<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1995 Commission File Number: 33-53656-A
G & W FINANCIAL CORPORATION
- -------------------------------------------------------------------------------
(Name of Small Business Issuer as specified in its charter)
<TABLE>
<S> <C>
GEORGIA 58-2015438
- --------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1800 LAKE PARK DRIVE, SUITE 100
ATLANTA, GEORGIA 30080
- --------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(770) 432-2284
-------------------------------------------------------
Issuer's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Check whether the issuer (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
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
------ ------
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year. $1,782,894
At December 31, 1995, there were outstanding 10,000 shares of registrant's
common stock, no par value. None of issuer's common stock is held by
non-affiliates.
Documents incorporated by reference: Certain of the exhibits included in Part
III, Item 13 are incorporated by reference from the registrant's Annual Report
Form 10-KSB for the year ended December 31, 1994 and Reports on Form 10-QSB
for the quarters ended December 31, 1993 and September 30, 1994.
<PAGE> 2
G & W FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-KSB
FISCAL YEAR ENDED DECEMBER 31, 1995
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . . . 6
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . 6
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . 7
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . 10
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ITEM 10. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT . . . . . . . . . . . . . . . . . . 13
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
G&W Financial Corporation (the "Company"), a Georgia corporation, was formed
on September 14, 1992.
The Company was established for the purpose of providing revolving credit
facilities (the "Loans") to premium finance companies (the "Obligors") licensed
in various states, including licensed premium finance companies which may be
Affiliates of the Company. These licensed premium finance companies provide
financing to companies and individuals who wish to finance the cost of their
insurance needs. The Loans are secured by a security interest in all accounts,
contract rights and general intangibles of the Obligors. Each Obligor assigns
to the Company the premium finance contracts which the Obligor finances with
the Company's credit facility. The Company will generally not advance more
than 85% of the face value of premium finance contracts which secure a Loan.
The Company began operations on June 2, 1993 when it received $500,000 in
proceeds from the sale of long term promissory notes (the "Notes") which mature
on December 31, 1998, earning interest at an annual rate, adjusted semi-
annually, at three percent (3%) above the annual rate of interest paid on
5-year U.S. Treasury Notes. The Notes are issued pursuant to an Indenture with
Texas Commerce Trust Company (formerly known as Ameritrust Texas, N.A.) (the
"Trustee") dated March 5, 1993 (the "Indenture"). Certain capitalized terms
set forth herein are defined in the Indenture. As of December 31, 1995, the
annual rate of interest was 9%. As of December 31, 1995, the Company had
outstanding Loans with eight Obligors, committed to advance a maximum aggregate
of $14.0 million pursuant to the terms of revolving credit facilities and had
advanced $13,066,498, including $6,216,703 to two affiliates, Express Premium
Finance Company ("Express") and Agency Premium Funding, Inc. ("Agency"),
respectively. During the year ended December 31, 1995, the Company earned
interest and servicing fees of $1,782,894 and incurred interest to the
Noteholders of $1,448,027. Operating expenses exclusive of interest payable to
Noteholders was $3,628,661, resulting in a net loss for the year ended December
31, 1995 of $3,293,794.
The funds necessary to fund the Loans are initially provided from the sale
of the Notes. Subject to the prior payment of interest due on the Notes and
certain expenses allowed pursuant to the Indenture governing the Notes, the
collection proceeds from the Loans will be used to originate additional Loans
and service the Loans until the Sinking Fund Trigger Date pursuant to the
Indenture as long as no Event of Default under the Indenture exists. Upon the
payment in full of all principal and interest on the Notes, the Loans will be
released by the Trustee to the Company and the Indenture will terminate. While
the Notes remain outstanding, the Company will be prohibited from engaging in
any business other than the origination, collection and servicing of the Loans
(including taking any action necessary to collect the proceeds of the Loans)
and from incurring any additional indebtedness other than Allowed Expenses (as
defined in the Indenture) and any other amounts incurred in the ordinary course
of its business.
<PAGE> 4
The Company is not itself a licensed premium finance company within the
State of Georgia or any other state.
PREMIUM FINANCE LOAN TRANSACTIONS.
In a typical premium finance loan transaction, the insured (an individual or
company) executes a premium finance contract which contains a promise to pay (a
promissory note) in favor of the premium finance company and a power of
attorney designating the premium finance company as beneficiary of any unearned
premiums held by the insurer. The finance charges set forth in the premium
finance contract are determined in accordance with the Rule of 78 (which is the
method of computing refunds of unearned finance charges on early payment of a
loan so that the refund is proportional to the monthly unpaid balance) and
disclosed to the insured as required by federal Truth-in-Lending regulations.
The premium finance contract represents the promise of the insured to repay the
full amount loaned, in accordance with the terms and conditions thereof. The
premium finance company receives an origination fee and, in addition to the
collection of interest at the statutorily approved rate, is entitled to the
receipt of late charges for late payment of installments and a cancellation fee
if the insured is in default under the premium finance contract after the
statutorily approved default period and notification to the insured of intent
to cancel. When the insured has been in default under the premium finance
contract for more than the statutorily approved default period, the premium
finance company has the right to exercise the power of attorney which it holds
from the insured to cancel the insurance and receive from the insurance company
the entire unearned premium due. In most instances, the unearned premium is
equal to or greater than the remaining amount due on the premium finance
contract, because the initial payment made by the insured on the insurance
policy (usually 25% to 30% of the total premium due) provides that safety
margin which assures the premium finance company that the amount outstanding on
the premium finance contract is at all times less than the unearned premium.
Upon receipt of the unearned premium from the insurance company, the premium
finance company deducts the amount due it under the premium finance contract
including late fees and/or cancellation charges and remits the remainder to the
insured.
THE PREMIUM FINANCE INDUSTRY.
Premium finance companies are licensed and authorized by state statutory law
to finance insurance premium requirements for insured companies or individuals
that are unable or do not wish to pay an entire insurance premium in one lump
sum. These companies are regulated by the statutorily appointed regulatory
agency in each state, usually the Commissioner of Insurance or other state
regulatory body having jurisdiction over the insurance industry. Some of the
premium finance companies are affiliated with insurance companies or with
insurance agencies. However, many are independent of either insurance
companies or insurance agencies. Customarily, insurance agents utilize premium
finance companies as an additional financing tool, and upon the execution of a
premium finance contract with the insured, the agents forward the completed
documents to premium finance companies. The agents forward the down payment
less their
-2-
<PAGE> 5
commission, as well as the policy application, to the insurance company. The
premium finance company then pays the amount financed (usually 50% to 75% of
the entire premium) to the insurance company. The premium finance company
collects interest and principal from the insured (the "Borrower"). In the
event the Borrower defaults, the insurance company is required by state statute
to refund the unearned premium to the premium finance company.
A substantial portion of the premium financing done by the premium finance
companies with which the Company has originated Loans finances automobile
insurance premiums. Premium finance companies have become an integral part of
the automobile insurance industry. The need for premium finance companies has
developed as state legislatures have required all automobile drivers to carry
insurance. As a result of the ever increasing premium costs, the need to
finance such costs for a substantial part of the population became evident. As
a result of this need, the states have individually legislated the charges,
procedures and licensing requirements for premium finance companies. Most
"non-rated" insurance carriers (those writing non-preferred or non-standard
business) usually require payment in full on any policies written (annual or
semi-annual) and may in some instances allow payment to be made in two
installments. However, many Americans wish to finance this cost for cash flow
purposes and as a result, premium finance companies were organized to fill this
need. Though many insurance carriers have their own premium finance companies,
agents who sell policies to consumers may choose outside premium finance
companies to finance their business. Since the rates and fee structures are
regulated statewide and permit no deviation, a premium finance company's
success or failure is dependent upon its ability to market the service to the
agents. The minimum capital requirements to acquire a license to conduct
business as a premium finance company are not very significant. Florida has a
minimum net worth requirement of $35,000. Georgia, on the other hand, requires
only a minimum capital of $5,000. Therefore, many of the general insurance
agencies establish their own premium finance companies to service the business
which their offices generate. Many Loans will be made to premium finance
companies owned by insurance agencies.
REGULATORY REGIME FOR PREMIUM FINANCE COMPANIES.
To date, the Company has made Loans in the States of New Jersey, Tennessee,
Maryland, Florida, Louisiana, Georgia and Texas. The Company may originate
Loans in the future in other states which have regulatory regimes for premium
finance companies similar to that found in the aforementioned states. These
states have licensing requirements to transact the business of financing
insurance premiums and regulatory regimes which are all similar with some
variation in regulation. All of the seven states listed above require
licensing or registration with the applicable regulatory officer in the
respective states. Each of the above-listed states also require annual
registration or reporting of operations and require some regulatory review
conducted by the state regulators. However, because the Company itself is not
making loans to consumers, it will not be required and it has no intention of
becoming licensed in these states. The Company may expand its operations into
other states which have a similar regulatory structure to the seven listed
states.
-3-
<PAGE> 6
COMPETITION.
The premium finance industry is intensely competitive. The Company has
numerous competitors engaged in the business of financing premium finance
companies. Such competitors include financial institutions, institutional
pension funds, insurance companies and other financial entities. However, the
Company has few competitors who finance the smaller premium finance companies
which have gross annual dollar volume in premium finance contracts of under
$5,000,000. It is these smaller companies which, to date, make up the majority
of the borrowers under loans originated by the Company's affiliates and all of
the Obligors under Loans originated by the Company. Many of the Company's
competitors have substantially greater resources than the Company as well as
more established reputations and working relationships in the industry that may
afford them a competitive advantage in the market place. These competitive
factors could have a material adverse effect upon the operations of the Company
in its ability to attract Obligors who satisfy the lending criteria of the
Company.
EMPLOYEES.
The Company's only employees are its President and Vice-President who only
devote so much of their time to the business of the Company as is necessary and
who are also employees and officers of G&W Asset Management, Inc. and its
Affiliates. The Company may in the future have such employees as may be
required.
ITEM 2. PROPERTIES
The Company does not own any real estate. The administrative offices of the
Company are located at 1800 Lake Park Drive, Suite 100, Atlanta, Georgia 30080
and consist of approximately 7,200 square feet of office space. The Company
shares this space with its affiliates including G&W Asset Management, Inc.
which services all of the Loans of the Company and owns 100% of the outstanding
stock. GN&W Capital Corporation, also an affiliate of the Company, leases the
administrative offices at a current rate of $2,000 per month for a term ending
on May 31, 2000. All computer hardware and software necessary for the
servicing of the Loans is owned and will be operated by G&W Asset Management,
Inc. Therefore, the Company does not anticipate owning any equipment or
furnishings whatsoever.
ITEM 3. LEGAL PROCEEDINGS
The following is a discussion of the legal proceedings in which the Company
is presently involved:
-4-
<PAGE> 7
1. South General Premium Finance, Inc. v. G & W Financial Corporation,
State Court of Fulton County, Civil Action File No. 94VS91368H.
On September 29, 1994, the Company was served with a Complaint by South
General Premium Finance, Inc. ("South General") in which it was alleged that
the Company breached its contract with South General by delaying and failing to
honor loan requests by South General and further terminating and liquidating
South General's line of credit with the Company. The Complaint alleges that
the Company's conduct, which was authorized under the two promissory notes and
related documentation executed by South General, destroyed South General's
business and its reputation. In its Complaint, South General has sought
damages for breach of contract in excess of $500,000. Further, South General
seeks to recover reasonable attorney's fees and expenses it incurs in pursuing
this amount as a result of the alleged bad faith on the part of the Company.
The Company filed an Answer and Counterclaim on November 14, 1994 in which
it asserted various affirmative defenses and denied any liability to South
General. Further, in its Counterclaim the Company alleged that, pursuant to
the promissory notes, South General is indebted to the Company in an amount in
excess of $900,000. The Counterclaim further alleged that South General was
indebted to the Company for any attorney's fees and expenses it incurs in
attempting to collect this debt by virtue of the terms of the promissory notes.
The Company further requested an accounting of the funds it has provided to
South General to date. Finally, the Counterclaim contained a count against
South General for breach of contract in which the Company alleged that South
General failed to perform various contractual obligations to the Company
arising under the promissory notes and related documentation.
The Company intends to aggressively defend this action and pursue all
remedies against South General as the Company has asserted that all actions it
has taken with regard to South General were authorized under the contract. The
parties have initiated discovery but have not actively pursued it at the
present time as they are actively engaged in settlement discussions currently.
