<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 June 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
JUNE 30, 1996 AND DECEMBER 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 93,224 $ 8,663
Accounts receivable 2,145,152 0
Interest receivable 205,590 1,012,358
Notes receivable (NOTES 3 AND 4) 6,645,758 10,266,499
----------- -----------
Total Current Assets 9,089,724 11,287,520
----------- -----------
OTHER ASSETS
Debt issuance costs, net of accumulated amortization 935,981 1,117,085
----------- -----------
Total Other Assets 935,981 1,117,085
----------- -----------
TOTAL ASSETS $10,025,705 $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) 15,475,879 15,217,074
----------- -----------
TOTAL LIABILITIES 15,700,379 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 (5,694,674) (3,678,723)
----------- -----------
Total Stockholders' Deficit (5,674,674) (3,658,723)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $10,025,705 $12,404,605
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 3
G&W FINANCIAL CORPORATION
STATEMENTS OF OPERATIONS
FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30,1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
---------------- 1996 ------ ------------- 1995 -------
YEAR TO YEAR TO
QUARTER DATE QUARTER DATE
------- ------ ------- -------
<S> <C> <C> <C> <C>
REVENUES
Interest 410,522 $ 913,497 411,211 $ 790,298
Other income 0 0 1,000 2,220
----------- ----------- --------- ---------
Total Revenues 410,522 $ 913,497 412,211 $ 792,518
----------- ----------- --------- ---------
OPERATING EXPENSES
Interest 378,680 707,855 436,281 769,315
Bad debt 1,052,159 1,989,829 31,611 31,611
Amortization of debt issuance costs 90,552 181,104 54,885 109,770
General & administrative expenses 0 15 3,790 3,800
Professional fees 12,053 47,653 21,725 21,725
Servicing fees 0 0 109,649 170,522
Trustee fees 0 2,513 6,550 6,550
Other 478 479 43 211
----------- ----------- --------- ---------
Total Operating Expenses 1,533,922 2,929,448 664,534 1,113,504
----------- ----------- --------- ---------
LOSS BEFORE INCOME TAXES (1,123,400) (2,015,951) (252,323) (320,986)
INCOME TAXES 0 0 0 0
----------- ----------- --------- ---------
NET LOSS $(1,123,400) $(2,015,951) $(252,323) $(320,986)
=========== =========== ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 4
G&W FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,015,951) $(320,986)
Adjustments to reconcile net loss to net cash
provided by operating activities
Amortization of debt issuance costs 181,104 109,770
Interest on capital appreciation notes 258,805 79,057
Bad debt reserves 1,786,340 0
Changes in assets and liabilities:
Increase in accounts receivable (2,145,152) 0
Increase in interest receivable 806,768 34,847
Increase in due to affiliate (613,417) (45,369)
Increase in accrued interest payable 467 89,628
Decrease in other accrued expenses (8,804) (21,883)
----------- ---------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES (1,749,840) (74,936)
----------- ---------
INVESTING ACTIVITY
Notes receivable (originations) repayments 1,834,401 (4,830,141)
----------- ---------
FINANCING ACTIVITIES
Proceeds of long-term debt, net of placement costs 0 4,354,566
----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 0 4,354,566
----------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 84,561 (550,511)
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 8,663 918,777
----------- ---------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 93,224 $ 368,266
=========== =========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
G&W FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 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 $5.675 million at June 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
June 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 June 30, 1996, $6,645,758, net of
$4,586,340 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 June 30, 1996, the insurance
premium finance companies owed the Company $205,590 for accrued interest
and servicing fees. The Company has established bad debt reserves of
$4,586,340 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 June 30, 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 5,495,879
-----------
$15,475,879
===========
</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
rate setting date of January 1, 1996.
<PAGE> 7
G&W FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 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 June 30,
1996 was $845,879.
NOTE 5 - LITIGATION
The Company has two of its loans in litigation as of June 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,
but the company has established loss reserves of $771,073 for these loans.
