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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 16, 1997.
REGISTRATION NO. 333- .
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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GRANITE FINANCIAL, INC.
(Name of small business issuer in its charter)
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DELAWARE 6153 84-1349929
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code) Identification No.)
WILLIAM W. WEHNER
6424 WEST 91ST AVENUE 6424 WEST 91ST AVENUE
WESTMINSTER, COLORADO 80030 WESTMINSTER, COLORADO 80030
TELEPHONE: (303) 650-4059 TELEPHONE: (303) 650-4059
(Address and telephone number of principal (Name, address and telephone number
executive
offices and principal place of business) of agent for service)
Copies to:
ROBERT W. WALTER, ESQ. STEVEN E. SEGAL, ESQ. NOLAN S. TAYLOR, ESQ.
DAVID C. ROOS, ESQ. LEBOEUF, LAMB, GREENE THOMAS R. TAYLOR, ESQ.
CURT R. FOUST, ESQ. & MACRAE, L.L.P. LEBOEUF, LAMB, GREENE
BERLINER ZISSER WALTER & GALLEGOS, P.C. SUITE 2000 & MACRAE, L.L.P.
1700 LINCOLN STREET, SUITE 4700 633 SEVENTEENTH STREET 136 SOUTH MAIN STREET, SUITE 1000
DENVER, COLORADO 80203 DENVER, COLORADO 80202 SALT LAKE CITY, UTAH 84101
TELEPHONE: (303) 830-1700 TELEPHONE: (303) 291-2600 TELEPHONE: (801) 320-6700
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the
Securities Act, please check the following box and list the Securities Act
registration statement number
of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check
the following box and list the Securities Act registration statement number of
the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock................................. 2,415,000(2) $ 9.50 $22,942,500 $6,952.27
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Underwriters' Warrants for Common Stock...... 150,000 $ .001 $ 100 $ .03
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Common Stock underlying Underwriters'
Warrants(3)................................ 150,000 $11.88 $ 1,782,000 $ 540.00
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Total............................... $24,724,600 $7,492.30
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c).
(2) Includes 315,000 shares of Common Stock contained in the over-allotment
option.
(3) Pursuant to Rule 416, includes such indeterminate number of additional
shares of Common Stock as may be required for issuance upon exercise of the
Underwriters' Warrants as a result of any adjustment in the number of shares
of Common Stock issuable upon such exercise by reason of the anit-dilution
provisions of the Underwriters' Warrants.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PROSPECTUS SUBJECT TO COMPLETION, DATED JUNE 16, 1997
dated , 1997
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[GRANITE FINANCIAL, INC. 2,100,000 SHARES
LOGO] GRANITE FINANCIAL, INC.
COMMON STOCK
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The shares of Common Stock offered hereby are being sold by Granite Financial,
Inc. (the "Company"). The Company's Common Stock trades on the Nasdaq National
Market under the symbol "GFNL." On June 13, 1997, the last reported sale price
of the Common Stock was $9.38 per share. See "Price Range of Common Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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Per Share....................................... $ $ $
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Total(3)........................................ $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. The Company has also agreed to issue to certain of the Underwriters
warrants to purchase 150,000 shares of Common Stock exercisable at
$ (125% of the Price to Public). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $375,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 315,000 shares of Common Stock solely to cover
over-allotments, if any, at the Price to Public shown above, less the
Underwriting Discount. If this option is exercised in full, the total Price
to Public, Underwriting Discount and Proceeds to Company will be
$ , $ , and $ , respectively. See "Underwriting."
The shares of Common Stock are offered by the Underwriters subject to prior sale
when, as, and if delivered and accepted by the Underwriters and subject to their
right to reject orders in whole or in part. It is expected that delivery of the
Common Stock will be made at the offices of Piper Jaffray Inc. in Minneapolis,
Minnesota or in book-entry form through the book-entry facilities of The
Depository Trust Company on or about , 1997.
PIPER JAFFRAY INC.
RAYMOND JAMES & ASSOCIATES, INC.
CRUTTENDEN ROTH
INCORPORATED
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[FOUR COLOR PICTURES TO COME]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED (THE "EXCHANGE ACT"). SEE "UNDERWRITING."
2
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and Consolidated Financial
Statements and the related Notes thereto appearing elsewhere in this Prospectus.
Except as otherwise indicated, all information in this Prospectus assumes that
the Underwriters' over-allotment option will not be exercised. Unless the
context indicates otherwise, all references herein to the "Company" refer to
Granite Financial, Inc., its limited liability company predecessor and its
subsidiaries. Industry data used in this Prospectus was obtained from industry
publications that the Company believes to be reliable, but has not been
independently verified. Each prospective investor is urged to read this
Prospectus in its entirety.
THE COMPANY
The Company is a finance company specializing in originating, funding,
acquiring, selling, securitizing and servicing non-cancelable, full-payout
equipment leases for a broad range of businesses located throughout the United
States. The Company's operations are primarily in the small-ticket segment of
the equipment leasing market, which encompasses leases of equipment with
original purchase prices of $100,000 or less. The average purchase price of
equipment leased by the Company's lessees is approximately $30,000 per lease.
Leases are originated through a network of approximately 50 independent lease
originators selected by the Company's experienced management team. The Company
is committed to providing the highest level of service to its lease originators
and is investing in advanced technology which will allow the Company to
electronically link each originator with the Company's systems and resources.
The Company also develops specialty lease finance programs in conjunction with
its lease originators that are designed to meet the particular financing
requirements of the business customer. Through providing superior customer
service and streamlining the lease application and funding process, the Company
seeks to position itself as a strategic partner with its lease originators.
The Company is currently implementing a consolidation strategy in the
small-ticket segment of the equipment leasing market. The Company believes a
favorable environment exists for acquisitions in this segment of the equipment
leasing market because of the highly fragmented nature of the industry, the
inability of a significant number of small equipment lease finance companies to
obtain more favorable financing rates available through the asset-backed
securities markets and the increased cost of new technologies that generally
cannot be afforded by smaller participants in the market. The Company's
consolidation strategy encompasses the purchase of other companies active in the
small-ticket segment of the equipment leasing market as well as independent
lease originators that may or may not currently conduct business with the
Company. Consistent with this consolidation strategy, the Company concluded the
acquisition of Global Finance & Leasing, Inc. ("Global Finance") in March 1997.
Founded in 1989, Global Finance specializes in providing equipment lease
financing for point-of-sale equipment which costs $2,000 or less per lease. The
Company's consolidation strategy is designed to expand its existing business and
take advantage of its core competencies including, among other things, its
highly developed customer service program, use of sophisticated technology to
achieve efficiencies in the application, underwriting and collection processes,
development of close working relationships with lease originators, knowledge of
the equipment leasing market and experienced management team.
The Company has experienced significant growth since its founding in
February 1995. The aggregate of lease payments under all leases financed by the
Company and either held as direct financing leases, or sold to third parties or
securitized, excluding leases funded by Global Finance (the "Gross Servicing
Portfolio") increased from $1.2 million at June 30, 1995 to $44.2 million at
June 30, 1996, and totalled $94.4 million at March 31, 1997. Total revenues
increased from $1.3 million in the period ended June 30, 1995 to $21.9 million
for fiscal 1996. For the first nine months of fiscal 1997, total revenues
increased 222.3% to $53.2 million from $16.5 million for the comparable period
of 1996, while pro forma net income increased 490.2% to $1.4 million from
$230,000 for the comparable period of 1996. The Company has also experienced
significant increases in lease applications, with its funding backlog increasing
from $2.9 million at June 30, 1995 to $12.9 million at
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June 30, 1996. At March 31, 1997, the Company had a backlog of approved lease
applications of approximately $31.4 million that were subject to lessee
acceptance of the lease terms, equipment delivery and funding.
According to the Equipment Leasing Association and the International Trade
Administration, business equipment leased in the United States accounted for
approximately $168.9 billion of 1996 business investment in equipment, compared
to $85.0 billion in 1986. The Company estimates that the market for small-ticket
equipment with an original purchase price of $100,000 or less constitutes
between approximately 25.0% and 30.0%, or an estimated range of $42.3 billion to
$50.7 billion of equipment acquired under lease. The small-ticket equipment
leasing market has experienced growth in recent years because of several
factors, including (i) the decline in prices of computers and computer
peripherals and corresponding increases in demand for this equipment; (ii) the
adoption of accounting pronouncements concerning the consolidation of earnings
of manufacturers and captive finance company subsidiaries, which has resulted in
an increased demand for independent financing such as that provided by the
Company; (iii) the consolidation of the banking industry; (iv) stricter lending
requirements of commercial banks; and (v) reductions in the cost of funds for
independent finance companies such as the Company through access to the
asset-backed securities market and other sources of lower cost capital.
The Company derives its earnings primarily from gains recognized on the
securitization or sale of leases. The Company has completed three securitization
transactions to date under which a special purpose subsidiary of the Company
sells lease-backed notes or certificates to institutional investors. In each
securitization, the Company receives advances based on a percentage which is
less than the aggregate present value of cash flows from an undifferentiated
pool of leases, effectively overcollateralizing the lease-backed notes or
certificates. Over the life of the lease pool securitized, the Company is
eligible to receive the excess cash flow (the "securitization residual
interest") resulting from the difference between the lease payments received,
net of defaults, and the payment of (i) principal and interest to investors in
lease-backed notes or certificates and (ii) servicing, backup servicing and
trustee fees and other securitization expenses. Payments due under the
lease-backed securities issued in each of the Company's securitizations have
been insured by a financial guaranty issued by MBIA Insurance Corporation and
have been rated AAA by Standard & Poor's Ratings Group and Aaa by Moody's
Investors Service. In the nine months ended March 31, 1997, the sales of leases
disposed of through securitization transactions represented 62.4% of the
Company's total revenues. The Company anticipates that sales of leases through
securitization transactions will comprise a significant portion of the Company's
revenues in future periods. Following securitization or sale of leases, the
Company services leases, for which it also receives monthly servicing fees.
The Company's objective is to become a leading provider of business
equipment lease financing in the small-ticket segment of the equipment leasing
market. The principal components of the Company's strategy for achieving this
objective are to (i) undertake additional strategic acquisitions in order to
accelerate growth, leverage operating efficiencies and increase funding volume;
(ii) expand the Company's existing business through a variety of means,
including implementing new marketing initiatives, establishing strategic
alliances with select equipment vendors, and entering the business-to-business
("e-commerce") market through an Internet Web site now under development; (iii)
maintain and enhance the Company's relationship with its network of select
independent lease originators through continuing strong customer service,
developing additional specialty leasing programs and implementing new
interactive technologies designed to maximize efficiencies in the lease
application, underwriting, approval, servicing and collection functions; (iv)
reduce and control the Company's cost of capital by conducting additional
securitization transactions and through the establishment and maintenance of
relationships with a diverse group of funding sources; and (v) utilize
sophisticated data processing systems and stringent internal controls to monitor
and maintain the application of consistent underwriting criteria throughout the
lease application process.
The Company was incorporated as a Delaware corporation in June 1996. The
Company's offices are located at 6424 West 91st Avenue, Westminster, Colorado
80030, and its telephone number is (303) 650-4059.
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THE OFFERING
Common Stock offered by the
Company.................. 2,100,000 shares
Common Stock to be
outstanding after this
offering................. 5,825,000 shares(1)
Use of proceeds............ To consummate acquisitions, to support
securitization transactions, to implement
computer system upgrades and interactive
technology to further expand the Company's
business, for other working capital needs and for
general corporate purposes. Pending application,
net proceeds will be used to temporarily reduce
indebtedness. See "Use of Proceeds."
Nasdaq National Market
symbol................... GFNL
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(1) Excludes 570,000 shares of Common Stock issuable upon the exercise of
options and warrants outstanding at May 31, 1997. See "Management -- Option
Plan" and "Description of Capital Stock."
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
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NINE MONTHS
ENDED MARCH 31 FISCAL YEAR FEBRUARY 21, 1995
----------------- ENDED (INCEPTION) TO
1997 1996 JUNE 30, 1996 JUNE 30, 1995
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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STATEMENT OF OPERATIONS DATA(1):
Sales of leases............................. $50,308 $16,380 $20,638 $1,261
Income from direct financing leases......... 2,918 135 1,224 7
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Total revenues.............................. 53,226 16,515 21,862 1,268
Cost of leases sold......................... 46,876 15,296 19,297 1,172
Provision for credit losses................. 443 46 95 28
Interest expense............................ 1,377 16 551 --
Securitization expenses and amortization.... 257 -- -- --
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Total costs................................. 48,953 15,358 19,943 1,200
Gross profit................................ 4,273 1,157 1,919 68
Other expenses.............................. 1,935 792 1,156 246
Pro forma income taxes(2)................... 983 135 282 --
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Pro forma net income (loss)................. $ 1,355 $ 230 $ 481 $ (178)
======= ======= ======= =======
Pro forma earnings (loss) per share......... $ .44 $ .11 $ .24 $ (.09)
OTHER DATA(1):
Dollar amount of leases funded during
period................................... $49,692 $23,110 $35,169 $1,450
Number of leases funded during period (not
in thousands)............................ 1,962 920 1,381 64
Gross Servicing Portfolio(3)................ $94,444 $30,692 $44,163 $1,216
Number of leases serviced as of period ended
(not in thousands)....................... 3,305 979 1,443 63
Delinquencies as a percentage of Gross
Servicing Portfolio at end of
period(4)................................ 1.65% .97% 1.44% --
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MARCH 31, 1997
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ACTUAL AS ADJUSTED(5)
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(IN THOUSANDS)
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BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 4,775 $13,031
Direct financing leases................................... 11,194 11,194
Direct financing leases assigned to lender................ 17,341 17,341
Securitization residual interest.......................... 6,107 6,107
Total assets.............................................. 45,495 53,751
Total liabilities......................................... 30,749 20,826
Stockholders' equity...................................... 14,746 32,925
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(1) Excludes information for Global Finance, which was acquired on March 31,
1997.
(2) Prior to the Company's initial public offering of Common Stock on October
25, 1996 (the "Initial Public Offering"), the Company was a limited
liability company and not subject to federal or state corporate income
taxes. On the date of the Initial Public Offering, the Company changed its
form of organization from a limited liability company to a C Corporation,
recorded deferred income taxes totalling approximately $100,000 and began
providing for federal and state corporate income taxes from that date. Pro
forma data includes adjustments for federal and state income taxes as if the
Company had been taxed as a C Corporation at a combined federal and state
tax rate of 37.0% for all periods presented. See Note 7 to Consolidated
Financial Statements.
(3) The Company's Gross Servicing Portfolio consists of aggregate lease payments
for all leases financed by the Company and either held as direct financing
leases, or sold to third parties or securitized, as of the end of the
indicated periods.
(4) Represents delinquencies of 31 or more days. The Company had no
delinquencies over 31 days at June 30, 1995.
(5) Adjusted to reflect the sale of 2,100,000 shares of Common Stock by the
Company at the assumed offering price of $9.50 per share and the application
of the estimated net proceeds therefrom, including repayments of amounts
outstanding under certain credit facilities of which a total of $9.9 million
was outstanding at March 31, 1997. See "Use of Proceeds."
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RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing shares of Common Stock offered hereby. This
Prospectus contains certain forward-looking statements that involve substantial
risks and uncertainties. When used in this Prospectus, the words "may," "will,"
"expect," "anticipate," "continue," "estimate," "project," "intend," "believe"
and similar expressions are intended to identify 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 regarding events, conditions and
financial trends that may affect the Company's future plan of operations,
business strategy, operating results and financial position. Prospective
investors are cautioned that any forward-looking statements are not guarantees
of future performance and are subject to risks and uncertainties and that actual
results could differ materially from the results expressed in or implied by
these forward-looking statements as a result of various factors. Such factors
are described under the headings "Management's Discussion and Analysis of
Financial Condition and the Results of Operations," "Business" and in the risk
factors set forth below.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The Company requires significant capital resources to fund new
equipment leases. In the nine months ended March 31, 1997, the Company's
liquidity was provided through the completion of the Initial Public Offering,
closing of two securitization transactions and establishment or assumption of
additional bank and other credit facilities. The Company's operating cash
requirements exceeded cash available from operations in the nine months ended
March 31, 1997 and fiscal 1996 as a result of the Company's rapid growth and
limited access to capital. Net cash used in operating activities in the nine
months ended March 31, 1997 and fiscal 1996 was $3.8 million and $7.0 million,
respectively. The Company's operating cash requirements include (a) funding of
equipment leases and interest expense on leases funded under bank and other
credit facilities, (b) fees and expenses incurred in connection with lease sales
and securitizations, including the cost of supporting each securitization
through over-collateralization of the amount funded, (c) tax payments and (d)
administrative and other operating expenses. The Company has obtained cash
required in operations through (a) lease sales and securitization transactions,
(b) bank and other credit facilities and warehouse financing arrangements under
which leases are financed on a temporary basis and (c) sales of equity to
affiliates of the Company upon formation of Granite Financial, LLC and in the
Initial Public Offering. At March 31, 1997, the Company had cash and cash
equivalents of approximately $4.8 million and unused borrowing capacity of $33.1
million under its bank credit facilities. The Company will continue to be
dependent on its ability to secure additional financing when and as needed, and
on terms acceptable to the Company, the unavailability of which could materially
adversely affect the Company's results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Dependence on Warehouse Credit Line and Other Credit Facilities. In
February 1997, the Company established a $36.0 million warehouse credit line
("Warehouse Credit Line") with a bank syndicate led by CoreStates Bank, N.A.,
under which the Company borrows against leases held for sale or pending their
inclusion in securitization transactions. The Warehouse Credit Line expires in
February 1998, subject to extension for additional one-year periods upon the
Company's request but at the sole discretion of the lenders. The Company
maintains six other full recourse credit facilities aggregating $12.5 million,
of which $6.0 million is available for funding at various times through July
1997, $2.0 million is available under an unsecured revolving line of credit
which expires on or before January 1998, and $4.5 million is available under two
term loans and a line of credit assumed by the Company in connection with the
acquisition of Global Finance. The credit facilities assumed on closing of the
Global Finance acquisition are currently usable only by Global Finance and not
by Granite Financial, Inc. The Company will use $1.5 million of the net proceeds
of this offering to prepay a term loan assumed by the Company in the Global
Finance acquisition. See "Use of Proceeds." Two of the Company's bank credit
facilities aggregating $6.0 million expire in June and July 1997. Given the
Company's access to other credit facilities, the Company may elect not to renew
these facilities. The Company anticipates that it will maintain its existing
Warehouse Credit Line and certain of its other
7
<PAGE> 9
credit facilities. The Company will seek to obtain replacement or additional
financing as these and other arrangements expire or become fully utilized.
However, there can be no assurance such replacement or additional financing will
be obtainable on acceptable terms. To the extent the Company is unable to
maintain its existing credit facilities or to arrange new credit facilities with
sufficient borrowing capabilities, the Company may have to curtail lease funding
activities, which could have a material adverse effect on the Company's
financial condition and results of operations.
Dependence on Securitization Transactions. The Company depends on pooling
and selling leases in securitization transactions to repay its bank and other
credit facilities and to generate cash for funding of new leases. In the nine
months ended March 31, 1997, the Company completed two securitization
transactions under which lease-backed securities in the aggregate principal
amount of up to $92.5 million can be issued by the Company through grantor
trusts, and as to which $30.7 million had been issued at March 31, 1997. The
sales of leases disposed of through securitization transactions represented
approximately 62.4% of the Company's revenues in the nine months ended March 31,
1997 and is expected to comprise a significant portion of the Company's revenues
in future periods. Accordingly, the Company's results of operations may
fluctuate from quarter to quarter as a result of the timing and size of its
securitizations. The timing of any securitization transaction is affected by a
number of factors, some of which are beyond the Company's control, including
conditions in the securities markets generally, conditions in the asset-backed
securities markets specifically, the credit quality of the Company's lease
portfolio, availability of third-party credit enhancements, the ability of the
Company to adequately service its lease portfolio, and the absence of any
material down-grading or withdrawal of ratings given to securities previously
issued in the Company's securitizations. While the Company retains the right to
substitute performing leases for non-performing leases in each securitization,
subject to certain limitations, a significant increase in non-performing leases
as to which substitution is impractical or untimely may trigger acceleration of
repayment obligations of principal outstanding under lease-backed notes or
certificates, which would materially adversely affect the Company's receipt of
cash flows from the securitization residual interest. The amount of any gain on
sale through a securitization is based upon certain estimates, which may not
subsequently be realized. To the extent that actual cash flows on a
securitization are materially below estimates, the Company would be required to
revalue the securitization residual interest and record a charge to earnings
based upon the reduction. Because the securitization residual interest retained
by the Company bears the risk of loss on the entire portfolio of leases which
are securitized in a particular transaction, small fluctuations in charge-off
rates and other factors could have a material adverse effect on the Company's
ability to realize its recorded basis in the securitization residual interest.
Adverse changes in the market for securitized leases, or a substantial
lengthening of the warehousing period, would adversely impact the Company's
reported earnings, the funding available to the Company, could require the
Company to curtail its funding of new leases, and could have a material adverse
effect on the financial condition of the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
ECONOMIC CONSIDERATIONS
Fluctuations in Portfolio Performance. The Company specializes in funding
leases of equipment with a purchase price of less than $100,000 to commercial
businesses located throughout the United States. To date, a significant majority
of leases funded by the Company have related to equipment leased by small and
mid-size businesses. Although the Company conducts its own independent credit
investigation and maintains strict underwriting criteria, no assurance can be
given that such criteria will afford adequate protection against payment
delinquencies or charge-offs. Because the Company commenced operations in
February 1995, there is limited performance data available with respect to the
Company's Gross Servicing Portfolio and, consequently, historical delinquency
and charge-off statistics are not necessarily indicative of future performance.
As anticipated by the Company, the Company's statistical analysis indicates that
delinquencies and charge-offs have risen as a percentage of lease receivables as
leases in the Gross Servicing Portfolio have aged and become more seasoned. In
the event the Company's leases experience higher delinquencies or charge-offs
than anticipated, the Company's earnings could be negatively impacted. In
addition, increasing rates of delinquencies or charge-offs could result in
adverse changes in the structure of the Company's future securitization
transactions, such as increased interest rates on asset-backed notes or
certificates issued in such
8
<PAGE> 10
transactions, an increase in the Company's net investment in the securitization
residual interest or a reduction in the advance rate against leases included in
a securitization transaction. See "Business."
Risk of General Economic Downturn. The Company's business is directly
related to business investment in capital and other equipment, which is
influenced by a variety of factors including the implicit return on capital
invested, prevailing interest rates, availability of capital and other general
economic conditions. Although the Company believes that current economic
conditions favor continued growth in the markets it serves, a future economic
slowdown or recession could adversely affect the Company's ability to fund or
securitize leases. In addition, delinquencies and charge-offs could be expected
to rise in an adverse economic environment, which could also adversely impact
the Company's ability to sell or securitize leases which it funds or its ability
to recognize its basis in the securitization residual interest or in leases held
in its portfolio.
Interest Rate and Cost of Funds Risk. The Company's profitability is
determined by, among other things, the difference between the implicit lease
rate charged to lessees and the Company's cost of funds. The implicit lease
rates charged by the Company are based on interest rates prevailing in the
market at the time of lease approval. Until the Company sells or securitizes
leases, the Company generally funds the cost of the lease investment under its
variable rate bank credit facilities and from working capital. The Company's
operating margins could be adversely affected if interest rates increase prior
to the Company selling or securitizing leases or if the Company is unable to
securitize leases. Future increases in the Company's cost of funds could result
in the Company raising the implicit lease rate charged to its customers, which
could cause originators or customers to seek funding elsewhere. The Company has
sought to mitigate the risk of interest rate increases by attempting to match
funds required for lease financings with funds available through bank and other
credit facilities, securitization transactions and lease sales. Although the
Company may be able to dispose of leases through other securitization
transactions in the event interest rates decline, existing securitization
arrangements require the Company to securitize a minimum dollar amount of leases
on a periodic basis. The Company does not hedge against interest rate increases
using derivative securities or otherwise. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
REALIZATION OF SECURITIZATION RESIDUAL INTEREST
In each securitization transaction conducted to date, the Company receives
advances based on a percentage which is less than the aggregate present value of
cash flows from an undifferentiated pool of leases, effectively
overcollateralizing the lease-backed notes or certificates. Over the life of the
leases securitized, the Company is eligible to receive the excess cash flow (the
"securitization residual interest") resulting from the difference between the
lease payments received, net of defaults, and the payment of (i) principal and
interest to investors in lease-backed notes or certificates and (ii) servicing,
backup servicing and trustee fees and other securitization expenses. The cash
flows ultimately available from the securitization residual interest are largely
dependent upon the actual default rates experienced on leases securitized in a
particular pool. Because the securitization residual interest bears the risk of
loss on the entire portfolio of leases in a particular securitized pool, small
fluctuations in defaults could have a material adverse effect on the Company's
ability to realize its recorded basis in the securitization residual interest.
The sales of leases disposed of through securitization transactions represented
approximately 0% and 62.4% of the Company's revenues in fiscal 1996 and in the
nine months ended March 31, 1997, respectively, and is expected to comprise a
significant portion of the Company's revenues in future years. The Company's
cost of leases sold through securitizations have been calculated using estimates
concerning charge-offs, recoveries from liquidated equipment and other factors
that are consistent with both the Company's and industry experience and that the
Company believes is consistent with estimates that would be applied by unrelated
purchasers of similar streams of estimated cash flows. Although actual
charge-offs have been materially consistent with management's estimates to date,
the lack of seasoning of the Company's leases and rapid increases in leases
available for sale could result in future charges to earnings as a result of
actual charge-offs exceeding management's forecasts. Any such future charges
could cause the price of the Common Stock to decline, perhaps substantially. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
9
<PAGE> 11
RISKS ASSOCIATED WITH CONSOLIDATION STRATEGY
One of the Company's strategies for growth is to acquire other companies
that originate, fund, service and sell equipment leases. Although the Company
has discussed and continues to discuss possible acquisitions with a variety of
entities, to date the Company has acquired only one company, Global Finance, and
currently has no acquisition agreements, understandings or commitments for any
material acquisitions, either singly or in the aggregate. In June 1997, the
Company entered into a memorandum of understanding to acquire a lease
origination company located in the State of New York. The acquisition is subject
to completion of due diligence, execution of a definitive agreement and
customary closing conditions. If completed, the acquisition will not have a
material effect on the Company's financial position and results of operations.
There can be no assurance that the acquisition of the lease originator will be
consummated or that the owners of other companies the Company desires to acquire
will be willing to sell them to the Company on reasonable terms, if at all.
Certain of the Company's competitors may also seek to acquire the same companies
which the Company seeks to acquire. This may increase the price and related
costs at which the Company could otherwise have acquired such companies, perhaps
materially. The Company's inability to complete acquisitions on reasonable terms
could adversely affect the Company's ability to grow its business.
The Company anticipates that it may expend a material and undetermined
portion of the proceeds of this offering to pursue and consummate acquisitions.
Such use of proceeds may significantly shorten the period of time during which
the proceeds of this offering are expected to fund the Company's operations and
will reduce the Company's working capital to the extent the Company uses cash to
fund acquisitions. In addition, the Company may fund acquisitions in whole or
part by issuing equity securities, and any such issuances, individually or in
the aggregate, may be substantially dilutive to holders of the Common Stock.
Acquisitions also may result in the Company incurring additional debt and
amortizing costs related to goodwill and other intangible assets, either of
which could have a material adverse effect on the Company's results of
operations.
The Company may experience difficulties in assimilating the operations,
services and personnel of acquired companies and may be unable to sustain or
improve the historical revenue and earnings levels of acquired companies, any of
which may materially adversely affect the Company's operating results. In
addition, to the extent it becomes necessary for the Company to fund the working
capital requirements of acquired companies, the Company's working capital
available for its currently existing operations will decrease. Acquisitions
involve a number of additional risks, including the diversion of management's
attention from ongoing business operations and the potential loss of key
employees of acquired companies. There can be no assurance that the Company can
successfully implement its consolidation strategy. The failure to consummate
acquisitions on reasonable terms or the inability to successfully integrate and
manage acquired operations and personnel could have a material adverse impact on
the Company's business and results of operations. See "Business."
COMPETITION
The market for financing in the small-ticket segment of the equipment
leasing industry is highly competitive. The Company competes with a number of
national, regional and local finance companies. The Company also competes
against captive finance companies affiliated with major equipment manufacturers,
commercial banks, savings and loan associations, credit unions and conventional
leasing companies. Many of the Company's competitors, as well as potential
competitors, possess substantially greater financial, marketing, personnel and
other resources than the Company. The Company's competitors and potential
competitors include far larger, more established companies that have access to
capital markets for unsecured commercial paper and investment grade rated debt
instruments, and to other funding sources that may be unavailable to the
Company. The Company is currently developing an interactive system for lease
origination. If similar systems are first developed or implemented by others,
the Company could be at a competitive disadvantage. There can be no assurance
the Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, operating results and financial
condition. See "Business -- Competition."
10
<PAGE> 12
LIMITED HISTORY OF OPERATIONS; MANAGEMENT OF RAPID GROWTH
The Company was organized in February 1995 and has had a limited history of
operations. Although the Company was profitable in fiscal 1996 and in the nine
months ended March 31, 1997, there can be no assurance that the Company's
operations will remain profitable. Since its inception, the Company has
significantly expanded its business and experienced rapid growth in revenues.
This significant growth has required the Company to increase its management,
administrative and financial resources and to hire, train, supervise and manage
an increased number of customer service, underwriting, accounting and other
personnel. The ability of such personnel to successfully manage the
underwriting, lease approval and collection functions will be dependent upon the
maintenance of consistently enforced underwriting criteria, existence of
adequate internal controls, efficient collection procedures, adequate staffing
and the use of effective automated systems. There can be no assurance that the
Company's management, staff, procedures, internal controls or systems will be
adequate to maintain, support and successfully manage the Company's anticipated
growth. Failure to manage growth and other changes in its business could have a
material adverse impact on the Company's results of operations and financial
condition. See "Business."
DEPENDENCE ON INDEPENDENT LEASE ORIGINATORS
The Company's leases are originated through a network of approximately 50
select independent lease originators located throughout the United States. Lease
transactions generated by the largest single independent lease originator
accounted for approximately 18.0% and 15.7% of the gross dollar amount of leases
funded by the Company during fiscal 1996 and the nine months ended March 31,
1997, respectively. Four independent lease originators accounted for between
5.0% and 10.0% of the gross dollar amount of leases funded by the Company during
the nine months ended March 31, 1997. Two independent lease originators each
accounted for between 5.0% and 10.0% of the gross dollar amount of leases funded
by the Company during fiscal 1996. The Company enters into non-exclusive
brokerage agreements with each of its independent lease originators which are
terminable on short notice. Continued growth in leases originated by its network
of independent lease originators will be dependent in part on the Company's
ability to obtain efficiencies in the lease approval process and to otherwise
enhance the level of service offered to its independent lease originators.
Should one or more independent lease originators that generate a significant
number of leases begin directing funding opportunities to the Company's
competitors, the Company's results of operations could be materially adversely
affected. See "Business."
DEPENDENCE ON KEY PERSONNEL
The Company's success is largely dependent on the efforts of William W.
Wehner, its Chairman of the Board and Chief Executive Officer, Larry K. White,
its President, Frank J. Corcoran, its Chief Financial Officer and on William S.
Cobb, Mark H. Speros, Kelly G. Long, William W. ("Skip") Wehner and Mark A.
Miyasaki, each of whom is a senior officer responsible for a different aspect of
the Company's operations. The Company has entered into employment agreements
with William W. Wehner, its Chief Executive Officer, and Larry K. White, its
President, but has no employment agreement with any other officer. Larry K.
White and Frank J. Corcoran, the Chief Financial Officer, were only recently
hired by the Company and therefore have had limited involvement in the Company's
operations to date. The loss of the services of any of the Company's senior
management personnel could have a material adverse effect on the Company,
although loss of William W. Wehner's services would be most significant. The
Company has obtained "key man" life insurance on the life of Mr. Wehner in the
amount of $2.0 million. See "Management."
CONTROL OF THE COMPANY
Following this offering, the Company's executive officers, directors and
their affiliates will, in the aggregate, beneficially own approximately 41.8% of
the Company's outstanding shares of Common Stock. These stockholders, if acting
together, would be able to effectively control most matters requiring approval
by the stockholders of the Company, including the election of the members of the
Board of Directors, the authorization of an increase in the Company's capital
stock, or the dissolution, merger or sale of the Company.
11
<PAGE> 13
The voting power of such stockholders under certain circumstances could have the
effect of delaying or preventing a change in control of the Company. See
"Principal Stockholders."
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND STATUTORY PROVISIONS
The Board of Directors of the Company is authorized, subject to certain
limitations, to issue without further consent of the stockholders up to
2,000,000 shares of Preferred Stock with rights, preferences and privileges
designated by the Board of Directors. In addition, in the event of certain
change of control transactions, the vesting of options and the expiration of any
restriction periods on stock awards under the 1996 Stock Option Plan (the
"Option Plan") may be accelerated. These provisions could have the effect of
delaying, deferring or preventing a change in control of the Company. In
addition, the Company is subject to the provisions of Section 203 of the General
Corporation Law of the State of Delaware ("Section 203") regulating corporate
takeovers. Section 203 prevents certain Delaware corporations from engaging,
under certain circumstances, in a "business combination" with an "interested
stockholder" (as defined) for three years following the date that such
stockholder became an "interested stockholder," unless the business combination
or interested stockholder is approved in a prescribed manner. These provisions
of Delaware law could delay or make more difficult a merger, tender offer or
proxy contest involving the Company. See "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after
this offering could adversely affect the market price of the Common Stock. Upon
closing of this offering (and assuming no exercise of any stock options), the
Company will have a total of 5,825,000 shares of Common Stock outstanding, of
which 3,825,000 will be freely tradeable without restriction under the
Securities Act of 1933, as amended (the "Securities Act"). All of the remaining
2,000,000 shares are "restricted securities" as defined by Rule 144 promulgated
under the Securities Act. Beginning 180 days after the date of this Prospectus,
upon the expiration of lock-up agreements with the Underwriters, all of these
shares will be available for sale in the public market subject to compliance
with Rule 144 volume and other requirements. The Company also anticipates
registering for issuance or resale the 900,000 shares of Common Stock reserved
for issuance under the Option Plan. As of May 31, 1997, options to purchase
420,000 shares have been granted and are outstanding under the Option Plan, of
which options to purchase 290,000 shares were then currently exercisable.
Options to purchase the remaining 130,000 shares become exercisable during
calendar 1997 and at varying times thereafter. See "Shares Eligible for Future
Sale."
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus contains certain forward-looking statements as defined in
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). These
forward-looking statements include the plans and objectives of management for
future operations, growth and development, including plans and objectives
relating to the origination, funding, sale and securitization of leases,
acquisitions and future economic performance of the Company. Specifically, the
forward-looking statements and associated risks set forth in this Prospectus
include or relate to the Company's plans or expectations to (i) capitalize on
its operational capabilities and experienced management team, (ii) increase
productivity through utilization of advanced technologies and expansion of its
business using new interactive capabilities, (iii) leverage its access to lower
cost funds through securitizations and perhaps other sources to increase the
gross profit margins of acquired companies, (iv) increase its market share as it
executes its consolidation strategy, (v) successfully implement an interactive
Web site and Internet marketing, (vi) implement additional marketing
initiatives, (vii) complete future securitization transactions or lease sales,
(viii) maintain delinquency and net charge-off rates within acceptable ranges,
(ix) identify and acquire complementary equipment leasing companies or
independent lease originators, (x) develop additional specialty lease and vendor
direct programs in the future and (xi) commence e-commerce transactions among
the Company, equipment vendors and lessees.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties that are based on
assumptions that the Company will continue to be able to provide
12
<PAGE> 14
lease financing at attractive rates, that the Company will be able to
successfully develop its interactive Web site and Internet marketing programs,
that the Company will be able to locate and successfully negotiate acquisitions
of complementary equipment leasing companies and independent lease originators,
that the Company will continue to be able to provide a high level of service to
its independent lease originators, that the Company will continue to be able to
attract qualified and experienced management personnel, that the Company has
some lead time in the development of its technology-based systems such that it
can successfully develop those systems before its competition, that competitive
conditions within the industry will not change materially or adversely, that
demand for the Company's lease financing will remain strong, that the Company
will retain its existing independent lease originators and key management
personnel, that the Company's forecasts will accurately anticipate market demand
for equipment lease financing in the small-ticket market, that the Company will
continue to have access to the asset-backed securities markets or other lower
cost sources of capital, and that there will be no material adverse change in
the Company's operations or business. Assumptions relating to the foregoing
involve judgments with respect to, among other things, future economic,
competitive and market conditions, and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond
the control of the Company and its management. Although the Company believes
that the assumptions underlying the forward-looking statements made in this
Prospectus are reasonable, any of those assumptions could prove inaccurate and,
therefore, there can be no assurance that the results contemplated in any
forward-looking statement made herein will be realized. In addition, as
disclosed elsewhere under "Risk Factors," the business and operations of the
Company are subject to substantial risks that increase the uncertainty inherent
in such forward-looking statements. Any of the other factors disclosed under
"Risk Factors" could cause the Company's revenues or net income, or the growth
in revenues or net income, to differ materially from prior results. Growth in
absolute amounts of cost of leases sold or charge-offs or the occurrence of
extraordinary events could cause actual results to vary materially from the
results contemplated by the forward-looking statements contained herein.
Budgeting and other management decisions are subjective in many respects and
thus susceptible to interpretations and periodic revisions based on actual
experience and business developments, the impact of which may cause the Company
to alter its funding, marketing, capital expenditure or other budgets, which may
in turn affect the Company's results of operations. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person or entity that the objectives or plans of the
Company can or will be achieved.
13
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are estimated to be approximately $18.2 million (approximately $21.0
million if the Underwriters' over-allotment option is exercised in full), after
deducting estimated underwriting discount and offering expenses and assuming a
public offering price of $9.50 per share.
The primary purpose of the offering is to provide the Company with
additional capital to fund its growth, including to consummate acquisitions, to
increase the number of leases that the Company can fund and hold for pooling and
sale in the asset-backed securities market, to support securitization
transactions, for other working capital needs and for general corporate
purposes. The Company intends to use an undetermined portion of the net proceeds
of this offering to pursue acquisitions of other companies engaged in the
origination, funding, servicing and sale of equipment leases. Although the
Company has discussed and continues to discuss possible acquisitions with other
entities, the Company has reached no agreements or understandings with respect
to any material acquisition. In addition, the Company will use $1.5 million to
prepay a term loan bearing interest at 13.0% per annum from Sirrom Capital, L.P.
that was assumed by the Company in the Global Finance acquisition. The Company
will also use approximately $500,000 for computer upgrades, including upgrades
for interactive systems. Pending their ultimate application, the net proceeds
will be used to reduce temporarily the Company's balances under its Warehouse
Credit Line and other credit facilities. As of March 31, 1997, amounts
outstanding under the Warehouse Credit Line bore interest at an effective rate
of 9.125% per annum and amounts outstanding under the Company's other credit
facilities bore interest at effective rates of 9.25% to 13.0% per annum. At
March 31, 1997, the amount to be temporarily repaid under the Company's credit
facilities would have been $8.4 million.
DIVIDEND POLICY
The Company currently intends to retain future earnings to finance its
growth and development and therefore does not anticipate paying any cash
dividends in the foreseeable future. In addition, the Company's revolving credit
facilities restrict the payment of cash dividends by the Company under certain
circumstances. Payment of any future dividends will depend upon the future
earnings and capital requirements of the Company and other factors which the
Board of Directors considers appropriate. For information regarding the
distribution paid to certain of the members of Granite Financial, LLC at the
time of the Initial Public Offering, see "Certain Transactions."
PRICE RANGE OF COMMON STOCK
Since the Initial Public Offering, the Company's Common Stock has been
quoted on the Nasdaq National Market under the symbol "GFNL". Prior to the
Initial Public Offering, the Common Stock was not listed or quoted on any
organized market system. The following table sets forth for the periods
indicated the high and low closing sales prices of the Common Stock as reported
on the Nasdaq National Market. Such quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
FISCAL 1997 HIGH LOW
----------- ------ -----
<S> <C> <C>
Second Quarter (from October 25, 1996)...................... $ 9.50 $8.00
Third Quarter............................................... $12.75 $9.38
Fourth Quarter (through June 13, 1997)...................... $11.00 $8.38
</TABLE>
On June 13, 1997, the last reported sale price of the Common Stock reported
on the Nasdaq National Market was as indicated on the cover page of this
Prospectus. As of March 31, 1997, there were approximately seven holders of
record of the Common Stock and the Company estimates, based upon information
provided by brokers, that it has in excess of 400 beneficial owners of its
Common Stock.
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997 and as adjusted to give effect to the sale by the Company of the
2,100,000 shares of Common Stock at an assumed public offering price of $9.50
per share and the application of the estimated net proceeds therefrom. See "Use
of Proceeds." The table should be read in conjunction with the Company's
Consolidated Financial Statements and the related Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
----------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
DEBT:
Warehouse Credit Line..................................... $ 5,686 $ --
Limited recourse Class A note payable..................... 16,293 16,293
Notes payable............................................. 4,237 --
------- -------
Total debt........................................ $26,216 $16,293
------- -------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 2,000,000 shares
authorized, none issued................................ $ -- $ --
Common Stock, $.001 par value, 20,000,000 shares
authorized; 3,725,000 shares issued and outstanding and
5,825,000 shares pro forma as adjusted(1).............. 13,754 31,933
Retained earnings......................................... 992 992
------- -------
Total stockholders' equity........................ 14,746 32,925
------- -------
Total capitalization.............................. $40,962 $49,218
======= =======
</TABLE>
- ---------------
(1) Does not include: (i) an aggregate of 300,000 shares of Common Stock
reserved for issuance upon exercise of warrants issued in connection with
the Initial Public Offering and the Underwriters' Warrants; (ii) 420,000
shares of Common Stock reserved for issuance upon exercise of stock options
outstanding under the Company's Option Plan, of which options to purchase
290,000 shares were exercisable at May 31, 1997; and (iii) 480,000 shares of
Common Stock reserved for issuance upon exercise of stock options available
for future grant under the Company's Option Plan. See "Management -- Option
Plan."
