<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
Commission File Number 33-53656A
G&W FINANCIAL CORPORATION
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
Georgia 58-2015438
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1800 Lake Park Drive, Suite 100, Smyrna, Georgia 30080
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(770) 432-2284
(Issuer's Telephone Number, Including Area Code)
1950 Lake Park Drive, Suite 110, Atlanta, GA 30080
(Former Name, Former Address and Former Fiscal year if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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____________ No____________
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 10,000 shares of common
stock
<PAGE> 2
G&W FINANCIAL CORPORATION
BALANCE SHEET
MARCH 31, 1996 AND DECEMBER 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,491 $ 8,663
Interest receivable 1,235,779 1,012,358
Notes receivable (NOTES 3 AND 4) 8,589,972 10,266,499
----------- -----------
Total Current Assets 9,827,242 11,287,520
----------- -----------
OTHER ASSETS
Debt issuance costs, net of accumulated amortization 1,026,533 1,117,085
----------- -----------
Total Other Assets 1,026,533 1,117,085
----------- -----------
TOTAL ASSETS $10,853,775 $12,404,605
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Due to affiliate $ (141,200) $ 613,417
Accrued interest payable 224,550 224,033
Other accrued expenses 0 8,804
----------- -----------
Total Current Liabilities 83,350 846,254
----------- -----------
LONG-TERM DEBT (NOTES 3 AND 4) 15,321,699 15,217,074
----------- -----------
TOTAL LIABILITIES 15,405,049 16,063,328
----------- -----------
STOCKHOLDERS' DEFICIT
Common stock, par value $.01 per share
Authorized 10,000,000 shares
Outstanding 10,000 shares 100 100
Additional paid-in capital 19,900 19,900
Deficit (4,571,274) (3,678,723)
----------- -----------
Total Stockholders' Deficit (4,551,274) (3,658,723)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $10,853,775 $12,404,605
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 3
G&W FINANCIAL CORPORATION
STATEMENTS OF OPERATIONS
FOR THE QUARTER AND THREE MONTHS ENDED MARCH 31,1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
--------- 1996 --------- -------- 1995 --------
YEAR TO YEAR TO
QUARTER DATE QUARTER DATE
--------- --------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Interest 502,975 $ 502,975 379,087 $379,087
Other income 0 0 1,220 1,220
--------- --------- -------- --------
Total Revenues 502,975 502,975 380,307 380,307
--------- --------- -------- --------
OPERATING EXPENSES
Interest 329,175 329,175 333,034 333,034
Bad debt 937,670 937,670 0 0
Amortization of debt issuance costs 90,552 90,552 54,885 54,885
General & administrative expenses 15 15 10 10
Professional fees 35,600 35,600 0 0
Servicing fees 0 0 60,873 60,873
Trustee fees 2,513 2,513 0 0
Other 1 1 168 168
--------- --------- -------- --------
Total Operating Expenses 1,395,526 1,395,526 448,970 448,970
--------- --------- -------- --------
LOSS BEFORE INCOME TAXES (892,551) (892,551) (68,663) (68,663)
INCOME TAXES 0 0 0 0
--------- --------- -------- --------
NET LOSS $(892,551) $(892,551) $(68,663) $(68,663)
========= ========= ======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 4
G&W FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(892,551) $ (68,663)
Adjustments to reconcile net loss to net cash
provided by operating activities
Amortization of debt issuance costs 90,552 54,885
Interest on capital appreciation notes 79,057 79,057
Bad debt reserves 937,670 0
Changes in assets and liabilities:
Increase in interest receivable (223,421) (33,296)
Increase in due to affiliate (754,617) (163,860)
Increase in accrued interest payable 517 73,935
Increase (decrease) in accrued commissions 0 19,840
Decrease in other accrued expenses (8,804) (19,389)
--------- ----------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES (771,597) (57,491)
--------- ----------
INVESTING ACTIVITY
Notes receivable (originations) repayments 738,857 (3,501,364)
--------- ----------
FINANCING ACTIVITIES
Proceeds of long-term debt, net of placement costs 25,568 3,593,006
Sales of capital stock 0 0
--------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 25,568 3,593,006
--------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS (7,172) 34,151
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 8,663 918,777
--------- ----------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 1,491 $ 952,928
========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
G&W FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
NOTE 1 - NATURE OF BUSINESS
G&W Financial Corporation (The Company) is a wholly-owned subsidiary
of G&W Asset Management, Inc. (GWAM). The Company was incorporated on
September 14, 1992 under the laws of the State of Georgia and
commenced its planned operations on June 2, 1993.