The current balances on these loans at June 30, 1996 are $1,007,324. There
are no collections being received on these loans while 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 $4,586,000 in reserves on both current and defaulted loans.
<PAGE> 8
G&W ASSET MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996 AND DECEMBER 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 488,559 $ 422,480
Restricted Cash 75,044 0
Accounts receivable 1,275,502 764,318
Due from affiliates 307,989 170,484
Premium finance notes receivable (NOTE 5) 3,942,218 3,196,293
Participation and other notes receivable (NOTE 6) 744,425 581,338
Interest receivable 759,922 1,020,817
Notes receivable (NOTES 4 & 8) 8,464,459 16,250,709
Deferred offering costs 52,780 31,446
----------- -----------
Total Current Assets 16,110,898 22,437,885
----------- -----------
PROPERTY AND EQUIPMENT
Equipment under capital lease 214,128 214,128
Furniture and fixtures 303,877 301,194
Less accumulated depreciation and amortization (277,015) (238,165)
----------- -----------
Total property and equipment 240,990 277,157
----------- -----------
OTHER ASSETS
Debt issuance costs, net of accumulated amortization 1,710,461 1,919,668
Investments in and advances to partnerships 841,733 1,385,571
Other assets 29,396 62,728
----------- -----------
Total other assets 2,581,590 3,367,967
----------- -----------
TOTAL ASSETS $18,933,478 $26,083,009
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ (153,997) $ 299,591
Participation note payable to affiliate 1,681,441 1,819,441
Due to affiliates 0 672,500
Accrued interest 438,628 355,114
Commissions payable 0 11,200
Unearned interest 362,165 113
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 4,674,413 5,753,135
----------- -----------
ACCRUED COMMISSIONS 57,210 256,535
----------- -----------
NOTES PAYABLE TO STOCKHOLDERS (NOTE 3) 72,500 72,500
----------- -----------
OBLIGATIONS UNDER CAPITAL LEASE 85,057 104,624
----------- -----------
LONG-TERM DEBT (NOTE 7) 27,137,552 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 2,158,030 2,188,030
Common stock, Class A, no par value, authorized
5,000,000 shares, outstanding 3,019,910 shares (NOTE 9) 99,257 53,284
Common stock, Class B, no par value, authorized
5,000,000 shares, outstanding 79,640 shares (NOTE 9) 397,029 212,738
Additional paid-in capital 254,900 254,900
Deficit (16,002,470) (9,078,261)
----------- -----------
Total Stockholders' Equity (Deficit) (13,093,254) (6,369,309)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $18,933,478 $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 SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
--------------- 1996 ---- ----------- 1995 --------
YEAR TO YEAR TO
QUARTER DATE QUARTER DATE
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES
Interest $ 865,129 $1,944,720 $ 946,384 $1,784,116
Fees 227,006 702,376 516,953 769,321
---------- ----------- ---------- ----------
Total Revenues 1,092,135 2,647,096 1,463,337 2,553,437
---------- ----------- ---------- ----------
OPERATING EXPENSES
Interest 829,005 1,607,211 846,144 1,513,113
Amortization of private placement costs 159,042 318,084 135,312 274,454
Bad debt 1,512,748 6,237,916 36,453 73,343
Professional fees 41,845 109,140 113,080 113,080
Depreciation and amortization 19,425 38,850 20,956 43,027
Marketing 54,666 126,224 99,840 161,495
Salaries 225,959 452,735 313,963 590,944
General and administrative 199,657 360,974 284,730 441,390
Service bureau expenses 35,057 73,210 65,370 91,844
Other 41,573 121,961 41,912 81,063
---------- ----------- ---------- ----------
Total Operating Expenses 3,118,977 9,446,305 1,957,760 3,383,753
---------- ----------- ---------- ----------
LOSS BEFORE INCOME TAXES (2,026,842) (6,799,209) (494,423) (830,316)
INCOME TAXES 0 0 0 0
---------- ----------- ---------- ----------
NET LOSS (2,026,842) (6,799,209) (494,423) (830,316)
========== =========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 10
G&W ASSET MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(6,799,209) $ (830,316)
Adjustments to reconcile net loss to net cash
used in operating activities
Amortization 318,084 274,454
Depreciation 38,850 43,027
Bad debt reserves 5,552,691 0
Interest on capital appreciation notes 258,805 247,137
