<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, 2000 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, 2000, there were 20,919,833 shares of the registrant's Common
Stock, ($.10 par value) outstanding.
<PAGE> 2
GAINSCO, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Review Report 3
Consolidated Balance Sheets as of March 31, 2000
(unaudited) and December 31, 1999 4
Consolidated Statements of Operations for the Three Months
Ended March 31, 2000 and 1999 (unaudited) 6
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999 (unaudited) 7
Notes to Consolidated Financial Statements
March 31, 2000 and 1999 (unaudited) 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 19
SIGNATURE 20
</TABLE>
2
<PAGE> 3
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors and Shareholders of GAINSCO, INC. and subsidiaries
We have reviewed the accompanying consolidated balance sheet of GAINSCO, INC.
and subsidiaries as of March 31, 2000 and the related consolidated statements of
operations for the three month periods ended March 31, 2000 and 1999, and
consolidated statements of cash flows for the three month periods ended March
31, 2000 and 1999. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of GAINSCO, INC. and subsidiaries as
of December 31 1999, and the related consolidated statements of operations,
statements of shareholders' equity and comprehensive income, and statements of
cash flows for the year then ended (not presented herein); and in our report
dated February 25, 2000, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the financial information set
forth in the accompanying consolidated balance sheet as of December 31, 1999, is
fairly presented, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
KPMG LLP
Dallas, Texas
May 11, 2000
3
<PAGE> 4
PART I. FINANCIAL INFORMATION
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31
2000 December 31
Assets (unaudited) 1999
------------ -----------
<S> <C> <C>
Investments
Fixed maturities:
Bonds available for sale, at fair value (amortized cost:
$202,262,298 - 2000, $200,415,218 - 1999) $200,406,322 197,077,075
Certificates of deposit, at cost (which approximates
fair value) 1,130,000 455,000
Common stock, at fair value
(cost: $5,544,917 - 2000) 5,668,820 --
Equity investments, at cost (which approximates fair
value) 1,721,226 916,278
Marketable securities, at fair value
(cost: $395,722 - 2000, $372,179 - 1999) 261,130 254,051
Short-term investments, at cost (which approximates
fair value) 31,003,769 46,477,728
------------ ------------
Total investments 240,191,267 245,180,132
Cash 5,029,506 1,205,364
Accrued investment income 3,634,467 3,797,286
Premiums receivable (net of allowance for
doubtful accounts: $42,000 - 2000, $42,000 - 1999) 34,092,610 25,431,714
Reinsurance balances receivable 5,204,727 3,254,930
Ceded unpaid claims and claim adjustment expenses 37,691,247 37,299,327
Ceded unearned premiums 24,081,376 23,148,581
Deferred policy acquisition costs 15,579,306 14,927,673
Property and equipment (net of accumulated depreciation
and amortization: $8,833,795 - 2000, $8,605,454 - 1999) 7,154,916 6,855,250
Current Federal income taxes (note 1) 140,096 144,628
Deferred Federal income taxes (note 1) 8,312,403 8,401,714
Management contract 1,625,071 1,637,571
Other assets 6,829,281 6,012,424
Goodwill (note 1) 21,879,148 18,351,117
------------ ------------
Total assets $411,445,421 395,647,711
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31
Liabilities and Shareholders' Equity 2000 December 31
(unaudited) 1999
------------- -----------
<S> <C> <C>
Liabilities:
Unpaid claims and claim adjustment expenses $ 134,120,520 132,813,583
Unearned premiums 87,992,348 82,219,785
Commissions payable 1,684,597 1,629,787
Accounts payable 11,464,703 9,198,827
Reinsurance balances payable 11,993,937 7,899,550
Deferred revenue 1,516,214 1,227,863
Drafts payable 6,332,200 4,206,314
Note payable (note 3) 17,500,000 18,000,000
Dividends payable (note 4) 474,598 474,598
Other liabilities 243,552 278,829
------------- -------------
Total liabilities 273,322,669 257,949,136
------------- -------------
Shareholders' Equity (note 4):
Preferred stock ($100 par value, 10,000,000 shares
authorized, 31,620 issued at March 31, 2000 and
December 31, 1999 3,162,000 3,162,000
Common stock ($.10 par value, 250,000,000 shares
authorized, 21,763,927 issued at March 31, 1999
and December 31, 1999) 2,176,393 2,176,393
Common stock warrants 2,040,000 2,040,000
Additional paid-in capital 112,761,068 112,674,842
Accumulated other comprehensive loss (note 1) (1,213,332) (2,246,575)
