<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 June 30, 1998 Commission File Number 1-9828
GAINSCO, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1617013
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Commerce Street Fort Worth, Texas 76102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (817) 336-2500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of June 30, 1998, there were 20,896,563 shares outstanding of the
registrant's Common Stock, $.10 par value.
<PAGE> 2
GAINSCO, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of June 30, 1998
(unaudited) and December 31, 1997 3
Consolidated Statements of Operations for the Three Months
and Six Months Ended June 30, 1998 and 1997 (unaudited) 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1997 (unaudited) 6
Notes to Consolidated Financial Statements
June 30, 1998 and 1997 (unaudited) 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 17
SIGNATURE 18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30
1998 December 31
Assets (unaudited) 1997
------------ -----------
<S> <C> <C>
Investments
Fixed maturities:
Bonds held to maturity, at amortized cost (fair
value: $72,004,919 - 1998, $90,527,669 - 1997) $ 71,156,765 89,733,503
Bonds available for sale, at fair value (Amortized cost:
$121,926,412 - 1998, $122,022,184 - 1997) 123,036,627 123,650,289
Certificates of deposit, at cost (which approximates
fair value) 595,000 595,000
Short-term investments, at cost (which approximates
fair value) 18,689,352 2,823,393
------------ -----------
Total investments 213,477,744 216,802,185
Cash 859,920 696,513
Accrued investment income 4,237,352 4,714,828
Premiums receivable (net of allowance for doubtful
accounts: $81,000 - 1998 and 1997) 12,627,904 14,249,890
Reinsurance balances receivable 1,314,836 2,604,511
Ceded unpaid claims and claim adjustment expenses 33,200,399 29,524,026
Ceded unearned premiums 21,239,610 19,146,272
Deferred policy acquisition costs 10,384,752 11,618,136
Property and equipment (net of accumulated depreciation
and amortization: $6,358,215 - 1998, $5,710,365 - 1997) 6,567,230 6,941,232
Current Federal income taxes recoverable (note 1) 4,784,664 796,631
Deferred Federal income taxes recoverable (note 1) 7,620,986 2,676,555
Management contract 1,712,570 1,737,570
Other assets 2,625,415 2,176,957
------------ -----------
Total assets $320,653,382 313,685,306
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30
1998 December 31
Liabilities and Shareholders' Equity (unaudited) 1997
------------- ------------
<S> <C> <C>
Liabilities:
Unpaid claims and claim adjustment expenses $ 140,341,343 113,227,009
Unearned premiums 60,728,798 64,004,507
Commissions payable 2,337,417 2,207,421
Accounts payable 3,035,601 3,542,075
Reinsurance balances payable 2,686,676 745,805
Deferred revenue 1,026,368 635,807
Drafts payable 4,812,742 9,393,375
Dividends payable (note 3) 365,690 365,300
Other liabilities 987,243 1,001,747
------------- ------------
Total liabilities 216,321,878 195,123,046
------------- ------------
Shareholders' Equity (note 3):
Preferred stock ($100 par value, 10,000,000 shares
authorized, none issued) -- --
Common stock ($.10 par value, 250,000,000 shares
authorized, 21,740,657 issued at June 30, 1998
and 21,701,118 issued at December 31, 1997) 2,174,066 2,170,112
Additional paid-in capital 87,778,548 87,697,754
Accumulated other comprehensive income (note 1) 721,640 1,058,268
Retained earnings 21,351,775 35,188,460
Treasury stock (844,094 shares at June 30, 1998 and
826,894 shares at December 31, 1997) (7,694,525) (7,552,334)
------------- ------------
Total shareholders' equity 104,331,504 118,562,260
------------- ------------
Total liabilities and shareholders' equity $ 320,653,382 313,685,306
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months Six Months
ended June 30 ended June 30
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned (note 2) $ 23,145,612 25,752,768 46,774,152 51,628,170
Net investment income 2,561,501 2,407,520 4,969,123 4,694,496
Net realized gains (losses) (note 1) 173,157 (5,025) 313,867 36,486
Insurance services 651,654 694,610 1,217,220 1,285,641
------------ ----------- ----------- ------------
Total revenues 26,531,924 28,849,873 53,274,362 57,644,793
------------ ----------- ----------- ------------
Expenses:
Claims and claim adjustment expenses
(note 2) 22,136,341 13,114,755 53,696,490 28,322,391
Commissions 5,759,071 5,490,476 11,664,401 10,225,280
Change in deferred policy acquisition costs 203,545 (137,495) 1,233,384 605,140
Underwriting and operating expenses 4,602,669 4,511,250 8,537,285 8,395,608
------------ ----------- ----------- ------------
Total expenses 32,701,626 22,978,986 75,131,560 47,548,419
------------ ----------- ----------- ------------
Income (loss) before Federal income taxes (6,169,702) 5,870,887 (21,857,198) 10,096,374
Federal income taxes:
Current expense (benefit) (1,163,032) 1,525,119 (3,964,991) 2,525,950
Deferred expense (benefit) (1,236,957) (63,642) (4,763,169) (3,023)
------------ ----------- ----------- ------------
Total taxes (2,399,989) 1,461,477 (8,728,160) 2,522,927
------------ ----------- ----------- ------------
Net income (loss) $ (3,769,713) 4,409,410 (13,129,038) $ 7,573,447
============ =========== =========== ============
Earnings (loss) per share:
Basic $ (.18) .21 (.63) .36
============ =========== =========== ============
Diluted (note 1) .21 $ .36
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months ended June 30
----------------------------
1998 1997
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(13,129,038) 7,573,447
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization 2,446,421 2,412,293
Change in accrued investment income 477,476 (488,779)
Change in premiums receivable 1,621,986 1,288,300
Change in reinsurance balances receivable 1,289,675 (177,823)
Change in ceded unpaid claims and claim adjustment
expenses (3,676,373) (510,164)
Change in ceded unearned premiums (2,093,338) (2,377,483)
Change in deferred policy acquisition costs 1,233,384 605,140
Change in current Federal income taxes recoverable (3,964,991) 550,950
Change in deferred Federal income taxes recoverable (4,763,169) (3,023)
Change in management contract 25,000 25,000
Change in other assets (448,458) 102,568
Change in unpaid claims and claim adjustment
expenses 27,114,334 3,918,596
Change in unearned premiums (3,275,709) (88,041)
Change in commissions payable 129,996 (1,786,023)
Change in accounts payable (506,474) (262,788)
Change in reinsurance balances payable 1,940,871 (156,111)
Change in deferred revenue 390,561 237,428
Change in drafts payable (4,580,633) (1,756,094)
Change in other liabilities (14,504) (476,760)
------------ -----------
Net cash provided by operating activities $ 217,017 8,630,633
------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
(continued)
6
<PAGE> 7
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months ended June 30
----------------------------
1998 1997
------------ -----------
<S> <C> <C>
Cash flows from investing activities:
Bonds held to maturity:
Matured $ 18,991,745 6,285,369
Purchased (1,210,688) (1,572,422)
Bonds available for sale:
Sold 14,283,646 13,292,540
Matured 1,020,000 3,778,959
Purchased (16,210,764) (46,484,058)
Certificates of deposit matured 290,000 200,000
Certificates of deposit purchased (290,000) (200,000)
Property and equipment purchased (273,848) (611,317)
Net change in short-term investments (15,865,959) 17,533,406
------------ -----------
Net cash provided by (used for) investing activities 734,132 (7,777,523)
------------ -----------
Cash flows from financing activities:
Cash dividends paid (730,299) (632,817)
Proceeds from exercise of stock options 84,748 90,450
Treasury stock acquired (142,191) (1,025,362)
------------ -----------
Net cash used for financing activities (787,742) (1,567,729)
------------ -----------
Net increase (decrease) in cash 163,407 (714,619)
Cash at beginning of period 696,513 1,044,740
------------ -----------
Cash at end of period $ 859,920 330,121
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) Summary of Accounting Policies
(a) Basis of Consolidation
In the opinion of management, the accompanying consolidated
financial statements contain all adjustments, consisting only
of normal recurring adjustments, necessary to present fairly
the financial position of GAINSCO, INC. and subsidiaries (the
"Company") as of June 30, 1998, the results of operations and
the statements of cash flows for the three months and six
months ended June 30, 1998 and 1997, on the basis of generally
accepted accounting principles. The December 31, 1997 balance
sheet included herein is derived from the consolidated
financial statements included in the Company's 1997 Annual
Report to Shareholders.
The accompanying consolidated financial statements are
prepared in conformity with generally accepted accounting
principles. The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Reference is made to the Company's annual consolidated
financial statements for the year ended December 31, 1997 for
a description of all other accounting policies. Certain
reclassifications have been made to the 1997 amounts to
conform to the 1998 presentation.
(b) Investments
Bonds held to maturity are stated at amortized cost, bonds
available for sale are stated at fair value. Short-term
investments are stated at cost. The "specific identification"
method is used to determine costs of investments sold. Since
investments not available for sale are held until maturity,
provisions for possible losses are recorded only when the
values have experienced impairment considered "other than
temporary". The bonds available for sale had an unrealized
gain of $721,640 at June 30, 1998, net of the deferred tax
expense of $388,575, and an unrealized gain at December 31,
1997 of $1,058,268 net of the deferred tax expense of
$569,837.