In addition, the parties have engaged in settlement negotiations which, if
completed, would result in South General paying a substantial portion on the
principal amount due. The Company has already obtained assets from South
General valued in excess of $300,000 in connection with the debt. If this
matter does not settle, the Company will be in a better position to assess the
merits of each parties position. It is not possible to predict at this time a
probable outcome in this matter for the foregoing reasons.
2. G & W Financial Corporation v. Miguel Benitez, Superior Court of Cobb
County, State of Georgia, Civil Action No. 9419168-24.
In response to the Complaint filed by South General described in Paragraph
1, the Company brought an action against Miguel Benitez, who is the President
of South General and the individual who personally guaranteed the two
promissory notes executed by South General. Mr. Benitez is a resident of
Florida but, by virtue of the terms of the guaranty he executed, he
-5-
<PAGE> 8
expressly waived objections and consented to jurisdiction and venue in the
Superior Court of Cobb County, Georgia. This Complaint is an action on a
guaranty and a request for attorney's fees and expenses incurred in bringing
the action, as provided for in the guaranty. Mr. Benitez filed an answer
denying liability. While it is possible the matter will be settled by mutual
agreement, the Company intends to pursue the matter vigorously if it is not
settled.
3. G&W Asset Management, Inc. v. Gerard F. Vinett, Jr. and American Premium
Plan Service Corporation, in the Superior Court of Cobb Country,
Georgia, Civil Action File No. 95-10345933.
On or about May 4, 1995, G&W Asset Management, Inc. filed, on behalf of G&W
Financial Corporation, an action against American Premium Plan Service
Corporation ("APPSC") for its default on a loan originally from G&W Asset
Management, Inc. (subsequently transferred to G&W Financial Corporation), and
against Gerard F. Vinett, Jr., in connection with his obligation as guarantor
for the debts of APPSC. The Defendants answered and counterclaimed on
September 15, 1995 for breach of contract and negligence. The Defendants did
not state the amount of their alleged damages, however, they requested an award
of punitive damages and attorney's fees. Defendant APPSC claims that errors in
the Company's computer system and the Company's failure to follow the terms of
the loan put APPSC out of business and cost APPSC anticipated profits.
The Defendants' allegations are fact sensitive, and the parties have not yet
conducted extensive discovery in the case in an effort to determine whether
settlement and an agreement on the amounts due the Company is possible. Given
these factors, we cannot opine as to the outcome of the litigation or the
prospects of settlement. However, management of the Company has indicated that
it wishes to pursue vigorously the action while maintaining a settlement
dialogue with the Defendants.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security-holders during the fourth
quarter of the Company's fiscal year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no market for the Company's common stock. At December 31, 1995,
all of the Company's common stock is owned by G&W Asset Management, Inc. The
Company does not have a history of paying cash dividends. Pursuant to the
terms of the Indenture, any earnings which the Company may realize after the
payment of all taxes and other Allowed Expenses under
-6-
<PAGE> 9
the terms of the Indenture must accumulate and may only be paid out to holders
of common stock after full redemption of the Notes.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL. The following discussion should be read in conjunction with the
Company's financial statements and notes attached hereto. Such financial
statements and information reflect historical operations of the Company prior
to January 1, 1996. As of December 31, 1995, the Company held eight revolving
credit facilities to premium finance companies. The Company's only source of
revenue will be the interest, payments and service charges derived from the
eight loans and other loans which it may originate (the "Loans"). The expenses
of the Company will consist of the Allowed Expenses as that term is defined
under the terms of the Indenture, which include (i) fees and expenses to the
Trustee, (ii) up to $30,000 per calendar quarter in administrative and
operating expenses, (iii) servicing fees, (iv) any federal, state and local
taxes and assessments, (v) bank service charges and account fees relating to
the Accounts set up under the Servicing Agreement among the Company, the
Trustee and G&W Asset Management, Inc. ("GWAM"), the Servicer or pursuant to
the Indenture, (vi) any legal and accounting fees for service with regard to
Loan origination, and (vii) the cost of reports, certificates and opinions of
attorneys and independent accountants required under the Indenture. The
Servicing Agreement provides for GWAM to provide all services required to
administer the Loans for which GWAM receives a monthly fee of .25% of the
aggregate outstanding loan balances per month for the first $5,000,000 in
aggregate loans and .33% per month on the aggregate loan balance over
$5,000,000. For the years ended December 31, 1995 and 1994, the Company
expensed a total of $279,305 and $165,760, respectively, in fees to GWAM
pursuant to the terms of the Servicing Agreement.
RESULTS OF OPERATIONS. During 1995, the Company incurred a net loss of
$3,293,794 on total revenues of $1,782,894 as compared to the 1994 net loss of
$282,382 on total revenues of $984,817. The increase in the 1995 net loss is
primarily attributable to a $2,715,838 increase in the provision for possible
loan losses. During 1995, the Company recorded an allowance for possible loans
of approximately $800,000 to provide for potential losses on three outstanding
loans currently in default with an aggregate balance outstanding of
approximately $1,600,000. The Company is aggressively pursuing its legal
remedies with respect to collection of these balances. The Company's operating
activities include providing lines of credit to two affiliated licensed premium
finance companies. During 1995, these two affiliated premium finance companies
incurred significant operating losses in connection with providing financing on
certain insurance premiums. Accordingly, the Company has recorded an allowance
for possible loan losses against its receivables from these two affiliates in
the amount of $2,000,000 in order to adjust the carrying value of such
receivables to the book value of the net assets available to the affiliates to
pay down the receivables.
-7-
<PAGE> 10
The Company generated revenues of $1,782,894 in 1995 compared to $984,817 in
1994. The increase of $798,077 or 81%, reflects the increase in the weighted
average notes receivable balance outstanding during 1995, which was funded
principally from the proceeds during 1995 and 1994 of long term debt issuances.
Interest expense increased to $1,448,027 in 1995 compared to $637,278 in
1994. The increase of $810,749, or 127%, is primarily due to an increase in
average borrowings outstanding of approximately $12,600,000 in 1995 compared to
$7,300,000 in 1994, and, to a lesser extent, an increase in the weighted
average borrowing rate of 9.8% in 1995 compared to 9.4% in 1994.
Provision for loan losses increased to $2,831,610 in 1995 compared to
$115,772 in 1994. The increase of $2,715,838 reflects provisions against three
loans currently in default and adjustments to the carrying value of receivables
from affiliates as discussed above.
Amortization of debt issuance costs increased to $441,925 in 1995 compared
to $156,660 in 1994. The increase of $285,265 reflects increases in 1995 and
1994 of deferred debt issuance costs associated with issuance of notes payable.
Servicing fees to parent increased to $279,305 in 1995 compared to $165,760
in 1994. The increase of $113,545, or 68%, reflects the increased average
loans receivable outstanding during 1995 upon which the fees are based.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. During 1995, the Company incurred a net loss of $3,293,794, had
$40,139 in negative cash flow from operations and, as of December 31, 1995, had
a net capital deficiency of $3,658,723. The Company's parent incurred a
consolidated net loss of $6,503,365, had $1,414,694 in negative cash flow from
its consolidated operating activities and, as of December 31, 1995, had a
consolidated net capital deficiency of $6,396,806. These matters raise
substantial doubt about the ability of the Company to continue as a going
concern. Management's plans in regard to these matters are discussed below.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
During the fourth quarter of 1995, the Company determined that certain notes
receivable currently in default required significant allowances for possible
loan losses in the amount of approximately $800,000. Furthermore, the Company
evaluated the collectibility of its revolving notes receivable made to two
affiliated licensed premium finance companies in the normal course of business.
These two affiliates incurred significant operating losses during 1995 in
connection with providing third party financing on certain insurance premiums.
In light of the foregoing, the Company has recorded an allowance for possible
loan losses against its receivables from these two affiliates in the amount of
$2,000,000 in order to adjust the carrying value of such receivables to the
book value of the net assets available to the affiliates to pay down the
receivables.
-8-
<PAGE> 11
Management of the Company and its parent have taken steps to deal with these
matters, including changes in certain underwriting procedures, changes in
certain personnel, and the aggressive pursuit of its legal remedies with
respect to collection of amounts owed under receivables in default.
The Company currently is actively seeking additional financing through any
combination of debt and equity and has retained investment advisors to assist
in identifying and securing additional financing. No assurances can be given
that such financing will be obtained or that, in the event such financing is
obtained, that the Company will achieve profitability or positive cash flow.
Cash used in operating activities improved to $40,139 in 1995 compared to
$190,000 in 1994. The 1995 net loss of $3,293,794 was incurred principally as
a result of the $2,831,610 non cash provision for possible loan losses and to a
lesser extent $441,925 non cash amortization of debt issuance costs. The
increase in interest receivable of $536,940 in 1995 was substantially offset by
$477,148 in non cash interest on capital appreciation notes.
Cash used in investing activities amounted to $5,019,444 in 1995 compared to
$5,580,155 in 1994. The Company's principal use of cash is attributable to
$5,384,838 in net note receivable originations which were funded principally by
the Company's financing activities.
Cash provided by financing activities amounted to $4,149,469 in 1995
compared to $4,611,301 in 1994, reflecting proceeds received from issuance of
notes payable, net of placement costs.
The Company has a commitment to fund $14.0 million in loans to insurance
premium finance companies. At December 31, 1995, the Company had advanced
$13,066,498 under the credit facilities, including $6,216,703 to affiliates.
It is anticipated that the Company can meet the demands of the insurance
premium financing companies to fund loans to them as they originate premium
finance contracts from additional placements of the Company's Notes.
The loan portfolio of the Company is collateralized by insurance premium
finance contracts which finance substandard auto insurance and other personal
property lines of insurance. To mitigate the Company's exposure to credit
risk, the Company, as a matter of policy, generally requires a 25% down payment
from insured individuals, restricts concentrations of insurance company
underwriting policies to less than 20% of the insurance premium financing
company's business and enters into loan agreements with insurance premium
financing companies operating in states covered by a state-sponsored recovery
fund. Such recovery funds provide for the recovery of unearned insurance
premium payments, subject to nominal deductible amounts, from insolvent
insurance companies.
The Company periodically reviews the requirement for providing for possible
losses on loans to insurance premium financing companies. Criteria used by
management, among others, to
-9-
<PAGE> 12
evaluate the adequacy of its allowance for possible loan loss include the
financial condition of the insurance premium financing companies, the
creditworthiness of its principals, the concentrations and ratings of insurance
companies underwriting insurance coverage, and the adequacy of collateral
pledged by the borrowers. At December 31, 1995, the Company had provided
$2,800,000 in allowances for possible loan loss in its financial statements.
CAPITAL RESOURCES. The Company's primary source of capital is from proceeds
generated from the placement of its Notes, through an active public
registration to individual investors. The maximum aggregate offering price is
$20,000,000 consisting of $10,000,000 under the Current Interest Notes and
$10,000,000 under the Capital Appreciation Notes. As of December 31, 1995, the
Company had raised $9,957,000 and $4,673,000 of the Current Interest Notes and
the Capital Appreciation Notes, respectively.
INFLATION. The effect of inflation and the increase in interest rates
adversely affected the Company in 1995. The per annum cost of money to the
Company increased to 9.8% at December 31, 1995, from 9.4% as of December 31,
1994. The maximum interest rate permitted under the Note agreement is 12.5% per
annum. The Company may, however, prospectively adjust the interest rate on
loan originations to offset any increase in its cost of money.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 through F-43 included herein.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The names, ages, backgrounds and principal occupations of each director and
executive officer of the Company are set forth below:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Donald A. Wagley 60 President and Director
</TABLE>
-10-
<PAGE> 13
<TABLE>
<S> <C> <C>
Priscilla J. Granese 54 Vice President - Secretary/Treasurer and Director
E. Hugh Edenfield 74 Director
Ralph Terry 70 Director
</TABLE>
Donald A. Wagley.
Donald A. Wagley, President and a Director, has served in that capacity for
the Company since its incorporation. Mr. Wagley is presently serving a
one-year term as President and Director. He is a professional management
executive who has been involved in the marketing of investment products for
over 25 years. Mr. Wagley is a graduate of Southeast Missouri State
University, receiving a Bachelor of Science degree in 1960. Mr. Wagley is a
veteran of the United States Navy.