Retained earnings 26,891,148 27,586,440
Treasury stock, at cost (844,094 shares at March 31, 2000
and December 31, 1999) (7,694,525) (7,694,525)
------------- -------------
Total shareholders' equity 138,122,752 137,698,575
------------- -------------
Total liabilities and shareholders' equity $ 411,445,421 395,647,711
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended March 31
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Net premiums earned (note 2) $ 36,703,747 22,769,576
Net investment income 2,941,081 2,193,450
Net realized gains (losses) (note 1) (1,087,455) 617,547
Insurance services 499,814 746,207
------------ ------------
Total revenues 39,057,187 26,326,780
------------ ------------
Expenses:
Claims and claim adjustment expenses
(note 2) 27,288,453 14,699,937
Commissions 8,731,559 5,602,478
Change in deferred policy acquisitions and
deferred ceding commission income (638,880) (826,963)
Interest expense (note 3) 346,409 320,911
Amortization of goodwill 232,712 172,301
Underwriting and operating expenses 3,764,152 3,925,763
------------ ------------
Total expenses 39,724,405 23,894,427
------------ ------------
Income (loss) before Federal income taxes (667,218) 2,432,353
Federal income taxes:
Current expense (benefit) (115,332) 328,210
Deferred benefit (417,418) (32,847)
------------ ------------
Total taxes (532,750) 295,363
------------ ------------
Net income (loss) $ (134,468) 2,136,990
============ ============
Earnings (loss) per share (note 1):
Basic $ (.02) .10
============ ============
Diluted $ (.02) .10
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended March 31
----------------------------
2000 1999
----------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (134,468) 2,136,990
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization 971,033 1,115,402
Change in deferred Federal income taxes (445,282) (32,847)
Change in accrued investment income 212,344 792,308
Change in premiums receivable (8,062,790) (4,312,109)
Change in reinsurance balances receivable (1,075,314) (1,108,238)
Change in ceded unpaid claims and claim adjustment
expenses 33,606 434,864
Change in ceded unearned premiums (932,795) (4,344,307)
Change in deferred policy acquisition costs and deferred
ceding commission income (638,880) (826,963)
Change in other assets (566,651) 184,416
Change in unpaid claims and claim adjustment
expenses (202,530) (3,592,542)
Change in unearned premiums 5,628,050 8,249,494
Change in commissions payable (38,102) (352,397)
Change in accounts payable 1,723,504 (2,658,564)
Change in reinsurance balances payable 4,094,387 5,033,079
Change in deferred revenue 288,351 7,645
Change in drafts payable 2,125,886 1,893,024
Change in other liabilities (35,277) (214,246)
Change in current Federal income taxes (417,011) 328,049
----------- -----------
Net cash provided by operating activities $ 2,528,061 2,733,058
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements. (continued)
7
<PAGE> 8
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended March 31
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from investing activities:
Bonds held to maturity:
Matured $ -- 10,870,000
Bonds available for sale:
Sold 41,439,341 11,064,735
Matured 6,095,000 1,711,042
Purchased (47,396,595) (15,627,553)
Certificates of deposit purchased (90,000) --
Common stock purchased (5,544,917) --
Equity investments purchased (804,948) --
Marketable securities purchased (430) (1,784)
Net change in short-term investments 15,620,692 (9,013,647)
Property and equipment purchased (216,305) (106,809)
Net assets acquired through purchase of
subsidiary (net of cash acquired of
$662,422) (6,831,159) --
------------ ------------
Net cash provided by investing activities 2,270,679 1,104,016
------------ ------------
Cash flows from financing activities:
Payments on note payable (500,000) --
Cash dividends paid (474,598) (365,690)
------------ ------------
Net cash used for financing activities (974,598) (365,690)
------------ ------------
Net increase in cash 3,824,142 1,263,352
Cash at beginning of period 1,205,364 3,982,059
------------ ------------
Cash at end of period $ 5,029,506 5,245,411
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 9
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, 2000, the results of operations and the statements of cash flows
for the three months ended March 31, 2000 and 1999, on the basis of
generally accepted accounting principles. The December 31, 1999
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, 1999.
