<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 1997
REGISTRATION NO. 333-22629
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
FIRST SIERRA FINANCIAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 6159 76-0438432
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
TEXAS COMMERCE TOWER, SUITE 7050
600 TRAVIS STREET
HOUSTON, TEXAS 77002
(713) 221-8822
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
THOMAS J. DEPPING
PRESIDENT
TEXAS COMMERCE TOWER, SUITE 7050
600 TRAVIS STREET
HOUSTON, TX 77002
(713) 229-6800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
Copies to:
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T. MARK KELLY SCOTT N. GIERKE
VINSON & ELKINS L.L.P. MCDERMOTT, WILL & EMERY
2300 FIRST CITY TOWER, 1001 FANNIN 227 W. MONROE
HOUSTON, TX 77002-6760 CHICAGO, IL 60606
(713) 758-4592 (312) 984-7521
(713) 615-5531(FAX)
</TABLE>
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
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. [ ]
---------------------
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 Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE> 2
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.
SUBJECT TO COMPLETION, DATED APRIL 15, 1997
PROSPECTUS
FIRST SIERRA FINANCIAL, INC.
2,000,000 Shares of Common Stock
All of the shares of common stock, $.01 par value per share (the "Common
Stock"), offered hereby (the "Offering") are being sold by First Sierra
Financial, Inc. (together with its subsidiaries, the "Company"). It is currently
estimated that the price of the Common Stock to be sold in the Offering will be
between $8.00 and $10.00 per share.
Prior to the Offering, there has been no public market for the Common
Stock. See "Underwriting" for information relating to the factors to be
considered in determining the initial public offering price. The Common Stock
has been approved for quotation on the Nasdaq National Market under the symbol
"FSFH."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 OF THIS PROSPECTUS FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
---------------------
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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=============================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------
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Per Share......................... $ $ $
- -------------------------------------------------------------------------------------------------------------
Total (3)......................... $ $ $
=============================================================================================================
</TABLE>
(1) See "Underwriting" for information regarding indemnification of the
Underwriters.
(2) Before deducting expenses payable by the Company estimated to be $740,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase from the Company up to 300,000
additional shares of Common Stock solely to cover over-allotments, if any.
To the extent that the option is exercised, the Underwriters will offer the
additional shares at the Price to Public shown above. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions 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 to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made against
payment therefor at the offices of Friedman, Billings, Ramsey & Co., Inc.,
Arlington, Virginia, the representative of the several Underwriters (the
"Representative"), or in book entry form, through the book entry facilities of
the Depository Trust Company on or about , 1997.
---------------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is , 1997.
<PAGE> 3
AVAILABLE INFORMATION
The Company has not previously been subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended. The Company has filed with
the Securities and Exchange Commission (the "Commission") a Registration
Statement on Form S-1 (the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act") with respect to the offer and sale of
Common Stock pursuant to this Prospectus. This Prospectus, filed as a part of
the Registration Statement, does not contain all of the information set forth in
the Registration Statement or the exhibits and schedules thereto in accordance
with the rules and regulations of the Commission and reference is hereby made to
such omitted information. Statements made in this Prospectus concerning the
contents of any contract, agreement or other document filed as an exhibit to the
Registration Statement are summaries of the terms of such contracts, agreements
or documents and are not necessarily complete. Reference is made to each such
exhibit for a more complete description of the matters involved and such
statements shall be deemed qualified in their entirety by such reference. The
Registration Statement and the exhibits and schedules thereto filed with the
Commission may be inspected, without charge, and copies may be obtained at
prescribed rates, at the public reference facility maintained by the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at 7 World Trade Center, 13th Floor,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60621-2511. The Registration Statement and other
information filed by the Company with the Commission are also available at the
web site maintained by the Commission on the World Wide Web at
http://www.sec.gov. For further information pertaining to the Company and the
Common Stock offered by this Prospectus, reference is made to the Registration
Statement.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by independent auditors and
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial statements.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING
TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE
PURCHASERS OF SHARES OF COMMON STOCK OFFERED HEREBY SHOULD CAREFULLY CONSIDER
THE FACTORS SET FORTH UNDER "RISK FACTORS." UNLESS OTHERWISE SPECIFIED, THE
INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS DO NOT EXERCISE THE
OVER-ALLOTMENT OPTION DESCRIBED HEREIN UNDER "UNDERWRITING." UNLESS OTHERWISE
INDICATED, THE INFORMATION IN THIS PROSPECTUS REFLECTS A 5.47-FOR-1 STOCK SPLIT
EFFECTED ON FEBRUARY 27, 1997. AS USED IN THIS PROSPECTUS, UNLESS THE CONTEXT
INDICATES OTHERWISE, THE TERMS "FIRST SIERRA" AND THE "COMPANY" REFER TO FIRST
SIERRA FINANCIAL, INC. AND ITS CONSOLIDATED SUBSIDIARIES.
THE COMPANY
The Company is a specialized finance company that acquires and originates,
sells and services equipment leases. The underlying leases financed by the
Company relate to a wide range of equipment, including computers and
peripherals, computer software, medical, dental and diagnostic,
telecommunications, office, automotive servicing, hotel security, food services,
tree service and industrial, as well as specialty vehicles. The equipment
generally has a purchase price of less than $250,000 (with an average of
approximately $17,000), and thus the Company's leases are commonly referred to
as "small ticket leases." The Company initially funds the acquisition or
origination of its leases through its warehouse facilities and, upon achieving a
sufficient portfolio size, sells such receivables in the public and private
markets, principally through its securitization program. The Company focuses on
maximizing the spread between the yield received on its leases and its cost of
funds by obtaining favorable terms on its warehouse facilities, securitizations
and other structured finance transactions.
The Company has established strategic alliances with a network of
independent leasing companies, lease brokers and equipment vendors, each of
which acts as a source from which the Company obtains access to equipment leases
(collectively, "Sources"). The Company customizes lease financing products to
meet the specific equipment financing needs of its Sources and in many cases
provides such Sources with servicing and technological support via on-line
connections to the Company's state-of-the-art computer system.
The Company views acquisitions of equipment leasing companies as a
fundamental part of its growth strategy. During 1996, the Company acquired
General Interlease Corporation ("GIC") and Corporate Capital Leasing Group, Inc.
("CCL"), and in February 1997, the Company acquired Lease Pro, Inc. ("Lease
Pro"). The Company also has an agreement to acquire Heritage Credit Services,
Inc. ("Heritage"), which acquisition (the "Heritage Acquisition") is expected to
close concurrently with the Offering. The Company's recent acquisitions have
substantially increased the Company's ability to generate lease origination
volume and have allowed it to introduce new programs and enter new markets.
After completion of the pending Heritage Acquisition, the Company will have
offices in eight states. The Company intends to continue to seek acquisition
opportunities in additional markets to further expand its business.
The Company commenced operations in June 1994 and initially developed a
program to purchase leases from leasing companies which had the ability to
originate significant lease volumes and were willing and able to provide credit
protection to the Company (through recourse and purchase price holdback
features) and perform certain servicing functions on an ongoing basis with
respect to such leases. This program, referred to by the Company as its "Private
Label" program, was designed to provide the Company with access to high volumes
of leases eligible for the securitization market, while minimizing the risk of
loss to the Company. The Company has experienced significant growth in its
Private Label program since inception, with the volume of leases purchased
increasing from $4.5 million in 1994, to $65.2 million in 1995, to $161.1
million in 1996.
In 1996, as part of its growth strategy, the Company began targeting
additional sources of lease volume from small ticket lease brokers which were
unwilling or unable to provide the credit protection or perform the servicing
functions required under the Private Label program and through relationships
with equipment vendors. The Company established its "Broker" and "Vendor"
programs in 1996 through the strategic acquisitions of GIC and CCL. The
acquisition of Lease Pro (the "Lease Pro Acquisition") and the pending
3
<PAGE> 5
Heritage Acquisition are expected to provide the Company with additional broker
and vendor lease volume. On a pro forma basis, assuming the acquisitions of GIC,
CCL, Lease Pro and Heritage occurred on January 1, 1996, the volume of leases
originated by the Company during 1996 pursuant to its Broker and Vendor programs
would have been $64.0 million and $66.5 million, respectively, and the weighted
average yield on such leases (net of brokers' fees) would have been 14.23% and
17.77%, respectively. Management intends to continue to pursue opportunities to
acquire additional small ticket leasing companies with broker and vendor
operations and believes that a larger percentage of the Company's revenues in
the future will be derived from broker and vendor Sources.
In addition to its Private Label, Broker and Vendor programs, the Company
has in the past generated, and may from time to time in the future generate,
gain on sale income through the acquisition of lease portfolios and the
subsequent sale of such portfolios at a premium.
The Company's management team has extensive experience in lease financing
and in securitizations and other structured finance transactions. Thomas J.
Depping, Chief Executive Officer of the Company, has over 15 years of experience
in the leasing and structured finance industries, including 11 years with
SunAmerica Financial Resources and its predecessor. Prior to founding the
Company, Mr. Depping was President of SunAmerica Financial Resources, the
equipment leasing and financial division of Sun America, Inc. Sandy B. Ho,
Executive Vice President and Chief Financial Officer of the Company, has over 15
years of experience in the leasing and structured finance industries, most
recently as Managing Director of SunAmerica Corporate Finance. Robert H. Quinn,
Jr., Executive Vice President and Chief Credit Officer of the Company, has over
23 years of leasing experience, most recently as Manager of AT&T Capital's
private label program. Upon completion of the Heritage Acquisition, Oren M. Hall
will become an Executive Vice President of the Company. Mr. Hall has 23 years of
experience in the leasing industry and during 1996 served as President of the
United Association of Equipment Lessors.
STRATEGY
The Company's business strategy is to continue to significantly expand its
business through internal growth as well as selective acquisitions of equipment
leasing companies and to sell the leases it acquires or originates through
securitizations and other structured finance techniques. Key elements of this
strategy include:
Pursuing Acquisitions. The Company believes that significant opportunities
exist to acquire leasing companies at prices the Company considers attractive.
The Company seeks to identify and acquire leasing companies in key geographic
regions that can be integrated into the Company's existing operations to expand
its business with minimal incremental expense. By acquiring and consolidating
these companies, the Company believes it can significantly increase revenues and
profit margins, utilizing the Company's relatively lower cost of funds and
advanced technological capabilities.
Expanding its Existing Business. The Company intends to continue to rely on
the sophisticated skills of its management team to develop new products with
customized terms to increase volumes from existing and new Sources of equipment
leases. The Company also intends to expand its existing sales force of 34
persons by attracting qualified and experienced individuals who can identify
Sources on a regional and national basis. The Company will continue to seek to
differentiate itself from its competition by emphasizing high levels of customer
service and technological support to its Sources.
Focusing on Structured Finance Transactions. The Company intends to
continue to focus on securitizations and other similar structured finance
transactions as vehicles for sale of the Company's lease portfolios.
Management's objective is to continue to improve the efficiency and execution of
these transactions by minimizing the Company's cost of funds and capital outlay
associated with financing its leases, while maximizing the number of leases that
qualify for funding and subsequent securitization. Management believes that its
significant experience in asset-backed securitization transactions and extensive
relationships with financing sources will allow the Company to continue to
achieve a low cost of funds and increased profitability upon securitization of
its equipment leases.
4
<PAGE> 6
Utilizing its Advanced Technology and Servicing Capabilities. The Company
intends to continue to utilize and further enhance its state-of-the-art data
processing systems to manage the high volume of information associated with
originating and servicing its leases. Management believes it has developed a
technologically advanced servicing system with excess system capacity which it
intends to utilize to decrease the Company's per lease servicing cost as its
lease volume and number of Sources increase.
Employing Conservative Credit Guidelines. Management believes that its low
level of credit losses since inception is due primarily to its credit
enhancement arrangements with its Private Label Sources and its conservative
underwriting guidelines. The Company intends to continue to monitor the credit
quality of its portfolio and apply its conservative underwriting standards to
minimize credit risk.
The Company was incorporated in Delaware on June 3, 1994. Its principal
executive office is located at 600 Travis Street, Suite 7050, Houston, Texas
77002, and its telephone number is (713) 221-8822.
THE OFFERING
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Common Stock offered by the Company............. 2,000,000 shares
Common Stock to be outstanding after the
Offering...................................... 8,140,754 shares(1)(2)
Use of Proceeds................................. To repay all outstanding amounts under the
Subordinated Note (as defined herein) and a portion
of the amounts outstanding under one of the
Company's warehouse facilities, and to fund the
cash portion of the consideration in the Heritage
Acquisition. See "Use of Proceeds."
Proposed Common Stock Nasdaq National Market
symbol........................................ FSFH
</TABLE>
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(1) Excludes (i) 1,010,762 shares of Common Stock issuable upon exercise of
options to be granted under the Company's 1997 Stock Option Plan (as defined
herein) concurrently with the Offering, (ii) 310,248 shares of Common Stock
(subject to adjustment for stock dividends, subdivisions or split-ups, or
reclassifications) issuable upon conversion of 56,718 outstanding shares of
the Company's Series A Preferred Stock, par value $.01 per share (the
"Series A Preferred Stock"), (iii) 238,990 shares of Common Stock (subject
to adjustment for stock dividends, subdivisions or split-ups, or
reclassifications) issuable upon conversion of 43,691 outstanding shares of
the Company's convertible redeemable Series B Preferred Stock, par value
$.01 per share (the "Series B Preferred Stock" and, together with the Series
A Preferred Stock, the "Preferred Stock"), and (iv) 198,397 shares of Common
Stock issuable upon exercise of outstanding warrants held by First Union
National Bank of North Carolina (the "Warrants"). See "Management -- Stock
Option Plan" and "Description of Capital Stock."
(2) Includes 444,444 shares of Common Stock to be issued to Oren M. Hall, the
sole shareholder of Heritage, upon consummation of the Heritage Acquisition
(assuming an initial public offering price of $9.00 per share). See
"Business -- Recent and Pending Acquisitions."
5
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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth summary consolidated financial and operating
data of the Company as of the dates and for the periods indicated. The summary
consolidated financial data, as of December 31, 1994 and for the period from
inception (June 3, 1994) to December 31, 1994 and as of and for the years ended
December 31, 1995 and 1996, have been derived from financial statements audited
by Arthur Andersen LLP, independent public accountants. The summary pro forma as
adjusted statement of operations and operating data assume (i) that the
acquisitions of GIC, CCL, Lease Pro and Heritage and (ii) the issuance and sale
of 2,000,000 shares of Common Stock offered hereby at an assumed price of $9.00
per share and the application of the net proceeds therefrom as described in "Use
of Proceeds" occurred on January 1, 1996. The summary pro forma as adjusted
balance sheet data assume (i) that the acquisitions of Lease Pro and Heritage
and (ii) the issuance and sale of 2,000,000 shares of Common Stock offered
hereby at an assumed price of $9.00 per share and the application of the net
proceeds therefrom as described in "Use of Proceeds" occurred on December 31,
1996. The pro forma as adjusted financial and operating data are not necessarily
indicative of the results the Company would have obtained had these events
actually occurred or of the Company's future results of operations. The summary
consolidated financial and operating data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Consolidated Financial Statements of the Company
and related notes thereto, the Unaudited Pro Forma Consolidated Financial
Statements of the Company and related notes thereto and the financial statements
of Heritage and CCL and related notes thereto included elsewhere herein.
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PERIOD FROM YEAR ENDED PRO FORMA
INCEPTION TO DECEMBER 31, AS ADJUSTED
DECEMBER 31, ------------------- DECEMBER 31,
1994 1995 1996 1996
------------ ------- ------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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STATEMENT OF OPERATIONS DATA:
Revenues:
Interest income........................................... $ 181 $ 3,053 $ 6,323 $ 8,916
Gain on sale of lease financing receivables............... -- 3,259(1) 3,456(2) 6,731
Servicing income.......................................... 6 323 1,050 1,050
Other income.............................................. -- 16 535 8,124
------- ------- ------- --------
Total revenues...................................... 187 6,651 11,364 24,821
Expenses:
Interest expense.......................................... 157 2,616 5,014 5,124
Salaries and benefits..................................... 312 1,346 1,987 5,413
Provision for credit losses............................... 28 392 537 1,183
Depreciation and amortization............................. 6 100 286 857
Other general and administrative.......................... 522 803 1,531 7,742
------- ------- ------- --------
Total expenses...................................... 1,025 5,257 9,355 20,319
Net income (loss) before provision (benefit) for income
taxes..................................................... (838) 1,394 2,009 4,502
Provision (benefit) for income taxes........................ (323) 569 792 1,789
------- ------- ------- --------
Net income (loss)........................................... (515) 825 1,217 2,713
Preferred stock dividends................................... -- -- 60 152
------- ------- ------- --------
Net income (loss) allocated to common stock................. $ (515) $ 825 $ 1,157 $ 2,561
======= ======= ======= ========
Net income (loss) per common share(3)....................... $ (.08) $ .13 $ .19 $ .30
======= ======= ======= ========
Shares used in computing net income (loss) per common
share(3).................................................. 6,308 6,436 5,991 8,436
BALANCE SHEET DATA (AT PERIOD END):
Assets:
Lease financing receivables, net.......................... $29,856 $67,322 $61,270 $ 81,347
Investment in Trust Certificates.......................... -- -- 9,534 9,534
Cash and cash equivalents................................. 2,305 876 2,598 449
Goodwill and other intangible assets, net................. -- -- 3,615 8,241
Furniture and equipment, net.............................. 130 262 1,049 1,453
Other assets.............................................. 1,261 884 1,276 2,807
------- ------- ------- --------
Total assets........................................ $33,552 $69,344 $79,342 $103,831
======= ======= ======= ========
Liabilities and Stockholders' Equity:
Warehouse credit facilities............................... $23,437 $55,827 $52,380 $ 62,681
Subordinated note payable................................. 9,000 9,000 9,000 1,000
Other liabilities......................................... 630 3,207 11,818 14,006
------- ------- ------- --------
Total liabilities................................... 33,067 68,034 73,198 77,687
Redeemable preferred stock................................ -- -- 3,890 3,890
Stockholders' equity...................................... 485 1,310 2,254 22,254
------- ------- ------- --------
Total liabilities and stockholders' equity.......... $33,552 $69,344 $79,342 $103,831
======= ======= ======= ========
</TABLE>
(Footnotes on following page)
6
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PERIOD FROM YEAR ENDED PRO FORMA
INCEPTION TO DECEMBER 31, AS ADJUSTED
DECEMBER 31, ------------------- DECEMBER 31,
1994 1995 1996 1996
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(DOLLARS IN THOUSANDS)
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OPERATING DATA:
Lease financing receivables acquired and originated:
Private Label
Number.................................................. 123 2,733 10,988 10,245(4)
Average Interest Rate................................... 9.92% 9.78% 9.45% 9.50%(4)
Principal Amount........................................ $ 4,492 $65,244 $161,137 $145,697(4)
Broker
Number(5)............................................... -- -- 371 2,463
Average Interest Rate................................... --% --% 14.07% 14.23%
Principal Amount........................................ $ -- $ -- $ 10,543 $ 64,019
Vendor
Number(5)............................................... -- -- 203 2,364
Average Interest Rate................................... --% --% 16.09% 17.77%
Principal Amount........................................ $ -- $ -- $ 7,526 $ 66,465
Total
Number.................................................. 123 2,733 11,562 15,072
Average Interest Rate................................... 9.92% 9.78% 10.00% 12.59%
Principal Amount........................................ $ 4,492 $65,244 $179,206 $276,181
Leases Portfolio Serviced(6):
Leases Serviced for Others
Number.................................................. 153 159 8,476
Principal Amount........................................ $10,687 $ 9,675 $157,078
Servicing Fee Income.................................... $ 6 $ 323 $ 1,050
Total Leases Serviced
Number.................................................. 1,551 3,026 13,967
Principal Amount........................................ $40,543 $77,204 $217,283
Credit Quality Statistics:
Delinquencies (at period end)
Gross Lease Receivables Serviced and Owned.............. $ 5,784 $83,687 $257,234
31-60 days.............................................. --% 2.53% 2.40%
61-90 days.............................................. --% 0.45% 0.78%
91+ days................................................ --% 0.08% 0.33%
------- ------- --------
Total delinquencies................................. --% 3.06% 3.51%
Net Charge-offs
Private Label
Principal Amount...................................... $ -- $ -- $ 25
Net Charge-offs as a % of average receivables
outstanding......................................... --% --% 0.02%
Broker(5)
Principal Amount...................................... $ -- $ -- $ --
Net Charge-offs as a % of average receivables
outstanding......................................... --% --% --%
Vendor(5)
Principal Amount...................................... $ -- $ -- $ --
Net Charge-offs as a % of average receivables
outstanding......................................... --% --% --%
</TABLE>
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(1) The gain on sale of lease financing receivables in 1995 relates to the sale
of a portfolio of leases which was purchased in December 1994. The aggregate
book value of the leases sold was $24.4 million.
(2) The gain on sale of lease financing receivables in 1996 relates to leases
sold in connection with the Company's securitization program.
