<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM __________TO__________
COMMISSION FILE NUMBER 0-21591
GRANITE FINANCIAL, INC.
(Name of small business issuer as specified in its charter)
DELAWARE 84-1349929
(State of Incorporation) (I.R.S. Employer Identification No.)
16100 TABLE MOUNTAIN PARKWAY, SUITE A
GOLDEN, COLORADO 80403
(Address of principal executive offices)
(303) 216-3500
(Issuer's telephone number)
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 X No
----- -----
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Common stock, $.001 par value, 6,140,000 shares outstanding
as of October 15, 1997
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
<PAGE> 2
GRANITE FINANCIAL, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1997
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
Financial Statements:
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statement of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6-7
Notes to Consolidated Financial Statements 8-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN
OR OPERATIONS 11-15
PART II. OTHER INFORMATION 16-17
EXHIBITS 18
11 Computation of Earnings per Common Share and Common Equivalent
Share
27 Financial Data Schedule
SIGNATURES 19
</TABLE>
-2-
<PAGE> 3
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
1997 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 680,529 $ 3,760,870
Restricted Cash 1,715,964 1,816,574
Direct financing leases (Note 2) 9,906,746 13,017,943
Direct financing leases assigned to lender 15,510,859 13,954,386
Securitization residual interest 10,138,341 15,220,407
Other receivables 1,193,609 8,056,988
Prepaid and other assets 1,441,319 2,837,120
Deferred offering costs 253,281 --
Furniture and equipment, net of accumulated depreciation of $293,332
(June 1997) and $332,613 (September 1997) 964,710 1,266,747
Goodwill, net of accumulated amortization of $36,207 (June 1997) and $92,353
(September 1997) 3,941,219 3,885,841
----------- -----------
Total assets $45,746,577 $63,816,876
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Lines-of-credit (Note 3) $ 7,331,983 $ 7,318,144
Accounts payable and accrued expenses 1,856,035 2,905,323
Security deposits 692,196 972,283
Due to trustee 350,525 766,130
Current and deferred income taxes payable 1,066,324 1,580,227
Limited recourse Class A note payable 14,770,561 13,240,003
Related party note payable 250,000 225,000
Notes payable 3,964,513 2,477,451
----------- -----------
30,282,137 29,484,561
----------- -----------
Stockholders' Equity
Preferred stock, $.01 par value, 2,000,000 shares authorized; none
issued or outstanding -- --
Common stock, $.001 par value; 20,000,000 shares authorized; 3,725,000
shares (June 1997) and 6,140,000 shares (September 1997) issued and
outstanding 3,725 6,140
Additional paid-in capital 13,757,059 31,761,239
Retained earnings 1,703,656 2,564,936
----------- -----------
Total stockholders' equity (Notes 4 and 5) 15,464,440 34,332,315
----------- -----------
Total liabilities and stockholders' equity $45,746,577 $63,816,876
=========== ===========
</TABLE>
See notes to consolidated financial statements
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<PAGE> 4
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
Revenues
Sales of leases $10,426,221 $32,621,893
Income from direct financing leases 929,614 1,364,169
----------- -----------
Total revenues 11,355,835 33,986,062
----------- -----------
Costs
Cost of leases sold 9,843,125 30,283,319
Provision for credit losses 25,000 60,700
Interest expense 437,988 468,202
Securitization expenses and amortization 33,045 57,132
----------- -----------
Total costs 10,339,158 30,869,353
----------- -----------
Gross profit 1,016,677 3,116,709
Other Expenses
Salaries and benefits 259,709 934,594
General and administrative 181,500 655,216
Depreciation and amortization 58,044 135,654
----------- -----------
Total other expenses 499,253 1,725,464
----------- -----------
Net income (1996) - Income before income taxes (1997) 517,424 1,391,245
Pro forma adjustment* (1996) - Provision for income
taxes (1997) 191,447 529,965
----------- -----------
Pro forma net income (1996) - Net income (1997) $ 325,977 $ 861,280
=========== ===========
Pro forma net income per share (1996) - Net income per
share (1997) $ 0.16 $ 0.15
=========== ===========
Weighted average number of pro forma common and common
equivalent shares outstanding (Notes 4 and 5) 2,000,000 5,912,663
=========== ===========
</TABLE>
*Note: 1996 pro forma income taxes assume a combined federal and state income
tax rate of 37.0% as if the entity was taxed as a C Corporation
See notes to consolidated financial statements.