15
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents certain summary consolidated financial
information for the year ended June 30, 1996 and the period February 21, 1995
(inception) to June 30, 1995, which has been derived from the Company's
Consolidated Financial Statements audited by Ehrhardt Keefe Steiner & Hottman
PC, independent certified public accountants, certain of which have been
included elsewhere herein. The selected consolidated financial data as of March
31, 1997 and for the nine months ended March 31, 1997 and 1996 have been derived
from the unaudited consolidated financial statements of the Company for such
periods and include, in the opinion of management, all adjustments (consisting
of normal recurring adjustments) necessary for the fair presentation of the
financial position and results of operations at and for such periods. The
Company's results of operations for the nine months ended March 31, 1997 may not
be indicative of its results of operations for the full year.
<TABLE>
<CAPTION>
FEBRUARY 21,
NINE MONTHS FISCAL YEAR 1995
ENDED MARCH 31 ENDED (INCEPTION) TO
----------------- JUNE 30, JUNE 30,
1997 1996 1996 1995
------- ------- ----------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Sales of leases.................................... $50,308 $16,380 $20,638 $1,261
Income from direct financing leases................ 2,918 135 1,224 7
------- ------- ------- ------
Total revenues..................................... 53,226 16,515 21,862 1,268
Cost of leases sold................................ 46,876 15,296 19,297 1,172
Provision for credit losses........................ 443 46 95 28
Interest expense................................... 1,377 16 551 --
Securitization expenses and amortization........... 257 -- -- --
------- ------- ------- ------
Total costs........................................ 48,953 15,358 19,943 1,200
------- ------- ------- ------
Gross profit....................................... 4,273 1,157 1,919 68
Other expenses..................................... 1,935 792 1,156 246
Pro forma income taxes(2).......................... 983 135 282 --
------- ------- ------- ------
Pro forma net income (loss)........................ $ 1,355 $ 230 $ 481 $ (178)
======= ======= ======= ======
Pro forma earnings (loss) per share................ $ .44 $ .11 $ .24 $ (.09)
OTHER DATA(1):
Dollar amount of leases funded during period....... $49,692 $23,110 $35,169 $1,450
Number of leases funded during period (not in
thousands)...................................... 1,962 920 1,381 64
Gross Servicing Portfolio(3)....................... $94,444 $30,692 $44,163 1,216
Number of leases serviced as of period ended (not
in thousands)................................... 3,305 979 1,443 63
Delinquencies as a percentage of Gross Servicing
Portfolio at end of period(4)................... 1.65% .97% 1.44% --
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------
ACTUAL AS ADJUSTED(5)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 4,775 $13,031
Direct financing leases................................... 11,194 11,194
Direct financing leases assigned to lender................ 17,341 17,341
Securitization residual interest.......................... 6,107 6,107
Total assets.............................................. 45,495 53,751
Total liabilities......................................... 30,749 20,826
Stockholders' equity...................................... 14,746 32,925
</TABLE>
- ---------------
(1) Excludes information for Global Finance, which was acquired on March 31,
1997.
(2) Prior to the Initial Public Offering, the Company was a limited liability
company and not subject to federal or state corporate income taxes. On the
date of the Initial Public Offering, the Company changed its form of
organization from a limited liability company to a C Corporation, recorded
deferred income taxes totalling approximately $100,000 and began providing
for federal and state corporate income taxes from that date. Pro forma data
includes adjustments for federal and state income taxes as if the Company
had been taxed as a C Corporation at a combined federal and state tax rate
of 37.0% for all periods presented. See Note 7 to Consolidated Financial
Statements.
(3) The Company's Gross Servicing Portfolio consists of aggregate lease payments
for all leases financed by the Company and either held as direct financing
leases, or sold to third parties or securitized, as of the end of the
indicated periods.
(4) Represents delinquencies of 31 or more days. The Company had no
delinquencies over 31 days at June 30, 1995.
(5) Adjusted to reflect the sale of 2,100,000 shares of Common Stock by the
Company at the assumed offering price of $9.50 per share and the application
of the estimated net proceeds therefrom, including repayments of amounts
outstanding under certain credit facilities of which a total of $9.9 million
was outstanding at March 31, 1997.
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ACCOUNTING PRACTICES
Overview. The leases underwritten by the Company are non-cancelable,
full-payout leases. As such, the Company's leases cannot be cancelled at the
lessee's discretion and all payments (which include interest implicit in the
lease) must be made at or before the dates due. The Company's leases meet the
accounting criteria for capitalization and are accounted for by the Company as
direct financing leases. See "Business -- Risk Management; Lease
Underwriting -- Lease Terms and Conditions." Since its inception, the Company
has initially funded all of its direct financing leases with recourse debt under
its existing bank and other credit facilities or using its own working capital.
The Company typically retains these leases for a period of time. Thereafter, the
Company may sell or securitize leases on a non-recourse or limited recourse
basis, at which time the Company may relinquish any continuing economic interest
in such leases or may retain a contingent interest in the leases. The Company
retains servicing rights on all leases it underwrites and is paid servicing fees
on a monthly basis. The Company's accounting practices with respect to direct
financing leases, securitizations and sales of leases are summarized below.
The Company's leases are collateralized by the business equipment leased as
well as, in many cases, personal guarantees provided by a principal of the
lessee. The Company also manages credit risk through diversifying its business
customer base, geographic location of lessees and the type of business equipment
leased. The Company believes that prepayment and charge-off risks are mitigated
by the non-cancelable, full payout structure of its leases which cover equipment
used in business operations. The Company has no contractual obligation to
discount the total lease payments due and, accordingly, the Company is entitled
to the aggregate amount of all lease payments on prepayment. The Company has
experienced nominal prepayments to date. The Company also attempts to manage the
risk of charge-offs through strict adherence to the Company's underwriting
criteria.
Direct Financing Leases. In accounting for direct financing leases, the
Company records the total lease payments, the estimated unguaranteed residual
equipment value and the initial direct costs (consisting of commissions and fees
paid to lease originators and other origination costs) as the investment in the
direct financing lease. The difference between the investment in the direct
financing lease and the cost to the Company of the equipment being financed is
recorded as unearned income. The unearned income is recognized over the life of
the lease using the interest method. On securitization or sale of the lease, the
Company's investment in the lease, including initial direct costs, is eliminated
and the resulting sales and cost of sales are included in results of operations.
Unless the residual value of the leased equipment (the "residual equipment
value") is sold in connection with the securitization or sale of the lease, the
estimated residual equipment value remains on the Company's balance sheet and is
recognized as income from direct financing leases over the life of the lease
using the interest method. Any permanent reduction in the estimated residual
equipment value is charged to operations in the period it occurs. The Company
books a maximum residual value of 10.0% of the original equipment cost of leases
(or, in the case of Global Finance, 10.0% of the lease receivable) other than
those leases with a $1.00 buy-out. No residual value is booked on leases with a
$1.00 buy-out.
Securitizations. The Company has completed three securitizations which
provide for aggregate funding in the amount of approximately $114.2 million. The
Company's securitizations consist of a $21.7 million lease-backed note
transaction completed in April 1996, a $65.0 million lease-backed certificate
transaction completed in November 1996, and a $27.5 million lease-backed
certificate transaction completed in March 1997. As of March 31, 1997, the
Company had securitized leases under the lease-backed note and certificates in
the aggregate amount of $52.4 million. In each securitization, the Company
transfers leases to a wholly-owned, bankruptcy remote special purpose subsidiary
which in turn simultaneously transfers its interest in the leases to a grantor
trust which issues beneficial interests in the leases in the form of debt or
equity securities.
In each securitization, the Company receives advances based on a percentage
which is less than the aggregate present value of cash flows from an
undifferentiated pool of leases, effectively overcollateralizing the
17
<PAGE> 19
lease-backed notes or certificates. Over the life of the lease pool securitized,
the Company is eligible to receive the excess cash flow (the "securitization
residual interest") resulting from the difference between the lease payments
received, net of defaults, and the payment of (i) principal and interest to
investors in lease-backed notes or certificates and (ii) servicing, backup
servicing and trustee fees and other securitization expenses. The securitization
residual interest may be sold to investors or may be retained by the Company. In
each of its securitizations to date, the Company has retained the securitization
residual interest. The fair value of the securitization residual interest is
based on the Company's estimates using a risk adjusted discounted cash flow
approach.
As the holder of the securitization residual interest, the Company's right
to receive this excess cash flow is subject to certain conditions specified in
the related agreements designed to provide additional credit enhancement to
holders of the lease-backed securities issued in the securitization. The Company
estimates the expected levels of cash flows available to the securitization
residual interest after taking into consideration estimated charge-offs,
recoveries and other factors which may affect the cash flows available to the
securitization residual interest. The Company estimates defaults on securitized
lease portfolios and has included estimated losses within the assumptions
underlying the accounting for the securitization residual interest. See Note 2
to the Consolidated Financial Statements. The Company believes its reserves are
adequate and monitors such adequacy by examining current delinquencies, lease
portfolio characteristics, economic conditions and trends and management's
expectations of future trends. The cash flows ultimately available to the
securitization residual interest are largely dependent upon the actual
charge-off rates experienced on the leases sold to the trust. The Company holds
the securitization residual interest and is typically entitled to receive from
15.0% to 20.0% of the cash flows, net of charge-offs, of the trust. Losses
incurred on leases held by the trust are borne solely by the securitization
residual interest. As a result, relatively small fluctuations which are in
excess of estimated charge-off rates and other factors impacting cash flows of
the leases could have a material adverse effect on the Company's ability to
realize its recorded basis in the securitization residual interest. In such
event, the Company would be required to reduce the carrying amount of the
securitization residual interest and record a charge to earnings in the period
in which the event occurred or became known to management.
In each securitization transaction, the Company is entitled to substitute
performing leases for non-performing leases, subject to certain limitations. The
right of lease substitution is exercised from time to time by the Company in
order to prevent non-performing leases from exceeding specified limitations in
each securitization transaction. Should those limitations be exceeded, the
trustee has the right to accelerate the repayment of the principal outstanding
under the lease-backed notes or certificates, which would materially adversely
affect the Company's receipt of cash flow from the securitization residual
interest. As a result of the Company's exercise of the right of substitution in
prior periods, direct financing leases with full recourse to the Company have
higher delinquency rates than delinquency rates experienced by non-recourse or
limited recourse leases that have been sold to third parties or securitized. See
"Risk Factors -- Liquidity and Capital Resources -- Dependence on Securitization
Transactions" and "Business -- Servicing and Collections."
Upon closing a securitization completed through the sale of lease-backed
equity securities, such as the Company's November 1996 and March 1997
securitizations, (i) the assigned leases are removed from the Company's
consolidated balance sheet, (ii) the investment in the assigned leases is
allocated between cost of leases sold and the securitization residual interest
on a relative fair value basis on the date of sale, (iii) the resulting sales of
leases and cost of leases sold are reflected in the consolidated statement of
operations and (iv) the difference between the excess cash flows received from
the trust and the securitization residual interest is recognized over the life
of the securitized leases using the interest method. Prior to the adoption of
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities ("SFAS No. 125"), a securitization completed
through the sale of lease-backed debt securities, such as the Company's April
1996 securitization, was accounted for as a collateralized borrowing. As a
result, upon closing the April 1996 securitization the Company recorded direct
financing leases assigned to lender of $24.8 million (which represents the
Company's investment in the assigned leases) and recorded limited recourse Class
A Notes payable of $21.7 million (which represents the principal amount of the
Class A Notes, as well as the gross securitization proceeds paid to the
Company). Gain or loss is not recognized upon the
18
<PAGE> 20
closing of such a securitization. Rather, income is recognized over the term of
the assigned leases consistent with the accounting treatment which is applied to
direct financing leases. The Company adopted SFAS No. 125 on January 1, 1997.
Pursuant to SFAS No. 125, future securitizations completed through the issuance
of lease-backed debt securities will generally be accounted for under the method
described above for equity securities.
Sales of Leases. In addition to disposing of leases through securitization
transactions, the Company has sold on a non-recourse basis lease portfolios to
institutional purchasers including an affiliate. Sales to the affiliate are
subject to the affiliate's recourse to the Company with respect to the entirety
of any leases under which a first payment default occurs and any shortfall in
the aggregate estimated residual equipment value of the leases where there is no
firm purchase obligation on the part of the lessee. Sales of leases 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. At
March 31, 1997, the Company's aggregate residual equipment value guarantees
totalled $759,000. See Note 3 to the Consolidated Financial Statements.
Income Taxes. Granite Financial, LLC, as the predecessor in interest to
Granite Financial, Inc., was a limited liability company taxable as a
partnership under federal and state income tax laws. As such, Granite Financial,
LLC was not subject to income taxes as a separate entity and its income or loss
was required to be included in the income tax returns of its members. Upon
consummation of the Initial Public Offering, Granite Financial, Inc. became
subject to taxation as a C Corporation. Since that time, the Company has applied
FAS 109, "Accounting for Income Taxes" ("FAS 109"). Under FAS 109, the Company
recognizes deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Deferred tax liabilities and assets are determined based on the
timing differences between financial statement accounting and tax basis
accounting.
RESULTS OF OPERATIONS
Nine months ended March 31, 1997 compared to nine months ended March 31, 1996
Revenues. Sales of leases totalled $50.3 million in the nine months ended
March 31, 1997, an increase of $33.9 million over sales of leases of $16.4
million in the nine months ended March 31, 1996. The increase in sales of leases
is due to the consistent increase in the volume of leases sold by the Company
since its inception. Income from direct financing leases totalled $2.9 million
in the nine months ended March 31, 1997, or an increase of $2.8 million from
$135,000 in the comparable 1996 period. Income from direct financing leases
primarily consists of the accretion of income on leases retained by the Company
and on the Company's securitization residual interest. Income from direct
financing leases also includes servicing fees, which to date have been nominal.
Expenses. Cost of leases sold totalled $46.9 million in the nine months
ended March 31, 1997, an increase of $31.6 million from cost of leases sold of
$15.3 million in the nine months ended March 31, 1996. The increase in cost of
leases sold is directly related to the increase in sales of leases. Cost of
leases sold includes all direct costs of funding the leases and commissions and
fees paid to the Company's independent lease originators.
Provision for credit losses for direct financing leases and direct
financing leases assigned to lender was $443,000 in the nine months ended March
31, 1997, an increase of $396,000 from $47,000 in the prior comparable period.
Provision for credit losses represented less than 1.0% of total revenues in each
period. The increase in the provision reflects the significant increase in the
volume of leases held prior to sale. The Company maintains an allowance for
credit losses which is established through a charge to earnings in the period in
which it is probable a lease asset is impaired and the amount can be reasonably
estimated.
Interest expense was $1.4 million in the nine months ended March 31, 1997,
compared to $16,000 in the nine months ended March 31, 1996. The increase in
interest expense reflects increased borrowings under the Company's bank and
other credit facilities and under the $21.7 million limited recourse note issued
in the April 1996 securitization. The increased borrowing levels were required
to support growth in the number of leases funded by the Company.
19
<PAGE> 21
Salaries and benefits totalled $1.0 million in the nine months ended March
31, 1997, an increase of $604,000 over salaries and benefits of $417,000 in the
comparable 1996 period. The increase reflects the addition of staff necessary to
support growth in the Company's business as well as certain salary increases for
existing personnel. General and administrative expenses were $762,000, an
increase of $414,000 from $348,000 in the nine months ended March 31, 1996.
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.
Depreciation and amortization increased to $151,000 in the nine months ended
March 31, 1997, an increase of $125,000 from $26,000 in the prior comparable
1996 period. This increase was due to the addition of office and computer
equipment necessary to support continued growth in the Company's business.
Net Income. During the nine months ended March 31, 1997, pro forma net
income totalled $1.4 million, compared to pro forma net income of $230,000 in
the nine months ended March 31, 1996. As Granite Financial, LLC was not subject
to federal and state income taxes, net income represents the difference between
gross profit and other expenses. To allow comparisons with C Corporations, pro
forma federal and state income taxes have been assumed at statutory rates.
Additionally, in October 1996 the Company recorded a one-time charge against
earnings of approximately $100,000 for income taxes associated with the
Company's restructuring. Based on the foregoing assumptions, the Company would
have incurred income taxes of $983,000 in the nine months ended March 31, 1997
and $135,000 in the comparable 1996 period.
Year ended June 30, 1996
The Company was formed on February 21, 1995. Accordingly, the following
discussion describes operating results for the year ended June 30, 1996, without
attempting any comparison to operating results for the period from inception to
June 30, 1995, during which time the Company had limited operations.
Revenues. During the year ended June 30, 1996, sales of leases were $20.6
million, or 94.4% of the total revenues. Revenue is recognized in connection
with the sale of leases on the date of sale based upon the present value of the
payments to be received under the leases. The Company funded a total of 1,381
leases during the year. Income from direct financing leases was $1.2 million, or
5.6% of total revenues. Income from direct financing leases primarily consists
of the accretion of income on the Company's lease portfolio.
Expenses. During the year ended June 30, 1996, cost of leases sold was
$19.3 million, or 88.3% of total revenues. Cost of leases sold includes all
direct costs of funding the leases and commissions and fees paid to the
Company's independent lease originators. Provision for credit losses was
$95,000, or less than 1.0% of total revenues. Interest expense was $551,000, or
2.5% of total revenues. Interest expense included borrowings under the Company's
credit lines and under the $21.7 million limited recourse note issued in the
April 1996 securitization. Salaries and benefits were $643,000, or 2.9% of total
revenues. General and administrative expenses were $472,000, or 2.2% of total
revenues, and include operational expenses such as office overhead, accounting,
legal and other expenses not directly attributable to personnel. Depreciation
and amortization was $41,000, and consisted principally of the depreciation of
office and computer equipment.
Net Income. During the year ended June 30, 1996, net income was $481,000.
As Granite Financial, LLC was not subject to federal and state income taxes, net
income represents the difference between gross profit and other expenses. To
allow comparisons with C Corporations, pro forma federal and state income taxes
have been assumed at statutory rates. Based on this assumption, the Company
would have incurred income taxes of $282,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company will require capital to fund increases in its lease portfolio,
fund acquisitions of complementary small-ticket equipment finance companies and
independent lease originators, support securitizations through retention of
securitization residual interests, provide for normal operating expenses and 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.
20
<PAGE> 22
Net cash used by operating activities was $3.8 million during the nine
months ended March 31, 1997 compared to $6.5 million during the nine months
ended March 31, 1996. For the nine months ended March 31, 1997, this was
primarily the result of a $6.1 million increase in securitization residual
interests and a $1.1 million net reduction in direct financing leases available
for sale. Net cash provided by investing activities was $4.4 million compared to
net cash used in investing activities of $131,000 in the comparable prior
period. During the nine months ended March 31, 1997, lease payments received
from leases assigned to lender contributed $5.2 million to net cash provided by
investing activities. During the nine months ended March 31, 1997, net cash
provided by financing activities was $4.2 million compared to $6.2 million in
the nine months ended March 31, 1996. Proceeds from bank and other credit
facilities provided cash of approximately $3.0 million in the nine months ended
March 31, 1997, a decrease of $1.9 million from the nine months ended March 31,
1996. This decrease is due to the Company's success in obtaining other sources
of financing, including securitizations, in the 1997 period, whereas the Company
was primarily reliant on bank financing in the 1996 period. Principal payments
on notes payable used cash of $9.5 million during the nine months ended March
31, 1997. Principal payments included $4.5 million paid on the Class A note
issued in the April 1996 securitization and $5.0 million paid on other notes
payable.
Bank and Other Credit Facilities. The Company currently maintains seven
credit facilities which permit borrowings in the aggregate amount of
approximately $48.5 million. At March 31, 1997, the Company's borrowings under
its then existing credit facilities totalled approximately $9.9 million. The
following table presents certain information regarding the Company's credit
facilities.
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING AT
LENDER TYPE OF FACILITY AMOUNT INTEREST RATE MARCH 31, 1997 EXPIRATION
------ ------------------- ------ --------------- -------------- --------------
(IN MILLIONS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CoreStates Bank, Revolving line $36.0 Bank reference $3,115 February 1998
N.A................ rate plus 0.63%
Colorado National Revolving line $ 2.0 Bank reference $1,800 January 1998
Bank, N.A. ........ rate plus 0.75%
FBS Business Finance Term loan $ 3.0 Treasury bill -- June 1997(1)
Corporation........ rate plus 3.0%
Norwest Equipment Revolving line/term $ 3.0 Treasury bill $ 837 July 1997(1)
Finance loan rate plus 3.85%
Corporation........
LaSalle National Term loan $ 2.2 8.72% $1,929 May 1999
Bank(2)............
LaSalle National Revolving line $ .8(3) Bank reference $ 771 May 1997
Bank(2)............ rate plus 1.0%
Sirrom Capital, Term loan $ 1.5(4) 13.0% $1,500 January 2000
L.P.(2)............
</TABLE>
- ---------------
(1) Represents the expiration date for funding. The lender will continue to hold
leases in its portfolio through expiration or termination dates for the
leases financed. Given the Company's access to other credit facilities, the
Company may elect not to renew these facilities.
(2) Assumed by the Company on closing of the acquisition of Global Finance.
(3) In May 1997, the lender committed to increase this revolving line to $5.0
million and to extend the term of the facility to November 1, 1998. The
commitment provides that the Company may at its election convert amounts
outstanding under the revolving line to fully amortizing four-year term
loans.
(4) The Company intends to use a portion of the proceeds from this offering to
repay the outstanding balance of such loan. See "Use of Proceeds."
The Warehouse Credit Line with CoreStates Bank and its participating
lenders established in February 1997 serves as the Company's principal warehouse
credit facility. Under the Warehouse Credit Line, the Company may borrow an
amount equal to the lesser of 95.0% of the present value of lease payments
discounted at CoreStates' reference rate plus 0.63% per annum or 75.0% of the
remaining lease receivables under the leases which form the borrowing base. The
Warehouse Credit Line is collateralized by security interests in the leases
against which the borrowing applies, as well as a security interest in the
underlying equipment and all cash and non-cash proceeds therefrom. The facility
provides for recourse borrowings, which
21
<PAGE> 23
obligates the Company to make all required payments regardless of the
performance of the pledged leases or availability of other collateral. The
Company retains ownership of the equipment during the term of the leases,
subject to the lenders' security interest.
The Company established a $2.0 million unsecured revolving credit line with
Colorado National Bank in January 1997. The credit line allows the Company to
borrow up to a maximum of $2.0 million for working capital purposes on an
unsecured basis. Borrowings may not exceed a borrowing base which is equal to
100.0% of the present value of total payments due under all unencumbered leases
owned by the Company, discounted at the lender's reference rate plus 0.75% per
annum.
The recourse credit facilities maintained with FBS Business Finance
Corporation and Norwest Equipment Finance, Inc. provide each of these lenders
with full recourse against the Company should the collateral prove to be
insufficient. Amounts outstanding under these credit facilities are
collateralized by the leases assigned to each lender simultaneously with each
advance and are similar in other respects to the Warehouse Credit Line. Given
the Company's access to other credit facilities, the Company may elect not to
renew these facilities.
The Company also assumed three credit facilities as a result of its
acquisition of Global Finance in March 1997. The Global Finance credit
facilities consist of a $2.2 million term loan and an $800,000 revolving line,
each with LaSalle National Bank, and a $1.5 million term loan with Sirrom
Capital, L.P. At March 31, 1997, borrowings by Global Finance under these credit
facilities totalled $4.2 million. In May 1997, LaSalle National Bank committed
to increase the borrowing limit under the Global Finance revolving line to $5.0
million and to extend the term of the revolving line to November 1, 1998.
The Company will renew or replace its bank credit facilities consistent
with its objectives of obtaining the lowest possible cost of funds and
maintaining diverse funding sources.
Securitizations. The Company has completed three securitizations which
provide for aggregate funding in the amount of approximately $114.2 million. As
of March 31, 1997, the Company had securitized leases under a lease-backed note
and certificates in the aggregate amount of $52.4 million.
The table below documents the Company's history of lease securitizations by
funding.
STRUCTURED LEASE SECURITIZATIONS
<TABLE>
<CAPTION>
NOTE OR CERTIFICATE
PERIOD FUNDED DOLLAR AMOUNT RATINGS RATING AGENCY POOL NAME
------------- ------------------- ------- ------------- --------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
April 1996........... $21.7 Aaa/AAA Moody's/S&P GF Funding Corp. I
November 1996........ $ 7.2 Aaa/AAA Moody's/S&P GF Funding Corp. II
December 1996........ $ 1.9 Aaa/AAA Moody's/S&P GF Funding Corp. II
January 1997......... $ 2.1 Aaa/AAA Moody's/S&P GF Funding Corp. II
February 1997........ $ 2.8 Aaa/AAA Moody's/S&P GF Funding Corp. II
March 1997........... $ 1.5 Aaa/AAA Moody's/S&P GF Funding Corp. II
March 1997........... $15.2 Aaa/AAA Moody's/S&P GF Funding Corp. III
April 1997........... $ 2.1 Aaa/AAA Moody's/S&P GF Funding Corp. II
April 1997........... $ 4.2 Aaa/AAA Moody's/S&P GF Funding Corp. III
</TABLE>
The Company intends in the future to undertake additional securitization
transactions because securitizations generally offer a lower cost of capital
than is available through other sources. The Company's ability to complete
additional securitizations will depend upon a number of factors, including
general conditions in the credit markets, the performance of already outstanding
asset-backed securities issued by the Company and other factors, some of which
may be beyond the Company's control. Additional asset-backed securitizations
will likely be subject to the Company's ability to obtain favorable ratings from
rating agencies, to provide credit enhancements such as insurance policies or
"overcollateralization" through the securitization residual interest, or to
deposit cash or other collateral which may have the effect of increasing the
Company's effective cost of capital.
22
<PAGE> 24
ASSET QUALITY AND STATIC POOL ANALYSIS
The Company believes that its asset quality is generally a function of
strict underwriting criteria and procedures and efficient servicing and
collection functions. The Company's underwriting criteria are intended to result
in a diverse customer base which does not exhibit dependence on a particular
geographic market or industry segment. The Company employs automated servicing
and collection methods and a proactive approach to identifying and addressing
delinquencies. Because the Company commenced operations in February 1995, there
is limited performance data available with respect to the Gross Servicing
Portfolio and, consequently, historical delinquency and charge-off statistics
are not necessarily indicative of future performance.
The Company estimates defaults on direct financing leases and securitized
leases and establishes reserves for expected losses on leases the Company either
owns or has sold on a recourse or limited recourse basis. The Company regularly
reviews its reserves and defaults are continuously monitored on a portfolio and
individual pool basis. The Company examines factors such as current
delinquencies, lease portfolio characteristics, economic conditions and trends,
historical default experience and management's expectations of future trends in
establishing reserves. The Company's reserve for credit losses on its lease
portfolio approximates $2.9 million as of March 31, 1997 ($1.6 million of which
is a reserve for credit losses for Global Finance). Included within this reserve
is approximately $477,000 in estimated losses which were established in the
assumptions underlying the accounting for the securitization residual interest
for the securitizations conducted in November 1996 and March 1997. The Company
believes its current reserves for credit losses are adequate to provide for
expected losses in the existing lease portfolio. See Note 2 to Consolidated
Financial Statements.
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 over 31 days and net charge-offs.
The following table documents lease delinquencies 31 or more days past due
as of March 31, 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>
PERCENTAGE OF REMAINING LEASE RECEIVABLE
ORIGINAL LEASE -----------------------------------------------------------------------------
CALENDAR PERIOD RECEIVABLE QTR 1 QTR 2 QTR 3 QTR 4 QTR 5 QTR 6 QTR 7 QTR 8 QTR 9
--------------- -------------- ----- ----- ----- ----- ----- ----- ----- ----- -----
(IN THOUSANDS)
<S> <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%
2nd Quarter......... 1,748 0.0 0.0 0.0 0.4 0.4 0.3 0.9 2.1
3rd Quarter......... 6,082 0.0 2.5 2.1 3.5 3.9 5.6 3.0
4th Quarter......... 10,444 0.0 0.9 2.4 3.0 5.3 3.1
1996:
1st Quarter......... 15,906 0.0 0.8 2.0 3.3 3.4
2nd Quarter......... 16,849 0.0 1.2 2.6 3.8
3rd Quarter......... 15,467 0.0 0.8 2.0
4th Quarter......... 22,220 0.0 0.4
1997:
1st Quarter......... 32,361 0.0
</TABLE>
- ---------------
(1) Excludes data for Global Finance. Lease delinquencies are calculated on a
monthly basis. Monthly calculations are then averaged to create an average
delinquency rate for the period.
23
<PAGE> 25
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-OFF
<TABLE>
<CAPTION>
ORIGINAL PERCENTAGE OF ORIGINAL INVESTMENT VALUE
INVESTMENT -----------------------------------------------------------------------------
CALENDAR PERIOD VALUE QTR 1 QTR 2 QTR 3 QTR 4 QTR 5 QTR 6 QTR 7 QTR 8 QTR 9
--------------- -------------- ----- ----- ----- ----- ----- ----- ----- ----- -----
(IN THOUSANDS)
<S> <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%
2nd Quarter................... 1,337 0.0 0.0 0.0 0.0 1.0 0.0 (0.4) 0.8
3rd Quarter................... 4,755 0.0 0.0 0.0 0.0 0.0 0.5 0.6
4th Quarter................... 8,107 0.0 0.0 0.2 0.2 2.4 0.8
1996:
1st Quarter................... 12,377 0.0 0.0 0.1 1.0 1.6
2nd Quarter................... 13,174 0.0 0.0 1.1 (0.1)
3rd Quarter................... 12,077 (0.1) 0.0 0.6
4th Quarter................... 17,338 0.0 0.0
1997:
1st Quarter................... 25,309 0.0
</TABLE>
- ---------------
(1) Excludes data for Global Finance and data related to leases sold to
Heartland Bank.
Sales to Heartland Bank. From June 1995 until completion of the April 1996
securitization, the Company's liquidity was dependent, in substantial part, on
sales of leases to Heartland Bank. In June 1995, the Company entered into a
Lease Sale Agreement with Heartland Bank to sell leases at a price equal to the
remaining cash flows of the leases (including residual equipment value),
discounted to present value at an 11.5% per annum rate. From June 1995 to March
1996, Heartland Bank purchased leases with a face amount of approximately $16.0
million from the Company. These lease purchases provided the Company with
significant liquidity during this period. In April 1996, the Company repurchased
substantially all of the lease portfolio previously sold to Heartland Bank. The
repurchase of this lease portfolio was completed in order to facilitate the
Company's first securitization. At the time of the repurchase of this lease
portfolio, Heartland Bank was an affiliate of the Company by virtue of its
ownership of Heartland Leasing Corporation of Missouri, then a member of Granite
Financial, LLC. See "Certain Transactions."
Future Cash Requirements and Capital Commitments. The Company believes that
the proceeds of this offering, funds available under existing credit facilities,
existing and anticipated securitizations, and cash from operations will be
sufficient to meet the Company's capital requirements for at least the next 12
months. If for any reason the Company is unable to sell or securitize leases, or
if the Company's available cash otherwise proves insufficient to fund operations
(because of future changes in the industry, general economic conditions,
unanticipated increases in expenses, or other factors) the Company may be
required to seek additional financing. The Company has budgeted $500,000 from
the proceeds of this offering to fund capital and other expenses associated with
computer system upgrades and implementation of interactive technology to
streamline the lease application process. The Company also expects to make
capital expenditures and incur other operating expenses in excess of fiscal 1997
levels as the Company's business continues to grow.
The Company plans to relocate its headquarters during July 1997 to a larger
facility in the Denver, Colorado area. The Company is engaged in discussions
regarding available facilities which would provide 13,000 to 18,000 square feet
of space. As a result, the Company expects to incur occupancy expenses during
fiscal 1998 which are approximately $95,000 in excess of fiscal 1997 occupancy
expenses.
24
<PAGE> 26
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans. SFAS No. 123 is effective
for transactions entered into in fiscal years beginning after December 15, 1995.
The Company currently accounts for stock-based compensation awards under the
provisions of Accounting Principles Board Opinion No. 25, as permitted by SFAS
No. 123, and intends to continue to do so.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996 and is to be applied
prospectively. This Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach that focuses
on control. SFAS No. 125 distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. The Company adopted SFAS No.
125 effective January 1, 1997.
FORWARD-LOOKING STATEMENTS
Certain statements made above in this Management's Discussion and Analysis
of Financial Condition and Results of Operations section and elsewhere in this
Prospectus are forward-looking statements as defined in the Reform Act. Such
forward-looking statements involve risks and uncertainties that are based on
certain assumptions that may not be realized and that include or relate to the
Company's plans or expectations to: (i) capitalize on its operational
capabilities and experienced management team, (ii) increase productivity through
utilization of advanced technologies and expansion of its business using new
interactive technologies, (iii) leverage its access to lower cost funds provided
by securitizations and perhaps other sources to increase the gross profit
margins of acquired companies, (iv) increase its market share as it executes its
consolidation strategy, (v) successfully develop and implement a direct
electronic link with its independent lease originators, (vi) successfully
implement an interactive Web site and Internet marketing strategies, (vii)
implement additional marketing programs, (viii) complete future securitization
transactions or lease sales, (ix) maintain delinquency and net charge-off rates
within acceptable and estimated ranges, (x) identify, acquire and assimilate
complementary equipment leasing companies and independent lease originators,
(xi) develop additional specialty lease and vendor direct programs in the future
and (xii) commence e-commerce transactions among the Company, equipment vendors
and lessees. Actual results and outcomes may differ materially from those
discussed or anticipated. Factors that might cause such differences include, but
are not limited to, risks and uncertainties associated with management of the
Company's growth, the Company's success in concluding acquisitions of
competitors and independent lease originators, the Company's dependence on its
independent lease originators, implementation and success of the Company's
planned interactive Web site and direct electronic link with its independent
lease originators, the Company's ability to retain key management personnel,
continued access by the Company to the securitization market and other lower
cost sources of capital, and any material adverse changes in the Company's
operations or business. For a more detailed discussion of these factors and
other risk factors to which the Company is subject, see "Risk Factors."
25
<PAGE> 27
BUSINESS
GENERAL
The Company is a finance company specializing in originating, funding,
acquiring, selling, securitizing and servicing non-cancelable, full-payout
equipment leases for a broad range of businesses located throughout the United
States. The Company's operations are primarily in the small-ticket segment of
the equipment leasing market, which encompasses leases of equipment with
original purchase prices of $100,000 or less. The average purchase price of
equipment leased by the Company's lessees is approximately $30,000 per lease.
Leases are originated through a network of approximately 50 independent lease
originators selected by the Company's experienced management team. The Company
is committed to providing the highest level of service to its lease originators
and is investing in advanced technology which will allow the Company to
electronically link each originator with the Company's systems and resources.
The Company also develops specialty lease finance programs in conjunction with
its lease originators that are designed to meet the particular financing
requirements of the business customer. Through providing superior customer
service and streamlining the lease application and funding process, the Company
seeks to position itself as a strategic partner with its lease originators.
The Company is currently implementing a consolidation strategy in the
small-ticket segment of the equipment leasing market. The Company believes a
favorable environment exists for acquisitions in this segment of the equipment
leasing market because of the highly fragmented nature of the industry, the
inability of a significant number of small equipment lease finance companies to
obtain more favorable financing rates available through the asset-backed
securities markets and the increased cost of new technologies that generally
cannot be afforded by smaller participants in the market. The Company's
consolidation strategy encompasses the purchase of other companies active in the
small-ticket segment of the equipment leasing market as well as independent
lease originators that may or may not currently conduct business with the
Company. Consistent with this consolidation strategy, the Company concluded the
acquisition of Global Finance in March 1997. Founded in 1989, Global Finance
specializes in providing equipment lease financing for point-of-sale equipment
which costs less than $2,000 per lease. The Company's consolidation strategy is
designed to expand its existing business and take advantage of its core
competencies including, among other things, its highly developed customer
service program, use of sophisticated technology to achieve efficiencies in the
application, underwriting and collection processes, development of close working
relationships with lease originators, knowledge of the equipment leasing market
and experienced management team.
HISTORY
The Company's predecessor, Granite Financial, LLC, was organized in
February 1995 by William W. Wehner and James E. Lewis to enter into the
small-ticket leasing market to capitalize on Mr. Wehner's extensive experience
within the equipment leasing industry. The period from February 21, 1995
(Granite Financial, LLC's inception) through June 1995 was devoted to start-up
of lease funding operations. In June 1995, Granite Financial, LLC entered into a
lease sale agreement with Heartland Bank and a letter of intent pursuant to
which Heartland Bank committed to purchase an ownership interest in Granite
Financial, LLC, subject to the satisfaction of certain conditions. Granite
Financial, LLC then began generating significant volumes of leases which were
purchased primarily by Heartland Bank from time to time through March 1996. In
January 1996, Heartland Leasing Corporation of Missouri, a wholly-owned
subsidiary of Heartland Bank, purchased a 45.0% interest in Granite Financial,
LLC pursuant to the letter of intent. In April 1996, the Company repurchased
approximately $16.0 million in leases previously sold to Heartland Bank and
entered into its first securitization transaction under which a special purpose
subsidiary, GF Funding Corp. I, issued approximately $21.7 million of
lease-backed notes to an institutional investor. The notes were insured by a
financial guaranty issued by MBIA Insurance Corporation and were rated AAA by
Standard & Poor's Ratings Group and Aaa by Moody's Investors Service. In October
1996, the Company completed the Initial Public Offering at which time the
Company exchanged 2,000,000 shares of its Common Stock for all of the
outstanding membership interests of Granite Financial, LLC. At that time, the
Company succeeded to servicing and all other activities formerly undertaken by
Granite Financial, LLC. In each of November 1996
26
<PAGE> 28
and March 1997, the Company completed additional securitization transactions
pursuant to which two special purpose subsidiaries, GF Funding Corp. II and GF
Funding Corp. III, respectively, issued lease-backed securities aggregating
$92.5 million in principal amount to third-party institutional investors. The
securities issued in these securitizations were also insured by a financial
guaranty issued by MBIA Insurance Corporation and were rated AAA by Standard &
Poor's Ratings Group and Aaa by Moody's Investors Service. In March 1997 the
Company also began to implement its consolidation strategy through the closing
of the acquisition of Global Finance, which finances small-ticket leases for
point-of-sale equipment.
INDUSTRY OVERVIEW
According to the Equipment Leasing Association and the International Trade
Administration, business investment in equipment exceeded $563.1 billion in
1996, an increase of approximately $267.0 billion from comparable 1986 data.
Equipment leasing accounted for approximately $168.9 billion of 1996 business
investment in equipment compared to $85.0 billion in 1986. Business investment
in equipment under lease is expected to account for over $176.2 billion of 1997
business investment in equipment, according to the same sources. Although the
Company is not aware of published industry statistics that specifically address
equipment leases with an original equipment cost of $100,000 or less, the
Company estimates that the market for equipment priced in this range constitutes
between approximately 25.0% and 30.0% of equipment acquisitions under lease.
The following table shows the growth in total equipment acquisitions in
billions of dollars and the growth in equipment placed under lease from 1986 to
1996 and as projected for 1997.
<TABLE>
<CAPTION>
Business
Measurement Period Equipment Investment in
(Fiscal Year Covered) Leasing(2) Equipment(2)
<S> <C> <C>
1986 $85.0 $296.2
1987 98.0 311.2
1988 112.7 348.4
1989 125.4 365.7
1990 124.3 388.3
1991 120.2 375.5
1992 121.7 376.2
1993 130.5 443.9
1994 140.2 487.0
1995 151.4 538.8
1996 168.9 563.1
1997E 176.2 570.1
</TABLE>
Source: U.S. Department of Commerce, Economics and Statistics Administration,
Bureau of Economic Analysis, and Equipment Leasing Association of America.
- ---------------
(1) Data for 1997 is estimated by the International Trade Administration and the
Equipment Leasing Association.
(2) Amounts stated in billions of dollars.
27
<PAGE> 29
The small-ticket equipment leasing market served by the Company is a highly
diversified market, with demand for lease financing coming from a variety of
small and mid-size businesses across the United States. This market has
experienced growth in recent years because of several factors, including (i) the
decline in prices of computers and computer peripherals and corresponding
increases in demand for this equipment; (ii) the adoption of accounting
pronouncements concerning the consolidation of earnings of manufacturers and
captive finance company subsidiaries that caused a number of manufacturers to
eliminate their captive finance companies, resulting in an increased demand for
independent financing such as that provided by the Company; (iii) the
consolidation of the banking industry, which has reduced the number of small
community banks that traditionally provided equipment financing for small to
mid-size businesses; (iv) stricter lending requirements of commercial banks; and
(v) the reduction in cost of funds for independent finance companies such as the
Company which have been able to access the asset-backed securities market and
other sources of lower cost capital. The small-ticket equipment leasing market
is highly fragmented, with no company believed to account for in excess of a
2.0% market share. As a result of efficiencies made possible by advances in
technology and access to the asset-backed securities markets, the Company
believes that the larger, better capitalized participants in the small-ticket
equipment leasing market will have opportunities to consolidate a portion of the
market. The Company believes that this consolidation will be driven by the
highly fragmented nature of the small-ticket leasing market segment; the need
for reductions in the cost of funds to remain competitive, which will require
market participants to access capital through securitizations or other low cost
sources of funds; the need for productivity gains and reductions in overhead as
a percentage of revenues by increasing the size of lease portfolios; and the
increased cost of new technologies that will not be affordable to smaller market
participants.
BUSINESS STRATEGY
The Company's objective is to become a leading provider of equipment lease
financing in the small-ticket equipment leasing market. The principal components
of the Company's strategy for achieving this objective are to:
- Increase Market Share Through Acquisitions. As a result of management's
experience in the equipment leasing industry, the Company is familiar
with a number of competitors and independent lease originators active in
the highly fragmented small-ticket equipment leasing market. The Company
has and will continue to discuss acquisitions with a number of candidates
that will complement the Company's existing operations, allow the Company
to enter new target industry segments and increase operating
efficiencies. The Company's acquisition strategy is designed to:
S Facilitate Entry into New Market Segments. As a result of its
acquisition of Global Finance, the Company is now engaged in
providing equipment lease financing for point-of-sale equipment which
costs $2,000 or less per lease. The Company recently entered into a
memorandum of understanding relating to a second proposed
acquisition. The Company intends to consummate other acquisitions in
order to enter complementary market segments such as municipal
leasing, early stage business leasing and vendor-affiliated programs.