Proceeds from the sale of bond securities totaled $7,279,122
and $7,385,963 for the three months ended June 30, 1998 and
1997, respectively, and $14,283,646 and $13,292,540 for the
six months ended June 30, 1998 and 1997, respectively.
Realized gains were $175,744 and $16,905 for the three months
ended June 30, 1998 and 1997, respectively, and $324,933 and
$67,789 for the six months ended June 30, 1998 and 1997,
respectively. Realized losses were $2,587 and $21,930 for the
three months ended June 30, 1998 and 1997, respectively, and
$11,066 and $31,303 for the six months ended June 30, 1998 and
1997, respectively.
8
<PAGE> 9
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(c) Federal Income Taxes
The Company and its subsidiaries file a consolidated Federal
income tax return. Deferred income tax items are accounted for
under the deferred method which provides for timing
differences between the reporting of earnings for financial
statement purposes and for tax purposes, primarily deferred
policy acquisition costs, the discount on unpaid claims and
claim adjustment expenses and the nondeductible portion of the
change in unearned premiums. The Company paid no income taxes
during the 1998 periods. The Company paid income taxes of
$1,975,000 during the three months and six months ended June
30, 1997.
(d) Earnings Per Share
In February 1997, the Financial Accounting Standards Board
(FASB) issued Statement 128, "Earnings Per Share". The
Statement was effective for financial statements issued for
periods ending after December 15, 1997 and was implemented by
the Company in the fourth quarter of 1997. Earnings per share
for prior periods presented in these financial statements have
been restated to comply with Statement 128.
The following table sets forth the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
Three months Six months
ended June 30 ended June 30
--------------------------- --------------------------
1998 1997 1998 1997
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ (3,769,713) 4,409,410 (13,129,038) 7,573,447
------------ ---------- ----------- ----------
Denominator:
Denominator for basic
earnings per share-
weighted average shares 20,869,448 21,035,609 20,868,323 21,065,057
Effect of dilutive securities:
Employee stock options 194,053 243,510 195,303 244,749
------------ ---------- ----------- ----------
Denominator for diluted
earnings per share-
weighted average shares
and assumed conversions 21,063,501 21,279,119 21,063,626 21,309,806
============ ========== =========== ==========
Basic earnings (loss) per share $ (.18) .21 (.63) .36
============ ========== =========== ==========
Diluted earnings (loss) per share $ .21 .36
========== ==========
</TABLE>
9
<PAGE> 10
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The effects of common stock options are antidilutive in the
1998 periods due to the net loss for these periods; therefore,
diluted loss per share is not presented.
(e) Accumulated Comprehensive Income
In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
(Statement 130). Statement 130 requires that a company include
in accumulated comprehensive income certain amounts which were
previously recorded directly to shareholders' equity. The
other comprehensive income amounts included in accumulated
comprehensive income consisted of net unrealized gains on
fixed maturities of $721,640 and $1,058,268 at June 30, 1998
and December 31, 1997, respectively.
(2) Reinsurance
The amounts deducted in the Consolidated Statements of Operations for
reinsurance ceded for the three months and six months ended June 30,
1998 and 1997, respectively, are set forth in the following table.
Premiums and claims ceded to the commercial automobile plans of
Arkansas, California, Louisiana, Mississippi and Pennsylvania are
designated as "plan servicing".
<TABLE>
<CAPTION>
Three months Six months
ended June 30 ended June 30
----------------------- -------------------------
1998 1997 1998 1997
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Premiums earned $ 395,614 412,795 796,594 820,361
Premiums earned -
plan servicing $ 997,250 955,541 1,867,975 2,046,858
Premiums earned -
fronting arrangements $9,525,593 7,958,356 18,638,163 15,145,199
Claims and claim
adjustment expenses $ 674,647 118,894 2,250,310 (1,176,058)
Claims and claim
adjustment expenses -
plan servicing $1,360,262 1,695,341 2,869,900 2,719,114
Claims and claim
adjustment expenses -
fronting arrangements $6,734,636 6,759,954 16,034,669 11,436,143
</TABLE>
10
<PAGE> 11
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The amounts included in the Consolidated Balance Sheets for reinsurance
ceded to the commercial automobile plans of Arkansas, California,
Louisiana, Mississippi and Pennsylvania, and the fronting arrangements
as of June 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Unearned premiums -
plan servicing $ 2,393,500 1,799,619
Unearned premiums -
fronting arrangements $18,319,039 16,377,793
Unpaid claims and claim
adjustment expenses -
plan servicing $10,005,522 10,460,869
Unpaid claims and claim
adjustment expenses -
fronting arrangements $11,346,735 7,139,399
</TABLE>
The Company remains directly liable to its policyholders for all policy
obligations and the reinsuring companies are obligated to the Company
to the extent of the reinsured portion of the risks. The Company does
not have a provision for uncollectible reinsurance and does not feel
one is warranted since all of the reinsurers on its treaties are rated
"A" or better by A.M. Best Company and/or the Company is adequately
collateralized on existing and anticipated claim recoveries.
The Company has not and does not intend to utilize retrospectively
rated reinsurance contracts with indefinite renewal terms. This form of
reinsurance is commonly known as a "funded cover". Under a funded cover
reinsurance arrangement, an insurance company essentially deposits
money with a reinsurer to help cover future losses and records the
"deposit" as an expense instead of as an asset; or, the insurance
company can borrow from a reinsurer recording the "loan" as income
instead of as a liability with the future "loan" payments recorded as
expense as the payments are made over time.
(3) Shareholders' Equity
As of June 30, 1998 there were 294,777 options, at an average exercise
price of $2.47 per share, that had been granted to officers and
directors of the Company under the 1990 Stock Option Plan and 943,788
options, at an average exercise price of $10.17 per share, that had
been granted to officers and directors of the Company under the 1995
Stock Option Plan.
11
<PAGE> 12
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
As of December 31, 1997, the Company had repurchased 714,634 shares of
its common stock at a cost of $6,539,742. During the first quarter of
1998, the Company purchased 17,200 shares at a cost of $142,191. The
Company has no plans to purchase additional shares.
The Company's policy is to pay a quarterly cash dividend of $.0175 per
share every quarter until further action is taken by the Board of
Directors. A cash dividend of $365,690 was paid on July 15, 1998.
12
<PAGE> 13
GAINSCO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Gross premiums written for the second quarter of 1998 were approximately
$22,224,000 versus $26,938,000 for the comparable 1997 period representing an
18% decrease that was largely attributable to continued intense competition. For
the first six months of 1998 gross premiums written have decreased 15% from the
comparable 1997 period. The following table presents, for each major product
line, gross premiums written for the periods indicated:
<TABLE>
<CAPTION>
Three months Six months
ended June 30 ended June 30
--------------------------------- ---------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial auto $12,130 55% $15,477 57% $23,815 56% $29,235 59%
Auto garage 5,411 24% 6,216 23% 9,847 23% 11,328 23%
General liability 4,355 20% 4,749 18% 8,018 19% 8,620 17%
Other lines 328 1% 496 2% 616 2% 775 1%
------- --- ------- --- ------- --- ------- ---
Total $22,224 100% $26,938 100% $42,296 100% $49,958 100%
======= === ======= === ======= === ======= ===
</TABLE>
For the second quarter of 1998 COMMERCIAL AUTO is down 22%, AUTO GARAGE is down
13% and GENERAL LIABILITY is down 8%. For the first six months of 1998
COMMERCIAL AUTO is down 19%, AUTO GARAGE is down 13% and GENERAL LIABILITY is
down 7%. Commercial auto is down largely due to the discontinuance of the
Kentucky coal truck business in the last half of 1997. Auto garage is down
largely because of competition in California, Connecticut, Pennsylvania and
Texas. General liability is down because of increased competition in Texas. For
the first six months of 1998, gross premium written percentages by state/product
line are as follows: Texas commercial auto (23%), Texas general liability (7%),
Pennsylvania commercial auto (6%), and Florida garage (6%) with no other
state/product line comprising 5% or more. The persistency rate decreased from
46% to 43% in 1998. Premiums earned decreased 10% and 9% for the three months
and six months ended June 30, 1998, respectively, as a result of the decrease in
premiums written.
Net investment income increased 6% for the second quarter and first six months
of 1998 as a result of growth in the portfolio from June 30, 1997. At June 30,
1998, 75% of the Company's investments were in investment grade tax-exempt bonds
with an average maturity of approximately 3 years. Since the majority of the
Company's investments are tax-exempt, the yields appear lower than those of the
industry; however, the industry as a whole has a significantly greater
percentage of its investments in taxable securities with substantially longer
maturities. On a taxable equivalent basis the return on average investments is
6.2% for 1998 and 6.3% for 1997. The Company has the ability to hold its bond
securities until their maturity date. The Company does not actively trade its
bonds, however, it does classify certain bond securities as available for sale.
At June 30, 1998, approximately 16% of the Company's investments were in U.S.
Treasury securities and 9%
13
<PAGE> 14
were in short-term money market funds. The Company has not invested and does not
intend to invest in derivatives or high-yield ("junk") securities, nor equity
securities in issuers of "junk" debt securities. The Company does not have any
non-performing fixed maturity securities.
The Company recorded net realized capital gains of $173,157 during the second
quarter of 1998 versus net realized capital losses of $5,025 for the comparable
1997 period, which brings net realized capital gains for the six months to
$313,867 versus $36,486 for the same period in 1997. All of the gains were
generated from the bonds available for sale category of the fixed maturity
portfolio.