(3) Net income (loss) per common share amounts are calculated based on net
income (loss) allocated to common stockholders after preferred dividends
divided by the weighted average number of shares of common stock and common
stock equivalents outstanding, as adjusted for stock splits. Supplemental
net income per share for the year ended December 31, 1996, was $.26. The
calculation assumes the issuance of an adequate number of shares at $9.00
per share such that the net proceeds therefrom, after payment of estimated
expenses incurred in connection with the Offering and underwriting discounts
and commissions, will be sufficient to repay in full the $9.0 million
subordinated note and to repay $5.6 million of the outstanding balance under
the Company's warehouse facilities. The calculation assumes the issuance of
1,832,736 shares of Common Stock on January 1, 1996 and that the net income
allocated to Common stockholders has been adjusted to give effect to the
elimination of interest expense of the debt repaid, net of the income tax
effect computed at the Company's effective income tax rate.
(4) Pro forma lease financing receivables acquired pursuant to the Company's
Private Label program reflects a reclassification of leases which would have
been acquired or originated under the Company's Broker or Vendor programs
had the acquisitions of GIC, CCL, Lease Pro and Heritage occurred on January
1, 1996.
(5) The Company established its Broker and Vendor programs in 1996 through the
acquisitions of GIC in July 1996 and CCL in October 1996.
(6) The number and principal amount of leases serviced for others and total
leases serviced reflect period end statistics. The Company began servicing
leases for others in December 1994. Accordingly, servicing fee income for
the period from inception (June 3, 1994) through December 31, 1994 reflects
limited servicing activity. The number and principal amount of leases
serviced for others, and thus the Company's servicing fee income, increased
significantly during 1996 due to the Company's servicing responsibilities
under its securitization program.
7
<PAGE> 9
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY BY PROSPECTIVE INVESTORS IN EVALUATING
THE COMPANY AND ITS BUSINESS BEFORE PURCHASING SHARES OF THE COMMON STOCK
OFFERED HEREBY. EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE
DISCUSSED ELSEWHERE HEREIN.
DEPENDENCE ON SECURITIZATION TRANSACTIONS
The Company sells substantially all of the equipment leases it acquires and
originates through the issuance of securities backed by such leases in
securitization transactions or other structured finance techniques. In a
securitization transaction, the Company sells and transfers a pool of leases to
a wholly-owned, special purpose subsidiary of the Company. The special purpose
subsidiary simultaneously sells and transfers an interest in the leases to a
trust, which issues beneficial interests in the leases in the form of senior and
subordinated securities and sells such securities through public offerings and
private placement transactions. The Company generally retains the right to
receive any excess cash flows of the trust, which right is represented by a
trust certificate (the "Trust Certificate"). The gain on sale of leases sold
through securitization transactions represented approximately 30% of the
Company's revenues in 1996 and is expected to comprise a significant portion of
the Company's revenues in future years.
The Company is dependent on securitizations for refinancing of amounts
outstanding under its warehouse facilities, which the Company utilizes to
acquire and originate additional leases. Several factors affect the Company's
ability to complete securitizations, including conditions in the securities
markets generally, conditions in the asset-backed securities markets, the credit
quality of the Company's lease portfolio, compliance of the Company's leases
with the eligibility requirements established in connection with the
securitizations, the Company's ability to obtain third-party credit enhancement,
the ability of the Company to adequately service its lease portfolio, and the
absence of any material downgrading or withdrawal of ratings given to securities
previously issued in the Company's securitizations. Any substantial reduction in
the availability of the securitization market for the Company's leases or any
adverse change in the terms of such securitizations could have a material
adverse effect on the Company's financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and "-- Liquidity and Capital
Resources -- Securitization Transactions."
NON-REALIZATION OF INVESTMENT IN TRUST CERTIFICATES
The cash flows available to the Trust Certificates are calculated as the
difference between (a) cash flows received from the leases and (b) the sum of
(i) interest and principal payable to the holders of the senior and subordinated
securities, (ii) trustee fees, (iii) third party credit enhancement fees, (iv)
service fees, and (v) backup service fees. The Company's right to receive this
excess cash flow is subject to certain conditions specified in the related trust
documents designed to provide additional credit enhancement to holders of the
senior and subordinated securities issued in the securitization. The Company
estimates the expected levels of cash flows available to the Trust Certificate
taking into consideration estimated prepayments, defaults, recoveries and other
factors which may affect the cash flows available to the holder of the Trust
Certificate. The cash flows ultimately available to the Trust Certificate are
largely dependent upon the actual default rates and recovery levels experienced
on the leases sold to the Trust. Losses incurred on leases held by the Trust are
borne solely by the holder of the Trust Certificate. Because the Company, as
holder of the Trust Certificates issued in its securitization transactions, is
typically entitled to receive from 6.0% to 6.5% of the cash flows of the Trust
yet bears the risk of loss on the entire portfolio of leases held by the Trust,
relatively small fluctuations in default rates, recovery levels 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 Trust Certificate.
In such
8
<PAGE> 10
event, the Company would be required to reduce the carrying amount of its Trust
Certificate and record a charge to earnings in the period in which the event
occurred or became known to management.
ACQUISITION RISKS
A key component of the Company's growth strategy is the acquisition of
other equipment leasing companies. The inability of the Company to identify
suitable acquisition candidates or to complete acquisitions on reasonable terms
could adversely affect the Company's ability to grow its business. In addition,
any acquisition made by the Company may result in potentially dilutive issuances
of equity securities, the incurrence of additional debt and the amortization of
expenses related to goodwill and other intangible assets, any of which could
have a material adverse effect on the Company's financial condition and results
of operations. The Company also may experience difficulties in the assimilation
of the operations, services, products and personnel of acquired companies, an
inability to sustain or improve the historical revenue levels of acquired
companies, the diversion of management's attention from ongoing business
operations, and the potential loss of key employees of such acquired companies.
The Company currently has no agreements with regard to any acquisitions other
than as described in "Business -- Recent and Pending Acquisitions." There can be
no assurance that any pending or future acquisitions will be consummated.
DEPENDENCE ON EXTERNAL FINANCING
The Company funds substantially all of the equipment leases that it
acquires or originates through its warehouse facilities. The warehouse
facilities are available to fund leases which satisfy eligibility criteria for
inclusion in the Company's securitizations. Borrowings under the warehouse
credit facilities are repaid with the proceeds received by the Company from
securitization transactions. Any adverse impact on the Company's ability to
complete securitizations could have a material adverse effect on the Company's
ability to obtain or maintain warehouse financing facilities or the amount
available under such facilities. Any failure by the Company to renew its
existing warehouse facilities or obtain additional warehouse facilities or other
financings with pricing, advance rates and other terms consistent with its
existing facilities could have a material adverse effect on the Company's
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
RISK OF NEED FOR ADDITIONAL CAPITAL
The structure of the Company's lease funding programs, along with the
structure of the Company's warehouse facilities and securitization program,
enabled the Company to generate positive cash flow from operations in 1996. In
the event that future market conditions adversely affect the terms of the
Company's warehouse facilities or the structure of its securitization
transactions, the Company may require additional capital to fund its operations.
The Company also may require additional capital to finance future acquisitions.
INTEREST RATE RISKS
Leases underwritten by the Company are non-cancelable and require payments
to be made by the lessee at fixed rates for specified terms. The rates charged
by the Company are based on interest rates prevailing in the market at the time
of lease approval. Until the Company's leases are securitized or otherwise sold,
the Company generally funds such leases under its warehouse facilities or from
working capital. Should the Company be unable to securitize or otherwise sell
leases with fixed rates within a reasonable period of time after funding, the
Company's operating margins could be adversely affected by increases in interest
rates. Moreover, increases in interest rates which cause the Company to raise
the implicit rate charged to its customers could cause a reduction in demand for
the Company's lease funding. The Company generally undertakes to hedge against
the risk of interest rate increases when its equipment lease portfolio exceeds
$10.0 million. Such hedging activities limit the Company's ability to
participate in the benefits of lower interest rates with respect to the hedged
portfolio of leases. In addition, there can be no assurance that the Company's
hedging activities will adequately insulate the Company from interest rate
risks. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
9
<PAGE> 11
DEPENDENCE ON CREDITWORTHINESS OF LESSEES
The Company specializes in acquiring and originating equipment leases with
a purchase price of less than $250,000, generally to small and mid-size
commercial businesses located throughout the United States. Small business
leases generally entail a greater risk of non-performance and higher
delinquencies and losses than leases entered into with larger, more creditworthy
lessees. Because of the Company's short operating history, only limited
performance data is available with respect to leases funded by the Company.
Thus, historical delinquency and loss statistics are not necessarily indicative
of future performance. In addition, the vast majority of leases acquired or
originated by the Company through December 31, 1996 were funded through the
Company's Private Label program under which Sources provide the Company with
credit protection through a combination of recourse and purchase price holdback
features. Management believes that increasingly larger percentages of its lease
originations and acquisitions in the future will be derived through its Broker
and Vendor programs under which Sources do not provide any credit protection to
the Company. The failure of the Company's lessees to comply with the terms of
their leases will result in the inability of such leases to qualify to serve as
collateral under the Company's warehouse facilities and securitization program
and may have a material adverse effect on the Company's liquidity. Additionally,
delinquencies and defaults experienced in excess of levels estimated by
management in determining the Company's allowance for credit losses and in
valuing the Company's right to receive excess cash flows under its
securitization program could have a material adverse effect on the Company's
ability to obtain financing and effect securitization transactions which may, in
turn, have a material adverse effect on the Company's financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
FLUCTUATIONS IN QUARTERLY RESULTS
The Company experiences significant fluctuations in quarterly operating
results due to a number of factors, including, among others, the completion of a
securitization transaction in a particular calendar quarter (or the failure to
complete such a securitization transaction) and the interest rate on the
securities issued in connection with such securitization transactions,
variations in the volume of leases funded by the Company, differences between
the Company's cost of funds and the average implicit yield to the Company on its
leases prior to being securitized, the effectiveness of the Company's hedging
strategy, the degree to which the Company encounters competition in its markets
and general economic conditions. As a result of these fluctuations and the
significant impact that the timing of securitization transactions may have on
the Company's results of operations, results for any one quarter should not be
relied upon as being indicative of performance in future quarters. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ABILITY TO SUSTAIN INCREASING VOLUMES OF RECEIVABLES
The Company's ability to sustain continued growth is dependent on its
capacity to attract, evaluate, finance and service increasing volumes of leases
of suitable yield and credit quality. Accomplishing this on a cost-effective
basis is largely a function of the Company's ability to market its products
effectively, to manage the credit evaluation process to assure adequate
portfolio quality, to provide competent, attentive and efficient servicing, and
to maintain access to institutional financing sources to achieve an acceptable
cost of funds for its financing programs. Any failure by the Company to market
its products effectively, to maintain its portfolio quality, to effectively
service its leases or to obtain institutional financing at reasonable rates
would have a material adverse effect on the Company's financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources,"
"Business -- Credit Policies and Procedures" and "Business -- Servicing and
Administration."
10
<PAGE> 12
LIMITED OPERATING HISTORY
The Company commenced business in June 1994 and therefore has a limited
history of operations. While the Company was profitable in 1995 and 1996, there
can be no assurance that the Company's operations will remain profitable in
future years. There can be no assurance that the Company's limited operating
history will not affect its ability to secure new financing sources necessary to
operate its business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE UPON KEY PERSONNEL
The Company depends to a large extent upon the experience, abilities and
continued efforts of Thomas J. Depping, President and Chief Executive Officer,
Sandy B. Ho, Executive Vice President and Chief Financial Officer, Robert H.
Quinn, Jr., Executive Vice President and Chief Credit Officer, and its other
senior management, including the management of companies it has acquired. The
Company has entered into employment agreements with its principal executive
officers. The loss of the services of one or more of the key members of the
Company's senior management could have a material adverse effect on the
Company's financial condition and results of operations. The Company's future
success also will depend upon its ability to attract and retain additional
skilled management personnel necessary to support anticipated future growth. See
"Management."
COMPETITION
The financing of small ticket equipment is highly competitive. The Company
competes for customers with a number of national, regional and local finance
companies. In addition, the Company's competitors include those equipment
manufacturers that finance the sale or lease of their products themselves and
other traditional types of financial services companies, such as commercial
banks and savings and loan associations, all of which provide financing for the
purchase of equipment. Many of the Company's competitors and potential
competitors possess substantially greater financial, marketing and operational
resources than the Company. The Company's competitors and potential competitors
include many larger, more established companies which may have a lower cost of
funds than the Company and access to capital markets and to other funding
sources which may be unavailable to the Company. See "Business -- Competition."
CONCENTRATION OF LEASE SOURCES AND CREDIT RISKS
Although the Company's portfolio of leases includes lessees located
throughout the United States, the Company acquires or originates a majority of
its leases from Sources operating in five states: Texas, Florida, New York, New
Jersey and California. The ability of the Company's lessees to honor their
contracts may be substantially dependent on economic conditions in these states.
All such leases are collateralized by the related equipment. The recourse and
holdback provisions of the Private Label program mitigate, but do not eliminate,
a significant portion of any economic risk not recoverable through the sale of
the related equipment.
Additionally, a substantial portion of the Company's leases are
concentrated in certain industries, including the medical industry, the dental
industry and the veterinary industry. To the extent that the economic or
regulatory conditions prevalent in such industries change, the ability of the
Company's lessees to honor their lease obligations may be adversely impacted.
On a pro forma basis, assuming the acquisitions of GIC, CCL, Lease Pro and
Heritage occurred on January 1, 1996, two of the Company's Private Label Sources
would have accounted for 12.6% and 10.0%, respectively, of all equipment leases
acquired or originated by the Company during 1996. No other Source accounted for
more than 5% of the equipment leases acquired or originated by the Company
during 1996. In the event that the Company's significant Private Label Sources
were to substantially reduce the number of leases sold to the Company, and the
Company was not able to replace the lost lease volume, such reduction could have
a material adverse effect on the Company's financial condition and results of
operations.
11
<PAGE> 13
MANAGEMENT OF GROWTH
The Company has grown dramatically since its inception in June 1994. Pretax
income has increased from a loss of $838,000 for the period from inception to
December 31, 1994, to income of $1.4 million for the year ended December 31,
1995, to income of $2.0 million for the year ended December 31, 1996. Leases
acquired or originated by the Company have grown from $4.5 million for the
period from inception to December 31, 1994, to $65.2 million for the year ended
December 31, 1995, to $179.2 million for the year ended December 31, 1996
($276.2 million on a pro forma basis, assuming the acquisitions of GIC, CCL,
Lease Pro and Heritage occurred on January 1, 1996). This significant growth has
placed, and if sustained will continue to place, a burden on the administrative
and financial resources of the Company. Accordingly, the Company's future
financial condition and results of operations will depend on management's
ability to effectively manage future growth, the success of which cannot be
assured. See "Business."
RESIDUAL VALUE RISK
The Company retains a residual interest in the equipment covered by certain
of its leases. The estimated fair market value of the equipment at the end of
the contract term of the lease, if any, is reflected as an asset on the
Company's balance sheet. The Company's results of operations depend, to some
degree, upon its ability to realize these residual values. Realization of
residual values depends on many factors, several of which are outside the
Company's control, including general market conditions at the time of expiration
of the lease, whether there has been unusual wear and tear on, or use of, the
equipment, the cost of comparable new equipment, the extent, if any, to which
the equipment has become technologically or economically obsolete during the
contract term and the effects of any additional or amended government
regulations. If, upon the expiration of a lease, the Company sells or refinances
the underlying equipment and the amount realized is less than the recorded value
of the residual interest in such equipment, a loss reflecting the difference
will be recognized. Any failure by the Company to realize aggregate recorded
residual values could have a material adverse effect on its financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Residual
Interests in Underlying Equipment."
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Restated Certificate of Incorporation ("Charter") and Amended
and Restated Bylaws ("Bylaws") contain certain provisions that may have the
effect of discouraging, delaying or preventing a change in control of the
Company or unsolicited acquisition proposals that a stockholder might consider
favorable, including provisions authorizing the issuance of "blank check"
preferred stock, providing for a Board of Directors with staggered, three-year
terms, requiring super-majority or class voting to effect certain amendments to
the Charter and Bylaws and to approve certain business combinations, limiting
the persons who may call special stockholders' meetings, and establishing
advance notice requirements for nominations for election to the Board of
Directors or for proposing matters that can be acted upon at stockholders'
meetings. In addition, certain provisions of Delaware law may have the effect of
discouraging, delaying or preventing a change in control of the Company or
unsolicited acquisition proposals. See "Description of Capital Stock -- Delaware
Law and Certain Charter Provisions."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 8,140,754 shares of
Common Stock outstanding. The 2,000,000 shares of Common Stock offered hereby
will be freely tradeable without restriction or further registration under the
Securities Act, except for shares sold by persons deemed to be "affiliates" of
the Company or acting as "underwriters," as those terms are defined in the
Securities Act. Following the expiration of the lock-up period described below,
all of the remaining outstanding shares of Common Stock (other than shares
issued in the Heritage Acquisition) and the shares of Common Stock issuable upon
conversion of the outstanding Preferred Stock will be freely tradeable subject
to the restrictions on resale imposed upon "affiliates" by Rule 144 under the
Securities Act. The Company, its executive officers and directors and certain
stockholders of the Company have agreed not to sell, offer to sell, contract to
sell, pledge
12
<PAGE> 14
or otherwise dispose of or transfer any shares of Common Stock, or any
securities convertible into or exchangeable or exercisable for, or any rights to
purchase or acquire, Common Stock for a period of 180 days commencing on the
date of this Prospectus without the prior written consent of the Representative,
other than the issuance of options to purchase Common Stock or shares of Common
Stock issuable upon the exercise thereof in connection with the Company's stock
option plans, provided that such options shall not vest or such shares shall not
be transferable prior to the end of the 180-day period, and the issuance by the
Company of capital stock in connection with acquisitions of lease finance
companies, provided that such shares shall not be transferable prior to the end
of the 180-day period. See "Shares Eligible for Future Sale" and "Underwriting."
NO PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. There can be no assurance that an active market for the Common Stock will
develop upon completion of the Offering or, if developed, that such market will
be sustained. The initial public offering price of the Common Stock will be
determined through negotiations between the Company and the Representative and
may bear no relationship to the market price of the Common Stock after the
Offering. Prices for the Common Stock after the Offering may be influenced by a
number of factors, including the liquidity of the market for the Common Stock,
investor perceptions of the Company and the equipment financing industry in
general, and general economic and other conditions. Sales of substantial amounts
of Common Stock in the public market subsequent to the Offering could adversely
affect the market price of the Common Stock. For information relating to the
factors to be considered in determining the initial public offering price, see
"Underwriting." The trading price of the Common Stock could be subject to wide
fluctuations in response to variations in financial estimates by securities
analysts and other events or facts. See "Underwriting."
SUBSTANTIAL DILUTION
Investors in the Common Stock offered hereby will experience immediate and
substantial dilution in net tangible book value per share of $7.28 (assuming an
initial public offering price of $9.00 per share). See "Dilution."
ABSENCE OF DIVIDENDS
Following the Offering, the Company intends to retain earnings to finance
the growth and development of its business. Additionally, provisions in certain
of the Company's credit facilities and the terms of the Preferred Stock contain
certain restrictions on the Company's ability to pay dividends on its Common
Stock. Accordingly, the Company does not anticipate paying cash dividends on the
Common Stock in the foreseeable future. See "Dividend Policy."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be $16.0 million ($18.5 million if the
Underwriters' over-allotment option is exercised in full) assuming an initial
public offering price of $9.00 per share, after deducting estimated underwriting
discounts and commissions and offering expenses. Of these net proceeds, $9.0
million will be used to repay in full a subordinated note (the "Subordinated
Note") with Redstone Group, Ltd. ("Redstone"). The Subordinated Note bears
interest at 11.00% and matures on June 6, 2004. See "Certain Transactions." Of
the remaining net proceeds, approximately $5.6 million will be used to repay a
portion of the outstanding balance under the Company's First Union Credit
Facility (as defined herein), and approximately $1.4 million will be utilized to
pay the cash portion of the purchase price in the Heritage Acquisition. See
"Business -- Recent and Pending Acquisitions."
The First Union Credit Facility bears interest at a floating rate equal to
the 30-day LIBOR plus 1.25% and matures on June 1, 1997. Amounts borrowed under
the First Union Credit Facility were used to fund lease acquisitions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
13
<PAGE> 15
DIVIDEND POLICY
The Company has never paid any cash dividends on the Common Stock. The
Company currently intends to retain earnings to finance the growth and
development of its business and does not anticipate paying any cash dividends on
the Common Stock in the foreseeable future. In addition, provisions in certain
of the Company's credit facilities and the terms of the Preferred Stock contain
certain restrictions on the payment of dividends on the Common Stock. Any future
change in the Company's dividend policy will be made at the discretion of the
Company's Board of Directors in light of the financial condition, capital
requirements, earnings and prospects of the Company and any restrictions under
the Company's credit agreements or rights of the Preferred Stock, as well as
other factors the Board of Directors may deem relevant. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Holders of shares of Series A Preferred Stock are entitled to receive
annual cash dividends of $1.86 per share, such dividends being payable annually
as declared by the Board of Directors. Holders of shares of Series B Preferred
Stock are entitled to receive annual cash dividends ranging from $1.14 to $2.29
per share, depending on how many shares of Series B Preferred Stock are released
from an escrow, such dividends being payable annually as declared by the Board
of Directors. See "Description of Capital Stock."