S Increase Lease Fundings. The Company intends to acquire competitors
and independent lease originators who may or may not currently
conduct business with the Company for the purpose of increasing lease
fundings. Acquisitions of competitors and independent lease
originators will expand the channels through which the Company
generates lease fundings, will result in the Company capturing all
lease funding opportunities from acquired lease originators and
thereby increase the Company's market share.
S Capitalize on Sophisticated Technology. Expansion of the Company's
business through acquisitions is expected to facilitate the Company's
continued use and implementation of sophisticated technologies. As
the Company grows by acquisition, the Company will continue to
integrate its computer system that is widely used by leaders in the
equipment leasing industry and customized off-the-shelf software
products to control costs and increase operating efficiencies of
acquired entities.
28
<PAGE> 30
o Promote Marketing Focus of Acquired Company Management. The Company
intends to target acquisitions of competitors and independent lease
originators that will focus primarily on expanding their businesses
through new and expanded marketing initiatives by relieving them of
much of their administrative and operating responsibilities and
allowing them to rely on the Company's funding capabilities,
operating systems and advanced technologies.
- Expand Existing Business. The Company will seek to expand its existing
business through a variety of means, including implementing new marketing
initiatives and establishing strategic alliances with select equipment
vendors. The Company is currently developing an interactive Web site and
Internet marketing capabilities that are expected to increase the
Company's volume of lease applications and allow the Company in the
future to engage in e-commerce transactions with equipment vendors and
lessees.
- Support Lease Originators. The Company will maintain and enhance its
strong relationships with its approximately 50 select independent lease
originators through continuing superior customer service, developing
additional specialty leasing programs and implementing new interactive
technologies designed to maximize efficiencies in the lease application,
underwriting, approval, servicing and collection functions. The Company
currently supports its independent lease originators with approximately
35 specialty lease programs developed to meet certain needs which have
been identified by lease originators. The development of a direct
electronic link between the Company and its independent lease
originators, which is expected to be on-line in calendar 1997, is
expected by the Company to further strengthen the relationship between
the Company and its network of independent lease originators.
- Reduce and Control Cost of Capital. The Company will seek to reduce and
control its cost of capital by conducting additional securitization
transactions and through the establishment and maintenance of
relationships with a diverse group of funding sources. To date the
Company has established three securitizations which provide for aggregate
funding in the amount of approximately $114.2 million and bank and other
credit facilities which permit approximately $48.5 million in borrowings.
- Leverage Advanced Technology. The Company will continue to utilize
sophisticated data processing systems and stringent internal controls to
monitor and maintain the application of consistent underwriting criteria
throughout the credit approval process. The Company currently utilizes a
credit scoring software program and a management information system that
are well-known in the leasing industry. The Company's proposed direct
link with its independent lease originators and its proposed interactive
Web site and Internet marketing strategies will further automate the
lease application process and expand the Company's use of leading
technologies.
SALES AND MARKETING
The Company's marketing strategy is to increase its volume of lease
financing by diversifying and expanding its lease origination channels. The
Company intends to implement this strategy by (i) maintaining, selectively
expanding and supporting its high quality network of independent lease
originators, (ii) developing specialty programs in conjunction with its lease
originators for specific vendor or customer groups, including franchisees, (iii)
developing direct links with independent lease originators in order to further
automate transactions between the Company and its lease originators and (iv)
developing Internet capabilities that are expected to increase the flow of
potential lease transactions and permit e-commerce transactions among the
Company, equipment vendors and lessees.
The Company has three marketing employees who are responsible for
implementing marketing strategies, coordinating marketing activities with the
Company's independent lease originators and supervising customer service. To
establish and maintain the Company's profile in the equipment leasing industry,
the Company's marketing employees attend major equipment leasing conventions and
trade shows held each year and several officers of the Company are active in the
Equipment Leasing Association and the United Association of Equipment Lessors,
well-recognized trade associations.
29
<PAGE> 31
Lease Originators. As of June 1997, the Company maintained a network of
approximately 50 select independent lease originators through which it markets
lease transactions. The Company developed its network of independent lease
originators as a result of the industry knowledge and experience of William W.
Wehner, Mark H. Speros and Kelly G. Long. While the Company is familiar with a
number of lease finance companies that have established large groups of sales
representatives or brokers with varying experience levels, the Company has
intentionally limited its network of lease originators to a small, highly
focused group of lease originators with extensive industry experience. Each
lease originator has had a prior relationship with senior management of the
Company within the equipment leasing industry and has in management's opinion
shown an ability to generate significant volumes of leases with a credit quality
that is consistent with the Company's stringent credit policies.
The Company's lease originators range from relatively small businesses
which account for a limited number of the Company's monthly lease transactions
to relatively large businesses which originate leases financed by the Company
and other fundings sources in an amount estimated by the Company to be in excess
of $50.0 million per year. Lease transactions generated by the Company's largest
single independent lease originator accounted for approximately 18.0% and 16.0%
of the gross dollar amount of leases funded by the Company during fiscal 1996
and the nine months ended March 31, 1997, respectively. The next four largest
independent lease originators accounted for between 5.0% and 10.0% of the gross
dollar amount of leases funded by the Company during the nine months ended March
31, 1997. Two lease originators each accounted for between 5.0% and 10.0% of the
gross dollar amount of leases funded by the Company during fiscal 1996.
The Company maintains agreements with each of its lease originators that
define each party's obligations, but which are terminable by either party on 30
days' written notice. The lease originators are compensated by the Company on a
commission basis. Because each of the lease originators is an independent
contractor, the Company cannot require its lease originators to direct lease
funding opportunities to the Company. The Company believes that a number of its
lease originators conduct business with other lease finance companies. However,
management believes that the Company's support of independent lease originators,
such as through direct personal communications, the development of specialty
lease programs, the use of leading edge technologies and a responsive,
predictable underwriting process will provide the Company with a strong
relationship with its lease originators and a basis upon which the Company can
expand the volume of lease transactions submitted by existing originators. The
Company has and will continue to focus on the development of value-added
services for its lease originators in order to enhance the Company's positioning
as a strategic partner with its originators.
Specialty Lease Programs. In conjunction with certain of the Company's
lease originators, the Company has developed specialty lease finance programs to
address the needs of specific lessees or businesses, particularly franchisees.
As of March 31, 1997, the Company had approximately 35 specialty programs in
place, each of which has unique attributes but all of which are based upon the
Company's standard lease form. Each of these programs has been developed as a
result of the Company or one of its lease originators identifying the need for a
specialty lease finance product not otherwise offered by the Company. The
principal difference between the Company's typical lease transactions and its
specialty leases is the period of time in which the lessee is required to have
been engaged in business. The Company's standard underwriting criteria typically
require that the lessee be engaged in its business for two years, while
specialty programs are available for start-up businesses. In consideration for
providing lease financing to a start-up business, certain lease terms are
adjusted to reflect the Company's increased risk. Underwriting procedures are in
other respects identical to those employed in the Company's other lease
transactions. The terms of each specialty lease program must be approved by
William W. Wehner and Mark H. Speros.
As an example, specialty programs have been developed to provide financing
for franchisees in national franchise organizations, which often have
significant equipment financing needs. Despite being a start-up business, the
new franchisee may represent a creditworthy lessee given the capital investment
required to establish the franchise, the franchisor's review of the franchisee
prior to granting a franchise, and operational and marketing support provided to
the franchisee by its franchisor. Each of the Company's specialty lease programs
is exclusive, and obligates the lease originator to source all of their
customer's lease financing requirements from the Company, and obligates the
Company to do business exclusively with the lease
30
<PAGE> 32
originator with respect to his or her specialty program. The specialty program
developed for franchisees of Domino's Pizza illustrates the type of program
offered by the Company to its originators. This program provides the franchisee
with a specially tailored lease to finance the purchase of computer and cash
register systems that are standardized throughout the Domino's Pizza franchise
system. The Company anticipates that it will continue to develop specialty lease
finance programs to meet the needs of its lease originators and their customers,
which management believes will further strengthen the Company's relationship
with its lease originators.
The Company believes that, through its network of independent lease
originators, it can introduce new lease finance products which are complementary
to those now offered by the Company. In particular, the Company believes that
small-ticket leases to municipalities, leases for start-up and early-stage
businesses and leases designed for franchise systems and chain businesses offer
significant areas in which the Company can expand its business. The Company
believes that a number of its lease originators now offer lease financing in
these market segments and that, by virtue of the Company's relationship with its
lease originators, the Company can be successful in expanding its volume of
lease financings in these market segments.
Vendor Direct Programs. The Company recently hired an in-house marketing
representative who will oversee the development of vendor direct programs. The
Company anticipates that the vendor direct programs will be focused on
establishing formal and informal relationships with equipment vendors whereby
the Company will become the financing source recommended by the vendor to its
equipment purchasers. The Company intends to promote its utilization as the
source of equipment lease financing and thereby increase the vendor's equipment
sales and its own lease fundings by offering convenient, competitive and timely
financing for equipment sales. The Company may also design vendor direct
programs in a manner similar to its specialty lease programs, under which the
Company will provide customized lease finance arrangements to respond to the
needs of a particular vendor and its equipment purchasers. The Company also
intends to pursue business-to-business lease transactions through its e-commerce
technologies now under development.
New Technologies. The Company is committed to implementing leading edge
technologies which can be used in the equipment leasing industry to streamline
and automate the lease application and approval process. The Company has
determined that, with certain exceptions, the most efficient means of achieving
this goal is by customizing off-the-shelf software applications and hardware
that can be tailored to the Company's operating requirements for a relatively
small additional investment. The Company believes that such off-the-shelf
products can be scaled to various lease funding volumes, are generally more
stable and less costly than products the Company might develop or have developed
solely for its use, and are easier to integrate with other commercially
available products. The Company generally avoids custom software programming so
as to limit costs of adapting new technology where possible. The Company
believes that by selecting and integrating superior customizable off-the-shelf
software applications, including periodic upgrades made available by software
developers at a relatively low cost, the Company will efficiently maintain its
competitive position and enhance the services it offers to its independent lease
originators. Examples of its commitment in this area include the Company's use
of a computer system developed by Decision Systems, Inc. ("DSI"), credit scoring
software licensed to the Company by Fair, Isaac and Company, Inc. ("Fair Isaac")
and lease processing software licensed to the Company by BrokerWare, Inc.
("BrokerWare"). While other large leasing companies use sophisticated management
information systems and credit scoring programs, the Company believes that the
cost of such technologies makes their use less common among smaller equipment
leasing concerns.
The Company is currently developing an interactive Web site and related
systems and protocols which will allow the Company to complete lease
transactions through a direct, on-line system with independent lease
originators. The Company has developed and is currently testing the on-line
system to be established with independent lease originators. The on-line system
will allow lease originators to electronically transmit lease applications to
the computer system located in the Company's headquarters. The Company's
computer system will then cause the application to be electronically scored
using the Fair Isaac credit scoring program. With respect to applications
approved for funding, the Company's system would prepare and electronically
transmit lease documents which would be downloaded and printed by the originator
and available for execution. The Company anticipates that the on-line system
will be fully operational in calendar year 1997.
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<PAGE> 33
In addition, the Company's interactive Web site and Internet marketing
program are currently under development. The Company's Internet presence will be
designed to create a new channel of potential lease financing transactions and
to accommodate e-commerce transactions. The Company anticipates that it will
establish an icon which will appear on the Web site of various equipment
manufacturers and vendors. Viewers of the manufacturers' and vendors' sites will
be able to click on the Company's icon and connect directly to the Company's Web
site. The Company's Web site will contain information concerning equipment lease
financing available through the Company and will allow potential lessees to
submit lease applications directly to the Company entirely over the Internet.
The Company has retained certain software development and Internet consulting
firms to develop the Company's proposed Internet system. The Company does not
expect that its Internet system will be fully operational until at least
calendar year 1998.
RISK MANAGEMENT; LEASE UNDERWRITING
The Company strives to maintain diversity in its business customer base,
geographic location of lessees and type of equipment under lease as part of its
risk management program and in order to meet or exceed standards required for
securitization transactions. The Company also seeks to maintain consistently
high asset quality through its reliance on a network of independent lease
originators that are carefully selected and extensively supported by the
Company, application of stringent underwriting criteria that are consistently
applied and maintenance of highly focused servicing and collection functions.
The Company believes that development of its operational resources, management
and marketing team, and lease processing and funding capabilities have
positioned the Company to increase its market share as it executes its
consolidation and internal growth strategies. The Company applies strict
underwriting criteria and procedures, a computerized credit scoring system and
independent credit investigations, all of which are designed to target
creditworthy lessees rather than "sub-prime" or "credit impaired" lessees. The
Company has also made significant investments in management information systems
and other technologies in order to automate and improve the performance of the
Company's servicing and collection functions.
Equipment and Industry Diversity. The following table sets forth certain
information with respect to the equipment types and industries which have been
served by the Company's equipment financing for the period from February 21,
1995 (inception) through March 31, 1997:
Types of Equipment Funded Chart
- ---------------
(1) Excludes leases funded by Global Finance.
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<PAGE> 34
The remaining leases underwritten by the Company and not reflected in the
foregoing table are divided among medical/dental, printing/typesetting,
engineering and scientific, refuse equipment, automotive and other licensed
equipment, and miscellaneous equipment. Leases underwritten in these categories
accounted for approximately $14.8 million in leases funded, or 17.1% of the
Company's lease fundings during the period from February 21, 1995 (inception)
through March 31, 1997.
Geographic Diversity. The following table sets forth certain information
with respect to the geographic distribution of leases funded by the Company from
February 21, 1995 (inception) through March 31, 1997:
<TABLE>
<CAPTION>
PERCENTAGE OF
STATE LEASES FUNDED(1) TOTAL LEASES FUNDED
----- ---------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
California................................. $20,353 23.6%
Texas...................................... 6,556 7.6
Florida.................................... 6,475 7.5
New York................................... 5,492 6.4
Colorado................................... 3,547 4.1
Illinois................................... 3,321 3.8
Pennsylvania............................... 3,314 3.8
Massachusetts.............................. 3,024 3.5
New Jersey................................. 2,894 3.3
Georgia.................................... 2,709 3.1
Ohio....................................... 2,444 2.8
Washington................................. 2,396 2.8
Arizona.................................... 2,117 2.5
Maryland................................... 1,713 2.0
North Carolina............................. 1,640 1.9
All other states(2)........................ 18,405 21.3
------- ------
Total.................................... $86,400 100.0%
======= ======
</TABLE>
- ---------------
(1) Based on cost of leased equipment. Excludes leases funded by Global Finance.
(2) Of the remaining 34 states in which the Company has conducted business, none
of such states individually accounts for in excess of 1.8% of the total
leases funded since inception.
Lease Terms and Conditions. The Company uses a standard, non-cancelable,
full-payout lease, the terms and conditions of which may vary slightly from
transaction to transaction. The Company's leases are structured so as to be
profitable regardless of the disposition of the leased equipment or the recovery
of any residual equipment value upon the expiration of the lease term. Excluding
Global Finance, approximately one-half of the leases underwritten by the Company
provide that the lessee may purchase the equipment for $1.00 at the expiration
of the lease, with the remainder of the leases calling for either a mandatory
10.0% firm price buy-out or an optional fair market value buy-out. The Company
books a maximum residual value of 10.0% of the original equipment cost of leases
other than those leases with a $1.00 buy-out. No residual value is booked on
leases with a $1.00 buy-out.
The leases covering point-of-sale equipment funded by Global Finance
generally provide for a maximum residual value of 10.0% of the lease receivable.
In certain cases, the residual value may be equivalent to 10.0% of the original
equipment cost. Leases funded by Global Finance generally have a term of 48
months and provide that, at the conclusion of the lease, the lessee may continue
to utilize the leased equipment by paying a monthly rental substantially
identical to the monthly payment required under the lease. The Company believes
that leases funded by Global Finance generally carry higher credit risk and,
therefore, the Company establishes higher reserves for credit losses as a
percentage of lease receivables for leases funded by Global Finance than those
funded by Granite Financial, Inc. Leases funded by Global Finance also carry
somewhat higher implicit lease rates than those funded by Granite Financial,
Inc.
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<PAGE> 35
Substantially all of the Company's leases provide that lessees are
obligated to (i) remit all amounts due, regardless of the performance of the
equipment, (ii) operate the equipment in a careful and proper manner and in
compliance with applicable government rules and regulations, (iii) maintain and
service the equipment, (iv) insure the equipment against casualty losses, public
liability, bodily injury and property damage, and require that the Company be
named as an additional insured and as a loss payee under each insurance policy,
and (v) pay directly, or reimburse the Company, for any taxes associated with
the equipment, its use, possession or lease, except those relating to net income
derived by the Company under the lease. The Company's equipment leases provide
that in the event of a default by a lessee, the Company may declare the entire
unpaid balance of rentals due and payable immediately, and may repossess the
equipment for subsequent sale, re-lease or other disposition.
Credit and Administrative Procedures. Based upon management's experience in
the equipment leasing industry, the Company has developed credit underwriting
policies and procedures that have been effective in the selection of
creditworthy equipment lessees. The Company's credit underwriting procedures are
based upon the use of, among other things, standardized lease application
documents, a computerized credit scoring system, credit investigations, and in
certain transactions, the tax returns, financial statements and other relevant
credit documentation concerning the lessee.
The underwriting process begins with the submission of a lease application
by the lease originator, generally by facsimile or electronic transmission, at
which time the Company conducts its own independent credit investigation through
recognized commercial credit reporting agencies such as Dun & Bradstreet,
Equifax Inc. and Experian Information Solutions, Inc. (formerly TRW, Inc.). The
lease application is then processed and scored by a software program licensed to
the Company by Fair Isaac. The Fair Isaac program assigns a credit score to each
application based upon its evaluation of a broad range of factors. As a result
of its extensive experience with the Fair Isaac program, the Company is able to
identify applications under which the creditworthiness of the lessee is so
strong (or alternatively, so weak) that the independent lease originator can be
promptly notified of initial approval or rejection. More extensive analysis is
performed by the Company's underwriters on lease applications receiving scores
within a certain range. Regardless of credit score, the Company's underwriters
perform the same extensive review and verification procedures on all approved
leases.
The time required for an underwriting decision varies according to the
strength of the lease application and the nature, size and complexity of the
transaction. Once a determination to fund a lease has been made, the Company
generates a standardized lease agreement and other documents. When the equipment
is shipped and installed, the vendor invoices the Company and the Company
verifies that the lessee has received and accepted the equipment before paying
the vendor's invoice. Because vendor relationships are an important part of the
Company's operations, the Company attempts to assure that vendors receive timely
payments once lessee acceptance of the equipment is received. In general, the
Company makes payments to vendors within 24 hours of receipt of lessee
acceptance. Upon the lessee authorizing payment to the vendor, the executed
lease is forwarded to the Company's funding and documentation department for
funding, transaction accounting, audit and billing procedures. The Company
requires receipt of an executed lease agreement and all related documentation
before funding. The Company's internal underwriters review all applications,
leases and associated documentation for accuracy and compliance with Company
policies. The Indenture trustee in each of the Company's securitizations has
conducted independent audits of leases submitted for funding, and has the right
to conduct additional audits in the future. The Company believes that such
audits have found a high degree of compliance with the Company's underwriting
criteria and procedures.
Each funded lease is then entered by the Company on the DSI computer
system. The DSI system is well-known in the leasing industry and is capable of
performing a wide range of monitoring and reporting functions concerning all
leases within the Company's servicing portfolio. The DSI system is scalable to
various portfolio sizes and, to the Company's knowledge, is currently used by a
number of the Company's largest competitors in the small-ticket equipment
leasing market. Reports and other data available through the DSI system are used
by the Company to analyze or track a wide range of variables. For example, the
DSI system is used to analyze various credit and demographic characteristics in
order to refine the Company's credit
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<PAGE> 36
underwriting procedures, monitor payments under all leases, and generate
management and accounting reports. The vendor payment process is also automated
through the DSI system.
SERVICING AND COLLECTIONS
The Company services all leases that have been originated or purchased by
the Company. The Company's servicing activities, with respect to both leases
retained by the Company or leases securitized or sold to third parties, consist
of collecting, accounting for and posting of all payments received; responding
to lessee inquiries; taking all necessary action to maintain the security
interest granted in the leased equipment; investigating delinquencies and taking
appropriate action; communicating with the lessee to obtain timely payments;
repossessing and reselling the collateral when necessary; and generally
monitoring each lease. The Company's existing servicing agreements provide that
the Company will bear all costs and expenses incurred in connection with
servicing activities in exchange for a fixed monthly fee assessed on each lease.
Monthly servicing fees range from $6.00 to $12.00 on each securitized lease and
are $5.00 on each lease sold to Heartland Bank. The servicing agreements require
the Company to deliver monthly reports to the securitization trustee or holder
of the lease reflecting all payment and collection activity with respect to the
leases and reconciliation of changes in the outstanding balance owed under the
leases. The Company's bank and other credit facilities do not place servicing
requirements upon the Company other than to require that the Company service
leases pledged as collateral to the respective bank or financial institution.
The sale of leases to certain institutional lease purchasers could require the
Company to relinquish the related servicing rights as well. The servicing
agreements which relate to the Company's securitizations stipulate that Norwest
Bank Minnesota, N.A. ("Norwest Minnesota") will serve as back-up servicer in the
event the Company is terminated as servicer. The Company may be terminated as
servicer by MBIA Insurance Corporation only upon the occurrence of certain
events of default in the Company's obligations as servicer or upon other
covenant violations by the Company.
The Company believes that its ability to monitor performance and collect
payments owed by lessees is primarily a function of its collection and support
systems. Certain members of the Company's management team and support staff have
extensive experience in lease servicing and collections. The Company seeks to
identify payment difficulties as early as possible and the Company's collection
staff works closely with lessees to address these difficulties. To this end, the
Company utilizes pro-active collection procedures, which include speaking by
telephone to each lessee at the outset of each lease in order to review the
payment schedule and other material terms of each new lease and to confirm the
lessee's receipt and approval of the leased equipment; attempting to repossess
leased equipment immediately following first payment defaults; communicating
with independent lease originators concerning delinquency trends; and employing
a customer service approach to assist the lessee in meeting its obligations,
which includes attempting to identify the underlying causes of delinquency and
quickly cure them whenever possible.
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<PAGE> 37
Delinquencies. The Company estimates that as of March 31, 1997,
approximately 8.6% of the leases in its Gross Servicing Portfolio were financed
on a recourse basis to the Company and the remaining 91.4% had been sold or
securitized on a non-recourse or limited recourse basis. In management's
opinion, the low delinquency rates of the Company's Gross Servicing Portfolio
reflects the consistent application of strict underwriting criteria, the
diversity in the Company's Gross Servicing Portfolio and the limited time period
that the vast majority of the Company's leases have been outstanding. As the
size and age of the Company's lease portfolio increases, the Company expects to
experience higher delinquency rates in the normal course of business. At March
31, 1997, the Company's portfolio of direct financing leases had 17 delinquent
leases over 31 days. The table below sets forth certain information concerning
direct financing leases held by the Company at March 31, 1997.
DIRECT FINANCING LEASE DELINQUENCIES(1)
<TABLE>
<CAPTION>
AT MARCH 31, 1997
-------------------------
LEASE STATUS DOLLARS PERCENT
------------ -------------- -------
(IN THOUSANDS)
<S> <C> <C>
Current..................................................... $7,244 89.1%
1-30 days past due.......................................... 87 1.1
31-60 days past due......................................... 251 3.1
61-90 days past due......................................... 286 3.5
Over 90 days past due....................................... 258 3.2
------ -----
Total............................................. $8,126 100.0%
====== =====
</TABLE>
- ---------------
(1) Excludes data for Global Finance. Data is presented using aged lease
receivables at March 31, 1997.
A majority of the leases funded by the Company have been sold to third
parties or securitized. However, to date the Company has retained the right to
service all leases that it has underwritten, including those that have been sold
or securitized. The following table sets forth certain information concerning
such leases at March 31, 1997.
LEASE DELINQUENCIES FOR LEASES SOLD OR SECURITIZED(1)
<TABLE>
<CAPTION>
AT MARCH 31, 1997
-------------------------
LEASE STATUS DOLLARS PERCENT
------------ -------------- -------
(IN THOUSANDS)
<S> <C> <C>
Current..................................................... $83,072 96.3%
1-30 days past due.......................................... 2,476 2.9
31-60 days past due......................................... 525 0.6
61-90 days past due......................................... 83 --
Over 90 days past due....................................... 162 0.2
------- -----
Total............................................. $86,318 100.0%
======= =====
</TABLE>
- ---------------
(1) Excludes data for Global Finance. Data is presented using aged lease
receivables at March 31, 1997.
As illustrated in the foregoing tables, the lease delinquency rates for
leases sold or securitized are less than the delinquency rates for direct
financing leases. This difference is primarily attributable to the Company's
exercise of its right to substitute performing leases for non-performing leases
previously securitized, at which time the non-performing lease is reflected in
the direct financing lease delinquency statistics. The Company exercises its
right of lease substitution from time to time in order to limit the risk of
acceleration of the repayment of principal under outstanding certificates or
notes. Each securitization facility permits such acceleration if delinquency or
net charge-off rates exceed specified amounts. Acceleration of principal
repayments would have a material adverse effect on the Company's financial
condition inasmuch as available cash flows from the securitization residual
interest would be diverted to the investor upon
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<PAGE> 38
acceleration until such time as all principal has been repaid. See "Risk
Factors -- Liquidity and Capital Resources."
Reserves for Credit Losses. The Company maintains a reserve for credit
losses in connection with payments due under leases held in the Company's
portfolio. The reserve is established by management in an amount deemed
sufficient to meet future asset write downs, based on an analysis of
delinquencies, problem accounts, overall risks and probable charge-offs
associated with outstanding leases, together with a review of the Company's
historical loss experience. The reserve relates to direct financing leases held
by the Company, which include any leases received as a result of lease
substitutions in a securitized pool. At March 31, 1997, the reserve for credit
losses equaled approximately 3.0% of the direct financing leases excluding
Global Finance. Due to the higher risk associated with leases funded by Global
Finance, the Company has established significantly higher reserves for credit
losses as a percentage of lease receivables for Global Finance leases as
compared to leases funded by Granite Financial, Inc. The reserve is evaluated by
management and the Board of Directors on a quarterly basis. The Company does not
provide a reserve for credit losses for leases sold to non-recourse lenders or
for leases disposed of through securitizations, except with respect to reserves
included within the securitization residual interest. The price paid by
purchasers of leases and the terms of securitizations give effect to estimated
delinquency and net charge-off rates.
FUNDING SOURCES
The Company purchases or originates and funds leases with the intention of
either selling the lease to an institutional purchaser, securitizing the lease
through the sale of lease-backed securities or holding the lease in the
Company's own portfolio. The Company initially funds a lease through its
existing working capital or through borrowings under the Warehouse Credit Line
or other credit facilities which are available to the Company. Upon completing a
sale or securitization of a pool of leases, the Company receives funds which are
generally used to pay down borrowings under the Company's credit facilities or
to restore the Company's working capital. Borrowings under the Company's credit
facilities and, to a lesser extent, the Company's cash and cash equivalents,
will therefore fluctuate based upon the timing and amount of lease sales and
securitizations.
Bank and Other Credit Facilities. The $36.0 million Warehouse Credit Line
with CoreStates Bank and its participating lenders serves as the Company's
principal warehouse credit line. Borrowings under the Warehouse Credit Line are
collateralized by security interests in the leases against which the borrowing
applies, as well as a security interest in the underlying equipment and all cash
and non-cash proceeds therefrom. The Company maintains a $3.0 million term loan
with FBS Business Finance Corporation and a $3.0 million revolving credit
line/term loan with Norwest Equipment Finance, Inc. These credit facilities are
collateralized by the leases assigned to each lender in connection with each
advance and are similar in certain other respects to the Warehouse Credit Line.
Given the Company's access to other credit facilities, the Company may elect not
to renew these facilities. The Company established a $2.0 million unsecured
revolving credit line with Colorado National Bank in January 1997. The credit
line allows the Company to borrow up to $2.0 million for working capital
purposes on an unsecured basis. The Company has also assumed three credit
facilities as a result of its acquisition of Global Finance in March 1997. The
Global Finance credit facilities consist of a $2.2 million term loan and an
$800,000 line of credit, each with LaSalle National Bank, and a $1.5 million
term loan with Sirrom Capital, L.P. At March 31, 1997, borrowings by Global
Finance under these credit facilities totalled $4.2 million. These credit
facilities are recourse to Global Finance, are secured by equipment leases and
can only be used by Global Finance. In May 1997, LaSalle National Bank agreed to
increase the borrowing limit under the Global Finance line of credit to $5.0
million. The Company expects to prepay the term loan owed to Sirrom Capital,
L.P. using proceeds of this offering. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Securitizations. The Company has completed three securitizations which
provide for aggregate funding in the amount of approximately $114.0 million
under which the Company had securitized leases in the aggregate amount of $52.4
million as of March 31, 1997. In each securitization, the Company transfers a
pool of leases to a wholly-owned, bankruptcy remote special purpose subsidiary
established for the limited purpose of purchasing the Company's leases and
selling lease-backed certificates or notes through a grantor trust to
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<PAGE> 39
institutional investors. Proceeds from the sale of lease-backed certificates or
notes are used by the subsidiary to purchase leases from the Company. Such
proceeds are generally then applied by the Company to pay down its Warehouse
Credit Line or bank and other credit facilities. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The Company completed its first securitization in April 1996. The
securitization provided for the issuance of $21.7 million in 6.33% Class A
Lease-Backed Notes due November 20, 2001. At March 31, 1997, the outstanding
principal balance of such notes was approximately $16.3 million with a present
value of lease receivables of $19.4 million.
In November 1996 the Company completed its second securitization facility.
The facility provides for the issuance of up to $65.0 million in aggregate
principal amount of Class A Lease-Backed Certificates due June 20, 2003. The
certificates are issuable in two tranches, a floating rate tranche and a fixed
rate tranche. The floating rate tranche bears interest at an annual rate equal
to the LIBOR rate plus 0.50% and generally converts to the fixed rate tranche on
a quarterly basis. The fixed rate tranche bears interest at an annual rate equal
to the treasury rate, as adjusted, plus 0.70%. The initial funding under the
securitization facility was approximately $7.2 million. The Company is required
to sell a minimum of $1.5 million in leases to the securitization facility per
month and until June 1997 was subject to limitations in the amount eligible to
be securitized under this facility. At March 31, 1997, certificates had been
issued in the aggregate principal amount of $15.5 million in this
securitization.
In March 1997 the Company established its third securitization facility.
This facility was established to securitize additional leases above the
eligibility limit formerly imposed in the November 1996 securitization facility.
The facility provides for the issuance of up to $27.5 million in the aggregate
principal amount of 6.82% Class A Lease-Backed Certificates due December 20,
2002. The initial funding under the securitization facility was approximately
$14.7 million. At March 31, 1997, certificates had been issued in the aggregate
principal amount of $15.2 million in this securitization.
Payments due under the lease-backed securities issued in each of the
Company's securitizations have been insured by a financial guaranty issued by
MBIA Insurance Corporation and have been rated AAA by Standard & Poor's Ratings
Group and Aaa by Moody's Investors Service. In each securitization, the lease-
backed securities were issued pursuant to an indenture (the "Indenture") by and
among the respective funding subsidiary, Norwest Minnesota, the trustee under
the Indenture, and the Company. Contemporaneously, the Company and Norwest
Minnesota entered into a servicing agreement pursuant to which the Company was
named as the servicer for all leases that collateralized the lease-backed
securities. Norwest Minnesota functions as back-up servicer, as the trustee
under the Indenture, as custodian of the lease contracts and as the paying agent
for the leases.
Under the terms of its existing securitizations, the Company has retained
the securitization residual interest. At March 31, 1997, the net book value of
the securitization residual interest totalled approximately $6.1 million. In
each securitization, the Company receives advances based on a percentage which
is less than the aggregate present value of cash flows from an undifferentiated
pool of leases, effectively overcollateralizing the lease-backed notes or
certificates. Over the life of the lease pool securitized, the Company is
eligible to receive the excess cash flow (the "securitization residual
interest") resulting from the difference between the lease payments received,
net of defaults, and the payment of (i) principal and interest to investors in
lease-backed notes or certificates and (ii) servicing, backup servicing and
trustee fees and other securitization expenses. The Company's success in
realizing the value of the securitization residual interest will depend
primarily on the performance and cash flow of the securitized leases. The
securitization residual interest is significant to the Company, and the failure
to realize all or a portion of such securitization residual interest may
adversely affect the Company's future results of operations.
The Company estimates that the cost of capital available to the Company
through securitizations has been significantly below the cost of capital to the
Company under its bank and other credit facilities. Accordingly, the Company may
enter into securitization transactions in the future in order to reduce and
control its cost of capital.
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<PAGE> 40
Lease Sales. From June 1995 until completion of the Company's first
securitization in April 1996, sales of leases to Heartland Bank represented the
Company's primary source of funding. Lease sales to Heartland Bank have declined
significantly since the Company's first securitization, and totalled
approximately $17.1 million in the nine months ended March 31, 1997. The Company
may sell leases to Heartland Bank or other institutional investors from time to
time in the future, particularly those leases which are not eligible for
securitization. Lease sales made by the Company to Heartland Bank are generally
non-recourse, although Heartland Bank has recourse to the Company with respect
to (i) the aggregate residual equipment value of the leases where there is no
firm purchase obligation on the part of the lessee and (ii) the entirety of the
lease in the case of first payment defaults. Heartland Bank has been an
affiliate of the Company since January 1996 and two directors of the Company are
also officers and directors of Heartland Bank and Heartland Leasing Corporation
of Missouri. See "Certain Transactions."
COMPETITION
Competition in the equipment lease finance market is intense. Management
believes that the small-ticket equipment leasing market is highly fragmented,
with no single competitor believed to have a market share in excess of
approximately 2.0%. The Company competes for lessees with a number of national,
regional and local finance companies, some of which are active in financing
small-ticket equipment. The Company also competes against captive finance
companies affiliated with major equipment manufacturers, banks, credit unions
that provide equipment leasing and conventional leasing companies. There also
exist a large number of financial service companies and financial institutions
which, should they choose to do so, may enter the equipment leasing business in
the future. Competition in the equipment lease finance market is based primarily
on price, service and market presence. A majority of the Company's existing and
potential competitors possess substantially greater financial, marketing,
personnel and other resources than the Company. In general, many of the
Company's competitors and potential competitors are larger, more established
companies that have a lower cost of capital than the Company and which may be
able to access capital markets and funding sources that are unavailable to the
Company. Although the Company expects that future securitizations will have the
effect of making capital available at a cost which will allow the Company to
continue to offer competitive lease rates, there can be no assurance that the
Company will be successful in completing future securitizations or that such
securitizations will allow the Company to realize increased proceeds from lease
sales. The Company has and will encounter significant competition and there can
be no assurance the Company will be successful in competing in its chosen market
segments. In addition, as the Company enters new markets such as the municipal
leasing market, the Company will encounter substantial competition.
The Company believes it currently maintains a competitive advantage in the
small-ticket market segment based on the high level of service provided to its
independent lease originators and its emphasis on the use of computer systems
and software specially designed for the equipment leasing market. The Company
believes its use of specialized computer systems and related technologies
provides the Company with a competitive advantage over smaller finance
companies. The Company believes that the principal competitive factors affecting
the lease originator's decision to offer leases through a particular financing
source are the purchase price offered for the leases, the reasonableness of
underwriting guidelines and documentation requests, the predictability and
timeliness of financing and the financial stability of the funding source.
Management has devoted considerable time and effort to the development of
comprehensive underwriting guidelines and documentation and to streamlining of
the lease underwriting process to provide its independent lease originators with
efficient, prompt and predictable outcomes.
INTELLECTUAL PROPERTY
The Company relies on a combination of common law trade secret and
trademark rights and nondisclosure agreements to protect its proprietary marks
and information. The Company has not registered any of its trademarks or service
marks, and does not believe that any such marks are necessary to the successful
operation of its business. The Company has developed certain specialty lease
programs for which the Company may register service marks in the future. There
can be no assurance the Company will receive
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<PAGE> 41
service mark registration of any terms applicable to its specialty lease
programs. The Company's non-exclusive license agreements with Fair Isaac and DSI
grant the Company limited non-exclusive licenses to the respective trademark or
servicemark of the licensor for the duration of the agreement. In December 1996,
the Company also entered into a non-exclusive license for software developed by
BrokerWare.
REGULATION
The Company's business is subject to numerous federal and state regulations
which, among other things, require the Company to obtain and maintain certain
licenses and qualifications. These regulations also address collection
practices, including the rights to repossess and sell equipment. Under certain
circumstances, the Company may also be required to comply with the Equal Credit
Opportunity Act ("ECOA"). Pursuant to the terms of the ECOA, the Company is
required to give all credit applicants notice of the right to receive a written
statement of reasons if their application for credit is denied, unless the
applicant had gross revenues exceeding $1.0 million during its last fiscal year.
The Company is also required by the ECOA to give oral or written notice of a
credit denial within 30 days after receipt of a completed lease application, or
within a reasonable time for applicants whose gross revenues exceeded $1.0
million during its last fiscal year. Although the Company believes that it is
currently in compliance with applicable statutes and regulations, there can be
no assurance that the Company will be able to maintain such compliance. The
failure to comply with such statutes and regulations could have a material
adverse effect upon the Company. Furthermore, the adoption of additional
statutes and regulations, changes in the interpretation and enforcement of
current statutes and regulations or the expansion of the Company's business into
new lease funding activities which are subject to more stringent regulatory
requirements than those which govern the Company's existing business could have
a material adverse effect upon the Company.
One of the Company's principal stockholders, Heartland Leasing Corporation
of Missouri ("Heartland Leasing"), is a wholly-owned subsidiary of Heartland
Bank. Heartland Bank is a federally chartered savings association and subject to
the jurisdiction of the Office of Thrift Supervision ("OTS"). Under authority
granted by the Federal Deposit Insurance Act, OTS regulates federally chartered
savings associations as well as wholly or partly owned subsidiaries. At May 31,
1997, Heartland Leasing owned approximately 28% of the outstanding Common Stock
of the Company and, by virtue of such ownership, the Company may be considered a
partly owned subsidiary of Heartland Bank by OTS. To facilitate compliance by
Heartland Bank with OTS regulations and the Federal Deposit Insurance Act, the
Company has agreed to engage solely in activities that are permissible to
affiliates of federally chartered savings associations as determined by OTS or
applicable regulations in effect from time to time. The Company does not believe
its operations as currently conducted, or as proposed to be conducted, will
place the Company or Heartland Bank in violation of applicable laws or OTS
regulations. Heartland Bank's indirect affiliation with the Company may subject
the Company to examinations and could subject the Company to civil enforcement
proceedings or other action by OTS if the Company engaged in conduct
impermissible to affiliates of federally chartered savings associations. See
"Principal Stockholders."
EMPLOYEES
At May 31, 1997, the Company had 35 full-time employees. Of these, seven
are principally engaged in management, three are engaged in sales and marketing
and the remainder are engaged in operations, accounting and administration. None
of the Company's employees are subject to collective bargaining agreements. The
Company believes its employee relations are excellent.
PROPERTY
The Company's offices are located in Westminster, Colorado and consist of
approximately 6,800 square feet. The offices are leased for an annual base rent
of $37,000 through July 31, 1998, subject to extension for an additional two
years at market rental rates then prevailing. The Company is also obligated to
pay its pro rata share of taxes, assessments and maintenance expenses
attributable to the building in which its offices are located. The Company plans
to relocate its headquarters during July 1997 to a larger facility in the
Denver, Colorado area. The Company is engaged in discussions regarding available
facilities which would provide
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<PAGE> 42
approximately 13,000 to 18,000 square feet of office space. As a result, the
Company expects to incur occupancy expenses during fiscal 1998 which are
approximately $95,000 in excess of fiscal 1997 occupancy expenses.
LITIGATION
The Company is not a party to any litigation and is not aware of any
threatened or pending legal proceeding which would have a material adverse
effect on the Company's business, operations or financial condition.
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Certain statements made above in this Business section and elsewhere in
this Prospectus are forward-looking statements as defined in the Reform Act.
Those forward-looking statements involve risks and uncertainties that are based
on certain assumptions that may not be realized. Those forward-looking
statements include or relate to the Company's plans or expectations to: (i)
capitalize on its operational capabilities and experienced management team, (ii)
increase productivity through utilization of advanced technologies and expansion
of its business using new interactive systems, (iii) leverage its access to
lower cost funds through securitizations and perhaps other sources to increase
the gross profit margins of acquired companies, (iv) increase its market share
as it executes its consolidation strategy, (v) successfully develop and
implement a direct electronic link with its independent lease originators, (vi)
successfully implement an interactive Web site and Internet marketing
strategies, (vii) implement additional marketing initiatives, (viii) complete
future securitization transactions or lease sales, (ix) maintain delinquency and
net charge-off rates within acceptable ranges, (x) identify, acquire and
assimilate complementary equipment leasing companies and independent lease
originators, (xi) develop additional specialty lease and vendor direct programs
in the future and (xii) commence e-commerce transactions among the Company,
equipment vendors and lessees.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties that are based on
assumptions that the Company will continue to be able to provide lease financing
at competitive rates, that the Company will be able to successfully develop its
interactive Web site and Internet marketing methods, that the Company will be
able to locate and successfully negotiate acquisitions of complementary
equipment leasing companies and independent lease originators, that the Company
will continue to be able to provide a high level of service to its independent
lease originators, that the Company will continue to be able to attract
qualified and experienced management personnel, that the Company is more
advanced in the development of its technology-based systems than its competitors
and that it can successfully develop and implement those systems before its
competition, that competitive conditions within the industry will not change
materially or adversely, that demand for the Company's lease financing will
remain strong, that the Company will retain its existing independent lease
originators and key management personnel, that the Company's forecasts will
accurately anticipate market demand for equipment lease financing in the
small-ticket market, that the Company will continue to have access to the
asset-backed securities markets or other lower cost sources of capital, and that
there will be no material adverse change in the Company's operations or
business. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions, and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company and its
management. Although the Company believes that the assumptions underlying the
forward-looking statements made in this Prospectus are reasonable, any of those
assumptions could prove inaccurate and, therefore, there can be no assurance
that the results contemplated in any of the forward-looking statements made
herein will be realized. In addition, as disclosed elsewhere under "Risk
Factors," the business and operations of the Company are subject to substantial
risks that increase the uncertainty inherent in such forward-looking statements.