Insurance services revenues decreased $42,956 in the second quarter of 1998 from
the second quarter of 1997. For the first six months of 1998 a decrease of
$68,421 has been recorded from the comparable 1997 period.
The following table presents the components:
<TABLE>
<CAPTION>
Three months Six months
ended June 30 ended June 30
-------------------- -----------------------
1998 1997 1998 1997
-------- ------- --------- ---------
<S> <C> <C> <C> <C>
Plan servicing $263,921 251,761 493,601 521,074
Fee income 163,928 152,420 325,558 294,636
Computer software 175,867 209,334 294,304 302,172
Premium finance 46,704 69,204 99,724 148,998
Other income 1,234 11,891 4,033 18,761
-------- ------- --------- ---------
Total $651,654 694,610 1,217,220 1,285,641
======== ======= ========= =========
</TABLE>
Plan servicing revenues from commercial automobile plans increased $11,530 in
the second quarter of 1998 when compared to the second quarter of 1997 but are
$27,473 below the comparable six month period of 1997. Plan servicing written
premiums are 60% ahead of last year on a six month comparative basis as a result
of increases in the California plan. The Company gave notice in June, 1998 to
each of the state plans informing them that it would no longer accept business
as a servicing carrier after December 31, 1998. This decision was the result of
an analysis that concluded the margins from this business were not adequate.
Fee income increased $11,508 and $30,922 for the second quarter and six months
ended 1998, respectively. This is a result of growth in the fronting reinsurance
operation.
Revenues in the computer software operation are down 16% and 3% for the second
quarter and six months ended 1998, respectively, versus the comparable 1997
periods as a result of several system sales during the second quarter of 1997.
Revenues are expected to show decreases for the year.
Revenues from the premium finance operation are down 33% in the second quarter
of 1998 from the second quarter of 1997 and are down 33% for the first six
months of 1998 as a result of the decision to offer an interest free payment
plan on the policies of the affiliated insurance companies. The Company decided
during the second quarter to exit the premium finance business, but will
continue to offer interest free payment plans on its own policies.
14
<PAGE> 15
Claims and claim adjustment expenses (C & CAE) increased $9,021,586 in the
second quarter of 1998 from the second quarter of 1997. This included
approximately $6,400,000 in development from prior accident years. The C & CAE
ratio was 95.6% in the second quarter of 1998 versus 50.9% in 1997 for the
comparable period. C & CAE have increased $25,374,099 for the first six months
of 1998 over the comparable 1997 period. This included approximately $23,100,000
in development from prior accident years. The C & CAE ratio was 114.8% for the
first six months of 1998 and 54.9% for the comparable 1997 period. The majority
of the development for the quarter was attributable to the 1996 and 1997
accident years in the commercial auto line. A comprehensive upgrading of the
Company's claims reserving process was conducted during the second quarter which
resulted in a significant increase in the confidence level of the reserves. The
increase in the C & CAE ratio was the result of unfavorable claim development
from prior accident years which surfaced in the first six months of 1998,
unfavorable claim adjustment expense development from prior accident years and
implementation of a more conservative reserving approach. During the first six
months of 1998 outstanding claims were reduced approximately 19%.
The ratio of commissions to gross premiums written was 26% for the second
quarter of 1998 versus 20% for the comparable 1997 period and it was 28% for the
first six months of 1998 as compared to 21% for the comparable 1997 period.
Commissions increased in the 1998 periods from the 1997 periods primarily due to
a decrease in commission income of approximately $897,000 for the second quarter
of 1998 and $2,564,000 for the first six months of 1998 as a result of reducing
previously accrued reinsurance commission. The reinsurance commission had been
accrued based on a lower ultimate C & CAE ratio. The ratio of commissions to
premiums earned is higher in the 1998 periods than in the 1997 periods largely
for the same reason.
The change in deferred policy acquisition costs resulted in a net decrease to
income of $203,545 for the second quarter of 1998 versus a net increase of
$137,495 in the second quarter of 1997. A net decrease of $1,233,384 was
recorded for the first six months of 1998 versus a net decrease of $605,140 in
the comparable 1997 period. The change in the amount of the increase in DAC
between comparable periods is directly related to the rate at which unearned
premiums are growing as a result of the growth rate of premium writings. Since
DAC (asset) is a function of unearned premiums (liability) the change in DAC
correlates to the change in unearned premiums. The ratio of DAC to net unearned
premiums was 26% at June 30, 1998 and 1997.
Underwriting and operating expenses were up 2% in the second quarter of 1998
over 1997 and for the first six months of 1998 over 1997, as a result of a
decrease in contingent compensation and premium taxes largely offsetting
increases in other expenses. The ratio to operating revenues increased to 17.8%
in the first six months of 1998 from 15.9% in the first six months of 1997
primarily due to the decrease in earned premiums.
The Company generated a current tax benefit in the 1998 periods as a result of
the loss recorded during the periods. The deferred tax benefit is the result of
the tax discounting of the large increase to C & CAE reserves recorded during
the 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. At June 30, 1998 the
Company held short-term investments and cash of $19,549,272 which the Company
believes is adequate liquidity for the payment of claims and other short-term
commitments.
With regard to long term liquidity, the average duration of the investment
portfolio is approximately 2.8 years
15
<PAGE> 16
which approximates the average payout period of claims. The fair value of the
fixed maturity portfolio at June 30, 1998 was $1,958,369 above amortized cost.
Investments decreased as a result of the decrease in premiums written and the
level of claims and claim adjustment expenses paid during the period. The
decrease in premiums receivable is a result of a larger level of premium
writings in the fourth quarter of 1997 than in the second quarter of 1998.
Reinsurance balances receivable decreased primarily because of smaller claim
recoverables due from the commercial auto plans. Ceded unpaid claims and claim
adjustment expenses increased due to increases in the fronting reinsurance
operation. Ceded unearned premiums increased because of the fronting reinsurance
operation. Deferred policy acquisition costs (DAC) decreased as a direct result
of the decrease in unearned premiums. DAC was 26% of net unearned premiums at
June 30, 1998 and at December 31, 1997. Current Federal income taxes recoverable
increased as a result of the loss recorded during the first six months of 1998.
Deferred Federal income taxes recoverable increased for the reasons mentioned
previously.
Unpaid claims and claim adjustment expenses increased as a result of unfavorable
claim and claim adjustment expense development from prior accident years and a
more conservative reserving approach for the current accident year. Unearned
premiums decreased as a result of the decline in gross premiums written. The
increase in reinsurance balances payable is largely attributable to premium
balances which the Company has collected as a servicing carrier and which are
due to various state insurance plans. Drafts payable decreased because an
unusually large amount of drafts were issued late in the fourth quarter of 1997
and cleared or reversed during the first quarter of 1998.
Accumulated other comprehensive income of $721,640 was recorded at June 30, 1998
as a result of the net unrealized gains on the bonds available for sale.
The Company purchased 17,200 shares of its common stock during the first quarter
of 1998 at a cost of $142,191 or $8.27 per share which accounts for the increase
in Treasury stock. The Company has no plans to purchase additional shares.
The Company is not aware of any current recommendations by the regulatory
authorities, which if implemented, would have a material effect on the Company's
liquidity, capital resources or results of operations.
Forward Looking Statements
This Form 10-Q Report contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that all forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from those contained in the
forward-looking statements. Important factors include, but are not limited to,
(i) heightened competition, including price competition from existing
competitors, from newly formed competitors and from the entry into the Company's
markets of standard insurance companies which historically have not competed in
the Company's specialty markets, (ii) contraction of the markets for the
Company's various lines of business, (iii) development and performance of new
specialty programs, (iv) the ongoing level of claims and claims-related
expenses, (v) adequacy of claim reserves, and (vi) general economic conditions.
16
<PAGE> 17
PART II. OTHER INFORMATION
GAINSCO, INC. AND SUBSIDIARIES
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11. The statement re computation of per share earnings is
included in the notes to consolidated financial
statements.
27. Financial Data Schedule for the period ended June
30,1998.
99.8 1998 Long-Term Incentive Plan
99.9 Replacement Nonqualified Stock Option Agreement
with Glenn W. Anderson
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
17
<PAGE> 18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized to sign on behalf of the Registrant as
well as in his capacity as Chief Financial Officer.
GAINSCO, INC.
Date: August 10, 1998
By /s/ Daniel J. Coots
-------------------------------------
Daniel J. Coots
Senior Vice President, Treasurer and
Chief Financial Officer
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NO. PAGE
------- ----------- ------------
<S> <C> <C>
11. The statement re computation of per share earnings is included
in the notes to consolidated financial statements.
27. Financial Data Schedule for the period ended June 30,1998.
99.8 1998 Long-Term Incentive Plan
99.9 Replacement Nonqualified Stock Option Agreement with Glenn W.
Anderson
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 123,036,627
<DEBT-CARRYING-VALUE> 71,156,765
<DEBT-MARKET-VALUE> 72,004,919
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 213,477,744
<CASH> 859,920
<RECOVER-REINSURE> 1,314,836
<DEFERRED-ACQUISITION> 10,384,752
<TOTAL-ASSETS> 320,653,382
<POLICY-LOSSES> 140,341,343
<UNEARNED-PREMIUMS> 60,728,798
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,174,066
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 320,653,382
46,774,152
<INVESTMENT-INCOME> 4,969,123
<INVESTMENT-GAINS> 313,867
<OTHER-INCOME> 1,217,220
<BENEFITS> 53,696,490
<UNDERWRITING-AMORTIZATION> 1,233,384
<UNDERWRITING-OTHER> 8,537,285
<INCOME-PRETAX> (21,857,198)
<INCOME-TAX> (8,728,160)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,129,038)
<EPS-PRIMARY> (.63)
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.8
AS APPROVED BY
SHAREHOLDERS ON
JULY 17, 1998
GAINSCO, INC.
