<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 September 30, 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
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 7,636 $ 8,663
Accounts receivable 969,769 0
Interest receivable 277,986 1,012,358
Notes receivable (NOTES 3 AND 4) 6,598,186 10,266,499
----------- -----------
Total Current Assets 7,853,577 11,287,520
----------- -----------
OTHER ASSETS
Debt issuance costs, net of accumulated amortization 845,429 1,117,085
----------- -----------
Total Other Assets 845,429 1,117,085
----------- -----------
TOTAL ASSETS $ 8,699,006 $12,404,605
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Due to affiliate $ 0 $ 613,417
Accrued interest payable 224,500 224,033
Other accrued expenses 0 8,804
----------- -----------
Total Current Liabilities 224,500 846,254
----------- -----------
LONG-TERM DEBT (NOTES 3 AND 4) 15,571,207 15,217,074
----------- -----------
TOTAL LIABILITIES 15,795,707 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 (7,116,701) (3,678,723)
----------- -----------
Total Stockholders' Deficit (7,096,701) (3,658,723)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 8,699,006 $12,404,605
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 3
G&W FINANCIAL CORPORATION
STATEMENTS OF OPERATIONS
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
YEAR TO YEAR TO
QUARTER DATE QUARTER DATE
------- ---- ------- ----
<S> <C> <C> <C> <C>
REVENUES
Interest 433,394 $ 1,346,891 536,734 $1,327,032
Other income 24,831 24,831 319 2,539
----------- ----------- --------- ----------
Total Revenues 458,225 1,371,722 537,053 1,329,571
----------- ----------- --------- ----------
OPERATING EXPENSES
Interest 323,352 1,031,207 337,891 1,107,206
Bad debt 1,445,895 3,435,724 0 31,611
Amortization of debt issuance costs 90,552 271,656 54,885 164,655
General & administrative expenses 10 25 (775) 3,025
Professional fees 15,193 62,846 21,320 43,045
Servicing fees 0 0 108,783 279,305
Trustee fees 5,250 7,763 2,462 9,012
Other 0 479 14 225
----------- ----------- --------- ----------
Total Operating Expenses 1,880,252 4,809,700 524,580 1,638,084
----------- ----------- --------- ----------
LOSS BEFORE INCOME TAXES (1,422,027) (3,437,978) 12,473 (308,513)
INCOME TAXES 0 0 0
----------- ----------- --------- ----------
NET LOSS ($1,422,027) ($3,437,978) $ 12,473 ($308,513)
=========== =========== ========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 4
G&W FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($3,437,978) ($308,513)
Adjustments to reconcile net loss to net cash
provided by operating activities
Amortization of debt issuance costs 271,656 164,655
Interest on capital appreciation notes 354,133 79,057
Bad debt reserves 3,103,300 0
Changes in assets and liabilities:
Increase in accounts receivable (969,769) 0
Increase in interest receivable 734,372 (348,161)
Increase in due to affiliate (613,417) (227,891)
Increase in accrued interest payable 467 44,441
Decrease in other accrued expenses (8,804) (21,883)
------------ -----------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES (566,040) (618,295)
------------ -----------
INVESTING ACTIVITY
Notes receivable (originations) repayments 565,013 (4,643,411)
------------ -----------
FINANCING ACTIVITIES
Proceeds of long-term debt, net of placement costs 0 4,451,813
Sales of capital stock 0 0
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 0 4,451,813
------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS (1,027) (809,893)
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 8,663 918,777
------------ -----------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 7,636 $ 108,884
============ ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
G&W FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 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 $7.096 million at September 30, 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
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 3 - NOTES AND INTEREST RECEIVABLE
Notes receivable consist of six 12% revolving credit facility loans
and two 14% revolving credit facility loan due from insurance premium
finance companies. The maximum advances under the terms of the
revolving credit facilities total $15,000,000. As of September 30,
1996, $6,598,186, net of $5,903,300 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 September 30,
1996, the insurance premium finance companies owed the Company
$277,986 for accrued interest and servicing fees. The Company has
established bad debt reserves of $5,903,300 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
<TABLE>
<S> <C>
At September 30, 1996, long-term debt consisted of:
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 5,591,207
-----------
$15,571,207
===========
</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 9.0% on
the subsequent dates of January 1 and July 1, 1996.
<PAGE> 7
G&W FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 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
September 30, 1996 was $944,207.