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, 1999 for a description of
all other accounting policies.
(b) Investments
Bonds available for sale, common stock and marketable securities are
stated at fair value with changes in fair value recorded as a
component of comprehensive income. Equity investments and short-term
investments are stated at cost.
The equity investments are predominately private equity investments
that are not traded in public markets and cost is considered to
approximate fair value. In the fourth quarter of 1999 all bonds
classified as held to maturity were transferred to the available for
sale classification and adjusted to fair value. The amortized cost at
the date of transfer for these bonds was $41,069,988 and the fair
value was $41,036,014 resulting in an unrealized loss before Federal
income taxes of $33,974. The Company made this change since it no
longer invests in bonds with the intent of holding them to maturity.
The "specific identification" method is used to determine costs of
investments sold. Provisions for possible losses are recorded only
when the values have experienced impairment considered "other than
temporary" by a charge to realized losses resulting in a new cost
basis of the investment. The bonds available for sale had an
unrealized loss of $1,206,384 at March 31, 2000, net of the deferred
tax benefit of $649,592, and an unrealized loss at December 31, 1999
of $2,169,793 net of the deferred tax benefit of $1,168,350. The
marketable securities had an unrealized loss of $87,485 at March 31,
2000, net of the deferred tax benefit of $47,107, and an unrealized
loss at December 31, 1999 of $76,782 net of the deferred tax benefit
of $41,346. Common stock investments had an unrealized gain of $80,537
at March 31, 2000, net of the deferred tax expense of $43,366.
9
<PAGE> 10
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Proceeds from the sale of bond securities totaled $41,439,341 and
$11,064,735 for the three months ended March 31, 2000 and 1999,
respectively. Realized gains were $14,098 and $617,547 for the three
months ended March 31, 2000 and 1999, respectively. Realized losses
were $1,101,553 and $0 for the three months ended March 31, 2000 and
1999, 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
asset and liability method which provides for temporary differences
between the reporting of earnings for financial statement purposes and
for tax purposes, primarily deferred policy acquisition costs, the
discount on unpaid claims and claim adjustment expenses and the
nondeductible portion of the change in unearned premiums. The Company
paid income taxes of $30,000 and $0 during the three months ended
March 31, 2000 and March 31, 1999, respectively.
(d) Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Quarters ended March 31
------------------------------
2000 1999
------------ ---------
<S> <C> <C>
Basic earnings (loss) per share:
Numerator:
Net income (loss) $ (134,468) 2,136,990
Less: Preferred stock dividends
Accretion of discount on preferred stock 108,500 --
Net income (loss) available to common shareholders 86,226 --
------------ ---------
$ (329,194) 2,136,990
Denominator:
Weighted average shares outstanding 20,919,833 20,896,563
------------ ---------
Basic earnings (loss) per share $ (.02) .10
============ =========
Diluted earnings (loss) per share:
Numerator:
Net income (loss) $ (134,468) 2,136,990
------------ ---------
Denominator:
Weighted average shares outstanding 20,919,833 20,896,563
------------ ---------
Effect of dilutive securities:
Employee stock options 164,274 165,153
Convertible preferred stock 6,200,000 --
------------ ---------
Weighted average shares and assumed conversions 27,284,107 21,061,716
------------ ---------
Diluted earnings (loss) per share $ * .10
============ =========
</TABLE>
* The effects of common stock equivalents and convertible preferred stock are
antidilutive for the three months ended 2000 due to the net loss for the
period; therefore diluted earnings per share is not presented.
