<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended September 30, 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 September 30, 2000, there were 21,169,736 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 September 30, 2000 (unaudited) and
December 31, 1999 4
Consolidated Statements of Operations for the Three Months and
Nine Months Ended September 30, 2000 and 1999 (unaudited) 6
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999 (unaudited) 7
Notes to Consolidated Financial Statements
September 30, 2000 and 1999 (unaudited) 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 22
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS 22
ITEM 3. DEFAULTS ON SENIOR SECURITIES 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22
ITEM 5. OTHER INFORMATION 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 23
SIGNATURE 24
</TABLE>
2
<PAGE> 3
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors and Shareholders of GAINSCO, INC.:
We have reviewed the accompanying condensed consolidated balance sheet of
GAINSCO, INC. and subsidiaries as of September 30, 2000 and the related
condensed consolidated statements of operations for the three months and nine
months ended September 30, 2000 and 1999, and condensed consolidated statements
of cash flows for the nine months ended September 30, 2000 and 1999. These
condensed 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 auditing standards generally accepted in the United States of America, 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 accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, 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
November 13, 2000
3
<PAGE> 4
PART I. FINANCIAL INFORMATION
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30
2000 December 31
Assets (unaudited) 1999
------ ------------ ------------
<S> <C> <C>
Investments
Fixed maturities:
Bonds available for sale, at fair value (amortized cost:
$190,228,522 - 2000, $200,415,218 - 1999) $191,306,524 197,077,075
Certificates of deposit, at cost (which approximates
fair value) 845,000 455,000
Common stock, at fair value (cost: $6,027,392 - 2000) 7,868,000 --
Other investments, at fair value (cost: $5,167,219 - 2000,
$1,288,457 - 1999) 5,088,293 1,170,329
Short-term investments, at cost (which approximates
fair value) 41,361,291 46,477,728
------------ ------------
Total investments 246,469,108 245,180,132
Cash 709,813 1,205,364
Accrued investment income 3,680,000 3,797,286
Premiums receivable (net of allowance for doubtful
accounts: $242,000 - 2000, $42,000 - 1999) 24,320,841 25,431,714
Reinsurance balances receivable 10,112,435 3,254,930
Ceded unpaid claims and claim adjustment expenses 36,719,622 37,299,327
Ceded unearned premiums 19,477,594 23,148,581
Deferred policy acquisition costs 13,936,984 14,927,673
Property and equipment (net of accumulated depreciation and
amortization: $9,492,277 - 2000, $8,605,454 - 1999) 6,844,649 6,855,250
Current Federal income taxes (note 1) 2,728,780 144,628
Deferred Federal income taxes (note 1) 9,653,275 8,401,714
Management contract 1,600,071 1,637,571
Other assets 7,194,120 6,012,424
Goodwill (note 1) 23,018,643 18,351,117
------------ ------------
Total assets $406,465,935 395,647,711
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30
2000 December 31
Liabilities and Shareholders' Equity (unaudited) 1999
------------------------------------ ------------- -------------
<S> <C> <C>
Liabilities
Unpaid claims and claim adjustment expenses $ 149,906,751 132,813,583
Unearned premiums 79,187,553 82,219,785
Commissions payable 1,423,192 1,629,787
Accounts payable 9,987,640 9,198,827
Reinsurance balances payable 9,473,548 7,899,550
Deferred revenue 1,662,870 1,227,863
Drafts payable 5,367,683 4,206,314
Note payable (note 3) 16,500,000 18,000,000
Dividends payable (note 4) 478,971 474,598
Other liabilities 187,984 278,829
------------- -------------
Total liabilities 274,176,192 257,949,136
------------- -------------
Shareholders' Equity (note 4)
Preferred stock ($100 par value, 10,000,000 shares authorized,
31,620 issued at September 30, 2000 and December 31, 1999) 3,162,000 3,162,000
Common stock ($.10 par value, 250,000,000 shares authorized, 22,013,830
issued at September 30, 2000 and 21,763,927 issued
at December 31, 1999) 2,201,383 2,176,393
Common stock warrants 2,040,000 2,040,000
Additional paid-in capital 113,453,355 112,674,842
Accumulated other comprehensive income (loss) (note 1) 1,873,516 (2,246,575)
Retained earnings 17,254,014 27,586,440
Treasury stock, at cost (844,094 shares at September 30, 2000 and
December 31, 1999) (7,694,525) (7,694,525)
------------- -------------
Total shareholders' equity 132,289,743 137,698,575
------------- -------------
Total liabilities and shareholders' equity $ 406,465,935 395,647,711