On March 23, 1994, GWAM acquired the voting common stock of the
Company in exchange for $100,000 in notes payable to the Company's
stockholders.
The Company was organized for the purposes of engaging in the
development and management of investment funds to be loaned to premium
finance companies and may engage in any other activities not
specifically prohibited to corporations under the laws of the State of
Georgia.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements are
presented on the going-concern basis of accounting 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 deficit of
$4.55 million at March 31, 1996. The financial statements included
herein have been prepared by the Company, without audit, pursuant to
rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules or regulations, although the Company believes that the
disclosures are adequate to make the information presented not
misleading. These financial statements and the notes thereto should be
read in conjunction with the audited financial statements.
In the opinion of the management of the Company, the accompanying
unaudited financial statements contain all necessary adjustments to
present fairly the financial position, the results of operations and
cash flows for the period reported. All adjustments are of a normal
recurring nature.
The results of operations for the above period is not necessarily
indicative of the results expected for the year.
<PAGE> 6
G&W FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
NOTE 3 - NOTES AND INTEREST RECEIVABLE
Notes receivable consist of six 12% revolving credit facility loans
and two 14% revolving credit facility loans due from insurance premium
finance companies. The maximum advances under the terms of the
revolving credit facilities total $15,000,000. As of March 31, 1996,
$8,589,972, net of $3,737,670 in bad debt reserves, has been advanced
on these notes. 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 monthly servicing fees, in addition to contractual
interest, of .50% (one half of one percent) (5 loans) and .33% (one
third of one percent) (2 loans) 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 premium, interest earned plus any application fees, late
fees, and other administrative fees. At March 31, 1996, the insurance
premium finance companies owed the Company $1,235,779 for accrued
interest and servicing fees. The Company has established bad debt
reserves of $3,737,670 for various loans and general operating
reserves. Of the reserves mentioned above, a $2 million reserve was
booked at December 31, 1995 on loans to affiliated companies for the
excess of the loan above the affiliates net equity. This reserve is
for fair presentation of the Company as a stand alone corporation and
is removed during consolidation with the parent company.
NOTE 4 - LONG-TERM DEBT
At March 31, 1996, long-term debt consisted of:
<TABLE>
<S> <C>
Current Interest Notes to individual investors,
which mature December 31, 1998 $ 9,980,000
Capital Appreciation Notes to individual investors,
which mature December 31, 1998 5,341,699
-----------
$15,321,699
===========
</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 rates are set every six months. The
interest rate changed to 9.0% on July 1, 1995 and remained at 9% on
the subsequent rate setting date of January 1, 1996.
<PAGE> 7
G&W FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
NOTE 4 - LONG-TERM DEBT - continued
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
March 31, 1996 was $691,699.
NOTE 5 - LITIGATION
The Company has two of its loans in litigation as of March 31, 1996.
Both of these loans are currently in default and have been called by
the Company. There is no way to estimate the amount of potential loss
on these loans, but the company has established loss reserves of
$525,000 for these loans. The current balances on these loans at March
31, 1996 are $1,007,346. There are limited collections still being
received on these loans although litigation is in process. The Company
does have a crime policy in place that may be used up to $500,000 per
incident if theft is a issue in these lawsuits.
NOTE 6 - LOAN LOSSES AND PROVISION FOR LOSSES
During 1996, the Company has taken an even more aggressive approach to
loan evaluations and loss provisions based on two years of experience
in loaning funds, knowledge gained from defaulted loans, lawsuits and
the assistance of outside consultants. The competition in the premium
finance industry over the last twelve months has driven the
downpayment received by the premium finance companies significantly
lower which in turn increases the potential for higher losses and more
risk for the loans the Company has made with premium finance
companies. Accordingly, the management is increasing reserves on the
higher risk. The Company has established approximately $3,730,000 in
reserves on both current and defaulted loans.