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996 on an actual basis, on a pro forma basis to give effect to the
Lease Pro and Heritage Acquisitions, and on a pro forma as adjusted basis to
give effect to the sale of the shares of Common Stock offered hereby and the
application of the estimated net proceeds therefrom. The table should be read in
conjunction with "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Consolidated Financial
Statements of the Company and related notes thereto and the Unaudited Pro Forma
Consolidated Financial Statements of the Company and related notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-----------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Subordinated notes(1)...................................... $ 9,000 $10,000 $ 1,000
Redeemable preferred stock(2).............................. 3,890 3,890 3,890
Stockholders' equity:
Common Stock, $.01 par value per share, 25,000,000 shares
authorized; 5,696,310 shares issued and outstanding;
6,140,754 shares issued and outstanding, pro forma(3);
and 8,140,754 shares issued and outstanding, pro forma
as adjusted(4)........................................ 57 61 81
Additional paid-in capital............................... 730 4,726 20,706
Retained earnings........................................ 1,467 1,467 1,467
------- ------- -------
Total stockholders' equity....................... 2,254 6,254 22,254
------- ------- -------
Total capitalization............................. $15,144 $20,144 $27,144
======= ======= =======
</TABLE>
- ---------------
(1) The pro forma amount assumes the issuance of a $1.0 million subordinated
note to Oren M. Hall in conjunction with the Heritage Acquisition. The pro
forma as adjusted amount assumes repayment of the outstanding Subordinated
Note with a portion of the proceeds of the Offering.
(2) The Series A Preferred Stock is convertible at the holder's option into
Common Stock at a conversion rate of 5.47 shares of Common Stock for each
share of such Preferred Stock, such rate being subject to adjustment for
stock dividends, subdivisions or split-ups, or reclassifications. On
December 31, 2001 the Company must redeem all shares of Series A Preferred
Stock then outstanding at a redemption price of $46.55 per share, together
with all accrued and unpaid dividends. See "Description of Capital Stock."
The Series B Preferred Stock is convertible at the holder's option into
Common Stock at a conversion rate of 5.47 shares of Common Stock for each
share of such Preferred Stock, such rate being subject to adjustment for
stock dividends, subdivisions or split-ups, or reclassifications. On
December 31, 2001, the Company must redeem all outstanding shares of Series
B Preferred Stock then outstanding at a redemption price in the range of
$57.22 to $28.61 per share, depending on how many shares of Series B
Preferred Stock are released from an escrow (subject to adjustment for any
stock dividend, subdivision or split-up, or reverse stock split), together
with all accrued and unpaid dividends. See "Description of Capital Stock."
(3) Includes 444,444 shares of Common Stock to be issued upon consummation of
the Heritage Acquisition (assuming an initial public offering price of $9.00
per share). See "Business -- Recent and Pending Acquisitions."
(4) Excludes 1,010,762 shares of Common Stock issuable upon exercise of options
to be granted under the Company's 1997 Stock Option Plan concurrently with
the Offering and 198,397 shares of Common Stock issuable upon exercise of
the Warrants. See "Management -- Stock Option Plan" and "Description of
Capital Stock -- Warrants."
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<PAGE> 17
DILUTION
The pro forma deficit in net tangible book value of the Company as of
December 31, 1996 was approximately $2.0 million or $0.32 per share of Common
Stock after giving effect to the Lease Pro and Heritage Acquisitions. Net
tangible book value per share represents the amount of the Company's
stockholders' equity, less intangible assets, divided by the 6.1 million shares
of Common Stock outstanding after giving effect to the Heritage Acquisition.
Dilution per share to new investors represents the difference between the
amount per share paid by purchasers of shares of Common Stock in the Offering
and the pro forma net tangible book value per share of Common Stock offered
hereby immediately after completion of the Offering. After giving effect to the
sale of the Common Stock at an estimated initial public offering price of $9.00
per share (the mid-point of the price range set forth on the cover page of this
Prospectus) and after deduction of the underwriting discounts and commissions
and estimated expenses of the Offering, the adjusted pro forma net tangible book
value, as of December 31, 1996, would have been approximately $14.0 million or
$1.72 per share of Common Stock. This represents an immediate increase in net
tangible book value of $2.04 per share to existing stockholders and an immediate
dilution of $7.28 per share to new investors purchasing the Common Stock. The
following table illustrates the pro forma per share dilution, as of December 31,
1996:
<TABLE>
<S> <C> <C>
Estimated initial public offering price per share........... $9.00
Pro forma net tangible book value (deficit) per share at
December 31, 1996...................................... $(.32)
Increase per share in pro forma net tangible book value
attributable to new investors.......................... 2.04
Pro forma net tangible book value per share after the
Offering.................................................. 1.72
-----
Dilution per share to new investors......................... $7.28
=====
</TABLE>
The following table sets forth, after giving effect to the Offering, the
number of shares of Common Stock purchased from the Company, the total
consideration paid therefor and the average price per share paid by existing
stockholders and by new investors:
<TABLE>
<CAPTION>
SHARES OWNED
AFTER THE OFFERING TOTAL CONSIDERATION
-------------------- -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 5,696,310 70.0% $ 787 3.5% $ .14
Heritage Acquisition........... 444,444 5.4 4,000 17.6 9.00
--------- ----- ------- -----
Subtotal..................... 6,140,754 75.4 4,787 21.1
New investors.................. 2,000,000 24.6 18,000 78.9 9.00
--------- ----- ------- -----
Total................ 8,140,754 100.0% $22,787 100.0%
========= ===== ======= =====
</TABLE>
The foregoing tables assume no exercise of outstanding warrants or stock
options to be granted and no conversion of outstanding shares of Series A
Preferred Stock or Series B Preferred Stock.
16
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth selected consolidated financial and
operating data of the Company as of the dates and for the periods indicated. The
selected consolidated financial data, as of December 31, 1994 and for the period
from inception (June 3, 1994) to December 31, 1994 and as of and for the years
ended December 31, 1995 and 1996, have been derived from financial statements
audited by Arthur Andersen LLP, independent public accountants. The selected pro
forma as adjusted statement of operations and operating data assume (i) that the
acquisitions of GIC, CCL, Lease Pro and Heritage and (ii) the issuance of
2,000,000 shares of Common Stock offered hereby at an assumed price of $9.00 per
share and the application of the net proceeds therefrom as described in "Use of
Proceeds" occurred on January 1, 1996. The selected pro forma as adjusted
balance sheet data assume (i) that the acquisitions of Lease Pro and Heritage
and (ii) the issuance of 2,000,000 shares of Common Stock offered hereby at an
assumed price of $9.00 per share and the application of the net proceeds
therefrom as described in "Use of Proceeds" occurred on December 31, 1996. The
pro forma as adjusted financial and operating data are not necessarily
indicative of the results the Company would have obtained had these events
actually occurred or of the Company's future results of operations. The selected
consolidated financial and operating data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Consolidated Financial Statements of the Company
and related notes thereto, the Unaudited Pro Forma Consolidated Financial
Statements of the Company and related notes thereto and the financial statements
of Heritage and CCL and related notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED
INCEPTION TO DECEMBER 31, PRO FORMA
DECEMBER 31, ------------------- AS ADJUSTED
1994 1995 1996 DECEMBER 31, 1996
------------- ------- ------- -----------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Interest income........................................ $ 181 $ 3,053 $ 6,323 $ 8,916
Gain on sale of lease financing receivables............ -- 3,259(1) 3,456(2) 6,731
Servicing income....................................... 6 323 1,050 1,050
Other income........................................... -- 16 535 8,124
------- ------- ------- --------
Total revenues................................... 187 6,651 11,364 24,821
Expenses:
Interest expense....................................... 157 2,616 5,014 5,124
Salaries and benefits.................................. 312 1,346 1,987 5,413
Provision for credit losses............................ 28 392 537 1,183
Depreciation and amortization.......................... 6 100 286 857
Other general and administrative....................... 522 803 1,531 7,742
------- ------- ------- --------
Total expenses................................... 1,025 5,257 9,355 20,319
Net income (loss) before provision (benefit) for income
taxes.................................................. (838) 1,394 2,009 4,502
Provision (benefit) for income taxes..................... (323) 569 792 1,789
------- ------- ------- --------
Net income (loss)........................................ (515) 825 1,217 2,713
Preferred stock dividends................................ -- -- 60 152
------- ------- ------- --------
Net income (loss) allocated to common stock.............. $ (515) $ 825 $ 1,157 $ 2,561
======= ======= ======= ========
Net income (loss) per common share(3).................... $ (.08) $ .13 $ .19 $ .30
======= ======= ======= ========
Shares used in computing net income (loss) per common
share(3)............................................... 6,308 6,436 5,991 8,436
BALANCE SHEET DATA (AT PERIOD END):
Assets:
Lease financing receivables, net....................... $29,856 $67,322 $61,270 $ 81,347
Investment in Trust Certificates....................... -- -- 9,534 9,534
Cash and cash equivalents.............................. 2,305 876 2,598 449
Goodwill and other intangible assets, net.............. -- -- 3,615 8,241
Furniture and equipment, net........................... 130 262 1,049 1,453
Other assets........................................... 1,261 884 1,276 2,807
------- ------- ------- --------
Total assets..................................... $33,552 $69,344 $79,342 $103,831
======= ======= ======= ========
Liabilities and Stockholders' Equity:
Warehouse credit facilities............................ $23,437 $55,827 $52,380 $ 62,681
Subordinated note payable.............................. 9,000 9,000 9,000 1,000
Other liabilities...................................... 630 3,207 11,818 14,006
------- ------- ------- --------
Total liabilities................................ 33,067 68,034 73,198 77,687
Redeemable preferred stock............................. -- -- 3,890 3,890
Stockholders' equity................................... 485 1,310 2,254 22,254
------- ------- ------- --------
Total liabilities and stockholders' equity....... $33,552 $69,344 $79,342 $103,831
======= ======= ======= ========
</TABLE>
(Footnotes on following page)
17
<PAGE> 19
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED PRO FORMA
INCEPTION TO DECEMBER 31, AS ADJUSTED
DECEMBER 31, --------------------- DECEMBER 31,
1994 1995 1996 1996
------------- -------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING DATA:
Lease financing receivables acquired and originated:
Private label
Number.................................................. 123 2,733 10,988 10,245(4)
Average Interest Rate................................... 9.92% 9.78% 9.45% 9.50%(4)
Principal Amount........................................ $ 4,492 $ 65,244 $161,137 $145,697(4)
Broker(5)
Number.................................................. -- -- 371 2,463
Average Interest Rate................................... --% --% 14.07% 14.23%
Principal Amount........................................ $ -- $ -- $ 10,543 $ 64,019
Vendor(5)
Number.................................................. -- -- 203 2,364
Average Interest Rate................................... --% --% 16.09% 17.77%
Principal Amount........................................ $ -- $ -- $ 7,526 $ 66,465
Total
Number.................................................. 123 2,733 11,562 15,072
Average Interest Rate................................... 9.92% 9.78% 10.00% 12.59%
Principal Amount........................................ $ 4,492 $ 65,244 $179,206 $276,181
Leases Portfolio Serviced(6):
Leases Serviced for Others
Number.................................................. 153 159 8,476
Principal Amount........................................ $ 10,687 $ 9,675 $157,078
Servicing Fee Income.................................... $ 6 $ 323 $ 1,050
Total Leases Serviced
Number.................................................. 1,551 3,026 13,967
Principal Amount........................................ $ 40,543 $ 77,204 $217,283
Credit Quality Statistics:
Delinquencies (at period end)
Gross Lease Receivables Serviced and Owed............... $ 5,784 $ 83,687 $257,234
31-60 days.............................................. --% 2.53% 2.40%
61-90 days.............................................. --% 0.45% 0.78%
91+ days................................................ --% 0.08% 0.33%
-------- -------- --------
Total delinquencies................................. --% 3.06% 3.51%
Net Charge-offs
Private Label
Principal Amount........................................ $ -- $ -- $ 25
Net Charge-offs as a % of average receivables
outstanding........................................... --% --% 0.02%
Broker(5)
Principal Amount........................................ $ -- $ -- $ --
Net Charge-offs as a % of average receivables
outstanding........................................... --% --% --%
Vendor(5)
Principal Amount........................................ $ -- $ -- $ --
Net Charge-offs as a % of average receivables
outstanding........................................... --% --% --%
</TABLE>
- ---------------
(1) The gain on sale of lease financing receivables in 1995 relates to the sale
of a portfolio of leases which was purchased in December 1994. The aggregate
book value of the leases sold was $24.4 million.
(2) The gain on sale of lease financing receivables in 1996 relates to leases
sold in connection with the Company's securitization program.
(3) Net income (loss) per common share amounts are calculated based on net
income (loss) allocated to common stockholders after preferred dividends
divided by the weighted average number of shares of common stock and common
stock equivalents outstanding, as adjusted for stock splits. Supplemental
net income per share for the year ended December 31, 1996, was $.26. The
calculation assumes the issuance of an adequate number of shares at $9.00
per share such that the net proceeds therefrom, after payment of estimated
expenses incurred in connection with the Offering and underwriting discounts
and commissions, will be sufficient to repay in full the $9.0 million
subordinated note and to repay $5.6 million of the outstanding balance under
the Company's warehouse facilities. The calculation assumes the issuance of
1,832,736 shares of Common Stock on January 1, 1996 and that the net income
allocated to Common stockholders has been adjusted to give effect to the
elimination of interest expense of the debt repaid, net of the income tax
effect computed at the Company's effective income tax rate.
(4) Pro forma lease financing receivables originated pursuant to the Company's
Private Label program reflects a reclassification of leases which would have
been acquired or originated under the Company's Broker or Vendor programs
had the acquisitions of GIC, CCL, Lease Pro and Heritage occurred on January
1, 1996.
(5) The Company established its Broker and Vendor programs in 1996 through the
acquisitions of GIC in July 1996 and CCL in October 1996.
(6) The number and principal amount of leases serviced for others and total
leases serviced reflect period end statistics. The Company began servicing
leases for others in December 1994. Accordingly, servicing fee income for
the period from inception (June 3, 1994) through December 31, 1994 reflects
limited servicing activity. The number and principal amount of leases
serviced for others, and thus the Company's servicing fee income, increased
significantly during 1996 due to the Company's servicing responsibilities
under its securitization program.
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a specialized finance company that acquires and originates,
sells and services equipment leases. The Company initially funds the acquisition
or origination of its leases through its warehouse credit facilities and, upon
achieving a sufficient portfolio size, sells such receivables in the public and
private markets, principally through its securitization program. Management
believes that its significant experience in asset-backed securitization
transactions and extensive relationships with financing sources has allowed the
Company to achieve a lower cost of funds and ultimately a wider spread upon
securitization of its equipment leases than many of its competitors. The
structure of the Company's lease funding programs (including the recourse and
purchase price holdback features of the Private Label program described below),
along with the structure of the Company's warehouse facilities and
securitization program, enabled the Company to generate positive cash flow from
operations in 1996.
The Company commenced operations in June 1994 and initially developed a
program to purchase leases from leasing companies which had the ability to
originate significant lease volume and were willing and able to provide credit
protection to the Company and perform certain servicing functions on an ongoing
basis with respect to such leases. This program, referred to by the Company as
its "Private Label" program, was designed to provide the Company with access to
high volumes of leases eligible for the securitization market, while minimizing
the risk of loss to the Company. In a typical Private Label transaction, the
Company purchases leases from the Private Label Source and receives a security
interest in the underlying equipment. Each Private Label Source provides credit
protection to the Company through a combination of recourse and purchase price
holdback features and performs certain labor-intensive servicing functions with
respect to the leases sold to the Company, such as credit collection, equipment
repossession and liquidation functions. Generally, the Company receives and
processes all lease payments on leases purchased by it under the Private Label
program. See "Business -- Lease Funding Programs -- Private Label."
The Company's yields generated under the Private Label program are
generally lower than those generated under the Company's Broker and Vendor
programs because of the credit protection afforded the Company and the reduced
level of servicing required of the Company. The weighted average yield to the
Company on leases funded through the Private Label program from inception
through December 31, 1996 was 9.55%. The Company has experienced significant
growth in its Private Label program, with the volume of leases purchased
increasing from $4.5 million in 1994, to $65.2 million in 1995, to $161.1
million in 1996.
In 1996, as part of its growth strategy, the Company began targeting
additional sources of lease volume from small ticket lease brokers which were
unable or unwilling to provide the credit protection or perform the servicing
functions required under the Private Label program and through relationships
with vendors of equipment. The Company established its Broker and Vendor
programs in 1996 through the strategic acquisitions of GIC in July 1996 and CCL
in October 1996. In a typical Broker or Vendor arrangement, leases are
originated by the Company without recourse to the Source. The Company also
performs all servicing functions on leases acquired or originated under its
Broker and Vendor programs. As a result, the Company's yields are higher than
those on its Private Label leases. The weighted average yields to the Company on
leases funded through its Broker and Vendor programs in 1996 were 14.07% and
16.09%, respectively.
The volume of leases funded by the Company through its Broker and Vendor
programs was $10.5 million and $7.5 million, respectively, in 1996. In February
1997, the Company acquired Lease Pro, a company primarily focused on originating
leases through vendor relationships. The Company also has an agreement to
acquire Heritage, which has both broker and vendor operations, upon the closing
of the Offering. On a pro forma basis, assuming the acquisitions of GIC, CCL,
Lease Pro and Heritage occurred on January 1, 1996, the volume of leases
acquired or originated by the Company under its Broker and Vendor programs would
have been $64.0 million and $66.5 million, respectively. Management intends to
continue to pursue opportunities to acquire additional small ticket leasing
companies with broker and vendor operations and believes that a larger
percentage of the Company's revenues in the future will be derived from such
broker and vendor Sources.
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<PAGE> 21
In addition to its Private Label, Broker and Vendor programs, the Company
has in the past generated, and may from time to time in the future generate,
gain on sale income through the acquisition of lease portfolios and the
subsequent sale of such portfolios at a premium. In December 1994, the Company
acquired a portfolio of leases for $25.4 million. In February 1995, the Company
sold the majority of the leases in such portfolio for total consideration of
$27.7 million. The Company realized a pre-tax gain on sale of portfolio leases
of $3.3 million in connection with such sale, net of related closing expenses.
No portfolio sales were made in 1996. See "Business -- Portfolio Acquisitions
and Sales."
The leases acquired or originated by the Company are non-cancelable for a
specified term during which the Company generally receives scheduled payments
sufficient, in the aggregate, to cover the Company's borrowing costs and the
costs of the underlying equipment, and to provide the Company with an
appropriate profit margin. The non-cancelable term of each lease is equal to or
less than the equipment's estimated economic life. Initial terms of the leases
in the Company's portfolio generally range from 12 to 84 months, with a weighted
average initial term of 55 months as of December 31, 1996. Certain of the leases
acquired or originated by the Company carry a $1.00 buy-out provision upon
maturity of the lease.
As a fundamental part of its business and financing strategy, the Company
sells the leases it acquires or originates through securitization transactions
and other structured finance transactions. In a securitization transaction, the
Company sells and transfers a pool of leases to a wholly-owned, special purpose
subsidiary of the Company. The special purpose subsidiary simultaneously sells
and transfers an interest in the leases to a trust, which issues beneficial
interests in the leases in the form of senior securities (the "Class A
Certificates") and subordinated securities (the "Class B-1 Certificates" and
"Class B-2 Certificates") and sells such senior and subordinated securities in
the public and private markets. The Company generally retains the right to
receive any excess cash flows of the trust, which right is represented by the
Trust Certificate.
Securities issued by the Company in its securitization transactions are
credit enhanced through a combination of (i) a financial guaranty insurance
policy which guarantees the holders of Class A Certificates the timely payment
of interest and the payment of principal at maturity; (ii) the terms of the
subordinated securities which provide that, in certain default and performance
deficiency situations, cash flows that would otherwise be allocated to holders
of Class B-1 and Class B-2 Certificates will be allocated to holders of Class A
Certificates; and (iii) the terms of the Trust Certificate, which provide that
in certain default and performance deficiency situations, excess cash flows that
would otherwise be allocated to the Company will be allocated to the holders of
Class A Certificates, Class B-1 Certificates and Class B-2 Certificates.
The Company funds the initial acquisition and origination of leases through
its warehouse facilities. Each such facility contemplates that the lease
receivables financed thereunder will be refinanced through the Company's
securitization program or other structured finance transactions.
Certain Accounting Considerations
Substantially all of the leases acquired or originated by the Company are
"direct financing" leases in that they transfer substantially all of the
benefits and risks of equipment ownership to the lessee. A lease is classified
as a direct financing lease if the collection of the minimum lease payments are
reasonably predictable, no significant uncertainties exist relating to
unreimbursable costs yet to be incurred by the lessor under the lease and the
lease meets one of the following criteria: (i) ownership of the property is
transferred to the lessee at the end of the lease term; (ii) the lease contains
a bargain purchase option; (iii) the term of the lease is at least equal to 75%
of the estimated economic life of the leased equipment; or (iv) the present
value of the minimum lease payments is at least equal to 90% of the fair value
of the leased equipment at the inception of the lease. Because the Company's
leases are classified as direct financing leases, the Company records total
lease rentals, estimated unguaranteed residual value and initial direct costs as
the gross investment in the lease. The difference between the gross investment
in the lease and the cost of the leased equipment is defined as "unearned
income." Interest income is recognized over the term of the lease by amortizing
the unearned income and deferred initial direct costs using the interest method.