-4-
<PAGE> 5
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD JUNE 30, 1997 TO SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1997 3,725,000 $ 3,725 $13,757,059 $ 1,703,656 $15,464,440
Net income for the period
July 1 - September 30, 1997 -- -- -- 861,280 861,280
Issuance of common stock pursuant
to secondary public offering (net of issuance
costs of $1,917,155) (Note 4) 2,415,000 2,415 18,004,180 -- 18,006,595
----------- ----------- ----------- ----------- -----------
Balance, September 30, 1997 6,140,000 $ 6,140 $31,761,239 $ 2,564,936 $34,332,315
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE> 6
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended
September 30,
------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 517,424 $ 861,280
------------ ------------
Adjustments to reconcile net income to net cash used in operating
activities
Provision for losses 19,685 222,993
Depreciation and amortization 90,991 94,659
Changes in operating assets and liabilities
Restricted Cash -- (100,610)
Direct financing leases (1,045,091) (3,136,197)
Securitization Residual Interest -- (5,082,066)
Other receivables -- (6,863,379)
Prepaids and other assets (430,431) (1,395,801)
Accounts payable and accrued expenses (20,584) 951,289
Due to trustee 261,382 415,605
Current and deferred income taxes -- 513,903
Security deposits -- 280,087
------------ ------------
(1,124,048) (14,099,517)
------------ ------------
Net cash used in operating activities (606,624) (13,238,237)
------------ ------------
Cash flows from investing activities
Payments received on leases assigned to lender 1,643,543 1,358,480
Purchase of furniture and equipment (59,898) (341,318)
------------ ------------
Net cash provided by investing activities 1,583,645 1,017,162
------------ ------------
Cash flows from financing activities
Checks written in excess of bank balance (288,848) --
Proceeds from notes payable 1,302,875 --
Principal payments on notes payable (492,482) (1,487,062)
Net proceeds (payments) on lines-of-credit 44,330 (13,839)
Principal payments received on related party note payable -- (25,000)
Principal payments on Class A note payable (1,469,398) (1,530,558)
Expenditures for loan origination fees (24,349) --
Net proceeds of common stock issuance -- 18,523,051
Deferred offering costs paid (41,062) (165,176)
------------ ------------
Net cash (used) provided by financing activities (968,934) 15,301,416
------------ ------------
Net increase in cash 8,087 3,080,341
Cash - beginning of period -- 680,529
------------ ------------
Cash - end of period $ 8,087 $ 3,760,870
============ ============
</TABLE>
Continued on following page.
See notes to consolidated financial statements.
-6-
<PAGE> 7
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Continued from prior page.
Supplemental disclosure of cash flow information:
Cash paid during the three month periods ended September 30, 1996 and 1997
for interest was $525,588 and $355,467, respectively.
Cash paid during the three month periods ended September 30, 1996 and
1997 for income taxes was $0 and $16,063, respectively.
Non cash investing and financing activities:
Deferred offering costs of $352,235 are included in accrued expenses during the
three months ended September 30, 1996.
Deferred offering costs of $388,457 were reclassified to additional paid-in
capital upon consummation of the secondary public offering. Additionally,
$97,999 of offering costs reflected in additional paid-in capital are included
in accrued expenses.
See notes to consolidated financial statements.
-7-
<PAGE> 8
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements of Granite
Financial, Inc. and subsidiaries (the Company) reflect all adjustments (which
include only normal recurring adjustments) necessary, in the opinion of
management, for a fair presentation of the interim periods presented. The
results of operations for the three months ended September 30, 1996 and 1997
are not necessarily indicative of the results of the entire year. The
consolidated financial statements included herein are presented in accordance
with the requirements of Form 10-QSB and consequently do not include all of the
disclosures normally made in the registrant's annual Form 10-KSB filing. These
financial statements should be read in conjunction with the financial
statements and notes thereto included in the annual Form 10-KSB.
The Company's consolidated financial statements include the accounts of Granite
Financial, Inc. and its wholly-owned subsidiaries, GF Funding Corp. I ("GF
Funding I"), GF Funding Corp. II ("GF Funding II"), GF Funding Corp. III ("GF
Funding III") and Granite Financial Acquisition Corp. I ("Granite
Acquisitions"). All intercompany accounts and transactions have been eliminated
in consolidation. The assets of GF Funding I, GF Funding II and GF Funding III
are not available to satisfy creditors of the Company.