1998 LONG-TERM INCENTIVE PLAN
ARTICLE I
THE PLAN
1.1 Name. This Plan shall be known as the "Gainsco, Inc. 1998
Long-Term Incentive Plan." Capitalized terms used herein are defined in Article
IX hereof.
1.2 Purpose. The purpose of the Plan is to promote the growth and
general prosperity of the Company by permitting the Company to grant to its
employees, directors, and Advisors Restricted Stock, Stock Appreciation Rights,
and Options to purchase Common Stock of the Company. The Plan is designed to
help the Company and its Subsidiaries attract and retain superior personnel for
positions of substantial responsibility and to provide employees, directors, and
Advisors with an additional incentive to contribute to the success of the
Company. The Company intends that Incentive Stock Options granted pursuant to
Article III shall qualify as "incentive stock options" within the meaning of
Section 422 of the Code.
1.3 Effective Date. The Plan shall become effective upon the Effective
Date; provided, however, that if the shareholders of the Company have not
approved the Plan by the date that is twelve months after the Effective Date,
the Plan and all grants made under the Plan shall be void and of no force or
effect.
1.4 Eligibility to Participate. Any Employee, Director, or Advisor
shall be eligible to participate in the Plan. Subject to the following
provisions, the Committee may make Awards in accordance with such determinations
as the Committee from time to time in its sole discretion shall make; provided,
however, that Incentive Stock Options may be granted only to persons who are
Employees.
1.5 Shares Subject to the Plan. The shares of Common Stock to be
issued pursuant to the Plan shall be either authorized and unissued shares of
Common Stock or shares of Common Stock issued and thereafter acquired by the
Company.
1.6 Maximum Number of Plan Shares. Subject to adjustment pursuant to
the provisions of Section 7.2, and subject to any additional restrictions
elsewhere in the Plan, the maximum aggregate number of shares of Common Stock
that may be issued and sold hereunder shall not exceed 1,000,000 shares. The
maximum aggregate number of shares of Common Stock with respect
1998 LONG-TERM INCENTIVE PLAN -- PAGE 1
<PAGE> 2
to which Awards may be granted to any person during the term of the Plan shall
not exceed 600,000 shares.
1.7 Options and Stock Granted Under Plan. Plan Shares with respect to
which an Option has been exercised or Restricted Stock has vested shall not
again be available for grant hereunder. If Options terminate for any reason
without being wholly exercised or if Restricted Stock is forfeited prior to
vesting, new Awards may be granted hereunder covering the number of Plan Shares
to which such termination or forfeiture relates.
1.8 Conditions Precedent. The Company shall not issue any certificate
for Plan Shares pursuant to the Plan prior to fulfillment of all of the
following conditions:
(a) The admission of the Plan Shares to listing on all stock
exchanges on which the Common Stock is then listed, unless the
Committee determines in its sole discretion that such listing is
neither necessary nor advisable;
(b) The completion of any registration or other qualification
of the offer or sale of the Plan Shares under any federal or state law
or under the rulings or regulations of the Securities and Exchange
Commission or any other governmental regulatory body that the Committee
shall in its sole discretion deem necessary or advisable; and
(c) The obtaining of any approval or other clearance from any
federal or state governmental agency that the Committee shall in its
sole discretion determine to be necessary or advisable.
1.9 Reservation of Shares of Common Stock. During the term of the
Plan, the Company shall at all times reserve and keep available such number of
shares of Common Stock as shall be necessary to satisfy the requirements of the
Plan as to the number of Plan Shares. In addition, the Company shall from time
to time, as is necessary to accomplish the purposes of the Plan, seek or obtain
from any regulatory agency having jurisdiction any requisite authority that is
necessary to issue Plan Shares hereunder. The inability of the Company to obtain
from any regulatory agency having jurisdiction the authority deemed by the
Company's counsel to be necessary to the lawful issuance of any Plan Shares
shall relieve the Company of any liability in respect of the nonissuance of Plan
Shares as to which the requisite authority shall not have been obtained.
1.10 Tax Withholding and Reporting.
(a) Condition Precedent. The issuance of Plan Shares pursuant
to the exercise of any Option, the vesting of any Restricted Stock, or
the payment of any SAR, is subject to the condition that if at any time
the Committee shall determine, in its discretion, that the satisfaction
of withholding tax or other withholding liabilities under any federal,
state, or local law is necessary or desirable as a condition of, or in
connection with such issuance, vesting or payment, then the issuance,
vesting or payment shall not be effected unless the withholding shall
have been effected or obtained in a manner acceptable to the Committee.
1998 LONG-TERM INCENTIVE PLAN -- PAGE 2
<PAGE> 3
(b) Manner of Satisfying Withholding Obligation. When the
Committee requires an Awardee to pay to the Company an amount required
to be withheld under applicable income tax laws in connection with
paragraph (a) above, such payment shall be made, as the Committee may
in each case in its discretion determine, (i) in cash, (ii) by check,
(iii) by delivery to the Company of shares of Common Stock already
owned by the Awardee having a Fair Market Value on the Tax Date equal
to the amount required to be withheld, (iv) through the withholding by
the Company ("Company Withholding") of a portion of the Plan Shares
acquired upon the exercise of an Option having a Fair Market Value on
the Tax Date equal to the amount required to be withheld, or (v) in any
other form of valid consideration.
(c) Notice of Disposition of Stock Acquired Pursuant to
Incentive Stock Options. The Company may require as a condition to the
issuance of Plan Shares covered by any Incentive Stock Option that the
party exercising the Option give a written representation to the
Company, satisfactory in form and substance to its counsel and upon
which the Company may reasonably rely, that he shall report to the
Company any disposition of such shares prior to the expiration of the
holding periods specified by Section 422(a)(1) of the Code. If and to
the extent the realization of income in such a disposition imposes upon
the Company federal, state, or local withholding tax requirements or
any such withholding is required to secure for the Company an otherwise
available tax deduction, the Company shall have the right to require
that the recipient remit to the Company an amount sufficient to satisfy
those requirements; and the Company may require as a condition to the
issuance of Plan Shares covered by an Incentive Stock Option that the
party exercising such Option give a satisfactory written representation
promising to make such a remittance.
(d) Tax Reporting. The Company shall file, and shall furnish
the Awardee a copy of, all federal, state, and local tax information
returns that it deems to be required in connection with the grant,
exercise, or vesting of any Award.
1.11 Exercise of Options and SARs.
(a) Method of Exercise. Each Option or SAR shall be
exercisable in accordance with the terms of the Option or SAR Agreement
pursuant to which the Option or SAR was granted. No Option may be
exercised for a fraction of a Plan Share.
(b) Payment of Purchase Price. The purchase price of any Plan
Shares purchased pursuant to an Option shall be paid at the time of
exercise of the Option, as the Committee may in each case in its
discretion determine, (i) in cash, (ii) by certified or cashier's
check, (iii) in shares of Common Stock, (iv) by cash or certified or
cashier's check for the par value of the Plan Shares plus a promissory
note for the balance of the purchase price, which note shall provide
for full personal liability of the maker and shall contain such terms
and provisions as the Committee may determine, including without
limitation the right to pay the note partially or wholly with Common
Stock, (v) by delivery of a copy of irrevocable instructions from the
Optionee to a broker or dealer, reasonably acceptable to the Company,
to sell certain of the Plan Shares purchased upon exercise of the
Option or to pledge them
1998 LONG-TERM INCENTIVE PLAN -- PAGE 3
<PAGE> 4
as collateral for a loan and promptly to deliver to the Company the
amount of sale or loan proceeds necessary to pay such purchase price or
(vi) in any other form of valid consideration permitted by the
Committee in its discretion. If any portion of the purchase price or a
note given at the time of exercise is paid in shares of Common Stock,
those shares shall be valued at their then Fair Market Value.
1.12 Acceleration in Certain Events. The Committee may accelerate the
exercisability or other vesting of any Award in whole or in part at any time.
Notwithstanding the provisions of any Award Agreement, the following provisions
shall apply:
(a) Mergers, Consolidation, Etc. In the event that the
Company, pursuant to action by the Board, at any time enters an
agreement whereby the Company will merge into, consolidate with, or
sell or otherwise transfer all or substantially all of its assets to
another corporation and provision is not made pursuant to the terms of
such transaction for the assumption by the surviving, resulting, or
acquiring corporation of outstanding Awards, or for the substitution of
new Awards with substantially equivalent benefit therefor, each
outstanding Award shall become fully (100 percent) vested. The
Committee shall advise each Awardee in writing of the manner and terms
under which such fully vested Awards shall be exercised, if applicable.