Any of the other factors disclosed under "Risk Factors" could cause the
Company's revenues or net income, or the growth in revenues or net income, to
differ materially from prior results. Growth in absolute amounts of cost of
leases sold or charge-offs or the occurrence of extraordinary events could cause
actual results to vary materially from the results contemplated by the
forward-looking
41
<PAGE> 43
statements contained herein. Budgeting and other management decisions are
subjective in many respects and thus susceptible to interpretations and periodic
revisions based on actual experience and business developments, the impact of
which may cause the Company to alter its funding, marketing, capital expenditure
or other budgets, which may in turn materially affect the Company's results of
operations. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person or
entity that the objectives or plans of the Company can or will be achieved.
42
<PAGE> 44
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William W. Wehner................. 55 Chairman of the Board and Chief Executive
Officer
Larry K. White.................... 42 President and Chief Operating Officer
Frank J. Corcoran................. 46 Senior Vice President and Chief Financial
Officer
William S. Cobb................... 41 Senior Vice President of Corporate Development
Mark H. Speros.................... 57 Senior Vice President of Credit Administration
Kelly G. Long..................... 32 Senior Vice President and Chief Marketing
Officer
William W. ("Skip") Wehner........ 28 Senior Vice President and Senior Operations
Officer
Mark A. Miyasaki.................. 33 Vice President and Chief Accounting Officer
James E. Lewis.................... 48 Director
Laurence A. Schiffer.............. 57 Director
Andrew S. Love, Jr................ 53 Director
Samuel R. Freeman................. 67 Director
</TABLE>
WILLIAM W. WEHNER has been the Chairman of the Board of the Company since
its formation in June 1996. Mr. Wehner co-founded and was the managing member of
Granite Financial, LLC, the Company's predecessor, from 1995 to 1996. From 1989
through 1994, Mr. Wehner served in several capacities with the Concord group of
companies. In 1990, Mr. Wehner formed and was the senior executive officer of
First Concord Acceptance Corporation, an equipment leasing company and an
affiliate of the Concord group of companies. From 1984 through 1989, Mr. Wehner
was the President of First Centennial Leasing Corporation, a joint venture with
The Hathaway Company which specialized in leasing high technology and office
equipment products. Mr. Wehner was President and Chief Executive Officer of
Colorado National Leasing, Inc. from 1972 through 1984. Mr. Wehner is a
Certified Lease Professional and is a member of the Equipment Leasing
Association ("ELA") and the United Association of Equipment Lessors ("UAEL").
Mr. Wehner is the father of William W. ("Skip") Wehner.
LARRY K. WHITE has been the President and Chief Operating Officer of the
Company since May 1997. From August 1995 to May 1997, Mr. White was Senior Vice
President of Operations and Chief Operating Officer of Rockford Industries,
Inc., a publicly-held specialty finance company. From June 1985 to August 1995,
he was director of operations of Tokai Financial Services, Inc., an equipment
leasing company.
FRANK J. CORCORAN has been a Senior Vice President and the Chief Financial
Officer since May 1997. From November 1994 to May 1997, Mr. Corcoran was Senior
Vice President and Chief Financial Officer of Continental Information Systems
Corporation, a publicly-held equipment leasing and distribution company. From
1992 to November 1994, Mr. Corcoran was Vice President and General Manager of
Unisys Finance Corporation, an equipment leasing and financing company. From
1985 to 1992, he held positions as controller and Chief Financial Officer of
Unisys Finance Corporation. From 1982 to 1985, Mr. Corcoran was a tax manager
for Unisys Corporation. Mr. Corcoran is a certified public accountant and was
formerly employed by a predecessor to KPMG Peat Marwick LLP.
WILLIAM S. COBB has been the Senior Vice President of Corporate Development
of the Company since April 1997. Mr. Cobb was the Chief Financial Officer of the
Company from June 1996 to April 1997, and was the chief financial manager of
Granite Financial, LLC from February 1995 to October 1996. He was also a
director of the Company from September 1996 to April 1997. Mr. Cobb served as
the Chief Financial Officer of the JELTEX group of companies from 1995 to
September 1996. From 1994 to 1995, Mr. Cobb was acting Chief Financial Officer
of Ramtron International Corporation. From 1988 through 1993, Mr. Cobb was Vice
President of Finance for the Concord group of companies. From 1983 to 1988, Mr.
Cobb was a commercial lending officer for Bank of the Southwest and MBank.
43
<PAGE> 45
MARK H. SPEROS has been the Senior Vice President of Credit Administration
of the Company since April 1997 and served as Senior Vice President of
Operations from June 1996 to April 1997. From February 1995 to June 1996, he was
the Director of Operations for Granite Financial, LLC. From 1993 to 1995, he was
Vice President of Operations and credit manager of Cypress Financial
Corporation, an equipment leasing firm. From 1988 through 1993, Mr. Speros was
Director of Operations for Fleet Credit and Denrich, an equipment leasing
company.
KELLY G. LONG has been Senior Vice President since June 1996 and Chief
Marketing Officer of the Company since April 1997. He was a marketing director
for Granite Financial, LLC from February 1995 to June 1996. From 1991 until
1995, Mr. Long was marketing director for First Concord Acceptance Corporation.
From 1987 through 1991, Mr. Long was a sales director for Business Credit
Leasing.
WILLIAM W. ("SKIP") WEHNER has been Senior Vice President and Senior
Operations Officer of the Company since April 1997. He was Vice President of
Marketing from June 1996 to April 1997, and was marketing director for Granite
Financial, LLC from February 1995 to June 1996. From 1992 through February 1995,
Mr. Wehner was a marketing representative for First Concord Acceptance
Corporation. William W. Wehner, the Chief Executive Officer, is his father.
MARK A. MIYASAKI has been Vice President and Chief Accounting Officer of
the Company since April 1997 and served as the Company's chief accountant from
April 1996 to April 1997. From April 1992 to April 1996, Mr. Miyasaki was a
Second Vice President of Corporate Planning for Life Partners Group, a publicly-
held life insurance company. Mr. Miyasaki is a certified public accountant and,
from September 1986 to April 1992, he was employed by Gelfond Hochstadt Pangburn
Stark & Co. (formerly Laventhol & Horwath).
JAMES E. LEWIS has been a director of the Company since its formation in
June 1996, and was a member of the managing board of Granite Financial, LLC from
its inception. Since 1991, Mr. Lewis has been the Chairman of the Board and
President of the JELTEX group of companies, a group of firms engaged in
vegetable farming, fresh produce distribution and vegetable canning. From 1991
to 1993, Mr. Lewis was a consultant to the Concord group of companies. From 1986
to 1991, Mr. Lewis was Vice Chairman and Executive Director of the Concord group
of companies. Mr. Lewis is a certified public accountant and is a member of the
American Institute of CPAs and the Colorado Society of CPAs.
LAURENCE A. SCHIFFER has been a director of the Company since its formation
in June 1996, and was a member of the managing board of Granite Financial, LLC
from January 1996 until October 1996. Mr. Schiffer is the Chairman of the Board
of Heartland Bank, a wholly-owned subsidiary of Love Savings Holding Company.
Mr. Schiffer is President of Love Savings Holding Company and has been a member
of its Board of Directors since 1985. He currently is the Chairman of the Board
of Love Funding Corporation. Mr. Schiffer is also Chairman of the Board of
Heartland Leasing Corporation of Missouri, a wholly-owned subsidiary of
Heartland Bank. Mr. Schiffer has served as President of Love Investment Company
and Love Real Estate Company since 1971.
ANDREW S. LOVE, JR. has been a director of the Company since its formation
in June 1996, and was a member of the managing board of Granite Financial, LLC
from January 1996 until October 1996. Mr. Love is the Chairman of the Board of
Love Savings Holding Company. Mr. Love is also Chairman of the Finance
Committee of Heartland Bank, where he has been a director since 1985. Mr. Love
has been a member of the Board of Directors of Heartland Leasing Corporation of
Missouri since its formation in December 1995. Mr. Love engaged in the private
practice of law and was a partner of Bryan Cave, St. Louis, Missouri, from 1969
to 1992. Mr. Love is also the Chairman of the Board of Love Investment Company
and Love Real Estate Company. Mr. Love currently serves as a trustee of the
Missouri Investment Trust, and has been a director and secretary of Love Funding
Corporation since 1984.
SAMUEL R. FREEMAN has been a director of the Company since May 1997. Mr.
Freeman has been a principal of the JELTEX group of companies since December
1996. From 1994 to 1996, he served as Chairman of the Denver Research Institute
of the University of Denver. Mr. Freeman was a consultant to the Southern
Pacific Railroad Company from 1993 to 1996 and to the Concord group of companies
from 1989 to 1991 and from 1992 to 1993. From 1991 to 1992, Mr. Freeman served
as Chairman of the Board and President
44
<PAGE> 46
of Belcaro Bank. From 1973 to 1989, he was Vice President and General Counsel of
Rio Grande Industries and the Denver Rio Grande Railroad. Mr. Freeman engaged in
the private practice of law from 1959 to 1973, and is a former Assistant
Attorney General in Colorado. He currently serves as an arbitrator with the
American Arbitration Association and the National Association of Securities
Dealers, Inc.
On February 23, 1995, Oren L. Benton and certain affiliates of Mr. Benton
which constitute a portion of the Concord group of companies filed for
protection under Chapter 11 of the United States Bankruptcy Code. The officers
and directors of the Company who had various affiliations with the Concord group
of companies, as described above, were not officers or directors of the Concord
group of companies at or within two years of the time of such bankruptcy
filings.
The Board of Directors has established a Compensation Committee and an
Audit Committee. The members of the Compensation Committee are James E. Lewis
and Laurence A. Schiffer, both non-management directors. This Committee reviews
and makes recommendations to the Board of Directors as to general levels of
compensation for all employees of the Company, the annual salary and bonuses of
each of the executive officers of the Company, and reviews and approves
compensation and benefit plans of the Company.
The members of the Audit Committee are William W. Wehner, James E. Lewis
and Andrew S. Love, Jr. The Audit Committee is empowered by the Board of
Directors to review the financial books and records of the Company in
consultation with the Company's accounting and auditing staff and its
independent auditors, and to review with the accounting staff and independent
auditors any questions raised with respect to accounting, auditing policy and
procedure. The Audit Committee reports to the Board of Directors with respect to
such matters and recommends the selection of independent auditors.
EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table provides the specified information concerning the
compensation earned by the Company's Chief Executive Officer, the only executive
officer of the Company whose total salary and bonus exceeded $100,000 for the
fiscal year ended June 30, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -------------
---------------------------- SECURITIES ALL OTHER
SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) OPTIONS/SARS ($)
--------------------------- ---- -------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
William W. Wehner................... 1996 $196,000 $ -- 90,000 $10,037(1)
Chairman of the Board and Chief
Executive Officer
</TABLE>
- ---------------
(1) Such amount consists of an automobile allowance, club dues and
associated expenses.
OPTION/SAR GRANTS TABLE
The following table provides the specified information concerning stock
options granted to the person named in the Summary Compensation Table during the
fiscal year ended June 30, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER PERCENT OF TOTAL
OF SECURITIES OPTIONS GRANTED EXERCISE OR
UNDERLYING OPTIONS TO EMPLOYEES IN BASE PRICE
NAME GRANTED(#)(1) FISCAL YEAR ($/SHARE) EXPIRATION DATE
---- --------------------- ----------------- ----------- ---------------
<S> <C> <C> <C> <C>
William W. Wehner........ 90,000 51.0% $6.55(1) June 22, 2001
</TABLE>
- ---------------
(1) Represents options granted pursuant to the Company's Option Plan. All
options listed were incentive stock options granted at 110.0% of fair market
value at the date of grant. These options became exercisable at the time of
grant.
45
<PAGE> 47
The following table provides the specified information concerning
unexercised stock options held as of June 30, 1996 by the person named in the
Summary Compensation Table. No options were exercised by such person in the year
ended June 30, 1996.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDER- VALUE OF UNEXERCISED
LYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
AT FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William W. Wehner.................. 90,000 -0- $85,500 $ --
</TABLE>
- ---------------
(1) Based upon the deemed fair value of the Common Stock at June 30, 1996, less
the exercise price payable per share. At June 30, 1996, there was no public
market for the Common Stock and the acquisition of Granite Financial, LLC
had not been completed. Accordingly, the fair value of the Company's Common
Stock at June 30, 1996 is deemed for purposes of this table to be the
Initial Public Offering price of $7.50 per share.
EMPLOYMENT CONTRACTS
Effective April 1, 1997, the Company entered into a three-year employment
agreement with William W. Wehner. The agreement provides for, among other
things: (a) a base salary of $250,000 per year, subject to increases at the
discretion of the Board of Directors; (b) a discretionary annual bonus based
upon the Company's performance, as measured by goals and objectives established
annually by the Board of Directors; (c) payment to Mr. Wehner of his base salary
(reduced by the amount received by him from state disability insurance or
workers' compensation or other similar insurance through policies provided by
the Company) for a period of 12 months and payment of $10,000 per month for 12
months thereafter if he becomes disabled so that he is unable to perform his
duties; (d) four weeks annual vacation; (e) reimbursement of life insurance
premiums in an amount up to $10,000 per year; (f) an automobile allowance in the
amount of $10,000 per year; and (g) reimbursement for ordinary and necessary
expenses incurred by Mr. Wehner in connection with his employment. The agreement
further provides that Mr. Wehner will not, directly or indirectly, compete with
the Company in the equipment lease financing business for a period of one year
following the termination of the agreement within 75 miles of the Company's
offices or the offices of the Company's independent lease originators. The
agreement may be terminated by the Company only with cause. Mr. Wehner may
terminate the agreement with or without cause. Upon termination of the agreement
by Mr. Wehner for cause, and after failure by the Company to remedy any
noncompliance, Mr. Wehner shall be entitled to receive his base salary and
benefits during the remaining term of the agreement. The agreement further
provides that in the event Mr. Wehner's employment is terminated following a
change in control of the Company, Mr. Wehner will be entitled to receive
severance compensation in an amount equal to 2.9 times his compensation during
the 12 months immediately preceding the change in control.
Effective April 28, 1997, the Company entered into an employment agreement
with Larry K. White. The agreement provides for, among other things: (a) a base
salary of $120,000 per year, subject to annual increases at the discretion of
the Board of Directors; (b) annual bonuses at the discretion of the Board of
Directors and guaranteed bonuses of $5,000 and $30,000 on June 30, 1997 and
1998, respectively; (c) four weeks annual vacation; (d) the grant of an
incentive stock option to purchase 10,000 shares of Common Stock at a price of
$9.50 per share in accordance with an annual vesting schedule; and (e) a term
expiring on June 30, 1998, subject to extension by the Company for an additional
one-year period. The agreement further provides that the employee will not
engage in certain competitive activities commencing as of the date of agreement
and continuing for one year following the date on which the employee ceases to
be employed by the Company.
OPTION PLAN
The Company's Board of Directors has adopted the Option Plan in order to
offer incentives and awards to those persons who are key to the Company's
growth, development and financial success. The Option Plan permits the grant of
options to purchase an aggregate of 450,000 shares of Common Stock to directors,
46
<PAGE> 48
officers, employees, agents and consultants of the Company. The Option Plan
combines the features of an incentive and a nonqualified stock option plan, a
stock award plan and a stock appreciation rights ("SAR") plan.
The Option Plan provides for the granting of incentive stock options
("Incentive Stock Options") within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") and non-qualified stock options.
Non-qualified stock options may be granted to employees, directors and
consultants of the Company, while Incentive Stock Options may be granted only to
employees. The Option Plan is administered by the Board of Directors, which
determines the terms and conditions of the options granted under the Option
Plan, including the exercise price, number of shares subject to the option and
the exercisability thereof. The Board of Directors may delegate administration
of the Option Plan to a compensation committee thereof. The Option Plan was
approved by the sole stockholder of the Company as of June 22, 1996. The Option
Plan was amended and restated in April 1997 in order to make certain technical
modifications thereto and was further amended in June 1997 to increase the
shares of Common Stock reserved for issuance to 900,000 shares.
The exercise price of all Incentive Stock Options granted under the Option
Plan must be at least equal to the fair market value of the Common Stock of the
Company on the date of grant, and must be 110.0% of fair market value when
granted to a 10.0% or more stockholder. The exercise price of all non-qualified
stock options granted under the Option Plan shall be not less than 85.0% of the
fair market value of the Common Stock on the date of grant. The term of all
options granted under the Option Plan may not exceed ten years, except the term
of Incentive Stock Options granted to a 10.0% or more stockholder may not exceed
five years. The Option Plan may be amended or terminated by the Board of
Directors, but no such action may impair the rights of a participant under a
previously granted option.
The Option Plan provides for the award of SARs. A SAR is an incentive award
that permits the holder to receive (per share covered thereby) the amount by
which the fair market value of a share of Common Stock on the date of exercise
exceeds the fair market value of such share on the date the SAR was granted or
at such date as the Compensation Committee designates. The Compensation
Committee may grant SARs independently, in addition to, or in tandem (such that
the exercise of the SAR or related stock option will result in forfeiture of the
right to exercise the related stock option or SAR for an equivalent number of
shares) with a stock option award.
The Option Plan provides the Board of Directors or the Compensation
Committee with the discretion to determine when options granted thereunder shall
become exercisable and the vesting period of such options. Upon termination of a
participant's employment or consulting relationship with the Company, all
unvested options terminate and are no longer exercisable. Vested non-qualified
options remain exercisable for a period not to exceed three months following the
termination date.
The Option Plan provides that, in the event the Company enters into an
agreement providing for the merger of the Company into another corporation or
the sale of substantially all of the Company's assets, any outstanding
unexercised option shall become immediately exercisable as of the date of such
agreement. Upon the consummation of the merger or sale of assets such options
shall terminate unless they are assumed or another option is substituted
therefor by the successor corporation.
COMPENSATION OF DIRECTORS
No employee of the Company receives any additional compensation for his
services as a director. Non-employee directors each receive an annual retainer
of $10,000 per year payable monthly, $1,000 per meeting attended, $500 per
committee meeting attended and options to purchase 10,000 shares of Common
Stock. The Board of Directors has also authorized payment of reasonable travel
or other out-of-pocket expenses incurred by non-management directors in
attending meetings of the Board of Directors and the committees thereof. The
Board of Directors may consider alternative director compensation arrangements
from time to time.
47
<PAGE> 49
CERTAIN TRANSACTIONS
In June 1995, Granite Financial, LLC entered into a lease sale agreement
(the "Lease Sale Agreement") with Heartland Bank, St. Louis, Missouri. The Lease
Sale Agreement called for Heartland Bank to purchase leases from Granite
Financial, LLC at a price which was equal to the remaining cash flows of the
leases purchased (including residual equipment values), discounted to present
value at an 11.5% per annum rate. Lease sales were made in accordance with
schedules prescribed by the Lease Sale Agreement. The Lease Sale Agreement
provided that the sale of leases was on a non-recourse basis to the Company with
the exception of any leases under which a first payment default occurred. The
Lease Sale Agreement also provided that, in the event of any shortfall in the
aggregate estimated value of residual equipment value of the equipment
underlying the leases, Heartland Bank would have recourse to the Company to the
extent of any such shortfall, but only with respect to those leases without firm
buy-out obligations on the part of the lessees. From June 1995 to March 1996,
Heartland Bank purchased leases with a face amount of approximately $16.0
million from Granite Financial, LLC. Immediately prior to the execution of the
Lease Sale Agreement, Heartland Bank had entered into a letter of intent with
Granite Financial, LLC pursuant to which Heartland Bank had committed to
purchase an ownership interest in Granite Financial, LLC, subject to the
satisfaction of certain conditions.
In January 1996, Heartland Leasing Corporation of Missouri, a wholly-owned
subsidiary of Heartland Bank, closed a purchase agreement with the members of
Granite Financial, LLC, Laurence A. Schiffer and Andrew S. Love, Jr., pursuant
to which Heartland Leasing Corporation of Missouri ("Heartland Leasing")
purchased an interest in Granite Financial, LLC equal to 45.0% of the total
outstanding membership interests of Granite Financial, LLC. Concurrently with
such purchase, Messrs. Schiffer and Love became members of the Board of Managers
of Granite Financial, LLC. In connection with the purchase of such membership
interests by Heartland Leasing, Messrs. Wehner and Lewis and Heartland Leasing
entered into an agreement granting each other the right of first refusal to
purchase any membership interest any of them proposed to sell on substantially
the same terms as a potential third-party offer. Such right of first refusal was
extinguished by agreement of the parties on the date of the Initial Public
Offering.
In April 1996, Granite Financial, LLC and Heartland Bank entered into a
lease purchase agreement (the "Lease Purchase Agreement"), pursuant to which
Granite Financial, LLC repurchased approximately $16.0 million in leases
previously sold to Heartland Bank under the Lease Sale Agreement. The Lease
Purchase Agreement provided for price and discount terms which were identical to
the price and discount terms contained in the Lease Sale Agreement. However,
Heartland Bank received the income from payments under the leases during the
period from the date of sale to Heartland Bank until consummation of the Lease
Purchase Agreement. Granite Financial, LLC repurchased the leases from Heartland
Bank in order to facilitate its first securitization which was completed in
April 1996. The terms of the Lease Purchase Agreement were negotiated on behalf
of Granite Financial, LLC by Mr. Wehner and approved by Messrs. Wehner and
Lewis. Neither of Messrs. Schiffer or Love participated in the approval of the
Lease Purchase Agreement by Granite Financial, LLC. Although Granite Financial,
LLC did not secure an independent determination of the fairness and
reasonableness of such transaction, and believes that individual leases could
have been purchased from unaffiliated third parties at a price more favorable
than that negotiated With Heartland Bank, the Company's disinterested directors
believed that the Company could not have purchased a similarly sized lease
portfolio with comparable delinquency and charge-off performance on terms more
favorable than that negotiated with Heartland Bank.
Subsequent to the closing of the April 1996 asset securitization and until
completion of the Initial Public Offering, the Company continued to sell leases
to Heartland Bank in the ordinary course of business. Leases sold to Heartland
Bank from April 1996 to the date of the Initial Public Offering were sold at
prices and on identical terms to the leases sold from June 1995 to March 1996.
The sale of these leases includes a stream of payments and any residual
equipment value under the leases. However, in the event that estimated residual
equipment value are less than projected by the Company, Heartland Bank will have
recourse to the Company to the extent of any shortfall in the aggregate residual
equipment value estimated by the Company, but only with respect to those leases
without firm buy-out obligations on the part of lessees and with respect to the
entirety of the purchase price of leases experiencing a first payment default.
48
<PAGE> 50
In September 1996, Messrs. Wehner and Lewis and Heartland Leasing advanced
an aggregate of $300,000 to Granite Financial, LLC. The advances were evidenced
by promissory notes in the amounts of $57,000 and $108,000 to Messrs. Wehner and
Lewis, respectively, and in the amount of $135,000 to Heartland Leasing. The
promissory notes were unsecured, accrued interest at the rate of 11.0% per
annum, and were repaid out of the proceeds of the Initial Public Offering.
William S. Cobb, the Senior Vice President of Corporate Development of the
Company, has been employed by the Company since its inception. Until September
1996, Mr. Cobb devoted approximately 50.0% of his time to the operations of the
Company. From February 1995 to September 1996, Mr. Cobb's salary was paid in
full by the JELTEX group of companies, of which James E. Lewis, a director and
principal stockholder of the Company, is a director and principal stockholder.
The Company has reimbursed the JELTEX group of companies $76,000 paid to Mr.
Cobb on the Company's behalf.
Granite Financial, LLC was formed as a limited liability company in order
to permit its members to recognize certain tax benefits, including the taxation
of earnings at the member level, as opposed to both the corporate and
stockholder level. In connection with completion of the Initial Public Offering,
the Company was reorganized from a limited liability company to a C Corporation
under the Code. The Board of Managers of Granite Financial, LLC declared a
distribution of approximately $100,000 payable to the members of Granite
Financial, LLC immediately prior to the Initial Public Offering of the Company
(the "Distribution"). The Distribution was equal to tax liabilities as a result
of income deemed received by certain of the members of Granite Financial, LLC
prior to the date of the Initial Public Offering. A portion of the net proceeds
received by the Company from the Initial Public Offering was used to pay the
Distribution.
49
<PAGE> 51
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of May 31, 1997 concerning
beneficial ownership of the Company's Common Stock by (i) each person known by
the Company to own beneficially more than 5.0% of the Company's outstanding
Common Stock, (ii) each director and executive officer of the Company, and (iii)
all directors and executive officers of the Company as a group. Except as noted,
each person has sole voting and sole investment power with respect to the shares
shown. The address of each person listed is 6424 West 91st Avenue, Westminster,
Colorado 80030, except as otherwise indicated.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------
NUMBER OF PERCENTAGE
NAME AND ADDRESS SHARES OF CLASS
---------------- ---------- -----------
<S> <C> <C>
William W. Wehner(1).................... 520,000 13.5%
Larry K. White.......................... -- --
Frank J. Corcoran....................... -- --
William S. Cobb(2)...................... 23,000 *
Mark H. Speros(3)....................... 2,000 *
William W. ("Skip") Wehner(3)........... 2,000 *
Kelly G. Long(3)........................ 2,000 *
Mark A. Miyasaki(4)..................... 2,900 *
James E. Lewis(5)....................... 765,000 20.3%
Heartland Leasing Corporation of
Missouri.............................. 1,050,000 28.2%
212 South Central Avenue
St. Louis, Missouri 63105
Laurence A. Schiffer(6)(7).............. 1,080,000 28.8%
212 South Central Avenue
St. Louis, Missouri 63105
Andrew S. Love, Jr.(6)(7)............... 1,080,000 28.8%
212 South Central Avenue
St. Louis, Missouri 63105
Samuel R. Freeman(8).................... 10,000 *
Kramer Spellman, L.P.................... 550,500 14.8%
2050 Center Avenue
Fort Lee, New Jersey 07024
All Directors and Officers as a Group
(12 persons)(9)....................... 2,436,900 60.8%
</TABLE>
- ---------------
* Less than 1.0%
(1) Includes 140,000 shares of Common Stock issuable upon exercise of options
that are currently exercisable or will become exercisable within 60 days of
May 31, 1997.
(2) Includes 20,000 shares of Common Stock issuable upon exercise of options
that are currently exercisable or will become exercisable within 60 days of
May 31, 1997.
(3) Consists of 2,000 shares of Common Stock issuable upon exercise of options
that are currently exercisable or will become exercisable within 60 days of
May 31, 1997.
(4) Includes 1,900 shares of Common Stock issuable upon exercise of options that
are currently exercisable or will become exercisable within 60 days of May
31, 1997.
(5) Includes 45,000 shares of Common Stock issuable upon exercise of options
that are currently exercisable or will become exercisable within 60 days of
May 31, 1997.
(6) Includes shares owned of record by Heartland Leasing Corporation of
Missouri, a wholly-owned subsidiary of Heartland Bank. Mr. Schiffer is
Chairman of the Board of Heartland Leasing Corporation of Missouri and
Heartland Bank. Mr. Love is a director of Heartland Leasing Corporation of
Missouri and a director of Heartland Bank. Heartland Bank is wholly-owned by
Love Savings Holding Company, of which Mr. Love is Chairman of the Board and
a principal shareholder.
(7) Includes 30,000 shares of Common Stock issuable upon exercise of options
that are currently exercisable or will become exercisable within 60 days of
May 31, 1997.
(8) Consists of 10,000 shares of Common Stock issuable upon exercise of options
that are currently exercisable or will become exercisable within 60 days of
May 31, 1997.
(9) Includes 282,900 shares of Common Stock issuable upon exercise of options
that are currently exercisable or will become exercisable within 60 days of
May 31, 1997.
50
<PAGE> 52
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, par value $.001 per share, and 2,000,000 shares of Preferred
Stock, par value $.01 per share. As of March 31, 1997, 3,725,000 shares of
Common Stock were issued and outstanding. No shares of Preferred Stock are
outstanding. The following description of the Company's capital stock is
qualified in its entirety by reference to the Certificate of Incorporation and
the Bylaws of the Company.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. The Company's
Certificate of Incorporation denies cumulative voting rights in the election of
directors. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Subject to preferences that may be applicable to any
then-outstanding Preferred Stock, holders of Common Stock will be entitled to
receive ratably such dividends as may be declared by the Board of Directors out
of funds legally available therefor. In the event of a liquidation, dissolution
or winding up of the Company, holders of Common Stock are entitled to share
ratably in the assets remaining after payment of liabilities and the liquidation
preference of any then-outstanding Preferred Stock. Holders of Common Stock have
no preemptive, conversion or redemption rights. All of the outstanding shares of
Common Stock are, and the shares to be sold in this offering when issued and
paid for will be, fully paid and non-assessable.
PREFERRED STOCK
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors has the authority, without further stockholder approval, to issue up
to 2,000,000 shares of Preferred Stock from time to time in one or more series,
to establish the number of shares to be included in each such series, and to fix
the designation, powers, preferences and rights of the shares of each such
series and the qualifications, limitations or restrictions thereof. The issuance
of Preferred Stock may have the effect of delaying or preventing a change in
control of the Company. The issuance of Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes could, among other things, decrease the amount of earnings and assets
available for distribution to the holders of Common Stock, adversely affect the
rights and powers, including voting rights, of the holders of the Common Stock,
and, under certain circumstances, make it more difficult for a third party to
gain control of the Company, discourage bids for Common Stock at a premium or
otherwise adversely affect the market price of the Common Stock.
DELAWARE BUSINESS COMBINATION PROVISIONS
As a Delaware corporation, the Company is subject to Section 203 of the
Delaware General Corporation Law ("Section 203"), which regulates corporate
takeovers. Section 203 may have the effect of significantly delaying or
discouraging a hostile takeover of the Company. In general, Section 203 prevents
an "Interested Stockholder" (defined generally as a person with 15.0% or more of
a corporation's outstanding voting stock) from engaging in a "Business
Combination" with a Delaware corporation for three years following the date such
person became an Interested Stockholder. For purposes of Section 203, the term
"Business Combination" is defined broadly to include certain significant
business transactions (such as mergers, asset sales and certain other
transactions) with or caused by the Interested Stockholder. The three-year
restriction generally does not apply if the transaction is approved in the
manner prescribed by Section 203. Under Section 203, the restrictions described
above do not apply if, among other things, the corporation's original
certificate of incorporation contains a provision expressly electing not to be
governed by Section 203. The Company's Certificate of Incorporation does not
contain such a provision.
OUTSTANDING WARRANTS AND REGISTRATION RIGHTS
As of March 31, 1997, there were outstanding warrants to purchase an
aggregate of 150,000 shares of Common Stock at an exercise price of $10.50 per
share. In conjunction with the Initial Public Offering, the
51
<PAGE> 53
Company registered the warrants and the shares of Common Stock underlying such
warrants. However, the holder may not exercise such warrants and sell the
underlying Common Stock until October 25, 1997, and only pursuant to a currently
effective registration statement. The warrants are exercisable through October
2001 and are entitled to certain additional demand and incidental registration
rights during the exercise period. The warrants were issued to Cruttenden Roth
Incorporated, an Underwriter of this offering and the representative of the
underwriters in the Initial Public Offering.
Upon closing of this offering, the Company has agreed to issue Piper
Jaffray Inc. and Raymond James & Associates, Inc. warrants (the "Underwriters'
Warrants") exercisable for an aggregate of 150,000 shares of Common Stock. The
Underwriters' Warrants will be exercisable for a period of four years commencing
one year after the effective date of the Registration Statement of which this
Prospectus forms a part, at a price per share equal to 125.0% of the Price to
Public. During the exercise period, holders of the Underwriters' Warrants are
entitled to certain demand and incidental registration rights with respect to
the securities issuable upon exercise of the Underwriters' Warrants. The Common
Stock issuable on exercise of the Underwriters' Warrants is subject to
adjustment in certain events to prevent dilution. The Underwriters' Warrants
cannot be transferred, assigned or hypothecated for a period of one year from
the date of issuance except to Underwriters, selling group members and their
officers or partners.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the provisions of the Delaware General Corporation Law, the
Company has adopted provisions in its Certificate of Incorporation which provide
that directors of the Company shall not be personally liable for monetary
damages to the Company or its stockholders for a breach of fiduciary duty as a
director, except for liability as a result of (i) a breach of the director's
duty of loyalty to the Company or its stockholders; (ii) acts or omissions not
in good faith or which involve intentional misconduct or knowing violation of
law; (iii) an act related to the unlawful stock repurchase or payment of a
dividend under Section 174 of the Delaware General Corporation Law; and (iv)
transactions from which the director derived an improper personal benefit. Such
limitation of liability does not affect the availability of equitable remedies
such as injunctive relief or rescission.
The Company's Certificate of Incorporation also authorizes the Company to
indemnify its officers, directors and other agents, by bylaws, agreements or
otherwise, to the full extent permitted under Delaware law. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is American
Securities Transfer & Trust, Inc.
52
<PAGE> 54
SHARES ELIGIBLE FOR FUTURE SALE
Sale of a substantial number of shares of Common Stock in the public market
after this offering could adversely affect the market price of the Common Stock.
Upon completion of this offering, the Company will have 5,825,000 shares of
Common Stock outstanding. Of these shares, the 2,100,000 shares sold in this
offering (and any shares sold upon exercise of the Underwriters' over-allotment
option) and approximately 1,725,000 of the currently outstanding shares will be
freely transferable without restriction or further registration under the
Securities Act, unless held by "affiliates" of the Company, as that term is
defined in Rule 144 of the Securities Act, in which case they will be subject to
resale limitations.
The remaining 2,000,000 outstanding shares of Common Stock are "restricted
securities" within the meaning of Rule 144 under the Securities Act and may not
be sold in the absence of registration under the Securities Act unless an
exemption from registration is available, including the exemption contained in
Rule 144. All of such shares are eligible for sale under Rule 144 commencing
October 25, 1997. The Company and its officers, directors and certain
stockholders have agreed that they will not sell any Common Stock without the
prior consent of Piper Jaffray Inc. for a period of 180 days after the date of
this Prospectus.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least one year would be entitled to sell,
within any three-month period, that number of "restricted" shares that does not
exceed the greater of 1.0% of the issuer's then-outstanding securities or the
average weekly trading volume in the securities during the four calendar weeks
preceding such sale, subject to certain manner of sale limitations, notice
requirements and the availability of current public information about the
issuer. In addition, Rule 144(k) provides that a person who is not deemed an
"affiliate" at any time during the three months preceding a sale, and who has
beneficially owned shares for at least two years is entitled to sell such shares
at any time under Rule 144 without regard to the limitations described above.
In addition to the shares of Common Stock that are currently outstanding, a
total of 900,000 shares of Common Stock have been reserved for issuance upon
exercise of options granted under the Option Plan, under which options to
acquire 420,000 shares of Common Stock have been granted as of May 31, 1997. The
holders of options to purchase 303,000 shares may exercise their options and
immediately sell these shares in compliance with Rule 701 of the Securities Act
without restriction under the Securities Act, except for shares held by an
"affiliate" of the Company, which remain subject to certain restrictions.
The Company can make no prediction as to the effect, if any, that sales of
shares of Common Stock or the availability of shares of Common Stock for sale
will have on the market price prevailing from time to time. Nevertheless, sales
of substantial amounts of Common Stock in the public market or the perception
that such sales may occur could have an adverse impact on the prevailing market
price of the Common Stock.
53
<PAGE> 55
UNDERWRITING
The Company has entered into a Purchase Agreement (the "Purchase
Agreement") with Piper Jaffray Inc., Raymond James & Associates, Inc. and
Cruttenden Roth Incorporated (the "Underwriters"). Subject to the terms and
conditions set forth in the Purchase Agreement, the Company has agreed to sell
to the Underwriters, and each of the Underwriters have severally agreed to
purchase, the number of shares of Common Stock set forth opposite each
Underwriter's name in the table below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Piper Jaffray Inc. .....................
Raymond James & Associates, Inc. .......
Cruttenden Roth Incorporated............
---------
Total......................... 2,100,000
=========
</TABLE>
Subject to the terms and conditions of the Purchase Agreement, the
Underwriters have agreed to purchase all of the Common Stock being sold pursuant
to the Purchase Agreement if any is purchased (excluding shares covered by the
over-allotment option granted therein). In the event of a default by any
Underwriter, the Purchase Agreement provides that, in certain circumstances,
purchase commitments of the nondefaulting Underwriters may be increased or
decreased or, in certain instances, the Purchase Agreement may be terminated.
The Underwriters have advised the Company that the Underwriters propose to
offer the Common Stock to the public at the Price to Public set forth on the
cover page of this Prospectus and to certain dealers at such price less a
concession of not in excess of $ per share. Additionally, the
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to certain other brokers and dealers. After the
offering, the Price to Public, concession and reallowance may be changed by the
Underwriters.
The Company has granted to the Underwriters an option, exercisable by the
Underwriters during the 30-day period after the date of this Prospectus, to
purchase up to an additional 315,000 shares of Common Stock at the Price to
Public less Underwriting Discount set forth on the cover page of this
Prospectus. If the Underwriters purchase any of such additional shares pursuant
to this option, each Underwriter will be committed to purchase such additional
shares in approximately the same proportion as set forth in the table above. The
Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any.
Certain of the Underwriters that currently act as market makers for the
Company's Common Stock may engage in "passive market making" in the Common Stock
on the Nasdaq National Market in accordance with Rule 103 of Regulation M under
the Exchange Act. Subject to certain conditions, Rule 103 permits underwriters
participating in a distribution to engage in limited market making transactions
during the period when Regulation M would otherwise prohibit such activity. Rule
103 generally prohibits underwriters engaged in passive market making activity
from entering a bid or effecting a purchase at a price which exceeds the highest
bid by a market maker not participating in the distribution. Rule 103 also
limits the volume of purchases which may be made by an underwriter in passive
market making activities. Subject to these limitations, certain Underwriters and
other members of the selling group intend to engage in passive market making in
the Company's Common Stock.
The Company has also agreed to issue to two of the Underwriters, Piper
Jaffray Inc. and Raymond James & Associates, Inc., for nominal consideration,
the Underwriters' Warrants to purchase 150,000 shares of Common Stock. See
"Description of Capital Stock."
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments which the Underwriters may be required to make in respect thereof.
54
<PAGE> 56
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Berliner Zisser Walter & Gallegos, P.C., Denver,
Colorado. A partner of such firm owns 5,250 shares of Common Stock and holds
options to acquire 10,000 shares of Common Stock. Certain legal matters will be
passed upon for the Underwriters by LeBoeuf, Lamb, Greene & MacRae, L.L.P., a
limited liability partnership including professional corporations, Denver,
Colorado.
EXPERTS
The consolidated financial statements of the Company as of June 30, 1996
and for the period ended June 30, 1995 and the fiscal year ended June 30, 1996,
have been included herein in reliance upon the report of Ehrhardt Keefe Steiner
& Hottman PC, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in auditing and
accounting. With respect to the unaudited interim consolidated financial
information for the nine months ended March 31, 1996 and 1997, the independent
certified public accountants have not audited or reviewed such consolidated
financial information and have not expressed an opinion or any other form of
assurance with respect to such consolidated financial information.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement (the
"Registration Statement") under the Securities Act with respect to the
securities offered by this Prospectus. This Prospectus, which constitutes a part
of the Registration Statement, does not contain all of the information set forth
in the Registration Statement. For further information with respect to the
Company and the securities offered hereby, reference is made to the Registration
Statement and to the exhibits filed therewith, which may be inspected without
charge at the principal office of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of the material contained therein may be
obtained from the Commission upon payment of applicable copying charges.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to herein are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement.
The Company is subject to the reporting and other informational
requirements of the Exchange Act and, in accordance therewith, files reports and
other information with the Commission. Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at the offices of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices at Northwest Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World
Trade Center, New York, New York 10048. The Commission also maintains a Web site
on the Internet that contains reports, proxy and information statements and
other information regarding issuers, including the Company, that file
electronically with the Commission. The address of such site is
http://www.sec.gov. Copies of such materials can also be obtained by written
request to the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
55
<PAGE> 57
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of June 30, 1996 and March
31, 1997 (unaudited)...................................... F-3
Consolidated Statements of Operations for the period
February 21, 1995 (inception) to June 30, 1995, the year
ended June 30, 1996 and the nine months ended March 31,
1996 and 1997 (unaudited)................................. F-4
Consolidated Statements of Changes in Members'/Stockholders'
Equity for the period February 21, 1995 (inception) to
June 30, 1995, the year ended June 30, 1996 and the nine
months ended March 31, 1997 (unaudited)................... F-5
Consolidated Statements of Cash Flows for the period
February 21, 1995 (inception) to June 30, 1995, the year
ended June 30, 1996 and the nine months ended March 31,
1996 and 1997 (unaudited)................................. F-6
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 58
INDEPENDENT AUDITORS' REPORT
To the Members and Manager
Granite Financial, LLC and Subsidiary
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Granite
Financial, LLC and Subsidiary as of June 30, 1996 and the related consolidated
statements of operations, members' equity and cash flows for the period February
21, 1995 (inception) through June 30, 1995 and the year ended June 30, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Granite
Financial, LLC and Subsidiary as of June 30, 1996 and the results of their
operations and their cash flows for the period from February 21, 1995
(inception) through June 30, 1995 and for the year ended June 30, 1996 in
conformity with generally accepted accounting principles.