He joined the firm of Shareholders Management Company (now Angeles Corp.) in
1966 and rose to Senior Vice President where he was responsible for developing
equity sales for the mutual fund industry with national and regional New York
Stock Exchange firms in the southeastern United States. Mr. Wagley satisfied
the National Association of Securities Dealers, Inc.'s requirements for
licensing for General Securities in 1966 and received his Principal's license
in 1969. Mr. Wagley is a member of the International Association of Financial
Planners. In 1972, Mr. Wagley entered the real estate business in Florida by
forming a Florida Real Estate Investment Equity Trust which raised in excess of
$3.5 million. Mr. Wagley sold his interest in late 1972 and brokered
commercial real estate in Jacksonville, Florida until 1975, at which time he
became a Regional Vice-President for First Connecticut Securities representing
the first public GNMA fund offered to the investing public. From 1976 until
1985, Mr. Wagley owned and operated a service company in Clearwater, Florida,
which included a pest control company and a franchise company with 44 offices
in 11 states. His firm was active in servicing residential and multi-family
properties in the Tampa Bay area. He was on the Board of Directors of the
Greater Tampa and Pinellas County Apartment Association from 1980 until 1984.
Mr. Wagley sold his business interest in Florida in 1985.
In 1986, Mr. Wagley joined AFC Capital Corporation (Associated Financial
Capital), Los Angeles, California, a syndication company specializing in
low-income housing offerings. Mr. Wagley was Regional Vice-President
representing the company primarily in the southeastern United States. In
September, 1988, Mr. Wagley founded GN & W Capital Corporation and has been its
President since its organization. Mr. Wagley is a member of CRUD (Council on
Rural and Urban Development) serving on the Tax and Legislative Committee,
Georgia Chapter. Mr. Wagley owns 80% of the stock issued by GWAM and is its
founder and President and serves as
-11-
<PAGE> 14
a Director. Mr. Wagley devotes most of his time to managing the business of
GWAM, GN&W Capital Corporation and the Company.
Priscilla J. Granese.
Priscilla J. Granese, Vice President, Secretary/Treasurer, Director, has
served in that capacity for the Company since its incorporation. Ms. Granese
is presently serving a one-year term as Vice President, Secretary/Treasurer and
Director. She is a career professional executive with 25 years experience in
corporate relations, marketing, administration and personnel. She completed
studies in business administration at Chandler Business School, Boston,
Massachusetts. From 1967 to 1969, she was employed by Wirthmore Feeds Ins., a
division of Corn Products International, in Waltham, Massachusetts. From 1969
to 1970, she was employed by BASF Systems, Inc. in Bedford, Massachusetts.
From 1970 to 1972, she was assistant director for operations of House of Nine,
a 125-chain apparel retailing organization in Los Angeles where she was
responsible for main office personnel, inventory control and supervision of
branch operations. From 1972 to 1974, she was assistant to the Vice
President/Financing for the Plastics Division of Dart Industries in Los Angeles
where she was responsible for a wide range of personnel and budgetary matters.
From 1974 to 1976, she was assistant to the Controller for a nationwide apparel
distributor - Deena Lingerie in Los Angeles, responsible for main office
administration, personnel and accounting related matters. From 1976 to 1981,
Ms. Granese was Director of Human Resources and Corporate Services with Orange
Julius International of Santa Monica, California. Ms. Granese joined AFC
Capital Corporation (Associated Financial Corporation) in 1981 and was Vice
President/Marketing. She was responsible for broker-dealer marketing and due
diligence, media design, sales ads, prospectus production, sales meetings and
seminar coordination. During her tenure at AFC, she was also responsible for
human resources and corporate services. Ms. Granese joined GN&W Capital
Corporation, Atlanta, Georgia in 1988. Ms. Granese has been an officer of GN&W
Capital Corporation since September 1988 and a Director since 1990. Ms.
Granese owns 20% of the stock of GWAM and has been a Director and Vice
President since its organization. Ms. Granese devotes substantially all of her
time to managing the business of GWAM, GN&W Capital Corporation and the
Company.
E. Hugh Edenfield.
E. Hugh Edenfield has been a director of the Company since its incorporation
and presently serves a one-year term. He was the director of Regulatory Laws,
Division of Premium Finance, of the Office of the Controller/Insurance
Commissioner for the State of Georgia from 1976 until 1989. Mr. Edenfield has
been actively involved in the insurance industry in Atlanta, Georgia since
1951. As director of Regulatory Laws, his responsibilities included
maintaining financial records of approximately 675 property and casualty
companies licensed to do business in Georgia. He was also responsible for
qualifying applicants for original Certificates of Authority as premium finance
companies and other licensing activities within the division, as well as county
mutuals and title insurance companies. Prior to his position with the State of
Georgia, Mr. Edenfield worked
-12-
<PAGE> 15
in the insurance industry for CIT Group - Service Fire Insurance Company
(1952), American Security Insurance Company (1953-1974) and Independent
Property & Casualty Insurance (1975). Mr. Edenfield attended Georgia Southern
University in Statesboro, Georgia and received a L.L.B. Degree from Atlanta Law
School. Mr. Edenfield retired from the Insurance Commissioner's Office in
October 1989. Mr. Edenfield is a Director of GWAM and a Director of the
Company.
Ralph Terry.
Ralph Terry has been a director of the Company since January 1993 and
presently serves a one-year term. He was Director of the Office of the
Controller/Insurance Commissioner for the State of Georgia from 1972 to 1990.
Mr. Terry had been retired since 1991, until he agreed in late 1992 to serve as
a Director of the Company and of GWAM. Mr. Terry was responsible for the
administration and supervision of all personnel and functions of the Insurance
Commissioner's office, including Life, Accident & Sickness, and Property &
Casualty. As Director, Mr. Terry was responsible for all insurance business
conducted in the State of Georgia. His staff supervised over 1600 admitted
insurance companies doing business in the state. He has been actively involved
in the insurance industry since 1952. Prior to his position with the State of
Georgia, Mr. Terry was a Supervisor, Claims Adjustor for Crawford & Company,
Atlanta, Georgia from 1952 until 1972. Mr. Terry is a graduate of Georgia
State University, where he received a Bachelor of Commercial Science Degree.
Mr. Terry also received a Bachelor of Laws Degree from John Marshall Law
School. Mr. Terry is a Director of GWAM and a Director of the Company.
Because the Company does not have a class of equity securities registered
pursuant to Section 12 of the Exchange Act, no disclosure is required or is
being furnished with respect to compliance with Section 16(a) of the Securities
Exchange Act of 1934 (the "Exchange Act").
ITEM 10. EXECUTIVE COMPENSATION
Donald A. Wagley, President of the Company, receives compensation of $3,000
per month. Priscilla J. Granese, Vice President of the Company, receives
compensation of $2,000 per month. In addition, each director receives a fee of
$100 each for Board of Director meetings attended. Total compensation paid and
accrued to Donald A. Wagley during 1994 was $36,000. Total compensation paid
and accrued to Priscilla J. Granese during 1994 was $24,000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information, as the date of this Annual
Report on Form 10-KSB, relating to the beneficial ownership of the Company's
Common Stock by any person or "group," as that term is used in Section 13(d)(3)
of the Exchange Act known to the Company to own beneficially 5% or more of the
outstanding shares of Common Stock, and known to the Company to be owned by
each director of the Company and by all officers and directors of the Company
-13-
<PAGE> 16
as a group. Each of the persons named below is believed by the Company to
possess sole voting and investment power with respect to the shares of Common
Stock beneficially owned by such person.
<TABLE>
<CAPTION>
Name and Address of Percentage of
Beneficial Owner (1) Shares Beneficially Owned Common Stock Owned (2)
- -------------------- ------------------------- ----------------------
<S> <C> <C>
G&W Asset Management, Inc. (3) 10,000 100%
1800 Lake Park Drive
Suite 100
Atlanta, GA 30080
Donald A. Wagley (4) 8,000 80%
1800 Lake Park Drive
Suite 100
Atlanta, GA 30080
Priscilla J. Granese (4) 2,000 20%
1800 Lake Park Drive
Suite 100
Atlanta, GA 30080
All current officers and 10,000 100%
directors as a group
(4 persons)
</TABLE>
(1) The information as to beneficial ownership of Common Stock has been
furnished by the respective shareholders, directors and officers of the
Company.
(2) Based on a total of 10,000 shares of Common Stock outstanding.
(3) On March 23, 1994, Donald A. Wagley and Priscilla Granese transferred
all of their ownership interest in the Company, which accounts for 100%
of the outstanding stock in the Company, to G&W Asset Management, Inc.
(4) Donald A. Wagley is the owner of 80% of the outstanding and issued Class
A Common Stock of G&W Asset Management, Inc. and Priscilla J. Granese is
the owner of 20% of the outstanding and issued Class A Common Stock of
G&W Asset Management, Inc. Class A Common Stock is the only outstanding
class of voting stock in G&W Asset Management, Inc.
-14-
<PAGE> 17
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All servicing of the Loans of the Company is provided by GWAM, the parent
company of the Company, as Servicer pursuant to the Servicing Agreement dated
as of March 5, 1993 among the Company, the Trustee and GWAM. The Servicing
Agreement establishes criteria to govern the servicing of the Loans, including
the performance of certain collection and collateral management activities on
the part of the Servicer. If the Servicer fails to comply with these criteria,
the Company may terminate the Servicing Agreement and may appoint another
Servicer. The Servicer receives a fee under the Servicing Agreement of 0.25%
of the aggregate outstanding balance of all Loans under $5 million and 0.33% of
the aggregate outstanding balance of all the Loans over $5 million per month.
The servicing fee is intended to compensation and reimburse the Servicer for
administering the advances and collections under the revolving credit facility
Loans, including collecting and posting all payments, responding to inquiries
of obligors, investigating delinquencies, paying costs of collections and
generally administering the Loans. The servicing fee also is intended to
compensate and reimburse the Servicer for furnishing monthly and annual
statements to the Company and the Trustee with respect to collections and
proceeds, and generating information necessary for the Company to prepare all
federal and state income tax returns. The Servicer is entitled to the
reimbursement of its costs and expenses incurred in foreclosing on collateral
of the Loans out of the related proceeds from the sale of such collateral. In
addition, subject to prior payment of any amounts owing on the Notes or to the
Trustee, the Servicer is paid, as an Allowed Expense under the terms of the
Indenture, any account fees and bank service charges relating to the Master
Accounts. For the year ended December 31, 1995, the Company expensed a total
of $279,305 in fees to GWAM pursuant to the Servicing Agreement.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) 1. Financial Statements and Schedules:
The financial statements listed in the Contents to Financial
Statements are filed as part of this annual report. No
financial statement schedules are required to be filed as part
of this annual report because all information otherwise
included in schedules has been incorporated into the Notes to
Financial Statements.
(a) 2. Exhibits:
EXHIBIT NO. DESCRIPTION
3.1* Articles of Incorporation of G & W Financial
Corporation
3.2* Bylaws of G & W Financial Corporation
4.1* Indenture dated March 5, 1993 between G&W Financial
Corporation and Texas Commerce Bank, formerly known
as Ameritrust Texas National Association, as Trustee
4.2* Form of Current Interest Note due December 31, 1998
-15-
<PAGE> 18
4.3* Form of Capital Appreciation Note due December 31, 1998
10.1** Stock Purchase Agreement between Donald A. Wagley and Priscilla
J. Granese as Sellers and G&W Asset Management, Inc. as
Purchasers dated March 23, 1994
10.2** $80,000 Promissory Note dated March 23, 1994 executed by G&W
Asset Management, Inc. and payable to Donald A. Wagley
10.3** $20,000 Promissory Note dated March 23, 1994 executed by G&W
Asset Management, Inc. and payable to Priscilla J. Granese
10.4*** Loan and Security Agreement dated April 14, 1994 between R & R
Financial Corporation
10.5*** $1 Million Promissory Note dated April 14, 1994, executed by
R & R Financial Corporation and payable to the Corporation
10.6*** Loan and Security Agreement dated April 20, 1994, between South
General Premium Finance, Inc. and the Corporation
10.7*** $1 Million Promissory Note dated April 20, 1994, executed by
South General Premium Finance, Inc. and payable to the
Corporation
10.8*** Loan and Security Agreement, dated December 30, 1993, between
American Premium Plan Service Corporation and the Corporation
10.9*** $2,000,000 Promissory Note, dated December 30, 1993, executed by
American Premium Plan Service Corporation and payable to the
Corporation
10.10*** Loan and Security Agreement, dated February 8, 1994, executed by
Express Premium Finance Corporation and payable to the
Corporation
10.11*** $2,000,000 Promissory Note, dated February 8, 1994, executed by
Express Premium Finance Corporation and payable to the
Corporation
10.12*** Loan and Security Agreement dated March 15, 1994, between Dome
Premium Service Company, Inc. and the Corporation
-16-
<PAGE> 19
10.13*** $1 Million Promissory Note dated March 15, 1994, executed by Dome
Premium Service Company, Inc. and payable to the Corporation
10.14*** Loan and Security Agreement dated March 18, 1994, executed by
Capital Premium Finance Corporation and the Corporation
10.15*** $1 Million Promissory Note dated March 18, 1994, executed by
Capital Premium Finance Corporation and payable to the
Corporation
_____________________
* Incorporated by reference to the Company's Registration Statement on
Form SB-2 (File No. 33-53656-A)
** Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ending December 31, 1993.
*** Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ending September, 1994.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of the
Company's fiscal year.