(b) Change in Control. Anything contained herein to the
contrary notwithstanding, (1) an Awardee shall become fully (100
percent) vested in each of his or her Awards upon the occurrence of a
Change in Control (as defined below) or a threatened Change in Control
(as determined by the Committee in its sole discretion); and (2) no
Award held by an Awardee at the time a Change in Control or threatened
Change in Control occurs or at any time thereafter shall terminate for
any reason before the end of the Award's express term (if applicable).
For purposes of this section, "Change in Control" means one or more of
the following events:
(i) Any person within the meaning of Section 13(d) and 14(d)
of the Exchange Act, other than the Company (including its
Subsidiaries, directors or executive officers) has become the
beneficial owner, within the meaning of Rule 13d-3 under the Exchange
Act, of 50 percent or more of the combined voting power of the
Company's then outstanding Common Stock and any other class or classes
of the Company's outstanding securities ordinarily entitled to vote in
elections of directors (collectively, "Voting Securities") (other than
through the purchase of Voting Securities from the Company); or
(ii) Shares representing 50 percent or more of the combined
voting power of the Company's Voting Securities are purchased pursuant
to a tender offer or exchange offer (other than an offer by the Company
or its subsidiaries or affiliates); or
(iii) As a result of, or in connection with, any tender offer
or exchange offer, merger or other business combination, sale of assets
or contested election, or any combination of the foregoing transactions
(a "Transaction"), the persons who were Directors
1998 LONG-TERM INCENTIVE PLAN -- PAGE 4
<PAGE> 5
of the Company before the Transaction shall cease to constitute a
majority of the Board of the Company or of any successor to the
Company; or
(iv) Following the effective date of the Plan, the Company is
merged or consolidated with another corporation and as a result of such
merger or consolidation less than 50 percent of the outstanding Voting
Securities of the surviving or resulting corporation shall then be
owned in the aggregate by the former shareholders of the Company, other
than (A) any party to such merger or consolidation or (B) any
affiliates of any such party; or
(v) The Company transfers more than 50 percent of its assets,
or the last of a series of transfers results in the transfer of more
than 50 percent of the assets of the Company, to another entity that is
not wholly-owned by the Company. For purposes of this subsection (v),
the determination of what constitutes a transfer and what constitutes
over 50 percent of the assets of the Company shall be made by the
Committee, as constituted immediately prior to the events that would
constitute a Change in Control if 50 percent of the Company's assets
were transferred in connection with such events, in its sole
discretion.
1.13 Written Notice Required. Any Option or SAR shall be deemed to be
exercised for purposes of the Plan when written notice of exercise has been
received by the Company at its principal office from the person entitled to
exercise the Option or SAR and payment for the Plan Shares with respect to which
the Option is exercised (if applicable) has been received by the Company in
accordance with Section 1.11.
1.14 Compliance with Securities Laws. Plan Shares shall not be issued
with respect to any Award unless the issuance and delivery of the Plan Shares
(and the exercise of an Option, if applicable) shall comply with all relevant
provisions of state and federal law (including without limitation (i) the
Securities Act and the rules and regulations promulgated thereunder and (ii) the
requirements of any stock exchange upon which the Plan Shares may then be
listed) and shall be further subject to the approval of counsel for the Company
with respect to such compliance. The Committee may also require an Awardee to
furnish evidence satisfactory to the Company, including without limitation a
written and signed representation letter and consent to be bound by any transfer
restrictions imposed by law, legend, condition, or otherwise, that the Plan
Shares are being acquired only for investment and without any present intention
to sell or distribute the shares in violation of any state or federal law, rule,
or regulation. Further, each Awardee shall consent to the imposition of a legend
on the certificate representing the Plan Shares issued pursuant to an Award,
restricting their transfer as required by law or this section.
1.15 Employment or Service of Awardee. Nothing in the Plan or in any
Award shall confer upon any Employee any right to continued employment by the
Company or any of its Subsidiaries or limit in any way the right of the Company
or any Subsidiary at any time to terminate or alter the terms of that
employment. Nothing in the Plan or in any Award shall confer upon any Director
or Advisor any right to continued service as a Director or Advisor of the
Company or any of its Subsidiaries or limit in any way the right of the Company
or any Subsidiary at any time to terminate or alter the terms of that service.
1998 LONG-TERM INCENTIVE PLAN -- PAGE 5
<PAGE> 6
1.16 Rights of Awardees Upon Termination of Employment or Service. The
provisions in this Section 1.16 shall be subject to the provisions of Section
5.1 and the provisions of any Restricted Stock Agreement. In the event an
Awardee ceases to be an Employee, Director, or Advisor for any reason other than
death, Retirement, Permanent Disability, or Cause or pursuant to a right of
termination under an Employee's employment agreement with the Company, (i) the
Committee shall have the ability to accelerate the vesting of the Awardee's
Awards, in its sole discretion, and (ii) any Option or SAR held by such Awardee
shall be exercisable (to the extent exercisable on the date of termination of
employment or rendition of services, or, if the vesting of such Option or SAR
has been accelerated, to the extent exercisable following such acceleration) at
any time within three months after the date of termination of employment or
rendition of services, unless by its terms the Option or SAR expires earlier or
unless, with respect to a Nonqualified Stock Option or an SAR, the Committee
agrees, in its sole discretion, to extend its term further; provided that the
term of any such Option or SAR shall not be extended beyond its initial term. In
the event an Awardee ceases to serve as an Employee, Director, or Advisor due to
death, Permanent Disability, Retirement, or Cause or pursuant to a right of
termination under an Employee's employment agreement with the Company, (i) the
Committee shall have the ability to accelerate the vesting of the Awardee's
Awards, in its sole discretion, and (ii) the Awardee's Options and SARs may be
exercised as follows:
(a) Death. Except as otherwise limited by the Committee at the
time of the grant of an Option or SAR, if an Awardee dies while serving
as an Employee, Director, or Advisor or within three months after
ceasing to be an Employee, Director, or Advisor, his Options and SARs
shall become fully (100 percent) vested on the date of his death and
shall expire twelve months thereafter, unless by their terms they
expire sooner or unless, with respect to a Nonqualified Stock Option or
SAR, the Committee agrees, in its sole discretion, to extend its term
further; provided that the term of any such Nonqualified Stock Option
or SAR shall not be extended beyond its initial term. During such
period, the Option or SAR may be fully exercised, to the extent that it
remains unexercised on the date of death, by the Awardee's personal
representative or by the distributees to whom the Awardee's rights
under the Option or SAR pass by will or by the laws of descent and
distribution.
(b) Retirement. If an Awardee ceases to serve as an Employee,
Director, or Advisor as a result of Retirement, (i) the Committee shall
have the ability to accelerate the vesting of the Awardee's Awards, in
its sole discretion, and (ii) the Awardee's Options and SARs shall be
exercisable (to the extent exercisable on the effective date of such
Retirement or, if the vesting of such Options or SARs has been
accelerated, to the extent exercisable following such acceleration)
only at any time within three months after the effective date of such
Retirement, unless by their terms the Options or SARs expire earlier or
unless, with respect to a Nonqualified Stock Option or SAR, the
Committee agrees, in its sole discretion, to extend its term further;
provided that the term of any such Option or SAR shall not be extended
beyond its initial term.
(c) Disability. If an Optionee ceases to serve as an Employee,
Director, or Advisor as a result of Permanent Disability, the Awardee's
Awards shall become fully (100
1998 LONG-TERM INCENTIVE PLAN -- PAGE 6
<PAGE> 7
percent) vested and shall expire twelve months thereafter, unless by
their terms they expire sooner or, unless, with respect to a
Nonqualified Stock Option or SAR, the Committee agrees, in its sole
discretion, to extend its term; provided that the term of any such
Option or SAR shall not be extended beyond its initial term.
(d) Cause. If an Awardee ceases to be employed by the Company
or a Subsidiary or ceases to serve as a Director or Advisor because the
Awardee's employment or service relationship with the Company or a
Subsidiary is terminated for Cause, the Awardee's Awards (other than
Restricted Stock that has already vested) shall automatically expire on
the date of such termination. If any facts that would constitute Cause
for termination or removal of an Awardee are discovered after the
Awardee's employment or service relationship with the Company has
ended, any Awards then held by the Awardee (other than Restricted Stock
that has already vested) may be immediately terminated by the
Committee. Notwithstanding the foregoing, if an Awardee is an Employee
employed pursuant to a written employment agreement with the Company or
a Subsidiary, the Awardee's relationship with the Company or a
Subsidiary shall be deemed terminated for Cause for purposes of the
Plan only if the Awardee is considered under the circumstances to have
been terminated "for cause" for purposes of such written agreement or
the Awardee voluntarily ceases to be an Employee in breach of his
employment agreement with the Company or a Subsidiary.
(e) Notice. If an Awardee's employment agreement with the
Company or a Subsidiary is terminated by either the Company, a
Subsidiary, or the Awardee by providing a required or permitted notice
of termination thereunder, the Awards that are exercisable as of the
date of termination shall remain exercisable for a period of twelve
months (three months if Incentive Stock Options) after the date of
termination and shall expire at the end of such twelve-month period
(three-month period if Incentive Stock Options).