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30 ended September 30
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned (note 2) $ 38,728,990 30,210,872 114,292,913 79,463,729
Net investment income 3,740,497 2,380,581 10,251,426 6,867,530
Net realized gains (losses) (note 1) (118,604) 22,539 (1,899,944) 681,438
Insurance services 190,483 482,853 1,232,938 1,641,463
------------ ------------ ------------ ------------
Total revenues 42,541,366 33,096,845 123,877,333 88,654,160
------------ ------------ ------------ ------------
Expenses:
Claims and claims adjustment
expenses (note 2) 40,933,439 21,853,230 99,351,750 53,631,751
Commissions 7,359,417 7,236,544 23,544,657 20,583,786
Change in deferred policy
acquisition costs 995,915 (1,018,458) 1,003,442 (3,761,936)
Interest expense (note 3) 354,872 327,841 1,067,854 941,008
Amortization expense 247,275 172,031 716,335 516,528
Underwriting and operating expenses 4,484,238 3,092,504 12,620,599 10,531,953
------------ ------------ ------------ ------------
Total expenses 54,375,156 31,663,692 138,304,637 82,443,090
------------ ------------ ------------ ------------
Income (loss) before Federal
income taxes (11,833,790) 1,433,153 (14,427,304) 6,211,070
Federal income taxes:
Current expense (benefit) (1,772,220) 129,942 (2,223,991) 912,969
Deferred benefit (2,500,147) (107,514) (3,403,756) (77,849)
------------ ------------ ------------ ------------
Total taxes (4,272,367) 22,428 (5,627,747) 835,120
------------ ------------ ------------ ------------
Net income (loss) $ (7,561,423) 1,410,725 (8,799,557) 5,375,950
============ ============ ============ ============
Earnings (loss) per share (note 1):
Basic $ (.37) .07 (.45) .26
============ ============ ============ ============
Diluted $ (.37) .07 (.45) .25
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (8,799,557) 5,375,950
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization 2,103,629 3,167,409
Change in deferred Federal income taxes (3,403,756) (77,849)
Change in accrued investment income 166,811 466,781
Change in premiums receivable 1,708,978 (8,586,003)
Change in reinsurance balances receivable (5,983,022) (2,375,899)
Change in ceded unpaid claims and claim adjustment expenses 1,005,231 (3,985,780)
Change in ceded unearned premiums 3,670,987 (3,216,151)
Change in deferred policy acquisition costs and deferred
ceding commission income 1,003,442 (3,761,936)
Change in other assets (931,488) (881,731)
Change in unpaid claims and claim adjustment expenses 15,583,701 (1,753,793)
Change in unearned premiums (3,176,745) 20,240,224
Change in commissions payable (299,507) (2,942,518)
Change in accounts payable 246,441 (2,555,886)
Change in reinsurance balances payable 1,573,998 7,060,049
Change in deferred revenue 435,007 (578,388)
Change in drafts payable 1,161,369 550,004
Change in other liabilities (90,846) (345,040)
Change in current Federal income taxes (2,851,958) 5,356,868
------------ ------------
Net cash provided by operating activities $ 3,122,715 11,156,311
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements. (continued)
7
<PAGE> 8
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from investing activities:
Bonds held to maturity:
Matured $ -- 16,639,999
Bonds available for sale:
Sold 76,863,578 18,894,471
Matured 24,422,954 6,721,142
Purchased (89,656,135) (38,731,216)
Certificates of deposit matured 740,000 370,000
Certificates of deposit purchased (545,000) (370,000)
Common stock purchased (6,027,392) --
Other investments purchased (3,855,649) (21,732)
Net change in short term investments 5,271,037 (14,109,194)
Property and equipment disposed (purchased) 11,111 (27,363)
Net assets acquired through purchase of subsidiary
(net of cash acquired of $662,422) (8,462,144) --
------------ ------------
Net cash used for investing activities (1,237,640) (10,633,893)
------------ ------------
Cash flows from financing activities:
Payments on note payable (1,500,000) --
Proceeds from exercise of common stock options 544,236 49,878
Cash dividends paid (1,424,862) (1,097,071)
------------ ------------
Net cash used for financing activities (2,380,626) (1,047,193)
------------ ------------
Net decrease in cash (495,551) (524,775)
Cash at beginning of period 1,205,364 3,982,059
------------ ------------
Cash at end of period $ 709,813 3,457,284
============ ============
</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
(Company) as of September 30, 2000, the results of operations
for the three months and nine months ended September 30, 2000
and 1999 and the statements of cash flows for the nine months
ended September 30, 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 other investments
are stated at fair value with changes in fair value recorded
as a component of comprehensive income. Short-term investments
are stated at cost.