[Remainder of page left blank intentionally]
-17-
<PAGE> 20
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Exchange
Act, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
G & W FINANCIAL CORPORATION
Date: October 21, 1996 By:/s/ Donald A. Wagley
---------------------------
Donald A. Wagley, President
In accordance with the requirements of the Exchange Act, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities indicated on April 13, 1995.
SIGNATURE TITLE
/s/ Donald A. Wagley
- ---------------------------------
Donald A. Wagley President and a Director (principal
executive officer)
/s/ Priscilla J. Granese
- ---------------------------------
Priscilla J. Granese Vice President, Secretary, Treasurer
and Director (principal financial
officer)
/s/ E. Hugh Edenfield
- ---------------------------------
E. Hugh Edenfield Director
/s/ Ralph Terry
- ---------------------------------
Ralph Terry Director
-18-
<PAGE> 21
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH
REPORTS FILED PURSUANT TO SECTION 15(d) OF THE
EXCHANGE ACT BY NON-REPORTING ISSUERS
No annual report or proxy material has been sent to the Company's
security-holders during the Company's last fiscal year. An annual report may
be furnished to the Company's long term promissory noteholders subsequent to
the filing of this annual report on Form 10-KSB (with such report to be
furnished concurrently to the Securities and Exchange Commission).
-19-
<PAGE> 22
G&W FINANCIAL CORPORATION
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<PAGE> 23
G&W FINANCIAL CORPORATION
CONTENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 2
FINANCIAL STATEMENTS
Balance sheet 3-4
Statements of operations 5
Statements of stockholder's deficit 6
Statements of cash flows 7
Notes to financial statements 8-15
<PAGE> 24
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
G&W Financial Corporation
We have audited the accompanying balance sheet of G&W Financial Corporation as
of December 31, 1995 and the related statements of operations, stockholder's
deficit and cash flows for each of the two years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of G&W Financial Corporation at
December 31, 1995, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's recurring losses from operations and net
capital deficiency, as well as, the recurring losses and net capital deficiency
of the Company's parent, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
BDO Seidman, LLP
June 20, 1996
2
<PAGE> 25
G&W FINANCIAL CORPORATION
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS (Note 2)
<S> <C>
RECEIVABLES
Notes receivable (Notes 2, 3, 6, 7 and 8):
Non affiliated $ 6,849,795
Affiliated 6,216,703
- -----------------------------------------------------------------------------
13,066,498
Less: allowance for possible loan losses (2,800,000)
- -----------------------------------------------------------------------------
10,266,498
- -----------------------------------------------------------------------------
Interest receivable (Notes 2, 3, 6, 7 and 8):
Non affiliated 425,527
Affiliated 586,831
- -----------------------------------------------------------------------------
1,012,358
- -----------------------------------------------------------------------------
Total receivables 11,278,856
- -----------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS 8,663
DEBT ISSUANCE COSTS, net of accumulated
amortization of $645,475 (Note 4) 1,117,085
- -----------------------------------------------------------------------------
$12,404,604
=============================================================================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 26
G&W FINANCIAL CORPORATION
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S DEFICIT
<S> <C>
LIABILITIES
Notes payable (Note 6) $15,217,074
Due to Parent (Note 4) 613,417
Accrued interest payable 224,032
Other accrued expenses 8,804
- -----------------------------------------------------------------------------
Total liabilities 16,063,327
- -----------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 8)
STOCKHOLDER'S DEFICIT
Common stock, par value $.01 per share, authorized 10,000,000
shares, outstanding 10,000 shares 100
Additional paid-in capital 19,900
Accumulated deficit (3,678,723)
- -----------------------------------------------------------------------------
Total stockholder's deficit (3,658,723)
- -----------------------------------------------------------------------------
$12,404,604
=============================================================================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 27
G&W FINANCIAL CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994
==================================================================================================
<S> <C> <C>
REVENUES
Interest income $ 583,320 $ 570,411
Interest income from affiliates 624,588 91,240
Servicing fees 325,794 277,616
Servicing fees from affiliates 249,192 45,550
- --------------------------------------------------------------------------------------------------
Total revenues 1,782,894 984,817
- --------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Interest 1,448,027 637,278
Provision for possible loan losses 2,831,610 115,772
Amortization of debt issuance costs (Note 4) 441,925 156,660
Servicing fees to parent (Note 4) 279,305 165,760
Professional fees 59,574 48,817
Trustee fees 11,528 12,486
General and administrative (Note 4) 4,719 67,526
- --------------------------------------------------------------------------------------------------
Total operating expenses 5,076,688 1,204,299
- --------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAX (EXPENSE) (3,293,794) (219,482)
Income tax (expense) (Note 5) - (62,900)
- --------------------------------------------------------------------------------------------------
NET LOSS $(3,293,794) $ (282,382)
===================================================================================================
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 28
G&W FINANCIAL CORPORATION
STATEMENTS OF STOCKHOLDER'S DEFICIT
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Additional
Common paid-in Accumulated
stock capital Deficit Total
================================================================================
<S> <C> <C> <C> <C>
BALANCE,
December 31, 1993 $100 $19,900 $ (102,547) $ (82,547)
Net loss for the year - - (282,382) (282,382)
- --------------------------------------------------------------------------------
BALANCE,
December 31, 1994 100 19,900 (384,929) (364,929)
Net loss for the year - - (3,293,794) (3,293,794)
- --------------------------------------------------------------------------------
BALANCE,
December 31, 1995 $100 $19,900 $(3,678,723) $(3,658,723)
================================================================================
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 29
G&W FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994
==============================================================================
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3,293,794) $ (282,382)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of debt issuance costs 441,925 156,660
Provision for possible loan losses 2,831,610 115,772
Interest on capital appreciation notes 477,148 69,372
Deferred income taxes - 62,900
Changes in assets and liabilities:
Increase in interest receivable (536,940) (412,065)
(Increase) decrease in accounts receivable 9,000 (9,000)
Increase in accrued interest payable 43,991 109,226
Decrease in accrued commissions - (4,878)
Increase (decrease) in other accrued expenses (13,079) 4,395
- ------------------------------------------------------------------------------
Cash used in operating activities (40,139) (190,000)
- ------------------------------------------------------------------------------
INVESTING ACTIVITIES
Notes receivable originations (21,445,129) (6,674,054)
Repayment of notes receivable 16,060,291 925,000
Advances from Parent 365,394 168,899
- ------------------------------------------------------------------------------
Cash used in investing activities (5,019,444) (5,580,155)
- ------------------------------------------------------------------------------
FINANCING ACTIVITY
Proceeds of long-term debt, net of placement costs 4,149,469 4,611,301
- ------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENT (910,114) (1,158,854)
CASH AND CASH EQUIVALENTS, at beginning of year 918,777 2,077,631
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, at end of year $ 8,663 $ 918,777
==============================================================================
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 30
G&W FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT NATURE OF BUSINESS
ACCOUNTING POLICIES
G&W Financial Corporation ("the Company") was
incorporated on September 14, 1992 under the laws of
the State of Georgia. The Company was organized for
the purposes of engaging in the development and
management of investment funds to be loaned to premium
finance companies, including affiliated premium
finance companies, and it may engage in any other
activities not specifically prohibited to corporations
for profit under the laws of the State of Georgia.
The Company's activities are carried out principally
in the states of Florida, Texas and Georgia. The
Company limits its lines of credit to those states
that have state recovery funds to protect against
insolvent insurance companies.
On March 23, 1994, the individual shareholders of the
Company sold 100% of their common stock outstanding to
G & W Asset Management, Inc. (GWAM), an affiliated
company of the shareholders, in exchange for $100,000
in notes payable. As a result of the transaction, the
Company became a wholly-owned subsidiary of GWAM.
USE OF ESTIMATES
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. Certain estimates used by management with
respect to loan loss reserves are particularly
susceptible to significant changes in the economic
environment. These estimates, as well as the related
amounts reported in the financial statements, are
sensitive to near term changes in the factors used to
determine them. A significant change in any one of
those factors could result in the determination of
amounts different from those reported in the financial
statements. Management believes that as of December
31, 1995, the estimates used in the financial
statements are adequate based on the information
currently available.
8
<PAGE> 31
G&W FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
CASH EQUIVALENTS
Cash equivalents are stated at cost, which
approximates market value, and include money market
accounts with original maturities of three months or
less.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Company periodically evaluates the requirement for
providing for possible losses on its notes receivable
from insurance premium finance companies. Criteria
used by management, among others, to evaluate the
adequacy of its allowance for possible loss include
the financial condition of the insurance premium
finance companies, the credit worthiness of its
principals, the concentration and ratings of insurance
companies underwriting insurance coverage, and the
adequacy of the collateral pledged by the borrowers.
At December 31, 1995, the Company has provided
$2,800,000 in allowances for possible loan losses in
the accompanying financial statements.
On January 1, 1995, the Company adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan,"
and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and
Disclosures," an amendment to SFAS No. 114. These
standards require that impaired loans be valued based
on the present value of these loans' estimated cash
flows at each loan's effective interest rate, the fair
value of the collateral or based on the loans
observable market price. Adoption of the above
standards did not have a significant impact on the
financial condition or results of operations.
INCOME RECOGNITION
Interest income from notes receivable is recognized
based on the contractual terms of the respective loan
facility. Accrual of interest income on notes
receivable is suspended when a note is contractually
delinquent ninety days or more. The accrual is
resumed when the note becomes contractually current,
and past-due interest income is recognized at that
time.
Servicing fees are recognized as services are
rendered.
9
<PAGE> 32
G&W FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DEBT ISSUANCE COSTS
Costs incurred in obtaining financing through the
placement of long-term debt are capitalized and
amortized using a method which approximates the
interest (level-yield) method over the term of the
notes.
INCOME TAXES
The Company accounts for income taxes in accordance
with the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's principal financial instruments, as
contemplated under SFAS No. 107, are represented by
its receivables and its notes payable. The Company's
receivables are short-term in nature and bear interest
at rates which the Company believes represent current
market rates, that is, rates at which the Company
currently renews or extends funds, accordingly,
carrying value is deemed to approximate fair value.
The Company's notes payable bear interest at rates
which change semi-annually with market interest rates,
accordingly, carrying value is deemed to approximate
fair value.
NEW ACCOUNTING PRONOUNCEMENTS
During 1995, SFAS No. 123, "Accounting for Stock Based
Compensation" was issued. The new standard allows
companies to continue to record compensation cost
under Accounting Principles Board Opinion ("APB") No.
25 or to record compensation cost based on the fair
value of stock based awards. Management has decided
to continue using its current accounting policy under
APB No. 25; and as a result, adoption of SFAS No. 123
will not affect the financial condition or results of
operations of the Company. SFAS No. 123 does,
however, require certain pro forma disclosures
reflecting what compensation cost would have been if
the fair value based method of recording compensation
expense for stock based compensation had been adopted.
The disclosure requirements of SFAS No. 123 will be
adopted by the Company in 1996.
10
<PAGE> 33
G&W FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
2. FUTURE PROSPECTS The financial statements have been prepared on a
going-concern basis which contemplates the realization
of assets and the settlement of liabilities and
commitments in the normal course of business. The
Company has suffered recurring losses from operations
and has a net capital deficiency of $3.66 million at
December 31, 1995. The Company's parent, GWAM,
likewise has suffered from recurring losses from
operations and has a consolidated net capital
deficiency of $6.4 million at December 31, 1995. These
matters raise substantial doubt about the ability of
the Company to continue as a going concern.
Management's plans in regard to these matters are
discussed below. The financial statements do not
include any adjustments that might result from the
outcome of this uncertainty.