<PAGE> 8
G&W ASSET MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1996 AND DECEMBER 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 148,767 $ 422,480
Restricted Cash 75,044 0
Accounts receivable 883,033 764,318
Due from affiliates 242,980 170,484
Premium finance notes receivable (NOTE 5) 3,559,553 3,196,293
Participation and other notes receivable (NOTE 6) 690,538 581,338
Interest receivable 915,310 1,020,817
Notes receivable (NOTES 4 & 8) 13,455,951 16,250,709
Deferred offering costs 34,762 31,446
----------- -----------
Total Current Assets 20,005,938 22,437,885
----------- -----------
PROPERTY AND EQUIPMENT
Equipment under capital lease 214,128 214,128
Furniture and fixtures 301,194 301,194
Less accumulated depreciation and amortization (257,590) (238,165)
----------- -----------
Total property and equipment 257,732 277,157
----------- -----------
OTHER ASSETS
Debt issuance costs, net of accumulated amortization 1,859,563 1,919,668
Investments in and advances to partnerships 977,487 1,385,571
Other assets 38,979 62,728
----------- -----------
Total other assets 2,876,029 3,367,967
----------- -----------
TOTAL ASSETS $23,139,699 $26,083,009
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 222,204 $ 299,591
Participation note payable to affiliate 1,752,441 1,819,441
Due to affiliates 1,776,233 672,500
Accrued interest 495,015 355,114
Commissions payable 0 11,200
Unearned interest 313,897 113
Current installment of obligation under capital lease 30,966 30,966
Current maturities of long-term debt (NOTE 7) 2,315,210 2,564,210
----------- -----------
Total Current Liabilities 6,905,966 5,753,135
----------- -----------
ACCRUED COMMISSIONS 157,930 256,535
----------- -----------
NOTES PAYABLE TO STOCKHOLDERS (NOTE 3) 72,500 72,500
----------- -----------
OBLIGATIONS UNDER CAPITAL LEASE 95,020 104,624
----------- -----------
LONG-TERM DEBT (NOTE 7) 27,067,369 26,265,524
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT) (NOTE 3)
12% cumulative convertible preferred stock,
$10 par value, (aggregate liquidation preference, including
dividends in arrears, $2,744,000) authorized 5,000,000 shares,
issued and outstanding 248,820 shares 2,188,030 2,188,030
Common stock, Class A, no par value, authorized
5,000,000 shares, outstanding 3,014,213 shares (NOTE 9) 62,302 53,284
Common stock, Class B, no par value, authorized
5,000,000 shares, outstanding 56,849 shares (NOTE 9) 248,810 212,738
Additional paid-in capital 254,900 254,900
Deficit (13,913,128) (9,078,261)
----------- -----------
Total Stockholders' Equity (Deficit) (11,159,086) (6,369,309)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $23,139,699 $26,083,009
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 9
G&W ASSET MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTER AND THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
---------- 1996 ---------- --------- 1995 ---------
YEAR TO YEAR TO
QUARTER DATE QUARTER DATE
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Interest $1,079,591 $1,079,591 $ 837,732 $ 837,732
Fees 475,370 475,370 252,368 252,368
---------- ---------- --------- ---------
Total Revenues 1,554,961 1,554,961 1,090,100 1,090,100
---------- ---------- --------- ---------
OPERATING EXPENSES
Interest 778,206 778,206 666,969 666,969
Amortization of private placement costs 159,042 159,042 139,142 139,142
Bad debt 4,725,168 4,725,168 36,890 36,890
Professional fees 67,295 67,295 0 0
Depreciation and amortization 19,425 19,425 22,071 22,071
Marketing 71,558 71,558 61,655 61,655
Salaries 226,776 226,776 276,981 276,981
General and administrative 161,317 161,317 156,660 156,660
Service bureau expenses 38,153 38,153 26,474 26,474
Other 80,388 80,388 39,151 39,151
---------- ---------- --------- ---------
Total Operating Expenses 6,327,328 6,327,328 1,425,993 1,425,993
---------- ---------- --------- ---------
LOSS BEFORE INCOME TAXES (4,772,367) (4,772,367) (335,893) (335,893)
INCOME TAXES 0 0 0 0
---------- ---------- --------- ---------
NET LOSS (4,772,367) (4,772,367) (335,893) (335,893)
========== ========== ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 10
G&W ASSET MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(4,772,367) $ (335,893)
Adjustments to reconcile net loss to net cash
used in operating activities
Amortization 159,042 139,142
Depreciation 19,425 22,071
Interest on capital appreciation notes 104,625 79,057
Bad debt reserves 3,992,570 0
Changes in assets and liabilities:
Increase in accounts receivable (118,715) (1,106,491)
Decrease in due from affiliates (72,496) 376,399
Decrease in interest receivable 105,507 60,896
Increase in other assets 23,749 (464,442)
Increase in accounts payable and accrued expenses (77,387) 138,194
Increase in unearned interest 313,784 711,514
Increase in due to affiliates 1,103,733 0
Increase in accrued interest 139,901 125,065
Increase (Decrease) in accrued commissions (109,805) (29,030)
----------- ----------
CASH USED IN OPERATING ACTIVITIES 811,566 (283,518)
----------- ----------
INVESTING ACTIVITIES
Deferred offering costs (3,316) (10,634)
Additions to property and equipment 0 (5,261)
Participation notes receivable (origination)/reduction (109,200) (250,000)
Premiun finance contracts origination (463,260) (2,333,379)
Notes receivable origination (1,097,812) (2,617,483)
(Investments) receipts in partnerships 408,084 (551,884)
----------- ----------
CASH USED IN INVESTING ACTIVITIES (1,265,504) (5,768,641)
----------- ----------
FINANCING ACTIVITIES