Sales of Leases
The Company generally sells the leases it acquires or originates through
securitization transactions or on a portfolio basis to certain financial
institutions on a recourse or non-recourse basis. Sales of leases in the
accompanying statements of operations reflect proceeds received by the Company,
net of related selling expenses, and the cost of leases sold reflect the
Company's net investment in the related leases.
In a securitization transaction, the Company sells and transfers a pool of
leases to a wholly-owned, bankruptcy remote, special purpose subsidiary. This
subsidiary in turn simultaneously sells and transfers its interest in the
leases to a trust which issues beneficial interests in the leases in the form
of senior and subordinated securities. The Company generally retains the right
to receive any excess cash flows of the trust (the Securitization Residual
Interest).
On January 1, 1997, the Company adopted FAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("FAS
125"). FAS 125 provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
Under FAS 125, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when
-8-
<PAGE> 9
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Sales of Leases (continued)
control has been surrendered, and derecognizes liabilities when extinguished.
FAS 125 prohibits early application and, accordingly, the Company adopted this
standard for transactions which occurred after December 31, 1996. Under FAS
125, a transfer of lease assets in which the transferor surrenders control of
the lease assets is accounted for as a sale and the transferred lease assets
are removed from the balance sheet with the resulting gain or loss on sale
reflected in the statement of operations.
NOTE 2 - DIRECT FINANCING LEASES
The Company's direct financing leases at September 30, 1997 consist of the
following:
<TABLE>
<CAPTION>
Direct Direct Financing
Financing Leases Assigned to
Leases Lender
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Minimum lease payments receivable $ 16,253,545 $ 15,874,303
Estimated residual values of leased property 2,955,308 762,913
Lease acquisition costs and broker commissions 1,527,560 271,833
Unearned income (6,254,542) (2,769,677)
Reserve for credit losses (1,221,868) (52,472)
Security deposits (242,060) (132,514)
------------ ------------
Net direct financing leases $ 13,017,943 $ 13,954,386
============ ============
</TABLE>
-9-
<PAGE> 10
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LINES-OF-CREDIT
<TABLE>
<CAPTION>
June 30, September 30,
1997 1997
------------ ------------
(Unaudited)
<S> <C> <C>
$36,000,000 line-of-credit to a consortium of lenders, due
February 1998. Interest at the lead lender's prime rate plus 5/8
of one percent (9.125% at September 30, 1997) payable monthly. The line is
collateralized by a first security interest in specific leases pledged and
the underlying equipment. The balance outstanding at June 30, 1997 consists
of actual net borrowings of $1,696,948 plus advance borrowings on the
line-of-credit of $2,864,185. $ 4,561,133 $ 5,718,144
$2,000,000 unsecured line-of-credit to a bank due January 1998. Interest is
at the bank's reference rate plus .75% (9.25% at September 30, 1997)
payable monthly. 2,000,000 1,600,000
$800,000 line-of-credit to a bank, due May 1997. Interest at the prime rate
plus 1% (9.5% at September 30, 1997) payable monthly. The line is
collateralized by all tangible and intangible property of Granite
Financial Acquisition Corp. I. 770,850 --
------------ ------------
$ 7,331,983 $ 7,318,144
============ ============
</TABLE>
NOTE 4 - STOCKHOLDERS' EQUITY
Secondary Public Offering
In July 1997, the Company completed a secondary public offering of 2,415,000
shares of common stock at $8.25 per share. The proceeds of the offering were
approximately $18,007,000, net of offering costs of approximately $1,917,000.
Additionally, the Company issued warrants to the underwriter to purchase
150,000 shares of common stock at $10.31 per share.
NOTE 5 - SUBSEQUENT EVENT
Subsequent to September 30, 1997, the Company granted 301,000 options under the
Company's Stock Option Plan at an exercise price of $11.25. Currently, 708,500
options are outstanding under the Company's Stock Option Plan with exercise
prices ranging from $5.95 to $11.25.
-10-
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FACTORS THAT MAY AFFECT OPERATING RESULTS
The statements contained in this Report on Form 10-QSB that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. All forward-looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. It is important to note that the Company's actual
results could differ materially from those in such forward-looking statements.
Among the factors that could cause actual results to differ materially are the
risk factors set forth in the Company's Registration Statements on Form SB-2.