The components of other investments at September 30, 2000 and
December 31, 1999 are set forth in the following table:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
-------------------------- --------------------------
Fair Value Cost Fair value Cost
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Equity investments $2,265,726 2,265,726 916,278 916,278
Marketable securities 322,567 401,493 254,051 372,179
Note receivable 2,500,000 2,500,000 -- --
---------- ---------- ---------- ----------
Total other investments $5,088,293 5,167,219 1,170,329 1,288,457
========== ========== ========== ==========
</TABLE>
The equity investments are predominately private equity
investments that are not traded in public markets and cost is
considered to approximate fair value. Cost is considered to
approximate fair value for the note receivable due to its
short duration and market rate of interest.
9
<PAGE> 10
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 unrealized gains (losses) on investments at September 30,
2000 and December 31, 1999 are set forth in the following
table:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Bonds available for sale:
Unrealized gain (loss) $ 1,078,002 (3,338,143)
Deferred tax expense (benefit) 367,173 (1,168,350)
----------- -----------
Net unrealized gain (loss) $ 710,829 (2,169,793)
=========== ===========
Common stock investments:
Unrealized gain $ 1,840,608 --
Deferred tax expense 625,807 --
----------- -----------
Net unrealized gain $ 1,214,801 --
=========== ===========
Other investments
Unrealized loss $ (78,926) (118,128)
Deferred tax benefit (26,812) (41,346)
----------- -----------
Net unrealized loss $ (52,114) (76,782)
=========== ===========
</TABLE>
Proceeds from the sale of bond securities totaled $6,936,721
and $2,845,644 for the three months ended September 30, 2000
and 1999, respectively, and $76,863,578 and $18,894,471 for
the nine months ended September 30, 2000 and 1999,
respectively. Realized gains were $7,260 and $22,539 for the
three months ended September 30, 2000 and 1999, respectively
and $21,358 and $681,438 for the nine months ended September
30, 2000 and 1999, respectively. Realized losses were $125,864
and $1,921,302 for the three months and nine months ended
September 30, 2000, respectively. There were no realized
losses for the 1999 periods.
(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
10
<PAGE> 11
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
expenses and the nondeductible portion of the change in
unearned premiums. The Company paid income taxes of $280,000
and $700,161 during the nine months ended September 30, 2000
and 1999, respectively. The Company paid no income taxes
during the three months ending September 30, 2000 and 1999.
The Company received Federal income tax refunds totaling
$40,000 and $5,144,060 during the three months ended September
30, 2000 and 1999, respectively.