Management evaluates the collectibility of its leases based on the level of
recourse provided, if any, delinquency statistics, historical loss experience,
current economic conditions and other relevant factors. The
20
<PAGE> 22
Company provides an allowance for credit losses for leases which are considered
impaired during the period from the funding of the leases through the date such
leases are sold through the Company's securitization program. Estimated losses
on leases that are considered impaired and have been sold through the Company's
securitization program are taken into consideration in the valuation of the
Company's investment in the Trust Certificate retained in the securitization
transaction. See "Business -- Exposure to Credit Losses."
As previously discussed, the Company generally sells the leases it acquires
or originates through securitization transactions and other structured finance
techniques. In a securitization transaction, the Company sells and transfers a
pool of leases to a wholly-owned, bankruptcy remote special purpose subsidiary
of the Company. 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 the Trust Certificate.
Gain on sale of leases sold through securitization transactions is recorded
as the difference between the proceeds received from the sale of senior and
subordinated securities, net of related issuance expenses, and the cost basis of
the leases allocated to the securities sold. The cost basis of the leases is
allocated to the senior and subordinated securities and the Trust Certificate on
a relative fair value basis on the date of sale. The fair value of the senior
and subordinated securities is based on the price at which such securities are
sold through public offerings and private placement transactions, while the fair
value of the Trust Certificate is based on the Company's estimate of its fair
value using a discounted cash flow approach.
The cash flows available to the Trust Certificates are calculated as the
difference between (a) cash flows received from the leases and (b) the sum of
(i) interest and principal payable to the holders of the senior and subordinated
securities, (ii) trustee fees, (iii) third party credit enhancement fees, (iv)
service fees, and (v) backup service fees. The Company's right to receive this
excess cash flow is subject to certain conditions specified in the related trust
documents designed to provide additional credit enhancement to holders of the
senior and subordinated securities issued in the securitization. The Company
estimates the expected levels of cash flows available to the Trust Certificate
taking into consideration estimated prepayments, defaults, recoveries and other
factors which may affect the cash flows available to the holder of the Trust
Certificate. The cash flows ultimately available to the Trust Certificate are
largely dependent upon the actual default rates and recovery levels experienced
on the leases sold to the Trust. Losses incurred on leases held by the Trust are
borne solely by the holder of the Trust Certificate. Because the Company, as
holder of the Trust Certificates issued in its securitization transactions, is
typically entitled to receive from 6.0% to 6.5% of the cash flows of the Trust
yet bears the risk of loss on the entire portfolio of leases held by the Trust,
relatively small fluctuations in default rates, recovery levels and other
factors impacting cash flows of the leases could have a materially adverse
effect on the Company's ability to realize its recorded basis in the Trust
Certificate. In such event, the Company would be required to reduce the carrying
amount of its Trust Certificates and record a charge to earnings in the period
in which the event occurred or became known to management.
Gain on sale of lease portfolios is calculated as the difference between
the proceeds received, net of related selling expenses, and the carrying amount
of the related leases, adjusted for ongoing recourse obligations of the Company,
if any.
The Company generally retains the right to service the leases it sells
through securitization transactions and receives a fee for performing such
services, as well as late charges applicable to the leases.
In June 1996, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standard ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 125
is effective for transactions occurring after December 31, 1996. Among other
things, SFAS No. 125 requires that servicing assets and other retained interests
in transferred assets be measured by allocating the previous carrying amount
between the assets sold, if any, and retained interests, if any, based on
relative fair values at the date of transfer. Under SFAS No. 125, the Company
will record a servicing asset representing the excess of estimated fees to be
received over expenses to be incurred in servicing leases sold through the
Company's securitization program. The effect will be to decrease the cost basis
allocable to the senior and subordinated securities and the Trust Certificate
issued in connection with the Company's securitization transactions. The reduced
basis allocated to the senior and subordinated securities
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<PAGE> 23
will result in greater gains being recorded upon sale of the leases than was
provided for under accounting pronouncements applicable through December 31,
1996, as well as reduced servicing income generated from leases sold after
December 31, 1996 as a result of the amortization of the servicing asset
recorded upon the sale.
RESULTS OF OPERATIONS
Year Ended December 31, 1995 Compared to Year Ended December 31, 1996
Interest income increased $3.3 million, or 107%, from $3.1 million for the
year ended December 31, 1995 to $6.3 million for the year ended December 31,
1996. The increase was primarily attributable to a 90% increase in average lease
receivable balance outstanding ($659,000 of interest income was recognized on
higher yielding leases originated under the Company's Broker and Vendor programs
which began in July 1996) and $573,000 recognized on subordinated securities
retained by the Company in its May and November 1996 securitization
transactions.
Gain on sale of lease financing receivables increased $197,000, or 6%, from
$3.3 million for the year ended December 31, 1995 to $3.5 million for the year
ended December 31, 1996. The gain on sale of lease financing receivables
recognized in 1996 reflects the net profit resulting from the Company's two 1996
securitization transactions. The leases securitized in 1996 were acquired
through the Company's Private Label program. The $3.3 million gain on sale of
lease financing receivables recognized in 1995 resulted from the sale of a lease
portfolio acquired at a discount from a third party in 1994.
Servicing income increased $727,000, or 225%, from $323,000 for the year
ended December 31, 1995 to $1.1 million for the year ended December 31, 1996.
Such increase was primarily attributable to servicing fees received from the
Company's two 1996 securitization transactions. At December 31, 1995, the
Company serviced 159 leases for others with an aggregate principal amount of
$9.7 million. At December 31, 1996, the Company serviced 8,476 leases with an
aggregate principal amount of $157.1 million.
Other income increased $519,000 from $16,000 for the year ended December
31, 1995 to $535,000 for the year ended December 31, 1996. Such increase was
primarily attributable to brokerage fees received on transactions brokered to
third parties by the Company subsequent to its acquisition of GIC in fulfillment
of an existing contractual obligation of GIC.
Interest expense increased $2.4 million, or 92%, from $2.6 million for the
year ended December 31, 1995 to $5.0 million for the year ended December 31,
1996. Such increase was due to an increase in the average balance outstanding
under the Company's warehouse facilities, which borrowings were used to finance
the significant increase in leases acquired or originated by the Company in
1996. In 1996, the Company acquired or originated $179.2 million of leases, as
compared to $65.2 million in 1995.
Salaries and benefits increased $641,000, or 48%, from $1.3 million for the
year ended December 31, 1995 to $2.0 million for the year ended December 31,
1996. Such increase was primarily attributable to a general expansion of the
Company's business and an increase in the number of employees resulting from the
acquisitions of GIC and CCL. Management expects that salaries and benefits will
increase in 1997 as a result of the operations of GIC and CCL being included for
a full year as well as the operations of Lease Pro and Heritage being included
from their respective dates of acquisition in 1997. In addition, due to the
higher level of servicing responsibility assumed by the Company in connection
with its Broker and Vendor programs, salaries and benefits are higher as a
percentage of lease volumes than under the Company's Private Label program.
Provision for credit losses increased $145,000, or 37%, from $392,000 for
the year ended December 31, 1995 to $537,000 for the year ended December 31,
1996. Such increase was primarily attributable to the increase in the amount of
leases acquired or originated by the Company in 1996.
Depreciation and amortization increased $186,000, or 186%, from $100,000
for the year ended December 31, 1995 to $286,000 for the year ended December 31,
1996. Such increase was primarily attributable to a 300% increase in fixed
assets owned during 1996, as well as amortization of goodwill and other
22
<PAGE> 24
intangible assets resulting from the acquisitions of GIC and CCL. Management
expects that depreciation and amortization will increase in 1997 as a result of
the operations of GIC and CCL being included for a full year as well as the
operations of Lease Pro and Heritage being included from their respective dates
of acquisition in 1997.
Other general and administrative expenses increased $728,000, or 91%, from
$803,000 for the year ended December 31, 1995 to $1.5 million for the year ended
December 31, 1996. Such increase was primarily attributable to the general
expansion of the Company's business and the acquisitions of GIC and CCL.
Management expects that other general and administrative expenses will increase
in 1997 as a result of the operations of GIC and CCL being included for a full
year as well as the operations of Lease Pro and Heritage being included from
their respective dates of acquisition in 1997.
Period from Inception, June 3, 1994, through December 31, 1994
Compared to Year Ended December 31, 1995
Operations of the Company for the period from inception, June 3, 1994,
through December 31, 1994, were limited and primarily focused on establishing
the Company's Private Label program, developing its lease accounting and
servicing system, establishing its warehouse facilities to be used to finance
the acquisition or origination of leases and developing its overall corporate
infrastructure. The only significant activity which occurred in 1994 was the
acquisition of a lease portfolio for $25.4 million in December 1994 at a
discount. In January 1995, the Company sold such portfolio and recognized a gain
on sale of $3.3 million. Total revenues for the period ended December 31, 1994
were only $187,000. The Company had total assets of $33.5 million and four
employees at December 31, 1994. Accordingly, management believes that further
comparison of 1994 results with results for the year ended December 31, 1995 is
not meaningful.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company's lease finance business is capital intensive and requires
access to substantial short-term and long-term credit to fund new equipment
leases. Since inception, the Company has funded its operations primarily through
sales of leases, borrowings under its warehouse facilities, sales of equity to
the Company's existing stockholders and through its two securitization
transactions completed in 1996. The Company will continue to require access to
significant additional capital to maintain and expand its volume of leases
funded.
The Company's uses of cash include the acquisition and origination of
equipment leases, payment of interest expenses, repayment of borrowings under
its warehouse facilities, operating and administrative expenses, income taxes
and capital expenditures. The structure of the Company's lease funding programs
(including the holdback and recourse features of the Private Label program
described under "Business -- Exposure to Credit Losses"), along with the
structure of the Company's warehouse facilities and securitization program,
enabled the Company to generate positive cash flow from operations in 1996.
The Company utilizes its warehouse facilities (described below) to fund the
acquisition and origination of leases that satisfy the eligibility requirements
established pursuant to each facility. At December 31, 1996, the Company had an
aggregate maximum of $150.0 million available for borrowing under two warehouse
facilities, of which the Company had borrowed an aggregate of approximately
$52.4 million. The Company's warehouse facilities provide the Company with
advance rates that generally do not require the Company to utilize its capital
during the period that lease receivables are financed under such facilities. The
financing provided under each warehouse facility is interim in nature and lease
receivables financed thereunder are generally refinanced through the Company's
securitization program within six to twelve months.
To date, proceeds received by the Company in its securitization
transactions have generally been sufficient to repay amounts borrowed under the
warehouse credit facilities, as well as issuance expenses. In addition to the
proceeds received upon closing of the sale of the securitized leases, the
Company generates cash flow from ongoing servicing and other fees, including
late charges on securitized equipment leases, and excess cash flow distributions
from the Trust Certificates retained by the Company and other assets of the
23
<PAGE> 25
trust once the securities are retired. The Company structures its securitization
transactions to qualify as financings for income tax purposes. Therefore, no
income tax is payable in the current period on the gain recognized. The Company
anticipates that future sales of its equipment leases will be through
securitization transactions or other structured finance techniques.
The Company believes that cash flow from its operations, the net proceeds
of the Offering, the net proceeds from future securitization transactions and
amounts available under its warehouse facilities will be sufficient to fund the
Company's operations for the foreseeable future.
Warehouse Facilities
In May 1995, First Sierra Receivables, Inc. (a wholly owned,
bankruptcy-remote special purpose subsidiary of the Company), entered into a
$50.0 million warehouse facility with First Union National Bank of North
Carolina (the "First Union Credit Facility"). The First Union Credit Facility
has subsequently been increased to $75.0 million. As of December 31, 1996, $12.2
million was outstanding under this facility and approximately $14.8 million of
net lease financing receivables had been transferred to First Sierra
Receivables, Inc. and were pledged as security for this facility. As of December
31, 1996, the First Union Credit Facility bore interest at a floating rate equal
to the 30-day LIBOR plus 1.25%. The First Union Credit Facility also provides
$25.0 million of financing to fund the purchase of subordinated securities
issued through the Company's securitization program, with any advances utilized
for that purpose reducing the amount available under such facility. Such
advances bear interest at a floating rate equal to the 30-day LIBOR plus 1.50%.
The First Union Credit Facility is recourse to First Sierra Receivables, Inc.,
but non-recourse to the Company. Under the terms of the facility, the Company is
required to maintain certain minimum financial ratios. As of December 31, 1996,
the Company was in compliance with such requirements. The First Union Credit
Facility matures on June 1, 1997, at which time any amounts outstanding would
convert to a term loan which matures on the tenth day of the month following the
date on which the last scheduled payment on the leases pledged is due. The
Company expects to replace the First Union Credit Facility with the First Union
Securitized Warehouse Facility described below.
In September 1996, the Company entered into a warehouse facility with
Prudential Securities Credit Corporation (the "Prudential Facility"). The
Prudential Facility provided the Company with $75.0 million of warehouse
financing, of which $40.1 million was outstanding at December 31, 1996. The
Prudential Facility provided for a maximum borrowing amount equal to 94.0% of
the present value of the remaining scheduled payments due on the leases funded
with advances under such facility. Borrowings under the Prudential Facility bore
interest at a floating rate equal to the 30-day LIBOR plus 0.95%. The Prudential
Facility matured on March 31, 1997 and was replaced by the Prudential
Securitized Warehouse Facility described below.
On March 31, 1997, the Company entered into a securitized warehouse
financing facility with Prudential Securities Credit Corporation
("Prudential")(the "Prudential Securitized Warehouse Facility"), pursuant to
which, on an on-going basis, the Company will transfer and sell lease
receivables to a wholly owned, bankruptcy-remote special purpose subsidiary,
which will sell such receivables to a trust. The trust has issued two classes of
certificates, a senior certificate, which has a limit of $75 million and is
owned by Prudential, and a residual interest certificate which is owned by the
subsidiary. The transfer and sale of lease receivables pursuant to the
Prudential Securitized Warehouse Facility is treated as a sale for accounting
purposes and the related gain on sale is recognized on the date of such transfer
and sale. Investments made by Prudential in the senior certificate bear interest
at 30-day LIBOR plus 0.90%. As of March 31, 1997, the amount of the Prudential
investment in the senior certificate was $74 million. The lease receivables in
the Prudential Securitized Warehouse Facility from time to time will be
refinanced through the Company's securitization program.
The Company is currently finalizing a securitized warehouse financing
facility with First Union National Bank of North Carolina (the "First Union
Securitized Warehouse Facility"). The structure of the First Union Securitized
Warehouse Facility is substantially equivalent to the Prudential Securitized
Warehouse Facility, allowing the Company to recognize accounting sale treatment,
on an on-going basis, when the lease
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receivables are sold and transferred. The senior certificates issued pursuant to
the First Union Securitized Warehouse Facility will have a limit of $90 million
and will bear interest at either 30-day LIBOR or Commercial Paper index rate
plus 0.75%. This facility is expected to be in place in May 1997 and will be
utilized initially to refinance certain amounts then outstanding under the First
Union Credit Facility and will replace such facility.
The Prudential Securitized Warehouse Facility and the First Union
Securitized Warehouse Facility provide several significant advantages as
compared to the warehouse credit facilities which they replace, including (i)
more favorable interest rate provisions, (ii) allowing the Company to recognize
gain on sale of lease receivables, on an on-going basis, at the time such
receivables are transferred to such facilities, rather than at the time of
permanent securitization, thus reducing the degree to which the Company's
quarterly results might fluctuate due to the timing of permanent securitizations
and (iii) providing greater flexibility with respect to the timing and sizing of
permanent securitizations, thereby reducing related transaction costs.
The Company currently is in negotiations with two lending institutions for
an additional warehouse facility (the "Supplemental Warehouse Facility") that
would provide the Company with up to $50.0 million of additional warehouse
funding. Borrowings under the Supplemental Warehouse Facility are expected to
bear interest at a floating rate equal to the 30-day LIBOR plus 1.25%. The
Supplemental Warehouse Facility would provide for the issuance of a letter of
credit for the purpose of providing credit enhancement at securitization, which
would allow the Company to issue one senior class of securities rated AAA/Aaa in
an amount which would be at least 94.0% of the present value of the remaining
scheduled payments due on the leases included in the securitization. This
securitization structure does not require the Company to obtain credit ratings
on the subordinated securities issued in the transaction and would allow the
Company to enhance the level of cash proceeds realized at securitization. The
Supplemental Warehouse Facility is expected to be finalized in May 1997.
Securitization Transactions
To date, the Company has completed two securitization transactions
involving lease receivables aggregating approximately $152.0 million. In
connection with each securitization transaction, Class A Certificates, rated AAA
by Standard & Poor's Rating Group and Aaa by Moody's Investors Services, were
sold in the public market. The Class B-1 and Class B-2 Certificates were rated
BBB and BB, respectively, by Duff & Phelps Rating Co., and were sold on a
non-recourse basis in the private market. Due to the Company's ability to
structure and sell its Class B-1 and Class B-2 Certificates in its two completed
securitization transactions, the sizes of the Trust Certificates retained by the
Company were reduced, thereby allowing the Company to maximize the cash proceeds
generated from such transactions. The Company has been able to realize
approximately 94.0% of the present value of the remaining scheduled payments of
the equipment leases included in its securitizations, which have generally been
sufficient to cover the Company's investment in the equipment leases sold, as
well as issuance costs. Management believes that the structures of its two
completed securitizations were among the most financially attractive
securitization structures achieved to date in the small ticket leasing market.
The Company continually seeks to improve the efficiency and execution of
its securitization transactions. In the Company's second securitization
transaction, which was completed in November 1996, the Company was able to
reduce the level of subordination required for the Class A Certificates from
14.0% to 12.0%, thereby increasing the size of the Class A Certificates, which
carry the lowest coupon rate, from 86.0% to 88.0% of the present value of the
remaining scheduled lease payments under the securitization. Furthermore, the
spread over comparable Treasury securities on the Class A Certificates was
reduced from 64 basis points to 51 basis points, and the spread over comparable
Treasury securities of the Class B-1 Certificates was reduced from 144 basis
points to 125 basis points. The effect of these reduced subordination levels and
lower spreads has been to decrease the effective cost of the transaction to the
Company and thus increase the gain realized by the Company in the securitization
transaction.
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The table below sets forth certain information related to the two
securitization transactions completed by the Company to date:
SECURITIZATION TRANSACTIONS
<TABLE>
<CAPTION>
FIRST SIERRA FIRST SIERRA
EQUIPMENT LEASE EQUIPMENT LEASE
TRUST 1996-1 TRUST 1996-2
--------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Closing Date........................................ May 1996 November 1996
SENIOR SECURITIES:
Class A Certificates Rating:
S & P.......................................... AAA AAA
Moody's........................................ Aaa Aaa
Duff & Phelps.................................. AAA AAA
Principal Amount.................................. $73,780 $63,382
% of Total........................................ 86.0% 88.0%
Subordination Level............................... 14.0% 12.0%
Spread over Treasury (Semi Bond).................. 64 51
SUBORDINATED SECURITIES:
Class B-1 Certificates Rating:
Duff & Phelps.................................. BBB BBB
Principal Amount.................................. $3,432 $2,161
% of Total........................................ 4.0% 3.0%
Subordination Level............................... 10.0% 9.0%
Spread over Treasury (Semi Bond).................. 144 125
Class B-2 Certificates Rating:
Duff & Phelps.................................. BB(1) BB
Amount............................................ $3,432 $1,801
% of Total........................................ 4.0% 2.5%
Subordination Level............................... 6.0% 6.5%
Spread over Treasury (Semi Bond).................. 250 250
TRUST CERTIFICATES:
Rating............................................ Unrated Unrated
Amount............................................ $4,451 $4,913
% of Total........................................ 6.0% 6.5%
</TABLE>
- ---------------
(1) In May 1996, Duff & Phelps assigned a "B" rating to the Class B-2
Certificates which were retained by the Company. In November 1996, such
Class B-2 Certificates were upgraded to BB and have subsequently been sold
by the Company pursuant to a private placement.
Subordinated Note
In 1994, the Company issued a $9.0 million Subordinated Note due June 6,
2004 to Redstone. Interest on the Subordinated Note is payable monthly at a rate
of 11.00% per annum. The Company intends to utilize a portion of the proceeds of
the Offering to repay the Subordinated Note. Upon completion of the Offering,
the Company also intends to enter into a new $5.0 million subordinated revolving
credit facility with Redstone, with the commitment level thereunder decreasing
by $1.0 million per year. Advances under the facility will bear interest at
11.00% per annum.
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Hedging Strategy
The implicit yield to the Company on all of its leases is on a fixed
interest rate basis due to the leases having scheduled payments that are fixed
at the time of origination of the lease. When the Company acquires or originates
leases, it bases its pricing in part on the "spread" it expects to achieve
between the implicit yield rate to the Company on each lease and the effective
interest cost it will pay when it sells such leases through securitization.
Increases in interest rates between the time the leases are acquired or
originated by the Company and the time they are securitized could narrow or
eliminate the spread, or result in a negative spread. The Company has adopted a
policy that is designed to provide a level of protection against the volatility
of interest rate movement between the time the Company acquires or originates a
lease and the time such lease is sold through a securitization. Such hedging
arrangements generally are implemented when the Company's portfolio of unhedged
leases reaches $10.0 million. The Company hedges against this risk by entering
into amortizing "swap" transactions under which the notional amount changes
monthly to match the amortization of the underlying lease receivables. Under
these swap agreements, the Company receives interest on the notional amount at
the 30-day LIBOR rate, which is reset monthly, and the Company pays a fixed rate
which is equal to a spread over the yield to maturity of U.S. Treasury
securities similar to the maturities of the specific leases being held for
securitization. The Company also may from time to time assume a short position
in U.S. Treasury securities having maturities similar to the maturities of the
specific leases being held for securitization. U.S. Treasury securities are
utilized by the Company as benchmarks due to the liquidity of the market for
such securities and the use of the yields to maturity on such securities in
determining the interest rates on the lease-backed securities issued in
connection with the Company's securitization activities.
