actions seeking payments for claims denied
by the Company and other monetary damages. In the opinion of the
Company's management the ultimate liability, if any, resulting from
the disposition of these claims will not have a material adverse
effect on the Company's consolidated financial position or results of
operations. The Company's management believes that unpaid claims and
claim adjustment expenses are adequate to cover liabilities from
claims which arise in the normal course of its insurance business.
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> 19
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 14, 1999
By /s/ Daniel J. Coots
------------------------------------
Daniel J. Coots
Senior Vice President, Treasurer and
Chief Financial Officer
19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------- -----------
<S> <C>
27.1 FDS
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 146,831,657
<DEBT-CARRYING-VALUE> 48,661,244
<DEBT-MARKET-VALUE> 49,560,910
<EQUITIES> 244,490
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 210,095,177
<CASH> 5,245,411
<RECOVER-REINSURE> 3,500,814
<DEFERRED-ACQUISITION> 12,147,105
<TOTAL-ASSETS> 355,054,307
<POLICY-LOSSES> 133,205,607
<UNEARNED-PREMIUMS> 71,851,171
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 18,000,000
0
0
<COMMON> 2,174,066
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 355,054,307
22,769,576
<INVESTMENT-INCOME> 2,193,450
<INVESTMENT-GAINS> 617,547
<OTHER-INCOME> 746,207
<BENEFITS> 14,699,937
<UNDERWRITING-AMORTIZATION> (826,963)
<UNDERWRITING-OTHER> 3,925,763
<INCOME-PRETAX> 2,432,353
<INCOME-TAX> 295,363
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,136,990
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