(d) Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
Three months ended September 30 Nine months ended September 30
------------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic earning (loss) per share:
Numerator:
Net income (loss) $ (7,561,423) 1,410,725 (8,799,557) 5,375,950
Less: Preferred stock dividends 108,500 -- 325,500 --
Accretion of discount on preferred stock 86,646 -- 259,267 --
------------ ------------ ------------ ------------
Net income (loss) available to common
shareholders $ (7,756,569) 1,410,725 (9,384,324) 5,375,950
------------ ------------ ------------ ------------
Denominator:
Weighted average shares outstanding 21,082,969 20,902,381 20,985,088 20,898,890
------------ ------------ ------------ ------------
Basic earnings (loss) per share $ (.37) .07 (.45) .26
============ ============ ============ ============
Diluted earnings (loss) per share:
Numerator:
Net income (loss) $ (7,561,423) 1,410,725 (8,799,557) 5,375,950
------------ ------------ ------------ ------------
Denominator:
Weighted average shares outstanding 21,082,969 20,902,381 20,985,088 20,898,890
Effect of dilutive securities:
Employee stock options -- 211,448 -- 207,162
Convertible preferred stock
6,200,000 -- 6,200,000 --
------------ ------------ ------------ ------------
Weighted average shares and assumed
conversions 27,282,969 21,113,829 27,185,088 21,106,052
------------ ------------ ------------ ------------
Diluted earnings (loss) per share $ (.37)* .07 (.45)* .25
============ ============ ============ ============
</TABLE>
* The effects of common stock equivalents and
convertible preferred stock are antidilutive for the
three months and nine months ended 2000 due to the
net loss for the periods; therefore, diluted earnings
per share is reported the same as basic earnings per
share.
(e) Accumulated Other Comprehensive Income
Included in accumulated other comprehensive income (loss)
are net unrealized gains (losses) on fixed maturities, common
stock, equity investments and marketable securities of
$1,873,516 and $(2,246,575) at September 30, 2000 and December
31, 1999, respectively. Accumulated other comprehensive income
(loss) consisted of net income (loss) and the changes in
unrealized gains (losses) on fixed maturities, common stock
and other investments of $(5,857,171) and $1,308,113 for the
three months ended September 30, 2000 and 1999, respectively
and $(4,679,466) and $3,078,481 for the nine months ended
September 30, 2000 and 1999, respectively.
11
<PAGE> 12
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(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 periodically reviews 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
approximately $6,000,000 with an additional payment of
$1,148,454 made in July, 2000 and additional payments up to
approximately $4,350,000 in cash possible over the next
several years based on a conversion goal and specific
profitability targets.
(2) Reinsurance
The amounts deducted in the Consolidated Statements of Operations for
reinsurance ceded for the three months and nine months ended September
30, 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 September 30 Nine months ended September 30
------------------------------- ------------------------------
2000 1999 2000 1999
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Premiums earned - all other $ 3,234,422 954,764 6,859,225 2,022,513
Premiums earned - Florida business $ 2,915,416 2,959,615 12,181,379 5,465,251
Premiums earned - plan servicing $ -- 74,528 -- 957,808
Premiums earned - fronting
arrangements $ 6,482,100 11,949,587 22,389,059 37,365,561
Claims and claim adjustment expenses - $ 3,851,721 1,353,587 8,403,214 5,369,905
all other
Claims and claim adjustment expenses -
Florida business $ 2,621,947 2,229,585 10,355,956 4,217,685
Claims and claim adjustment expenses -
plan servicing $ 546,184 994,304 1,526,463 3,461,187
Claims and claim adjustment expenses -
fronting arrangements $ 2,948,479 10,134,206 15,850,564 29,067,452
</TABLE>
12
<PAGE> 13
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 September 30, 2000 and December 31,
1999 were as follows:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Unearned premiums - Florida business $ 2,474,206 7,817,052
Unearned premiums - plan servicing $ -- --
Unearned premiums - fronting arrangements $ 9,002,342 14,263,364
Unpaid claims and claim adjustment expenses - Florida business $ 3,926,742 2,651,273
Unpaid claims and claim adjustment expenses - plan servicing $ 5,977,171 8,094,763
Unpaid claims and claim adjustment expenses - fronting arrangements $10,449,976 13,575,089
</TABLE>
Effective April 1, 2000 the Company entered into a quota share
reinsurance agreement whereby it ceded 40% of its nonstandard personal
auto writings in Florida to a non-affiliated reinsurer. This treaty was
amended during the third quarter of 2000 and the ceding percentage was
decreased to 20% effective April 1, 2000. The net adjustment due to the
amendment resulted in an increase to income of $12,990 of which $6,495
was recognized in the third quarter of 2000 and the remainder will be
recognized in the fourth quarter of 2000. The treaty year ends December
31, 2000.