10
<PAGE> 11
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(e) Accumulated Other Comprehensive Income
The other comprehensive loss amounts included in accumulated
comprehensive income (loss) consisted of net unrealized losses on
fixed maturities, common stock and marketable securities of
$(1,213,332) and $(2,246,575) at March 31, 2000 and December 31, 1999,
respectively. Total comprehensive income consisting of net income
(loss) and the changes in unrealized losses on fixed maturities,
common stock and marketable securities was $898,775 and $1,464,245 for
the three months ended March 31, 2000 and March 31, 1999,
respectively.
(f) Goodwill
Goodwill,which represents the excess of purchase price over fair value
of net assets acquired, is amortized on a straight-line basis over 25
years which is the expected period to be benefited. The Company will
periodically review the recoverability of goodwill based on an
assessment of undiscounted cash flows of future operations to ensure
it is appropriately valued.
On January 7, 2000 the Company completed the acquisition of Tri-State
Ltd. (Tri-State), an insurance operation specializing primarily in
underwriting, servicing and claims handling of nonstandard personal
auto insurance in Minnesota, North Dakota and South Dakota. The
purchase price was for approximately $6,000,000 with additional
payments of up to approximately $5,500,000 in cash over the next
several years based on conversion of business, specific profitability
targets and Tri-State's December 31, 1999 book value.
(2) Reinsurance
The amounts deducted in the Consolidated Statements of Operations for
reinsurance ceded for the three months ended March 31, 2000 and 1999,
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
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
Premiums earned $1,075,436 65,767
Premiums earned - Florida business $4,781,750 488,625
Premiums earned - plan servicing $ -- 580,490
Premiums earned - fronting arrangements $6,579,637 10,971,070
Claims and claim adjustment expenses $1,364,265 1,245,732
Claims and claim adjustment expenses -
Florida business $3,684,499 619,032
Claims and claim adjustment expenses -
plan servicing $1,135,768 1,985,041
Claims and claim adjustment expenses -
fronting arrangements $6,255,239 8,157,317
</TABLE>
11
<PAGE> 12
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The amounts included in the Consolidated Balance Sheets for reinsurance
ceded under fronting arrangements and reinsurance ceded to the commercial
automobile plans of Arkansas, California, Louisiana, Mississippi and
Pennsylvania as of March 31, 2000 and December 31, 1999 were as follows:
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
Unearned premiums -
Florida business $ 9,694,296 7,817,052
Unearned premiums -
plan servicing $ -- --
Unearned premiums -
fronting arrangements $12,280,734 14,263,364
Unpaid claims and claim
adjustment expenses -
Florida business $ 3,684,027 2,651,273
Unpaid claims and claim
adjustment expenses -
plan servicing $ 8,068,271 8,094,763
Unpaid claims and claim
adjustment expenses -
fronting arrangements $12,880,545 13,575,089
</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 entered into a note payable for
$18,000,000 with a commercial bank. Interest is due monthly at an interest
rate that approximates the 30-day London Interbank Offered Rate (LIBOR)
plus 175 basis points (7.88% and 7.34375% at March 31, 2000 and December
31, 1999, respectively). Beginning in January 2000, principal payments of
$500,000 are paid each quarter with the balance of $10,500,000 due at
maturity of the note on October 1, 2003. The Company recorded interest
expense of $346,409 and $320,911 for the three months ended March 31,
12
<PAGE> 13
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
2000 and 1999, respectively. The Company paid interest of $346,409 and
$418,142 for the three months ended March 31, 2000 and 1999, respectively.
The Company made principal payments of $500,000 in January and April 2000.