Proceeds of long-term debt, net of placement costs 263,075 4,538,946
Proceeds of issuance of stock, net of costs
of issuance and restricted proceeds 45,090 0
Dividend payments (62,500) 0
Principal payments on stockholder loans 0 (27,500)
Principal payments under capital lease obligations 9,604 (7,238)
----------- ----------
CASH PROVIDED BY FINANCING ACTIVITIES 255,269 4,504,208
----------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (198,669) (1,547,951)
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 422,480 3,444,453
----------- ----------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 223,811 $1,896,502
=========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 11
G & W ASSET MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
NOTE 1 - ORGANIZATION
G&W Asset Management, Inc. (the Company) was organized in 1991 to
provide lines of credit to operating licensed premium finance
companies in Florida and Georgia and intends to offer financing in
other states. The Company limits these lines of credit to those states
that have state recovery funds to protect against insolvent insurance
companies.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements are
presented on the going-concern basis of accounting 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 deficit of
$11.16 million at March 31, 1996. The consolidated financial
statements include the accounts of G&W Asset Management, Inc. and its
wholly-owned subsidiaries, including G&W Financial Corporation (GWFC),
a Securities and Exchange Commission (SEC) registrant. All significant
intercompany balances and transactions have been eliminated in
consolidation. GWFC makes an elimination entry of $2 million to remove
booked reserves, on a stand alone basis, on the loans to affiliates
for the loan amount in excess of the equity of the affiliate. The
consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to SEC rules and regulations.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules or regulations, although the Company believes that the
disclosures are adequate to make the information presented not
misleading. These financial statements and the notes thereto should be
read in conjunction with the Company's audited consolidated financial
statements.
In the opinion of the management of the Company, the accompanying
unaudited consolidated financial statements contain all necessary
adjustments to present fairly the financial position, the results of
operations and cash flows for the period reported. All adjustments are
of a normal recurring nature.
The results of operations for the above period is not necessarily
indicative of the results expected for the year.
<PAGE> 12
G & W ASSET MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
NOTE 3 - MERGER OF THE COMPANY
On March 23, 1994, the Company acquired the voting common stock of an
affiliated company, G&W Financial Corporation, (GWFC) in exchange for
$100,000 in notes payable to the Company's stockholders. The
acquisition was recorded as (i) a merger of the two companies
accounted for in a manner similar to pooling of interests and (ii)
distribution to the Company's stockholders. Accordingly, the Company's
financial statements have been restated to include the results of GWFC
for all periods presented.
NOTE 4 - NOTES RECEIVABLE - FINANCE COMPANIES
Notes receivable consist of thirteen 12%, one 14%, and one 15.96%
revolving credit facilities loans due from insurance premium finance
companies. The maximum advances under the terms of the revolving
credit facilities total $21,000,000. As of March 31, 1996, $13,455,951
gross, including $4,692,570 in bad debt reserves, has been advanced on
these notes to non-affiliated companies. 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 monthly servicing fees, in addition to
contractual interest, ranging from .00% (zero percent) to .50% (one
half of one percent) 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 premium, interest earned plus any application fees, late
fees, and other administrative fees. At March 31, 1996, the insurance
premium finance companies owed the Company $905,474 for accrued
interest and servicing fees.
NOTE 5 - PREMIUM FINANCE CONTRACTS
Two of the Company's subsidiaries originate premium finance contracts
directly with individuals over terms not exceeding 12 months at
interest rates established by state jurisdictions. The risk of loss
has been increased by the downward movement of upfront downpayments in
the premium finance market. At March 31, 1996, the Company had
contracts outstanding of $3,559,553, net of bad debt reserves of $1.5
million, of which $1,578,170 was due from insurance companies. The
increased reserves are due to the lower downpayments taken by the
competition.
<PAGE> 13
G & W ASSET MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
NOTE 6 - PARTICIPATION NOTES RECEIVABLE
Participation notes receivable consist of the Company's share of
amounts due under certain participating loan agreements. These
agreements are with two limited partnership affiliates. The Company
has control and manages both partnerships. The Company has undivided
participation interests in loans made by the partnerships. The
participation consists of interest at 14% and service fees determined
by funds advanced by the Company compared to the total amount
advanced. The notes receivable are collateralized by 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.
At March 31, 1996, there is $9,836 of accrued interest receivable on
participation notes receivable.