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 rate "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 credit agreement with a
commercial bank pursuant to which it borrowed $18,000,000. Interest is
due monthly at an interest rate that approximates the 30-day London
Interbank Offered Rate (LIBOR) plus 175 basis points (8.37% and
7.34375% at September 30, 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 on October 1,
2003. The Company recorded interest expense of $354,872 and $327,841
for the three months ended September 30, 2000 and 1999, respectively
and $1,067,854 and $941,008 for the nine months ended September 30,
2000 and 1999, respectively. The Company paid interest of $357,889 and
327,841 for the three months ended September 30, 2000 and 1999,
respectively and $944,089 and $1,042,872 for the nine months ended
September 30, 2000 and 1999, respectively. The Company made principal
payments of $500,000 in January, April, July and October 2000.
General Agents Insurance Company of America, Inc. (General Agents), a
wholly owned subsidiary of the Company, sustained operating losses in
the nine month period ended September 30, 2000 because of the C & CAE
experience. As a result, General Agents may not have the level of
statutory earnings for the year ending December 31, 2000 required by
the Company's credit agreement. The Company has apprised the bank of
the situation and requested an amendment or waiver of the credit
agreement covenant, which the bank has thus far declined to grant. The
Company is seeking an acceptable resolution.
(4) Shareholders' Equity
As of September 30, 2000 there were 713,930 options, at an average
exercise price of $8.54 per
13
<PAGE> 14
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
share, that had been granted to officers and directors of the Company
under the 1995 Stock Option Plan; 516,820 options, at an average
exercise price of $5.57 per share, that had been granted to officers,
directors and employees of the Company under the 1998 Long-Term
Incentive 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.
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 $478,971 was
paid on October 13, 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.
The following tables present a summary of segment profit (loss) for the
three months and nine months ending September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three months ended September 30, 2000
------------------------------------------------------------------
Commercial Personal
Lines Lines Other Total
------------ ------------ ------------ ------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Gross premiums written $ 26,300 13,974 -- 40,274
============ ============ ============ ============
Premiums earned $ 27,494 11,235 -- 38,729
Net investment income 2,221 1,246 273 3,740
Insurance services -- 23 168 191
Expenses (38,992) (14,162) (619) (53,773)
------------ ------------ ------------ ------------
Operating loss (9,277) (1,658) (178) (11,113)
Net realized losses -- -- (119) (119)
Interest expense -- (355) -- (355)
Amortization expense -- (247) -- (247)
------------ ------------ ------------ ------------
Loss before Federal income taxes $ (9,277) (2,260) (297) (11,834)
============ ============ ============ ============
</TABLE>
In the third quarter of 2000 commercial lines results were adversely impacted
by an increase in ultimate claim and claim adjustment expenses for prior
accident years. In the third quarter of 2000 personal lines results were
adversely impacted by an increase in ultimate claim and claim adjustment
expenses for the current accident year.
14
<PAGE> 15
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, 1999
----------------------------------------------------------
Commercial Personal
Lines Lines Other Total
---------- ---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Gross premiums written $ 24,854 10,546 -- 35,400
========== ========== ========== ==========
Premiums earned $ 23,161 7,050 -- 30,211
Net investment income 1,300 1,081 -- 2,381
Insurance services -- 247 235 482
Expenses (24,095) (6,978) (91) (31,164)
---------- ---------- ---------- ----------
Operating income 366 1,400 144 1,910
Net realized gains -- -- 23 23
Interest expense -- (328) -- (328)
Amortization expense -- (172) -- (172)
---------- ---------- ---------- ----------
Income before Federal income taxes $ 366 900 167 1,433
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30, 2000
------------------------------------------------------------------
Commercial Personal
Lines Lines Other Total
------------ ------------ ------------ ------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Gross premiums written $ 86,864 41,716 -- 128,580
============ ============ ============ ============
Premiums earned $ 80,939 33,354 -- 114,293
Net investment income 6,014 3,321 916 10,251
Insurance services -- 689 544 1,233
Expenses (97,497) (37,556) (1,467) (136,520)
------------ ------------ ------------ ------------