During 1995, the Company determined that certain notes
receivable currently in default required significant
allowances for possible loan losses in the amount of
approximately $800,000. Further, two affiliated
premium finance companies with whom the Company has
outstanding notes receivable aggregating $6,803,534,
including accrued interest receivable of $586,831,
incurred significant operating losses during 1995 in
the course of their normal lending activities (refer
to the accompanying consolidated financial statements
of G&W Asset Management, Inc.). Accordingly, the
Company has recorded a $2,000,000 allowance for
possible loan losses at December 31, 1995 to reduce
the carrying value of the notes receivable from
affiliates to the book value of the net assets
available to the affiliates to pay down these notes
receivable (see Note 3. Notes and Interest Receivable
and Fourth Quarter Adjustments).
Management of the Company and its parent have taken
steps to deal with the foregoing matters, including
changes in certain underwriting procedures, changes in
certain personnel, and the aggressive pursuit of its
legal remedies with respect to the collection of
amounts owed under receivables in default.
The Company's parent is actively seeking additional
financing through any combination of debt and equity
and has retained investment advisors to assist in
securing additional financing. No assurances can be
given that such financing will be obtained or that, in
the event such financing is obtained, that the Company
and its parent will achieve profitability or positive
cash flow.
11
<PAGE> 34
G&W FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
3. NOTES AND INTEREST Notes receivable consist of eight revolving credit
RECEIVABLE AND facility loans due from insurance premium finance
FOURTH QUARTER companies at rates ranging from 12% to 18%. The
ADJUSTMENTS maximum advances under the terms of the revolving
credit facilities total $14,000,000. As of December
31, 1995, $13,066,498 had been advanced under the
credit facilities including $6,216,703 due from two
other subsidiaries of GWAM, Express Premium Finance
Company ("Express") and Agency Premium Funding, Inc.
("Agency"), which bear interest at 18% and 12%,
respectively. The notes receivable are due on demand
and are collateralized by certain invoices, insurance
premium finance contracts and accounts receivable of
the insurance premium finance companies. Additionally,
the notes are personally guaranteed by the owners of
the premium finance companies.
The note agreements generally provide for monthly
servicing fees, in addition to contractual interest,
of .50% (6 loans), .25% (1 loan), and .00% (1 loan) of
the aggregate outstanding balance. The insurance
premium finance companies are required to deposit into
a Company controlled bank account, all collections on
the financed insurance premiums, interest earned plus
any application fees, late fees, and other
administrative fees. At December 31, 1995, the
insurance premium finance companies owed the Company
$1,012,358 for accrued interest and servicing fees,
including $586,831 in fees from Express and Agency.
During the fourth quarter of 1995, the Company made
adjustments to its allowance for possible loan losses
which increased its 1995 net loss and stockholders
deficit by $2,800,000 (see Note 2. Future Prospects).
Of these adjustments, $1,600,000 relate to previously
issued quarterly data for the second and third
quarters which, on a restated basis, increased the
1995 second quarter net loss by $600,000 from $252,323
to $852,323, and increased the 1995 third quarter net
loss by $1,000,000 from $12,473 (income) to $987,527
loss. The Company intends to amend its prior filings
on Form 10-Q for the quarters ended June 30, 1995 and
September 30, 1995 to reflect the foregoing
adjustments.
4. RELATED PARTY The Company is a wholly-owned subsidiary of GWAM. The
TRANSACTIONS shareholders of GWAM received compensation of $0 and
$60,000 during the years ended December 31, 1995 and
1994 for services performed on behalf of the Company.
12
<PAGE> 35
G&W FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
The Company has a Servicing Agreement with GWAM to
provide loan administration and collecting services
for a fee equal to .25% per month of the aggregate
outstanding balance of all notes receivable under
$5,000,000 and .33% per month of the aggregate
outstanding balance of all notes receivable over
$5,000,000. The Company expensed $279,305 and
$165,760 in servicing fees to GWAM during the years
ended December 31, 1995 and 1994. The Company is
required to pay GWAM a fee of 4% of the gross proceeds
from the placement of long-term debt financing, as
reimbursement for certain marketing, registration,
legal, accounting and other expenses associated with
the offering and organization of the Company. This
fee is included as debt issuance costs in the
accompanying balance sheet. Aggregate debt issuance
costs amounted to $1,762,560 and $1,191,480 for the
years ended December 31, 1995 and 1994.
5. INCOME TAXES At December 31, 1995, the Company has net operating
losses to offset future taxable income of
approximately $750,000 which expire in 2009. The tax
effect of the net operating loss carryforwards that
give rise to a deferred tax asset is approximately
$250,000. However, the Company has provided a
valuation allowance equal to such deferred tax asset
at December 31, 1995.
6. NOTES PAYABLE Notes payable consist of:
<TABLE>
<S> <C>
Current Interest Notes to individual
investors, which mature December 31, 1998 $ 9,957,000
Capital Appreciation Notes to individual
investors, which mature December 31, 1998 5,260,074
-----------------------------------------------------------
$15,217,074
===========================================================
</TABLE>
The Current Interest Notes require quarterly interest
payments while the Capital Appreciation Notes require
interest to be reinvested and compounded quarterly
until maturity. Both notes bear interest at 3% above
the five-year U.S. Treasury Note, with a 9% minimum
and a 12.5% maximum rate. The interest rate at
December 31, 1995 was 9.0%.
13
<PAGE> 36
G&W FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
The Notes are general obligations of the Company and
are collateralized by the assets of the Company,
including a specific assignment of notes receivable.
The amount of compounded unpaid interest on the
Capital Appreciation Notes included in long-term debt
in the accompanying balance sheet at December 31, 1995
was $587,074.
7. BUSINESS AND CREDIT The Company provides revolving credit facilities to
CONCENTRATION AND premium finance companies which conduct business
ALLOWANCE FOR principally in the states of Florida, Georgia,
LOAN LOSSES Tennessee, Mississippi, Louisiana, Alabama and Texas.
At December 31, 1995, the four largest individual note
receivable balances accounted for 32%, 23%, 16% and
15%, respectively (86% in the aggregate) of aggregate
notes receivable. This concentration of credit risk
exposes the Company to a greater risk of loss than
would be the case with greater diversification.
The loan portfolio of the Company is collateralized by
insurance premium finance contracts originated by the
Company's borrowers. Many of the premium finance
contracts assigned to the Company finance substandard
auto insurance and other personal property lines of
insurance.
To mitigate the Company's exposure to credit risk, the
Company as a matter of policy, generally requires the
insurance premium finance companies to receive a 25%
down payment from insured individuals, restricts
concentrations of insurance companies' underwriting
policies to less than 20% of the insurance premium
finance company's business and enters into loan
agreements with insurance premium finance companies
operating in states covered by state-sponsored
recovery funds. Such recovery funds provide for the
recovery of unearned premium payments, subject to
nominal deductible amounts, from insolvent insurance
companies.
The following table summarizes the changes in the allowance for possible
loan losses for the years ended December 31:
<TABLE>
<CAPTION>
ALLOWANCE FOR POSSIBLE LOAN LOSSES: 1995 1994
----------- -------------
<S> <C> <C>
Balance, beginning of year $ 115,772 $ -
Provision for possible loan losses 2,831,610 115,772
Loans charged-off (147,382) -
Recoveries - -
---------- ------------
Balance, end of year $2,800,000 $ 115,772
========== ============
</TABLE>
The recorded investment in impaired loans at December 31, 1995 was $8.4
million, including $6.8 million from affiliates, for which a related allowance
for possible loan losses was provided on all such impaired loans in the
aggregate amount of $2.8 million (Note 2). The average investment in impaired
loans for the year ended December 31, 1995 amounted to $3.6 million and the
related interest and fee income recognized during the time within 1995 that
such loans were impaired amount to approximately $440,000, reflecting interest
and fee income on loans due from affiliates.
14
<PAGE> 37
G&W FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
8. LITIGATION The Company has two of its loans in litigation as of
December 31, 1995. Both of these loans are currently
in default and have been accelerated by the Company.
The current balances on these loans at December 31,
1995 are approximately $1,000,000. The Company has
established bad debt reserves of $500,000 for these
loans. The Company has a crime policy in place that
may be used up to $500,000 per incident if theft is an
issue in these lawsuits.
Management believes that the ultimate resolution of
these matters will not have a material adverse effect
upon the financial position of the Company.
9. SUPPLEMENTAL Cash payments for interest totalled $945,183 and
DISCLOSURE $329,006 for the years ended December 31, 1995 and
OF CASH FLOW 1994.
INFORMATION
15
<PAGE> 38
G&W ASSET MANAGEMENT, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
<PAGE> 39
G&W ASSET MANAGEMENT, INC.
CONTENTS
INDEPENDENT AUDITORS' REPORT 2
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheet 3-4
Statements of operations 5
Statements of stockholders' equity (deficit) 6
Statements of cash flows 7-8
Notes to financial statements 9-28
<PAGE> 40
INDEPENDENT AUDITORS' REPORT
Board of Directors
G&W Asset Management, Inc.