NOTE 5 - LITIGATION
The Company has two of its loans in litigation as of September 30,
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, accordingly the company has established
loss reserves for the full amount of these loans. The current
balances on these loans at September 30, 1996 are $1,007,324. There
have been no collections received on these loans since the first
quarter of 1996 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 has been increasing
reserves on the higher risk loans during each quarter of 1996. The
Company has established approximately $5,903,000 in reserves on both
current and defaulted loans.
<PAGE> 8
G&W ASSET MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
ASSETS ---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 122,009 $ 422,480
Restricted Cash 75,044 0
Accounts receivable 1,279,032 764,318
Due from affiliates 714,445 170,484
Premium finance notes receivable (NOTE 5) 4,451,989 3,196,293
Participation and other notes receivable (NOTE 6) 0 581,338
Suspense receivable 62,465 0
Interest receivable 245,634 1,020,817
Notes receivable (NOTES 4 & 8) 4,907,361 16,250,709
Deferred offering costs 63,222 31,446
----------- -----------
Total Current Assets 11,921,201 22,437,885
----------- -----------
PROPERTY AND EQUIPMENT
Equipment under capital lease 214,128 214,128
Furniture and fixtures 305,668 301,194
Less accumulated depreciation and amortization (296,440) (238,165)
----------- -----------
Total property and equipment 223,356 277,157
----------- -----------
OTHER ASSETS
Debt issuance costs, net of accumulated amortization 1,551,419 1,919,668
Investments in and advances to partnerships 1,029,729 1,385,571
Other assets 29,396 62,728
----------- -----------
Total other assets 2,610,544 3,367,967
----------- -----------
TOTAL ASSETS $14,755,101 $26,083,009
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses $473,533 $ 299,591
Participation note payable to affiliate 1,529,441 1,819,441
Due to affiliate 230,000 672,500
Accrued interest 381,207 355,114
Suspense reserve 62,465 0
Commissions payable 0 11,200
Unearned interest 441,723 113
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 5,464,545 5,753,135
----------- -----------
ACCRUED COMMISSIONS 11,322 256,535
----------- -----------
NOTES PAYABLE TO STOCKHOLDERS (NOTE 3) 72,500 72,500
----------- -----------
OBLIGATIONS UNDER CAPITAL LEASE 74,722 104,624
----------- -----------
LONG-TERM DEBT (NOTE 7) 27,020,565 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 2,168,030 2,188,030
Common stock, Class A, no par value, authorized
5,000,000 shares, outstanding 3,021,912 shares (NOTE 9) 112,272 53,284
Common stock, Class B, no par value, authorized
5,000,000 shares, outstanding 87,469 shares (NOTE 9) 449,088 212,738
Additional paid-in capital 254,900 254,900
Deficit (20,872,843) (9,078,261)
----------- -----------
Total Stockholders' Equity (Deficit) (17,888,553) (6,369,309)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $14,755,101 $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 NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
YEAR TO YEAR TO
QUARTER DATE QUARTER DATE
------- ---- ------- ----
<S> <C> <C> <C> <C>
REVENUES
Interest $ 721,249 $ 2,665,969 $1,042,277 $ 2,826,393
Fees 111,246 813,622 378,925 1,148,246
----------- ------------ ---------- ------------
Total Revenues 832,495 3,479,591 1,421,202 3,974,639
----------- ------------ ---------- ------------
OPERATING EXPENSES
Interest 760,844 2,368,055 763,618 2,276,731
Amortization of private placement costs 159,042 477,126 141,452 415,906
Bad debt 4,101,017 10,338,933 121,245 194,588
Professional fees 53,566 162,706 64,427 177,507
Depreciation and amortization 19,425 58,275 26,840 69,867
Marketing 73,977 200,201 142,949 304,444
Salaries 217,498 670,233 314,090 905,034
General and administrative 207,186 568,160 220,725 662,115
Service bureau expenses 25,475 98,685 32,922 124,766
Other 23,088 145,049 29,848 110,911
----------- ------------ ---------- ------------
Total Operating Expenses 5,641,118 15,087,423 1,858,116 5,241,869
----------- ------------ ---------- ------------
LOSS BEFORE INCOME TAXES (4,808,623) (11,607,832) (436,914) (1,267,230)
INCOME TAXES 0 0 0 0
----------- ------------ ---------- ------------
NET LOSS (4,808,623) (11,607,832) (436,914) (1,267,230)
=========== ============ ========== ============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 10
G&W ASSET MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($11,607,832) ($1,267,230)
Adjustments to reconcile net loss to net cash
used in operating activities
Amortization 477,126 415,906
Depreciation 58,275 69,867
Bad debt reserves 7,932,551 0
Interest on capital appreciation notes 354,133 360,337
Changes in assets and liabilities:
Increase in accounts receivable (514,714) (989,728)
Decrease in due from affiliates (543,961) 593,283
Decrease in interest receivable 775,183 (379,678)
Increase in other assets 33,332 (306,997)
Increase in accounts payable and accrued expenses 173,942 468,791
Increase in unearned interest 441,610 237,278
Increase in due to affiliates (442,500) 0
Increase in accrued interest 26,093 70,627
Increase (Decrease) in accrued commissions (256,413) 99,606
------------- ------------
CASH USED IN OPERATING ACTIVITIES (3,093,175) (627,938)
------------- ------------
INVESTING ACTIVITIES
Deferred offering costs (31,776) (126,374)
Additions to property and equipment (4,473) (48,738)
Participation notes receivable (origination)/reduction 581,338 (347,664)