Operating income (loss) (10,544) (192) (7) (10,743)
Net realized losses -- -- (1,900) (1,900)
Interest expense -- (1,068) -- (1,068)
Amortization expense -- (716) -- (716)
------------ ------------ ------------ ------------
Loss before Federal income taxes $ (10,544) (1,976) (1,907) (14,427)
============ ============ ============ ============
</TABLE>
15
<PAGE> 16
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30, 1999
------------------------------------------------------------------
Commercial Personal
Lines Lines Other Total
------------ ------------ ------------ ------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Gross premiums written $ 70,312 28,056 -- 98,368
============ ============ ============ ============
Premiums earned $ 66,732 12,732 -- 79,464
Net investment income 5,594 1,274 -- 6,868
Insurance services -- 964 678 1,642
Expenses (66,674) (12,698) (1,614) (80,986)
------------ ------------ ------------ ------------
Operating income (loss) 5,652 2,272 (936) 6,988
Net realized gains -- -- 681 681
Interest expense -- (941) -- (941)
Amortization expense -- (517) -- (517)
------------ ------------ ------------ ------------
Income (loss) before Federal income taxes $ 5,652 814 (255) 6,211
============ ============ ============ ============
</TABLE>
16
<PAGE> 17
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 personal auto insurance
in Minnesota, North Dakota and South Dakota. The purchase price was
approximately $6,000,000 with an additional payment of $1,148,454 made
in July, 2000 and additional payments up to approximately $4,350,000 in
cash possible over the next several years based on a conversion goal
and specific profitability targets.
Results of Operations
Gross premiums written for the third quarter of 2000 were $40,273,882
versus $35,399,741 for the comparable 1999 period representing a 14%
increase of which 10 percentage points (points) were attributable to
personal lines and 4 points were attributable to commercial lines. For
the first nine months of 2000 gross premiums written have increased 31%
from the comparable 1999 period with personal lines accounting for 14
points and commercial lines accounting for 17 points of the increase.
The following table compares the major product lines between the
periods for gross premiums written.
<TABLE>
<CAPTION>
Three months ended September 30 Nine months ended September 30
------------------------------------------------ ------------------------------------------------
2000 1999 2000 1999
--------------------- --------------------- --------------------- ---------------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial lines $ 26,300 65% $ 24,854 70% $86,864 71% $ 70,312 71%
Personal lines 13,974 35 10,546 30 41,716 29 28,056 29
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 40,274 100% $ 35,400 100% $128,580 100% $ 98,368 100%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
COMMERCIAL LINES are up 6% for the third quarter of 2000 versus the
comparable 1999 period and were up 24% for the first nine months of
2000 versus the comparable 1999 period. Commercial auto contributed 4
points of decrease for the third quarter and 8 points of the increase
for the first nine months of 2000 versus the comparable 1999 period.
The Company has decided to cease writing certain identified
non-profitable commercial trucking business that had accounted for
approximately $25 million in annual premiums. Exiting this book of
business will occur over the next twelve months. Auto garage accounted
for 2 points of the increase for the third quarter. The general
liability line contributed 8 points to the increase for the third
quarter and 14 points to the increase for the first nine months of
2000.
PERSONAL LINES are up 33% for the third quarter of 2000 versus the
comparable 1999 period and are up 49% for the first nine months of 2000
versus the comparable 1999 period. Umbrella liability writings recorded
in the third quarter of 2000 account for 19 points of the increase for
the quarter and 7 points of the increase for the first nine months of
2000 versus the comparable 1999 periods. Dwelling writings recorded in
the third quarter of 2000 account for 12 points of the increase for the
quarter and 5 points of the increase for the first nine months of 2000.
Quarterly increases of the magnitude recorded in the third quarter of
2000 for umbrella liability and dwelling are not expected in the
future. Personal auto writings contributed 9 points to the increase for
the third quarter and 41 points to the increase for the first nine
months of 2000. Mobile home writings contributed 7 points of decrease
in the third quarter and 4 points of decrease for the first nine
17
<PAGE> 18
months of 2000. For the first nine months of 2000, gross premium
percentages by significant product line were as follows: commercial
auto (35%), personal auto (29%), general liability (18%) and auto
garage (10%), with no other product line comprising 5% or more.