(4) Shareholders' Equity
As of March 31, 2000 there were 271,507 options outstanding to purchase
common stock (options), at an average exercise price of $2.66 per share,
that had been granted to officers and directors of the Company under the
1990 Stock Option Plan, 629,930 options at an average exercise price of
$8.57 per share, that had been granted to officers and directors of the
Company under the 1995 Stock Option Plan, 308,325 options at an average
exercise price of $5.50 per share that had been granted to officers,
directors and employees of the Company under the 1998 Long-Term Incentive
Plan and 759,710 options at an average exercise price of $5.74 per share
that had been granted to Glenn W. Anderson under an employment agreement.
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. Dividends on preferred shares are paid as if those shares had
been converted to common shares. A cash dividend of $474,598 was paid on
April 14, 2000.
(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, garage, general liability
and property. The personal lines segment writes primarily nonstandard
personal auto coverages.
The Company considers many factors including the nature of the insurance
product and distribution strategies in determining how to aggregate
operating segments.
The Company does not allocate assets to the commercial lines or personal
lines segments for management reporting purposes.
13
<PAGE> 14
The following tables present a summary of segment profit (loss) for the
quarters ending March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Quarter ending March 31, 2000
---------------------------------------------------
Commercial Personal
Lines Lines Other Total
---------- -------- ----- ------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Gross premiums written $ 27,908 15,846 -- 43,754
======== ======= ====== =======
Premiums earned 25,956 10,748 -- 36,704
Net investment income 1,990 604 347 2,941
Insurance services -- 309 191 500
Expenses (27,531) (11,198) (417) (39,146)
-------- ------- ------ -------
Operating income (loss) 415 463 121 999
Net realized losses -- -- (1,087) (1,087)
Interest expense -- (346) -- (346)
Amortization expense -- (233) -- (233)
-------- ------- ------ -------
Income (loss) before
Federal income taxes $ 415 (116) (966) (667)
======== ======= ====== =======
<CAPTION>
Quarter ending March 31, 1999
---------------------------------------------------
Commercial Personal
Lines Lines Other Total
---------- -------- ----- ------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Gross premiums written $ 19,675 7,444 -- 27,119
======== ======= ====== =======
Premiums earned 21,456 1,314 -- 22,770
Net investment income -- -- 2,193 2,193
Insurance services -- -- 746 746
Expenses (20,969) (1,445) (988) (23,402)
-------- ------- ------ -------
Operating income (loss) 487 (131) 1,951 2,307
Net realized gains -- -- 618 618
Interest expense -- (321) -- (321)
Amortization expense -- (172) -- (172)
-------- ------- ------ -------
Income (loss) before
Federal income taxes $ 487 (624) 2,569 2,432
======== ======= ====== =======
</TABLE>
14
<PAGE> 15
GAINSCO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Business Operation
On January 7, 2000 the Company completed the acquisition of Tri-State, Ltd.
(Tri-State), an insurance operation specializing primarily in underwriting,
servicing and claims handling of nonstandard personal auto insurance in
Minnesota, North Dakota and South Dakota. The purchase price was for
approximately $6,000,000 with additional payments of up to approximately
$5,500,000 in cash over the next several years based on conversion of business,
specific profitability targets and Tri-State's December 31, 1999 book value.
Results of Operations
Gross premiums written for the first quarter of 2000 were $43,753,693 versus
$27,118,929 for the comparable period of 1999 representing an increase of 61% of
which 31 percentage points (points) were attributable to personal lines and 30
points were attributable to commercial lines. The following table compares the
major product lines between the periods for gross premiums written.