Premium finance contracts origination (1,629,696) (705,208)
Notes receivable origination 3,784,797 (6,134,937)
(Investments) receipts in partnerships 355,842 (760,039)
------------- ------------
CASH USED IN INVESTING ACTIVITIES 3,056,032 (8,122,960)
------------- ------------
FINANCING ACTIVITIES
Proceeds of long-term debt, net of placement costs (326,774) 7,503,958
Proceeds of issuance of stock, net of costs
of issuance and restricted proceeds 295,338 265,687
Dividend payments (186,750) (85,216)
Principal payments on stockholder loans 0 27,500
Principal payments under capital lease obligations 29,902 (9,525)
------------- ------------
CASH PROVIDED BY FINANCING ACTIVITIES (188,284) 7,702,404
------------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (225,427) (1,048,494)
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 422,480 3,444,453
------------- ------------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 197,053 $ 2,395,959
============= ============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 11
G & W ASSET MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 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 intended to offer financing in other states. The Company
has expanded into Louisiana, Texas, Alabama, Tennesse since 1991. 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 $17.88 million at September
30, 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
SEPTEMBER 30, 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 September 30, 1996, $13,965,911
gross, of which $9,058,550 is 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 September
30, 1996, the insurance premium finance companies owed the Company
$242,848 (net) 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 September 30, 1996, the Company had contracts
outstanding of $4,451,989 (net of bad debt reserves of $0.8 million), of
which $2,448,473 was due from insurance companies. The change in reserves
are due to the higher reserves for the lower downpayments caused by market
competition less actual losses experienced.
<PAGE> 13
G & W ASSET MANAGMENT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 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 determinined 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 September 30, 1996, there is $2,786 of accrued
interest receivable on participation notes receivable.
NOTE 7 - LONG-TERM DEBT
<TABLE>
<S> <C>
At September 30, 1996, long-term debt consisted of:
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 5,591,207
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) 1,858,210
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) 50,000
</TABLE>
<PAGE> 14
G & W ASSET MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 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) - 0 -
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) 1,980,000
Other notes payable at various interest rates 147,424
-----------
29,335,775
Less current maturities (2,315,210)
-----------
$27,020,565
===========
</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 September 30, 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
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 9 - COMMON STOCK (continued)
<TABLE>
<CAPTION>
9/30/96 6/15/95 12/31/94
Shares Net Dollars Shares Dollars Shares Dollars
------ ----------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Class A 3,021,912 $112,272 3,000,000 $ 100 4,250,000 $ 100
Class B 87,469 449,088 - 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 September 30, 1996, there were 21,912 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 September 30, 1996 Balance Sheet.
NOTE 10 - 12% CUMULATIVE CONVERTIBLE PREFERRED STOCK
As of September 30, 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 $109,000. Accordingly, the aggregate redemption price of
the preferred stock is approximately $2,769,000.
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 $9,058,550 in
reserves on loans and approximately $800,000 in reserves on premium
finance contracts of affiliates.
<PAGE> 16
ITEM 2
ITEM 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF G&W FINANCIAL CORPORATION
GENERAL
Nine Months Ended September 30, 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
September 30, 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 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 nine month period ended September 30, 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
Nine Months Ended September 30, 1996
During the nine month period ended September 30, 1996, the Company
incurred a net loss of $3,437,978 on total revenues of $1,371,722 as compared
to the same period in 1995 net loss of $308,513 on total revenues of
$1,329,571. The increase in the September 30, 1996 net loss is primarily
attributable to an $3,103,300 increase in the provision for possible loan
losses. During 1996, the Company recorded additional allowances of $3,103,300
to increase the total to $5,903,300 in provisions for possible loan losses on
loans in excess of $12,501,000 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> 17
The Company generated revenues of $1,371,722 for the nine month period
ended September 30, 1996 compared to $1,329,571 for the nine month ended
September 30, 1995. The increase of $42,151 or 3%, reflects the increase in
the weighted average notes receivable balance outstanding during the first nine
months of 1996, which was funded during the debt issuance.