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<PAGE> 29
BUSINESS
GENERAL
The Company is a specialized finance company that acquires and originates,
sells and services equipment leases. The underlying leases financed by the
Company relate to a wide range of equipment, including computers and
peripherals, computer software, medical, dental and diagnostic,
telecommunications, office, automotive servicing, hotel security, food services,
tree service and industrial, as well as specialty vehicles. The equipment
generally has a purchase price of less than $250,000 (with an average of
approximately $17,000), and thus the Company's leases are commonly referred to
as "small ticket leases." The Company initially funds the acquisition or
origination of its leases through its warehouse facilities and, upon achieving a
sufficient portfolio size, sells such receivables in the public and private
markets, principally through its securitization program. The Company focuses on
maximizing the spread between the yield received on its leases and its cost of
funds by obtaining favorable terms on its warehouse facilities, securitizations
and other structured finance transactions.
The Company has established strategic alliances with a network of
independent leasing companies, lease brokers and equipment vendors, each of
which acts as a Source from which the Company obtains access to equipment
leases. The Company customizes lease financing products to meet the specific
equipment financing needs of its Sources and in many cases provides such Sources
with servicing and technological support via on-line connections to the
Company's state-of-the-art computer system.
The Company views acquisitions of equipment leasing companies as a
fundamental part of its growth strategy. During 1996, the Company acquired GIC
and CCL, and in February 1997, the Company acquired Lease Pro. The Company also
has an agreement to acquire Heritage, which acquisition is expected to close
concurrently with the Offering. See "-- Recent and Pending Acquisitions." The
Company's recent acquisitions have substantially increased the Company's ability
to generate lease origination volume and have allowed it to introduce new
programs and enter new markets. After completion of the pending Heritage
Acquisition, the Company will have offices in eight states. The Company intends
to continue to seek acquisition opportunities in additional markets to further
expand its business.
The Company commenced operations in June 1994 and initially developed a
program to purchase leases from leasing companies which had the ability to
originate significant lease volumes and were willing and able to provide credit
protection to the Company and perform certain servicing functions on an ongoing
basis with respect to such leases. This program, referred to by the Company as
its "Private Label" program, was designed to provide the Company with access to
high volumes of leases eligible for the securitization market, while minimizing
the risk of loss to the Company. The Company has experienced significant growth
in its Private Label program since inception, with the volume of leases
purchased increasing from $4.5 million in 1994, to $65.2 million in 1995, to
$161.1 million in 1996.
In 1996, as part of its growth strategy, the Company began targeting
additional sources of lease volume from small ticket lease brokers which were
unwilling or unable to provide the credit protection or perform the servicing
functions required under the Private Label program and through relationships
with equipment vendors. The Company established its Broker and Vendor programs
in 1996 through the strategic acquisitions of GIC and CCL. The acquisition of
Lease Pro and the pending Heritage Acquisition are expected to provide the
Company with additional broker and vendor lease volume. On a pro forma basis,
assuming the acquisitions of GIC, CCL, Lease Pro and Heritage occurred on
January 1, 1996, the volume of leases originated by the Company during 1996
pursuant to its Broker and Vendor programs would have been $64.0 million and
$66.5 million, respectively, and the weighted average yield on such leases (net
of brokers' fees) would have been 14.23% and 17.77%, respectively. Management
intends to continue to pursue opportunities to acquire additional small ticket
leasing companies with broker and vendor operations and believes that a larger
percentage of the Company's revenues in the future will be derived from broker
and vendor Sources.
In addition to its Private Label, Broker and Vendor programs, the Company
has in the past generated, and may from time to time in the future generate,
gain on sale income through the acquisition of lease portfolios and the
subsequent sale of such portfolios at a premium. Since its inception, the
Company has acquired $25.4 million of leases pursuant to portfolio acquisitions.
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The Company's management team has extensive experience in lease financing
and in securitizations and other structured finance transactions. Thomas J.
Depping, Chief Executive Officer of the Company, has over 15 years of experience
in the leasing and structured finance industries, including 11 years with
SunAmerica Financial Resources and its predecessor. Prior to founding the
Company, Mr. Depping was President of SunAmerica Financial Resources, the
equipment leasing and financial division of SunAmerica, Inc. Sandy B. Ho,
Executive Vice President and Chief Financial Officer of the Company, has over 15
years of experience in the leasing and structured finance industries, most
recently as Managing Director of SunAmerica Corporate Finance. Robert H. Quinn,
Jr., Executive Vice President and Chief Credit Officer of the Company, has over
23 years of leasing experience, most recently as Manager of AT&T Capital's
private label program. Upon completion of the Heritage Acquisition, Oren M. Hall
will become an Executive Vice President of the Company. Mr. Hall has 23 years of
experience in the leasing industry and during 1996 served as President of the
United Association of Equipment Lessors.
INDUSTRY OVERVIEW
The equipment financing industry in the United States has grown rapidly
during the last decade and includes a wide range of entities that provide
funding for the purchase of equipment. The equipment leasing industry in the
United States is a significant factor in financing capital expenditures of
businesses. According to research by the Equipment Leasing Association of
America ("ELA"), using United States Department of Commerce data, approximately
$160.7 billion of the $571 billion spent on productive assets in 1995 was
financed by means of leasing. The ELA estimates that 80% of all U.S. businesses
use leasing or financing to acquire capital assets.
The Company believes that the small ticket segment of the equipment leasing
industry is one of the most rapidly growing segments of the industry in part due
to: (i) the consolidation of the banking industry, which has eliminated many of
the smaller community banks that traditionally provided equipment financing for
small to mid-size businesses, forcing these businesses to seek alternative
financing rather than deal with the approval process of large commercial banks;
(ii) stricter lending requirements of commercial banks; (iii) a trend toward
instant approvals at the point of sale made possible by improved technology;
(iv) the decline in the price of computer hardware and software and increasing
demand therefor; and (v) the adoption of accounting pronouncements concerning
the accounting treatment of transactions with captive finance company
subsidiaries, which has caused a number of manufacturers to eliminate their
finance companies, resulting in an increased demand for independent financing.
STRATEGY
The Company's business strategy is to continue to significantly expand its
business through internal growth as well as selective acquisitions of equipment
leasing companies and to sell the leases it acquires or originates through
securitizations and other structured finance techniques. Key elements of this
strategy include:
Pursuing Acquisitions. The Company believes that significant opportunities
exist to acquire leasing companies at prices the Company considers attractive.
The Company seeks to identify and acquire leasing companies in key geographic
regions that can be integrated into the Company's existing operations to expand
its business with minimal incremental expense. By acquiring and consolidating
these companies, the Company believes it can significantly increase revenues and
profit margins, utilizing the Company's relatively lower cost of funds and
advanced technological capabilities.
Expanding its Existing Business. The Company intends to continue to rely on
the sophisticated skills of its management team to develop new products with
customized terms to increase volumes from existing and new Sources of equipment
leases. The Company also intends to expand its existing sales force of 34
persons by attracting qualified and experienced individuals who can identify
Sources on a regional and national basis. The Company will continue to seek to
differentiate itself from its competition by emphasizing high levels of customer
service and technological support to its Sources.
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<PAGE> 31
Focusing on Structured Finance Transactions. The Company intends to
continue to focus on securitizations and other similar structured finance
transactions as vehicles for sale of the Company's lease portfolios.
Management's objective is to continue to improve the efficiency and execution of
these transactions by minimizing the Company's cost of funds and capital outlay
associated with financing its leases, while maximizing the number of leases that
qualify for funding and subsequent securitization. Management believes that its
significant experience in asset-backed securitization transactions and extensive
relationships with financing sources will allow the Company to continue to
achieve a low cost of funds and increased profitability upon securitization of
its equipment leases.
Utilizing its Advanced Technology and Servicing Capabilities. The Company
intends to continue to utilize and further enhance its state-of-the-art data
processing systems to manage the high volume of information associated with
originating and servicing its leases. Management believes it has developed a
technologically advanced servicing system with excess system capacity which it
intends to utilize to decrease the Company's per lease servicing cost as its
lease volume and number of Sources increase.
Employing Conservative Credit Guidelines. Management believes that its low
level of credit losses since inception is due primarily to its credit
enhancement arrangements with its Private Label Sources and its conservative
underwriting guidelines. The Company intends to continue to monitor the credit
quality of its portfolio and apply its conservative underwriting standards to
minimize credit risk.
LEASE FUNDING PROGRAMS
The Company provides lease financing to different participants in the small
ticket equipment leasing industry through three general lease funding programs,
referred to as its Private Label, Broker and Vendor programs. While the terms of
the underlying leases are similar in all of the Company's lease funding
programs, the financing arrangement offered by the Company varies depending on
the size and servicing capabilities of the Source.
The Company initially developed its Private Label program to target leasing
companies which had the ability to originate significant lease volumes and were
willing and able to provide credit protection to the Company and perform certain
servicing functions on an ongoing basis with respect to such leases. The Company
subsequently developed its Broker and Vendor programs to increase its level of
lease volume through the acquisition or origination of leases from lease brokers
which were unwilling or unable to provide the credit protection and perform
certain servicing functions required by the Private Label program and through
relationships with equipment vendors.
Private Label
The Company's Private Label program is designed to provide financing to
established leasing companies which have demonstrated the ability to originate a
significant level of lease volume, follow prudent underwriting guidelines
established by the Company and undertake certain labor-intensive aspects of
lease servicing on an ongoing basis. Such leasing companies typically rely on
commercial loans from local banks to fund their leases. The loans are generally
secured by a specific pledge of the lease receivable and the underlying
equipment as well as recourse back to the leasing company. Financing available
to these companies under typical commercial lending arrangements is generally
limited and the Private Label program offers an attractive alternative to meet
their financing needs. This program also offers an alternative source of
financing to companies whose volume of leases may be too small to economically
securitize such leases. The Private Label program is designed to provide the
economic advantages of securitized financings, namely enhanced liquidity at
relatively low rates, without the administrative and financial burdens common to
issuers of asset-backed securities.
Under the Private Label program, participating leasing companies identify,
document and evaluate potential leases in accordance with the Company's
underwriting guidelines. Completed application packages for potential leases are
submitted to the Company for review prior to acquisition by the Company. Because
of the leasing companies' familiarity with the Company's guidelines, acceptance
by the Company of leases submitted by Private Label Sources is generally in
excess of 90%.
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In a typical Private Label transaction, the Company purchases leases from a
Private Label Source and receives a security interest in the underlying
equipment. The Private Label Source typically retains ownership of the leased
equipment and is responsible for paying applicable property taxes. Leases
acquired pursuant to the Private Label program generally carry a $1.00 buyout
provision upon maturity. Payments on the leases are received directly by the
Company in a lockbox account. The Private Label Source is responsible for
monitoring the payment activity of the lessees and performing collection
activities as necessary. To facilitate the Sources's collection efforts, the
Company provides the Source with on-line access to the Company's servicing
system.
The terms of the lease purchase agreements under the Company's Private
Label program provide the Company protection from losses on defaulted leases
through a first lien security interest in the underlying equipment, recourse to
the Source, holdbacks from amounts paid to the Source upon purchase, or a
combination of the above. Under the recourse provisions, the Source is generally
required to repurchase a lease from the Company in the event that it becomes 90
days past due. Such recourse is typically limited to 10% to 20% of the aggregate
amount of leases funded from each Source. Holdback amounts generally range from
1% to 10% of the purchase price of the related leases. See "-- Delinquency and
Losses." Through December 31, 1996, the Company had incurred losses of $25,000
from leases funded pursuant to the Private Label program. There can be no
assurance that the Company's Private Label Sources will continue to meet their
repurchase obligations or that the amounts withheld under the purchase price
holdback feature of the Private Label program, together with any amounts
realized upon disposal of the underlying equipment, will be sufficient to fully
offset any losses which might be incurred upon default of lessees in the future.
On a pro forma basis, assuming the acquisitions of GIC, CCL, Lease Pro and
Heritage occurred on January 1, 1996, two of the Company's Private Label Sources
would have accounted for 12.6% and 10.0%, respectively, of all equipment leases
acquired or originated by the Company during 1996. No other Source accounted for
more than 5% of the equipment leases acquired or originated by the Company
during 1996. In the event that the Company's significant Private Label Sources
were to substantially reduce the number of leases sold to the Company, and the
Company was not able to replace the lost lease volume, such reduction could have
a material adverse effect on the Company's financial condition and results of
operations.
Broker
The Company's Broker program is designed to fund equipment leases from
small ticket lease brokers that are unwilling or unable to provide the credit
protection and perform the servicing functions necessary to participate in the
Company's Private Label program. In a typical Broker transaction, the Company
originates leases referred to it by the Broker Source and pays the Source a
referral fee. Leases originated under the Broker program are structured on a
non-recourse basis, with risk of loss in the event of default by the lessee
residing with the Company. The Company owns the underlying equipment covered by
a Broker lease and, in certain cases, retains a residual interest in such
underlying equipment. All servicing functions are performed by the Company.
The Company also provides a variety of value-added services to participants
in its Broker program, including consulting on the structuring of financing
transactions with equipment purchasers, timely and efficient credit approvals
and preparation and completion of standardized lease documents. Although the
Company enters into a brokerage agreement with each of the participants in its
Broker program, such agreements are not exclusive and can be terminated by
either party.
The Company's yields on leases originated under its Broker program are
higher than those acquired under its Private Label program because of the risk
of loss and servicing responsibilities assumed by the Company in the Broker
program.
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Vendor
The Company's Vendor program focuses on establishing formal and informal
relationships with equipment vendors in order to establish the Company as the
provider of financing recommended by such vendors to their equipment purchasers.
By assisting such vendors in providing timely, convenient and competitive
financing for their equipment sales and offering vendors a variety of
value-added services, the Company simultaneously promotes the vendor's equipment
sales and the utilization of the Company as the equipment finance provider.
In a typical vendor arrangement, the Company originates all leases referred
to it by the Vendor Source. Leases originated under the Vendor program are
structured on a non-recourse basis, with risk of loss in the event of a default
by the lessee residing with the Company. The Company owns the underlying
equipment covered by a vendor lease and, in certain cases, retains a residual
interest in such equipment. All servicing functions are performed by the Company
under the Vendor program.
The Vendor program provides for customized lease finance arrangements to
respond to the needs of a particular vendor and its equipment purchasers. The
value-added services offered by the Company to participants in its Vendor
program include consulting with vendors on structuring financing transactions
with equipment purchasers, training the vendor's sales and management staffs to
understand and market the Company's various financing alternatives, customizing
financial products to encourage product sales, and preparation and completion of
standardized lease documents. In most cases, the Company's sales representatives
also work directly with the vendor's equipment purchasers, providing them with
the guidance necessary to complete the equipment financing transaction. The
Company also may participate actively in the vendor's sales and marketing
efforts, including advertising, promotions, trade show activities and sales
meetings.
The Company generally obtains higher yields on leases funded under the
Vendor program than those in the Broker program due to additional services
provided by the Company under the Vendor program.
PORTFOLIO ACQUISITIONS AND SALES
In addition to its Private Label, Broker and Vendor programs, the Company
has in the past generated, and may from time to time in the future generate,
gain on sale income through the acquisition of lease portfolios and the
subsequent sale of such portfolios at a premium. Such leases typically do not
fit within the eligibility criteria established pursuant to the Company's
warehouse facilities and thus will be sold outside the Company's securitization
program. In general, the Company seeks to acquire portfolios of equipment leases
from finance companies exiting the business, independent companies seeking a
financial partner, or companies with businesses complementary to the Company.
Prior to the acquisition of a portfolio of leases under its portfolio
acquisition program, the Company performs due diligence procedures including
review of a sample of the lease files included in such portfolio, loss and
delinquency experience of such portfolio and such other factors as may be
appropriate.
In December 1994, the Company purchased a portfolio of leases for $25.4
million. These leases were sold in February 1995, and the Company realized a
gain on sale of $3.3 million. No portfolio sales were made in 1996.
RECENT AND PENDING ACQUISITIONS
On July 11, 1996, the Company acquired certain assets and liabilities of
GIC, including its key personnel. GIC is located in Fort Lauderdale, Florida and
primarily focuses on the small ticket broker and vendor markets in the
southeastern region of the United States. From January 1 through July 11, 1996,
GIC generated equipment leases of $19.4 million. By virtue of the GIC
acquisition, the Company was able to enter the lease broker market and gained a
geographic presence in the Florida vendor market, the fourth largest vendor
market in the United States based on a study by the Foundation for Leasing
Education. In addition, the Company gained a presence in several national vendor
markets, including hotel security, food services, industrial and automotive
servicing equipment. Upon completion of the GIC acquisition, Eric J. Barash, the
founder and former President of GIC, became Senior Vice President of the
Company.
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On October 31, 1996, the Company acquired the outstanding capital stock of
CCL. CCL is located in West Chester, Pennsylvania and focuses primarily on the
broker market in the mid-Atlantic region of the United States. By virtue of the
CCL acquisition, the Company gained a geographic presence in the mid-Atlantic
broker market, as well as the national market for vendors of arbor servicing
equipment. See "-- Sales and Marketing." For the ten months ended October 31,
1996, CCL generated equipment leases of $31.4 million. Upon completion of the
CCL acquisition, Valerie A. Hayes, the founder and former President of CCL,
became President of the Company's Corporate Capital Leasing Division.
On February 4, 1997, the Company acquired certain assets and liabilities of
Lease Pro. Lease Pro is located in Atlanta, Georgia and has a significant
presence in the national market for veterinary equipment financing. Since
October 1986, Lease Pro has generated approximately 5,000 veterinarian leases.
For the year ended December 31, 1996, Lease Pro generated equipment leases of
approximately $12.6 million. In connection with the acquisition of Lease Pro,
Charles E. Lester, the founder and former President of Lease Pro, was named
President of the Company's Lease Pro division.
The Company has entered into an agreement to acquire the outstanding
capital stock of Heritage for $6.4 million, consisting of $1.4 million in cash,
a $1.0 million subordinated note bearing interest at 9.00% per annum and 444,444
shares of Common Stock (assuming an initial public offering price of $9.00 per
share). Closing of the Heritage Acquisition will occur concurrently with and is
contingent upon, the closing of the Offering. Heritage is located near
Sacramento, California and maintains sales offices in Miami, Florida, Los
Angeles, California and Prescott, Arizona. Heritage is primarily involved in the
broker market on the U.S. west coast and has a significant vendor base in
California, the largest market in the United States, based on a study by the
Foundation for Leasing Education. For the year ended December 31, 1996, Heritage
generated equipment leases of approximately $48.9 million. Upon completion of
the Heritage Acquisition, it is expected that Oren M. Hall, the founder and
President of Heritage, will be named an Executive Vice President of the Company,
and Greg E. McIntosh, Executive Vice President and Chief Operating Officer of
Heritage, will be named a Senior Vice President of the Company. Charles E.
Brazier, Executive Vice President and Chief Operating Officer of Oakmont
Financial, a division of Heritage, also will be named a Senior Vice President of
the Company upon completion of the Heritage Acquisition.
CREDIT POLICIES AND PROCEDURES
The Company has developed credit underwriting policies and procedures that
management believes have been effective in the selection of creditworthy
equipment lessees and in minimizing the risks of delinquencies and credit
losses. The nature of the Company's business requires two levels of review, the
first focused on the qualification of the Source and the second focused on the
lessee or ultimate end-user of the equipment.
Source Qualification
The Company performs a background investigation on all potential Sources.
This investigation may include verification of bank and trade references and a
review of financial statements, past credit history and the business and
industry in which the Source operates. The Company performs additional
procedures to evaluate the credit worthiness of its Private Label Sources
because of the credit protection provided by such Sources under the Private
Label program. Such additional procedures may include an examination of the
Source's management team, staffing and servicing infrastructure, as well as a
review of ongoing support capabilities in credit, documentation, customer
service and collections.
Lease Underwriting
In each of the Company's lease funding programs, the Company reviews
individual leases for compliance with underwriting guidelines prepared by the
Company's Credit Policy Committee. The Company's underwriting guidelines
generally require a credit investigation of an equipment lessee, including an
analysis of the personal credit of the owner who typically guarantees the lease,
verification of time in business and corporate name, and bank and trade
references. Under the Private Label program, certain of these functions are
performed by the Source.
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<PAGE> 35
The lease approval process begins with the submission by facsimile or
electronic transmission of a credit application by the lease originator, at
which time the Company conducts its own independent credit investigation through
recognized commercial credit reporting agencies such as Dun & Bradstreet,
Equifax, Inc. and TRW, Inc. The credit application is then forwarded to the
Company's operations center in Jupiter, Florida for review and approval by a
senior credit officer. The time required for an underwriting decision varies
according to the nature, size and complexity of each transaction, but approval
is generally accomplished within one day.
Once a determination to fund has been made, the Company requires receipt of
signed lease documentation on the Company's standard lease form, or other
pre-approved lease forms, before funding. Once the equipment is shipped and
installed, the vendor invoices the Company, and thereafter the Company verifies
that the lessee has received and accepted the equipment. Upon the lessee
authorizing payment to the vendor, the lease is forwarded to the Company's
funding and documentation department for funding, transaction accounting and
billing procedures.