NOTE 7 - LONG-TERM DEBT
At March 31, 1996, long-term debt consisted of:
<TABLE>
<S> <C>
Current Interest 9% Notes to individual investors,
interest payable quarterly which mature
December 31, 1998 $ 9,980,000
Capital Appreciation 9% Notes to individual investors
interest payable at maturity which mature
December 31, 1998 5,341,699
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:
11% note, 36 mo. term (due 1996) 2,230,210
10% note, 36 mo. term (due 1997 - 1998) 551,000
12% note, 60 mo. term (due 1999 - 2000) 2,644,184
7.5% note, 12 mo. term, (due 1996) 68,000
</TABLE>
<PAGE> 14
G & W ASSET MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
NOTE 7 - LONG-TERM DEBT - continued
<TABLE>
<S> <C>
9% note, 24 mo. term, (due 1997) $ 487,000
10% note, 36 mo. term, (due 1998) 379,000
12% note, 60 mo. term, (due 2000) 2,690,350
8% note, 12 mo. term, (due 1996) 17,000
9% note, 24 mo. term, (due 1997) 25,000
10% note, 36 mo. term, (due 1998) 1,236,000
10% note, 60 mo. term, (due 2000 - 2001) 1,716,400
11% note, 72 mo. term, (due 2001 - 2002) 1,863,000
Other notes payable at various interest rates 153,736
-----------
29,382,579
Less current maturities (2,315,210)
-----------
$27,067,369
===========
</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 March 31, 1996 was 9.0%.
The other notes were issued in private placements through NASD
broker/dealers by the Company and are collateralized by a specific
assignment of notes receivable.
The notes are payable $2,315,210 in 1996, $803,000 in 1997,
$17,196,699 in 1998, $1,125,000 in 1999, $5,875,934 in 2000 and
$330,000 in 2001.
<PAGE> 15
G & W ASSET MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
NOTE 8 - LITIGATION
The Company was served with a new 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 in question is $188,800 plus interest. The Company has not
established a loss reserve for this loan as of March 31, 1996.
One of the Company's subsidiaries has two of its loans in litigation
as of March 31, 1996. Both of these loans are currently in default and
have been called by the Company. The current balances on these loans
at March 31, 1996 are $1,007,346. The Company has established bad debt
reserves of over $500,000 for these loans. There are insignificant
collections still being received on these loans although litigation is
in process. The Company does have a crime policy in place that may be
used up to $500,000 per incident if theft is an issue in these
lawsuits.
The Company and two of its limited partnerships (LP) have initiated
legal proceedings seeking recovery against the holder of an
outstanding loan due to the LP which is currently in default and in
which the Company participates. The LP has obtained a default
judgement against a guarantor of the debt, however, at this time the
loan remains in default and the Company and its LP are continuing to
pursue collection on the loan. At March 31, 1996, the aggregate
outstanding balance was $4,539,031 of which the Company's
participation share was $1,280,538. The Company has established
reserves of $590,000, although it is currently unable to determine the
amount of any potential loss which may arise as a result of this
matter.
NOTE 9 - COMMON STOCK
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 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 March 31, 1996, the Company had sold $461,900 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
March 31, 1996 after stock sales.
<PAGE> 16
G & W ASSET MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
NOTE 9 - COMMON STOCK (continued)
<TABLE>
<CAPTION>
3/31/96 6/15/95 12/31/94
Shares Dollars Shares Dollars Shares Dollars
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Class A 3,014,213 $ 92,480 3,000,000 $ 100 4,250,000 $ 100
Class B 56,849 369,520 - 0 - - 0 - - 0 - - 0 -
</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 March 31, 1996, there were 14,213
warrants outstanding from the regulation D common stock offering.
The common stock offering was setup 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, $75,044 has been
presented as restricted cash in the March 31, 1996 Balance Sheet.
NOTE 10 - 12% CUMULATIVE CONVERTIBLE PREFERRED STOCK
As of March 31, 1996, the Company's preferred stock has accumulated
dividends in arrears of approximately $172,000 and an additional
accumulated liquidation preference, payable upon liquidation or
redemption, of $84,000. Accordingly, the aggregate redemption price of
the preferred stock is approximately $2,744,000.
NOTE 11 - LOAN LOSSES AND PROVISION FOR LOSSES
During 1996, the Company has taken an even more aggressive approach to
loan evaluations and loss provisions based on three years of
experience in loaning funds, two years experience as a premium finance
company, knowledge gained from defaulted loans and assistance from
outside consultants. The competition in the premium finance industry
has driven the downpayment rates significantly lower over the past 12
to 18 months. The results of the increased competition has been a
higher risk of loss on contracts in order to stay competitive in the
market. Accordingly, the management has established increased reserves
for the results of the higher risk. The Company has established
approximately $4,700,000 in reserves on loans and approximately
$1,500,000 in reserves on premium finance contracts of affiliates.