Effective April 1, 2000, the Company entered into a quota share
reinsurance agreement whereby it ceded 40% of its personal auto
writings in Florida. This treaty was amended during the third quarter
of 2000 and the ceding percentage was decreased to 20% effective April
1, 2000. Net premiums written for the third quarter of 2000 were up 4%
over the comparable 1999 period and they were up 19% for the first nine
months of 2000 versus the comparable 1999 period. Premiums earned
increased 28% and 44% for the third quarter and first nine months of
2000 versus the comparable 1999 periods, respectively as a result of
the continued increase in premiums written.
Net investment income increased 57% and 49% for the third quarter and
first nine months of 2000 versus the comparable 1999 periods,
respectively. 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
nine months of 2000, approximately $76.9 million in bond securities
were sold for a pre-tax loss of $1,899,944 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. This strategy is expected to result in net realized
losses for the year. 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 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 third quarter and first
nine months of 2000 from the comparable 1999 periods primarily as a
result of a decrease in claim servicing revenues.
Claims and claims adjustment expenses (C & CAE) increased $19,080,209
in the third quarter of 2000 from the comparable 1999 period. The C &
CAE ratio was 105.7% in the third quarter of 2000 and 72.3% in the
third quarter of 1999. C & CAE have increased 85% to $99,351,750 for
the first nine months of 2000 from the comparable 1999 period. The C &
CAE ratio was 86.9% for the first nine months of 2000 and 67.5% for the
first nine months of 1999. Upon concluding its end of third quarter
analysis of claims experience and trends, the Company determined it
was necessary to increase expected ultimate liabilities by
approximately $10 million for periods prior to 2000. The analysis
revealed significant unexpected third quarter increases in underlying
claims severity trends, primarily related to periods prior to 2000 for
the commercial trucking business. The Company also increased claim
reserves for the current accident year during the third quarter of
2000.
The ratio of commissions to net premiums written was 21% for all
periods presented. The change in deferred policy acquisition costs net
of deferred ceding commission income resulted in a net decrease to
income of $995,915 in the third quarter of 2000 and a net increase to
income of $1,018,458 for the comparable 1999 period. A net decrease to
income of $1,003,442 was recorded for the first nine months of 2000
compared to a net increase to income of $3,761,936 for the first nine
months of 1999. The net decrease for the 2000 periods is primarily
related to an increase in deferred ceding commission income as a result
of the quota share reinsurance treaty the Company entered into
beginning in the second quarter of 2000. Effective April 1, 2000, the
Company entered into a quota share reinsurance agreement whereby it
ceded 40% of its personal auto writings in Florida. This treaty was
amended during the third quarter of 2000 and the ceding percentage was
decreased to 20% effective April 1, 2000. The net adjustment due to the
amendment resulted in an increase to income of $12,990 of which $6,495
was recognized in the third quarter of 2000 and the remainder will be
recognized in the fourth quarter of 2000. The ratio of commissions and
change in deferred policy acquisition costs to premiums earned was 22%
for the third
18
<PAGE> 19
quarter of 2000 versus 21% for the comparable 1999 period and 22% for
the first nine months of 2000 as compared to 21% for the comparable
1999 period.
Interest expense from the note payable increased due to the increase in
interest rates from the comparable 1999 period. Amortization expense
increased in the third quarter and first nine months of 2000 versus the
comparable 1999 periods as a result of the amortization of additional
goodwill recorded 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 up 45% in the third quarter of
2000 from the comparable 1999 period and were up 20% for the first nine
months of 2000 from the comparable 1999 period primarily as a result of
salary increases, personnel additions and bad debt reserve increases.
The Company generated a tax benefit for the third quarter and first
nine months of 2000 as a result of the loss recorded during these
periods.
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
are adequate liquidity for the payment of claims and other short-term
commitments. This amount is large in relation to total investments
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 years. The fair value of the
fixed maturity portfolio at September 30, 2000 was $1,078,002 above
amortized cost.
Premiums receivable decreased primarily as a result of the run-off of
an assumption reinsurance treaty for personal auto business.