Ehrhardt Keefe Steiner & Hottman PC
August 9, 1996, except for Note 9
as to which the date is September 27, 1996
and except for Note 6 as to which the date is
October 23, 1996
Denver, Colorado
F-2
<PAGE> 59
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents................................... $ -- $ 4,774,653
Direct financing leases (Notes 2 and 3)..................... 8,671,869 11,194,158
Direct financing leases assigned to lender (Note 2)......... 22,575,827 17,340,624
Securitization residual interest (Note 2)................... -- 6,107,119
Other receivables........................................... -- 897,207
Prepaid and other assets.................................... 255,716 389,786
Equipment held for sale..................................... -- 349,628
Furniture and equipment, net of accumulated depreciation of
$37,350 (1996) and $130,210 (1997)........................ 399,150 780,793
Loan origination and securitization fees, net of accumulated
amortization of $20,885 (1996) and $76,354 (1997)......... 450,342 1,072,183
Goodwill.................................................... -- 2,588,567
----------- -----------
Total assets...................................... $32,352,904 $45,494,718
=========== ===========
LIABILITIES AND EQUITY
Line-of-credit (Note 4)..................................... $ 3,690,618 $ 5,685,655
Checks written in excess of bank balance.................... 288,848 --
Accounts payable and accrued expenses....................... 761,460 1,114,798
Security deposits........................................... -- 401,570
Due to trustee.............................................. -- 514,266
Due to seller of acquired business.......................... -- 1,884,000
Income taxes payable (Note 7)............................... -- 20,997
Deferred income taxes payable (Note 7)...................... -- 597,063
Limited recourse Class A note payable (Note 2).............. 20,761,785 16,293,489
Notes payable (Note 4)...................................... 4,090,818 4,236,982
----------- -----------
29,593,529 30,748,820
----------- -----------
Commitments and contingency (Notes 3 and 5)
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 issued and outstanding................... -- 3,725
Additional paid-in capital.................................. -- 13,750,310
Members' equity/retained earnings........................... 2,759,375 991,863
----------- -----------
Total stockholders' and members' equity (Note
6)............................................. 2,759,375 14,745,898
----------- -----------
Total liabilities and equity...................... $32,352,904 $45,494,718
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 60
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 21,
1995 FOR THE NINE MONTHS ENDED
(INCEPTION) TO YEAR ENDED MARCH 31,
JUNE 30, JUNE 30, --------------------------
1995 1996 1996 1997
-------------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues
Sales of leases (Notes 2 and 3)..... $1,260,821 $20,638,040 $16,380,270 $50,307,716
Income from direct financing
leases........................... 7,595 1,223,798 135,200 2,918,388
---------- ----------- ----------- -----------
Total revenues.............. 1,268,416 21,861,838 16,515,470 53,226,104
---------- ----------- ----------- -----------
Costs
Cost of leases sold (Notes 2 and
3)............................... 1,171,645 19,296,885 15,296,597 46,876,077
Provision for credit losses......... 28,381 95,107 46,619 442,686
Interest expense.................... -- 550,776 15,631 1,376,999
Amortization........................ -- -- -- 257,157
---------- ----------- ----------- -----------
Total costs................. 1,200,026 19,942,768 15,358,847 48,952,919
---------- ----------- ----------- -----------
Gross profit.......................... 68,390 1,919,070 1,156,623 4,273,185
Other expenses
Salaries and benefits............... 194,212 642,556 417,456 1,021,790
General and administrative.......... 51,728 472,144 347,726 762,070
Depreciation and amortization....... -- 40,963 26,896 151,380
---------- ----------- ----------- -----------
Total other expenses........ 245,940 1,155,663 792,078 1,935,240
---------- ----------- ----------- -----------
Net (loss) income..................... (177,550) 763,407 364,545 2,337,945
Pro forma adjustment -- provision for
income taxes (Note 7)............... -- 282,000 134,880 982,563
---------- ----------- ----------- -----------
Pro forma net (loss) income........... $ (177,550) $ 481,407 $ 229,665 $ 1,355,382
========== =========== =========== ===========
Pro forma net income per share........ $ .24 $ .11 $ .44
=========== =========== ===========
Weighted average number of pro forma
shares outstanding (Notes 1 and
6).................................. 2,000,000 2,000,000 3,093,900
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 61
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS'/STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL MEMBERS'/
MEMBERS' ------------------ PAID-IN RETAINED STOCKHOLDERS'
EQUITY SHARES AMOUNT CAPITAL EARNINGS EQUITY
----------- --------- ------ ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, February 21, 1995
(inception)................. $ -- -- $ -- $ -- $ -- $ --
Equity contribution........... 945,000 -- -- -- -- 945,000
Net loss for the period
February 21, 1995
(inception) to June 30,
1995........................ (177,550) -- -- -- -- (177,550)
----------- --------- ------ ----------- -------- -----------
Balance June 30, 1995......... 767,450 -- -- -- -- 767,450
Equity contribution, net of
costs of $76,482............ 1,228,518 -- -- -- -- 1,228,518
Net income for the year....... 763,407 -- -- -- -- 763,407
----------- --------- ------ ----------- -------- -----------
Balance, June 30, 1996........ 2,759,375 -- -- -- -- 2,759,375
Net income for the period July
1, 1996 to October 25, 1996
(unaudited)................. 363,519 -- -- -- -- 363,519
Distribution to members
(unaudited)................. (111,000) -- -- -- -- (111,000)
Restructuring of Granite
Financial, LLC into Granite
Financial, Inc.
(unaudited)................. (3,011,894) 2,000,000 2,000 3,009,894 -- --
Issuance of common stock
pursuant to initial public
offering (net of offering
costs of $2,195,357)
(unaudited)................. -- 1,725,000 1,725 10,740,416 -- 10,742,141
Net income for the period
October 26, 1996 to March
31, 1997 (unaudited)........ -- -- -- -- 991,863 991,863
----------- --------- ------ ----------- -------- -----------
Balance, March 31, 1997
(unaudited)................. $ -- 3,725,000 $3,725 $13,750,310 $991,863 $14,745,898
=========== ========= ====== =========== ======== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 62
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 21,
1995 FOR THE NINE MONTHS ENDED
(INCEPTION) TO YEAR ENDED MARCH 31,
JUNE 30, JUNE 30, -------------------------
1995 1996 1996 1997
-------------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net (loss) income........................ $(177,550) $ 763,407 $ 364,545 $ 1,355,382
--------- ------------ ----------- -----------
Adjustments to reconcile net (loss)
income to net cash used in operating
activities
Provision for losses.................. 28,381 95,107 46,619 442,686
Loan fees amortized................... -- 54,984 -- --
Depreciation and amortization......... -- 40,963 16,343 638,634
Changes in operating assets and
liabilities
Direct financing leases............. (341,436) (8,453,921) (8,545,283) 1,135,407
Securitization residual interest.... -- -- -- (6,107,119)
Other receivables................... -- -- -- (885,860)
Prepaids and other assets........... (27,915) (20,224) (55,505) (218,107)
Equipment held for sale............. -- -- -- (333,778)
Securitization loan fees............ -- -- -- (1,096,344)
Accounts payable and accrued
expenses......................... 83,945 553,537 1,703,341 (252,205)
Due to trustee...................... -- -- -- 514,266
Current and deferred income taxes... -- -- -- 597,063
Security deposits................... -- -- -- 401,570
--------- ------------ ----------- -----------
(257,025) (7,729,554) (6,834,485) (5,163,787)
--------- ------------ ----------- -----------
Net cash used in operating
activities..................... (434,575) (6,966,147) (6,469,940) (3,808,405)
--------- ------------ ----------- -----------
Cash flows from investing activities
Leases assigned to lender................ -- (24,793,127) -- --
Payments received on leases assigned to
lender................................ -- 2,217,300 -- 5,235,203
Acquisition of subsidiary net of cash
acquired.............................. -- -- -- (410,725)
Expenditures for organization costs...... (13,009) (6,826) -- --
Purchase of furniture and equipment...... (53,759) (382,742) (131,336) (404,379)
--------- ------------ ----------- -----------
Net cash used by investing
activities..................... (66,768) (22,965,395) (131,336) 4,420,099
--------- ------------ ----------- -----------
Cash flows from financing activities
Checks written in excess of bank
balance............................... -- 288,848 -- --
Proceeds from notes payable.............. -- 4,298,418 -- 1,032,255
Principal payments on notes payable...... -- (207,600) -- (5,056,627)
Net proceeds from line-of-credit......... -- 3,690,618 4,919,950 1,995,037
Proceeds from Class A note payable....... -- 21,688,993 -- --
Principal payments on Class A note
payable............................... -- (927,208) -- (4,468,296)
Expenditures for loan origination fees... -- (505,326) -- (68,316)
Members' equity contribution net of
related costs......................... 945,000 1,228,518 1,237,669 --
Net proceeds of common stock
issuance.............................. -- -- -- 10,839,906
Distributions to members................. -- -- -- (111,000)
Deferred offering costs paid............. -- (67,376) -- --
--------- ------------ ----------- -----------
Net cash provided by financing
activities..................... 945,000 29,487,885 6,157,619 4,162,959
--------- ------------ ----------- -----------
Net increase (decrease) in cash............ 443,657 (443,657) (443,657) 4,774,653
Cash -- beginning of period................ -- 443,657 443,657 --
--------- ------------ ----------- -----------
Cash -- end of period...................... $ 443,657 $ -- $ -- $ 4,774,653
========= ============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 63
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
Supplemental disclosure of cash flow information:
Cash paid during the period ended June 30, 1995 and the year ended June 30,
1996 for interest was $0 and $471,130, respectively, and during the nine months
ended March 31, 1996 and 1997 was $15,631 and $1,379,775, respectively.
Cash paid during the nine month periods ended March 31, 1996 and 1997 for
income taxes was $0 and $385,500, respectively.
Non cash investing and financing activities:
Deferred offering costs of $30,389 are included in accrued expenses during
the year ended June 30, 1996.
Concurrently with the consummation of the initial public offering and the
related restructuring from an LLC to a regular corporation, members' equity of
$3,011,894 was reclassified to common stock of $2,000 and additional paid-in
capital of $3,009,894. In addition, deferred offering costs of $97,765 were
reclassified to additional paid-in capital upon consummation of the initial
public offering.
On March 31, 1997, the Company acquired all of the assets and recorded
liabilities of Global Finance & Leasing, Inc. for cash of $2,334,000 ($1,884,000
of the cash was paid subsequent to period end). The assets and liabilities
acquired were as follows:
<TABLE>
<S> <C>
ASSETS ACQUIRED
- -------------
Cash........................................................ $ 39,275
Direct financing leases..................................... 4,100,382
Other receivables........................................... 11,347
Prepaid and other assets.................................... 16,684
Equipment held for sale..................................... 15,850
Furniture and equipment..................................... 70,124
----------
4,253,662
----------
LIABILITIES ASSUMED
- ----------------
Accounts payable............................................ 316,696
Income taxes payable........................................ 20,997
Notes payable............................................... 4,170,536
----------
4,508,229
----------
(254,567)
Aggregate purchase price.................................... 2,334,000
----------
Goodwill.................................................... $2,588,567
==========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 64
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Granite Financial, LLC. was organized in Colorado on February 21, 1995 and
is principally engaged in the business of originating, funding, acquiring,
selling, securitizing and servicing non-cancelable, full-payout equipment leases
for a broad range of businesses located throughout the United States. All
equipment leased is acquired from unrelated parties.
In June 1996, Granite Financial, Inc. ("GFI") was incorporated.
Concurrently with the consummation of the public offering (Note 6), GFI
exchanged 2,000,000 shares of its common stock for all of the outstanding
membership interests of Granite Financial, LLC, as a result of which GFI is the
sole member. Contemporaneously, GFI caused Granite Financial, LLC to be
liquidated and the assets were distributed to GFI as the sole member.
Interim Financial Statements
In the opinion of Granite Financial, Inc. and Subsidiaries (the Company),
the accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary to present
fairly the financial position of the Company at March 31, 1997 and the results
of their operations and changes in cash flows for the nine months ended March
31, 1996 and 1997. The results of operations for the nine months ended March 31,
1997 are not necessarily indicative of the results to be expected for the full
year.
Principles of Consolidation
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 Acquisitions 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.
Checks Written in Excess of Bank Balance
At June 30, 1996, the Company maintained a $0 cash balance and had written
checks in excess of its bank balance totaling approximately $289,000. Prior to
or at the time these checks are presented for payment, the Company makes
arrangements with its banks to transfer funds as necessary to permit the payment
of all outstanding checks. In the case of one bank credit facility, the Company
maintains an arrangement with the bank under which an automatic transfer is made
from the bank credit facility to the Company's checking account as checks are
presented for payment.
Direct Financing Leases
The Company has entered into various lease agreements which, in accordance
with Statement No. 13 of the Financial Accounting Standards Board, meet the
criteria of capitalization and are accounted for as direct financing leases.
Under this method, the amount by which gross lease rentals exceed the cost of
the related assets, less the estimated recoverable residual value at the
expiration of the lease, is recognized as income from direct financing leases
over the life of the lease using the interest method. Any permanent reduction in
the estimated residual equipment value of leased property is charged to
operations in the period it occurs.
Sales of Leases
The Company generally sells the leases it acquires or originates through
securitization transactions or on a portfolio basis to Heartland Bank on a
non-recourse basis. The Company may also sell leases to other financial
institutions either on a recourse or nonrecourse basis. In a securitization
transaction, the Company
F-8
<PAGE> 65
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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).
Proceeds from the sale of leases sold through securitization transactions
are reflected as sales of leases. The cost basis of the leases is allocated
between the portion sold and the securitization residual interest in the cash
flows based on a relative fair value basis on the date of sale. The fair value
of the portion sold is based on the price at which the related securities are
sold through private placement transactions, while the fair value of the
securitization residual interest is based on the Company's estimate of its fair
value using a risk adjusted discounted cash flow approach.
On January 1, 1997, the Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 125"). SFAS 125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. Under SFAS 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 control has been surrendered,
and derecognizes liabilities when extinguished. SFAS 125 prohibits early
application and, accordingly, the Company adopted this standard for transactions
which occurred after December 31, 1996. Under SFAS 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.
Direct Financing Leases Assigned to Lender
As SFAS 125 prohibits early application, prior to January 1, 1997, direct
financing leases sold as part of a securitization to a special-purpose entity
that issued debt securities were accounted for as collateralized borrowings. The
securitized leases, recorded as Direct Financing Leases Assigned to Lender, and
the related debt are reflected in the consolidated balance sheets.
Securitization Residual Interest
Securitization residual interest represents the excess cash flow resulting
from the difference between lease payments received in the Trust, net of
defaults, and the payment of principal and interest to investors in lease backed
notes or certificates and servicing, backup servicing, trustee fees and other
securitization expenses. Income from the Securitization Residual Interest is
recognized over the life of the securitized leases using the interest method.
Furniture and Equipment
Furniture and equipment are recorded at cost and are depreciated on a
straight-line basis over the estimated useful lives of the equipment ranging
from five to seven years.
Organization Costs
Organization costs are recorded at cost and will be amortized on a
straight-line basis over five years.
Goodwill
Goodwill is recorded as the difference between net assets acquired and the
related purchase price and will be amortized over the estimated useful life of
twenty years.
F-9
<PAGE> 66
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loan Origination Fees
Fees incurred to originate loans are deferred and amortized to interest
expense on the interest method over the term of the loan.
Lease Acquisition Costs and Broker Commissions
Lease acquisition costs consist of broker bonuses and commissions paid upon
the origination of the lease contracts. These costs are included in direct
financing leases held for sale and are amortized to expense over the life of the
related lease contracts on the interest method.
Income Taxes
Granite Financial, LLC was taxable as a partnership under federal and state
income tax laws. As such, it was not subject to income taxes as a separate
entity and its income or loss was required to be included in the income tax
returns of its members. Upon consummation of the public offering, Granite
Financial, LLC was liquidated and the successor corporation, Granite Financial,
Inc., is taxed as a regular corporation. The 1996 statements of operations
reflect pro-forma information which present proforma income taxes as if computed
at the statutory rate.
Upon liquidation of the LLC, the successor Company applied SFAS 109,
"Accounting for Income Taxes". Under SFAS 109, the Company recognized deferred
tax liabilities and assets for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
Allowance for Credit Losses
An allowance for credit losses is maintained at a level which is estimated
by the Company to be necessary and adequate to provide for expected losses in
the existing portfolio of leases the Company either owns or has sold on a
recourse basis. The leases are collateralized by the equipment under lease and
lessees generally are required to personally guarantee lease payments. The
Company's risk of loss is partially mitigated by recovering collateral and
enforcing guarantees. However, the resale value of leased equipment generally
declines at a rate greater than the principal of the lease, so full recovery on
defaulted leases is usually not possible.
Net Income Per Common Share
The computation of net income per common and common equivalent share is
based upon the Treasury Stock Method using the weighted average number of common
shares outstanding during the period plus (in periods in which they have a
dilutive effect) the effect of common shares contingently issuable, primarily
from stock options and warrants.
Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, accounting for stock issued to employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25
F-10
<PAGE> 67
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and provide pro forma net income and pro forma earnings per share disclosures
for employee stock option grants made in 1995 and future years as if the
fair-value based methods defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and to
provide the pro forma disclosure provisions of SFAS No. 123.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) DIRECT FINANCING LEASES
The Company's direct financing leases consist of the following:
<TABLE>
<CAPTION>
DIRECT FINANCING LEASES
DIRECT FINANCING LEASES ASSIGNED TO LENDER
------------------------- -------------------------
JUNE 30, MARCH 31, JUNE 30, MARCH 31,
1996 1997 1996 1997
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Minimum lease payments receivable....... $10,793,832 $15,205,315 $27,531,023 $20,224,799
Estimated residual equipment values of
leased property....................... 225,425 2,455,620 852,588 803,302
Lease acquisition costs and broker
commissions........................... 1,110,393 1,297,248 656,584 394,719
Unearned income......................... (2,680,359) (5,167,651) (6,170,385) (3,894,033)
Reserve for credit losses............... (660,000) (2,338,896) (88,213) (40,609)
Security deposits....................... (117,422) (257,478) (205,770) (147,554)
----------- ----------- ----------- -----------
Net direct financing leases............. $ 8,671,869 $11,194,158 $22,575,827 $17,340,624
=========== =========== =========== ===========
</TABLE>
Included in direct financing leases at March 31, 1997 are the following
amounts related to Global Finance & Leasing, Inc.
<TABLE>
<CAPTION>
GLOBAL
-----------
<S> <C>
Minimum lease payments receivable....... $ 5,530,270
Estimated residual equipment values of
leased property....................... 2,146,697
Lease acquisition costs and broker
commissions........................... --
Unearned income......................... (3,105,723)
Reserve for credit losses............... (470,862)
Security deposits....................... --
-----------
Net direct financing leases............. $ 4,100,382
===========
</TABLE>
F-11
<PAGE> 68
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled collections of minimum lease payments receivable as of March 31,
1997 are as follows:
<TABLE>
<CAPTION>
DIRECT
FINANCING
DIRECT LEASES
YEAR ENDING FINANCING ASSIGNED TO
JUNE 30, LEASES LENDER
----------- ----------- -----------
<S> <C> <C>
1997 (remaining three months)............................ $ 1,289,764 $ 1,954,016
1998..................................................... 3,818,830 7,824,494
1999..................................................... 3,516,554 5,561,259
2000..................................................... 2,687,470 3,652,029
2001..................................................... 3,480,382 1,190,896
Thereafter............................................... 412,315 42,105
----------- -----------
$15,205,315 $20,224,799
=========== ===========
</TABLE>
The Company is required to estimate the amount of leases expected to result
in default and to estimate the amount of loss that will be incurred under each
default. The Company currently provides reserves for these losses based on the
historical performance of the leases. These losses relate both to leases that
are held by the Company to maturity along with losses that could result on
leases sold to third parties. The actual losses incurred could differ materially
from the amounts that the Company has estimated in preparing the historical
financial statements.
Securitization residual interest consists of the following at March 31,
1997:
<TABLE>
<S> <C>
Future remaining cash flows............. $ 8,934,164
Estimated losses........................ (477,015)
-----------
Future remaining cash flows, net of
estimated losses...................... 8,457,149
Unearned income......................... (2,350,030)
-----------
Securitization residual interest........ $ 6,107,119
===========
</TABLE>
Asset Securitizations
The Company funds leases with the intention of selling the leases to
investors or securitizing the leases through lease-backed securities. The
Company has completed three securitizations which provide for aggregate funding
in the amount of approximately $114,000,000. In each securitization, the Company
transfers leases to a wholly-owned, bankruptcy remote special purpose subsidiary
established for the limited purpose of purchasing the Company's leases. The
subsidiary then sells the leases to a grantor trust, which in turn sells
lease-backed notes or certificates to institutional investors. Proceeds from the
sale of lease-backed notes or certificates are used by the trust to purchase
leases from the subsidiary, which uses such proceeds to purchase the leases from
the Company. The securitization may also be completed by the subsidiary without
the use of a trust, in which case the subsidiary issues the lease-backed
security directly to the investor. The lease-backed securities are promissory
notes or equity certificates which are generally collateralized by or represent
an undivided interest in the leases, the leased equipment and certain collateral
accounts. Payments due under the lease-backed securities issued in each of the
Company's securitizations have been insured by a financial guaranty policy which
provides an unconditional guarantee of the Class A note payments in the case of
defaults or prepayments on the lease assets.
In April 1996, the Company's wholly-owned subsidiary, GF Funding I, issued
$21,688,993 of 6.33% Class A Lease-Backed Term Notes due November 20, 2001 (the
Notes) in a private placement. The Notes are collateralized by (i) payments to
be made under leases contributed by Granite Financial, LLC to GF Funding I, (ii)
all of GF Funding I's rights and interest in the leased equipment, (iii) a cash
collateral
F-12
<PAGE> 69
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
account (which generally does not increase the overall level of credit
enhancement, but rather accommodates changes that may occur from time to time in
the form of credit enhancement from excess implicit principal balance of lease
receivables to cash) and (iv) a financial guaranty insurance policy. Under the
terms of the insurance policy, the monthly payments of interest and final
payment of principal at maturity are unconditionally guaranteed. As this
securitization was completed through the issuance of a debt security prior to
the adoption of SFAS 125, the transaction is accounted for as a collateralized
borrowing. Accordingly, the underlying lease assets, recorded as direct
financing leases assigned to lender, and the related limited recourse note
payable are reflected in the accompanying consolidated balance sheets. The
underlying assets are comprised of the Company's net investment in the leases of
$22,575,827 and $17,340,624 as of June 30, 1996 and March 31, 1997,
respectively. The related limited recourse note payable was $20,761,785 and
$16,293,489 as of June 30, 1996 and March 31, 1997, respectively.
In November 1996, GF Funding II was formed to establish the Company's
second securitization facility. The facility provides for the issuance of up to
$65 million in aggregate principal amount of Class A Lease-Backed Certificates
due June 20, 2003 (the 1996 Certificates) in a private placement. For purposes
of computing interest, the 1996 Certificates are issued in two tranches,
consisting of the Floating Rate Tranche and the Fixed Rate Tranche. The
principal amount of the Floating Rate Tranche will generally convert to the
Fixed Rate Tranche on a quarterly basis. The Floating Rate Tranche bears
interest at an annual rate equal to the LIBOR Rate, as adjusted from time to
time, plus .50%. The Fixed Rate Tranche bears interest at an annual rate equal
to the Treasury Rate, as adjusted from time to time, plus .70%. The annual
interest rate on each tranche is subject to a maximum annual rate of 10%. The
1996 Certificates represent an undivided interest in a trust estate created by
GF Funding II comprised of (i) payments to be made under leases contributed to
GF Funding II, (ii) all of GF Funding II's right and interest in the leased
equipment, (iii) a cash collateral account and (iv) a financial guaranty
insurance policy. The initial funding under the securitization facility was
approximately $7,200,000. The Company is required to sell a minimum of
$1,500,000 in leases to the securitization facility per month. As this
securitization was completed through the issuance of equity certificates and the
Company and GF Funding II have surrendered control over the future cash flows
from these lease assets for the benefit of the holders of the Certificates, the
transfer of the lease assets is accounted for as a sale. Accordingly, the
portion of the underlying lease assets sold were removed from the consolidated
balance sheet and the resulting sales of leases and cost of leases sold are
reflected in the consolidated statement of operations. The sales of leases
represent the gross proceeds from the certificate holders and the cost of leases
sold represent the Company's net investment in the portion of the lease assets
sold. The Company has recorded sales of leases and a cost of leases sold with
respect to this securitization of $17,095,885 and $15,767,796, respectively,
during the nine months ended March 31, 1997. Included in the consolidated
balance sheet is the allocated portion of the Company's net investment in the
lease assets which represents the securitization residual interest retained in
the lease assets. The allocation between the cost of leases sold and the
securitization residual interest retained is based on their relative fair values
on the date of sale. The securitization residual interest for this
securitization was $3,278,415 at March 31, 1997.
In March 1997, GF Funding III was formed to establish the Company's third
securitization facility. The facility provides for the issuance of up to
$27,500,000 in the aggregate principal amount of 6.82% Class A Lease-Backed
Certificates due December 20, 2002 (the 1997 Certificates) in a private
placement. The 1997 Certificates represent an undivided interest in a trust
estate created by GF Funding III comprised of (i) payments to be made under
leases contributed to GF Funding III, (ii) all of GF Funding III's right and
interest in the leased equipment, (iii) a cash collateral account, a capitalized
interest account, a prefunding account and a collection account and (iv) a
financial guaranty insurance policy. The Company and GF Funding III have
surrendered control over all future cash flows of the underlying lease assets
and, under SFAS 125, the securitization is accounted for as a sale. The Company
has recorded sales of leases and cost of leases sold with respect to this
transfer of $15,181,487 and $14,057,988, respectively, during the nine months
ended March 31, 1997. Included in the consolidated balance sheet is the
allocated portion of the Company's
F-13
<PAGE> 70
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
net investment in the lease assets which represents the securitization residual
interest retained in the lease assets. The allocation between the cost of leases
sold and the securitization residual interest retained is based on their
relative fair values on the date of sale. The securitization residual interest
for this securitization was $2,828,704 at March 31, 1997.
The source of repayment for the Notes and Certificates is the stream of
payments to be made on the equipment leases included in the corresponding pool
of transferred leases. The value of the securitization residual interest of the
collateral enhancement leases in the pool will be realized by the Company once
all principal and interest due under the Notes or Certificates and associated
expenses are paid. The collateral enhancement leases are not a separate and
distinct pool of individual leases, but rather are part of the undifferentiated
pool of leases.
(3) SALE OF LEASES
The Company entered into agreements with certain financial institutions to
sell, on an ongoing basis, certain leases, either on a recourse or non-recourse
basis. The purchase price of the leases is determined on a transaction by
transaction basis based upon the present value of the payments to be received
under the lease. Revenue, in the amount of the purchase price, is recognized on
the date of sale. The Company retains servicing of all leases under the
agreements. Sales of leases and the cost of leases sold during the period ended
June 30, 1995, the year ended June 30, 1996 and the nine months ended March 31,
1996 and 1997 were $1,260,821 and $1,171,645, $20,638,040 and $19,296,885,
$16,380,270 and $15,296,597, and $18,030,344 and $17,050,293, respectively.
Sales and cost of leases sold to Heartland Bank during the period ended
June 30, 1995, the year ended June 30, 1996 and the nine month periods ended
March 31, 1996 and 1997 were $641,993 and $605,134, $19,259,557 and $18,044,325,
$15,001,786 and $14,044,037 and $17,077,686 and $16,133,232, respectively.
Heartland Bank purchased an equity interest in the Company in January 1996. The
costs and related sales amounts are included in the accompanying consolidated
statements of operations. With respect to the leases sold to Heartland Bank,
there is recourse to the Company for the amount of the equipment residual
guarantees of approximately $759,000 at March 31, 1997.
F-14
<PAGE> 71
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) CREDIT FACILITIES
Lines-of-Credit
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 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 March 31, 1997) payable
monthly. The line is collateralized by
a first security interest in specific
leases pledged and the underlying
equipment............................. $ -- $3,114,805
$5,000,000 line-of-credit to a bank, due
June 30, 1997. Interest at the bank's
reference rate plus 1% (9.25% at June
30, 1996) payable monthly. The line is
collateralized by a security interest
in certain eligible leases, as
defined, in the agreement, including a
security interest in the equipment
covered by such leases. In February
1997, the outstanding balance of this
line was transferred into the
Company's $36 million
line-of-credit........................ 3,690,618 --
$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 March 31, 1997) payable
monthly............................... -- 1,800,000
$800,000 line-of-credit to a bank, due
May 1997. Interest at the prime rate
plus 1% (9.5% at March 31, 1997)
payable monthly. The line is
collateralized by all tangible and
intangible property of a subsidiary... -- 770,850
---------- ----------
$3,690,618 $5,685,655
========== ==========
</TABLE>
F-15
<PAGE> 72
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1997
---------- -----------
(UNAUDITED)
<S> <C> <C>
Notes Payable
Note payable to bank; the note requires
a minimum monthly payment of $86,700,
as defined in the agreement, and
interest at 11%, with all unpaid
principal and interest due July 31,
1997. As part of the note agreement,
the Company assigned a portion of its
interest in the private offering of
lease-backed term notes as described
in Note 2. This agreement is evidenced
by an irrevocable proxy between the
bank and GF Funding I with respect to
all the shares of capital stock in GF
Funding I. The notes were paid in full
in November 1996 using proceeds from
the initial public offering........... $1,126,600 $ --
Note payable to bank, payable in monthly
installments of $28,303, including
interest of 9.80% through January
2000. The note is collateralized by
certain leases including a security
interest in the underlying equipment.
The Company has a total of a
$3,000,000 line-of-credit with the
bank to be funded in increments of
$500,000 or more...................... -- 837,296
Note payable to a limited partnership,
monthly interest only payments at 13%.
All unpaid principal and interest due
at maturity in January 2000. The note
is collateralized by all equipment,
inventory, accounts and intangibles of
a subsidiary.......................... -- 1,470,615
Note payable to a bank, payable in
monthly installments of $83,000,
including interest at 8.72% through
May 1999. The note is collateralized
by all tangible and intangible
property of a subsidiary.............. -- 1,929,071
Note payable to a bank, payable in
monthly installments of $78,754,
including interest at the Treasury
Rate plus 3% (9% at June 30, 1996),
through February, 2000 when all unpaid
principal and interest is due;
collateralized by certain leases
including a security interest in the
underlying equipment. Note was repaid
in full in November 1996 as part of a
sale of leases into the Company's
second securitization................. 2,964,218 --
---------- ----------
$4,090,818 $4,236,982
========== ==========
</TABLE>
Maturities due on the notes payable as of March 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
-----------
<S> <C> <C>
1997 (remaining three months)................................... $ 272,469
1998............................................................ 1,154,900
1999............................................................ 1,147,193
2000............................................................ 1,662,420
----------
$4,236,982
==========
</TABLE>
Each of the Company's available credit facilities contain certain financial
and reporting covenants. As of March 31, 1997, the Company was not in violation
of any reporting covenants.
F-16
<PAGE> 73
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) COMMITMENTS
Leases
The company has entered into various operating lease agreements for office
space and equipment and has an annual commitment for a software license.
Subsequent to year end, the Company renewed their office lease agreement for the
existing and additional office space. The minimum scheduled lease payments as of
March 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
-----------
<S> <C> <C>
1997 (three months remaining)..................................... $ 11,850
1998.............................................................. 47,123
1999.............................................................. 48,862
2000.............................................................. 4,787
--------
$112,622
========
</TABLE>
Rental expense included in general and administrative costs was $8,532 and
$60,717 for the period ended June 30, 1995 and the year ended June 30, 1996,
respectively, and $43,897 and $58,299 for the nine month periods ended March 31,
1996 and 1997, respectively.
Other
The Company has approved contingent fundings of approximately $31 million
in leases at March 31, 1997.
(6) MEMBERS'/STOCKHOLDERS' EQUITY
Initial Public Offering
In October 1996, the Company completed a public offering of 1,725,000
shares of common stock at $7.50 per share. The proceeds of the offering were
approximately $10,742,000, net of offering costs of $2,195,000. Additionally,
the Company issued warrants to the underwriter to purchase 150,000 shares at
$10.50.
Stock Option Plans
In June 1996, the Company adopted a Stock Option Plan (the Plan) allowing
for the issuance of qualified and non-qualified stock options to purchase an
aggregate of 450,000 shares of common stock to directors, officers, employees,
agents and consultants of the Company. The Plan is administered by the Board of
Directors. The Plan provides that qualified stock options be granted at an
exercise price equal to fair market value of the common shares of the Company on
the date of the grant, and must be at least 110% of fair market value when
granted to a 10% or more shareholder. The term of all qualified stock options
granted under the Plan may not exceed ten years, except the term of qualified
stock options granted to a 10% or more shareholder which may not exceed five
years.
The Plan provides that non-qualified stock options be granted at an
exercise price not less than 85% of the fair market value of the common shares
of the Company on the date of grant. The term of all non-qualified stock options
granted under the Plan may not exceed ten years, except the term of
non-qualified stock options granted to a 10% or more shareholder which may not
exceed five years.
F-17
<PAGE> 74
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In April 1997, the Plan was amended and restated in order to make certain
technical modifications thereto and was further amended in June 1997 to increase
the shares of common stock reserved for issuance to 900,000. The following is a
summary of options and warrants:
<TABLE>
<CAPTION>
EXERCISE
OPTIONS WARRANTS PRICE
------- -------- ---------------
<S> <C> <C> <C>
Outstanding, June 30, 1996........................ 250,000 -- $5.95 to 6.55
Granted........................................... 45,000 150,000 $8.375 to 10.50
------- ------- ---------------
Outstanding, March 31, 1997....................... 295,000 150,000 5.95 to 10.50
======= ======= ===============
</TABLE>
Subsequent to March 31, 1997, the Company granted 125,000 options under the
Plan at exercise prices ranging from $9.00 to $10.45 and increased the number of
shares reserved for the Plan to 900,000 shares.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock option plan. Had compensation cost for the Company's stock option plan
been determined based on the fair value at the grant date consistent with the
provisions of SFAS No. 123, the Company's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
JUNE 30, MARCH 31,
1996 1997
---------- -----------
(UNAUDITED)
<S> <C> <C>
Net income applicable to common stockholders -- as
reported.................................................. $481,407 $1,355,382
======== ==========
Net income (loss) applicable to common stockholders -- pro
forma..................................................... (366,234) 1,126,309
======== ==========
Earnings per share -- as reported........................... .24 .44
======== ==========
Earnings (loss) per share -- pro forma...................... (.18) .36
======== ==========
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: dividend yield of 0%; expected volatility of 37.8%;
discount rate of 9.0%; and expected lives of 10 years.
(7) INCOME TAXES
The Company's status as an LLC was terminated upon the completion of the
initial public offering. At that time, the deferred tax liabilities were
recorded, and a charge to earnings of approximately $100,000 was included in
continuing operations during the period of the change in tax status. The Company
distributed $111,000 to certain of the members of the LLC to provide the members
with sufficient funds to pay the tax liabilities arising as a result of income
received prior to the date of the public offering.
F-18
<PAGE> 75
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
MARCH 31,
1997
------------
(UNAUDITED)
<S> <C>
Current tax provision
Federal................................................... $335,500
State..................................................... 50,000
Deferred tax provision
Federal................................................... 514,218
State..................................................... 82,845
--------
$982,563
========
</TABLE>
Deferred taxes result from sales treatment of securitized leases for
financial reporting purposes and debt treatment for tax purposes, reserve for
bad debts and depreciation for tax purposes in excess of depreciation for
financial reporting purposes. The income tax effects of items comprising
deferred income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
MARCH 31,
1997
------------
(UNAUDITED)
<S> <C>
Direct financing leases..................................... $666,683
Depreciation................................................ 21,500
Bad debts................................................... (91,120)
--------
$597,063
========
</TABLE>
The Company had a net deferred tax liability of $0 and $597,063 as of June
30, 1996 and March 31, 1997, respectively.
The difference between the Company's effective income tax rate and the
United States Statutory rate is as follows:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
MARCH 31,
1997
------------
(UNAUDITED)
<S> <C>
United State statutory rate................................. 34.0%
State income tax, net of federal income tax benefit......... 3.3
Permanent differences....................................... 4.7
----
42.0%
====
</TABLE>
(8) FAIR VALUE OF FINANCIAL STATEMENTS
Notes Payable
The fair value of the line-of-credit and bank notes payable at June 30,
1996 and March 31, 1997 approximated the carrying value because of the
short-term nature of these instruments. The fair value of the Class A
lease-backed term notes is determined based upon current market rates.
F-19
<PAGE> 76
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
<TABLE>
<CAPTION>
JUNE 30, 1996 MARCH 31, 1997
---------------------------- ----------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash and cash equivalents............... $ -- $ -- $ 4,774,653 $ 4,774,653
Line-of-credit.......................... (3,690,618) (3,690,618) (5,685,655) (5,685,655)
Notes payable........................... (4,090,818) (4,090,818) (4,236,982) (4,236,982)
Limited recourse Class A note payable... (20,761,785) (20,761,785) (16,293,489) (16,575,750)
</TABLE>
The preceding methods and assumptions were used to estimate the fair value
to each class of financial instruments for which it is practicable to estimate
that value. Fair value estimates are made at a specific point in time for the
Company's financial instruments; they are subjective in nature and involve
uncertainties, matters of significant judgment and, therefore, cannot be
determined with precision. Fair value estimates do not reflect the total value
of the Company as a going concern.
(9) MAJOR SUPPLIER
The Company's leases are originated through a network of approximately 50
independent lease originators located throughout the United States. Transactions
generated by a single independent lease originator accounted for approximately
17.9% and 15.7% of the Company's leases funded during the year ended June 30,
1996 and the nine months ended March 31, 1997, respectively. Transactions
generated by the Company's ten largest independent lease originators accounted
for approximately 58.3% and 61.1% of leases funded during the year ended June
30, 1996 and the nine months ended March 31, 1997, respectively.
(10) ACQUISITIONS
On March 31, 1997, the Company acquired the assets and recorded liabilities
of Global Finance & Leasing, Inc. (Global) for an aggregate cash purchase price
of $2,334,000. The acquisition has been accounted for using the purchase method
of accounting. Under the purchase method of accounting, the results of Global
will be included in the Company's results from the acquisition date (March 31,
1997). The allocation of the purchase price to the fair market value of the net
assets is based on preliminary estimates of fair market value and may be revised
as additional information is obtained.
The acquisition agreement provides for additional contingent consideration
of $916,000 based on the collection of certain receivables. The Company believes
the collection of the certain receivables is remote; therefore, no liability is
recorded at this time.
F-20
<PAGE> 77
GRANITE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table reflects, on an unaudited pro forma basis, the combined
operations of the Company and Global for the periods shown as if the
acquisitions had taken place at the beginning of periods shown. Appropriate
adjustments have been made to reflect the cost basis used in recording these
acquisitions. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
that would have resulted had the combinations been in effect on the dates
referred to above, that have resulted since the dates of the acquisitions or
that may result in the future (in thousands, except per share amounts):
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION NINE MONTHS ENDED
(FEBRUARY 21, YEAR ENDED MARCH 31,
1995 TO JUNE 30, JUNE 30, ------------------
1995 1996 1996 1997
---------------- ---------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................... 2,231 24,427 18,351 55,237
Net (loss) income allocated to common
stockholders......................... (151) 734 219 2,491
(Loss) income per common and common
equivalent share..................... (.08) .37 .11 .81
</TABLE>
(11) SUBSEQUENT EVENTS
In June 1997, the Company entered into a memorandum of understanding to
acquire a lease origination company located in the State of New York. The
acquisition is subject to completion of due diligence, execution of a definitive
agreement and customary closing conditions. If completed, the acquisition will
not have a material effect on the Company's financial position and results of
operations.
(12) RELATED PARTY TRANSACTION
In September 1996, two officers and Heartland Leasing advanced an aggregate
of $300,000 to Granite Financial, LLC. The promissory notes were unsecured,
accrued interest at the rate of 11% per annum, and were repaid out of the
proceeds of the initial public offering.
F-21
<PAGE> 78
No dealer, salesperson or other person is authorized to give any information or
to make any representations not contained in this Prospectus in connection with
the offer made by this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or any Underwriter. This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, any of the securities offered hereby by anyone
in any jurisdiction in which such offer or solicitation is not authorized or in
which the person making such offer or solicitation is not qualified to do so, or
to anyone to whom it is unlawful to make such an offer or solicitation. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the affairs of the Company since the
date hereof or the information contained in this Prospectus is correct as of any
time subsequent to the date of this Prospectus.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 14
Dividend Policy....................... 14
Price Range of Common Stock........... 14
Capitalization........................ 15
Selected Consolidated Financial
Data................................ 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 26
Management............................ 43
Certain Transactions.................. 48
Principal Stockholders................ 50
Description of Capital Stock.......... 51
Shares Eligible for Future Sale....... 53
Underwriting.......................... 54
Legal Matters......................... 55
Experts............................... 55
Additional Information................ 55
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
2,100,000 SHARES
GRANITE LOGO
GRANITE
FINANCIAL, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
PIPER JAFFRAY INC.
RAYMOND JAMES &
ASSOCIATES, INC.
CRUTTENDEN ROTH
INCORPORATED
, 1997
<PAGE> 79
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law permits a corporation organized
thereunder to indemnify its directors and officers for certain of their acts.
The Certificate of Incorporation of the Company has been framed so as to conform
to the Delaware General Corporation Law.
In general, any officer, director, employee or agent may be indemnified
against expenses, fines, settlements or judgments arising in connection with a
legal proceeding to which such person is a party, if that person's actions were
in good faith, were believed to be in the Company's best interest and were not
unlawful. Unless such person is successful upon the merits in such an action,
indemnification may be awarded only after a determination by independent
decision of the Board of Directors, by legal counsel or by a vote of the
stockholders that the applicable standard of conduct was met by the person to be
indemnified.
The circumstances under which indemnification is granted in connection with
an action brought on behalf of the Company are generally the same as those set
forth above; however, with respect to such actions, indemnification is granted
only with respect to expenses actually incurred in connection with the defense
or settlement of the action. In such actions, the person to be indemnified must
have acted in good faith, in a manner believed to have been in the Company's
best interest and with respect to which such person was not adjudged liable for
negligence or misconduct.
Indemnification may also be granted pursuant to the terms of agreements
which may be entered into in the future pursuant to a vote of stockholders or
directors. The Delaware General Corporation Law and the referenced portion of
the Certificate of Incorporation also grant the power to the Company to purchase
and maintain insurance which protects its officers and directors against any
liabilities incurred in connection with their services in such a position, and
such a policy may be obtained by the Company in the future.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses other than
underwriting discounts, payable by the Company in connection with the sale and
distribution of the Common Stock being registered hereby. All amounts shown are
estimates, except the SEC registration fee, the NASD filing fee and the Nasdaq
listing fee.
<TABLE>
<CAPTION>
AMOUNT PAYABLE
BY THE
ITEM COMPANY
---- ---------------
<S> <C>
S.E.C. Registration Fees................ $ 7,492.30
N.A.S.D. Filing Fees.................... 2,972.46
State Securities Laws (Blue Sky) Legal
Fees.................................. 2,500.00*
Printing and Engraving.................. 120,000.00*
Legal Fees.............................. 120,000.00
Nasdaq Additional Registration Fee...... 10,000.00
Accounting Fees and Expenses............ 80,000.00*
Transfer Agent's Fees................... 5,000.00*
Miscellaneous Expenses.................. 27,035.24*
-----------
Total......................... $375,000.00*
===========
</TABLE>
- ---------------
* Estimated for the purpose of filing.