The reader should consult these risk factors as well as risk factors listed
from time to time in the Company's reports on Forms 10-QSB, 10-KSB and filings
under the Securities Act of 1933, as amended.
RESULTS OF OPERATIONS
Three months ended September 30, 1997 and 1996
REVENUES - Sales of leases were $32.6 million, representing 96% of total
revenues in the 1997 period, an increase of $22.2 million over sales of leases
of $10.4 million, representing 91.8% of total revenues, in the 1996 period. The
increase in sales of leases is due to the consistent increase in the volume of
leases originated and sold by the Company since its inception. The Company
funded a total of 1,307 leases during the 1997 period as compared to 421 leases
during the 1996 period. During the 1997 period, leases were sold through the
Company's second securitization facility, to an independent financial
institution and to Heartland Bank, a related party. For the 1996 period, the
majority of the sales were to Heartland Bank, a related party, and a small
portion to an independent third party.
Income from direct financing leases was $1.4 million in the 1997 period, or an
increase of $434,000 from $930,000 in the 1996 fiscal year. Income from direct
financing leases primarily consists of the accretion of income on both leases
retained by the Company and leases held in the Company's first securitization
facility and on the Company's securitization residual interest. Income from
direct financing leases represented 4.0% of total revenues in the 1997 period
as compared to 8.2% in the 1996 period.
GROSS PROFIT - Total costs were $30.9 million or 90.8% of total revenues in the
1997 period, an increase of $20.5 million from total costs of $10.3 million or
91.0% of total revenues during the 1996 period. The resulting gross profit was
9.2% in the 1997 period, a slight increase over the 1996 gross profit of 9.0%.
The total costs included in gross profit include not only the cost of leases
sold but also the provision for credit losses and interest expense related to
the borrowings used to
-11-
<PAGE> 12
fund leases held in the Company's portfolio. The Company's gross profit is
affected by two factors: 1) the discount rate utilized in calculating the
proceeds under each sales facility; and 2) the difference between the implicit
rate of interest received on leases funded and the interest paid on amounts
borrowed and the provision for credit losses on leases held in the Company's
portfolio.
EXPENSES - Interest expense was $468,000 in the 1997 period, compared to
$438,000 in the 1996 period. Interest expense for the 1997 period was 1.4% of
total revenues as compared to 3.9% in the 1996 period. The decrease in interest
expense as a percentage of revenues in the 1997 period is a direct result of
the Company's use of the proceeds from its secondary public offering in July
1997 to reduce outstanding borrowings on its various credit facilities.
Salaries and benefits were $935,000 in the 1997 period, an increase of $675,000
over salaries and benefits of $260,000 in the 1996 period. As a percentage of
total revenues, salaries and benefits were 2.8% and 2.3% in the 1997 and 1996
periods, respectively. The increase reflects the addition of staff necessary to
support growth in the Company's business, certain salary increases for existing
personnel and the additional personnel associated with two acquired companies.
General and administrative expenses were $655,000 in the 1997 period, an
increase of $473,000 from general and administrative expenses of $182,000 in
the 1996 period. Those expenses were 1.9% and 1.6% of total revenues in the
1997 and 1996 periods, respectively. General and administrative expenses
include operational expenses such as office overhead, accounting, legal and
other expenses not directly attributable to personnel. The increase is due to
the overall growth in the Company's business, expenses incurred during the
search for potential acquisitions and the addition of two acquired companies
during fiscal 1997. Another component of the increase was due to certain
"one-time costs" such as moving expenses of $42,000 and a $92,000 loss on the
sale of furniture and fixtures located at the Company's previous place of
business. The Company relocated its headquarters in August 1997 to a larger
facility in the Denver, Colorado metropolitan area. As a result, the Company
has experienced increases in its monthly occupancy expenses. Depreciation and
amortization increased to $136,000 in the 1997 period, an increase of $78,000
from $58,000 in the 1996 period. This increase was due to the addition of
office and computer equipment necessary to support the continued growth in the
Company's business.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to fund increases in its lease portfolios, fund
acquisitions of complimentary small-ticket equipment finance companies and
independent lease originators, support securitizations through retention of
securitization residual interests, provide for normal operating expenses and to
provide for general working capital purposes. The capital sources available to
the Company include cash from operating activities, borrowings under bank and
other credit facilities, cash from lease sales, advances in connection with
lease securitizations and capital provided by sales of equity securities.