In connection with the Company's securitization program, extensive reviews
of the Company's underwriting standards and procedures are conducted by
financial guaranty insurers and rating agencies.
SERVICING AND ADMINISTRATION
The Company's servicing responsibilities with respect to any lease vary
depending on the program under which the lease was acquired or originated. Such
servicing responsibilities generally include billing, processing payments,
remitting payments to Sources and investors, preparing investor reports, paying
taxes and insurance and performing collection and liquidation functions. For
equipment leases funded under the Private Label program, the collection and
customer service functions are performed by the Source, while the Company
performs other servicing functions including billing and cash receipt. This
arrangement allows the Source to maintain close relationships with lessees and
reduces the Company's servicing costs. Under its Broker and Vendor programs, the
Company is normally responsible for all servicing functions.
The Company retains the right to service leases sold though its
securitization transactions. In return, the Company receives a servicing fee of
0.50% per annum on the outstanding principal balance of all securitized leases
plus late fees, which are collected out of monthly lease payments. Management
believes that the Company's performance of servicing functions on its
securitized leases enhances certain operating efficiencies and provides an
additional revenue stream. As of December 31, 1996, the Company had a servicing
portfolio of $217.3 million.
The small ticket leasing industry is operationally intensive due, in part,
to the small average lease size. Accordingly, state-of-the-art technology is
critical in keeping servicing costs to a minimum and providing quality customer
service. Recognizing the importance of servicing, the Company utilizes a lease
administration system tailored to support the Company's technological needs. The
system handles application tracking, invoicing, payment processing, automated
collection queuing, portfolio evaluation, cash forecasting and report writing.
The system is linked with a lockbox bank account for payment processing and
provides for direct withdrawal of lease payments. The system also allows users
to view all lease documents on-line.
The Company's underwriting, customer service and collection staff are
centralized in its Jupiter, Florida office. This operations center is managed by
Robert H. Quinn, Jr., Executive Vice President and Chief Credit Officer of the
Company, who has over 23 years of experience in the lease finance industry.
Payment processing, accounting, and reporting are performed in Houston, Texas
and are managed by Sandy B. Ho, Executive Vice President and Chief Financial
Officer of the Company, and Craig M. Spencer, Senior Vice President and Chief
Accounting Officer of the Company, who together have in excess of 28 years of
experience in financial services and reporting. See "Management."
Collection functions (other than receipt of cash) for leases acquired under
the Company's Private Label program are performed by the Source. Many of the
Company's Private Label Sources have direct access to the Company's lease
administration system to assist them in servicing and collecting the leases sold
to the Company. Delinquency information with respect to leases from each Private
Label Source is closely
34
<PAGE> 36
monitored by the Company's management. In the event of a lessee default
(typically when an account is 90 days past due), the Company sends a notice to
the Source stating that the Source is obligated to repurchase the lease or cure
the delinquency within 60 days. For leases acquired or originated under the
Company's Broker and Vendor programs, the Company's collections policy is
designed to identify payment problems sufficiently early to permit the Company
to quickly address delinquencies and, when necessary, to act to preserve equity
in the equipment leased. Collection procedures commence immediately upon
payments becoming 10 days past due.
TERMS OF EQUIPMENT LEASES
Substantially all equipment leases acquired or originated by the Company
are non-cancelable. During the term of the lease, the Company generally receives
scheduled payments sufficient, in the aggregate, to cover the Company's
borrowing costs and the costs of the underlying equipment, and to provide the
Company with an appropriate profit margin. The initial non-cancelable term of
the lease is equal to or less than the equipment's estimated economic life and a
small portion of the Company's leases provide the Company with additional
revenues based on the residual value of the equipment financed at the end of the
initial term of the lease. Initial terms of the leases in the Company's
portfolio generally range from 12 to 84 months, with a weighted average initial
term of 55 months as of December 31, 1996.
The terms and conditions of all of the Company's leases are substantially
similar. In most cases, the lessees contractually are required to: (i) maintain,
service and operate the equipment in accordance with the manufacturer's and
government-mandated procedures; (ii) insure the equipment against property and
casualty loss; (iii) pay all taxes associated with the equipment; and (iv) make
all scheduled contract payments regardless of the performance of the equipment.
The Company's standard forms of leases provide that in the event of a default by
the lessee, the Company can require payment of liquidated damages and can seize
and remove the equipment for subsequent sale, refinancing or other disposal at
its discretion. Any additions, modifications or upgrades to the equipment,
regardless of the source of payment, are automatically incorporated into and
deemed a part of the equipment financed.
RESIDUAL INTERESTS IN UNDERLYING EQUIPMENT
Under its Broker and Vendor programs, the Company may own a residual
interest in the equipment covered by the lease. The Company records the residual
value of a lease on its books when there is no obligation on the part of the
lessee to purchase the equipment at the expiration of the lease term. Of the
leases acquired or originated by the Company under its Broker and Vendor
programs and outstanding as of December 31, 1996, approximately 47% of such
leases (as measured by net investment) had no residual value on the Company's
books, generally because the lessee was granted an option to purchase the
equipment at the end of the term for a nominal price or the lessee was required
to purchase the equipment at the end of the term at a fixed price. The balance
of the equipment leases acquired and originated by the Company under its Broker
and Vendor programs and outstanding as of December 31, 1996 had a residual value
of approximately $564,000 in the aggregate, representing less than 0.8% of the
Company's total assets at December 31, 1996. With respect to equipment in which
the Company owns a residual interest, the Company generally seeks to determine
the best remarketing plan for such equipment prior to the expiration of the
lease covering such equipment. In many cases, such remarketing plan provides for
the continuation of the lease on a month to month or other basis or the
negotiated sale of the equipment to the lessee through equipment brokers and
remarketers, rather than the Company's employees, in order to maximize the net
proceeds from such sale.
EXPOSURE TO CREDIT LOSSES
The Company manages its risk of credit losses through adherence to
conservative underwriting guidelines, providing for recourse to Private Label
Sources and prompt and diligent collection procedures. Management evaluates the
collectibility of leases acquired or originated based on the level of recourse
provided, if any, delinquency statistics, historical loss experience, current
economic conditions and other relevant factors. The Company provides an
allowance for credit losses for leases which are considered impaired during the
period from the funding of the leases through the date such leases are sold
through the
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<PAGE> 37
Company's securitization program. Estimated losses on leases that are considered
impaired and have been sold through the Company's securitization program are
taken into consideration in the valuation of the Company's investment in the
Trust Certificates retained in the securitization transaction.
The following table sets forth certain information as of December 31, 1995
and 1996, with respect to leases which were held by the Company in its portfolio
or serviced by the Company pursuant to its securitization program (dollars in
thousands):
<TABLE>
<CAPTION>
1996
---------------------------------------
PRIVATE
1995 LABEL BROKER VENDOR
TOTAL(1) PROGRAM PROGRAM PROGRAM TOTAL
-------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Gross leases outstanding............ $83,687 $244,049 $9,715 $3,470 $257,234
31-60 days past due................. 2.53% 2.46% 1.69% --% 2.40%
61-90 days past due................. 0.45% 0.81% 0.29% --% 0.78%
Over 90 days past due............... 0.08% 0.35% --% --% 0.33%
------- -------- ------ ------ --------
Total past due.................... 3.06% 3.62% 1.98% --% 3.51%
</TABLE>
- ---------------
(1) All leases outstanding at December 31, 1995 were acquired under the
Company's Private Label program.
In assessing the Company's exposure to credit losses, management generally
segregates the leases acquired under its Private Label program from those
acquired or originated under its Broker and Vendor programs due to the differing
levels of credit protection available to the Company under the various lease
funding programs.
The following table sets forth the Company's allowance for credit losses
for its Private Label program and its Broker and Vendor programs as of December
31, 1994 and for the years ended December 31, 1995 and 1996 (in thousands):
<TABLE>
<CAPTION>
PRIVATE BROKER AND
LABEL VENDOR
PROGRAM PROGRAMS(1) TOTAL
------- ----------- -----
<S> <C> <C> <C>
Balance at December 31, 1994............................ $ 28 -- $ 28
Provision for credit losses............................. 392 -- 392
Charge-offs, net of recoveries.......................... -- -- --
---- ---- ----
Balance at December 31, 1995............................ 420 -- 420
Provision for credit losses............................. 326 211 537
Charge-offs, net of recoveries.......................... (25) -- (25)
Reduction of allowance for leases sold.................. (407) -- (407)
---- ---- ----
Balance at December 31, 1996............................ $314 $211 $525
==== ==== ====
</TABLE>
- ---------------
(1) The Company established its Broker and Vendor programs in 1996 through the
acquisitions of GIC in July 1996 and CCL in October 1996.
Under the Private Label program, the Company seeks to minimize its losses
through a first lien security interest in the equipment funded, recourse to the
Private Label Source, holdback reserves withheld from the Private Label Source
upon purchase of the lease, or a combination of the above. The recourse
provisions generally require the Private Label Source to repurchase a receivable
when it becomes 90 days past due. The recourse commitment generally ranges from
10% to 20% of the aggregate purchase price of all leases acquired from a Private
Label Source. Holdback reserves withheld from the purchase price generally range
from 1% to 10% of the aggregate purchase price of the leases acquired from the
Private Label Source. In determining whether a lease acquired pursuant to the
Private Label program which is considered impaired will result in a loss to the
Company, management takes into consideration the ability of the Private Label
Source to honor its recourse commitments, the holdback reserves withheld from
the Private Label Source upon purchase of the
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<PAGE> 38
lease, as well as the credit quality of the underlying lessee and the related
equipment value. At December 31, 1995 and 1996, the Company had holdback
reserves of $2.0 million and $6.5 million, respectively, relating to leases
acquired pursuant to the Private Label program. Such amounts have been
classified as liabilities in the accompanying financial statements.
The following table sets forth certain aggregate information regarding the
level of credit protection afforded the Company pursuant to the recourse and
holdback provisions of the Private Label program as of December 31, 1995 and
1996 (dollars in thousands):
<TABLE>
<CAPTION>
1995 1996
------- --------
<S> <C> <C>
Leases outstanding under the Private Label program(1)....... $67,322 $202,523
======= ========
Recourse to Sources available............................... 5,744 19,480
Holdback reserves outstanding............................... 1,969 6,523
------- --------
Total recourse and holdback reserves available.............. $ 7,713 $ 26,003
======= ========
Ratio of recourse and holdback reserves outstanding to total
leases outstanding under the Private Label program(2)..... 11.46% 12.84%
======= ========
</TABLE>
- ---------------
(1) Represents net principal balance of leases held by the Company in its
portfolio, as well as leases serviced by the Company pursuant to its
securitization program.
(2) The specific level of credit protection varies for each Private Label
Source. Specific levels of credit protection by Source are considered by
management in determining the allowance for credit losses.
The following table sets forth the experience of the Company with respect
to leases acquired pursuant to the Private Label program for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION TO YEAR ENDED DECEMBER 31,
DECEMBER 31, -----------------------
1994 1995 1996
------------ -------- ---------
<S> <C> <C> <C>
Average balance of leases acquired pursuant to
the Private Label program outstanding during
the period(1)................................. $1,442 $30,561 $124,592
====== ======= ========
Total amount of leases triggering action under
recourse and holdback provisions during the
period........................................ -- 266 1,855
Amounts recovered under recourse provisions..... -- 238 1,694
Amounts recovered pursuant to holdback
reserves...................................... -- 28 136
------ ------- --------
Total amounts recovered......................... -- 266 1,830
------ ------- --------
Net loss experienced on leases acquired pursuant
to the Private Label program.................. $ -- $ -- $ 25
====== ======= ========
Net default ratio............................... 0.00% 0.00% 0.02%
====== ======= ========
</TABLE>
- ---------------
(1) Represents net principal balance of leases held by the Company in its
portfolio, as well as leases serviced by the Company pursuant to its
securitization program.
At December 31, 1996, the Company's outstanding net principal balance of
leases acquired or originated under its Broker and Vendor programs was $10.5
million. Such leases had been outstanding for less than two months on a weighted
average basis as of such date. Management analyzes the collectibility of leases
acquired or originated pursuant to its Broker and Vendor programs based on its
underwriting criteria, delinquency statistics, historical loss experience,
current economic conditions and other relevant factors. While the Company has a
first lien security interest in the underlying equipment, it does not have any
recourse or holdback reserves with respect to any leases acquired or originated
under its Broker and Vendor programs. Management believes, however, that the
relatively short holding period between the time that leases are
37
<PAGE> 39
acquired or originated under these programs and the time that such leases are
sold minimizes the Company's exposure to credit losses. Accordingly, management
believes that an allowance for credit losses of $211,000 is adequate to cover
estimated losses incurred on Broker or Vendor leases considered to be impaired
as of December 31, 1996.
The Company's allowance for credit losses and its valuation of the Trust
Certificates retained in its securitization transactions are based on estimates
and qualitative evaluations, and ultimate losses will vary from current
estimates. These estimates are reviewed periodically and, as adjustments, either
positive or negative, become necessary, they are reported in the Company's
results of operations for the period in which they become known.
SALES AND MARKETING
The Company's marketing strategy is to increase its volume of lease funding
by (i) maintaining, selectively expanding and supporting its network of lease
Sources, (ii) developing programs for specific vendor or customer groups, (iii)
developing and introducing complementary lease finance products that can be
marketed and sold through its existing network of lease Sources, and (iv)
selectively acquiring leasing companies with origination capabilities which are
complementary to the Company.
As of February 27, 1997, the Company employed a sales force of 34
employees. These employees are responsible for implementing marketing plans and
coordinating marketing activities with the Company's lease Sources, as well as
providing customer service and participating in the Company's attendance at
industry conventions and trade shows. The Company expects to add 18 employees to
its sales force upon consummation of the Heritage Acquisition.
The Company has established a substantial network of independent leasing
companies, brokers and vendors. The Company developed its network of Sources as
a result of the industry knowledge and experience of its management. In
conjunction with the Company's sales force, the Company's management maintains
close contact with these Sources. Many of these Sources have had a prior
relationship with the management or sales force of the Company and have, in
management's opinion, shown an ability to generate significant volumes of leases
with a credit quality that meets the Company's conservative underwriting
guidelines.
The Company's sales force has developed several convenience-oriented
speciality lease finance programs designed to enhance lease volume in specific
industries. For example, the Company provides financing to the arbor (tree
service) industry and provides business operators within this industry with a
pre-approved credit line, referred to by the Company as an "Arbor Card," which
can be used with various vendors of arbor equipment, enabling the business
operator to obtain quick and efficient financing. The Company intends to
continue to grow its business by offering specialized finance products to both
existing and new Sources.
The Company is represented at major equipment leasing conventions and trade
shows held each year, and several officers of the Company are active in the
Equipment Leasing Association, the United Association of Equipment Lessors and
the Eastern Association of Equipment Lessors, all well-recognized trade
associations.
COMPETITION
The Company competes in the equipment financing market with a number of
national, regional and local finance companies. In addition, the Company's
competitors include those equipment manufacturers that finance the sale or lease
of their products themselves and other traditional types of financial services
companies, such as commercial banks and savings and loan association, all of
which provide financing for the purchase of equipment. The Company's competitors
include many larger, more established companies that may have access to capital
markets and to other funding sources which may not be available to the Company.
Many of the Company's competitors have substantially greater financial,
marketing and operational resources and longer operating histories than the
Company.
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<PAGE> 40
The Company believes that the structure of its warehouse facilities and its
securitization program provide it with access to capital on terms comparable to
those of its larger, more established competitors. The Company believes that its
experienced management team and sales force, its advanced technology and
servicing capacity and its significant broker and vendor base allows the Company
to aggressively compete with larger, more established companies.
FACILITIES
The Company's corporate headquarters are located in leased space of 9,114
square feet at 600 Travis Street, Suite 7050, Houston, Texas 77002. The
Company's operations center is located in leased space of 4,683 square feet at
1061 E. Indiantown Road, Suite 204, Jupiter, Florida 33477. The Company also
leases office space for its regional offices in Fort Lauderdale, Florida,
Marietta, Georgia and West Chester, Pennsylvania. As of December 31, 1996, the
aggregate monthly rent under all of the Company's office leases was
approximately $33,000. The Company has an aggregate of approximately 26,253
square feet under lease with an average remaining lease term of two years.
EMPLOYEES
As of February 27, 1997, the Company had 80 full time employees, of which
24 were engaged in credit and collection activities, 22 were engaged in
servicing and general administration activities and 34 were engaged in marketing
activities. Upon consummation of the Heritage Acquisition, the Company expects
to add 45 employees, of which 10 will be engaged in credit and collection
activities, 17 will be engaged in servicing and general administration
activities and 18 will be engaged in marketing activities. Management believes
that its relationship with its employees is good. No employees of the Company
are members of a collective bargaining unit.
LEGAL PROCEEDINGS
From time to time, the Company and its subsidiaries are parties to various
claims, lawsuits and administrative proceedings arising in the ordinary course
of business. Although the outcome of these lawsuits cannot be predicted with
certainty, the Company does not expect such matters to have a material adverse
effect on the financial condition or results of operations of the Company.
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<PAGE> 41
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position with the Company
of each of the directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Thomas J. Depping(1)....... Chairman of the Board, President and Chief Executive
38 Officer
Richard J. Campo(2)(3)..... 42 Director
Norman J. Metcalfe(2)(3)... 54 Director
David C. Shindeldecker..... 48 Director
David L. Solomon(1)........ 43 Director
Oren M. Hall(4)............ 60 Executive Vice President
Sandy B. Ho................ 37 Executive Vice President and Chief Financial Officer
Robert H. Quinn, Jr........ 42 Executive Vice President and Chief Credit Officer
Craig M. Spencer........... 35 Senior Vice President and Chief Accounting Officer
</TABLE>
- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit and Stock Option Committees.
(3) To be elected following completion of the Offering.
(4) To be named an Executive Vice President following closing of the Heritage
Acquisition.
Set forth below is a brief description of the business experience of the
executive officers and directors of the Company.
Thomas J. Depping has served as Chairman of the Board, President and Chief
Executive Officer of the Company since its inception in June 1994. Mr. Depping
has over 15 years of experience in the equipment leasing industry, including 11
years with SunAmerica Financial Resources and its predecessor company. From 1991
to May 1994, Mr. Depping served as President of SunAmerica Financial Resources,
the equipment leasing and financial division of SunAmerica, Inc. Mr. Depping is
a licensed Certified Public Accountant in the State of Texas.
Richard J. Campo will become a director of the Company upon completion of
the Offering. Mr. Campo has been Chairman of the Board and Chief Executive
Officer of Camden Property Trust, a self-administered, self-managed real estate
investment trust based in Houston, Texas, since May 1993. From 1986 to May 1993,
Mr. Campo was Chairman of the Board and Chief Executive Officer of Centeq
Holdings, Inc., a predecessor company of Camden Property Trust. Mr. Campo has
over 20 years of experience in the real estate industry.
Norman J. Metcalfe will become a director of the Company upon completion of
the Offering. Mr. Metcalfe is the managing director of a private investment and
consulting firm. From February 1993 to December 1996, Mr. Metcalfe served as
Vice Chairman and Chief Financial Officer for The Irvine Company. From 1989 to
1992, Mr. Metcalfe served as President of SunAmerica Investments as well as
Chief Investment Officer for SunAmerica Investments' $10 billion insurance
investment portfolio. In the past, Mr. Metcalfe has served on the Board of
Directors of SunAmerica, Inc., Kaufman and Broad Home Corporation and Irvine
Apartment Communities.
David C. Shindeldecker has been a director of the Company since June 1994.
Mr. Shindeldecker has been Chairman and Chief Executive Officer of Northwest
Bancorporation Inc. since June 1988. He was Chief Executive Officer of Northwest
Bank, N.A., a subsidiary of Northwest Bancorporation Inc., from 1988 to 1993,
and currently serves on the Board of Directors of Northwest Bank, N.A. In
addition, he currently serves as President and Co-Chief Executive Officer of
Redstone, Inc., general partner of Redstone, and has served as an executive
officer and director of Redstone, Inc. since 1994. Redstone is an investment
company with investments and operations, either directly or through various
affiliates, in hotels, restaurants and real estate.
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<PAGE> 42
Redstone and Northwest Bancorporation Inc. are affiliates of each other. Mr.
Shindeldecker has also served as an executive officer and director of numerous
entities that are affiliated with Redstone and/or its predecessor entities since
1989.
David L. Solomon has been a director of the Company since June 1994. Mr.
Solomon has served as Chairman and Co-Chief Executive Officer of Redstone, Inc.,
general partner of Redstone, since 1996. Mr. Solomon has also served as an
executive officer and director of numerous entities that are affiliated with
Redstone and/or its predecessor entities since 1989. Mr. Solomon serves on the
Board of Directors of Northwest Bank, N.A. and L.B. Simmons Energy, Inc. Mr.
Solomon also has served on the Board of Directors of TeleServe, Inc., an
affiliate of Camden Property Trust, since 1995. Mr. Solomon has been a Senior
Vice President with PaineWebber since August 1994. From May 1985 to August 1994,
Mr. Solomon was a Senior Vice President of Kidder, Peabody & Co.