We have audited the accompanying consolidated balance sheet of G&W Asset
Management, Inc. and subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the two years in the period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of G&W Asset
Management, Inc. and subsidiaries at December 31, 1995, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's recurring losses from operations and net
capital deficiency, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
BDO Seidman, LLP
June 20, 1996
2
<PAGE> 41
G&W ASSET MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS
<S> <C>
RECEIVABLES
Notes receivable, net of allowance for loan
losses of $1,544,000 (Notes 4, 11, 15 and 19) $16,250,709
Accrued interest on notes receivable (Note 4) 1,020,817
Participation notes receivable, net of allowance
for loan losses of $590,000 (Notes 5, 11 and 15) 581,338
Other receivables 117,134
- -------------------------------------------------------------------------------
17,969,998
Premium finance contracts receivable, net of allowance
for loan losses of $1,475,000 and unearned interest
of $328,000 (Notes 6, 9, 11 and 19) 3,196,180
Advance drafts and receivables from agents, net of
allowance for losses of $426,000 764,044
- -------------------------------------------------------------------------------
21,930,222
CASH AND CASH EQUIVALENTS, including $75,025 restricted (Note 17) 422,809
PROPERTY AND EQUIPMENT, at cost, net of accumulated
amortization and depreciation of $238,165 (Note 7) 277,157
DEBT ISSUANCE COSTS, net of accumulated
amortization of $1,838,265 (Note 8) 1,919,718
INVESTMENT IN G&W FUNDING L.P. (Note 9) 1,039,137
INVESTMENTS IN AND ADVANCES TO AFFILIATED PARTNERSHIPS (Note 10) 220,817
GOODWILL, net of accumulated amortization of $34,544 (Note 3) 205,456
OTHER ASSETS 67,693
- -------------------------------------------------------------------------------
$26,083,009
===============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 42
G&W ASSET MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C>
LIABILITIES
Notes payable (Note 11) $28,929,734
Notes payable to affiliates (Note 12) 1,819,441
Obligations under capital leases (Note 13) 135,589
Accounts payable and accrued expenses 191,773
Drafts payable 107,929
Accrued interest payable 355,114
Accrued commissions payable 267,735
Due to affiliates 672,500
- -------------------------------------------------------------------------------
Total liabilities 32,479,815
COMMITMENTS AND CONTINGENCIES (Note 15)
STOCKHOLDERS' DEFICIT
12% cumulative convertible preferred stock, $10 par
value, (aggregate involuntary liquidation preference,
including dividends in arrears, of $2,772,200) authorized
5,000,000 shares, issued and outstanding 248,820
shares (Note 16) 2,188,030
Common stock, Class A, no par value, authorized
10,000,000 shares, issued and outstanding
3,012,825 shares (Notes 16 and 17) 53,285
Common stock, Class B, no par value, authorized
10,000,000 shares, issued and outstanding 51,300
shares (Notes 16 and 17)) 212,740
Additional paid-in capital 254,900
Notes receivable from stockholders (27,500)
Deficit (9,078,261)
- -------------------------------------------------------------------------------
Total stockholders' deficit (6,396,806)
- -------------------------------------------------------------------------------
$26,083,009
===============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 43
G&W ASSET MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994
================================================================================
<S> <C> <C>
REVENUES
Interest income on notes receivable $ 2,418,243 $ 1,640,904
Interest income on premium finance contracts 1,575,987 878,901
Servicing fees and other income (Note 9) 1,333,457 362,742
Management fees (Note 18) 108,000 90,000
- --------------------------------------------------------------------------------
Total revenues 5,435,687 2,972,547
- --------------------------------------------------------------------------------
OPERATING EXPENSES
Interest 3,044,080 1,648,795
Provision for possible loan losses 4,565,986 150,772
General and administrative (Note 18) 2,916,693 1,608,864
Amortization of debt issuance costs 882,197 524,011
Professional fees 306,426 395,731
Depreciation and amortization 128,915 97,216
Insurance 83,227 47,287
Trustee fees 11,528 12,486
Other - 2,701
- --------------------------------------------------------------------------------
Total operating expenses 11,939,052 4,487,863
- --------------------------------------------------------------------------------
LOSS BEFORE INCOME TAX EXPENSE (6,503,365) (1,515,316)
Income tax expense (Note 14) - (113,900)
- --------------------------------------------------------------------------------
NET LOSS (6,503,365) (1,629,216)
PROVISION FOR CUMULATIVE PREFERRED DIVIDENDS (248,820) (232,600)
- --------------------------------------------------------------------------------
NET LOSS APPLICABLE TO COMMON STOCK $(6,752,185) $(1,861,816)
================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 44
G&W ASSET MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
12% cumulative Notes
convertible Class A Class B Additional receivable
preferred common common paid-in from
stock stock stock capital stockholders Deficit Total
===================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
at December 31,1993 $1,053,694 $ 100 $ - $254,900 $(27,500) $ (632,481) $ 648,713
Issuance of 129,850
shares of
preferred stock,
net of $164,164
issue costs 1,134,336 - - - - - 1,134,336
Net loss for the year - - - - - (1,629,216) (1,629,216)
Dividends declared
on preferred stock - - - - - (64,379) (64,379)
- -------------------------------------------------------------------------------------------------------------------
BALANCE,
at December 31,1994 2,188,030 100 - 254,900 (27,500) (2,326,076) 89,454
Issuance of 12,825
shares of Class A
common stock, net
of $30,178 issue costs - 53,185 - - - - 53,185
Issuance of 51,300
shares of Class B
common stock,
net of $120,710
issue costs - - 212,740 - - - 212,740
Net loss for the year - - - - - (6,503,365) (6,503,365)
Dividends declared
on preferred stock - - - - - (248,820) (248,820)
- -------------------------------------------------------------------------------------------------------------------
BALANCE,
at December 31, 1995 $2,188,030 $53,285 $212,740 $254,900 $(27,500) $(9,078,261) $(6,396,806)
===================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 45
G&W ASSET MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994
===============================================================================
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (6,503,365) $ (1,629,216)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for possible loan loss 4,565,986 150,772
Amortization of debt issuance costs 882,197 524,011
Depreciation and amortization 128,915 97,216
Interest on capital appreciation notes 477,148 69,372
Deferred income taxes - 113,900
Changes in assets and liabilities:
Advance drafts and receivables (685,228) (621,950)
Interest receivable (601,395) (31,013)
Other assets 118,012 (189,635)
Accrued interest payable 51,269 126,255
Accounts payable and accrued expenses 151,767 190,244
- -------------------------------------------------------------------------------
Cash used in operating activities (1,414,694) (1,200,044)
- -------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (12,788) (221,940)
Advances to (repayments from) affiliates 593,283 (571,784)
Net investment in premium finance contracts (13,120,834) (7,902,780)
Proceeds on sales of contracts receivables 11,291,310 4,537,426
Notes receivable originations (37,699,488) (17,740,963)
Principal repayments on notes receivable 29,562,759 11,714,772
Net investment in participation notes receivable (270,164) 2,091,826
Investment in G&W Funding L.P. (428,453) (610,683)
Advances to affiliated partnerships (110,049) -
- -------------------------------------------------------------------------------
Cash used in investing activities (10,194,424) (8,704,126)
- -------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 46
G&W ASSET MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994
===============================================================================
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds of long-term debt, net of placement costs 12,614,930 7,546,137
Repayments of long-term debt (3,684,962) (1,129,496)
Proceeds from (repayments of)short-term borrowings (1,044,000) 1,044,000
Proceeds from notes payable to affiliates 52,000 1,237,441
Proceeds from advances from affiliates 672,500 -
Proceeds from issuance of common stock, net of cost
of issuance 265,925 1,134,336
Principal payments under capital lease obligations (40,099) (31,072)
Dividends paid (248,820) (64,378)
- -------------------------------------------------------------------------------
Cash provided by financing activities 8,587,474 9,736,968
- -------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,021,644) (167,202)
CASH AND CASH EQUIVALENTS, at beginning of year 3,444,453 3,611,655
- -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, at end of year $ 422,809 $ 3,444,453
===============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 47
G&W ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF NATURE OF BUSINESS
SIGNIFICANT
ACCOUNTING POLICIES G&W Asset Management, Inc. (the "Company") was
organized in 1991 and, together with its wholly-owned
subsidiaries, is engaged in providing lines of credit
to licensed insurance premium finance companies,
operating premium finance companies through two of its
subsidiaries, and providing servicing and management
services. The Company's activities are carried out
principally in the states of Florida, Texas and
Georgia. The Company limits its lines of credit to
those states that have state recovery funds to protect
against insolvent insurance companies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the
accounts of G&W Asset Management, Inc. and its four
wholly owned subsidiaries, G&W Financial Corporation
(GWFC); Agency Premium Funding, Inc.; Express Premium
Finance Company, Inc. and G&W Associates Funding
Corporation. All significant intercompany balances
and transactions have been eliminated in
consolidation.
Investments in affiliates, in which the Company acts
as the general partner, are accounted for using the
equity method.
Certain amounts in the 1994 financial statements have
been reclassified to conform with the 1995
presentation. Such reclassification had no effect on
net income.
USE OF ESTIMATES
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. Certain estimates used by management with
respect to loan loss reserves are particularly
susceptible to significant changes in the economic
environment. These estimates, as well as the related
amounts reported in the financial statements, are
9
<PAGE> 48
sensitive to near term changes in the factors used to
determine them. A significant change in any one of
those factors could result in the determination of
amounts different from those reported in the financial
statements. Management believes that as of December
31, 1995, the estimates used in the financial
statements are adequate based on the information
currently available.
INCOME RECOGNITION
Interest income from notes receivable is recognized
based on the contractual terms of the respective loan
facility. Accrual of interest income on notes
receivable is suspended when a note is contractually
delinquent ninety days or more. The accrual is
resumed when the note becomes contractually current,
and past-due interest income is recognized at that
time.
Interest income from premium finance contracts is
recognized using the interest method. Recognition of
interest income is suspended upon cancellation of the
contract by the insured. Finance charges are
subsequently recognized upon the recovery of premiums
advanced to insurance companies on behalf of the
insured.
Servicing fees are recognized as services are
rendered.
ALLOWANCE FOR POSSIBLE LOSSES
The Company periodically evaluates the requirement for
providing allowances for possible losses on its notes
and premium finance contracts receivable, including
refunds receivable from agents on cancelled contracts.
Criteria used by management, among others, to
evaluate the adequacy of its allowance for possible
loss on individual note receivable balances include
the financial condition of the insurance premium
finance companies, the creditworthiness of its
principals, the concentration and ratings of insurance
companies underwriting insurance coverage, and the
adequacy of the collateral pledged by the borrowers.
With respect to premium finance contracts receivable,
criteria used by management to estimate the amount of
the allowance includes such factors as economic
conditions and overall portfolio characteristics and
10
<PAGE> 49
delinquencies. At December 31, 1995, the Company has
provided in the aggregate, $4,035,000 in allowances
for possible loan losses in the accompanying
consolidated financial statements.
On January 1, 1995, the Company adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan,"
and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and
Disclosures," an amendment to SFAS No. 114. These
standards require that impaired loans be valued based
on the present value of these loans' estimated cash
flows at each loan's observable market price.
Adoption of the above standards did not have a
significant impact on the financial condition or
results of operations of the Company.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost.
Depreciation is computed over the estimated useful
lives of the assets on accelerated methods for both
financial reporting and income tax purposes.
DEBT ISSUANCE COSTS
Costs incurred in obtaining financing through private
and public placements of long-term debt are deferred
and amortized using a method which approximates the
interest (level-yield) method over the term of the
related notes.
INCOME TAXES
The Company accounts for income taxes in accordance
with the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109).
CASH EQUIVALENTS
Cash equivalents are stated at cost, which
approximates market value, and include money market
accounts with original maturities of three months or
less.
11
<PAGE> 50
G&W ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has a number of financial instruments,
principally represented by its receivables and notes
payable, none of which are held for trading purposes.
The Company estimates that the fair value of its
financial instruments at December 31, 1995, does not
differ materially from the aggregate carrying values
of its financial instruments recorded in the
accompanying balance sheets. The Company's
receivables are short-term in nature and bear interest
at rates which the Company believes represent current
market rates, that is, rates at which the Company
currently renews or extends funds, accordingly,
carrying value is deemed to approximate fair value.
The Company's notes payable bear interest at both
fixed and floating rates which in the aggregate result
in an effective interest rate which approximates
management's estimate of the Company's incremental
borrowing rate, accordingly, carrying value is deemed
to approximate fair value. The estimated fair value
amounts have been determined by the Company using
available market information and appropriate valuation
methodologies. Considerable judgment is necessarily
required in interpreting market data to develop the
estimates of fair value, and, accordingly, the
estimates are not necessarily indicative of the
amounts that the Company could realize in a current
market exchange.
NEW ACCOUNTING PRONOUNCEMENTS
During 1995, SFAS No. 123, "Accounting for Stock Based
Compensation" was issued. The new standard allows
companies to continue to record compensation cost
under Accounting Principles Board Opinion ("APB") No.
25 or to record compensation cost based on the fair
value of stock based awards. Management has decided
to continue using its current accounting policy under
APB No. 25; and as a result, adoption of SFAS No. 123
will not affect the financial condition or results of
operations of the Company. SFAS No. 123 does,
however, require certain pro forma disclosures
reflecting what compensation cost would have been if
the fair value based method of recording compensation
expense for stock based compensation had been adopted.
The disclosure requirements of SFAS No. 123 will be
adopted by the Company in 1996.
12
<PAGE> 51
G&W ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. FUTURE PROSPECTS The financial statements have been prepared on a
going-concern basis which contemplates the realization
of assets and the settlement of liabilities and
commitments in the normal course of business. The
Company has suffered recurring losses from operations
and has a consolidated net capital deficiency of $6.4
million at December 31, 1995. These matters raise
substantial doubt about the ability of the Company to
continue as a going concern. Management's plans in
regard to these matters are discussed below. The
financial statements do not include any adjustments
that might result from the outcome of this
uncertainty.
During 1995, the Company determined that its portfolio
of premium finance contracts was not performing as had
been previously estimated and, consequently, a
significant provision for loan losses and resulting
addition to the allowance for loan losses was required
as of and for the year ended December 31, 1995.
Further, the Company determined that certain notes
receivable and participation notes receivable
currently in default required a significant allowance
for possible loan losses (see Note 20. Fourth Quarter
Adjustments).
Management has taken steps to deal with these matters,
including changes to certain underwriting procedures,
changes in certain personnel, and the aggressive
pursuit of its legal remedies with respect to the
collection of amounts owed to the Company.
The Company currently is actively seeking additional
financing through any combination of debt and equity
and has retained investment advisors to assist in
identifying and securing additional financing. No
assurances can be given that such financing will be
obtained or that, in the event such financing is
obtained, that the Company will achieve profitability
or positive cash flow.
13
<PAGE> 52
G&W ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. MERGER OF THE On March 23, 1994, the Company acquired the voting
COMPANY AND common stock of an affiliated company, G&W Financial
ACQUISITIONS Corporation, (GWFC) in exchange for $100,000 in notes
payable to the Company's stockholders. The
acquisition was recorded as a merger of the two
companies accounted for in a manner similar to a
pooling of interests. Accordingly, the Company's
financial statements have been restated to include the
results of GWFC for all periods presented.
In 1994, the Company acquired all of the outstanding
common stock of two premium finance companies for a
note payable totalling $295,000. At December 31,
1995, the remaining face amount due under the note was
$225,000 which is included, net of $65,889 discount
for imputed interest, in notes payable. The
acquisitions were accounted for under the purchase
method. Accordingly, the purchase prices were
allocated to assets acquired based on their estimated
fair values. This treatment resulted in the
recognition of goodwill of approximately $240,000.
Such goodwill is being amortized on a straight-line
basis over 10 years. The results of operations of the
acquired companies have been included in the
consolidated results of operations since the dates of
their respective acquisition. The acquisitions did
not have a material pro forma impact on operations.