-12-
<PAGE> 13
Net cash used in operating activities was $13.2 million during the 1997 period
compared to $607,000 in the 1996 period. This substantial increase in cash used
is related primarily to an increase in other receivables of $6.9 million, an
increase in securitization residual interests of $5.1 million and a net
increase in direct financing leases of $3.1 million. The substantial increase
in other receivables is primarily related to two lease sales and a
securitization rate conversion which were consummated at the end of the 1997
period in which the funds were received in the following month.
The net cash provided by investing activities was $1.0 million in the 1997
period as compared to $1.6 million in the 1996 period. The decrease is primarily
related to a decrease in the amount of payments received on leases assigned to
lender. This decrease is directly related to a reduction in the number of
outstanding leases assigned to lender. The net cash provided by financing
activities was $15.3 million in the 1997 period as compared to net cash used of
$969,000 in the 1996 period. The substantial increase in cash provided is due
primarily to the net proceeds of the Company's secondary public offering of
$18.0 million completed in July 1997.
Sale of Equity Securities. During the 1997 period the Company's liquidity
improved substantially when it completed a secondary public offering of
2,415,000 shares of common stock at $8.25 per share. The proceeds of the
offering were approximately $18,007,000, net of offering costs of approximately
$1,917,000. Additionally, the Company issued warrants to the underwriter to
purchase 150,000 shares of common stock at $10.31 per share. The Company
utilized $1.5 million of the net proceeds to payoff the balance on a term loan
and $13.4 million to reduce outstanding borrowings on various line-of-credit
facilities. Additionally, the Company invested $700,000 in various certificates
of deposit with certain financial institutions. The remaining proceeds of $2.4
million combined with the additional availability under the Company's
line-of-credit facilities are available to the Company for lease fundings,
consummation of acquisitions, support of securitization transactions, other
working capital needs and for general corporate purposes.
Lease Sale Agreement. On September 30, 1997, the Company entered into a master
sales agreement with a financial institution to sell, on an ongoing basis,
leases on a partial recourse basis. The leases will be sold at a price equal to
the remaining cash flows of the leases discounted at a rate to be determined on
each closing date. Neither the Company nor the purchaser are obligated to sell
or purchase leases under the master sales agreement. At September 30, 1997, the
Company had sold leases of $5.3 million at a discount rate of 7.9% under the
master sales agreement.
Bank and Other Credit Facilities. The Company has a $36 million revolving
line-of-credit agreement with a consortium of lenders which include CoreStates
Bank of Philadelphia, Pennsylvania as lead lender, Colorado National Bank,
Colorado, PNC National Bank of Philadelphia, Pennsylvania and Bank Leumi of New
York. The interest rate on this facility is prime rate plus five-eighths of one
percent. Outstanding borrowings on this facility were $5.7 million at September
30, 1997.
-13-
<PAGE> 14
The Company's second securitization transaction, closed in November 1996,
provides for an aggregate lease funding amount of $65 million. During the
quarter ended September 30, 1997, the Company funded $24.0 million of leases
under this facility. At September 30, 1997, the remaining amount available for
funding under such facility was $17.2 million and the Company anticipates
funding this amount in the second quarter of this fiscal year. Additionally,
the Company expects to complete its fourth securitization facility in the
second quarter of this fiscal year.
Static Pool Analysis - Since its inception, the Company has monitored its
underwriting and collection performance using "static pool" analysis. Static
pool analysis is a statistical monitoring methodology by which each month's
lease originations are treated as a unique pool and the performance of this
pool is tracked separately. The measure of performance is based on several
factors which include delinquencies 31 or more days past due and net investment
charge-offs.
The following table documents lease delinquencies 31 or more days past due as
of September 30, 1997. The table presents the delinquent leases for the
quarters presented as a percentage of the remaining lease receivable balance
for that pool.