Oren M. Hall was the founder of Heritage and has been its sole shareholder
and President since 1986. The Company and Mr. Hall are currently parties to a
definitive agreement that contemplates the acquisition by the Company of
Heritage through a merger transaction, effective as of the date of closing of
the Offering. Upon such closing, Mr. Hall will become an Executive Vice
President of the Company. In such capacity, it is expected that Mr. Hall will be
responsible for the overall management of the Company's acquisition and
origination of leases. Mr. Hall has 23 years of experience in the leasing
industry. Mr. Hall was President of the United Association of Equipment Lessors
during 1996.
Sandy B. Ho has served as Executive Vice President and Chief Financial
Officer of the Company since January 1995. Ms. Ho has over 15 years of
experience in the equipment leasing and financial services industries, including
10 years with SunAmerica Financial Resources and its predecessor company. From
1991 through 1994, Ms. Ho served as Vice President of SunAmerica Financial
Resources and Managing Director of SunAmerica Corporate Finance. Ms. Ho is a
licensed Certified Public Accountant in the State of Texas.
Robert H. Quinn, Jr. has served as Executive Vice President and Chief
Credit Officer of the Company since August 1994. Mr. Quinn has over 23 years of
experience in the commercial banking and lease finance industries. From December
1992 through July 1994, Mr. Quinn managed the private label division of AT&T
Capital. In such capacity, Mr. Quinn was directly responsible for generating new
private label transactions for AT&T Capital and managing its sales force,
credit, documentation and funding, as well as portfolio quality. Prior to his
employment at AT&T, Mr. Quinn was employed by Bank of New England for 18 years,
most recently as a senior credit officer.
Craig M. Spencer has served as Senior Vice President and Chief Accounting
Officer of the Company since November 1996. From 1984 until 1996, Mr. Spencer
was employed by Arthur Andersen LLP as a senior manager specializing in
financial services companies and asset securitization transactions. Immediately
prior to joining the Company, Mr. Spencer was a Director of Portfolio Management
with Enron Capital & Trade Resources, Inc. Mr. Spencer is a licensed Certified
Public Accountant in the State of Texas.
ELECTION OF DIRECTORS
Upon completion of the Offering, the Company's Board of Directors will be
divided into three classes and the directors will be appointed to the following
classes: Mr. Campo and Mr. Shindeldecker will be Class I directors with their
terms of office expiring on the date of the Company's annual meeting of
stockholders in 1998; Mr. Metcalfe will be a Class II director with a term of
office expiring on the date of the Company's annual meeting of stockholders in
1999; and Mr. Depping and Mr. Solomon will be Class III directors with their
terms of office expiring on the date of the Company's annual meeting of
stockholders in 2000.
Messrs. Depping, Solomon and Shindeldecker were elected to the Company's
Board of Directors pursuant to the terms of a Stockholders Agreement dated as of
June 3, 1994 (the "Stockholders Agreement"). The Stockholders Agreement will be
terminated prior to completion of the Offering.
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<PAGE> 43
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information
concerning the compensation payable by the Company to its Chief Executive
Officer and its other most highly compensated executive officers for the year
ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
NAME AND PRINCIPAL POSITION SALARY BONUS
--------------------------- -------- --------
<S> <C> <C>
Thomas J. Depping........................................... $200,000 $100,000
President and Chief Executive Officer
Sandy B. Ho................................................. $131,250 $110,000
Executive Vice President and Chief Financial Officer
Robert H. Quinn, Jr......................................... $145,417 $120,000
Executive Vice President and Chief Credit Officer
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Thomas J. Depping
effective as of completion of the Offering. Mr. Depping's employment agreement
has an initial term of three years with an evergreen three year extension
continuing after the initial term unless either the Company or the employee
gives 90 days' notice of termination. Pursuant to his employment agreement, Mr.
Depping will be entitled to receive an annual salary of not less than $250,000.
In addition, if the agreement is terminated without cause by the Company, or
with cause (including certain changes in control of the Company) by Mr. Depping,
the Company is obligated to pay Mr. Depping a termination fee equal to three
times the amount of Mr. Depping's then current annual rate of total
compensation. In addition, the agreement contains a covenant prohibiting Mr.
Depping from competing with the Company for a period of one year following
termination of his employment with the Company. The agreement also provides for
customary benefits and perquisites.
The Company has entered into separate employment agreements with each of
Sandy B. Ho and Robert H. Quinn effective as of completion of the Offering. The
employment agreements have an initial term of three years. Pursuant to these
agreements, Ms. Ho and Mr. Quinn will each be entitled to receive an annual
salary of not less than $160,000. In addition, these agreements contain a
covenant prohibiting the employee from competing with the Company for a period
of one year following termination of his or her employment with the Company. The
agreements with Ms. Ho and Mr. Quinn also will provide for customary benefits
and perquisites.
In connection with the closing of the Heritage Acquisition, the Company
will enter into an employment agreement with Oren M. Hall, whereby Mr. Hall will
be employed as an Executive Vice President of the Company. Mr. Hall's employment
agreement will have a term of three years and will provide that Mr. Hall will
have an annual salary of not less than $195,000. The agreement will contain a
provision which requires the Company to pay Mr. Hall at least 12 months of base
salary if the agreement is terminated without cause by the Company or with cause
by Mr. Hall. In addition, the agreement will contain a covenant prohibiting Mr.
Hall from competing with the Company for a period of one year following
termination of his employment with the Company. The agreement also will provide
for customary benefits and perquisites.
COMPENSATION OF DIRECTORS
Following the Offering, it is anticipated that each outside director of the
Company who is not an officer or employee of the Company or any of its
subsidiaries or affiliated with Redstone will have the option to receive, as of
the date of each annual meeting of stockholders of the Company, a cash retainer
of $25,000 or a number of shares of Common Stock of the Company valued at
$25,000 (based on the closing price of the Common
42
<PAGE> 44
Stock on the date of the annual meeting of stockholders). In addition, all
directors of the Company will be reimbursed for expenses incurred in attending
meetings of the Board of Directors and committees thereof.
STOCK OPTION PLAN
1997 Stock Option Plan. The Company has adopted the 1997 Stock Option Plan
(the "1997 Stock Option Plan") to align the interests of the directors,
executives, consultants, and employees of the Company with those of its
stockholders. 1,800,000 shares of Common Stock have been reserved for issuance
pursuant to the 1997 Stock Option Plan. The 1997 Stock Option Plan is
administered by the Stock Option Committee of the Board of Directors. Under the
1997 Stock Option Plan, the Company may grant both incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code and options
that are not qualified as incentive stock options ("non-qualified stock
options"). Non-qualified stock options may be granted to directors, executives,
consultants and employees of the Company and its subsidiaries. The exercise
price of non-qualified stock options will be determined by the Board of
Directors or a committee thereof and will not be less than the fair market value
of the Common Stock on the date the option is granted. Incentive stock options
may be granted only to individuals who are employees of the Company or a
subsidiary on the date of grant. The exercise price of incentive stock options
will be determined by the Board of Directors or a committee thereof and will not
be less than the fair market value of the Common Stock on the date the incentive
stock option is granted. Subject to the terms of the 1997 Stock Option Plan, the
Board of Directors or a committee thereof is authorized to select the recipients
of options from among those eligible and to establish the exercise price and the
number of shares that may be issued under each option. The maximum number of
shares of Common Stock that may be subject to options granted to any one
individual under the 1997 Stock Option Plan during any calendar year may not
exceed 500,000 shares. Under the terms of the 1997 Stock Option Plan, the
exercise price of an option may be paid in cash, in shares of Common Stock
(valued at fair market value on the date of exercise) or by a combination of
such means of payment, as may be determined by the Board of Directors or a
committee thereof.
The 1997 Stock Option Plan provides that the total number of shares covered
by such plan, the maximum number of shares which may be the subject of options
awarded to any one individual in a calendar year, the number of shares covered
by each option, and the exercise price per share under each option will be
proportionately adjusted in the event of a stock split, reverse stock split,
stock dividend, or similar capital adjustment effected without receipt of
consideration by the Company.
Concurrently with the Offering, each of the following individuals will be
awarded a non-qualified stock option under the 1997 Stock Option Plan for the
number of shares of Common Stock indicated: David L. Solomon, Director, 137,826
shares; David C. Shindeldecker, Director, 137,826 shares; Thomas J. Depping,
President, Chief Executive Officer and Chairman of the Board of Directors,
367,536 shares; Robert H. Quinn, Jr., Executive Vice President, 128,941 shares;
Sandy B. Ho, Executive Vice President, 128,941 shares; and 109,692 shares to
other officers of the Company. Each option will (i) have an exercise price per
share equal to the initial public offering price of the Common Stock, (ii) vest
over a period of five years at the rate of 20% per year beginning on the first
anniversary of the date of grant, and (iii) have a term of ten years. All of
such options also will become fully vested in the event that the optionee's
employment with the Company terminates by reason of death or upon the occurrence
of a "Corporate Change" while the optionee is employed by the Company or one of
its subsidiaries. The 1997 Stock Option Plan provides that a Corporate Change
occurs (i) if the Company is dissolved and liquidated, (ii) if the Company is
not the surviving entity in any merger, consolidation, or reorganization (or
survives only as a subsidiary of another entity), (iii) if the Company sells,
leases or exchanges, or agrees to sell, lease, or exchange, all or substantially
all of its assets, (iv) if any person, entity or group acquires or gains
ownership or control of more than 50% of the outstanding shares of the Company's
voting stock (based upon voting power), or (v) if, after a contested election of
directors, the persons who were directors before such election cease to
constitute a majority of the Board of Directors.
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<PAGE> 45
EXECUTIVE INCENTIVE COMPENSATION PLAN
The Board of Directors has adopted the Executive Incentive Compensation
Plan (the "Incentive Plan"). The Incentive Plan provides for the payment of
incentive awards for a fiscal year only if the Company's after-tax earnings for
such fiscal year (determined without regard to payments under the Incentive
Plan) exceeds 20% of the Company's Average Common Equity (as defined below) for
such fiscal year. In the event that such threshold is satisfied for a fiscal
year, then the aggregate incentive compensation that will be paid under the
Incentive Plan for a fiscal year (the "Incentive Pool") will be equal to 12% of
the excess, if any, of the Company's pre-tax earnings for such fiscal year
(determined without regard to payments under the Incentive Plan) over 20% of the
Company's Average Common Equity for such fiscal year. The Average Common Equity
for a fiscal year is the average of the balance of equity attributable to the
outstanding Common Stock of the Company (including par value, additional paid in
capital and retained earnings), as reflected in the financial statements of the
Company at the end of each month during the fiscal year. The entire amount in
each Incentive Pool will be paid in cash to the Incentive Plan participants
within two and one-half months after the last day of the fiscal year to which
such Incentive Pool relates. At least 85% of each Incentive Pool will be paid to
the Chief Executive Officer and the Executive Vice Presidents of the Company,
with each such individual's share of such aggregate amount to be determined by
the Chief Executive Officer, subject to the approval of the Compensation
Committee. The balance of the Incentive Pool will be paid to other senior
management employees of the Company. Such other employees, and the amount paid
to each such individual, will be determined by the Chief Executive Officer,
subject to the approval of the Compensation Committee.
44
<PAGE> 46
CERTAIN TRANSACTIONS
The Stockholders Agreement contains provisions for voting of shares,
election of directors, restrictions on transfer of shares and certain demand and
piggyback registration rights. All of the existing members of the Company's
Board of Directors were elected pursuant to the terms of the Stockholders
Agreement. The Stockholders Agreement will be terminated prior to completion of
the Offering. The Company and the holders of 100% of the Common Stock
outstanding prior to the Offering will enter into a Registration Rights
Agreement (the "Registration Rights Agreement") prior to completion of the
Offering. The Registration Rights Agreement will provide each of Redstone and
its affiliates and Thomas J. Depping, after the Offering, with the right on two
occasions to require the Company to register all or part of their registrable
shares under the Securities Act, provided that at least 400,000 shares of Common
Stock will be registered in such offering, and the Company will be required to
use its diligent good faith efforts to effect such registration, subject to
certain conditions and limitations. The Registration Rights Agreement also will
provide all the parties to the Registration Rights Agreement with piggyback
registration rights on any underwritten offering by the Company of any of its
securities, either for its own account or the account of a selling stockholder,
except for certain types of registrations, and with piggyback registration
rights on a registration pursuant to the demand rights described in the previous
sentence. The Company will bear the expenses of all registrations under the
Registration Rights Agreement other than the underwriting discounts and
commissions. The parties to the Registration Rights Agreement have waived their
rights to include their shares in the Offering.
Redstone and the Company are parties to a Loan Agreement dated June 8, 1994
pursuant to which Redstone loaned to the Company $9.0 million on a subordinated
basis. David L. Solomon, Chairman and Co-Chief Executive Officer of Redstone,
Inc., general partner of Redstone, is a director of the Company and its largest
beneficial stockholder. David C. Shindeldecker, President and Co-Chief Executive
Officer of Redstone, Inc., is a director of the Company and one of its largest
beneficial stockholders. The Subordinated Note bears interest at a rate of
11.00% per annum. Interest on the Subordinated Note is payable monthly and such
note matures on June 6, 2004.
The Company expects to use a portion of the proceeds of the Offering to
repay the outstanding balance under the Subordinated Note. Upon completion of
the Offering, the Company will enter into a new $5.0 million subordinated
revolving credit facility with Redstone. Advances under the subordinated
revolving credit facility will bear interest at 11.00% per annum and the
commitment level thereunder will decrease by $1.0 million per year.
The Company and an affiliate of Redstone (the "Affiliate") are parties to
an agreement dated December 20, 1996 whereby the Affiliate may introduce
potential lease customers or vendors of equipment to the Company. Pursuant to
this agreement, the Company will pay a referral fee to the Affiliate equal to
5.0% of the total equipment cost funded for each lease the Company enters into
with a customer referred to it by the Affiliate, which fee is consistent with
referral fees paid by the Company to other referral sources.
In June 1994, the Company entered into a two-year consulting agreement with
Roy H. Trice, Jr., one of the Company's stockholders, which terminated in June
1996. Pursuant to this agreement, Mr. Trice provided the Company with certain
consulting services and received an annual fee of $75,000 plus expenses. In May
1996, the Company acquired 628,426 shares of Common Stock from Mr. Trice for
$360,000.
In connection with the acquisition of GIC, irrevocable standby letters of
credit were issued by a financial institution in favor of Eric Barash and Daniel
Dengate in the amounts of $2,244,000 and $396,000, respectively. In connection
with the acquisition of CCL, an irrevocable standby letter of credit was issued
by a financial institution in favor of Valerie Hayes in the amount of
$2,500,000. See "Business -- Recent and Pending Acquisitions." Such letters of
credit are guaranteed by Redstone and can be drawn upon if certain events occur,
including the failure of the Company to pay dividends when due on the Preferred
Stock, the failure of the Company to redeem the Preferred Stock when required or
the occurrence of a liquidation, dissolution or winding up of the Company. The
Company has agreed to reimburse Redstone for any amounts required to be paid by
Redstone pursuant to its guarantee of the letters of credit.
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<PAGE> 47
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of April 15, 1997, and as
adjusted to reflect the sale of the Common Stock offered hereby, with respect to
the beneficial ownership of Common Stock of each person known by the Company to
be the beneficial owner of more than 5% of the outstanding Common Stock, each
director and executive officer of the Company and all directors and executive
officers of the Company as a group. Each person named has sole voting and
investment power with respect to the shares indicated, except as otherwise
stated in the notes to the table.
<TABLE>
<CAPTION>
PERCENT OF COMMON
STOCK OWNED
--------------------
SHARES OF BEFORE AFTER
COMMON STOCK OFFERING OFFERING
------------ -------- --------
<S> <C> <C> <C>
Thomas J. Depping........................................... 1,795,801 31.5% 22.1%
Redstone Group, Ltd.(1)..................................... 1,823,151 32.0% 22.4%
David C. Shindeldecker(2)................................... 1,970,518 34.6% 24.2%
David L. Solomon(2)......................................... 2,735,000 48.0% 33.6%
Oren M. Hall(3)............................................. -- -- 5.5%
Sandy B. Ho................................................. 235,790 4.1% 2.9%
Robert H. Quinn, Jr......................................... 235,790 4.1% 2.9%
Craig M. Spencer............................................ -- -- --
Richard J. Campo(4)......................................... -- -- --
Norman J. Metcalfe(4)....................................... -- -- --
All directors and executive officers as a group (9
persons).................................................. 5,149,748 90.4% 68.7%
</TABLE>
- ---------------
(1) Redstone is a Texas limited partnership, of which Redstone, Inc. is the
general partner.
(2) Includes 1,823,151 shares which are owned of record by Redstone. Messrs.
Shindeldecker and Solomon are Co-Chief Executive Officers of Redstone, Inc.,
the general partner of Redstone.
(3) Mr. Hall will be named an Executive Vice President following closing of the
Heritage Acquisition, expected to occur concurrently with completion of the
Offering. 444,444 shares (assuming an initial public offering price of $9.00
per share) will be issued to Mr. Hall upon consummation of the Heritage
Acquisition.
(4) To be elected following completion of the Offering.
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<PAGE> 48
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 25,000,000 shares
of common stock, par value $.01 per share ("Common Stock"), and 1,000,000 shares
of preferred stock, par value $.01 per share ("Preferred Stock").
COMMON STOCK
As of April 15, 1997, 5,696,310 shares of Common Stock were outstanding and
held of record by ten persons. Upon completion of the Offering, 8,140,754 shares
of Common Stock will be outstanding, excluding 918,878 shares of Common Stock
issuable upon exercise of options to be granted under the 1997 Stock Option Plan
concurrently with the Offering and 198,397 shares of Common Stock issuable upon
exercise of the Warrants.
The holders of Common Stock are entitled to one vote for each share held on
all matters submitted to a vote of holders of Common Stock. The Common Stock
does not have cumulative voting rights, which means that the holders of a
majority of the voting power of shares of Common Stock outstanding are able to
elect all the directors and the holders of the remaining shares are not able to
elect any directors. Each share of Common Stock is entitled to participate
equally in dividends, if, as and when declared by the Company's Board of
Directors, and in the distribution of assets in the event of liquidation,
subject in all cases to any prior rights of outstanding shares of Preferred
Stock. The Company has never paid cash dividends on its Common Stock. The shares
of Common Stock have no preemptive rights, redemption rights, or sinking fund
provisions. The outstanding shares of Common Stock are, and the shares of Common
Stock offered hereby upon issuance and sale will be, duly authorized, validly
issued, fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of Preferred Stock. The
Company's Board of Directors may establish, without stockholder approval, one or
more classes or series of Preferred Stock having the number of shares,
designations, relative voting rights, dividend rates, liquidation and other
rights, preferences, and limitations that the Board of Directors may designate.
The Company believes that this power to issue Preferred Stock will provide
flexibility in connection with possible corporate transactions. The issuance of
Preferred Stock, however, could adversely affect the voting power of holders of
Common Stock and restrict their rights to receive payments upon liquidation of
the Company. It could also have the effect of delaying, deferring or preventing
a change in control of the Company. As of April 15, 1997, the Company's
outstanding Preferred Stock consisted of 56,718 shares of Series A Preferred
Stock and 43,691 shares of Series B Preferred Stock.
SERIES A PREFERRED STOCK
As of April 15, 1997, the Company had issued and outstanding 56,718 shares
of Series A Preferred Stock. These shares will remain outstanding after the
Offering. The following description is a summary of the Certificate of
Designation for the Series A Preferred Stock, and is qualified in its entirety
by reference to that document.
Dividends. The Series A Preferred Stock ranks, with respect to dividend
rights and distribution of assets on liquidation, senior and prior to the Common
Stock, on parity with the Series B Preferred Stock and junior to, or on parity
with, as the case may be, any other stock of the Company designated as senior
to, or on parity with, as the case may be, Series A Preferred Stock. Holders of
Series A Preferred Stock are entitled to receive non-cumulative annual cash
dividends of $1.86 per share payable annually when declared by the Board of
Directors. Upon any voluntary or involuntary liquidation, dissolution or winding
up of the Company, the holders of Series A Preferred Stock then outstanding will
be entitled to receive an amount of cash per share equal to $46.54607 before any
distribution is made on the Common Stock. As long as any shares of Series A
Preferred Stock are outstanding, the Company may not pay, declare or set apart a
dividend or distribution on the Common Stock (other than stock dividends or
distributions payable in Common Stock).
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<PAGE> 49
Redemption. The Series A Preferred Stock is mandatorily redeemable by the
Company on December 31, 2001 (subject to conversion rights at any time on or
prior to November 30, 2001) at a redemption price of $46.54607 per share.
Conversion. The Series A Preferred Stock is convertible, at the option of
the holder thereof, at any time into Common Stock at a conversion rate of 5.47
shares of Common Stock for each share of Series A Preferred Stock, subject to
adjustment for stock dividends, stock splits and combinations.
Voting Rights. The shares of Series A Preferred Stock have general voting
rights on all issues submitted to the stockholders. Each share of Series A
Preferred Stock entitles the holder thereof to such number of votes per share as
shall equal the number of shares of Common Stock into which such shares of
Series A Preferred Stock are convertible.