<TABLE>
<CAPTION>
Three months
ended March 31
--------------------------------------------
2000 1999
------------------- -------------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Commercial lines $27,908 64% $19,675 73%
Personal lines 15,846 36% 7,444 27%
------- ------- ------- -------
Total $43,754 100% $27,119 100%
======= ======= ======= =======
</TABLE>
COMMERCIAL LINES are up 42% for the first quarter of 2000 versus the comparable
1999 period. Commercial auto contributed 22 points of the increase in commercial
lines with Alabama, Florida, Georgia and Texas accounting for the majority. The
general liability line contributed 18 points to the commercial lines growth with
California, Florida and Texas representing the majority of the growth. PERSONAL
LINES are up 113% for the first quarter of 2000 versus the comparable 1999
period. This is primarily attributable to growth in nonstandard personal auto
writings in Florida. For the first quarter of 2000, gross premium written
percentages by significant product line are as follows: commercial auto (35%),
personal auto (35%), general liability (17%) and garage (8%), with no other
product line comprising 5% or more. Premiums earned increased 61% as a result of
the increase in premiums written for the period.
Net investment income increased 34% in the first quarter of 2000 over the
comparable 1999 period. In the fourth quarter of 1999 Goff Moore Strategic
Partners, L.P. (GMSP) invested approximately $30 million in the Company and took
over management of the Company's investments. During the first quarter of 2000
approximately $41.4 million in bond securities were sold for a loss of
$1,087,455 and the proceeds were reinvested in bond securities with an average
taxable equivalent yield increase of more than 150 basis points over the bond
securities that were sold. The increase in investments and the increase in yield
on the proceeds reinvested from the sales of bonds account for the increase in
investment income. The Company anticipates redeploying up to an additional $60
million of its bond securities during the remainder of 2000 in an attempt to
increase the taxable equivalent yield. This strategy is expected to result in
additional net realized losses in 2000. The impact on book value is anticipated
to be significantly less than the impact on earnings because the Company
classifies its bond securities as available for sale so they have been recorded
on the balance sheet
15
<PAGE> 16
at fair value. The scope and results of the investment redeployment will depend
upon interest rates and timing of specific transactions.
Insurance service revenues decreased in the first quarter of 2000 from the
comparable 1999 period primarily as a result of a decrease in claim adjusting
revenues.
Claims and claim adjustment expenses (C & CAE) increased $12,588,516 in the
first quarter of 2000 from the comparable 1999 period. The C & CAE ratio was
74.4% in 2000 and 64.6% in 1999. The ratio in 2000 was adversely impacted by the
late March tornado and storm systems in northern Texas, as well as the broader
impact of winter-related claims in the property and auto physical damage lines.
The ratio of commissions to gross premiums written is 20% in the first quarter
of 2000 and 21% in the comparable 1999 period. The ratio of commissions to
premiums earned was 24% for the first quarter of 2000 versus 25% for the
comparable 1999 period.
The change in deferred policy acquisition costs and deferred ceding commission
income ("DAC") resulted in a net increase to income of $638,880 in the first
quarter of 2000 and a net increase to income of $826,963 for the comparable 1999
period. The change in the amount of the increase or decrease in DAC between the
comparable periods is primarily 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), and increase in the growth rate of
net unearned premiums would correspondingly result in an increase in the growth
rate of DAC and vice versa.
Interest expense from the note payable increased due to the general increase in
interest rates from the 1999 period. Amortization expense increased in the first
quarter of 2000 versus the comparable 1999 period as a result of additional
goodwill recorded and the related additional amortization on the Lalande earnout
accrued in the fourth quarter of 1999 and the Tri-State acquisition completed in
January, 2000.
Underwriting and operating expenses were down 4% in the first quarter of 2000
versus the comparable 1999 period primarily as a result of variable expenses
related to the earnings level of the Company.
The Company generated a tax benefit for the first quarter of 2000 as a result of
the loss recorded during this 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. The Company has
short-term investments and cash that the Company believes is adequate liquidity
for the payment of claims and other short-term commitments. This amount is large
because the funds received from GMSP in October 1999 have not been fully
invested in bonds, stocks and alternative investments.
With regard to long term liquidity, the average maturity of the investment
portfolio is approximately 4.1 years. The fair value of the fixed maturity
portfolio at March 31, 2000 was $1,855,976 below amortized cost.