II-1
<PAGE> 80
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
(a) The Company has made the following sales of its Common Stock within the
past three years to the following persons for the cash or other consideration
indicated, which sales were not registered under the Securities Act of 1933.
<TABLE>
<CAPTION>
DATE OF NUMBER OF
NAME ISSUANCE CONSIDERATION SHARES
---- -------- ------------- ---------
<S> <C> <C> <C>
1. William W. Wehner(1)................. 07/11/96 $2,000 200,000
180,000
10/07/96 Membership interest in
Granite Financial, LLC
2. James E. Lewis(1).................... 10/07/96 Membership interest in 720,000
Granite Financial, LLC
3. Heartland Leasing Corporation of 10/07/96 Membership interest in
Missouri.............................. Granite Financial, LLC 900,000
</TABLE>
- ---------------
(1) Director or officer.
All the foregoing sales were made to individuals or entities which had
access to information enabling them to evaluate the merits and risks of the
investment by virtue of their relationship to the Company or their economic
bargaining power.
The Company relied on Section 4(2) of the Securities Act of 1933 for the
exemption from the registration requirements of such Act. Each investor was
furnished with information concerning the operations of the Company and each had
the opportunity to verify the information supplied. Additionally, the Company
obtained a signed representation from each of the foregoing persons or entities
of his or its intent to acquire the Common Stock of the Company for the purpose
of investment only, and not with a view toward the subsequent distribution
thereof; each of the certificates representing the Common Stock issued to the
foregoing persons or entities has been stamped with a legend restricting
transfer of the Common Stock represented thereby, and the Company issued stop
transfer instructions to American Securities Transfer & Trust, Inc., the
Transfer Agent for the Common Stock of the Company, concerning all the
certificates representing the Common Stock of the Company issued and outstanding
as represented by the foregoing table.
ITEM 27. EXHIBITS.
The following is a complete list of Exhibits filed as part of this
Registration Statement and which are incorporated herein.
<TABLE>
<CAPTION>
EXHIBIT NO. PAGE NO.
- ----------- --------
<C> <S> <C>
*1.1 -- Form of Purchase Agreement by and between Granite
Financial, Inc. (the "Company"), Piper Jaffray Inc.,
Raymond James & Associates, Inc. and Cruttenden Roth
Incorporated.
+2.1 -- Exchange Memorandum, dated October 7, 1996 regarding the
reorganization of the Registrant from a Colorado limited
liability company to a Delaware corporation (the
"Exchange Memorandum").
+3.1 -- Certificate of Incorporation of the Company as filed on
June 20, 1996 with the Secretary of State of the State of
Delaware.
+3.2 -- By-laws of the Company.
+4.1.1 -- Form of specimen certificate for Common Stock of the
Company.
+4.1.2 -- Form of Representative's Warrant issued by the Company to
Cruttenden Roth Incorporated in connection with the
Company's initial public offering.
-4.1.3 -- Underwriters' Warrant to be issued by the Company to
Piper Jaffray Inc. and Raymond James & Associates, Inc.
</TABLE>
II-2
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT NO. PAGE NO.
- ----------- --------
<C> <S> <C>
-5. -- Opinion of Berliner Zisser Walter & Gallegos, P.C.,
regarding legality of the securities covered by this
Registration Statement.
*10.1.1 -- Form of Employment Agreement, dated April 1, 1997, by and
between William W. Wehner and the Company.
*10.1.2 -- Employment Agreement, dated April 28, 1997, by and
between Larry K. White and the Company.
-10.1.3 -- Employment Agreement, dated April 28, 1997, by and
between Frank J. Corcoran and the Company.
+10.2 -- Form of Indemnification Agreement entered into between
the Company and each officer and director of the Company.
+10.3 -- 1996 Omnibus Stock Option Plan, as amended effective
April 24, 1997, authorizing 900,000 shares of Common
Stock for issuance pursuant to the Plan.
+10.4.1 -- Membership Units Purchase Agreement, dated January 31,
1996, by and among Heartland Leasing Corporation of
Missouri, Granite Financial, LLC, James E. Lewis, William
W. Wehner, Andrew S. Love, Jr., Laurence A. Schiffer and
Heartland Bank.
+10.4.2 -- Members' Agreement of Granite Financial, LLC, dated
January 31, 1996, by and among Granite Financial, LLC,
James E. Lewis, William W. Wehner and Heartland Leasing
Corporation of Missouri.
+10.4.3 -- Lease Purchase Agreement, dated June 14, 1995, by and
between Granite Financial, LLC and Heartland Bank.
+10.4.4 -- Lease Sale Agreement, dated April 1, 1996, by and between
Heartland Bank and Granite Financial, LLC.
+10.4.5 -- Lease Service Agreement, dated June 14, 1995, by and
between Heartland Bank and Granite Financial, LLC.
++10.5.1 -- Loan and Security Agreement, dated February 4, 1997, by
and between CoreStates Bank, N.A. and Granite Financial,
Inc.
++10.5.2 -- Unsecured Revolving Credit Agreement, dated January 30,
1997, by and between Colorado National Bank, and Granite
Financial, Inc.
+10.6 -- Lease of Space, dated June 26, 1995, by and between Arbor
Lake Limited Partnership, a Colorado limited partnership,
and Granite Financial, LLC.
+10.7 -- Form of Broker/Lessor Partnership Agreement, dated
various dates, by and between Lease Originators and
Granite Financial, LLC.
+10.8.1 -- Servicing Agreement, dated April 1, 1996, by and among GF
Funding Corp. I, Norwest Bank Minnesota, National
Association and Granite Financial, LLC.
+10.8.2 -- Indenture, dated April 1, 1996, by and among GF Funding
Corp. I, Norwest Bank Minnesota, National Association and
Granite Financial, LLC.
+10.8.3 -- Lease Acquisition Agreement, dated April 10, 1996, by and
between Granite Financial, LLC and GF Funding Corp. I.
++10.9.1 -- Trust and Security Agreement, dated November 1, 1996,
among G.F. Funding Corp. II, the Company, Norwest Bank
Minnesota, National Association.
++10.9.2 -- Lease Acquisition Agreement, dated November 1, 1996,
between the Company and G.F. Funding Corp. II.
++10.9.3 -- Servicing Agreement, dated November 1, 1996, among G.F.
Funding Corp. II, the Company, Norwest Bank Minnesota,
National Association.
++10.10.1 -- Trust and Security Agreement, dated March 1, 1997, by and
among GF Funding Corp. III, the Company and Norwest Bank
Minnesota, National Association.
++10.10.2 -- Lease Acquisition Agreement, dated March 1, 1997, by and
between the Company and GF Funding Corp. III.
</TABLE>
II-3
<PAGE> 82
<TABLE>
<CAPTION>
EXHIBIT NO. PAGE NO.
- ----------- --------
<C> <S> <C>
++10.10.3 -- Servicing Agreement, dated March 1, 1997, by and among
the Company, GF Funding Corp. III and Norwest Bank
Minnesota, National Association.
+10.11.1 -- CreditDesk(R) License Agreement, dated September 22,
1995, by and between Fair, Isaac and Company, Inc. and
Granite Financial, LLC.
+10.11.2 -- InfoLease License Agreement, dated October 5, 1995, by
and between Decision Systems, Inc. and Granite Financial,
LLC.
++10.12 -- Asset Purchase Agreement, dated March 31, 1997, by and
among Granite Financial Acquisition Corp. I, Global
Finance & Leasing, Inc. and Thomas Mannes.
*10.13 -- Agreement, dated December 13, 1996, by and between
BrokerWare, Inc. and the Company.
*22. -- List of Subsidiaries.
-23.1 -- The consent of Berliner Zisser Walter & Gallegos, P.C.,
to the use of its opinion with respect to the legality of
the securities covered by this Registration Statement and
to the references to such firm in the Prospectus filed as
part of this Registration Statement will be included in
Exhibit 5.
*23.2 -- Consent of Ehrhardt Keefe Steiner & Hottman PC,
independent certified public accountants for the Company.
*24. -- The Power of Attorney is included in the signature page
of this Registration Statement.
++27. -- Financial Data Schedule.
</TABLE>
- ---------------
<TABLE>
<S> <C>
* Filed herewith.
- - To be filed by amendment.
+ Incorporated by reference from the Company's Registration
Statement on Form SB-2 (S.E.C. File No. 333-5264-D).
++ Incorporated by reference from the Company's Form 10-QSB
filed February 14, 1997 (S.E.C. File No. 1-21591).
+ Incorporated by reference from the Company's Form 10-QSB
filed December 6, 1996 (S.E.C. File No. 1-21591).
++ Incorporated by reference from the Company's Form 10-QSB
filed May 15, 1997 (S.E.C. File No. 1-21591).
</TABLE>
ITEM 28. UNDERTAKINGS.
(e) Indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE> 83
(f) Rule 430A.
The undersigned Registrant hereby undertakes that:
(i) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of Prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of Prospectus filed by the Registrant under Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time the Commission declared
it effective.
(ii) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 84
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this Registration Statement
or Amendment to be signed on its behalf by the undersigned in the City of
Westminster, State of Colorado on June 14, 1997.
GRANITE FINANCIAL, INC.
By: /s/ WILLIAM W. WEHNER
----------------------------------
William W. Wehner,
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints, jointly and severally, William W. Wehner
or James E. Lewis, or any of them, with full power to act alone, his true and
lawful attorneys-in-fact, with full power of substitution, and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement or any Registration Statement filed pursuant to Rule 462 under the
Securities Act of 1933, and file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact full power and authority to do and perform
each and every act and thing requisite and necessary to be done as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or Amendment has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM W. WEHNER Chairman of the Board and Chief June 14, 1997
- ----------------------------------------------------- Executive Officer (Principal
William W. Wehner Executive Officer)
/s/ FRANK J. CORCORAN Chief Financial Officer June 14, 1997
- ----------------------------------------------------- (Principal Financial and
Frank J. Corcoran Accounting Officer)
/s/ JAMES E. LEWIS Director June 14, 1997
- -----------------------------------------------------
James E. Lewis
/s/ LAURENCE A. SCHIFFER Director June 14, 1997
- -----------------------------------------------------
Laurence A. Schiffer
/s/ ANDREW S. LOVE, JR. Director June 14, 1997
- -----------------------------------------------------
Andrew S. Love, Jr.
/s/ SAMUEL R. FREEMAN Director June 14, 1997
- -----------------------------------------------------
Samuel R. Freeman
</TABLE>
II-6
<PAGE> 85
EXHIBIT INDEX
The following is a complete list of Exhibits filed as part of this
Registration Statement and which are incorporated herein.
<TABLE>
<CAPTION>
EXHIBIT NO. PAGE NO.
- ----------- --------
<C> <S> <C>
*1.1 -- Form of Purchase Agreement by and between Granite
Financial, Inc. (the "Company"), Piper Jaffray Inc.,
Raymond James & Associates, Inc. and Cruttenden Roth
Incorporated.
+2.1 -- Exchange Memorandum, dated October 7, 1996 regarding the
reorganization of the Registrant from a Colorado limited
liability company to a Delaware corporation (the
"Exchange Memorandum").
+3.1 -- Certificate of Incorporation of the Company as filed on
June 20, 1996 with the Secretary of State of the State of
Delaware.
+3.2 -- By-laws of the Company.
+4.1.1 -- Form of specimen certificate for Common Stock of the
Company.
+4.1.2 -- Form of Representative's Warrant issued by the Company to
Cruttenden Roth Incorporated in connection with the
Company's initial public offering.
-4.1.3 -- Underwriters' Warrant to be issued by the Company to
Piper Jaffray Inc. and Raymond James & Associates, Inc.
-5. -- Opinion of Berliner Zisser Walter & Gallegos, P.C.,
regarding legality of the securities covered by this
Registration Statement.
*10.1.1 -- Form of Employment Agreement, dated April 1, 1997, by and
between William W. Wehner and the Company.
*10.1.2 -- Employment Agreement, dated April 28, 1997, by and
between Larry K. White and the Company.
-10.1.3 -- Employment Agreement, dated April 28, 1997, by and
between Frank J. Corcoran and the Company.
+10.2 -- Form of Indemnification Agreement entered into between
the Company and each officer and director of the Company.
+10.3 -- 1996 Omnibus Stock Option Plan, as amended effective
April 24, 1997, authorizing 900,000 shares of Common
Stock for issuance pursuant to the Plan.
+10.4.1 -- Membership Units Purchase Agreement, dated January 31,
1996, by and among Heartland Leasing Corporation of
Missouri, Granite Financial, LLC, James E. Lewis, William
W. Wehner, Andrew S. Love, Jr., Laurence A. Schiffer and
Heartland Bank.
+10.4.2 -- Members' Agreement of Granite Financial, LLC, dated
January 31, 1996, by and among Granite Financial, LLC,
James E. Lewis, William W. Wehner and Heartland Leasing
Corporation of Missouri.
+10.4.3 -- Lease Purchase Agreement, dated June 14, 1995, by and
between Granite Financial, LLC and Heartland Bank.
+10.4.4 -- Lease Sale Agreement, dated April 1, 1996, by and between
Heartland Bank and Granite Financial, LLC.
+10.4.5 -- Lease Service Agreement, dated June 14, 1995, by and
between Heartland Bank and Granite Financial, LLC.
++10.5.1 -- Loan and Security Agreement, dated February 4, 1997, by
and between CoreStates Bank, N.A. and Granite Financial,
Inc.
++10.5.2 -- Unsecured Revolving Credit Agreement, dated January 30,
1997, by and between Colorado National Bank, and Granite
Financial, Inc.
</TABLE>
<PAGE> 86
<TABLE>
<CAPTION>
EXHIBIT NO. PAGE NO.
- ----------- --------
<C> <S> <C>
+10.6 -- Lease of Space, dated June 26, 1995, by and between Arbor
Lake Limited Partnership, a Colorado limited partnership,
and Granite Financial, LLC.
+10.7 -- Form of Broker/Lessor Partnership Agreement, dated
various dates, by and between Lease Originators and
Granite Financial, LLC.
+10.8.1 -- Servicing Agreement, dated April 1, 1996, by and among GF
Funding Corp. I, Norwest Bank Minnesota, National
Association and Granite Financial, LLC.
+10.8.2 -- Indenture, dated April 1, 1996, by and among GF Funding
Corp. I, Norwest Bank Minnesota, National Association and
Granite Financial, LLC.
+10.8.3 -- Lease Acquisition Agreement, dated April 10, 1996, by and
between Granite Financial, LLC and GF Funding Corp. I.
++10.9.1 -- Trust and Security Agreement, dated November 1, 1996,
among G.F. Funding Corp. II, the Company, Norwest Bank
Minnesota, National Association.
++10.9.2 -- Lease Acquisition Agreement, dated November 1, 1996,
between the Company and G.F. Funding Corp. II.
++10.9.3 -- Servicing Agreement, dated November 1, 1996, among G.F.
Funding Corp. II, the Company, Norwest Bank Minnesota,
National Association.
++10.10.1 -- Trust and Security Agreement, dated March 1, 1997, by and
among GF Funding Corp. III, the Company and Norwest Bank
Minnesota, National Association.
++10.10.2 -- Lease Acquisition Agreement, dated March 1, 1997, by and
between the Company and GF Funding Corp. III.
++10.10.3 -- Servicing Agreement, dated March 1, 1997, by and among
the Company, GF Funding Corp. III and Norwest Bank
Minnesota, National Association.
+10.11.1 -- CreditDesk(R) License Agreement, dated September 22,
1995, by and between Fair, Isaac and Company, Inc. and
Granite Financial, LLC.
+10.11.2 -- InfoLease License Agreement, dated October 5, 1995, by
and between Decision Systems, Inc. and Granite Financial,
LLC.
++10.12 -- Asset Purchase Agreement, dated March 31, 1997, by and
among Granite Financial Acquisition Corp. I, Global
Finance & Leasing, Inc. and Thomas Mannes.
*10.13 -- Agreement, dated December 13, 1996, by and between
BrokerWare, Inc. and the Company.
*22. -- List of Subsidiaries.
-23.1 -- The consent of Berliner Zisser Walter & Gallegos, P.C.,
to the use of its opinion with respect to the legality of
the securities covered by this Registration Statement and
to the references to such firm in the Prospectus filed as
part of this Registration Statement will be included in
Exhibit 5.
*23.2 -- Consent of Ehrhardt Keefe Steiner & Hottman PC,
independent certified public accountants for the Company.
*24. -- The Power of Attorney is included in the signature page
of this Registration Statement.
++27. -- Financial Data Schedule.
</TABLE>
- ---------------
* Filed herewith.
- - To be filed by amendment.
+ Incorporated by reference from the Company's Registration
Statement on Form SB-2 (S.E.C. File No. 333-5264-D).
<PAGE> 87
++ Incorporated by reference from the Company's Form 10-QSB
filed February 14, 1997 (S.E.C. File No. 1-21591).
+ Incorporated by reference from the Company's Form 10-QSB
filed December 6, 1996 (S.E.C. File No. 1-21591).
++ Incorporated by reference from the Company's Form 10-QSB
filed May 15, 1997 (S.E.C. File No. 1-21591).
<PAGE> 1
LLGM DRAFT
2,100,000 SHARES(1)
GRANITE FINANCIAL, INC.
COMMON STOCK
FORM OF PURCHASE AGREEMENT
, 1997
---------------------
PIPER JAFFRAY INC.
RAYMOND JAMES AND ASSOCIATES, INC.
CRUTTENDEN ROTH INCORPORATED
As Representatives of the several
Underwriters named in Schedule I hereto
c/o Piper Jaffray Inc.
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Ladies and Gentlemen:
Granite Financial, Inc., a Delaware corporation (the "Company"),
proposes to sell to the several Underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of 2,100,000 shares (the "Firm Shares") of the
Company's Common Stock, $0.001 par value per share (the "Common Stock"). The
Company has also granted to the several Underwriters an option to purchase up to
315,000 additional shares of Common Stock (the "Option Shares") on the terms and
for the purposes set forth in Section 3 hereof. In addition, the Company
proposes to sell to Piper Jaffray Inc. and Raymond James & Associates, Inc.,
individually and not in their capacity as Representatives (as hereinafter
defined), four-year warrants exercisable commencing one year from the date of
the Company's Prospectus (as hereinafter defined) and for a period of four years
thereafter (the "Representatives' Warrants") to purchase up to one hundred fifty
thousand (150,000) shares of Common Stock (the "Representatives' Warrant
Stock"), which sale will be consummated in accordance with the terms and
conditions of the Representatives' Stock Purchase Warrant (the "Representatives'
Stock Purchase Warrant"), the form of which is filed as an exhibit to the
Registration Statement described below. The Firm Shares and any Option Shares
issued pursuant to this Agreement are herein collectively called the
"Securities."
The Company hereby confirms its agreement with respect to the sale of
the Securities to the several Underwriters, for whom you are acting as
Representatives (the "Representatives").
1. Registration Statement and Prospectus. A registration
statement on Form SB-2 (File No. 333-___________ ) with respect to the
Securities, the Representatives' Warrants and the Representatives' Warrant
Stock, including a preliminary form of prospectus, has been prepared by
the Company in conformity with the requirements of the Securities Act of 1933,
as amended (the "Act"), and the rules and regulations ("Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") thereunder and has
been filed with the Commission; one
- ------------------------------
(1) Plus an option to purchase up to an additional 390,000 shares of
Common Stock to cover over-allotments.
<PAGE> 2
or more amendments to such registration statement have also been so prepared
and have been, or will be, so filed; and, if the Company has elected to rely
upon Rule 462(b) of the Rules and Regulations to increase the size of the
offering registered under the Act, the Company will prepare and file with the
Commission a registration statement with respect to such increase pursuant to
Rule 462(b). Copies of such registration statement(s) and amendments and each
related preliminary prospectus have been delivered to you.
If the Company has elected not to rely upon Rule 430A of the Rules and
Regulations, the Company has prepared and will promptly file an amendment to
the registration statement and an amended prospectus (including a term sheet
meeting the requirements of Rule 434 of the Rules and Regulations). If the
Company has elected to rely upon Rule 430A of the Rules and Regulations, it
will prepare and file a prospectus (or a term sheet meeting the requirements of
Rule 434) pursuant to Rule 424(b) that discloses the information previously
omitted from the prospectus in reliance upon Rule 430A. Such registration
statement as amended at the time it is or was declared effective by the
Commission, and, in the event of any amendment thereto after the effective date
and prior to the First Closing Date (as hereinafter defined), such registration
statement as so amended (but only from and after the effectiveness of such
amendment), including a registration statement (if any) filed pursuant to Rule
462(b) of the Rules and Regulations increasing the size of the offering
registered under the Act and information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rules 430A(b)
and 434(d) of the Rules and Regulations, is hereinafter called the
"Registration Statement." The prospectus included in the Registration
Statement at the time it is or was declared effective by the Commission is
hereinafter called the "Prospectus," except that if any prospectus (including
any term sheet meeting the requirements of Rule 434 of the Rules and
Regulations provided by the Company for use with a prospectus subject to
completion within the meaning of Rule 434 in order to meet the requirements of
Section 10(a) of the Act) filed by the Company with the Commission pursuant to
Rule 424(b) (and Rule 434, if applicable) of the Rules and Regulations or any
other such prospectus provided to the Underwriters by the Company for use in
connection with the offering of the Securities (whether or not required to be
filed by the Company with the Commission pursuant to Rule 424(b) of the Rules
and Regulations) differs from the prospectus on file at the time the
Registration Statement is or was declared effective by the Commission, the term
"Prospectus" shall refer to such differing prospectus (including any term sheet
within the meaning of Rule 434 of the Rules and Regulations) from and after the
time such prospectus is filed with the Commission or transmitted to the
Commission for filing pursuant to such Rule 424(b) (and Rule 434, if
applicable) or from and after the time it is first provided to the Underwriters
by the Company for such use. The term "Preliminary Prospectus" as used herein
means any preliminary prospectus included in the Registration Statement prior
to the time it becomes or became effective under the Act and any prospectus
subject to completion as described in Rule 430A or Rule 434 of the Rules and
Regulations. For purposes of this Agreement, all references to the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement to any of the foregoing shall be deemed to include the
copy filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval system ("EDGAR").
-2-
<PAGE> 3
2. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the several Underwriters as
follows:
(a) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission and each
Preliminary Prospectus, at the time of filing thereof, did not contain
an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; except that the foregoing shall not apply to
statements in or omissions from any Preliminary Prospectus in reliance
upon, and in conformity with, written information furnished to the
Company by you, or by any Underwriter through you, specifically for
use in the preparation thereof.
(b) As of the time the Registration Statement (or any
post-effective amendment thereto, including a registration statement
(if any) filed pursuant to Rule 462(b) of the Rules and Regulations
increasing the size of the offering registered under the Act) is or
was declared effective by the Commission, upon the filing or first
delivery to the Underwriters of the Prospectus (or any supplement to
the Prospectus (including any term sheet meeting the requirements of
Rule 434 of the Rules and Regulations)) and at the First Closing Date
and the Second Closing Date (as hereinafter defined), (i) the
Registration Statement and the Prospectus (in each case, as so amended
and/or supplemented) conformed or will conform in all material
respects to the requirements of the Act and the Rules and Regulations,
(ii) the Registration Statement (as so amended) did not or will not
include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and (iii) the Prospectus (as so
supplemented) did not or will not include an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they are or were made, not misleading; except
that the foregoing shall not apply to statements in or omissions from
any such document in reliance upon, and in conformity with, written
information furnished to the Company by you, or by any Underwriter
through you, specifically for use in the preparation thereof. Each
Preliminary Prospectus and the Prospectus delivered to the
Underwriters for use in connection with this offering was (or, with
respect to any Prospectus not yet delivered, will be) identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T
under the Act. If the Registration Statement has been declared
effective by the Commission, no stop order suspending the
effectiveness of the Registration Statement has been issued, and no
proceeding for that purpose has been initiated or, to the Company's
knowledge, threatened by the Commission.
(c) The consolidated financial statements of the Company,
together with the Notes thereto, set forth in the Registration
Statement and the Prospectus comply in all material respects with the
requirements of the Act and the Rules and Regulations and fairly
present the financial condition of the Company as of the dates
indicated and the results of operations and changes in cash flows for
the periods therein specified in conformity with generally accepted
accounting principles consistently applied throughout the periods
involved (except as otherwise stated therein); and the supporting
schedules included in the Registration Statement present fairly the
information required to be stated therein. No other financial
statements or
-3-
<PAGE> 4
schedules are required to be included in the Registration Statement or
Prospectus. Ehrhardt Keefe Steiner & Hottman PC, which has expressed
its opinion with respect to the audited consolidated financial
statements and schedules filed as a part of the Registration Statement
and included in the Registration Statement and the Prospectus, are
independent public accountants as required by the Act and the Rules
and Regulations.
(d) Each of the Company and its subsidiaries has been
duly organized and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation. Each of
the Company and its subsidiaries has full corporate power and
authority to own its properties and conduct its business as currently
being carried on and as described in the Registration Statement and
the Prospectus, and is duly qualified to do business as a foreign
corporation in good standing in each jurisdiction in which it owns or
leases real property or in which the conduct of its business makes
such qualification necessary and in which the failure to so qualify
would have a material adverse effect upon its business, condition
(financial or otherwise) or properties, taken as a whole.
(e) Except as contemplated in the Prospectus, subsequent
to the respective dates as of which information is given in the
Registration Statement and the Prospectus, neither the Company nor any
of its subsidiaries has incurred any material liabilities or
obligations, direct or contingent, or entered into any material
transactions, or declared or paid any dividends or made any
distribution of any kind with respect to its capital stock; and there
has not been any change in the capital stock (other than a change in
the number of outstanding shares of Common Stock due to the issuance
of shares upon the exercise of outstanding options or warrants), or
any material change in the short-term or long-term debt, or any
issuance of options, warrants, convertible securities or other rights
to purchase the capital stock, of the Company or any of its
subsidiaries, or any material adverse change, or any development
involving a prospective material adverse change, in the general
affairs, condition (financial or otherwise), business, key personnel,
property, prospects, net worth or results of operations of the Company
and its subsidiaries, taken as a whole.
(f) Except as set forth in the Prospectus, there is not
pending or, to the best knowledge of the Company, threatened or
contemplated, any action, suit or proceeding to which the Company or
any of its subsidiaries is a party before or by any court or
governmental agency, authority or body, or any arbitrator, which might
result in any material adverse change in the condition (financial or
otherwise), business, prospects, net worth or results of operations of
the Company and its subsidiaries, taken as a whole.
(g) There are no contracts or documents of the Company or
any of its subsidiaries that are required to be filed as exhibits to
the Registration Statement by the Act or by the Rules and Regulations
that have not been so filed.
(h) The Company has full corporate power and authority to
execute, deliver and perform its obligations under this Agreement and
the Representatives' Stock Purchase Warrant, including, without
limitation, to authorize, issue and sell the Securities, the
Representatives' Warrants and the Representatives' Warrant Stock as
contemplated herein and therein. Each of this Agreement and the
Representatives' Stock Purchase Warrant has been duly authorized,
executed and delivered by the Company, and constitutes a valid, legal
and binding obligation of the Company, enforceable in accordance with
its terms, except as rights to indemnity
-4-
<PAGE> 5
under this Agreement or the Representatives' Stock Purchase Warrant may
be limited by bankruptcy, insolvency, reorganization and moratorium
laws or similar laws affecting the rights of creditors generally and
subject to general principles of equity.
(i) The execution, delivery and performance of this
Agreement and the Representatives' Stock Purchase Warrant and the
consummation of the transactions herein and therein contemplated will
not conflict with, or result in a breach or violation of any of the
terms and provisions of, or constitute a default under, (i) any
statute, rule or regulation, (ii) any agreement or instrument to which
either the Company or any subsidiary is a party or by which either the
Company or any subsidiary is bound or to which any of their property is
subject, (iii) the Company's or any subsidiary's charter or by-laws, or
(iv) any order, rule, regulation or decree of any court or governmental
agency or body having jurisdiction over the Company, any subsidiary or
any of their respective properties. No consent, approval,
authorization or order of, or filing with, any court or governmental
agency or body is required for the execution, delivery and performance
of this Agreement or the Representatives' Stock Purchase Warrant or for
the consummation of the transactions contemplated hereby or thereby,
including the issuance or sale of the Securities, the Representatives'
Warrants and the Representatives' Warrant Stock by the Company, except
such as may be required under the Act or any securities or "blue sky"
laws of any state or jurisdiction.
(j) All of the issued and outstanding shares of capital
stock of the Company, including the outstanding shares of Common Stock,
are duly authorized and validly issued, fully paid and nonassessable,
have been issued in compliance with all federal and state securities
laws, were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase securities, and the
holders thereof are not subject to personal liability by reason of
being such holders; the Securities that may be sold hereunder by the
Company have been duly authorized and, when issued, delivered and paid
for in accordance with the terms hereof, will have been validly issued
and will be fully paid and nonassessable, and the holders thereof will
not be subject to personal liability by reason of being such holders;
and the capital stock of the Company, including the Common Stock,
conforms to the description thereof in the Registration Statement and
the Prospectus. Except as otherwise stated in the Registration
Statement and the Prospectus, there are no preemptive rights or other
rights to subscribe for or to purchase, or any restriction upon the
voting or transfer of, any shares of Common Stock pursuant to the
Company's charter, by-laws or any agreement or other instrument to
which the Company is a party or by which the Company is bound. Neither
the filing of the Registration Statement nor the offering or sale of
the Securities, the Representatives' Warrants or the Representatives'
Warrant Stock as contemplated by this Agreement and the
Representatives' Stock Purchase Warrant gives rise to any rights for or
relating to the registration of any shares of Common Stock or other
securities of the Company. All of the issued and outstanding shares of
capital stock of each of the Company's subsidiaries have been duly and
validly authorized and issued and are fully paid and nonassessable,
and, except as otherwise described in the Registration Statement and
the Prospectus and except for any directors' qualifying shares, the
Company owns of record and beneficially, free and clear of any security
interests, claims, liens, proxies, equities or other encumbrances, all
of the issued and outstanding shares of such stock. Except as described
in the Registration Statement and the Prospectus, there are no options,
warrants, agreements, contracts or other rights in existence to
purchase or acquire from the Company or any subsidiary of the Company
any shares of the capital stock of the Company or any subsidiary of the
Company. The Company
-5-
<PAGE> 6
has an authorized and outstanding capitalization as set forth in the
Registration Statement and the Prospectus.
(k) The Company and each of its subsidiaries holds, and
is operating in compliance in all material respects with, all
franchises, grants, authorizations, licenses, permits, easements,
consents, certificates and orders of any governmental or
self-regulatory body required for the conduct of its business and all
such franchises, grants, authorizations, licenses, permits, easements,
consents, certifications and orders are valid and in full force and
effect; and the Company and each of its subsidiaries is in compliance
in all material respects with all applicable federal, state, local and
foreign laws, regulations, orders and decrees.
(l) The Company and its subsidiaries have good and
marketable title to all property described in the Registration
Statement and the Prospectus as being owned by them, in each case free
and clear of all liens, claims, security interests or other
encumbrances except such as are described in the Registration
Statement and the Prospectus; the property held under lease by the
Company and its subsidiaries is held by them under valid, subsisting
and enforceable leases with only such exceptions with respect to any
particular lease as do not interfere in any material respect with the
conduct of the business of the Company or its subsidiaries; the
Company and each of its subsidiaries owns, possesses or otherwise has
the right to use all patents, patent applications, trademarks, service
marks, tradenames, trademark registrations, service mark
registrations, copyrights, licenses, inventions, proprietary or other
confidential information, trade secrets and rights necessary for the
conduct of the business of the Company and its subsidiaries as
currently carried on and as described in the Registration Statement
and the Prospectus (collectively, the "Intangibles"); except as stated
in the Registration Statement and the Prospectus, no name that the
Company or any of its subsidiaries uses and no other aspect of the
business of the Company or any of its subsidiaries will involve or
give rise to any infringement of, or license or similar fees for,
asserted Intangibles of others and neither the Company nor any of its
subsidiaries has received any notice alleging any such infringement or
fee; and, to the Company's best knowledge, there is no infringement by
others of the Company's or any of its subsidiaries' Intangibles.
(m) Neither the Company nor any of its subsidiaries is in
violation of its respective charter or by-laws or in breach of or
otherwise in default in the performance of any material obligation,
agreement or condition contained in any bond, debenture, note,
indenture, loan agreement or any other material contract, lease or
other instrument to which it is subject or by which any of them may be
bound, or to which any of the material property or assets of the
Company or any of its subsidiaries is subject.
(n) The Company and its subsidiaries have filed all
federal, state, local and foreign income and franchise tax returns
required to be filed and are not in default in the payment of any
taxes that were payable pursuant to said returns or any assessments
with respect thereto, other than any which the Company or any of its
subsidiaries is contesting in good faith.
(o) The Company has not distributed and will not
distribute any prospectus or other offering material in connection
with the offering and sale of the Securities other than
-6-
<PAGE> 7
any Preliminary Prospectus or the Prospectus or other materials
permitted by the Act to be distributed by the Company.
(p) The Common Stock is registered pursuant to Section
12(g) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and is qualified as a Nasdaq National Market security
of The Nasdaq Stock Market, Inc. The Company has taken no action
designed to terminate, or likely to have the effect of terminating,
the registration of the Common Stock under the Exchange Act, or the
qualification of the Common Stock on the Nasdaq National Market, nor
has the Company received any notification that the Commission or The
Nasdaq Stock Market, Inc. is contemplating terminating such
registration or qualification. The Securities have been conditionally
approved for quotation on the Nasdaq National Market and the Company's
Registration Statement on Form 8-A registering the Common Stock is
effective.
(q) Other than the subsidiaries of the Company listed in
Exhibit 21 to the Registration Statement, the Company owns no capital
stock or other equity or ownership or proprietary interest in any
corporation, partnership, association, trust or other entity.
(r) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(s) Other than as contemplated by this Agreement, the
Company has not incurred any liability for any finder's or broker's
fee or agent's commission in connection with the execution and
delivery of this Agreement or the consummation of the transactions
contemplated hereby.
(t) Neither the Company nor any of its affiliates is
presently doing business with the government of Cuba or with any
person or affiliate located in Cuba.]
(u) The Company and each of its subsidiaries are insured
by insurers of recognized financial responsibility against such losses
and risks and of the types and in such amounts as are prudent and
customary in the business in which they are engaged by similarly
situated companies, including, but not limited to, real and personal
property owned or leased by the Company, against theft, damage,
destruction, acts of vandalism and all other risks customarily insured
against, all of which insurance is in full force and effect, and
neither the Company nor any such subsidiary has any reason to believe
that it will not be able to renew its existing insurance coverage from
similar insurers as may be necessary to continue its business at a
comparable cost.
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<PAGE> 8
(v) The Company has been advised concerning the
Investment Company Act of 1940, as amended (the "1940 Act"), and the
rules and regulations thereunder, and has in the past conducted, and
intends in the future to conduct, its affairs in such a manner as to
ensure that it will not become an "investment company" or a company
"controlled" by an "investment company" within the meaning of the 1940
Act and such rules and regulations.
(w) Neither the Company nor any of the subsidiaries, nor
any director, officer, agent, employee or other person associated with
or acting on behalf of the Company or any such subsidiary has,
directly or indirectly (i) used any corporate funds for unlawful
contributions, gifts, entertainment or other unlawful expenses related
to political activity, (ii) made any unlawful payment to foreign or
domestic government officials or employees or to foreign or domestic
political parties or campaigns from corporate funds, (iii) violated
any provisions of the Foreign Corrupt Practices Act of 1977, as
amended, or (iv) made any bribe, rebate, payoff, influence payment,
kick back or other unlawful payment.
(x) Neither the Company nor any of its officers,
directors or affiliates has taken, nor will take, directly or
indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization in violation of law or
manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities.
(y) Except as set forth in the Registration Statement and
the Prospectus, (i) the Company is in material compliance with all
rules, ordinances, laws and regulations relating to occupational
health and safety and to the use, treatment, storage and disposal of
toxic substances and protection of the environment ("Laws") that are
applicable to its business, (ii) the Company has received no notice
from any governmental authority or third party of an asserted claim
under Laws, which claim is required to be disclosed in the
Registration Statement and the Prospectus, (iii) to its best
knowledge, the Company is not likely to be required to make future
material capital expenditures to comply with Laws, and (iv) no
property that is owned and, to the best of the Company's knowledge, no
property that is leased or occupied by the Company, has been
designated as a Superfund site pursuant to the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as
amended (42 U.S.C. Section 9601, et seq.), or otherwise designated as
a contaminated site under applicable state or local law.
(z) There are no outstanding loans, advances (except
normal advances for business expenses in the ordinary course of
business) or guarantees of indebtedness by the Company to or for the
benefit of any of the officers or directors of the Company or any of
the members of the families of any of them, except as disclosed in the
Registration Statement and the Prospectus.
(aa) To the best of the Company's knowledge, no labor
disturbance by the employees of the Company exists or is imminent. No
collective bargaining agreement exists with any of the Company's
employees and, to the best of the Company's knowledge, no such
agreement is imminent. None of the Company's independent lease
originators has indicated that he, she or it intends to terminate its
relationship with the Company or reduce the volume of potential leases
submitted to the Company.
(bb) The Representatives' Warrants have been duly and
validly authorized by the Company and, upon delivery to Piper Jaffray
Inc. and Raymond James & Associates, Inc., in accordance with the
Representatives' Stock Purchase Warrant, will be duly issued and
constitute valid, legal and binding obligations of the Company.
(cc) The Representatives' Warrant Stock has been duly
authorized and reserved for issuance upon the exercise of the
Representatives' Warrants and when issued upon payment of the exercise
price therefor will be validly issued, fully paid and nonassessable
shares of Common Stock.
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<PAGE> 9
Any certificate signed by any officer of the Company
and delivered to you or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to each Underwriter as to the
matters covered thereby.
3. Purchase, Sale and Delivery of Securities.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to issue and sell the Firm Shares to the several
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I hereto. The purchase price for each Firm
Share shall be $____ per share, which shall reflect an underwriting discount of
____% payable to the Underwriters. In making this Agreement, each Underwriter
is contracting severally and not jointly; except as provided in paragraph (c)
of this Section 3 and in Section 8 hereof, the agreement of each Underwriter is
to purchase only the respective number of Firm Shares specified in Schedule I.
The Firm Shares will be delivered by the Company to you for
the accounts of the several Underwriters against payment of the purchase price
therefor by certified or official bank check or other next day funds payable to
the order of the Company at the offices of Piper Jaffray Inc., Piper Jaffray
Tower, 222 South Ninth Street, Minneapolis, Minnesota, or such other location
as may be mutually acceptable, at 9:00 a.m. Central Time on the third (or if
the Securities are priced, as contemplated by Rule 15c6-1(c) under the Exchange
Act, after 4:30 p.m. Eastern Time, the fourth) full business day following the
date hereof, or at such other time and date as you and the Company determine
pursuant to Rule 15c6-1(a) under the Exchange Act, such time and date of
delivery being herein referred to as the "First Closing Date." If the
Representatives so elect, delivery of the Firm Shares may be made by credit
through full fast transfer to the accounts at The Depository Trust Company
designated by the Representatives. Certificates representing the Firm Shares,
in definitive form and in such denominations and registered in such names as
you may request upon at least two business days' prior notice to the Company,
will be made available for checking and packaging not later than 10:30 a.m.,
Central Time, on the business day next preceding the First Closing Date at the
offices of Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street,
Minneapolis, Minnesota, or such other location as may be mutually acceptable.
(b) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants to the several Underwriters an option to
purchase all or any portion of the Option Shares at the same purchase price as
the Firm Shares for use solely in covering any over-allotments made by the
Underwriters in the sale and distribution of the Firm Shares. The option
granted hereunder may be exercised at any time (but not more than once) within
30 days after the effective date of this Agreement upon notice (confirmed in
writing) by the Representatives to the Company setting forth the aggregate
number of Option Shares as to which the several Underwriters are exercising the
option, the names and denominations in which the certificates representing the
Option Shares are to be registered and the date and time, as determined by you,
when such Option Shares are to be delivered, such time and date being herein
referred to as the "Second Closing" and the "Second Closing Date,"
respectively; provided, however, that the Second Closing Date shall not be
earlier than the First Closing Date nor earlier than the second business day
after the date on which the option shall
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<PAGE> 10
have been exercised. The number of Option Shares to be purchased by each
Underwriter shall be the same percentage of the total number of Option Shares
to be purchased by the several Underwriters as the number of Firm Shares
purchased by such Underwriter is of the total number of Firm Shares purchased
by the several Underwriters, as adjusted by the Representatives in such manner
as the Representatives deem advisable to avoid fractional shares. No Option
Shares shall be sold and delivered unless the Firm Shares previously have been,
or simultaneously are, sold and delivered.
The Option Shares will be delivered by the Company to you for
the accounts of the several Underwriters against payment of the purchase price
therefor by certified or official bank check or other next day funds payable to
the order of the Company at the offices of Piper Jaffray Inc., Piper Jaffray
Tower, 222 South Ninth Street, Minneapolis, Minnesota, or such other location
as may be mutually acceptable at 9:00 a.m., Central Time, on the Second Closing
Date. If the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives. Certificates representing the
Option Shares in definitive form and in such denominations and registered in
such names as you have set forth in your notice of option exercise, will be
made available for checking and packaging not later than 10:30 a.m., Central
Time, on the business day next preceding the Second Closing Date at the office
of Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street,
Minneapolis, Minnesota, or such other location as may be mutually acceptable.
(c) It is understood that you, individually and not as
Representatives of the several Underwriters, may (but shall not be obligated
to) make payment to the Company on behalf of any Underwriter for the Securities
to be purchased by such Underwriter. Any such payment by you shall not relieve
any such Underwriter of any of its obligations hereunder. Nothing herein
contained shall constitute any of the Underwriters an unincorporated
association or partner with the Company.