4. NOTES RECEIVABLE Notes receivable consist of 19 revolving credit
facility loans to insurance premium finance companies
at rates ranging from 12% to 18%. The maximum
advances under the credit facilities total
$27,000,000. As of December 31, 1995, $17,795,000 had
been advanced under the credit facilities. The notes
receivable are due on demand and are collateralized by
certain invoices, insurance premium finance contracts
and accounts receivable of the insurance premium
finance companies. Additionally, the notes are
personally guaranteed by the owners of the insurance
premium finance companies. The note agreements
provide for certain monthly servicing fees, in
addition to contractual interest, at .50% of the
aggregate outstanding balance. The insurance premium
finance companies are required to deposit into a
Company controlled bank account, all collections on
the financed insurance premiums, interest earned plus
any application fees, late fees, and other
administrative fees. At December 31, 1995, there was
$1,020,817 of accrued interest receivable on these
notes.
14
<PAGE> 53
G&W ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PARTICIPATION Participation notes receivable consist of the
NOTES RECEIVABLE Company's share of amounts due under certain
participating loan agreements. These agreements are
with two affiliated limited partnerships, American
Premium Finance Cash Flow Fund I, LP (APFI) and
American Premium Finance Cash Flow Fund II, LP
(APFII). A company owned by the Company's
stockholders is the general partner in APFI, and the
Company is the general partner in APFII. The Company
manages the operations of APFI and APFII. The Company
has undivided participation interests in loans made to
certain insurance premium finance companies by APFI
and APFII. The participation consists of interest at
14% on the notes plus a participation on the loan
servicing charges. The participation percentages are
determined by the amounts of funds advanced by the
Company as compared to the total funds advanced to the
insurance premium finance companies. These demand
notes are collateralized by certain premium finance
contracts and all accounts receivable of the insurance
premium finance companies. The insurance premium
finance companies are required to deposit into a
Company controlled bank account, all collections on
the financed insurance premiums plus any application
fees, late fees and other administrative fees. These
funds received are then divided between APFI, APFII
and the Company based on the participation
percentages. Additionally, the notes are personally
guaranteed by the owners of the insurance premium
finance companies.
6. PREMIUM FINANCE Two of the Company's subsidiaries originate premium
CONTRACTS finance contracts directly with individuals over terms
not exceeding 12 months at interest rates established
by state jurisdictions. In originating such
contracts, individuals execute promissory notes in
favor of the originators to obtain financing of the
insured's coverage which is, generally, car insurance.
Risk of loss is mitigated to some extent by a
significant advance payment by the insured, generally
25%, to the insurance company. Upon cancellation of a
policy, the Company is entitled to receive all
unearned premiums from the insurer. At December 31,
1995, the Company had contracts outstanding of
$3,196,180, net of reserves for loan losses
($1,475,000) and unearned interest ($328,000), of
which approximately $1.6 million was due from
insurance companies.
15
<PAGE> 54
G&W ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
7. PROPERTY AND
EQUIPMENT Property and equipment consists of the following:
<S> <C>
Leasehold improvements $ 18,958
Automobiles 32,899
Equipment under capital lease 214,127
Furniture and fixtures 249,338
--------------------------------------------------------------
515,322
Less: accumulated amortization and
depreciation (238,165)
--------------------------------------------------------------
$ 277,157
==============================================================
</TABLE>
8. DEBT ISSUANCE The Company raises capital through the consummation of
COSTS private and public placements of long-term debt
financing. In connection with these offerings, the
Company has incurred certain commissions and marketing
costs. Commissions are payable in annual installments
through 1996 totalling $267,735. These costs have
been deferred and are being amortized over the
respective terms of the notes. Total debt issuance
costs, net of accumulated amortization, amounted to
$1,919,718 at December 31, 1995.
9. INVESTMENT IN G&W In June 1994, G&W Funding Master Trust (Trust) was
FUNDING, L.P. established to purchase premium finance contracts
(Contracts) from G&W Funding L.P. (GWFLP). GWFLP was
established to acquire from its limited partners for
sale to the Trust certain eligible Contracts up to a
maximum of $25 million. G&W Associates Funding
Corporation (Funding Corp), a wholly owned subsidiary
of the Company, is the general partner of GWFLP.
The Trust is funded by the sale of Certificates
representing individual beneficial ownership interests
in the Trust. The Certificates bear interest at rates
of 8.13% and 9.53%, depending on date of issuance, and
such interest is payable on a monthly basis. The
Company and GWFLP are not Certificate holders and thus
have no beneficial ownership in the Trust. The sale of
the Contracts to the Trust are without recourse to
GWFLP and are initially funded at 84% of the
outstanding contract principal amount. The difference
between the principal amount of the Contracts and the
amount funded by the Trust is accounted for as
16
<PAGE> 55
an investment in GWFLP on behalf of the limited
partners originating the contracts. Two of the
Company's subsidiaries own 33.65% limited partnership
interests in GWFLP and have made investments in the
Partnership equal to $1,039,137. Such investments
are used by GWFLP to (i) pay closing costs, (ii) fund
a liquidity account maintained by the Trust, and
(iii) provide excess collateral to the Trust.
Subsequent sales of Contracts to the Trust are funded
at 100% of the unpaid principal balances of the
Contracts.
During 1995 and 1994, the Company's two premium
finance subsidiaries sold $11.3 million and $4.5
million of premium finance contracts receivable to
GWFLP which, in turn, were sold to the Trust. These
sales have been reflected as a reduction of premium
finance contracts receivables in the accompanying
consolidated balance sheet. The sale of receivables
to GWFLP are made with recourse limited to the extent
of the Company's investment in GWFLP. As of December
31, 1995, the Company's investment in GWFLP was
$1,039,137. The Company's allowance for potential
losses on premium finance contracts receivable
contemplates the expected collectibility of all
premium finance contracts receivables, including
receivables sold. At December 31, 1995,
approximately $2.25 million of receivables sold to
GWFLP remain outstanding.
The Company is entitled to receive a Placement Fee of
1.6% of the principal amount of Certificates
purchased by the Trust. The Placement Fee is payable
from the Trust over a 60-month period. In addition,
the Company has entered into a Servicing Agreement
with the Trust to provide contract administration and
collecting services for a monthly fee equal to .265%
times the average principal of Contracts outstanding
for the month. The Company recognized $479,136 and
$108,499 in Servicing Fees and Placement Fees from
the Trust during the years ended December 31, 1995
and 1994, respectively.
The Company is entitled to 2% of the aggregate
principal value of Contracts sold to the Trust for
reimbursement of costs associated with the formation
of the Trust and the placement of Contracts.
17
<PAGE> 56
G&W ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1995 and 1994, GWFLP
recorded net earnings of $186,738 and $102,183,
respectively (unaudited) on revenues of $1,251,638 and
$725,804, respectively (unaudited). The Company's
equity in the net earnings was $13,601 and $35,819
(unaudited) for the years ended December 31, 1995 and
1994, respectively. At December 31, 1995 and 1994,
GWFLP had total assets of $2,761,106 and $2,157,190,
respectively (unaudited), and partners' capital of
$2,798,129 and $1,613,894, respectively (unaudited).
GWFLP is obligated to maintain a Contracts collateral
ratio equal to 113% of the principal balance of Trust
Certificates issued and is maintained in this ratio.
GWFLP is entitled to receive the residual assets of
the Trust upon termination in June 1999, after the
payment of the remaining Certificate principal and
accrued interest.
10. INVESTMENTS IN AND The Company is a participant in a joint venture to
ADVANCES TO develop and sell certain low income housing
AFFILIATED properties. The joint venture agreement requires the
PARTNERSHIPS Company to advance the initial funds to locate
appropriate sites and obtain financing. Through
December 31, 1995, the Company has invested and
advanced, net of reimbursements, a total of $88,328 to
this joint venture for a 37% interest.
The following is a summary of the Company's various
partnership investments and selected unaudited
financial information.
The Company, as the general partner, has a 1%
ownership interest in American Premium Finance Cash
Flow Fund II, L.P. ("APFII"), a limited partnership
formed in April 1991 to loan money to insurance
premium finance companies in a fashion similar to the
Company's operations. The Company also manages the
operations of APFII. For the years ended December 31,
1995 and 1994, APFII recorded net loss of $(155,955)
and $(3,257), respectively, on revenues of $16,555 and
$377,847, respectively. The Company's equity in the
net loss is $(15,596) and $(33), respectively, for the
years ended December 31, 1995 and 1994. At December
31, 1995, APFII had working capital of $1,064,188,
total assets of $2,315,013, and partners' capital of
$1,150,414.
18
<PAGE> 57
The Company, as the general partner, has a 1%
ownership interest in G & W Premium Finance, L.P.
(GWLP), a limited partnership formed in May 1992 to
loan money to insurance premium finance companies in a
fashion similar to the Company's operations. The
Company manages the operations of GWLP. For the years
ended December 31, 1995 and 1994, GWLP recorded net
loss of $(1,500) and $(1,581) on revenues of $212,418
and $346,818, respectively. The Company's equity in
the net loss is $(15) and $(16) for the years ended
December 31, 1995 and 1994, respectively. At December
31, 1995, GWLP had working capital of $2,290,869,
total assets of $2,720,506, and partners' capital of
$2,658,908.
The Company, as the general partner, has a 1%
ownership interest in G&W Premium Finance II, L.P.
(GWIILP), a limited partnership formed in August 1994
to loan money to insurance premium finance companies
in a fashion similar to the Company's operations. The
Company manages the operations of GWIILP. For the
years ended December 31, 1995 and 1994, GWIILP
recorded net earnings (loss) of $(15,698) and $8,072
on revenues of $181,543 and $62,024, respectively.
The Company's equity in the net earnings is (1,570)
and $807 for the years ended December 31, 1995 and
1994, respectively. At December 31, 1995, GWIILP had
working capital of $1,315,985, total assets of
$1,513,748, and partner's capital of $1,501,174.
11. NOTES PAYABLE AND
RELATED SUBSEQUENT Notes payable consists of the following:
EVENT
<TABLE>
<S> <C>
Current interest notes of GWFC to individual
investors, which mature December 31, 1998,
described below: $9,957,000
Capital appreciation notes of GWFC to
individual investors, which mature December
31, 1998, described below: 5,260,074
Recourse notes payable to individuals with
interest payable monthly and principal due
after sale and acceptance of the note
agreement by the Company as follows:
13% recourse notes; 36 month term 690,000
12% recourse notes; 60 month term 2,634,184
</TABLE>
19
<PAGE> 58
G&W ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
12% recourse notes; 60 month term 2,755,350
11% recourse notes; 72 month term 440,000
11% recourse notes; 36 month term 2,354,210
10% recourse notes; 60 month term 1,666,200
10% recourse notes; 36 month term 1,236,000
10% recourse notes; 36 month term 581,000
10% recourse notes; 36 month term 379,000
9% recourse notes; 24 month term 472,000
9% recourse notes; 24 month term 25,000
8% recourse notes; 12 month term 17,000
7-1/2% recourse notes; 12 month term 193,000
Other notes payable at various interest rates 169,716
Notes payable to stockholders bearing interest at
6%; due March 31, 1999 100,000
--------------------------------------------------------------
$28,929,734
==============================================================
</TABLE>
The Current Interest Notes require quarterly interest
payments while the Capital Appreciation Notes require
interest to be reinvested and compounded quarterly
until maturity. The Current Interest Notes and
Capital Appreciation Notes bear interest at 3% above
the five-year U.S. Treasury Note, with a 9% minimum
and a 12.5% maximum rate. The interest rate at
December 31, 1995 was 9.0%.
The Current Interest and Capital Appreciation Notes
are general obligations of the Company and are
collateralized by the assets of GWFC, including a
specific assignment of notes receivable. The remaining
notes were issued in private placements by the Company
from 1991 to 1995 and are collateralized by premium
finance contracts, participation notes receivable and
notes receivable from finance companies. The
investors have an option to renew their respective
note agreements at the end of the initial term at the
then prevailing interest rate.