<PAGE> 17
ITEM 2
ITEM 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF G&W FINANCIAL CORPORATION
GENERAL
Three Months Ended March 31,1996
The following discussion should be read in conjunction with the
accompanying unaudited condensed financial statements and notes attached
hereto. Such financial statements and information reflect historic operations
of G&W Financial Corporation (Company) prior to April 1, 1996. The discussions
below are limited to the activities of the Company and are not inclusive of the
activities of G&W Asset Management, Inc. ("GWAM"), the parent company, other
than some references to GWAM because of the inter-relations of the Company and
it's parent.
The Company and GWAM are both highly leveraged corporations. As of
March 31, 1996, 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 that
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 (Texas Commerce Bank), (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 GWAM, the Servicer
or pursuant to the Indenture, (vi) any legal or 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 0.25%
(one quarter of 1%) of the aggregate outstanding loan balances per month for
the first $5,000,000 in aggregate loans and 0.33% (one third of 1%) per month
on the aggregate loan balance over $5,000,000.
For the three month period ended March 31,1996, the Company expensed
no fees to GWAM pursuant to the terms of the Servicing Agreement. The earnings
of the Company have been insufficient to cover interest payments to current
interest noteholders and Allowed Expenses due to lawsuits and loan loss
provisions established based on history of findings in the lawsuits and
operations. GWAM has subordinated its rights to receive servicing fees and
agreed to pay, for the moment, all general and administrative costs, to the
extent current earnings remain insufficient to cover such costs. Any future
reimbursement will come only from future income above the amount needed to
repay the noteholders.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996
During the three month period ended March 31,1996, the Company
incurred a net loss of $892,551 on total revenues of $502,975 as compared to
the same period in 1995 net loss of $68,663 on total revenues of $380,307. The
increase in the March 31, 1996 net loss is primarily attributable to an
$937,670 increase in the provision for possible loan losses. During 1996, the
Company recorded additional allowances of $937,670 to increase the total to
$3,737,670 in provisions for possible loan losses on loans in excess of
$12,300,000 gross (including three loans in default). 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,
during 1995, the Company recorded an allowance for possible loan losses against
the receivables of the two affiliates in the amount of $2,000,000 in order to
adjust the carrying value to the book value of the net assets available to pay
down the receivables.
<PAGE> 18
The Company generated revenues of $502,975 for the quarter ended March
31, 1996 compared to $380,307 for the quarter ended March 31, 1995. The
increase of $121,668 or 32%, reflects the increase in the weighted average
notes receivable balance outstanding during the first quarter of 1996, which
was funded during the debt issuance.
Interest expense decreased to $329,175 for the quarter ended March 31,
1996 compared to $333,034 for the quarter ended March 31, 1995. The decrease is
due to a reduction in the interest rate paid from 9.8% in March 1995 to 9.0% in
March 1996.
The total provision for loan losses increased to $3,737,670 at March
31, 1996 compared to $115,772 as March 31, 1995. The majority of the increase
was in the fourth quarter of 1995 as discussed above. The increase during the
three month period ended March 31, 1996 was $937,670. The increase was
additional provisions against the defaulted loans and initial provisions
against current loans based on more stringent evaluation with assistance of
outside consultants.
Management has determined it is necessary to be more aggressive with
loan loss provisions based on two years of experience, the knowledge gained
from the due process of attempting to recover defaulted loans and assistance of
outside consultants. Accordingly, the Company increased its loss reserves by
$937,670 in the first quarter of 1996 for defaulted loans and current loans for
future possible loan losses.
Management's more aggressive approach includes an evaluation of all
loans to determine collectible amounts and to adjust provisions accordingly on
a monthly basis. Management is in the process of taking the necessary steps to
deal with the losses and provisions, including changes in personnel, changes in
certain underwriting policies, and the aggressive pursuit of legal remedies
with respect to collection of amounts owed under receivables in default.
Management is concentrating more on the creditworthiness of the companies, the
companies principals and the adequacy of the pledged collateral.
Amortization of debt issuance costs increased to $90,552 for the
quarter ended March 31, 1996 compared to $54,885 for the quarter ended March
31, 1995. The increase of $35,667 reflects increases in deferred debt issuance
costs until March 30, 1995, when the offering closed.