4. Covenants.
The Company covenants and agrees with the several Underwriters
as follows:
(a) If the Registration Statement has not already been
declared effective by the Commission, the Company will use its best
efforts to cause the Registration Statement and any post-effective
amendments thereto to become effective as promptly as possible; the
Company will notify you promptly of the time when the Registration
Statement or any post-effective amendment to the Registration
Statement has become effective or any supplement to the Prospectus
(including any term sheet within the meaning of Rule 434 of the Rules
and Regulations) has been filed and of any request by the Commission
for any amendment or supplement to the Registration Statement or the
Prospectus or additional information; if the Company has elected to
rely on Rule 430A of the Rules and Regulations, the Company will
prepare and file a prospectus (or term sheet within the meaning of
Rule 434 of the Rules and Regulations) containing the information
omitted therefrom pursuant to Rule 430A of the Rules and Regulations
with the Commission within the time period required by, and otherwise
in accordance with the provisions of, Rules 424(b), 430A and 434, if
applicable, of the Rules and Regulations; if the Company has elected
to rely upon Rule 462(b) of the Rules and Regulations to increase the
size of the offering registered under the Act, the Company will
prepare and file a registration statement with respect to such
increase with the
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<PAGE> 11
Commission within the time period required by, and otherwise in
accordance with the provisions of, Rule 462(b); the Company will
prepare and file with the Commission, promptly upon your request, any
amendments or supplements to the Registration Statement or the
Prospectus (including any term sheet within the meaning of Rule 434 of
the Rules and Regulations) that, in your opinion, may be necessary or
advisable in connection with the distribution of the Securities by the
Underwriters; and the Company will not file any amendment or
supplement to the Registration Statement or the Prospectus (including
any term sheet within the meaning of Rule 434 of the Rules and
Regulations) to which you shall reasonably object by notice to the
Company after having been furnished a copy thereof a reasonable time
prior to the filing.
(b) The Company will advise you, promptly after it shall
receive notice or obtain knowledge thereof, of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement, of the suspension of the qualification of the
Securities for offering or sale in any jurisdiction, or of the
initiation or threatening of any proceeding for any such purpose; and
the Company will promptly use its best efforts to prevent the issuance
of any stop order or to obtain its withdrawal if such a stop order
should be issued.
(c) Within the time during which a prospectus (including
any term sheet within the meaning of Rule 434 of the Rules and
Regulations) relating to the Securities is required to be delivered
under the Act, the Company will comply with all requirements imposed
upon it by the Act and the Exchange Act, as now and hereafter amended,
by the Rules and Regulations, as from time to time in force
(including, without limitation, filing all registrations, statements
and other documents required to be filed with the Commission pursuant
to the Exchange Act within the time periods required by the Exchange
Act and the rules and regulations thereunder as from time to time in
force), so far as necessary to permit the continuance of sales of or
dealings in the Securities as contemplated by the provisions hereof
and the Prospectus. If during such period any event occurs as a
result of which the Prospectus would include an untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances then existing,
not misleading, or if during such period it is necessary to amend the
Registration Statement or supplement the Prospectus to comply with the
Act, the Company will promptly notify you and will amend the
Registration Statement or supplement the Prospectus (at the expense of
the Company) so as to correct such statement or omission or effect
such compliance.
(d) The Company will use its best efforts to qualify the
Securities for sale under the securities or "blue sky" laws of such
states or jurisdictions as you reasonably designate and to continue
such qualifications in effect so long as required for the distribution
of the Securities, except that the Company shall not be required in
connection therewith to qualify as a foreign corporation or to execute
a general consent to service of process in any state or jurisdiction.
(e) The Company will furnish to the Underwriters copies
of the Registration Statement (six of which will be signed and will
include all exhibits), each Preliminary Prospectus, the Prospectus,
and all amendments and supplements (including any term sheet
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<PAGE> 12
within the meaning of Rule 434 of the Rules and Regulations) to such
documents, in each case as soon as available and in such quantities as
you may from time to time reasonably request. The copies of the
Registration Statement and each amendment thereto furnished to you
will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T under the Act.
(f) During a period of five years commencing with the
date hereof, the Company will furnish to the Representatives, and to
each Underwriter who may so request in writing, copies of all periodic
and special reports furnished to the stockholders of the Company and
all information, documents and reports filed with the Commission, the
National Association of Securities Dealers, Inc., The Nasdaq Stock
Market, Inc. or any securities exchange.
(g) The Company will make generally available to its
security holders as soon as practicable, but in any event not later
than 15 months after the end of the Company's current fiscal quarter,
an earnings statement (which need not be audited) covering a 12-month
period beginning after the effective date of the Registration
Statement that shall satisfy the provisions of Section 11(a) of the
Act and Rule 158 of the Rules and Regulations.
(h) The Company, whether or not the transactions
contemplated hereunder are consummated or this Agreement is prevented
from becoming effective under the provisions of Section 9(a) hereof or
is terminated, will pay or cause to be paid (i) all expenses
(including transfer taxes allocated to the respective transferees)
incurred in connection with the delivery to the Underwriters of the
Securities, (ii) all expenses and fees (including, without limitation,
fees and expenses of the Company's accountants and counsel but, except
as otherwise provided below, not including fees of the Underwriters'
counsel) in connection with the preparation, printing, filing,
delivery, and shipping of the Registration Statement (including the
financial statements therein and all amendments, schedules, and
exhibits thereto), the Securities, each Preliminary Prospectus, the
Prospectus, and any amendment thereof or supplement thereto, and the
printing, delivery, and shipping of this Agreement and other
underwriting documents, including Blue Sky Memoranda, (iii) all filing
fees and fees and disbursements of the Underwriters' counsel incurred
in connection with the qualification of the Securities for offering
and sale by the Underwriters or by dealers under the securities or
"blue sky" laws of the states and other jurisdictions that you shall
designate in accordance with Section 4(d) hereof, (iv) the fees and
expenses of any transfer agent or registrar, (v) the filing fees
incident to any required review by the National Association of
Securities Dealers, Inc. of the terms of the sale of the Securities,
(vi) listing fees, if any, and (vii) all other costs and expenses
incident to the performance of its obligations hereunder that are not
otherwise specifically provided for herein. If the sale of the
Securities provided for herein is not consummated by reason of action
by the Company pursuant to Section 9(a) hereof that prevents this
Agreement from becoming effective, or by reason of any failure,
refusal or inability on the part of the Company to perform any
agreement on its part to be performed, or because any other condition
of the Underwriters' obligations hereunder required to be fulfilled by
the Company is not fulfilled, the Company will reimburse the several
Underwriters for all out-of-pocket disbursements (including fees and
disbursements of counsel) incurred by the Underwriters in connection
with their investigation, preparing to market and marketing the
Securities or in contemplation of performing their obligations
hereunder. The Company
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<PAGE> 13
shall not in any event be liable to any of the Underwriters for loss
of anticipated profits from the transactions covered by this
Agreement.
(i) The Company will apply the net proceeds from the sale
of the Securities to be sold by it hereunder for the purposes set
forth in the Prospectus.
(j) The Company will not, without your prior written
consent, offer for sale, sell, contract to sell, grant any option for
the sale of or otherwise issue or dispose of any Common Stock or any
securities convertible into or exchangeable for, or any options,
warrants or rights to purchase or acquire, shares of Common Stock,
except to the Underwriters pursuant to this Agreement for a period of
180 days after the commencement of the public offering of the
Securities by the Underwriters.
(k) The Company either has caused to be delivered to you
or will cause to be delivered to you prior to the effective date of
the Registration Statement a letter from each of the Company's
directors and officers and holders of 5% or more of its outstanding
Common Stock stating that such person agrees that he, she or it will
not, without your prior written consent, offer for sale, sell,
contract to sell or otherwise dispose of any shares of Common Stock or
rights to purchase Common Stock, except to the Underwriters pursuant
to this Agreement, for a period of 180 days after commencement of the
public offering of the Securities by the Underwriters.
(l) The Company has not taken and will not take, directly
or indirectly, any action designed to or that might reasonably be
expected to cause or result in, or that has constituted, the
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities, and has
not effected any sales of Common Stock that are required to be
disclosed in response to Item 701 of Regulation S-K under the Act that
have not been so disclosed in the Registration Statement.
(m) The Company will not incur any liability for any
finder's or broker's fee or agent's commission in connection with the
execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby.
[(n) The Company will inform the Florida Department of
Banking and Finance at any time prior to the consummation of the
distribution of the Securities by the Underwriters if it commences
engaging in business with the government of Cuba or with any person or
affiliate located in Cuba. Such information will be provided within
90 days after the commencement thereof or after a change occurs with
respect to previously reported information.]
(o) The Company will use its best efforts to cause the
Common Stock to be approved for quotation on the Nasdaq National
Market or listed on a national securities exchange as long as the
Company is required to file periodic reports under the Exchange Act.
5. Conditions of Underwriters' Obligations. The obligations of
the several Underwriters hereunder are subject to the accuracy, as of the date
hereof and at each of the First Closing Date and
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<PAGE> 14
the Second Closing Date (each, a "Closing Date"), as if made at such Closing
Date, of and compliance with all representations, warranties and agreements of
the Company contained herein, to the performance by the Company of its
obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become
effective not later than 5:00 p.m., Central Time, on the date of this
Agreement, or such later time and date as you, as the Representatives
of the several Underwriters, shall approve and all filings required by
Rules 424, 430A and 434 of the Rules and Regulations shall have been
timely made; no stop order suspending the effectiveness of the
Registration Statement or any amendment thereof shall have been issued
by the Commission; no proceedings for the issuance of such an order
shall have been initiated or threatened; and any request of the
Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been
complied with to your satisfaction.
(b) No Underwriter shall have advised the Company that
the Registration Statement or the Prospectus, or any amendment thereof
or supplement thereto (including any term sheet within the meaning of
Rule 434 of the Rules and Regulations), contains an untrue statement
of fact that, in your opinion, is material, or omits to state a fact
that, in your opinion, is material and is required to be stated
therein or necessary to make the statements therein not misleading.
(c) Except as contemplated in the Prospectus, subsequent
to the respective dates as of which information is given in the
Registration Statement and the Prospectus, neither the Company nor any
of its subsidiaries shall have incurred any material liabilities or
obligations, direct or contingent, or entered into any material
transactions, or declared or paid any dividends or made any
distribution of any kind with respect to its capital stock; and there
shall not have been any change in the capital stock (other than a
change in the number of outstanding shares of Common Stock due to the
issuance of shares upon the exercise of outstanding options or
warrants), or any material change in the short-term or long-term debt
of the Company, or any issuance of options, warrants, convertible
securities or other rights to purchase the capital stock of the
Company or any of its subsidiaries, or any material adverse change or
any development involving a prospective material adverse change
(whether or not arising in the ordinary course of business), in the
general affairs, condition (financial or otherwise), business, key
personnel, property, prospects, net worth or results of operations of
the Company and its subsidiaries, taken as a whole, that, in your
judgment, makes it impractical or inadvisable to offer or deliver the
Securities on the terms and in the manner contemplated in the
Prospectus.
(d) On each Closing Date, there shall have been furnished
to you, as Representatives of the several Underwriters, an opinion of
Berliner Zisser Walters & Gallegos, counsel for the Company, dated
such Closing Date and addressed to you, to the effect that:
i) Each of the Company and its subsidiaries has
been duly organized and is validly existing as a corporation in good
standing under the laws of its jurisdiction of
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<PAGE> 15
incorporation. Each of the Company and its subsidiaries has full
corporate power and authority to own its properties and conduct its
business as currently being carried on and as described in the
Registration Statement and the Prospectus, and is duly qualified to do
business as a foreign corporation and is in good standing in each
jurisdiction in which it owns or leases real property or in which the
conduct of its business makes such qualification necessary and in
which the failure to so qualify would have a material adverse effect
upon the business, condition (financial or otherwise) or properties of
the Company and its subsidiaries, taken as a whole.
ii) The capital stock of the Company conforms as
to legal matters to the description thereof contained in the
Prospectus under the caption "Description of Capital Stock." All of
the issued and outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid and
nonassessable, and the holders thereof are not subject to personal
liability by reason of being such holders. The Securities to be
issued and sold by the Company hereunder have been duly authorized
and, when issued, delivered and paid for in accordance with the terms
of this Agreement, will have been validly issued and will be fully
paid and nonassessable, and the holders thereof will not be subject to
personal liability by reason of being such holders.
iii) Except as otherwise stated in the
Registration Statement and the Prospectus, there are no preemptive
rights or other rights to subscribe for or to purchase, or any
restriction upon the voting or transfer of, any shares of Common Stock
pursuant to the Company's charter, by-laws or any agreement or other
instrument known to such counsel to which the Company is a party or by
which the Company is bound. To the best of such counsel's knowledge,
neither the filing of the Registration Statement nor the offering or
sale of the Securities as contemplated by this Agreement or the
Representatives' Warrants or the Representatives' Warrant Stock as
contemplated by the Representatives' Stock Purchase Warrant, gives
rise to any rights for or relating to the registration of any shares
of Common Stock or other securities of the Company.
iv) All of the issued and outstanding shares of
capital stock of each of the Company's subsidiaries have been duly and
validly authorized and issued and are fully paid and nonassessable,
and, to the best of such counsel's knowledge, except as otherwise
described in the Registration Statement and the Prospectus and except
for directors' qualifying shares, the Company owns of record and
beneficially, free and clear of any security interests, claims, liens,
proxies, equities or other encumbrances, all of the issued and
outstanding shares of such stock. To the best of such counsel's
knowledge, except as described in the Registration Statement and the
Prospectus, there are no options, warrants, agreements, contracts or
other rights in existence to purchase or acquire from the Company or
any subsidiary any shares of the capital stock of the Company or any
subsidiary of the Company.
v) The Registration Statement has become
effective under the Act and, to the best of such counsel's knowledge,
no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceeding for that purpose has been
instituted or, to the knowledge of such counsel, threatened by the
Commission.
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<PAGE> 16
vi) The descriptions in the Registration
Statement and the Prospectus of statutes, legal and governmental
proceedings, contracts and other documents are accurate and fairly
present the information required to be shown; and such counsel does
not know of any statutes or legal or governmental proceedings required
to be described in the Prospectus that are not described therein as
required, or of any contracts or documents of a character required to
be described in the Registration Statement or the Prospectus or
included as exhibits to the Registration Statement that are not
described or included therein as required.
vii) The Company has full corporate power and
authority to execute, deliver and perform its obligations under this
Agreement and the Representatives' Stock Purchase Warrant, including,
without limitation, to authorize, issue and sell the Securities, the
Representatives' Warrants and the Representatives' Warrant Stock as
contemplated herein and therein. Each of this Agreement and the
Representatives' Stock Purchase Warrant has been duly authorized,
executed and delivered by the Company and constitutes a valid, legal
and binding obligation of the Company enforceable in accordance with
its terms, except as rights to indemnity under this Agreement or the
Representatives' Stock Purchase Warrant may be limited by federal or
state securities laws and except as such enforceability may be limited
by bankruptcy, insolvency, reorganization and moratorium laws or
similar laws affecting the rights of creditors generally and subject to
general principles of equity.
viii) The execution, delivery and performance of
this Agreement and the Representatives' Stock Purchase Warrant and the
consummation of the transactions herein and therein contemplated will
not conflict with, or result in a breach or violation of any of the
terms and provisions of, or constitute a default under, (A) any
statute, rule or regulation, (B) any agreement or instrument known to
such counsel to which either the Company or any subsidiary is a party
or by which either the Company or any subsidiary is bound or to which
any of their property is subject, (C) the Company's or any subsidiary's
charter or by-laws, or (D) any order, rule, regulation or decree known
to such counsel of any court or governmental agency or body having
jurisdiction over the Company or any subsidiary or any of their
respective properties or assets. No consent, approval, authorization
or order of, or filing with, any court or governmental agency or body
is required for the execution, delivery and performance of this
Agreement or the Representatives' Stock Purchase Warrant or for the
consummation of the transactions contemplated hereby and thereby,
including the issuance or sale of the Securities, the Representatives'
Warrants and the Representatives' Warrant Stock by the Company, except
such as may be required under the Act or state securities or "blue sky"
laws.
ix) To the best of such counsel's knowledge, the
Company and each of its subsidiaries holds, and is operating in
compliance in all material respects with, all franchises, grants,
authorizations, licenses, permits, easements, consents, certificates
and orders of any governmental or self-regulatory body required for
the conduct of its business, and all such franchises, grants,
authorizations, licenses, permits, easements, consents, certifications
and orders are valid and in full force and effect.
x) To the best of such counsel's knowledge,
neither the Company nor any of its subsidiaries is in violation of its
respective charter or by-laws. To the best of such counsel's
knowledge, neither the Company nor any of its subsidiaries is in
breach of or otherwise in default in the performance of any material
obligation, agreement or condition contained in any bond, debenture,
note, indenture, loan agreement or any other material contract, lease
or other instrument to which it is subject or by which any of them may
be
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<PAGE> 17
bound, or to which any of the material property or assets of the
Company or any of its subsidiaries is subject.
xi) The Representatives' Warrants have been duly
and validly authorized by the Company and, upon delivery to Piper
Jaffray Inc. and Raymond James & Associates, Inc., in accordance with
the Representatives' Stock Purchase Warrant will be duly issued and
valid, legal and binding obligations of the Company.
xii) The Representatives' Warrant Stock to be issued
by the Company pursuant to the terms of the Representatives' Warrants
has been duly authorized and, upon issuance and delivery against
payment therefor in accordance with the terms of the Representatives'
Stock Purchase Warrant will be duly and validly issued and fully paid
and nonassessable, and to such counsel's knowledge, will not have been
issued in violation of or subject to any preemptive right, co-sale
right, registration right, right of first refusal or other similar
right of stockholders.
xiii) The Registration Statement and the
Prospectus, and any amendment thereof or supplement thereto (including
any term sheet within the meaning of Rule 434 of the Rules and
Regulations), comply as to form in all material respects with the
requirements of the Act and the Rules and Regulations; and on the
basis of conferences with officers of the Company, examination of
documents referred to in the Registration Statement and the Prospectus
and such other procedures as such counsel deemed appropriate, nothing
has come to the attention of such counsel that causes such counsel to
believe that the Registration Statement or any amendment thereof, at
the time the Registration Statement became effective and as of such
Closing Date (including any Registration Statement filed under Rule
462(b) of the Rules and Regulations), contained any untrue statement
of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading or that the Prospectus (as of its date and as of such
Closing Date), as amended or supplemented, includes any untrue
statement of material fact or omits to state a material fact necessary
to make the statements therein, in light of the circumstances under
which they were made, not misleading; it being understood that such
counsel need express no opinion as to the financial statements or
other financial data included in any of the documents mentioned in
this clause (xi).
Such other matters as you may reasonably request.
In rendering such opinion such counsel may rely (i) as to
matters of law other than Colorado law, the General Corporation Law of the
State of Delaware, and federal law, upon the opinion or opinions of local
counsel, provided that the extent of such reliance is specified in such opinion
and that such counsel shall state that such opinion or opinions of local
counsel are satisfactory to them and that they believe they and you are
justified in relying thereon and (ii) as to matters of fact, to the extent such
counsel deems reasonable, upon certificates of officers of the Company and its
subsidiaries, provided that the extent of such reliance is specified in such
opinion.
(e) On each Closing Date, there shall have been furnished
to you, as the Representatives of the several Underwriters, such
opinion or opinions of LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel
for the several Underwriters, dated such Closing Date and addressed to
you, with respect to the formation of the Company, the validity of the
Securities, the Registration Statement, the Prospectus and other
related matters as you reasonably may request, and such counsel shall
have received such papers and information as they request to enable
them to pass upon such matters.
(f) On each Closing Date you, as the Representatives of
the several Underwriters, shall have received a letter of Ehrhardt
Keefe Steiner & Hottman PC dated such Closing Date and addressed to
you, confirming that they are independent public accountants within
the meaning of the Act and are in compliance with the applicable
requirements relating to the qualifications of accountants under Rule
2-01 of Regulation S-X of the Commission, and stating, as of the date
of such letter (or, with respect to matters involving changes or
developments since the respective dates as of which specified
financial information is given
-17-
<PAGE> 18
in the Prospectus, as of a date not more than five days prior to the
date of such letter), the conclusions and findings of said firm with
respect to the financial information and other matters covered by its
letter delivered to you concurrently with the execution of this
Agreement, and the effect of the letter so to be delivered on such
Closing Date shall be to confirm the conclusions and findings set
forth in such prior letter.
(g) On each Closing Date, there shall have been furnished
to you, as the Representatives of the Underwriters, a certificate,
dated such Closing Date and addressed to you, signed by the Chief
Executive Officer and by the Chief Financial Officer of the Company,
to the effect that:
i) The representations and warranties of the
Company in this Agreement are true and correct, in all material
respects, as if made at and as of such Closing Date, and the Company
has complied with all the agreements and satisfied all the conditions
on its part to be performed or satisfied at or prior to such Closing
Date;
ii) No stop order or other order suspending the
effectiveness of the Registration Statement or any amendment thereof
or the qualification of the Securities for offering or sale has been
issued, and no proceeding for that purpose has been instituted or, to
the best of their knowledge, is contemplated by the Commission or any
state or regulatory body; and
iii) The signers of said certificate have
carefully examined the Registration Statement and the Prospectus, and
any amendments thereof or supplements thereto (including any term
sheet within the meaning of Rule 434 of the Rules and Regulations),
and (A) such documents contain all statements and information required
to be included therein, the Registration Statement, or any amendment
thereof, does not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and the
Prospectus, as amended or supplemented, does not include any untrue
statement of material fact or omit to state a material fact necessary
to make the statements therein, in light of the circumstances under
which they were made, not misleading, (B) since the effective date of
the Registration Statement, there has occurred no event required to be
set forth in an amended or supplemented prospectus that has not been
so set forth, (C) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
neither the Company nor any of its subsidiaries has incurred any
material liabilities or obligations, direct or contingent, or entered
into any material transactions, not in the ordinary course of
business, or declared or paid any dividends or made any distribution
of any kind with respect to its capital stock, and except as disclosed
in the Prospectus, there has not been any change in the capital stock
(other than a change in the number of outstanding shares of Common
Stock due to the issuance of shares upon the exercise of outstanding
options or warrants), or any material change in the short-term or
long-term debt, or any issuance of options, warrants, convertible
securities or other rights to purchase the capital stock, of the
Company, or any of its subsidiaries, or any material adverse change or
any development involving a prospective material adverse change
(whether or not arising in the ordinary course of business), in the
general affairs, condition (financial or otherwise), business, key
personnel, property, prospects, net worth or results of
-18-
<PAGE> 19
operations of the Company and its subsidiaries, taken as a whole, and
(D) except as stated in the Registration Statement and the Prospectus,
there is not pending, or, to the knowledge of the Company, threatened
or contemplated, any action, suit or proceeding to which the Company
or any of its subsidiaries is a party before or by any court or
governmental agency, authority or body, or any arbitrator, that might
result in any material adverse change in the condition (financial or
otherwise), business, prospects or results of operations of the
Company and its subsidiaries, taken as a whole.
(h) The Common Stock is qualified as a Nasdaq National
Market security of The Nasdaq Stock Market, Inc., and the Common
Stock, including the Securities, is approved for quotation thereon.
(i) The Company shall have furnished to you and counsel
for the Underwriters such additional documents, certificates and
evidence as you or they may have reasonably requested.
(j) The Representatives' Stock Purchase Warrant shall have
been entered into by the Company and Piper Jaffray Inc. and Raymond
James & Associates, Inc., and the Representatives' Warrants shall have
been issued and sold to Piper Jaffray Inc. and Raymond James &
Associates, Inc., pursuant thereto.
All such opinions, certificates, letters and other documents
will be in compliance with the provisions hereof only if they are satisfactory
in form and substance to you and counsel for the Underwriters. The Company
will furnish you with such conformed copies of such opinions, certificates,
letters and other documents as you shall reasonably request.
6. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless
each Underwriter against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter may become subject, under
the Act or otherwise (including in settlement of any litigation if
such settlement is effected with the written consent of the Company),
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement, including the information deemed to be a part
of the Registration Statement at the time of effectiveness pursuant to
Rules 430A and 434(d) of the Rules and Regulations, if applicable, any
Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto (including any term sheet within the meaning of Rule 434 of
the Rules and Regulations), or arise out of or are based upon the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter for any legal or other
expenses reasonably incurred by it in connection with investigating or
defending against such loss, claim, damage, liability or action;
provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage, liability or
action arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or
any such amendment or supplement, in reliance upon and in conformity
with written information furnished to the Company by you, or by any
Underwriter through you, specifically for use in the preparation
thereof.
-19-
<PAGE> 20
In addition to its other obligations under Section
6(a), the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other
proceeding arising out of or based upon any statement or omission, or
any alleged statement or omission, described in Section 6(a), it will
reimburse each Underwriter on a monthly basis for all reasonable legal
fees or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other
proceeding, notwithstanding the absence of a judicial determination as
to the propriety and enforceability of the Company's obligation to
reimburse the Underwriters for such expenses and the possibility that
such payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the
Underwriter that received such payment shall promptly return it to the
party or parties that made such payment, together with interest
thereon, compounded daily, determined on the basis of the prime rate
(or other commercial lending rate for borrowers of the highest credit
standing) announced from time to time by ___________ (the "Prime
Rate"). Any such interim reimbursement payments that are not made to
an Underwriter within 30 days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request. This
indemnity agreement shall be in addition to any liabilities that the
Company may otherwise have.
(b) Each Underwriter will indemnify and hold harmless the
Company against any losses, claims, damages or liabilities to which
the Company may become subject, under the Act or otherwise (including
in settlement of any litigation, if such settlement is effected with
the written consent of such Underwriter), insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement,
any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto (including any term sheet within the meaning of
Rule 434 of the Rules and Regulations), or arise out of or are based
upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in the Registration Statement,
any Preliminary Prospectus, the Prospectus, or any such amendment or
supplement, in reliance upon and in conformity with written
information furnished to the Company by you, or by such Underwriter
through you, specifically for use in the preparation thereof, and will
reimburse the Company for any legal or other expenses reasonably
incurred by the Company in connection with investigating or defending
against any such loss, claim, damage, liability or action.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any
action, such indemnified party shall, if a claim in respect thereof is
to be made against the indemnifying party under such subsection,
notify the indemnifying party in writing of the commencement thereof;
but the omission so to notify the indemnifying party shall not relieve
the indemnifying party from any liability that it may have to any
indemnified party. In case any such action shall be brought against
any indemnified party, and it shall notify the indemnifying party of
the commencement thereof, the indemnifying party shall be entitled to
participate in, and, to the extent that it shall wish,
-20-
<PAGE> 21
jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel satisfactory to such
indemnified party, and after notice from the indemnifying party to
such indemnified party of the indemnifying party's election so to
assume the defense thereof, the indemnifying party shall not be liable
to such indemnified party under such subsection for any legal or other
expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation;
provided, however, that if, in the sole judgment of the
Representatives, it is advisable for the Underwriters to be
represented as a group by separate counsel, the Representatives shall
have the right to employ a single counsel to represent the
Representatives and all Underwriters who may be subject to liability
arising from any claim in respect of which indemnity may be sought by
the Underwriters under subsection (a) of this Section 6, in which
event the reasonable fees and expenses of such separate counsel shall
be borne by the indemnifying party or parties and reimbursed to the
Underwriters as incurred (in accordance with the provisions of the
second paragraph in subsection (a) above). An indemnifying party
shall not be obligated under any settlement agreement relating to any
action under this Section 6 to which it has not agreed in writing.
(d) If the indemnification provided for in this Section 6
is unavailable or insufficient to hold harmless an indemnified party
under subsection (a) or (b) above, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as
a result of the losses, claims, damages or liabilities referred to in
subsection (a) or (b) above, (i) in such proportion as is appropriate
to reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other from the offering of the
Securities or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and
the Underwriters on the other in connection with the statements or
omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting
expenses) received by the Company bears to the total underwriting
discounts and commissions received by the Underwriters, in each case
as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Underwriters and
the parties' relevant intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this subsection (d) were to be
determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations
referred to in the first sentence of this subsection (d). The amount
paid by an indemnified party as a result of the losses, claims,
damages or liabilities referred to in the first sentence of this
subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending against any action or claim that is the
subject of this subsection (d). Notwithstanding the provisions of
this subsection (d), no
-21-
<PAGE> 22
Underwriter shall be required to contribute any amount in excess of
the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages that such Underwriter has
otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(e) The obligations of the Company under this Section 6
shall be in addition to any liability that the Company may otherwise
have and shall extend, upon the same terms and conditions, to each
person, if any, who controls any Underwriter within the meaning of the
Act; and the obligations of the Underwriters under this Section 6
shall be in addition to any liability that the respective Underwriters
may otherwise have and shall extend, upon the same terms and
conditions, to each director of the Company (including any person who,
with his consent, is named in the Registration Statement as about to
become a director of the Company), to each officer of the Company who
has signed the Registration Statement and to each person, if any, who
controls the Company within the meaning of the Act.
7. Representations and Agreements to Survive Delivery. All
representations, warranties, and agreements of the Company herein or in
certificates delivered pursuant hereto, and the agreements of the several
Underwriters and the Company contained in Section 6 hereof, shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any Underwriter or any controlling person thereof, or the
Company or any of its officers, directors, or controlling persons, and shall
survive delivery of, and payment for, the Securities to and by the Underwriters
hereunder.
8. Substitution of Underwriters.
If any Underwriter or Underwriters shall fail to take up and
pay for the amount of Firm Shares agreed by such Underwriter or Underwriters to
be purchased hereunder, upon tender of such Firm Shares in accordance with the
terms hereof, and the amount of Firm Shares not purchased does not aggregate
more than 10% of the total number of Firm Shares set forth in Schedule I
hereto, the remaining Underwriters shall be obligated to take up and pay for
(in proportion to their respective underwriting obligations hereunder as set
forth in Schedule I hereto except as may otherwise be determined by you) the
Firm Shares that the withdrawing or defaulting Underwriter or Underwriters
agreed but failed to purchase.
If any Underwriter or Underwriters shall fail to take up and
pay for the number of Firm Shares agreed by such Underwriter or Underwriters to
be purchased hereunder, upon tender of such Firm Shares in accordance with the
terms hereof, and the number of Firm Shares not purchased aggregates more than
10% of the total number of Firm Shares set forth in Schedule I hereto, and
arrangements satisfactory to you for the purchase of such Firm Shares by other
persons are not made within 36 hours thereafter, this Agreement shall
terminate. In the event of any such termination, the Company shall not be
under any liability to any Underwriter (except to the extent provided in
Section 6 hereof) nor shall any Underwriter (other than an Underwriter who
shall have failed,
-22-
<PAGE> 23
otherwise than for some reason permitted under this Agreement, to purchase the
number of Firm Shares agreed by such Underwriter to be purchased hereunder) be
under any liability to the Company (except to the extent provided in Section 6
hereof).
If Firm Shares to which a default relates are to be purchased
by the non-defaulting Underwriters or by any other person or persons, the
Representatives or the Company shall have the right to postpone the First
Closing Date for not more than seven business days in order that the necessary
changes in the Registration Statement, the Prospectus and any other documents,
as well as any other arrangements, may be effected. As used herein, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 8.
9. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective at 10:00 a.m.,
Central Time, on the first full business day following the effective
date of the Registration Statement, or at such earlier time after the
effective time of the Registration Statement as you in your discretion
shall first release the Securities for sale to the public; provided,
that if the Registration Statement is effective at the time this
Agreement is executed, this Agreement shall become effective at such
time as you in your discretion shall first release the Securities for
sale to the public. For the purpose of this Section 9(a), the
Securities shall be deemed to have been released for sale to the
public upon release by you of the publication of a newspaper
advertisement relating thereto or upon release by you of telexes
offering the Securities for sale to securities dealers, whichever
shall first occur. By giving notice as hereinafter specified before
the time this Agreement becomes effective, you, as the Representatives
of the several Underwriters, or the Company may prevent this Agreement
from becoming effective without liability of any party to any other
party, except that the provisions of Section 6 hereof shall at all
times be effective.
(b) You, as the Representatives of the several
Underwriters, shall have the right to terminate this Agreement by
giving notice as hereinafter specified at any time at or prior to the
First Closing Date, and the option referred to in Section 3(b) hereof,
if exercised, may be cancelled at any time prior to the Second Closing
Date, if (i) the Company shall have failed, refused or been unable, at
or prior to such Closing Date, to perform any agreement on its part to
be performed hereunder, (ii) any other condition of the Underwriters'
obligations hereunder is not fulfilled, (iii) trading in the Common
Stock has been suspended by the Commission or the Nasdaq National
Market, (iv) trading generally on the New York Stock Exchange, the
American Stock Exchange or the Nasdaq National Market shall have been
wholly suspended, (v) minimum or maximum prices for trading shall have
been fixed, or maximum ranges for prices for securities shall have
been required, on the New York Stock Exchange, the American Stock
Exchange, or the Nasdaq National Market, by such Exchange or the
Nasdaq National Market or by order of the Commission or any other
governmental authority having jurisdiction, (vi) a banking moratorium
shall have been declared by federal, New York, Minnesota or Colorado
authorities, or (vii) there has occurred any material adverse change
in the financial markets in the United States or an outbreak of major
hostilities (or an escalation thereof) in which the United States is
involved, a declaration of war by the United States Congress, any
other substantial national or international calamity or any other
event or occurrence of a similar character shall have occurred since
the execution of this
-23-
<PAGE> 24
Agreement that, in your judgment, makes it impractical or inadvisable
to proceed with the completion of the sale of and payment for the
Securities. Any such termination shall be without liability of any
party to any other party hereto except that the provisions of Section
6 hereof shall at all times be effective.
(c) If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section
9, the Company shall be notified promptly by you by telephone or
telegram, confirmed by letter. If the Company elects to prevent this
Agreement from becoming effective, you shall be promptly notified by
the Company by telephone or telegram, confirmed by letter.
10. Default by the Company. If the Company shall fail at the
First Closing Date to sell and deliver the number of Securities that it is
obligated to sell hereunder, then this Agreement shall terminate without any
liability on the part of any non-defaulting party. No action taken pursuant to
this Section 10 shall relieve the Company from liability, if any, in respect of
such default.
11. Information Furnished by Underwriters. The statements set
forth in the last paragraph of the cover page and under the caption
"Underwriting" in any Preliminary Prospectus and in the Prospectus constitute
the written information furnished by or on behalf of the Underwriters referred
to in Sections 2(a) and (b) and Section 6(a) hereof.
12. Notices. Except as otherwise provided herein, all
communications hereunder shall be in writing or by telegraph and, if to the
Underwriters, shall be mailed, telegraphed or delivered to the Representatives
c/o Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street,
Minneapolis, Minnesota 55402, except that notices given to an Underwriter
pursuant to Section 6 hereof shall be sent to such Underwriter at the address
stated in the Underwriters' Questionnaire furnished by such Underwriter in
connection with this offering; if to the Company, shall be mailed, telegraphed
or delivered to it at Granite Financial, Inc., 6424 West 91st Avenue,
Westminster, Colorado 80030 Attention: William W. Wehner, or in each case to
such other address as the person to be notified may have requested in writing.
All notices given by telegram shall be promptly confirmed by letter. Any party
to this Agreement may change its address for notices by sending to the parties
to this Agreement written notice of a new address for such purpose.
13. Persons Entitled to Benefit of Agreement. This Agreement
shall inure to the benefit of and be binding upon the parties hereto and their
respective successors and assigns and the controlling persons, officers and
directors referred to in Section 6 hereof. Nothing in this Agreement is
intended or shall be construed to give to any other person, firm or corporation
any legal or equitable remedy or claim under or in respect of this Agreement or
any provision herein contained. The term "successors and assigns" as herein
used shall not include any purchaser, as such purchaser, of any of the
Securities from any of the several Underwriters.
14. Governing Law.
This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota.
-24-
<PAGE> 25
Please sign and return to the Company the enclosed duplicates
of this Agreement whereupon this Agreement will become a binding agreement
between the Company and the several Underwriters in accordance with its terms.
Very truly yours,
GRANITE FINANCIAL, INC.
By:
-------------------------------------
Title:
-----------------------------------
Confirmed as of the date first
above mentioned, on behalf of
themselves and the other several
Underwriters named in Schedule I
hereto.
PIPER JAFFRAY INC.
By:
-----------------------------------
Managing Director
RAYMOND JAMES & ASSOCIATES, INC.
By:
-----------------------------------
Managing Director
CRUTTENDEN ROTH INCORPORATED
By:
-----------------------------------
Managing Director
-25-
<PAGE> 26
SCHEDULE I
<TABLE>
<CAPTION>
Underwriter Number of Firm Shares(1)
----------- ---------------------
<S> <C>
Piper Jaffray Inc.
Raymond James and Associates
Cruttenden Roth Incorporated
Total. . . . . . . . . . . . . . . . . . . . . . 2,600,000
=========
</TABLE>
- ------------------
(1) The Underwriters may purchase up to an additional 315,000 shares of
Common Stock to the extent the option to purchase the Option Shares
described in Section 3(b) of the Agreement is exercised, in the
proportions and in the manner described in the Agreement.
-26-
<PAGE> 1
EXECUTIVE EMPLOYMENT AGREEMENT
EXECUTIVE EMPLOYMENT AGREEMENT effective April 1, 1997 (the "Agreement")
by and between GRANITE FINANCIAL, INC. (the "Company") with principal offices
located at 6424 W. 91st Avenue, Westminister, Colorado 80030 and WILLIAM W.
WEHNER (the "Executive").
NOW THEREFORE, in consideration of the foregoing premises and mutual
covenants herein contained, the parties hereto agree as follows:
1. Employment. The Company agrees to employ the Executive and the
Executive agrees to serve the Company as its Chairman, Chief Executive Officer
and President.
2. Position and Responsibilities. The Executive shall exert his best
efforts and devote full time and attention to the affairs of the Company. The
Executive shall be in charge of formulating strategic policy and direction of
the Company and developing, negotiating and concluding acquisitions, and shall
have full authority and responsibility with respect thereto, subject to the
general direction, approval and control of the Board of Directors and to the
restrictions, limitations and guidelines set forth by the Board of Directors in
resolutions adopted in the minutes of the Board of Directors meetings, copies
of which will be provided to the Executive from time to time and will be
incorporated herein by reference. His powers shall include the authority to
hire and fire personnel of the Company except for executive officers and
members of the Board of Directors and to retain consultants when he deems
necessary in order to implement Company policies.
3. Board of Directors. The Executive shall at all times discharge his
duties in consultation with and under the supervision of the Board of Directors
of the Company. In the performance of his duties the Executive shall make his
principal office at the corporate headquarters of the Company in Westminster,
Colorado.
<PAGE> 2
4. Term of Employment. The term of the Executive's employment under this
Agreement be deemed to have commenced on April 1, 1997, and shall continue
until June 30, 2000, subject to extension or termination as hereinafter
provided.
5. Duties. During the period of his employment hereunder and except for
illness, specified vacation periods and reasonable leaves of absence, the
Executive shall devote his best efforts and full, attention and skill to the
business and affairs of the Company and its affiliated companies. as such
business and affairs now exist and as they may be hereinafter changed or added
to, under and pursuant to the general direction of the Board of Directors of
the Company.
6. Compensation. The Company shall pay to the Executive as compensation
for his services the sum of $250,000 per year, payable monthly, or such higher
salary as may be from time to time approved by the Board of Directors. In
addition, the Executive shall receive such additional compensation and/or
bonuses or stock options as may be voted to him at the discretion of the Board
of Directors in connection with Executive's annual review as provided under
Paragraph 15 herein.
7. Expense Reimbursement. The Company will reimburse the Executive, at
least monthly, for all reasonable and necessary expenses incurred by him in
carrying out his duties under this Agreement. The Executive shall present to
the Chief Financial Officer or Controller each month an itemized account of
such expenses in such form as is reasonably required by the Board of Directors.
Such expenses shall include attorneys' fees and disbursements of Executive in
connection with any legal proceedings (including, but not limited to,
arbitration), whether or not instituted by the Company or Executive, relating
to the interpretation or enforcement of any provision of this Agreement;
provided, however, that in the case of any such proceeding to which the Company
and the Executive are adverse parties, the losing party shall reimburse the
prevailing party for all costs and expenses, including attorneys' fees and
disbursements, incurred by the prevailing party in defense or prosecution of
any such
2
<PAGE> 3
proceeding. Prior to advancing costs and expenses to Executive, the Board of
Directors shall have the right to obtain an agreement, and to require
acceptable security therefor, from Executive requiring him to repay Company for
the same should it be determined that Executive is not entitled to payment of
such costs and expenses.
8. Medical and Dental Coverage. The Executive, his wife, and those
children who qualify will be entitled to participate in the Company's employee
group medical and other group insurance programs on the same basis as other
executives of the Company.
9. Medical Examination. The Executive agrees to submit himself for
physical examination on one occasion per year as requested by the Company for
the purpose of the Company's obtaining life insurance on the life of the
Executive for the benefit of the Company; provided, however, that the Company
shall bear the entire cost of such examinations and shall pay all premiums on
any key man life insurance obtained for the benefit of the Company as
beneficiary.
10. Life Insurance Premiums. If the Executive qualifies for coverage, the
Company agrees to reimburse the Executive up to $ 10,000 per year for life
insurance premiums which the Executive may pay as premiums on any policy of
life insurance he may purchase for the benefit of his designated beneficiary or
beneficiaries.
11. Automobile or Automobile Allowance. The Company will provide the
Executive with an automobile or with an automobile allowance in the amount of
$10,000 for the duration of his employment with the Company under this
Agreement. The Company shall also provide insurance on such automobile or will
include a reimbursement for insurance in the automobile allowance.
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12. Vacation Time. The Executive shall be entitled to take four (4) weeks
paid vacation per calendar year. Such vacation may not be taken in any greater
than consecutive two (2) week increments. Vacation not used by the Executive
during the calendar year will be carried forward up to a maximum of eight (8)
weeks accrual going forward.
13. Benefits Payable on Disability. If the Executive becomes disabled from
properly performing services hereunder by reason of illness or other physical or
mental incapacity, the Company shall continue to pay the Executive his then
current salary hereunder for the first twelve (12) months of such continuous
disability commencing with the first date of such disability.
If the Executive qualifies for coverage, during the term of this
Agreement, the Company shall purchase and maintain a policy of Disability
Insurance which, after twelve (12) continuous months of disability, will pay up
to $12,000 per month of the Executive's salary until Executive reaches the age
of 65. After the first twelve (12) months of disability, the Company has no
obligation to supplement or augment disability payments made under any such
disability policy or plan or make any other payment in connection with such
disability.