STATIC POOL REPORTING(1)
31+ DAYS DELINQUENT
<TABLE>
<CAPTION>
ORIGINAL
LEASE
CALENDAR RECEIVABLE PERCENTAGE OF REMAINING LEASE RECEIVABLE
QUARTER (IN THOUSANDS) QTR 1 QTR 2 QTR 3 QTR 4 QTR 5 QTR 6 QTR 7 QTR 8 QTR 9 QTR 10 QTR 11
- ------- -------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995:
1st Quarter $ 31 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
2nd Quarter 1,748 0.0 0.0 0.0 0.4 0.4 0.3 0.9 2.1 4.6 4.9%
3rd Quarter 6,082 0.0 2.5 2.1 3.5 3.9 5.6 3.0 2.6 4.9%
4th Quarter 10,444 0.0 0.9 2.4 3.0 5.3 3.1 4.8 5.5%
1996:
1st Quarter 15,906 0.0 0.8 2.0 3.3 3.4 2.8 2.7%
2nd Quarter 16,849 0.0 1.2 2.6 3.8 5.4 5.7%
3rd Quarter 15,467 0.0 0.8 2.0 2.2 3.2%
4th Quarter 22,220 0.0 0.4 2.2 2.0%
1997:
1st Quarter 32,361 0.0 0.6 2.2%
2nd Quarter 38,478 0.0 1.5%
3rd Quarter 51,664 0.0%
</TABLE>
(1) Excludes data for Granite Financial Acquisition Corp. I. Lease
delinquencies are calculated on a monthly basis. Monthly calculations are then
averaged to create an average delinquency rate for the period.
-14-
<PAGE> 15
The following table documents net charge-offs for each quarter presented as a
percentage of original net investment in leases for that quarter. Negative net
charge-off amounts indicate that recoveries exceeded charge-offs during the
quarter.
STATIC POOL REPORTING (1)
NET INVESTMENT CHARGE-OFFS
<TABLE>
<CAPTION>
PERCENTAGE OF ORIGINAL INVESTMENT VALUE
ORIGINAL
INVESTMENT
VALUE
CALENDAR (IN
QUARTER THOUSANDS) QTR 1 QTR 2 QTR 3 QTR 4 QTR 5 QTR 6 QTR 7 QTR 8 QTR 9 QTR 10 QTR 11 TOTAL
- ------- ------ ----- ----- ----- ----- ----- ----- ----- ----- ----- ------ ------ -----
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995:
1st Quarter $ 23 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
2nd Quarter $ 1,337 0.0% 0.0% 0.0% 0.0% 1.0% 0.0% -0.4% 0.8% 1.0% 1.9% 4.4%
3rd Quarter $ 4,755 0.0% 0.0% 0.0% 0.0% 0.0% 0.5% 0.6% 0.9% 1.6% 3.5%
4th Quarter $ 8,107 0.0% 0.0% 0.2% 0.2% 2.4% 0.8% -0.1% 1.3% 4.8%
1996:
1st Quarter $12,377 0.0% 0.0% 0.1% 1.0% 1.6% 1.3% 0.3% 4.2%
2nd Quarter $13,174 0.0% 0.0% 1.1% -0.1% 1.3% 0.6% 3.0%
3rd Quarter $12,077 -0.1% 0.0% 0.6% 0.5% 0.1% 1.2%
4th Quarter $17,338 0.0% 0.0% 0.4% 1.4% 1.8%
1997:
1st Quarter $25,309 0.0% 0.0% 0.6% 0.6%
2nd Quarter $30,231 0.0% 0.2% 0.2%
3rd Quarter $40,744 0.0% 0.0%
</TABLE>
(1) Excludes data for Granite Financial Acquisition Corp. I. and data related
to leases sold to Heartland Bank.
While the Company analyzes its static pool on a monthly basis, for presentation
purposes, the information in the table is presented on a quarterly basis. The
data in the table above is in line with what the management of the Company
expected with respect to its overall portfolio performance.
-15-
<PAGE> 16
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
a) Not applicable.
b) Not applicable.
c) Not applicable.
d) Use of proceeds of the Initial Public Offering - The Company registered
1,500,000 shares of Common Stock for sale to the public at a price of
$7.50 per share on a Form SB-2 Registration Statement (Reg. No.
33-5264-D) (the "Registration Statement") declared effective October
25, 1996. The Company also granted to the underwriters an overallotment
option, exercisable for 45 days from the effective date of the
Company's Registration Statement, to purchase up to 225,000 additional
shares of Common Stock at $7.50 per share. The Company also registered
150,000 shares of Common Stock underlying warrants issued to Cruttenden
Roth Incorporated, the underwriter of the public offering.