Servicing fees to the parent decreased to $0 for the quarter ended
March 31, 1996 compared to $60,873 for the quarter ended March 31, 1995. The
decrease is due to the parent company's subordination of its rights to fees
until such time as the Company is sufficiently profitable to cover all prior
losses and debt issuance costs.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Three Months Ended March 31,1996
During the three months ended March 31,1996, the Company incurred a
net loss of $892,551, had $771,597 in negative cash flow from operations and,
as of March 31,1996, had a net capital deficiency of $4,551,274. The Company's
parent incurred a consolidated net loss of $4,772,367, had $811,566 in negative
cash flow from its consolidated operating activities and, as of March 31,1996,
had a consolidated net capital deficiency of $11,159,086. 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.
Cash used in operating activities was $771,597 for the quarter ended
March 31, 1996 compared to $57,491 for the quarter ended March 31, 1995. The
net loss for the three months ended March 31, 1996 was incurred principally as
a result of the $937,670 non-cash provision for possible loan losses, $90,552
non-cash amortization and $79,057 non-cash deferred interest on capital
appreciation notes.
There was positive cash provided by investing activities of $738,857
for the quarter ended March 31, 1996. The positive cash was due to collections
on existing loans being closed out. As of March 31, 1995, the Company used
cash in investing activities of $3,501,364 to fund new and existing loans.
<PAGE> 19
The Company currently is actively seeking additional financing through
a 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.
The parent company is also considering a restructuring of its current debt.
During 1996, the Company has taken an even more aggressive approach to
loan evaluation and loss provisions with assistance from outside consultants.
The results of this approach not only has an effect on operating losses but
also on cash flow. The nature of this business is such that the timely return
of principal in order to generate new loans determines the profitability of the
Company. Accordingly, the defaults on the outstanding loans have impeded the
profitability and general liquidity of the Company.
The Company has a commitment to fund $14.0 million in loans to
insurance premium finance companies. At March 31,1996, the Company had advanced
$12,327,642 under the credit facilities, including $5,171,982 to affiliates. It
is anticipated that the Company can meet the demands of the insurance premium
finance companies to fund loans to them as they originate premium finance
contracts by taking proceeds from defaulted contracts and using those proceeds
to meet the current contract demands.
The loan portfolio of the company is collateralized by insurance
premium finance contracts which finance non-standard auto insurance and other
personal property lines of insurance. The Company, as a matter of policy,
generally requires a minimum downpayment of at least 15%, restricts
concentrations of insurance company underwriting policies to less than 20% for
any one company of the total portfolio and only finances in states that have a
state-sponsored recovery fund in order to reduce the risk of loss in the
transaction. The state recovery funds provide a means for collection of
unearned premiums from insurance companies that become insolvent.
CAPITAL RESOURCES
The Company's primary source of capital is from proceeds generated
from the placement of its Notes, through an active public registration placed
by NASD broker/dealers to individual investors. The maximum aggregate offering
price was $20,000,000 consisting of $10,000,000 under the Current Interest
Notes and $10,000,000 under the Capital Appreciation Notes. As of March 31,
1996, the Company has raised $9,980,000 and $4,650,000 of the Current Interest
and Capital Appreciation Notes, respectively. The offering was closed on March
30, 1995.
INFLATION
The effect of inflation and the increase in interest rates have not
adversely affected the Company in 1996. The per annum cost of the notes is 9.0%
as of March 1996 and the Company expects that rate to remain during 1996. The
rates adjust semi-annually on January 1 and July 1 of each year based on the
five-year U.S. treasury notes as quoted in the Wall Street Journal. The rate
has a floor and a ceiling of 9.0% and 12.5%, respectively.
OUTLOOK FOR REMAINDER OF 1996
The Company expects the remainder of the year to be very similar to
the first quarter of 1996. The competition in the premium finance industry has
driven the downpayment rates significantly lower over the last twelve to
eighteen months. The Company will continue to aggressively scrutinize loss
reserves and loans through the remainder of 1996 in an attempt to balance the
earnings potential with the market risk . The Company does expect the interest
rate to hold steady at 9.0%. The management of the Company and the parent
company continues to look at all viable options to restructure the loans and
obtain additional financing. Management is optimistic that they will be able to
restructure, although, there is no guarantee that management will be able to
achieve any of its financing options.
<PAGE> 20
PART II.
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the legal proceedings
previously disclosed in the Company's Annual Report on Form 10-KSB.
ITEM 2. CHANGES IN SECURITIES
There have been no material modifications in the instruments defining
the rights of Noteholders. None of the rights evidenced by the Notes have been
materially limited or qualified by the issuance or modification of any other
class of securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There have been no material defaults in the payment of principal,
interest, sinking fund installment or any other material default not cured
within 30 days, with respect to any indebtedness of the Company exceeding five
percent (5%) of the total assets of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
During the period covered by this report, no matters were submitted to
the vote of the Securityholders of the Company.