Changes in assets and liabilities:
Increase in accounts receivable (511,184) (1,115,401)
Decrease in due from affiliates (137,505) 583,683
Decrease in interest receivable 260,895 (181,967)
Increase in other assets 33,332 (369,183)
Increase in accounts payable and accrued expenses (453,588) 287,800
Increase in unearned interest 362,052 529,554
Increase in due to affiliates (672,500) 0
Increase in accrued interest 83,514 91,924
Increase (Decrease) in accrued commissions (210,525) 87,481
----------- -----------
CASH USED IN OPERATING ACTIVITIES (1,876,288) (351,807)
----------- -----------
INVESTING ACTIVITIES
Deferred offering costs (21,334) (45,388)
Additions to property and equipment (2,683) (46,248)
Participation notes receivable (origination) / reduction (163,087) (321,850)
Premiun finance contracts origination (945,925) (2,383,695)
Notes receivable origination 2,433,559 (4,889,622)
(Investments) receipts in partnerships 543,838 (940,451)
----------- -----------
CASH USED IN INVESTING ACTIVITIES 1,844,368 (8,627,254)
----------- -----------
FINANCING ACTIVITIES
Proceeds of long-term debt, net of placement costs 48,212 7,459,589
Proceeds of issuance of stock, net of costs
of issuance and restricted proceeds 230,264 0
Dividend payments (125,000) 0
Principal payments on stockholder loans 0 (27,500)
Principal payments under capital lease obligations 19,567 19,413
----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES 173,043 7,451,502
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS 141,123 (1,527,559)
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 422,480 3,444,453
----------- -----------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 563,603 $ 1,916,894
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 11
G & W ASSET MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 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
$13.09 million at June 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
JUNE 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 June 30, 1996, $14,717,149
gross, including $6,852,690 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 June 30, 1996, the insurance
premium finance companies owed the Company $753,836 (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
June 30, 1996, the Company had contracts outstanding of $3,942,218 (net of bad
debt reserves of $0.8 million), of which $1,865,849 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 MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 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 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 June 30, 1996, there is
$6,086 of accrued interest receivable on participation notes receivable.
NOTE 7 - LONG-TERM DEBT
<TABLE>
<S> <C>
At June 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 5,495,879
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) 2,063,210
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
JUNE 30, 1996
(UNAUDITED)
<TABLE>
NOTE 7 - LONG-TERM DEBT - continued
- -----------------------------------
<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) 1,980,000
Other notes payable at various interest rates 137,739
-----------
29,452,762
Less current maturities (2,315,210)
-----------
$27,137,552
===========
</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 June 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
JUNE 30, 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 $160,252 plus
interest. The Company has established a loss reserve for the full value of
this loan as of June 30, 1996.
One of the Company's subsidiaries has two of its loans in litigation as of
June 30, 1996. Both of these loans are currently in default and have been
called by the Company. The current balances on these loans at June 30, 1996
are $1,007,324. The Company has established bad debt reserves of over $750,000
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 June 30, 1996, the
aggregate outstanding balance was $4,495,668 of which the Company's
participation share was $1,334,425. The Company has established reserves of
over $500,000 of its participation, 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 June 30, 1996, the Company had sold $647,075,
gross, 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
June 30, 1996 after stock sales.