20
<PAGE> 59
The amount of compounded unpaid interest on the
Capital Appreciation Notes included in long-term debt
in the accompanying balance sheet at December 31, 1995
was $587,074. Future maturities of principal on the
notes are as follows:
<TABLE>
<CAPTION>
Year Amount
---------------------------------------------------
<S> <C>
1996 $ 2,433,951
1997 1,822,975
1998 17,067,074
1999 1,515,000
2000 5,650,734
Thereafter 440,000
---------------------------------------------------
$28,929,734
===================================================
</TABLE>
Subsequent to December 31, 1995, the Company received
proceeds of $1,423,000 pursuant to a private placement
memorandum to raise a maximum of $2,500,000 of
additional debt.
<TABLE>
12. NOTES PAYABLE TO Notes payable to affiliates consist of the following:
AFFILIATES <S> <C>
Participation note payable to GWLP $ 480,192
Participation note payable to GWIILP 1,059,130
Unsecured note payable to GWLP 72,000
Unsecured note payable to GWIILP 208,119
---------------------------------------------------
$1,819,441
===================================================
</TABLE>
Participation notes payable are due to GWLP and GWIILP
for proceeds used to originate notes receivable to
premium finance companies for which GWLP and GWIILP
have undivided participation interests. Interest is
payable to GWLP and GWIILP at 16% plus a participation
on the loan servicing charges which are passed through
to GWLP and GWIILP. The participation notes payable
are due on demand and are collateralized by notes
receivable from insurance premium finance companies.
At December 31, 1995 and 1994, there is $10,657 and
$42,784,
21
<PAGE> 60
G&W ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
respectively of accrued interest and servicing fees
payable relating to the participation notes payable.
The unsecured notes payable to GWLP and GWIILP bear
interest at 16% and are due on demand.
13. CAPITAL LEASE
OBLIGATION The present value of future minimum capital lease
payments as of December 31, 1995 is as follows:
<TABLE>
<CAPTION>
Year Amount
---------------------------------------------------------
<S> <C>
1996 $ 57,799
1997 57,799
1998 42,398
1999 7,843
2000 1,961
---------------------------------------------------------
Total minimum lease payments 167,800
Less amount representing interest 32,211
---------------------------------------------------------
Present value of minimum lease payments $135,589
=========================================================
</TABLE>
14. INCOME TAX EXPENSE At December 31, 1995, the Company had net operating
(BENEFIT) losses to offset future taxable income of
approximately $4,200,000 which expire in 2009 and
2010. The tax effect of the net operating loss
carryforwards that give rise to a deferred tax asset
is approximately $1,400,000. However, the Company has
provided a valuation allowance equal to such deferred
tax asset at December 31, 1995.
15. LITIGATION One of the Company's subsidiaries has two of its loans
in litigation as of December 31, 1995. Both of these
loans are currently in default and have been
accelerated by the Company. The current balances on
these loans at December 31, 1995 are approximately
$1,000,000. The Company has established bad debt
reserves of $500,000 for these loans. The Company has
a crime policy in place that may be used up to
$500,000 per incident if theft is an issue in these
lawsuits.
22
<PAGE> 61
G&W ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company and two of its limited partnerships (LP)
have initiated legal proceedings seeking recovery
against the holders of two outstanding loans due to
the LP which are currently in default and in which the
Company participates. The LP has obtained a default
judgment against a guarantor of one of the outstanding
loans, however, at this time both loans remain in
default and the Company and its LP are continuing to
pursue collection on the loans. At December 31, 1995,
the Company's participation share was $1,171,000. The
Company has established reserves of $590,000.
The Company was served with a lawsuit filed against it
during the third quarter of 1995. One of the premium
finance companies to which the company has a loan,
filed a lawsuit in order to be released from the
remainder of the loan to the Company. The Company
anticipates the lawsuit to be withdrawn or settled.
The balance outstanding on the loan is approximately
$200,000. The Company believes that it will
ultimately collect substantially all amounts owed
under this loan and, accordingly, no specific loss
reserve has been established.
Management believes that the ultimate resolution of
these matters will not have a material adverse effect
upon the financial position of the Company.
16. 12% CUMULATIVE Through December 31, 1995, the Company has issued
CONVERTIBLE 248,820 shares of 12% Cumulative Convertible Preferred
PREFERRED STOCK Stock, $10 par value to investors plus 248,820
redeemable warrants to purchase Class B common stock
for an aggregate of $2,488,200 in cash ($2,188,030 net
of aggregate issuance costs). The terms of the
Cumulative Convertible Preferred Stock provide for
annual cumulative dividends of $1.20 per share, $0.20
of which will not be distributed but will accrue to
the liquidation value and redemption price.
Distributable dividends are payable quarterly
commencing on the second dividend date (as defined)
after issuance. At December 31, 1995, preferred
cumulative stock dividends in arrears totalled
$284,000. At its option, the Company may redeem the
Cumulative Convertible Preferred Stock after December
31, 1995 at $10 per share plus accrued and unpaid
dividends. The Cumulative Convertible Preferred Stock
may be converted at any time into Class B common
stock, at the option
23
<PAGE> 62
G&W ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of the holders, at a 1.42 to 1 conversion rate. In
connection with the preferred stock offering, an
additional 248,820 redeemable warrants have been
issued to placement agents. The 497,640 aggregate
redeemable warrants to purchase Class B common stock
are exercisable upon issuance through December 31,
1998 at an exercise price of one dollar per share.
17. COMMON STOCK (a) Common Stock Transaction
The Company's Board of Directors voted to approve a
1:0 to 1:42 reverse stock split effective for all
Common A stock as of June 15, 1995. The stock split
was done in conjunction with a private placement
common stock offering for Common A and B stock. The
stock offering by the Company is for $6.50 a share for
both A and B stock. The purchaser must purchase stock
in units consisting of one share of A and four shares
of B stock. As of December 31, 1995, the Company had
sold $416,813 ($265,925 net of issuance costs) of A
and B stock. The table below illustrates the stock
shares at December 31, 1994, after the reverse stock
split on June 15, 1995 and as of December 31, 1995
after stock sales.
<TABLE>
<CAPTION>
December 31, 1995 June 15, 1995 December 31, 1994
----------------- ------------- -----------------
Shares Dollars Shares Dollars Shares Dollars
============================================================================
<S> <C> <C> <C> <C> <C> <C>
Class A 3,012,825 $ 53,285 3,000,000 $100 4,250,000 $100
Class B 51,300 212,740 - - - -
</TABLE>
Each unit of common stock purchased is accompanied by
a redeemable warrant to purchase two shares of class B
stock. The warrants can be exercised anytime before
December 31, 2000 at $8.25 per share. The warrants
are redeemable at the option of the Company at $.50
each anytime after December 31, 1995. At December 31,
1995, there were 12,825 warrants outstanding.
24
<PAGE> 63
G&W ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The common stock offering was set up with a repurchase
trust agreement for 18% of the amount raised. The
trust is controlled by the Company and will be a
restricted asset. Accordingly, $75,025 has been
reflected as restricted cash in the December 31, 1995
consolidated balance sheet.
(b) Stock Options
The Company has a Stock Option Plan which provides for
the issuance of stock options to certain eligible
employees. An aggregate of 1,000,000 shares of Class
B common stock is reserved for issuance upon the
exercise of options to be granted under the Plan.
There were no stock options granted through December
31, 1995.
18. OTHER RELATED The Company manages the operations of APFI, APFII,
PARTY TRANSACTIONS GWLP and GWIILP. The affiliates pay monthly
management fees to the Company for these services.
During the year ended December 31, 1995, the Company
received management fees from APFI, APFII, GWLP and
GWIILP of $0, $36,000, $36,000 and $36,000,
respectively. During the year ended December 31,
1994, the Company received management fees from APFI,
APFII, GWLP and GWIILP of $6,000, $36,000, $36,000 and
$12,000, respectively. The Company paid $0 and $42,911
to its majority stockholder in 1995 and 1994,
respectively, for marketing and other services
performed on behalf of the Company.
19. BUSINESS AND The Company's notes receivable are made to licensed
CREDIT premium finance companies for the purpose of financing
CONCENTRATIONS insurance premium finance contracts originated by the
AND ALLOWANCE Company's borrowers. Many of the premium finance
FOR POSSIBLE contracts, including those of the Company's premium
LOW LOSSES finance subsidiaries, finance substandard auto
insurance and other personal property lines of credit.
The Company's notes receivable are concentrated with
companies doing business principally in the states of
Texas and Florida. Further, the notes receivable are
concentrated among approximately twenty premium
finance companies, including five such companies which
comprise 19%, 18%, 16%, 13% and 11%, respectively (77%
in the aggregate) of the aggregate notes receivable
outstanding at December 31, 1995. This concentration
25
<PAGE> 64
G&W ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of credit risk exposes the Company to a greater risk
of loss than would be the case with greater
diversification.
To mitigate the Company's exposure to credit risk, the
Company as a matter of policy, generally requires the
insurance premium finance companies to receive a 25%
down payment from insured individuals, restricts
concentrations of insurance companies underwriting
policies to less than 20% of the insurance premium
finance company's business and enters into loan
agreements with insurance premium finance companies
operating in states covered by state-sponsored
recovery funds. Such recovery funds provide for the
recovery of unearned premium payments, subject to
nominal deductible amounts, from insolvent insurance
companies.
The following table summarizes the changes in the allowance for possible
loan losses for the years ended December 31:
<TABLE>
<CAPTION>
ALLOWANCE FOR POSSIBLE LOAN LOSSES: 1995 1994
---------- ---------
<S> <C> <C>
Balance, beginning of year $ 150,772 $ -
Provision for possible loan losses 4,565,986 150,772
Loans charged-off (681,758) -
Recoveries - -
---------- ---------
Balance, end of year $4,035,000 $ 150,772
========== =========
</TABLE>
The recorded investment in impaired loans at December 31, 1995 was $7.6 million
of which 7.4 million had an allowance for possible loan losses of 2.6 million
and the remaining $200,000 impaired loans did not have any allowance because it
is deemed adequately collateralized. The average investment in impaired loans
for the year ended December 31, 1995 amounted to $3.2 million.
26
<PAGE> 65
G&W ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. FOURTH QUARTER During the fourth quarter of 1995, the Company made
ADJUSTMENTS adjustments to its allowances for possible loan losses
which increased the consolidated net loss and
consolidated stockholders' deficit by $4,400,000. Of
these adjustments, $2,000,000 relate to previously
issued quarterly data which, on a restated basis,
increased the 1995 second quarter consolidated net
loss by $800,000 from $494,423 to $1,294,423, and,
increased the 1995 third quarter consolidated net loss
by $1,200,000 from $436,914 to $1,636,914.
21. SUPPLEMENTAL Cash payments for interest amounted to $2,521,016 and
DISCLOSURES $1,453,168 for the years ended December 31, 1995 and
1994.
In 1994, the Company acquired $55,000 in net assets
and recorded $240,000 as goodwill in its acquisition
of two premium finance companies for cash and notes
payable totalling $295,000.
In Note 3, in 1994, the Company acquired all the net
assets of an affiliated company in exchange for
$100,000 in promissory notes.
During 1995, the Company entered into a capital lease
in the amount of $35,422.
Depreciation expense amounted to $102,162 and $73,668
in 1995 and 1994.
Rent expense amounted to $60,000 and $24,450 in 1995
and 1994.
27
<PAGE> 66
G&W ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
22. SEGMENT INFORMATION 1995 1994
======================================================================
<S> <C> <C>
REVENUES
Providing lines of credit $ 2,460,000 $ 1,641,000
Operating premium finance companies 2,006,000 879,000
Servicing and management 969,000 452,000
----------------------------------------------------------------------
$ 5,435,000 $ 2,972,000
======================================================================
OPERATING INCOME (LOSS)
Providing lines of credit $(4,009,000) $(1,650,000)
Operating premium finance companies (2,732,000) 54,000
Servicing and management 238,000 81,000
----------------------------------------------------------------------
$(6,503,000) $(1,515,000)
======================================================================
IDENTIFIABLE ASSETS
Providing lines of credit $19,865,000 $16,273,000
Operating premium finance companies 5,336,000 4,910,000
Servicing and management 882,000 776,000
----------------------------------------------------------------------
$26,083,000 $21,959,000
======================================================================
CAPITAL EXPENDITURES
Providing lines of credit $ - $ 18,000
Operating premium finance companies - -
Servicing and management 13,000 204,000
----------------------------------------------------------------------
$ 13,000 $ 222,000
======================================================================
DEPRECIATION AND AMORTIZATION
Providing lines of credit $ 906,000 $ 534,000
Operating premium finance companies - -
Servicing and management 105,000 87,000
----------------------------------------------------------------------
$ 1,011,000 $ 621,000
======================================================================
</TABLE>
28