The initial offering was completed in October 1996 and the
overallotment option was exercised in December 1996 and the Company
received aggregate gross proceeds of $12,937,500. Expenses incurred by
the Company in connection with the issuance and distribution of the
securities registered for underwriting discounts and commissions were
$1,164,375, expenses paid to or for underwriters were $388,125, and
other expenses (consisting of registration fees, filing fees, legal
fees, printing and engraving, consulting fees, accounting fees,
transfer agent fees and costs and other related costs) were $636,108,
for total expenses of $2,188,608. None of such expenses were direct or
indirect payments to directors, officers or their associates or to
persons owning ten percent or more of any class of equity securities
of the Company or to affiliates of the Company. The resulting net
offering proceeds to the Company after payment of all expenses was
$10,748,892.
From the effective date of the Registration Statement through
September 30, 1997, the net offering proceeds have been used by the
Company as follows: purchase and installation of machinery and
equipment, $491,869; repayment of indebtedness, $1,178,020; working
capital, $747,592; payment for marketing activities, $152,408;
distributions to members for tax liabilities, $111,000; fund expanded
leasing operations, $6,000,000; payment of expenses associated with
the Company's second securitization and funding of collateral
enhancement leases, $2,068,003. None of such expenditures were direct
or indirect payments to directors, officers or their associates or to
persons owning ten percent or more of any class of equity
-16-
<PAGE> 17
securities of the Company or to affiliates of the Company. Furthermore,
the use of proceeds described above does not represent a material change
in the use of proceeds described in the prospectus contained in the
Registration Statement. All of the initial offering proceeds have been
applied.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
-17-
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8 - K
None.
-18-
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Form 10-QSB to be signed on its behalf by the
undersigned, thereunto duly authorized.
GRANITE FINANCIAL, INC.
Dated: November 14, 1997 By: /s/ William W. Wehner
-----------------------------
William W. Wehner
Chairman and Chief Executive Officer
Dated: November 14, 1997 By: /s/ William S. Cobb
----------------------------------
William S. Cobb
Senior Vice President
Corporate Development and Chief
Financial Officer
-19-
<PAGE> 20
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
11 Computation of Earnings Per Share
27 Financial Data Schedule
-18-
<PAGE> 1
EXHIBIT 11
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1996 1997
---------- ----------
<S> <C> <C>
Earnings Per Share - Basic
Earnings
Pro forma net income (1996) - Net income (1997) ( a ) $ 325,977 $ 861,280
---------- ----------
Pro forma net income (1996) - Net income (1997) $ 325,977 $ 861,280
========== ==========
Shares
Weighted average pro forma common shares outstanding (1996) -
Weighted average common shares outstanding (1997) 2,000,000 5,798,750
========== ==========
Pro forma net income per share - Basic (1996) - Net income per share
- Basic (1997) $ 0.16 $ 0.15
========== ==========
Earnings Per Share - Diluted
Earnings
Pro forma net income (1996) - Net income (1997) ( a ) $ 325,977 $ 861,280
========== ==========
Pro forma net income (1996) - Net income (1997) $ 325,977 $ 861,280
========== ==========
Shares
Weighted average pro forma common shares outstanding (1996) -
Weighted average common shares outstanding (1997) 2,000,000 5,798,750
Additional dilutive effect of assumed exercise of stock options ( b ) -- 113,913
========== ==========
Pro forma common shares outstanding (1996) - Common and common
equivalent shares outstanding (1997) 2,000,000 5,912,663
========== ==========
Pro forma net income per share - Diluted (1996) - Net income per
share - Diluted (1997) $ 0.16 $ 0.15
========== ==========
</TABLE>
( a ) The 1996 period reflects pro forma taxes at 37% as if the entity was
taxed as a C Corporation.
( b ) Common stock equivalents are calculated using the treasury stock method.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 5,577,444
<SECURITIES> 0
<RECEIVABLES> 51,524,064
<ALLOWANCES> 1,274,340
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,599,360
<DEPRECIATION> 332,613
<TOTAL-ASSETS> 63,816,876
<CURRENT-LIABILITIES> 0
<BONDS> 23,260,598
0
0
<COMMON> 6,140
<OTHER-SE> 34,326,175
<TOTAL-LIABILITY-AND-EQUITY> 63,816,876
<SALES> 32,621,893
<TOTAL-REVENUES> 33,986,062
<CGS> 30,283,319
<TOTAL-COSTS> 30,283,319
<OTHER-EXPENSES> 1,725,464
<LOSS-PROVISION> 60,700
<INTEREST-EXPENSE> 525,334
<INCOME-PRETAX> 1,391,245
<INCOME-TAX> 529,965
<INCOME-CONTINUING> 861,280
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 861,280
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