<PAGE> 16
G & W ASSET MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
NOTE 9 - COMMON STOCK (continued)
<TABLE>
<CAPTION>
6/30/96 6/15/95 12/31/94
Shares Net Dollars Shares Dollars Shares Dollars
------- ----------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Class A 3,019,910 $ 99,257 3,000,000 $ 100 4,250,000
$ 100
Class B 79,640 397,029 - 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 June 30, 1996, there were 19,910 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 June 30, 1996 Balance Sheet.
NOTE 10 - 12% CUMULATIVE CONVERTIBLE PREFERRED STOCK
As of June 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 $96,500. Accordingly,
the aggregate redemption price of the preferred stock is approximately
$2,756,500.
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
$6,852,000 in reserves on loans and approximately $800,000 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
Six Months Ended June 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 June
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 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 six month period ended June 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
Six Months Ended June 30, 1996
During the six month period ended June 30, 1996, the Company incurred a
net loss of $2,015,951 on total revenues of $913,497 as compared to the same
period in 1995 net loss of $320,986 on total revenues of $792,518. The increase
in the June 30, 1996 net loss is primarily attributable to an $1,786,340
increase in the provision for possible loan losses. During 1996, the Company
recorded additional allowances of $1,786,340 to increase the total to
$4,586,340 in provisions for possible loan losses on loans in excess of
$11,232,000 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 $913,497 for the six month period ended
June 30, 1996 compared to $792,518 for the six month ended June 30, 1995. The
increase of $120,979 or 15%, reflects the increase in the weighted average
notes receivable balance outstanding during the first six months of 1996, which
was funded during the debt issuance.
Interest expense decreased to $707,855 for the six month period ended June
30, 1996 compared to $769,315 for the six month period ended June 30, 1995. The
decrease is due to a reduction in the interest rate paid from 9.8% in June 1995
to 9.0% in June 1996.
The total provision for loan losses increased to $4,586,340 at June 30,
1996 compared to $115,772 as June 30, 1995. The majority of the increase was
in the fourth quarter of 1995 as discussed above. The increase during the six
month period ended June 30, 1996 was $1,786,340. 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. Accordingly, the Company continues to recognize the need
for agressive pursuit of the defaulters in addtion to increasing its loss
reserves by $1,786,340 in the first six 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 $181,104 for the six
month period ended June 30, 1996 compared to $109,770 for the six month period
ended June 30, 1995. The increase of $71,334 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 six month period
ended June 30, 1996 compared to $170,522 for the six month period ended June
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
Six Months Ended June 30,1996
During the six months ended June 30, 1996, the Company incurred a net loss
of $2,015,951, had $1,749,840 in negative cash flow from operations and, as of
June 30, 1996, had a net capital deficiency of $5,674,674. The Company's parent
incurred a consolidated net loss of $6,799,209, had $1,876,228 in negative cash
flow from its consolidated operating activities and, as of June 30,1996, had a
consolidated net capital deficiency of $13,093,254. 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 $1,749,840 for the six months ended
June 30, 1996 compared to $74,936 for the six months ended June 30, 1995. The
net loss for the six months ended June 30, 1996 was incurred principally as a
result of the $1,786,340 non-cash provision for possible loan losses, $181,104
non-cash amortization and $258,805 non-cash deferred interest on capital
appreciation notes.
There was positive cash provided by investing activities of $1,834,401 for
the six months ended June 30, 1996. The positive cash was largely due to
collections on existing loans being closed out. As of June 30, 1995, the
Company used cash in investing activities of $4,830,141 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 June 30,1996, the Company had advanced
$11,232,098 under the credit facilities, including $4,184,572 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 June 30,
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 June 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.
OUTLOOK FOR REMAINDER OF 1996
The Company expects the remainder of the year to be very similar to the
first six months of 1996. The competition in the premium finance industry has
driven the downpayment rates significantly lower over the last twelve to
eighteen months. During the six months ended June 30, 1996, the premium finance
industry has continued the trend of lower downpayments which creates higher
defaults by insureds and insurance agents. 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 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
<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 second
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.
Signature Title
- --------- -----
\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
Priscilla J. Granese (principal financial officer)