1.17 Transferability of Awards. Except as may be agreed upon by the
Committee in accordance with this section, Awards (other than Restricted Stock
that has fully vested) shall not be transferable other than by will or the laws
of descent and distribution or, with respect to Nonqualified Stock Options or
SARs, pursuant to the terms of a qualified domestic relations order as defined
by the Code or Title I of ERISA, or the rules thereunder, and, with respect to
Incentive Stock Options, may be exercised during the lifetime of an Optionee
only by that Optionee or by his legally authorized representative. The
designation by an Awardee of a beneficiary shall not constitute a transfer of
the Award. The Committee may, in its discretion, provide in an Award Agreement
that Nonqualified Stock Options or SARs may be transferred to members of the
Awardee's immediate family, trusts for the benefit of such immediate family
members, and partnerships in which such immediate family members are the only
partners, provided that there is no consideration for the transfer.
1.18 Information to Awardees. The Company shall furnish to each
Awardee a copy of the annual report, proxy statements and all other reports sent
to the Company's shareholders, unless the Awardee otherwise receives same as a
shareholder of the Company. Upon written request, the
1998 LONG-TERM INCENTIVE PLAN -- PAGE 7
<PAGE> 8
Company shall furnish to each Awardee a copy of its most recent Annual Report or
Form 10-K and each quarterly report to shareholders issued since the end of the
Company's most recent fiscal year.
ARTICLE II
ADMINISTRATION
2.1 Committee. The Plan shall be administered by a Committee of not
fewer than two members of the Board. The Committee shall be appointed by the
Board. Each member of the Committee shall be both a "Non-Employee Director"
within the meaning of Rule 16b-3 under the Exchange Act and an "outside
director" within the meaning of Section 162(m) of the Code and the regulations
issued pursuant thereto. Subject to the provisions of the Plan, the Committee
shall have the sole discretion and authority to determine from time to time the
persons to whom Awards shall be granted and the number of Plan Shares subject to
each Award, to interpret the Plan, to prescribe, amend, and rescind any rules
and regulations necessary or appropriate for the administration of the Plan, to
determine and interpret the details and provisions of each Award Agreement, to
modify or amend any Award Agreement or waive any conditions or restrictions
applicable to any Award (or the exercise thereof), and to make all other
determinations necessary or advisable for the administration of the Plan.
2.2 Majority Rule; Unanimous Written Consent. A majority of the
members of the Committee shall constitute a quorum, and any action taken by a
majority present at a meeting at which a quorum is present or any action taken
without a meeting evidenced by a writing executed by all members of the
Committee shall constitute the action of the Committee. Meetings of the
Committee may take place by telephone conference call.
2.3 Company Assistance. The Company shall supply full and timely
information to the Committee on all matters relating to Employees, Directors,
and Advisors, their employment, death, Retirement, Permanent Disability, or
other termination of employment or service, and such other pertinent facts as
the Committee may require. The Company shall furnish the Committee with such
clerical and other assistance as is necessary in the performance of its duties.
2.4 Exculpation of Committee. No member of the Committee shall be
personally liable for, and the Company shall indemnify all members of the
Committee and hold them harmless against, any claims resulting directly or
indirectly from any action or inaction by the Committee pursuant to the Plan,
including without limitation any determination by the Committee regarding
whether a Change in Control (within the meaning of Section 1.12) is threatened
and any failure by the Committee to consider such a determination.
1998 LONG-TERM INCENTIVE PLAN -- PAGE 8
<PAGE> 9
ARTICLE III
INCENTIVE STOCK OPTIONS
3.1 Terms and Conditions. The terms and conditions of Options granted
under this Article may differ from one another as the Committee shall, in its
discretion, determine, as long as all Options granted under this Article satisfy
the requirements of this Article.
3.2 Duration of Options. Each Option granted pursuant to this Article
and all rights thereunder shall expire on the date determined by the Committee,
but in no event shall any Option granted under this Article expire earlier than
one year or later than ten years after the date on which the Option is granted;
and in no event shall any Option granted under this Article to an individual
who, at the time the Option is granted, owns shares of stock possessing more
than ten percent of the total combined voting power of all classes of stock of
the Company or any Subsidiary or affiliate thereof within the meaning of Section
422 of the Code expire later than five years after the date on which the Option
is granted. In addition, each Option shall be subject to early termination as
provided elsewhere in the Plan.
3.3 Purchase Price. The purchase price for Plan Shares acquired
pursuant to the exercise, in whole or in part, of any Option granted under this
Article shall not be less than the Fair Market Value of the Plan Shares at the
time of the grant of the Option; provided, however, in the event of the grant of
any Option to an individual who, at the time the Option is granted, owns shares
of stock possessing more than ten percent of the total combined voting power of
all classes of stock of the Company or any Subsidiary or affiliate thereof
within the meaning of Section 422 of the Code, the purchase price for the Plan
Shares subject to that Option must be at least 110 percent of the Fair Market
Value of those Plan Shares at the time the Option is granted.
3.4 Maximum Amount of Options First Exercisable in Any Calendar Year.
The aggregate Fair Market Value of Plan Shares (determined at the time the
Option is granted) with respect to which Options issued under this Article are
exercisable for the first time by any Employee during any calendar year under
all incentive stock option plans of the Company and its Subsidiaries and
affiliates shall not exceed $100,000. Any portion of an Option granted under the
Plan in excess of the foregoing limit shall be considered granted pursuant to
Article IV.
3.5 Individual Option Agreements. Each Employee receiving Options
pursuant to this Article shall be required to enter a written Option Agreement
with the Company. In such Option Agreement, the Employee shall agree to be bound
by the terms and conditions of the Plan, the Options granted pursuant hereto,
and such other matters as the Committee deems appropriate.
ARTICLE IV
NONQUALIFIED STOCK OPTIONS
4.1 Option Terms and Conditions. The terms and conditions of Options
granted under this Article may differ from one another as the Committee shall,
in its discretion, determine as long as all Options granted under this Article
satisfy the requirements of this Article.
1998 LONG-TERM INCENTIVE PLAN -- PAGE 9
<PAGE> 10
4.2 Duration of Options. Each Option granted pursuant to this Article
and all rights thereunder shall expire on the date determined by the Committee,
but in no event shall any Option granted under this Article expire later than
ten years after the date on which the Option is granted. In addition, each
Option shall be subject to early termination as provided elsewhere in the Plan.
4.3 Purchase Price. The purchase price for the Plan Shares acquired
pursuant to the exercise, in whole or in part, of any Option granted under this
Article shall not be less than the Fair Market Value of the Plan Shares at the
time of the grant of the Option.
4.4 Individual Option Agreements. Each Optionee receiving Options
pursuant to this Article shall be required to enter a written Option Agreement
with the Company. In such Option Agreement, the Optionee shall agree to be bound
by the terms and conditions of the Plan, the Options granted pursuant hereto,
and such other matters as the Committee deems appropriate.
ARTICLE V
RESTRICTED STOCK
5.1 Terms and Conditions. Each grant of Restricted Stock shall confer
upon the Awardee thereof the right to receive a specified number of Plan Shares
in accordance with the terms and conditions of a Restricted Stock Agreement as
set forth in Section 5.2. The general terms and conditions of the Restricted
Stock grants shall be as follows:
(a) Restrictions. Any Plan Shares awarded under this Article
shall be restricted for a period of time to be determined by the
Committee at the time of the award, which period shall be not less than
3 years or more than 10 years. The restrictions shall prohibit the
sale, assignment, transfer, pledge, or other encumbrance of the Plan
Shares and will provide for possible reversion thereof to the Company
in accordance with paragraph (b) during the period of restriction.
(b) Forfeiture Upon Termination of Employment. All Restricted
Stock awarded under this Article shall be forfeited and returned to the
Company in the event the Awardee ceases to be an Employee, Director, or
Advisor of the Company or one of its subsidiaries or affiliates prior
to the expiration of the period of restriction, unless the Awardee's
termination of employment or service is due to his death, Permanent
Disability, or Retirement, or termination without Cause, or
constructive termination after a Change in Control. Whether or not an
Awardee's Retirement or Permanent Disability has occurred will be
determined by the Committee in its sole discretion.
(c) Lapse of Restrictions Upon Death or Disability. In the
event of an Awardee's death or Permanent Disability, or termination
without cause, or constructive termination after a Change in Control,
the restrictions under paragraph (a) will lapse with respect to all
Restricted Stock awarded to the Awardee under this Article prior to any
such event, and the Plan Shares involved shall cease to be Restricted
Stock within the meaning of this Article and shall no longer be subject
to forfeiture to the Company pursuant to paragraph (b).
1998 LONG-TERM INCENTIVE PLAN -- PAGE 10
<PAGE> 11
(d) Effect of Retirement. In the event of an Awardee's
Retirement, the restrictions under paragraph (a) shall continue to
apply as though the Awardee were still an Employee, Director, or
Advisor, unless the Committee shortens the restriction period.
(e) Certificates. Plan Share certificates issued with respect
to awards of Restricted Stock shall be registered in the name of the
Awardee but shall be delivered by him to the Company together with a
stock power endorsed in blank. Each such certificate shall bear the
following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO FORFEITURE,
RESTRICTIONS ON TRANSFER, AND CERTAIN OTHER TERMS AND CONDITIONS SET
FORTH IN THE GAINSCO, INC. 1998 LONG-TERM INCENTIVE PLAN AND THE
RESTRICTED STOCK AGREEMENT BETWEEN THE REGISTERED OWNER OF THE SHARES
REPRESENTED BY THIS CERTIFICATE AND GAINSCO, INC., ENTERED PURSUANT TO
SUCH PLAN."