The decrease in investments and cash is primarily attributable to the purchase
of Tri-State, mentioned previously. Premiums receivable increased primarily as a
result of the growth in premiums written. Reinsurance balances receivable
increased primarily due to an increase in paid loss recoverables from the
commercial auto plans and from excess casualty reinsurers. Ceded unearned
premiums increased primarily as a result of the increase in nonstandard personal
auto writings. Goodwill increased primarily because of the Tri-State
acquisition.
16
<PAGE> 17
Unpaid claims and claim adjustment expenses increased primarily due to claim
reserve increases in the commercial auto and personal auto lines as a result of
current year growth in these lines. Unearned premiums increased primarily
because of the increase in premiums written mentioned previously. Accounts
payable increased primarily because of the accrual for the book value adjustment
on the Tri-State acquisition. Reinsurance balances payable increased primarily
because of the increased activity in personal lines. Drafts payable increased
primarily because of an increase in paid claims.
An accumulated other comprehensive loss of $1,213,332 was recorded at March 31,
2000 as a result of the net unrealized loss on the bonds available for sale.
This was primarily attributable to the general increase in interest rates.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of economic losses due to adverse changes in the
estimated fair value of a financial instrument as the result of changes in
equity prices, interest rates, foreign exchange rates and commodity prices. The
Company's consolidated balance sheets include assets whose estimated fair values
are subject to market risk. The primary market risk to the Company is interest
rate risk associated with investments in fixed maturities. The Company has no
foreign exchange or commodity risk, and its exposure to equity risk is small.
Interest Rate Risk
The Company's fixed maturity investments are subject to interest rate risk.
Increases and decreases in interest rates typically result in decreases and
increases in the fair value of these investments.
Most of the Company's investable assets come from premiums paid by
policyholders. These funds are invested predominately in investment grade bonds.
The fixed maturity portfolio is exposed to interest rate fluctuations; as
interest rates rise, fair values decline and as interest rates fall, fair values
rise. The changes in the fair value of the fixed maturity portfolio are
presented as a component of shareholders' equity in accumulated other
comprehensive income, net of taxes.
The effective duration of the fixed maturity portfolio is managed with
consideration given to the estimated duration of the Company's liabilities. The
Company has investment policies which limit the maximum duration and maturity of
the fixed maturity portfolio.
The Company utilizes the modified duration method to estimate the effect of
interest rate risk on the fair values of its fixed maturity portfolio. The
usefulness of this method is to a degree limited, as it is unable to accurately
incorporate the full complexity of market interactions.
Year 2000 Readiness
There has been concern that there would be worldwide computer problems in early
2000 due to their failure to properly recognize a year that beings with "20"
instead of the familiar "19" and because the Year 2000 is a leap year. To
address these and related concerns, the Company appointed a Year 2000 team
involving personnel from all business units to assess the Year 2000 readiness of
the Company and those with whom it does business, and then address any problems
found. 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 all identified
non-conforming programs have been corrected and that it has not experienced any
material Year 2000 related system failures or disruptions. The Company, however,
plans to
17
<PAGE> 18
continue to monitor its systems and operations and to address any date-related
problems that may arise.
The Company reviewed 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 re-interpreting 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 company may bear for Year 2000 losses.
The Company estimates that its costs in 1998 and 1999 of addressing the year
2000 problem aggregated approximately $920,000, including modifying or replacing
software and other systems, hiring Year 2000 solution providers and internal
assessment, remediation and testing. These costs were funded by internally
generated funds. No material additional Year 2000 costs are anticipated.