ITEM 5. OTHER INFORMATION
No information to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 1. Exhibits
Financial Statements and Schedules:
The financial statements listed in the Content to
Financial Statements are filed as part of this
quarterly report. No financial statement schedules
are required to be filed as part of this quarterly
report because all information otherwise included in
schedules has been incorporated into the Notes to
Financial statements (for SEC use only).
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
*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
*4.3 Form of Capital Appreciation Note due December 31, 1998
**10.1 Loan and Security Agreement dated May 28, 1993
between Senate Acceptance Corporation and the Company
</TABLE>
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
**10.2 $500,000 Promissory Note dated June 17,1993
executed by Senate Acceptance Corporation and
payable to the Company
**10.3 Loan and Security Agreement dated July 27, 1993
between All Florida Premium Finance, Inc. and the Company
**10.4 $1,000,000 Promissory Note dated July 27,1993
executed by All Florida Premium Finance, Inc. and
payable to the Company
**10.5 Loan and Security Agreement dated August 13, 1993
between Apple Premium Finance Service Company
and the Company
**10.6 $2,000,000 Promissory Note dated August 13,1993
executed by Apple Premium Finance Service Company
and payable to the Company
**10.7 Loan and Security Agreement dated September 28, 1993
between Louisiana Automotive Financial Service, Inc.
and the Company
**10.8 $3,000,000 Promissory Note dated September 28,1993
executed by Louisiana Automotive Financial Service, Inc.
and payable to the Company
**10.9 Stock Purchase Agreement between Donald A. Wagley
and Priscilla J. Granese as Sellers and G&W Asset
Management, Inc. as Purchasers date March 23, 1994
**10.10 $80,000 Promissory Note dated March 23, 1994
executed by G&W Asset Management, Inc. and
payable to Donald A. Wagley
**10.11 $20,000 Promissory Note dated March 23, 1994
executed by G&W Asset Management, Inc. and
payable to Priscilla J. Granese
****10.12 Loan and Security Agreement dated April 14, 1994
between R&R Financial Corporation and the Company
****10.13 $1,000,000 Promissory Note dated April 14,1994
executed by R&R Financial Corporation and payable
to the Company
****10.14 Loan and Security Agreement dated April 20, 1994
between South General Premium Finance, Inc. and the Company
****10.15 $1,000,000 Promissory Note dated April 20,1994
executed by South General Premium Finance, Inc.
and payable to the Company
</TABLE>
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
****10.16 Loan and Security Agreement dated December 30,
1993 between American Premium Plan Service Corp.
and the Company
****10.17 $2,000,000 Promissory Note dated December 30,
1993 executed by American Premium Plan Service
Corp. and payable to the Company
****10.18 Loan and Security Agreement dated February 8,
1994 between Express Premium Finance Corp.
and the Company
****10.19 $2,000,000 Promissory Note dated February 8,
1994 executed by Express Premium Finance
Corp. and payable to the Company
****10.20 Loan and Security Agreement dated March 15,
1994 between Dome Premium Service Company,
Inc. and the Company
****10.21 $1,000,000 Promissory Note dated March 15,
1994 executed by Dome Premium Service
Company, Inc. and payable to the Company
****10.22 Loan and Security Agreement dated March 18,
1994 between Capital Premium Finance Corp.
and the Company
****10.23 $1,000,000 Promissory Note dated March 18,
1994 executed by Capital Premium Finance
Corp. and payable to the Company
**24.1 Power of Attorney
* 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 Form
10-KSB for the fiscal year ending December 31, 1993
filed on March 30, 1994
*** Incorporated by reference to the Company's Form
10-QSB for the quarterly period ending March 31, 1993
**** Incorporated by reference to the Company's Form
10-QSB for the six month period ending June 30, 1994
(b) Reports on Form 8-K:
No reports on form 8-K were filed during the
first quarter of the Company's fiscal year, 1996.
</TABLE>
<PAGE> 23
SIGNATURES
In accordance with the requirements 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
By:\s\Donald A. Wagley, President
-------------------------------------
Donald A. Wagley, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this form 10-QSB was signed by the following persons in the capacities
indicated on November 19, 1996.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
\s\Donald A. Wagley President and a Director (principal
- ------------------------------ executive officer)
Donald A. Wagley
\s\Priscilla J. Granese Vice President, Secretary, Treasurer
- ------------------------------ and a Director (principal financial
Priscilla J. Granese officer)
</TABLE>