(f) Lapse of Restriction Period. Upon the lapse of a
restriction period as determined pursuant to paragraph (a), the Company
will return the stock certificates representing the Plan Shares with
respect to which the restriction has lapsed to the Awardee or his legal
representative and pursuant to the instruction of the Awardee or his
legally authorized representative will issue a certificate for such
Plan Shares which does not bear the legend set forth in paragraph (e).
(g) Restrictions on Corresponding Securities and Assets. Any
other securities or assets (other than ordinary cash dividends) that
are received by an Awardee with respect to Restricted Stock awarded to
him, which is still subject to restrictions provided for in paragraph
(a), will be subject to the same restrictions and shall be delivered by
the Awardee to the Company as provided in paragraph (e).
(h) Rights in Restricted Stock. From the time of grant of the
Restricted Stock, the Awardee shall be entitled to exercise all voting
rights attributable to the Restricted Stock, subject to forfeiture of
such voting rights and the Restricted Stock as provided in paragraph
(b).
5.2 Individual Restricted Stock Agreements. Each Awardee of Restricted
Stock shall be required to enter a written Restricted Stock Agreement with the
Company as a precondition to receiving the award. In such Restricted Stock
Agreement, the Awardee shall agree to be bound by the terms and conditions of
the Plan, the awards made pursuant hereto, and such other matters as the
Committee deems appropriate.
1998 LONG-TERM INCENTIVE PLAN -- PAGE 11
<PAGE> 12
ARTICLE VI
STOCK APPRECIATION RIGHTS
6.1 Terms and Conditions. The Committee may, but shall not be obligated
to, authorize the Company, on such terms and conditions as the Committee deems
appropriate in each case, to accept the surrender by an Optionee of the right to
exercise his Option, or a portion thereof, in consideration for the payment by
the Company of an amount equal to the excess of the Fair Market Value of the
Plan Shares subject to such Option, or portion thereof, surrendered over the
purchase price of such Plan Shares under the Option (a "Stock Appreciation
Right"). Such payment, at the discretion of the Committee, may be made in Plan
Shares valued at the then Fair Market Value thereof or in cash or partly in cash
and partly in Plan Shares.
6.2 Effect of Exercise of Stock Appreciation Rights on Related Options.
Upon the exercise of a Stock Appreciation Right, the number of Plan Shares
available under the Option to which it relates shall decrease by a number equal
to the number of Plan Shares for which the Stock Appreciation Right was
exercised. Upon the exercise of an Option, any related Stock Appreciation Right
shall terminate as to any number of Plan Shares subject to the Stock
Appreciation Right that exceeds the total number of Plan Shares for which the
Option remains unexercised.
6.3 Time of Grant. Stock Appreciation Rights may be granted
concurrently with the Options to which they relate or at any time thereafter
prior to the exercise or expiration of the Options.
6.4 Tandem Incentive Stock Option. Whenever an Incentive Stock Option
and a Stock Appreciation Right are granted together and the exercise of one
affects the right to exercise the other, the following requirements shall apply:
(a) The Stock Appreciation Right will expire no later than the
expiration of the underlying Incentive Stock Option;
(b) The Stock Appreciation Right may be for no more than the
difference between the purchase price under the underlying Incentive
Stock Option and the market price of the Plan Shares subject to the
underlying Incentive Stock Option at the time the Stock Appreciation
Right is exercised;
(c) The Stock Appreciation Right shall be transferable only
when the underlying Incentive Stock Option is transferable, and under
the same conditions;
(d) The Stock Appreciation Right may be exercised only when
the underlying Incentive Stock Option is eligible to be exercised; and
(e) The Stock Appreciation Right may be exercised only when
the market price of the Plan Shares subject to the underlying Incentive
Stock Option exceeds the purchase price of the Plan Shares subject to
the underlying Incentive Stock Option.
6.5 Individual SAR Agreement. Each Awardee receiving SARs pursuant to
this Article shall be required to enter a written SAR Agreement with the Company
as a precondition to receiving
1998 LONG-TERM INCENTIVE PLAN -- PAGE 12
<PAGE> 13
the SARs. In such SAR Agreement, the Awardee shall agree to be bound by the
terms and conditions of the Plan, the awards made pursuant hereto, and such
other matters as the Committee deems appropriate.
ARTICLE VII
TERMINATION, AMENDMENT, AND ADJUSTMENT
7.1 Termination and Amendment. The Plan shall terminate on the date
that is one day prior to the tenth anniversary of the Effective Date. No Award
shall be granted under the Plan after that date of termination. Subject to the
limitations contained in this Section, the Committee may at any time amend or
revise the terms of the Plan, including the form and substance of the Award
Agreements to be used in connection herewith; provided that no amendment or
revision may be made without the approval of the shareholders of the Company if
such approval is required under the Code, Rule 16b-3, or any other applicable
law or rule; and provided further that, except as provided in Section 7.2, no
amendment or revision may be made that reduces the exercise price of any
previously granted but unexercised Option or SAR, or that reduces the unpaid
purchase price, if any, of any previously issued Restricted Stock. No amendment,
suspension, or termination of the Plan shall, without the consent of the
individual who has received an Award hereunder, alter or impair any of that
individual's rights or obligations under any Award granted prior to that
amendment, suspension, or termination.
7.2 Adjustments. If the outstanding Common Stock is increased,
decreased, changed into, or exchanged for a different number or kind of shares
or securities through merger, consolidation, combination, exchange of shares,
other reorganization, recapitalization, reclassification, stock dividend, stock
split, or reverse stock split, an appropriate and proportionate adjustment shall
be made in the maximum number and kind of Plan Shares as to which Awards may be
granted under the Plan. A corresponding adjustment changing the number or kind
of shares allocated to unexercised Options or SARs, outstanding Restricted
Stock, or portions thereof granted prior to any such change also shall be made.
Any such adjustment in outstanding Options shall be made without change in the
aggregate purchase price applicable to the unexercised portion of the Options
but with a corresponding adjustment in the price for each share covered by the
Options. The foregoing adjustments and the manner of application of the
foregoing provisions shall be determined solely by the Committee, and any such
adjustment may provide for the elimination of fractional share interests.
ARTICLE VIII
MISCELLANEOUS
8.1 Other Compensation Plans. The adoption of the Plan shall not affect
any other stock option or incentive or other compensation plans in effect for
the Company or any Subsidiary or affiliate of the Company, nor shall the Plan
preclude the Company or any Subsidiary or affiliate thereof from establishing
any other forms of incentive or other compensation plans.
1998 LONG-TERM INCENTIVE PLAN -- PAGE 13
<PAGE> 14
8.2 Plan Binding on Successors. The Plan shall be binding upon the
successors and assigns of the Company and any Subsidiary or affiliate of the
Company that adopts the Plan.
8.3 Number and Gender. Whenever used herein, nouns in the singular
shall include the plural where appropriate, and the masculine pronoun shall
include the feminine gender.
8.4 Headings. Headings of articles and sections hereof are inserted
for convenience of reference and constitute no part of the Plan.
ARTICLE IX
DEFINITIONS
As used herein, the following terms have the meanings hereinafter set
forth unless the context clearly indicates to the contrary:
9.1 "Advisor" means any person not employed by the Company and not a
Director, rendering consulting or advisory services to the Company, who is
expected or determined by the Committee to contribute significantly to the
management, growth, or direction of some part or all of the business of the
Company. The power to determine who is and who is not an Advisor for purposes of
the Plan is reserved solely to the Committee.
9.2 The term "affiliate" means, with respect to any Person, any other
Person directly or indirectly controlling or controlled by, or under direct or
indirect common control with such Person.
9.3 "Award" means the grant of an Option, Restricted Stock, or Stock
Appreciation Rights pursuant to the Plan.
9.4 "Award Agreement" means an Option Agreement, SAR Agreement, or
Restricted Stock Agreement.
9.5 "Awardee" means the recipient of an Award.
9.6 "Board" means the Board of Directors of the Company.
9.7 "Cause" means conviction of a crime involving moral turpitude or a
crime providing for a term of imprisonment in a federal or state
penitentiary; failure or refusal to follow reasonable instructions of
the Board; failure or refusal to comply with the reasonable policies,
standards and regulations of the Company, which from time to time may
be established; failure or refusal to faithfully and diligently perform
the usual customary duties of his employment or service; acting in an
unprofessional, unethical, immoral or fraudulent manner; acting in a
manner which discredits or is detrimental to the reputation, character
and standing of Company or a Subsidiary; or the commission of any other
act that causes or reasonably may be expected to cause substantial
injury to the Company.
1998 LONG-TERM INCENTIVE PLAN -- PAGE 14
<PAGE> 15
9.8 The term "Change in Control" has the meaning set forth in Section
1.12(b).
9.9 "Code" means the Internal Revenue Code of 1986, as amended.
9.10 "Committee" means the Committee appointed in accordance with
Section 2.1.
9.11 "Common Stock" means the Common Stock, par value $0.10 per share,
of the Company or, in the event that the outstanding shares of such Common Stock
are hereafter changed into or exchanged for shares of a different stock or
security of the Company or some other corporation, such other stock or security.
9.12 "Company" means GAINSCO, INC., a Texas corporation, or one or
more of its Subsidiaries.
9.13 "Director" means a member of the Board.
9.14 "Effective Date" means the date on which the Board approves the
Plan.