If the Company is unable to obtain a policy of Disability Insurance, the
Company shall pay up to $10,000 per month to the Executive for a twelve (12)
month period from the twelfth to the twenty-fourth month from the first date of
such disability.
14. Obligations of Executive During and After Employment.
(a) The Executive agrees that during the terms of his employment under
this Agreement, he will engage in no other business activities directly or
indirectly, which are competitive with or which might place him in a competing
position to that of the Company, or any affiliated company.
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(b) The Executive realizes that during the course of his employment,
Executive will have produced and/or have access to confidential business
plans, information, business opportunity records, notebooks, data, formula,
specifications, trade secrets, customer lists, account lists and secret
inventions and processes of the Company and its affiliated companies.
Therefore, during or subsequent to his employment by the Company, or by an
affiliated company, the Executive agrees to hold in confidence and not to
directly or indirectly disclose or use or copy or make lists of any such
information, except to the extent authorized by the Company in writing. All
records, files, business plans, documents, equipment and the like, or copies
thereof, relating to Company's business, or the business of an affiliated
company, which Executive shall prepare, or use, or come into contact with,
shall remain the sole property of the Company, or of an affiliated company,
and shall not be removed from the Company's or the affiliated company's premises
without its written consent, and shall be promptly returned to the Company
upon termination of employment with the Company and its affiliated companies.
The restrictions and obligations of Executive set forth in this Section 14(b)
shall not apply to (i) information that is or becomes generally available and
known to the equipment leasing industry (other than as a result of a disclosure
directly or indirectly by Executive); or (ii) information that was known to
Executive prior to Executive's employment by the Company or its predecessor,
Granite Financial, LLC.
(c) Because of his employment by the Company, Executive will have access
to trade secrets and confidential information about the Company, its business
plans, its business accounts, its business opportunities, its expansion plans
into other geographical areas and its methods of doing business. Executive
agrees that for a period of one (1) year(s) after termination of his employment
(except if such termination is as a result of termination by Executive with
cause under Section 17 or by the Company without cause), he will not, directly
or indirectly, compete with the Company in the business of providing equipment
lease financing
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to businesses and related services within seventy-five (75) miles of the
offices of lease originators doing business with the Company at the date
of termination hereof or offices operated by the Company or its affiliated
companies on the date of termination.
(d) In the event a court of competent jurisdiction finds any provision
of this Section 14 to be so overbroad as to be unenforceable, then such
provision shall be reduced in scope by the court, but only to the extent
deemed necessary by the court to render the provision reasonable and
enforceable, it being the Executive's intention to provide the Company with
the broadest protection possible against harmful competition.
15. Annual Review. Within 60 days following the effective date of this
Agreement, and prior to June 30, 1998, and each June 30 thereafter, the
Executive and the Compensation Committee of the Board of Directors (the
"Committee") shall agree upon financial objectives and goals for the Company for
the upcoming fiscal year of the Company (the "Annual Goals"). Beginning during
July 1998, and during each July thereafter during the term of Executive's
employment, the Committee shall review Executive's performance, including
performance of the Company against the Annual Goals. At such time, the
Committee shall consider and make a determination regarding an increase to
Executive's base pay, an award of a bonus to Executive in the form of cash,
stock options or other consideration and a one year extension of the term of
this Agreement. In making such determination, the Committee shall base its
decision upon Executive's review, the performance of the Company against the
Annual Goals and executive compensation packages being given to chief
executives of other public company's of comparable size.
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16. Termination for Cause by the Company. During the term of this
Agreement there can be no termination of the Executive by the Company except
for "Termination for Cause" as outlined below:
(1) Notwithstanding anything herein to the contrary the Company
may, without liability, terminate the Executive's employment hereunder
for cause at any time upon written notice from the Board of Directors
specifying such cause, and thereafter the Company's obligations
hereunder shall cease and terminate; provided, however, that the
Company shall pay the Executive two (2) weeks pay and that such
written notice shall not be delivered until after the Board of
Directors shall have given the Executive written notice specifying the
conduct alleged to have constituted such cause and the Executive has
failed to cure such conduct, if curable, within thirty (30) days
following receipt of such notice.
Grounds for termination "for cause" include but are not limited to one or
more of the following:
i) A willful breach of duty by the Executive during the course of
his employment;
ii) Habitual neglect of duty by the Executive;
iii) Action or inaction by the Executive which places the Company
in circumstances of financial peril; and
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iv) Disloyal, dishonest or illegal conduct of the Executive.
17. Termination by the Executive without Cause. The Executive, without
cause, may terminate this Agreement upon 90 days', written notice to the
Company. In such event, the Executive shall be required to render the services
required under this Agreement during such 90-day period unless otherwise
directed by the Board of Directors. Compensation for vacation time not taken by
Executive shall be paid to the Executive at the date of termination.
18. Termination by the Executive with Cause. The Executive may terminate
his employment with the Company at any time, upon 30-day written notice and
opportunity for the Company to remedy any non-compliance, by reason of (i) the
Company's material failure to perform its duties pursuant to this Agreement,
(ii) any material diminishment in the duties and responsibilities, working
facilities, or compensation as described in Paragraphs 2, 5 and 6 of this
Agreement, or (iii) Executive's location of employment is moved more than 40
miles from where it is on the date of this Agreement; provided that such
termination takes place within 90 days after receipt by Executive of written
notice of such relocation. Executive shall be entitled to all base salary and
other benefits and consideration specified herein for the remaining term of
this Agreement.
19. Termination upon Death of Executive. In addition to any other
provision relating to termination, this Agreement shall terminate upon the
Executive's death. No severance allowance shall be paid to the Executive's
estate.
20. Lump Sum Compensation. In the event of (A) the occurrence of a
"Triggering Event" which shall be defined to include a non-negotiated (i)
change in ownership of 50% or more of the outstanding shares of the Company, or
(ii) merger, consolidation, reorganization or liquidation of the Company, and
(B) following the occurrence of the Triggering Event, the Executive's
employment is
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terminated (i) by the Company without cause or (ii) by Executive with cause
under Section 17, the Executive shall, in addition to all other rights and
benefits hereunder, receive lump sum compensation equal to 2.9 times his annual
salary and incentive or bonus payments, if any, as shall have been paid to the
Executive during the Company's most recent 12-month period within 30 days of
termination of Executive's employment. If the total amount of the change of
control compensation were to exceed three (3) times the Executive's base amount
(the average annual taxable compensation of the Executive for the five (5)
years preceding the year in which the change of control occurs), the Company
and the Executive may agree to reduce the lump sum compensation to be received
by Executive in order to avoid the imposition of the golden parachute tax as
provided in the Tax Reform Act of 1984, as amended by the Tax Reform Act of
1986.
In the event the Executive is required to hire counsel to negotiate on his
behalf in connection with his termination or resignation from the Company upon
the occurrence of a Triggering Event, or in order to enforce the rights and
obligations of the Company as provided in this Paragraph, the Company shall
reimburse to the Executive all reasonable attorneys' fees which may be expended
by the Executive in seeking to enforce the terms hereof. Such reimbursement
shall be paid every 30 days after the Executive provides copies of invoices
from the Executive's counsel to the Company. However, such invoices may be
redacted to preserve the attorney-client privilege, client confidentiality or
work product.
21. Arbitration. Any controversy, dispute or claim arising out of, or
relating to, this Agreement and/or its interpretation shall, unless resolved by
agreement of the parties, be settled by binding arbitration in Denver, Colorado
in accordance with the Rules of the American Arbitration Association then
existing. This Agreement to arbitrate shall be specifically enforceable under
the prevailing arbitration law of the State of Colorado. The award rendered by
the arbitrators shall be final and judgment may be entered upon the award in any
court of the State of Colorado having jurisdiction of the matter.
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22. General Provisions.
(a) The Executive's rights and obligations under this Agreement shall
not be transferrable by assignment or otherwise, nor shall Executive's
rights be subject to encumbrance or to the claims of the Company's
creditors. Nothing in this Agreement shall prevent the consolidation of
the Company with, or its merger into, any other corporation, or the sale
by the Company of all or substantially all of its property or assets.
(b) This Agreement constitutes the entire agreement between the parties
hereto in respect of the employment of the Executive by the Company and
supersede any and all other agreements either oral or in writing between
the parties hereto with respect to the employment of the Executive.
(c) Executive shall have no duty to mitigate the payment due him from
Company pursuant to this Agreement and any money earned by Executive from
other sources after his employment with the Company terminates shall not
reduce the amount owed him by the Company pursuant to this Agreement.
(d) The provisions of this Agreement shall be regarded as divisible,
and if any of said provisions or any part thereof are declared invalid or
unenforceable by a court of competent jurisdiction, the validity and
enforceability of the remainder of such provisions or parts thereof and
the applicability thereof shall not be affected thereby.
(e) This Agreement may not be amended or modified except by a written
instrument executed by Company and Executive.
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(f) This Agreement and the rights and obligations hereunder shall be
governed by and construed in accordance with the laws of the State of
Colorado.
23. Construction. Throughout this Agreement the singular shall include the
plural, and the plural shall include the singular, and the masculine and neuter
shall include the feminine, wherever the context so requires.
24. Text to Control. The headings of paragraphs and sections are included
solely for convenience of reference. If any conflict between any heading and
the text of this Agreement exists, the text shall control.
25. Authority. The officer executing this agreement on behalf of the
Company has been empowered and directed to do so by the Board of Directors of
the Company.
26. Effective Date. This Agreement shall be effective as of April 1, 1997.
FOR THE COMPANY: GRANITE FINANCIAL, INC.
DATED ,1997 By:
--------------- --------------------------
Title:
-----------------------
FOR THE EXECUTIVE:
DATED ,1997 By:
--------------- --------------------------
William W. Wehner
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<PAGE> 1
EMPLOYMENT/NON-COMPETE AGREEMENT
This Employment Agreement (the "Agreement"), effective as of this 28th
day of April, 1997, is between Granite Financial Inc., a Delaware corporation
("Company"), and Larry White ("LW").
RECITALS
A. The Company desires to hire LW to serve as the President and Chief
Operating Officer of the Company.
B. LW desires to accept such employment by the Company.
NOW, THEREFORE, in consideration of the mutual promises set forth
herein, the parties agree as follows:
1. Employment. Upon the terms and subject to the conditions contained
herein, LW shall, during the term of this Agreement, serve as President
and Chief Operating Officer of the Company and shall perform such duties
and responsibilities as designated from time to time by Chairman and
Chief Executive Officer of the Company. LW hereby accepts such
position and, during the term of this Agreement, shall devote his full
time, skill, energy and attention to the business of the Company.
2. Term. The period of employment under this Agreement shall commence as
of the date hereof and, subject to the terms and conditions hereof,
shall terminate on June 30, 1998. The Company shall have the option to
extend the period of employment for an additional one year at the end
of the initial term by notice to LW given on or prior to March 31,
1998. The period of employment is referred to hereinafter as the
"Employment Term."
3. Compensation.
3.1 Salary. During the Employment Term, Company shall pay LW an
annual salary of $120,000. If, prior to the scheduled
expiration of the Employment Term, Company terminates LW
without Cause (as hereinafter defined), Company shall remain
obligated to pay LW his salary hereunder, when the same
becomes due, and continue to provide LW with all benefits
under Section 3.2 below through the expiration of the
Employment Term. The salary shall be paid in accordance with
the Company's payroll policy in effect from time to time,
currently twice per month on the 15th and the last day
of each month.
3.2 Benefit Plans. During the Employment Term, LW shall be
entitled to participate in all benefit plans applicable to
employees of Company, and to be entitled to all other benefits
and perquisites, to the extent eligible, generally offered to
the other full-time employees or officers of Company,
including, as may be amended from time to time, all health,
medical and disability benefit plans of the Company. LW shall
be entitled
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<PAGE> 2
to four weeks (20 business days) of paid vacation time for each
full calendar year that LW is employed by the Company.
3.3 Performance Reviews. On an annual basis, the Company shall
review LW's performance and shall make a determination as to
any increase in LW's base pay and an award of a bonus to LW in
the form of cash, restricted stock, stock options or other
consideration. The Company will make such determination based
on LW's performance and the financial results of the Company.
Except as hereinafter provided with respect to the guaranteed
bonuses, whether a pay increase and/or bonus are granted and
the amount and form of consideration for each shall be at the
sole and absolute discretion of the Company, as determined by
the Chairman or the Board of Directors of the Company, and such
determination shall be final and binding upon the parties
hereto. The Company shall pay LW a guaranteed cash bonus of
$5,000 on June 30, 1997, and $30,000 on June 30, 1998, as
further consideration for this Agreement and the non-compete
provisions contained in Section 4 hereof.
3.4 Stock Options. As additional consideration for entering into
this Agreement, Company shall grant and issue to LW 10,000
incentive stock options pursuant to the Company's 1996 Omnibus
Stock Option Plan, as amended (the "Plan"). The terms and
conditions and form of such option shall be as stated in the
form of option attached hereto as Exhibit A, and shall contain
an exercise price equal to the closing price of the Company's
common stock, as reported on the NASDAQ National Market System,
as of April 25, 1997.
4. Non-Compete Provisions.
4.1 Restrictive Covenants. LW agrees that during the period
beginning upon execution of this Agreement and ending one (1)
year after the date that LW ceases to be an employee of Company
for any reason (the "Restricted Period"), LW will not, without
the express written approval of the Company (i) solicit the
hire or employment of any person who is an employee of the
Company or any other affiliate or subsidiary of the Company at
the date of solicitation; (ii) act as employee, consultant,
shareholder, lender or agent of an entity which engages in any
such solicitation or (iii) directly or indirectly, manage, own,
operate, advise or join, control, or participate in the
ownership, management, operation or control of, or provide
services to or be employed by or connected with, in any manner,
any person engaged anywhere in the United States in the
equipment leasing or finance business or any other business
engaged in by the Company or any affiliate or subsidiary of the
Company as of the date LW ceases to be employed by Company.
Notwithstanding the foregoing, LW may invest in public
companies engaged in a competing business provided such
investment is passive and does not exceed 1% of the outstanding
stock of the public company.
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<PAGE> 3
4.2 Reasonableness. LW acknowledges and agrees that the
restrictive covenants set forth in Section 4.1 (collectively,
the "Restrictive Covenants") are reasonable and valid in
geographical and temporal scope and in all other respects. If
any court determines that any of the Restrictive Covenants, or
any part thereof, is invalid or unenforceable, the remainder of
the Restrictive covenants shall not thereby be affected and
shall be given full force and effect, without regard to the
invalid or unenforceable parts. If any court determines that
any of the Restrictive Covenants, or any part thereof, is
invalid or unenforceable for any reason, such court shall have
the power to modify such Restrictive Covenants, or any part
thereof, and, in its modified form, such Restrictive Covenant
shall then be valid and enforceable.
4.3 Remedies and Survival. In the event of a breach by LW of any
of the Restrictive Covenants, LW acknowledges that the Company
will suffer substantial and irreparable damage and agrees
that the Company shall be entitled to a temporary restraining
order, preliminary injunction and/or a permanent injunction
restraining LW from continuing to breach any of said covenants
as well as other remedies permitted by applicable law. This
Section 4 shall survive termination of this Agreement and/or
LW's employment.
5. Confidentiality and Non-Disclosure Agreement. Concurrent with the
execution of this Agreement, LW shall enter into the Non-Disclosure
Agreement in the form attached hereto as Exhibit B.
6. Permanent Disability or Death. In the event LW shall fail during the
Employment Term, because of illness, physical or mental disability or
other incapacity for a period of two consecutive months, to render the
services provided for by this agreement ("Permanent Disability"), or in
the event of the death of LW, this Agreement shall terminate as of the
date of Permanent Disability or death, and the Company shall not have
any further obligations hereunder.
7. Discharge for Cause. Company shall have the right to terminate the
employment of LW for Cause. As used herein, the term "Cause" shall be
limited to:
i) A willful breach of duty by LW during the course of his
employment;
ii) Habitual neglect of duty by LW; or
iii) Disloyal, dishonest or illegal conduct of LW.
8. Disputes. Any dispute or controversy arising under or in connection
with this Agreement shall be finally settled exclusively by arbitration
in Denver, Colorado in accordance with the Rules of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction.
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<PAGE> 4
9. Severability. If any provision of this Agreement shall be declared to
be invalid or unenforceable, such invalidity or unenforceability shall
not affect the remaining provisions hereof which shall remain in full
force and effect.
10. Amendment. This Agreement can only be amended by a writing signed by
the party against whom such amendment is sought to be enforced.
11. Successors and Assigns. This Agreement shall inure to the benefit of
and be binding on the Company and its successors and assigns, and any
entity with which Company may merge or consolidate. Since LW's duties
and services hereunder are special, personal and unique in nature, LW
may not transfer, sell or otherwise assign his obligations under this
Agreement. No right or interest of LW under this Agreement shall be
assignable or transferable in any manner or be subject to alienation,
anticipation, sale, pledge, encumbrance or other legal process.
12. Expenses. In the case of any proceeding involving this Agreement to
which Company and the LW are adverse parties, the losing party shall
reimburse the prevailing party for all costs and expenses, including
attorneys' fees and disbursements, incurred by the prevailing party
in defense or prosecution of any such proceeding.
13. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Colorado, without giving
effect to any provision of Colorado law relating to the conflict of
laws.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
GRANITE FINANCIAL, INC.
By: William W. Wehner
-----------------------------
Title: Chairman & CEO
--------------------------
LARRY WHITE
By: LARRY K. WHITE
-----------------------------
Larry White
Page 4 of 4
<PAGE> 1
AGREEMENT
This Agreement ("Agreement") is entered into by and between Granite
Financial Inc., a Delaware corporation ("Granite"), and BrokerWare, Inc., an
Illinois corporation ("BrokerWare"). The effective date of this Agreement is
December 13, 1996.
RECITALS
BrokerWare has developed certain software for use in the equipment
leasing industry (commonly referred to as BrokerTrac Network and BrokerTrac
Remote) and Granite desires a non-exclusive license to use such software in its
business. Granite also desires to obtain the services of BrokerWare in
connection with the installation and customization of such software on
Granite's existing computer system.
AGREEMENT
The parties hereby agree as follows:
1. Term of Agreement.
Granite hereby contracts BrokerWare and BrokerWare accepts such
contract for a term of one year commencing December 13, 1996, and terminating
December 12, 1997, unless sooner terminated as hereinafter provided.
1.1 General Provisions.
1.1.1 Survival of Agreement. This Agreement shall not be terminated
by a restructuring of Granite or of BrokerWare. If either of the parties
restructures but remains in the business, the contract shall survive and shall
be binding upon the successor entity.
1.1.2 Legal Representation. Each party acknowledges that they were
advised that they were entitled to separate counsel and they have either
employed such counsel or voluntarily waived their right to consult with counsel.
1.1.3 Notices. All notices and other communications provided for or
permitted hereunder shall be in writing and shall be made by hand delivery,
first class mail, telex or telecopier, addressed as follows:
If to BrokerWare:
BrokerWare, Inc.
4716 N. Main St.
Lisle, IL 60532
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Telecopy Number: 630-964-5593
With a copy to:
George M. Bradshaw
Huck, Bouma, Martin, Charlton & Bradshaw, P.C.
1755 S. Naperville Rd., Suite 200
Wheaton, IL 60187
If to Granite:
Mr. William Skip Wehner
Granite Financial, Inc.
6424 W. 91st Avenue
Westminster, CO 80030-2913
Telecopy Number: 303-650-4061
All such notices and communications shall be deemed to have been duly given
when delivered by hand, if personally delivered; three (3) business days after
deposit in any United States Post Office in the Continental United States,
postage prepaid, if mailed; when answered back, if telexed, and when receipt is
acknowledged, if telecopied.
1.1.4 Attorney Fees. In the event that a dispute arises with respect
to this Agreement, each party is responsible for its own legal expenses,
including, without limitation, reasonable attorney's fees and expenses,
incurred in ascertaining such party's rights or in preparing to enforce, or in
enforcing, such party's rights under this Agreement, whether or not it was
necessary for such party to institute suit.
1.1.5 Complete Agreement of the Parties. This Agreement, the
BrokerTrac Software Support Agreement attached hereto as Exhibit A (the
"Support Agreement"), the BrokerTrac Remote Software License Agreement attached
hereto as Exhibit B (the "Remote License") and the BrokerTrac Network Software
License Agreement attached hereto as Exhibit C (the "Network License") are the
complete agreement of the parties and they supersede any agreement that has
been made prior to this Agreement.
1.1.6 Assignment. This Agreement is of a personal nature and may not
be assigned without the prior written consent of the other party hereto, which
consent shall not be unreasonably withheld or delayed.
1.1.7 Binding. This Agreement shall be binding both of the parties
hereto and their successors and permitted assigns.
1.1.8 Number and Gender. Whenever the singular number is used in this
Agreement and
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<PAGE> 3
when required by the context, the same shall include the plural. The masculine
gender shall include the feminine and neuter genders, and the word "person"
shall include a corporation, firm, partnership, or other form of association.
1.1.9 Governing Law. The parties hereby expressly acknowledge and
agree that this Agreement is entered into in the State of Illinois and, to the
extent permitted by law, this Agreement shall be construed, and enforced in
accordance with the laws of the State of Illinois.
1.1.10 Failure to Object Not a Waiver. The failure of a party to
object to, or to take affirmative action with respect to, any conduct of the
other which is in violation of the terms of this Agreement shall not be
considered as a waiver of the violation or breach or of any future violation,
breach, or wrongful conduct.
1.1.11 Unenforceable Terms. Any provision hereof prohibited or
unenforceable under any applicable law of any jurisdiction shall as to such
jurisdiction be ineffective without affecting any other provision of this
Agreement. To the full extent, however, that the provisions of such applicable
law may be waived, they are hereby waived to the end that this Agreement be
deemed to be a valid and binding agreement enforceable in accordance with its
terms.
1.1.12 Execution in Counterparts. This Agreement may be executed in
several counterparts and when so executed shall constitute one agreement
binding on all the parties, notwithstanding that all the parties are not
signatories to the original and same counterpart.
1.1.13 Further Assurance. From time to time each party shall execute
and deliver such further instruments and shall take such other action as any
other party may reasonably request in order to discharge and perform their
obligations and agreements hereunder and to give effect to the intentions
expressed in this Agreement.
1.1.14 Incorporation by Reference. All exhibits referred to in this
Agreement and the Recitals are incorporated herein in their entirety by such
reference.
1.1.15 Cross-References. All cross-references in this Agreement,
unless specifically directed to another agreement or document, refer to
provisions in this Agreement, and shall not be deemed to be references to any
overall transaction or to any other agreements or documents.
1.1.16 Miscellaneous Provisions. The various headings and numbers
herein and the grouping of provisions of this Agreement into separate divisions
are for the purpose of convenience only and shall not be considered a part
hereof. The language in all parts of this Agreement shall in all cases be
construed in accordance to its fair meaning as if prepared by all parties to
the Agreement and not strictly for or against any of the parties.
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<PAGE> 4
2. General Scope.
Concurrent with the execution of this Agreement, Granite and BrokerWare
are entering into the Remote License and the Network License, whereby
BrokerWare is granting to Granite a non-exclusive license to use the software
described therein (the "Software"). The amounts to be paid by Granite to
BrokerWare under Section 4 of this Agreement constitutes consideration for this
Agreement, the Remote License and the Network License.
BrokerWare shall provide the following services to Granite:
a. Installation of the BrokerTrac Network Software for 25
workstations (Granite shall be responsible for installation of
the WinFrame server and NT clients for 25 workstations);
b. Modification of BrokerTrac Network and BrokerTrac Remote
according to Granite's requirements as detailed below:
1. Add to BrokerTrac Network a function to collect broker
applications from BrokerTrac Remote clients and export
appropriate data to Granite's F. Isaacs application as
well as place transaction in Granite's BrokerTrac
Network database.
2. Add to BrokerTrac Network a function to allow brokers
access to status and notes on their application.
3. Add a BrokerTrac Network function to allow brokers to
download their lease documentation and print onsite.
4. Add to BrokerTrac Network a function to allow brokers
to update automatically buy rates from Granite for
their Lease Pricing Module.
5. Add to BrokerTrac Network a function to check decisions
made by F. Isaacs system and update status of
transactions in Granite BrokerTrac database.
c. Up to 40 hours of training of Granite's personnel at Granite's
offices in the period immediately following installation of
the Software; the fee for training is $40 per hour and is in
addition to any other fees paid pursuant to this Agreement or
any exhibit thereto (training in excess of 40 hours will be
billed at a rate of $120 per hour);
d. Other general advice, services and project management to ensure
that the Software is properly installed and fully operational
on Granite's system;
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e. Assistance with the configuration of the WinFrame server, when
needed; and
f. Preparation, configuration and delivery of ten (10) BrokerTrac
Remote client pieces.
The Software shall be fully installed and operational (the "Completion Date")
on Granite's system on or prior to January 31, 1997. All of BrokerWare's
services shall be personally provided by BrokerWare and its employees.
3. Necessary Services; Software Evaluation Period.
3.1 Performance of Duties. BrokerWare agrees that it shall perform at
all times faithfully, industriously, and to the best of its ability,
experience, and talents all of the obligations and duties set forth under this
Agreement, the Support Agreement, the Remote Licenses and the Network License
and such additional duties that may be reasonably assigned to it hereunder or
thereunder and, shall devote such time to the performance of such obligations
and duties as may be necessary therefor.
3.2 Software Evaluation Period. To allow Granite a period of time
following the Completion Date to evaluate the Software for the purpose of
ensuring that such Software meets Granite's business needs, Granite shall have
the right to terminate this Agreement, the Remote License, the Network License
and the Support Agreement (collectively, the "Software Documents"), without
cause, upon notice given to BrokerWare within 30 days following the Completion
Date (the "Software Evaluation Period"). If Granite terminates the Software
Documents within the Evaluation Period, (i) Granite shall return all copies of
the Software to BrokerWare and (ii) Granite shall not be required to make the
final installment of the license fee.
4. Compensation.
In consideration for the services required of BrokerWare hereunder
and the licenses granted under the exhibits, Granite agrees to compensate
BrokerWare as follows:
4.1 License Fees. The license fees for the BrokerTrac Network and
BrokerTrac Remotes are as follows:
<TABLE>
<S> <C> <C>
One BrokerTrac Network $ 5,500.00 - $2,750.00
Ten BrokerTrac Remotes ($500 per Remote) $ 5,000.00 - $2,500.00
----------
Total license costs: $10,500.00
</TABLE>
Payment of the license fees shall be as follows:
$5,250.00 due upon execution of this Agreement, with the remaining
$5,250.00 due upon completion of the Software Evaluation Period.
5
<PAGE> 6
4.2 Fees for Services. For purposes of this paragraph, "services" refers
to the installation of the BrokerTrac Network, software development, and any
project management and consulting services provided. All services will be billed
at an hourly rate of $120 per hour, subject to an overall cap on fees under
this paragraph 4.2 of $12,840.00. An advance payment of $4,000 shall be paid
upon execution of this Agreement, which advance payment shall be applied
against the hourly fees incurred hereunder. Fees earned under this paragraph
4.2 shall be invoiced on a biweekly basis and payment shall be made within 10
days following receipt of such invoice.
4.3 Expense Reimbursement. Granite shall reimburse BrokerWare for any
out-of-pocket expenses incurred in connection with the performance of services
required of BrokerWare hereunder. Out-of-pocket expenses include normal and
reasonable lodging, transportation and meal expenses (but does not include any
overhead, labor or similar charges). Examples of other types of expenses are
phone calls, shipping charges, and miscellaneous hardware. If any one item of
expense may exceed $200, BrokerWare will call Granite for authorization before
incurring the expense.
5. Independent Contractor.
In performing services and duties hereunder, BrokerWare and any person
acting on BrokerWares's behalf shall do so as independent contractors and are
not, and are not to be deemed, employees or agents of Granite or any other
person acting on behalf of Granite. BrokerWare shall be responsible for meeting
any legal requirements imposed on BrokerWare or any person acting on its behalf
as a result of this Agreement, including but not limited to the filing of
income tax returns and the payment of taxes; and BrokerWare agrees to indemnify
Granite for the failure to do so, if Granite is required to make any such
payment otherwise due by BrokerWare or any such person acting on BrokerWare's
behalf.
6. Remedy for Breach.
BrokerWare acknowledges that the services to be rendered by it hereunder
are of a special, unique and extraordinary character which gives this Agreement
a peculiar value to Granite, the loss of which cannot be reasonably or
adequately compensated in damages in an action at law, and that a breach by
BrokerWare of this Agreement shall cause Granite irreparable injury. Therefore,
BrokerWare expressly acknowledges that this Agreement may be enforced against
it by injunction and other equitable remedies, without bond. Such relief shall
not be exclusive, but shall be in addition to any other rights or remedies
Granite may have for such breach.
Granite acknowledges that the obligations to be performed by it hereunder
are of a special, unique and extraordinary character which gives this Agreement
a peculiar value to BrokerWare, the loss of which cannot be reasonably or
adequately compensated in damages in an action at law, and that a breach by
Granite of this Agreement shall cause BrokerWare irreparable injury. Therefore,
Granite expressly acknowledges that this Agreement may be enforced against it
by injunction and other equitable remedies, without bond. Such relief shall not
be exclusive, but shall be in addition to any other rights or remedies
BrokerWare may have for such breach.
6
<PAGE> 7
7. Termination.
7.1 Causes for Termination. This Agreement shall terminate immediately
upon the occurrence of any one of the following events:
7.1.1 The expiration of the term hereof;
7.1.2 The written agreement of the parties;
7.1.3 BrokerWare's breach of its duties hereunder, unless waived by
Granite or cured by BrokerWare within 30 days after Granite's having given
written notice thereof to BrokerWare;
7.1.4 Granite's breach of its duties hereunder, unless waived by
BrokerWare, or cured by Granite within 30 days after BrokerWare's having given
written notice thereof to Granite.
Termination of this Agreement shall not terminate or affect either parties
rights and obligations under the Support Agreement, Remote License or Network
License, all of which shall survive any termination or expiration of this
Agreement. Termination of this Agreement shall not affect any obligations or
liabilities of the parties incurred or arising prior to such termination.
8. Source Code. Upon the occurrence of any of the following events, BrokerWare
shall provide Granite with a complete copy of the source and object
codes for the Software (i) BrokerWare sells all or substantially all of its
assets to a person or entity engaged in the leasing business (a "Leasing
Acquiror") or more than 10% of the outstanding stock of BrokerWare is sold to
or acquired by a Leasing Acquiror in one or a series of transactions or (ii) an
adjudication of BrokerWare as a bankrupt. In the event of a transfer of source
code and/or object code under this paragraph, Granite's interest in the source
and/or object codes shall be a perpetual, nonexclusive license, which will
preclude Granite, or its affiliates, from disclosure of the source or object
code or from the sale, license or transfer of the software.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first written above.
GRANITE FINANCIAL, INC.
By: /s/ William Wehner
------------------------------------
Title: V.P. Operations
------------------------------------
BROKERWARE
By: /s/ Dick Farmer
------------------------------------
Title: Vice President
------------------------------------
7
<PAGE> 8
EXHIBIT A
BROKERWARE, INC.
SOFTWARE, NETWORKING, AND CONSULTING FOR the SMALL
TICKET LEASING INDUSTRY
4716 N Main St. Lisle, IL 60532
Telephone/Fax 708-964-8154
- -------------------------------------------------------------------------------
BROKERTRAC SOFTWARE SUPPORT AGREEMENT
This Software Support Agreement (the "Agreement") is made and entered into
as of this __ day of December 1996. BrokerWare, Inc. ("BrokerWare") will
provide Granite Financial, Inc. ("Granite") service and maintenance for the
Granite site BrokerTrac Network system on the following basis:
1. Telephone support (via toll call) for Granite employees.
2. For the services to be rendered by BrokerWare hereunder and as
additional consideration for the licenses granted to Granite under
the BrokerTrac Network Software License Agreement, Granite shall pay
to BrokerWare an amount equal to $1.00 per lease application inputted
by Granite or its brokers into the Software. There shall be no lease
application charge on applications which are data transfers from past
systems, and such data exists on the first day of the first term of
this Agreement. Amounts accrued hereunder shall be paid on a
quarterly basis at the end of each quarter.
3. Billings shall be done by BrokerWare on a quarterly basis. Granite
shall notify BrokerWare of the total applications inputted for each
quarter within 15 days following the end of such quarter. BrokerWare
shall periodically monitor the number of inputted applications,
either electronically or otherwise. Granite shall disclose such
information and documentation of Granite or its affiliates as
BrokerWare shall reasonably require to verify the accuracy of the
information required to compute BrokerWare's fees.
4. BrokerWare shall provide Granite with free updates or upgrades of the
regular BrokerTrac Network software while this Agreement is in effect.
5. Upon request by Granite, BrokerWare shall also provide Granite with
programming services at BrokerWare's standard rates for such
services. Fifty percent of all amounts paid by Granite under this
Agreement shall be credited for use by Granite
8
<PAGE> 9
against such programming charges. For example, if Granite pays BrokerWare
$10,000 under this Agreement for the first Year, Granite shall have a
credit of $5,000 for use against programming charges. Any programming
charges in excess of the credit shall be paid by Granite. Programming
credits shall be computed on an annual basis, and the amount of such
credit not used by the completion of the first quarter of the year
following of the end of the year, shall be forfeited.
6. Granite shall pay to BrokerWare the sum of $3,000.00 upon execution of
this Agreement, such sum estimating the approximate charge Granite will
incur for lease applications inputted during the first quarter of this
Agreement. At the close of each quarter, BrokerWare shall invoice or
credit Granite as appropriate to reflect the actual number of applications
inputted by Granite or its brokers. Granite will then be invoiced for the
actual number of applications inputted during the previous quarter, as an
estimated charge for Granite's inputting for the current quarter. At the
end of each such quarter, a like adjustment and estimation will be made.
7. Termination of this Agreement shall terminate the BrokerTrac Network
Software License Agreement.
The initial term of this Agreement shall commence as of the date first set
forth above and shall terminate one year thereafter. The term of this Agreement
shall automatically extend for additional one year periods at the end of the
initial term or any extended term unless terminated by Granite upon notice to
BrokerWare given 30 days prior to the expiration of the term.
GRANITE FINANCIAL, INC.
By: /s/ William Wehner
------------------------------
Title: V.P. Operations
---------------------------
BROKERWARE, INC.
By: /s/ Dick Farmer
------------------------------
Title: Vice President
---------------------------
9
<PAGE> 10
EXHIBIT B
BROKERWARE, INC.
BROKERTRAC REMOTE SOFTWARE LICENSE AGREEMENT
LICENSE: BrokerWare, Inc. ("BrokerWare") Grants to Granite Financial Inc.
("Granite") The non-exclusive right to install/use the enclosed BrokerTrac
Remote software programs ("Software"). Granite will not use, copy, modify,
rent, sell or transfer the Software or any portion thereof except as provided
in this Agreement.
Granite may:
1. Install/use the Software, on ten (10) separate workstations not
connected to a network; and
2. Copy the Software solely for backup or archival purposes.
RESTRICTIONS:
Granite will not:
1. Sub-license the Software.
2. Reverse engineer, de-compile, or disassemble the Software;
3. Copy the Software, in whole or in part, except as provided in this
Agreement.
TRANSFER: Granite may transfer the Software to another party if the receiving
party agrees to the terms of this Agreement and Granite retains no copies of
the Software and accompanying documentation. Transfer of the Software
terminates Granite's right to use the Software.
OWNERSHIP AND COPYRIGHT OF THE SOFTWARE: Title to the Software and all copies
thereof remain with BrokerWare. The Software is copyrighted and is protected by
United States and international copyright laws. Granite will not remove the
copyright notice from the Software. Granite agrees to prevent any unauthorized
copying of the Software.
LIMITED WARRANTY: BrokerWare warrants that it has the right to license Granite
to use the Software and such Software does not infringe on the rights of any
third parties. The Software is provided "AS IS." BrokerWare warrants that the
media on which the Software is furnished will be free from defects in material
and workmanship for a period of one (1) year from the date of purchase. Upon
return of such defective media, BrokerWare's entire liability and Granite's
exclusive remedy shall be the replacement of the Software.
THE PREVIOUS WARRANTIES ARE THE ONLY WARRANTIES OF ANY KIND EITHER EXPRESS OR
IMPLIED INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR
PURPOSE.
10
<PAGE> 11
LIMITATION OF LIABILITY: BROKERWARE SHALL NOT BE LIABLE FOR ANY LOSS OF
PROFITS, LOSS OF USE, LOSS OF DATA, INTERRUPTIONS OF BUSINESS, NOR FOR INDIRECT,
SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND WHETHER UNDER THIS
AGREEMENT OR OTHERWISE, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
AUDIT: BrokerWare, at its own cost, reserves the right to have audits conducted
to verify Granite's compliance with this Agreement.
TERM AND TERMINATION OF THIS LICENSE: This license shall continue in full force
and effect for so long as the BrokerTrac Software Support Agreement between
Granite and BrokerWare remains in effect. BrokerWare may terminate this license
at any time if Granite is in breach of any of its terms and conditions and
fails to cure such breach within 30 days following notice from BrokerWare. Upon
termination, Granite will immediately destroy the Software or return all copies
of the Software and documentation to BrokerWare.
EXPORT LAWS: Granite agrees that the distribution and export/re-export of the
Software shall be in compliance with the laws, regulation, orders or other
restrictions of the US Export Administration Regulations.
APPLICABLE LAW: This Agreement is governed by the laws of the State of Illinois
and the United States, including patent and copyright laws. Any claim arising
out of this Agreement will be brought in Dupage County, Illinois.
ADDITIONAL WORKSTATIONS: Granite may install and use the Software on additional
workstations (in excess of the authorization for ten workstations set forth
above) upon payment of a fee to BrokerWare in an amount determined based on the
number of additional workstations as follows:
Number of Additional Amount of Fee
WorkStations Added per Additional Workstation
1 through 10 $500.00
11 though 29 $400.00
30 or more $300.00
GRANITE FINANCIAL, INC.
By: /s/ William Wehner
------------------------------
Title: V.P. Operations
---------------------------
BROKERWARE, INC.
By: /s/ Dick Farmer
------------------------------
Title: Vice President
---------------------------
11
<PAGE> 12
EXHIBIT C
BROKERWARE, INC.
BROKERTRAC NETWORK SOFTWARE LICENSE AGREEMENT
LICENSE: BrokerWare, Inc. ("BrokerWare") grants to Granite Financial, Inc.
("Granite") the non-exclusive right to install/use the enclosed BrokerTrac
Network software programs ("Software"). Granite will not use, copy, modify,
rent, sell or transfer the Software or any portion thereof except as provided
in this Agreement.
Granite may:
1. Install/use the Software, on one PC network;
2. Copy the Software solely for backup or archival purposes.
RESTRICTIONS:
Granite will not:
1. Sub-license the Software.
2. Reverse engineer, de-compile, or disassemble the Software;
3. Copy the Software, in whole or in part, except as provided in this
Agreement.
TRANSFER: Granite may transfer the Software to another party if the receiving
party agrees to the terms of this Agreement and Granite retains no copies of
the Software and accompanying documentation. Transfer of the Software
terminates Granite's right to use the Software.
OWNERSHIP AND COPYRIGHT OF THE SOFTWARE: Title to the Software and all copies
thereof remain with BrokerWare. The Software is copyrighted and is protected by
United States and international copyright laws. Granite will not remove the
copyright notice from the Software. Granite agrees to prevent any unauthorized
copying of the Software.
LIMITED WARRANTY: BrokerWare warrants that it has the right to license Granite
to use the Software and such Software does not infringe on the rights of any
third parties. The Software is provided "AS IS." BrokerWare warrants that the
media on which the Software is famished will be free from defects in material
and workmanship for a period of one (1) year from the date of purchase. Upon
return of such defective media, BrokerWare's entire liability and Granite's
exclusive remedy shall be the replacement of the Software.
THE PREVIOUS WARRANTIES ARE THE ONLY WARRANTIES OF ANY KIND EITHER EXPRESS OR
IMPLIED INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR
PURPOSE.
12
<PAGE> 13
LIMITATION OF LIABILITY: BROKERWARE SHALL NOT BE LIABLE FOR ANY LOSS OF
PROFITS, LOSS OF USE, LOSS OF DATA, INTERRUPTIONS OF BUSINESS, NOR FOR INDIRECT,
SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND WHETHER UNDER THIS
AGREEMENT OR OTHERWISE, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
AUDIT: BrokerWare, at its own cost, reserves the right to have audits conducted
to verify Granite's compliance with this Agreement.
TERM AND TERMINATION OF THIS LICENSE: This license shall continue in full force
and effect for so long as the BrokerTrac Software Support Agreement between
Granite and BrokerWare remains in effect. BrokerWare may terminate this license
at any time if Granite is in breach of any of its terms and conditions and
fails to cure such breach within 30 days following notice from BrokerWare. Upon
termination, Granite will immediately destroy the Software or return all copies
of the Software and documentation to BrokerWare.
EXPORT LAWS: Granite agrees that the distribution and export/re-export of the
Software shall be in compliance with the laws, regulation, orders or other
restrictions of the US Export Administration Regulations.
APPLICABLE LAW: This Agreement is governed by the laws of the State of Illinois
and the United States, including patent and copyright laws. Any claim arising
out of this Agreement will be brought in Dupage County, Illinois.
GRANITE FINANCIAL, INC.
By: /s/ William Wehner
------------------------------
Title: V.P. Operations
---------------------------
BROKERWARE, INC.
By: /s/ Dick Farmer
------------------------------
Title: Vice President
---------------------------
13
<PAGE> 1
EXHIBIT 22
LIST OF SUBSIDIARIES
1. GF Funding Corp. I
2. GF Funding Corp. II
3. GF Funding Corp. III
4. Granite Financial Acquisition Corp. I
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have issued our report dated August 9, 1996 (except for Note 9, as to which
the date is September 27, 1996 and except for Note 6 as to which the date is
October 23, 1996), accompanying the consolidated financial statements of
Granite Financial, Inc. and Subsidiaries contained in the Registration
Statement and Prospectus. We consent to the use of the aforementioned report in
the Registration Statement and Prospectus, and to the use of our name as it
appears under the caption "Experts."
/s/ EHRHARDT KEEFE STEINER & HOTTMAN PC
Ehrhardt Keefe Steiner & Hottman PC
Denver, Colorado
June 14, 1997