Interest expense decreased to $1,031,207 for the nine month period
ended September 30, 1996 compared to $1,107,206 for the nine month period ended
September 30, 1995. The decrease is due to a reduction in the interest rate
paid from 9.8% in June 1995 to 9.0% in September 1996.
The total provision for loan losses increased to $5,903,300 at September
30, 1996 compared to $115,772 as September 30, 1995. The majority of the
increase was in the fourth quarter of 1995 as discussed above. The increase
during the nine month period ended September 30, 1996 was $3,103,300. 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. During 1996, the competitiveness of the premium finance
industry has continued which has caused the default rates of the insured and
insurance agents to increase. Due to the trend of the market, the management
determined that it was necessary during the fourth quarter to obtain the
assistance of outside consultants to help evaluate the adequacy of loss
reserves, lending criteria and policies to recover defaults. Accordingly, the
Company continues to recognize the need for agressive pursuit of the defaulters
in addition to increasing its loss reserves by $3,103,300 in the first nine
months 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 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 $271,656 for the nine
month period ended September 30, 1996 compared to $164,655 for the nine month
period ended September 30, 1995. The increase of $107,001 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 nine month period
ended September 30, 1996 compared to $279,305 for the nine month period ended
September 30, 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
Nine Months Ended September 30, 1996
During the nine months ended September 30, 1996, the Company incurred a
net loss of $3,437,978, had $566,040 in negative cash flow from operations and,
as of September 30, 1996, had a net capital deficiency of $7,096,701. The
Company's parent incurred a consolidated net loss of $11,607,832, had
$3,093,175 in negative cash flow from its consolidated operating activities
and, as of September 30, 1996, had a consolidated net capital deficiency of
$17,888,553. 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 $566,040 for the nine months ended
September 30, 1996 compared to $618,295 for the nine months ended September 30,
1995. The net loss for the nine months ended September 30, 1996 was incurred
principally as a result of the $3,103,300 non-cash provision for possible loan
losses, $271,656 non-cash amortization and $354,133 non-cash deferred interest
on capital appreciation notes.
<PAGE> 18
There was positive cash provided by investing activities of $565,013
for the nine months ended September 30, 1996. The positive cash was due to
collections on existing loans being closed out. As of September 30, 1995, the
Company used cash in investing activities of $4,643,411 to fund new and
existing loans.
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 September 30, 1996, the Company had
advanced $12,501,486 under the credit facilities, including $5,141,034 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 nonstandard 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 RESOURSES
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 September
30, 1996, the Company has raised $9,980,000 and $4,647,000 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 September 30, 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.
<PAGE> 19
OUTLOOK FOR REMAINDER OF 1996
The Company does not expect any changes in the market for the remainder
of the year. During 1996, the competition in the premium finance industry has
continued the trend of lower downpayments which creates higher defaults by
insureds and insurance agents. There have been some indications that the
industry is leveling off with the reduced downpayments, although no significant
changes will be seen in 1996. 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. Management is also
optimistic that recent changes in personnel and underwriting policies are
having a positive influence on the performance of the Company and are hopeful
that results for the final quarter of 1996 and throughout 1997 will show
significant improvement.
<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 Contents 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).
(a) 2. Exhibits
EXHIBIT NO. DESCRIPTION PAGE
*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
**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
<PAGE> 21
EXHIBIT NO. DESCRIPTION PAGE
**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
****10.16 Loan and Security Agreement dated December 30,
1993 between American Premium Plan Service Corp. and
the Company
<PAGE> 22
EXHIBIT NO. DESCRIPTION PAGE
****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 third
quarter of the Company's fiscal year, 1996.
<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
-----------------------------
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 15, 1996.
Signature Title
/s/ Donald A. Wagley
- ------------------------------ President and a Director (principal executive
Donald A. Wagley officer)
/s/ Priscilla J. Granese
- ------------------------------ Vice President, Secretary, Treasurer and a
Priscilla J. Granese Director (principal financial officer)