9.15 "Employee" means an employee (within the meaning of Section
3401(c) of the Code and the regulations thereunder) of the Company or of any
Subsidiary of the Company that adopts the Plan, including Officers.
9.16 "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
9.17 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
9.18 "Fair Market Value" means such value as determined by the
Committee on the basis of such factors as it deems appropriate; provided that if
the Common Stock is traded on a national securities exchange or transactions in
the Common Stock are quoted on the Nasdaq National Market System, such value as
shall be determined by the Committee on the basis of the reported sales prices
for the Common Stock on the date for which such determination is relevant, as
reported on the national securities exchange or the Nasdaq National Market
System, as the case may be. If the Common Stock is not listed and traded upon a
recognized securities exchange or on the Nasdaq National Market System, the
Committee shall make a determination of Fair Market Value on a reasonable basis
which may include the mean between the closing bid and asked quotations for such
stock on the date for which such determination is relevant (as reported by a
recognized stock quotation service) or, in the event that there shall be no bid
or asked quotations on the date for which such determination is relevant, then
on the basis of the mean between the closing bid and asked quotations on the
date nearest preceding the date for which such determination is relevant for
which such bid and asked quotations were available.
9.19 "Incentive Stock Option" means an Option granted pursuant to
Article III.
9.20 "Nonqualified Stock Option" means an Option granted pursuant to
Article IV.
1998 LONG-TERM INCENTIVE PLAN -- PAGE 15
<PAGE> 16
9.21 "Officer" means an officer of the Company or any Subsidiary.
9.22 "Option" means an Incentive Stock Option or a Nonqualified Stock
Option.
9.23 "Optionee" means an Awardee to whom an Option has been granted
hereunder.
9.24 "Option Agreement" means an agreement between the Company and an
Optionee with respect to one or more Options.
9.25 "Permanent Disability" has the meaning provided for that term in
Section 22(e)(3) of the Code.
9.26 "Person" means any individual, corporation, partnership, joint
venture, trust, or unincorporated organization.
9.27 "Plan" means the GAINSCO, INC. Long-Term Incentive Plan, as set
forth herein and as amended from time to time.
9.28 "Plan Shares" means shares of Common Stock issuable pursuant to
the Plan.
9.29 "Restricted Stock" means stock issued pursuant to Article V.
9.30 "Restricted Stock Agreement" means an agreement between the
Company and an Awardee with respect to Restricted Stock.
9.31 "Retirement" occurs when an Awardee terminates his employment or
service relationship with the Company or a Subsidiary on or after the date he
(a) turns 65 years old or (b) turns 55 years old and has completed ten years of
service with the Company or a Subsidiary as otherwise determined by the Board.
9.32 "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act
or any successor rule.
9.33 "Securities Act" means the Securities Act of 1933, as amended.
9.34 "Stock Appreciation Right" or "SAR" means a right issued pursuant
to Article VI.
9.35 "SAR Agreement" means an agreement between the Company and an
Awardee with respect to Stock Appreciation Rights.
9.36 "Subsidiary" means a subsidiary corporation of the Company, as
defined in Section 424(f) of the Code.
9.37 "Tax Date" means the date on which the amount of tax to be
withheld is determined.
1998 LONG-TERM INCENTIVE PLAN -- PAGE 16
<PAGE> 17
9.38 "Transaction" has the meaning set forth in Section 1.12(b)(iii).
9.39 The term "Voting Securities" has the meaning set forth in Section
1.12(b)(i).
1998 LONG-TERM INCENTIVE PLAN -- PAGE 17
<PAGE> 1
EXHIBIT 99.9
GAINSCO INC.
REPLACEMENT NONQUALIFIED STOCK OPTION AGREEMENT
This Replacement Nonqualified Stock Option Agreement (this "Agreement")
is entered into between Gainsco, Inc., a Texas corporation (the "Company"), and
Glenn W. Anderson (the "Optionee") this 24th day of July, 1998 pursuant to the
second sentence of Section 4(c) of the Employment Agreement entered into by and
between the Company and the Optionee dated effective as of April 17, 1998 (the
"Employment Agreement") to supersede and replace the Nonqualified Stock Option
Agreement dated April 25, 1998 between the Company and the Optionee, which is
hereby cancelled. Terms used herein with an initial capital letter but not
defined herein shall have the meanings ascribed to such terms in the Employment
Agreement. In consideration of the mutual promises and covenants made herein,
the parties hereby agree as follows:
1. GRANT OF OPTION. The Company grants to the Optionee an option (the
"Option") to purchase from the Company all or any part of a total of 579,710
shares of the Company's Common Stock, par value $.10 per share ("Common Stock"),
at a purchase price of $5 3/4 per share.
2. CHARACTER OF OPTION. The Option is not an "incentive stock option"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
3. TERM. The unexercised part of the Option will expire at 11:59 PM
(CST) on July 24, 2003.
4. VESTING. The Option is fully vested and exercisable in full on the
date of this Agreement.
5. PROCEDURE FOR EXERCISE. Exercise of the Option or a portion thereof
shall be effected by the Optionee's giving written notice of exercise to the
Company at its principal place of business and the Optionee's payment of the
purchase price prescribed in Section 1 above for the shares to be acquired
pursuant to the exercise.
6. PAYMENT OF PURCHASE PRICE. Payment of the purchase price for any
shares purchased pursuant to the Option shall be in cash or in such other form
of consideration as the Compensation Committee of the Board of Directors of the
Company (the "Compensation Committee") may permit.
7. TRANSFER OF OPTIONS. The Option may not be transferred except (i) by
will or the laws of descent and distribution or (ii) pursuant to the terms of a
qualified domestic relations order, as defined by the Code or Title I of the
Employee Retirement Income Security Act of 1974, as amended, and, during the
lifetime of the Optionee, may be exercised only by the Optionee or by the
Optionee's legally authorized representative.
<PAGE> 2
8. TERMINATION. The Option shall terminate on the expiration date set
forth in Section 3 above; provided, however, that in the event of the
termination of the Optionee's service as an employee of the Company, the Option
shall terminate on the following date, as applicable:
a. On the expiration date specified in Section 3 if Optionee
terminates his employment with the Company any time during the period that
begins on the business day before and ends at the end of a period of twenty-four
(24) months beyond the month in which such change in control occurs;
b. On the expiration date specified in Section 3 if the
termination of Optionee's employment is effected by the Company without Cause as
specified in Section 6 of the Employment Agreement;
c. On the date that is one year after the date of Optionee's
termination of employment if such termination is on account of the Optionee's
death or Disability;
d. On the date of Optionee's termination of employment if such
termination is effected by the Company for Cause or is effected by the Optionee
(except as provided in Section 8a above with respect to a "change in control"
termination); or
e. On the expiration date specified in Section 3 in the event
of the expiration of the Employment Agreement after its initial forty-eight
month term without renewal by the parties for an additional year pursuant to
Section 3 of the Employment Agreement.
9. RESERVATION OF SHARES. The Company shall at all times during the
term of the Option reserve and keep available a sufficient number of shares of
its Common Stock to satisfy the Company's obligation to transfer shares to the
Optionee upon exercise of the Option.
10. TAX WITHHOLDING. If the Company determines that the issuance of
shares of Common Stock to the Optionee upon his exercise in whole or in part of
the Option is subject to any federal, state, or local tax withholding
requirement, the Company shall notify the Optionee of such requirement, and, as
a condition to the issuance of such shares, the Optionee shall pay to the
Company, in cash or in any other form of consideration the Company's Board of
Directors may permit, the amount required to be withheld.
11. COMPLIANCE WITH SECURITIES LAWS. Shares of Common Stock shall be
issued pursuant to the exercise of the Option only if the Company determines
that the issuance and delivery of the shares will comply with all relevant
provisions of state and federal law, including without limitation the Securities
Act of 1933 and the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the Company's Common Stock then is
listed. The Optionee consents to the imposition of a legend upon the certificate
representing such shares restricting their transfer as required by law or by
this Agreement.
-2-
<PAGE> 3
12. ANTIDILUTION. If the outstanding Common Stock is increased,
decreased, changed into, or exchanged for a different number or kind of shares
or securities through merger, consolidation, combination, exchange of shares,
other reorganization, recapitalization, reclassification, stock dividend, stock
split, or reverse stock split, an appropriate and proportionate adjustment shall
be made in the number and type of shares subject to the Option. Any such
adjustment in the Option shall be made without change in the aggregate purchase
price applicable to the unexercised portion of the Option, but with a
corresponding adjustment in the price for each share covered by the Option. The
foregoing adjustments and the manner of application of this section shall be
determined solely by the Compensation Committee.
13. AMENDMENT. This Agreement may be amended only by an instrument in
writing signed by both the Company and the Optionee.
14. PRIOR OPTION CANCELLED. The Nonqualified Stock Option Agreement
dated April 25, 1998 between the Company and the Optionee is hereby cancelled.
15. MISCELLANEOUS. This Agreement will be construed and enforced in
accordance with the laws of the State of Texas and will be binding upon and
inure to the benefit of any successor or assign of the Company and any executor,
administrator, trustee, guarantor, or other legal representative of the
Optionee.
Executed as of the first day written above.
GAINSCO, INC.
/s/ JOEL C.PUCKETT
-----------------------------------
Chairman of the Board
/s/ GLENN W. ANDERSON
-----------------------------------
GLENN W. ANDERSON
###-##-####
-----------------------------------
Social Security Number of Optionee
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