Forward Looking Statements
Statements made in this report that are not strictly historical may be
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that important factors,
representing certain risks and uncertainties, could cause actual results to
differ materially from those contained in the forward-looking statements. These
factors include, but are not limited to, (a) heightened competition from
existing competitors and new competitor entrants into the Company's markets, (b)
contraction of the markets for the Company's various lines of business, (c)
development and performance of new specialty programs, (d) the ongoing level of
claims and claims-related expenses, (e) adequacy of claim reserves, (f) the
ability to complete value-adding acquisitions and fully integrate newly acquired
companies and their customers and managers into the Company, as well as, the
ability to implement growth strategies which can achieve incremental value, (g)
the effectiveness of the deployment of the Company's bond portfolio and other
investment strategies implemented by the Company's investment manager, and (h)
general economic conditions including fluctuations in interest rates. A
forward-looking statement is relevant as of the date the statement is made. The
Company undertakes no obligation to update any forward-looking statements to
reflect events or circumstances arising after the date on which the statements
are made.
18
<PAGE> 19
PART II. OTHER INFORMATION
GAINSCO, INC. AND SUBSIDIARIES
Item 1. Legal Proceedings.
GAINSCO, INC. ("GNA") was named a defendant in the proceedings styled William
Steiner v. Joseph D. Macchia, Joel C. Puckett, Daniel J. Coots and GAINSCO,
INC., filed on August 25, 1998 in the United States District Court for the
Northern District of Texas, Fort Worth Division (the "Trial Court"). In that
case, the plaintiff asserted claims on behalf of a putative class of persons who
purchased GNA's common stock between August 6, 1997 and July 16, 1998,
inclusive. The plaintiff asserted claims for damages under sections 10(b) and
20(a) of the Securities Exchange Act of 1934, alleging that GNA's financial
results did not reflect GNA's true financial position and results of operations
in accordance with generally accepted accounting principles in that they
understated reserves for claims and claim adjustment expenses. On March 31, 2000
the Trial Court dismissed plaintiff's amended class action complaint for failure
to state a claim upon which relief can be granted and dismissed as moot the
plaintiff's request for class certification. To date the plaintiff has not
appealed the Trial Court's decision.
In the normal course of its operations, GNA and its subsidiaries (collectively,
the "Company") have been named as defendant in various legal actions seeking
payments for claims denied by the Company and other monetary damages. In the
opinion of the Company's management the ultimate liability, if any, resulting
from the disposition of these claims will not have a material adverse effect on
the Company's consolidated financial position or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
15. Awareness Letter of KPMG LLP
27. Financial Data Schedule for the period ended March 31, 2000.
(b) Reports on Form 8-K
No Form 8-K Report was filed by Registrant during its quarter ended
March 31, 2000.
19
<PAGE> 20
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 12, 2000
By /s/ Daniel J. Coots
--------------------------------------
Daniel J. Coots
Senior Vice President, Treasurer and
Chief Financial Officer
20
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
15. Awareness Letter of KPMG LLP
27. Financial Data Schedule for the period ended March 31, 2000.
</TABLE>
<PAGE> 1
EXHIBIT 15
GAINSCO, INC.
Fort Worth, Texas
Ladies and Gentlemen:
Re: Registration Statement Nos. 33-48634 and 33-37070
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated May 11, 2000 related to our
review of interim financial information.
Pursuant to Rule 436(c) under Securities Act of 1933, such report is not
considered part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of sections 7 and 11 of the Act.
Very truly yours,
KPMG LLP
Dallas, Texas
May 11, 2000
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 200,406,322
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 7,651,176
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 240,191,267
<CASH> 5,029,506
<RECOVER-REINSURE> 5,204,727
<DEFERRED-ACQUISITION> 15,579,306
<TOTAL-ASSETS> 411,445,421
<POLICY-LOSSES> 134,120,520
<UNEARNED-PREMIUMS> 87,992,348
<POLICY-OTHER> 6,332,200
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 17,500,000
0
3,162,000
<COMMON> 2,176,393
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 138,122,752
36,703,747
<INVESTMENT-INCOME> 2,941,081
<INVESTMENT-GAINS> (1,087,455)
<OTHER-INCOME> 499,814
<BENEFITS> 27,288,453
<UNDERWRITING-AMORTIZATION> (638,880)
<UNDERWRITING-OTHER> 3,764,152
<INCOME-PRETAX> (667,218)
<INCOME-TAX> (532,750)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (134,468)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