Reinsurance balances receivable increased primarily due to an increase
in paid loss recoverables from personal auto claims and from commercial
excess casualty claims. Ceded unpaid claims and claim adjustment
expenses decreased primarily as a result of a decrease in fronting and
servicing carrier claim reserves. Ceded unearned premiums decreased
primarily as a result of a decrease in fronting business. Deferred
policy acquisition costs decreased as a result of an increase in
deferred ceding commission income from the quota share reinsurance
treaty. Current Federal income taxes recoverable and Deferred Federal
income taxes recoverable both increased as a result of the loss
recorded for the 2000 periods. Other assets increased primarily as a
result of prepaid items in the agency operation. Goodwill increased
primarily because of the Tri-State acquisition.
Unpaid claims and claims adjustment expenses increased primarily due to
claim reserve increases in the commercial auto line mentioned
previously. Unearned premiums decreased primarily because of the
decrease in fronting premiums mentioned previously. Accounts payable
increased primarily because of the accrual for a book value adjustment
and conversion payout on the Tri-State acquisition. Reinsurance
balances payable increased primarily because of the quota share treaty
on the Florida personal auto writings. Drafts payable increased
primarily because of the increase in paid claims. The note payable
decreased due to principal repayments made in the first, second and
third quarters of 2000.
General Agents Insurance Company of America, Inc. (General Agents), a
wholly owned subsidiary of the Company, sustained operating losses in
the nine month period ended September 30, 2000 because of the
19
<PAGE> 20
C & CAE experience discussed previously. As a result, General Agents
may not have the level of statutory earnings for the year ending
December 31, 2000 required by the Company's credit agreement. The
Company has apprised the bank of the situation and requested an
amendment or waiver of the credit agreement covenant, which the bank
has thus far declined to grant. The Company is seeking an acceptable
resolution.
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 that limit the maximum
duration and maturity of the fixed maturity portfolio.
The Company uses 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 transactions.
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) the ability to effect the successful exit from unprofitable
trucking lines while maintaining and growing other profitable lines,
(b) heightened competition from existing competitors and new competitor
entrants into the Company's markets, (c) changes in 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 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, (h) the effectiveness of the deployment of
the Company's bond portfolio and other investment strategies
implemented by the Company's investment manger, and (i) general
economic conditions including fluctuations in interest rates. A
forward-looking statement is relevant as of the date the statement in
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.
20
<PAGE> 21
PART II. OTHER INFORMATION
GAINSCO, INC. AND SUBSIDIARIES
Item 1. Legal Proceedings
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.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults on Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders
An Annual Meeting of Shareholders of the Company was held on
September 7, 2000, in Fort Worth, Texas. At the Annual Meeting,
shareholders elected directors for the ensuing year and until
their successors are duly elected and qualified, and ratified
the selection by the Board of Directors of KPMG LLP as the
Company's independent auditors for the year ending December 31,
2000. The results of the voting were as follows:
<TABLE>
<CAPTION>
Election of Directors For Withheld
--------------------- --------- ---------
<S> <C> <C>
Glenn W. Anderson 23,529,728 1,521,225
J. Randall Chappel 23,535,371 1,515,582
John C. Goff 23,535,366 1,515,587
Robert J. McGee, Jr. 23,367,011 1,683,942
Joel C. Puckett 23,535,728 1,515,225
Sam Rosen 23,534,728 1,516,225
Harden H. Wiedemann 23,528,728 1,522,225
John H. Williams 23,528,428 1,522,525
</TABLE>
Ratification of appointment of independent auditors:
<TABLE>
<CAPTION>
Abstentions and Brokers
For Against Non-Votes
--- ------- -----------------------
<S> <C> <C>
23,627,269 1,360,735 62,949
</TABLE>
22
<PAGE> 22
Item 5. Other Information
None.
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 September
30, 2000
(b) Reports on Form 8-K
No Form 8-K Report was filed by Registrant during its
quarter ended September 30, 2000.
23
<PAGE> 23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized to sign on behalf of the Registrant as
well as in his capacity as Chief Financial Officer.
GAINSCO, INC.
Date: November 13, 2000 By: /s/ Daniel J. Coots
------------------------------------
Daniel J. Coots
Senior Vice President, Treasurer and
Chief Financial Officer
24
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
15 Awareness Letter of KPMG LLP
27 Financial Data Schedule for the period ended September 30,
2000
</TABLE>