Registration Rights. Until the earlier of December 31, 2001 or, as to any
holder of Series A Preferred Stock, (a) the date such holder owns less than the
equivalent of 5,000 shares of fully diluted Common Stock, or (b) the date on
which such holder is able to dispose of all shares of Common Stock issuable upon
conversion of the Series A Preferred Stock under Rule 144, the holders of Series
A Preferred Stock have piggyback registration rights with respect to any
offering by the Company or a stockholder of the Company of Common Stock to the
public for cash except for (i) offerings of shares issuable by the Company upon
the exercise of employee or director stock options, or (ii) offerings of shares
issued in mergers wherein the Company is the surviving corporation. The Company
is required to give holders of Series A Preferred Stock at least 30 days prior
written notice of the filing of any registration statement, specifying the
estimated price range of the offering covered thereby. The holders of the Series
A Preferred Stock have waived their registration rights with respect to the
Offering.
SERIES B PREFERRED STOCK
As of April 15, 1997, the Company had issued and outstanding 43,691 shares
of Series B Preferred Stock. These shares will remain outstanding after the
Offering. The following description is a summary of the Certificate of
Designation for the Series B Convertible Preferred Stock, and is qualified in
its entirety by reference to that document.
Dividends. The Series B Preferred Stock ranks, with respect to dividend
rights and distribution of assets on liquidation, senior and prior to the Common
Stock, on parity with the Series A Preferred Stock and junior to, or on parity
with, as the case may be, any other stock of the Company designated as senior
to, or on parity with, as the case may be, the Series B Preferred Stock. Holders
of Series B Preferred Stock are entitled to receive cumulative annual cash
dividends ranging from $1.14 to $2.29 per share, depending upon the number of
shares of Series B Preferred Stock which have then been released from escrow
pursuant to an escrow agreement between the Company and Valerie A. Hayes (the
"Escrow"). 21,845 shares of the Series B Preferred Stock issued to Valerie A.
Hayes are held pursuant to the Escrow and will be released therefrom pursuant to
certain earnout provisions contained in the Escrow Agreement. The earnout covers
an aggregate period of approximately 39 months (with the first earnings period
being approximately 15 months and the two succeeding earnings periods being 12
months each) and provides that approximately 7,281 shares of such Series B
Preferred Stock are to be released from the Escrow per earnings period if the
Corporate Capital Leasing division of the Company meets or exceeds an income
amount determined pursuant to a formula. If the Corporate Capital Leasing
division of the Company does not meet or exceed the required income amount in
any earnings period, then approximately 7,281 shares of such Series B Preferred
Stock are required to be cancelled. As of April 15, 1997, no shares of Series B
Preferred Stock had been released from the Escrow and the dividend rate in
effect for the Series B Preferred Stock was $1.14. Upon any voluntary or
involuntary liquidation, dissolution or winding up of the Company, except a
Redemption Acceleration Event (as defined below), the holders of Series B
Preferred Stock then outstanding will be entitled to receive an amount of cash
per share ranging from $28.61 to $57.22, depending upon the number of shares of
Series B Preferred Stock which have then been released from the Escrow, before
any distribution is made on the Common Stock. As of April 15, 1997, the
dissolution rate in effect for the Series B Preferred Stock was $28.61. As long
as dividends on the Series B Preferred Stock are in arrears or the Company shall
be obligated to, and shall have
48
<PAGE> 50
failed to redeem, any shares of Series B Preferred Stock which are mandatorily
redeemable or optionally redeemable following a Redemption Acceleration Event,
the Company may not pay or declare a dividend on the Common Stock (other than
distributions payable in Common Stock).
Redemption. The Series B Preferred Stock is mandatorily redeemable by the
Company on December 31, 2001 (subject to conversion rights at any time on or
prior to November 30, 2001) at a redemption price ranging from $28.61 to $57.22
per share, depending upon the number of shares of Series B Preferred Stock which
have then been released from the Escrow (the "Redemption Price"). As of April
15, 1997, the Redemption Price in effect for the Series B Preferred Stock was
$28.61. In addition, if the Company files for bankruptcy, a bankruptcy petition
is filed against the Company, the Company institutes insolvency proceedings,
fails to renew or extend the Letter of Credit described in the Agreement and
Plan of Reorganization dated as of October 15, 1996 between Valerie A. Hayes,
CCL, the Company and First Sierra Pennsylvania, Inc. (the "Reorganization
Agreement"), or fails to pay any dividends on the Series B Preferred Stock when
required pursuant to the Reorganization Agreement (each, a "Redemption
Acceleration Event"), then each holder of Series B Preferred Stock may, at such
holder's option, require the Company to redeem all of the shares of Series B
Preferred Stock held by such holder at the Redemption Price then in effect.
Conversion. The Series B Preferred Stock is convertible at any time, at the
option of the holder thereof, into Common Stock at a conversion rate of 5.47
shares of Common Stock for each share of Series B Preferred Stock. In addition,
shares of Series B Preferred Stock will be automatically converted by the
Company into shares of Common Stock at a conversion rate of 5.47 shares of
Common Stock for each share of Series B Preferred Stock if the Common Stock
trades at or above $12.33 per share (subject to adjustment for stock dividends,
subdivisions or split-ups, and reverse stock splits) for twenty consecutive
trading days and there is then in effect a registration statement and prospectus
covering the resale of the shares of Common Stock into which such shares of
Series B Preferred Stock are convertible.
Voting Rights. The shares of Series B Preferred Stock have general voting
rights on all issues submitted to stockholders. Each share of Series B Preferred
Stock entitles the holder thereof to such number of votes per share as shall
equal the number of shares of Common Stock into which such shares of Series B
Preferred Stock are convertible.
Registration Rights. Unless waived by written consent, the holders of
Series B Preferred Stock have piggyback registration rights on any offering by
the Company or by a stockholder of the Company of Common Stock to the public for
cash except for (i) offerings of shares issuable by the Company upon the
exercise of employee or director stock options, or (ii) offerings of shares
issued in mergers wherein the Company is the surviving corporation. The Company
is required to give holders of Series B Preferred Stock at least 15 days prior
written notice of the filing of a registration statement, specifying the
estimated price range of the offering covered thereby. The holders of the Series
B Preferred Stock have waived their piggyback registration rights with respect
to the Offering. In addition, during the period beginning on the 12-month
anniversary of the completion of the Offering and ending 48 months thereafter,
the holders of Series B Preferred Stock can demand, on one occasion,
registration of the shares of Common Stock which are issuable upon conversion of
their shares of Series B Preferred Stock, provided that the number of shares
proposed to be sold shall be at least equal to 25% of the aggregate number of
shares of Common Stock issuable upon conversion of all of the then outstanding
shares of Series B Preferred Stock. If a demand is made pursuant to the previous
sentence, then the Company is required to prepare and file a continuous or
"shelf" registration statement pursuant to Rule 415 under the Securities Act
respecting the sale from time to time of all of the shares of Common Stock
issuable upon conversion of the Series B Preferred Stock then outstanding.
WARRANTS
In connection with the First Union Credit Facility, First Union National
Bank of North Carolina was granted warrants (the "Warrants") to purchase 198,397
shares of the Company's Common Stock at an exercise price of $.0018 per share.
The Warrants are currently exercisable and have an expiration date of May 8,
2005. To date, none of the Warrants have been exercised. Pursuant to the warrant
agreement, holders of a majority of the shares of Common Stock to be acquired
upon exercise of the Warrants have the right on
49
<PAGE> 51
one occasion to demand registration of their registrable securities as well as
certain piggyback registration rights. Such registration rights terminate to the
extent such holders are able to sell the shares of Common Stock issuable upon
exercise of the Warrants under Rule 144(k) (or any successor provision). The
holder of the Warrants has waived its registration rights with respect to the
registration statement filed by the Company with respect to the Offering.
The Company has the option to purchase the Warrants at Fair Market Value
(as defined in the Warrant Agreement) on May 8, 2001 or upon the occurrence of
certain events, including an event of default under the First Union Credit
Facility.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
the Company's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with the Company for three years
following the date that person becomes an interested stockholder unless (a)
before that person became an interested stockholder, the Company's Board of
Directors approved the transaction in which the interested stockholder became an
interested stockholder or approved the business combination; (b) upon completion
of the transaction that resulted in the interested stockholder becoming an
interested stockholder, the interested stockholder owns at least 85% of the
voting stock outstanding at the time the transaction commenced (excluding stock
held by directors who are also officers of the Company and by employee stock
plans that do not provide employees with the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer); or (c) following the transaction in which that person became an
interested stockholder, the business combination is approved by the Company's
Board of Directors and authorized at a meeting of stockholders by the
affirmative vote of the holders of at least two-thirds of the outstanding voting
stock not owned by the interested stockholder.
Under Section 203, these restrictions do not apply to certain business
combinations proposed by an interested stockholder following the announcement or
notification of one of certain extraordinary transactions involving the Company
and a person who was not an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the Company's directors, if that extraordinary transaction is approved or not
opposed by a majority of the directors who were directors before any person
became an interested stockholder in the previous three years or who were
recommended for election or elected to succeed such directors by a majority of
such directors then in office.
Upon completion of the Offering, the Company's Board of Directors will be
divided into three classes. The directors of each class will be elected for
three-year terms, with the terms of the three classes staggered so that
directors from a single class are elected at each annual meeting of
stockholders. Stockholders may remove a director only for cause upon the vote of
at least 80% of the then outstanding shares of capital stock entitled to vote
upon the election of directors ("Voting Stock"). In general, the Board of
Directors, not the stockholders, has the right to appoint persons to fill
vacancies on the Board of Directors.
The Charter provides that special meetings of holders of Common Stock may
be called only by the Company's Board of Directors and that only business
proposed by the Board of Directors may be considered at special meetings of
holders of Common Stock.
The Charter provides that the only business (including election of
directors) that may be considered at an annual meeting of holders of Common
Stock, in addition to business proposed (or persons nominated to be directors)
by the directors of the Company, is business proposed (or persons nominated to
be directors) by holders of Common Stock who comply with the notice and
disclosure requirements set forth in the Charter. In general, the Charter
requires that a stockholder give the Company notice of proposed business or
nominations no later than 60 days before the annual meeting of holders of Common
Stock (meaning the date on which the meeting is first scheduled and not
postponements or adjournments thereof) or (if later) ten days after the first
public notice of the annual meeting is sent to holders of Common Stock. In
general, the notice must also contain information about the stockholder
proposing the business or nomination, the stockholder's interest in
50
<PAGE> 52
the business, and (with respect to nominations for director) information about
the nominee of the nature ordinarily required to be disclosed in public proxy
statements. The stockholder also must submit a notarized letter from each of the
stockholder's nominees stating the nominee's acceptance of the nomination and
indicating the nominee's intention to serve as director if elected.
The Charter provides that the affirmative vote of at least two-thirds of
the Voting Stock shall be required to approve any of the following proposed
transactions: (i) a merger or consolidation in which the Company shall not be
the surviving entity or shall survive only as a subsidiary of an entity; (ii) a
sale, lease or exchange or an agreement to sell, lease or exchange all or
substantially all of the assets of the Company to any other person or entity; or
(iii) the dissolution or liquidation of the Company.
The Charter authorizes the Board of Directors, without any action by the
stockholders of the Company, to issue up to 1,000,000 shares of Preferred Stock,
in one or more series and to determine the voting rights (including the right to
vote as a series on particular matters), preferences as to dividends and in
liquidation and the conversion and other rights of each such series. Because the
terms of the preferred stock may be fixed by the Board of Directors without
stockholder action, the preferred stock could be issued quickly with terms
designed to make more difficult a proposed takeover of the Company or the
removal of its management, thus affecting the market price of the Common Stock
and preventing stockholders from obtaining any premium offered by the potential
buyer. The Board of Directors will make any determination to issue such shares
based on its judgment as to the best interests of the Company and its
stockholders.
The Delaware General Corporation Law provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or bylaws, unless
the corporation's certificate of incorporation or bylaws requires a greater
percentage. The Charter provides that approval by the holders of at least 80% of
the Voting Stock is required to amend the provisions of the Charter previously
discussed and certain other provisions.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Harris Trust and
Savings Bank.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 8,140,754 shares of
Common Stock outstanding. The 2,000,000 shares of Common Stock offered hereby
will be freely tradeable without restriction or further registration under the
Securities Act, except for shares sold by persons deemed to be "affiliates" of
the Company or acting as "underwriters," as those terms are defined in the
Securities Act. Following the expiration of the lock-up period described below,
all of the remaining outstanding shares of Common Stock (other than shares
issued in the Heritage Acquisition) and the shares of Common Stock issuable upon
conversion of the Preferred Stock will be freely tradeable subject to the
restrictions on resale imposed upon "affiliates" by Rule 144 under the
Securities Act.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned, for at
least two years, shares of Common Stock that have not been registered under the
Securities Act or that were acquired from an "affiliate" of the Company is
entitled to sell within any three-month period the number of shares of Common
Stock which does not exceed the greater of one percent of the number of then
outstanding shares or the average weekly reported trading volume during the four
calendar weeks preceding the sale. Sales under Rule 144 are also subject to
certain notice requirements and to the availability of current public
information about the Company and must be made in unsolicited brokers'
transactions or to a market maker. A person (or persons whose shares are
aggregated) who was not an "affiliate" of the Company under the Securities Act
during the three months preceding a sale and who has beneficially owned such
shares for at least three years is entitled to sell such shares under Rule 144
without regard to the volume, notice, information and manner of sale provisions
of such Rule. The Commission has approved amendments to Rule 144 which become
effective on April 29, 1997 that shorten the holding periods for restricted
securities. The amendments permit limited resales of restricted securities
51
<PAGE> 53
after a one-year, rather than a two-year, holding period, and allow unlimited
resales of restricted securities by non-affiliates after a two-year, rather than
a three-year, holding period.
An aggregate of 1,800,000 shares of Common Stock are reserved for issuance
to directors, executives, consultants and employees of the Company pursuant to
the 1997 Stock Option Plan. The Company intends to file a registration statement
on Form S-8 covering the issuance of shares of Common Stock pursuant to the 1997
Stock Option Plan. Accordingly, shares issued pursuant to the 1997 Stock Option
Plan will be freely tradeable, except for any shares held by an "affiliate" of
the Company.
All of the Company's current stockholders have been granted certain demand
and "piggy-back" registration rights if the Company proposes to undertake a
public offering and have waived their registration rights in connection with the
Offering.
The Company, its executive officers and directors, and certain stockholders
of the Company, have agreed not to sell, offer to sell, contract to sell, pledge
or otherwise dispose of or transfer any shares of Common Stock, or any
securities convertible into or exchangeable or exercisable for, or any rights to
purchase or acquire, Common Stock for a period of 180 days commencing on the
date of this Prospectus without the prior written consent of the Representative,
other than the issuance of options to purchase Common Stock or shares of Common
Stock issuable upon the exercise thereof in connection with the Company's stock
option plans, provided that such options shall not vest or such shares shall not
be transferable prior to the end of the 180-day period, and the issuance by the
Company of capital stock in connection with acquisitions of lease finance
companies, provided that such shares shall not be transferable prior to the end
of the 180-day period.
Prior to the Offering, there has been no market for the Common Stock. No
predictions can be made of the effect, if any, that market sales of shares of
Common Stock or the availability of such shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of significant amounts
of Common Stock could adversely affect the prevailing market price of the Common
Stock, as well as impair the ability of the Company to raise capital through the
issuance of additional equity securities.
52
<PAGE> 54
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters") through their Representative, have
severally agreed to purchase from the Company the following respective numbers
of shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc.......................
---------
Total............................................. 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares of the Common Stock offered hereby
if any of such shares of Common Stock are purchased.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
securities dealers at such price less a concession not in excess of $
per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After
the Offering, the initial public offering price, concession, allowance and
reallowance may be changed by the Representative.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 300,000
additional shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 2,000,000 and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 2,000,000 shares of Common Stock are being offered.
Prior to the Offering, there has been no public trading market for the
Common Stock. The Company has made application for quotation of the Common Stock
on the Nasdaq National Market. However, there can be no assurance that an active
trading market for the Common Stock will develop after the Offering, or if
developed, that such a market will be sustained. See "Risk Factors -- No Prior
Market for Common Stock; Possible Volatility of Stock Price."
The initial public offering price for the Common Stock has been determined
by negotiations between the Company and the Representative. Among the factors to
be considered in determining the initial public offering price are prevailing
market conditions, revenue and earnings of the Company, estimates of the
business potential and prospects of the Company, the present state of the
Company's business operations, an assessment of the Company's management and the
consideration of the above factors in relation to the market valuation of
certain publicly traded companies in comparable lines of business.
The Company, its executive officers and directors, and certain stockholders
of the Company, have agreed not to sell, offer to sell, contract to sell, pledge
or otherwise dispose of or transfer any shares of Common Stock, or any
securities convertible into or exchangeable or exercisable for, or any rights to
purchase or
53
<PAGE> 55
acquire, Common Stock for a period of 180 days commencing on the date of this
Prospectus without the prior written consent of the Representative, other than
the issuance of options to purchase Common Stock or shares of Common Stock
issuable upon the exercise thereof in connection with the Company's stock option
plans, provided that such options shall not vest or such shares shall not be
transferable prior to the end of the 180-day period, and the issuance by the
Company of capital stock in connection with acquisitions of lease finance
companies, provided that such shares shall not be transferable prior to the end
of the 180-day period.
The Representative has informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
The Company has agreed to indemnify the Underwriters and controlling
persons, if any, against certain losses, claims, damages or liabilities,
including liabilities under the Securities Act, or will contribute to payments
that the Underwriters or any such controlling persons may be required to make in
respect thereof.
In connection with this Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock. Such transactions may include stabilization transactions
pursuant to which the Representative may bid for or purchase Common Stock for
the purpose of stabilizing its market price. The Underwriters also may create a
short position for the account of the Underwriters by selling more Common Stock
in connection with the Offering than they are committed to purchase from the
Company, and in such case the Representative may purchase Common Stock in the
open market following completion of the Offering to cover all or a portion of
such short position. The Underwriters may also cover all or a portion of such
short position by exercising the Underwriters' over-allotment option referred to
above. In addition, the Representative, on behalf of the Underwriters, may
impose "penalty bids" under contractual arrangements with the Underwriters
whereby it may reclaim from an Underwriter (or dealer participating in the
Offering) for the account of other Underwriters, the selling concession with
respect to Common Stock that is distributed in the Offering but subsequently
purchased for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Common Stock at a level above that which might otherwise prevail in
the open market. The imposition of a penalty bid might also affect the price of
the Common Stock to the extent that it could discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Representative intends to make a market in the Common Stock on
completion of the Offering, as permitted by applicable laws and regulations. The
Representative, however, is not obligated to make a market in such shares, and
any such market making may be discontinued at any time at the sole discretion of
the Representative.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Vinson & Elkins L.L.P., Houston, Texas.
Certain legal matters relating to the Common Stock offered hereby will be passed
upon for the Underwriters by McDermott, Will & Emery, Chicago, Illinois.
EXPERTS
The Audited Consolidated Financial Statements of the Company included in
this Prospectus and Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
The Audited Consolidated Financial Statements of Heritage Credit Services,
Inc. included in this Prospectus and Registration Statement have been audited by
BDO Seidman, LLP, independent certified
54
<PAGE> 56
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
auditing and accounting.
The Audited Financial Statements of Corporate Capital Leasing Group, Inc.
included in this Prospectus and Registration Statement have been audited by
MacDade Abbott LLP, independent public accountants, as indicated in their report
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said report.
55
<PAGE> 57
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
FIRST SIERRA FINANCIAL, INC. -- CONSOLIDATED FINANCIAL
STATEMENTS
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets as of December 31, 1995 and
1996................................................... F-3
Consolidated Statements of Operations for the Period from
Inception (June 3, 1994) through December 31, 1994 and
for the Years Ended December 31, 1995 and 1996......... F-4
Consolidated Statements of Stockholders' Equity for the
Period from Inception (June 3, 1994) through December
31, 1994 and for the Years Ended December 31, 1995 and
1996................................................... F-5
Consolidated Statements of Cash Flows for the Period from
Inception (June 3, 1994) through December 31, 1994 and
for the Years Ended December 31, 1995 and 1996......... F-6
Notes to Consolidated Financial Statements................ F-7
FIRST SIERRA FINANCIAL, INC. -- UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Pro Forma Consolidated Balance Sheet as of
December 31, 1996...................................... F-24
Unaudited Pro Forma Consolidated Statement of Operations
for the Year Ended
December 31, 1996...................................... F-25
Notes to Unaudited Pro Forma Consolidated Financial
Statements............................................. F-26
CORPORATE CAPITAL LEASING GROUP, INC. -- FINANCIAL
STATEMENTS
Report of Independent Public Accountants.................. F-29
Balance Sheets as of December 31, 1995 and October 31,
1996................................................... F-30
Statements of Income for the Ten Months Ended December 31,
1995 and the Year Ended October 31, 1996............... F-31
Statements of Stockholder's Equity for the Ten Months
Ended December 31, 1995 and the Year Ended October 31,
1996................................................... F-32
Statements of Cash Flows for the Ten Months Ended December
31, 1995 and the Year Ended October 31, 1996........... F-33
Notes to Financial Statements............................. F-34
HERITAGE CREDIT SERVICES, INC. -- FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants........ F-38
Balance Sheets as of September 30, 1995 and 1996 and
December 31, 1996 (unaudited).......................... F-39
Statements of Income and Retained Earnings for the Years
Ended September 30, 1994, 1995 and 1996 and the Three
Months Ended December 31, 1995 and 1996 (unaudited).... F-40
Statements of Cash Flows for the Years Ended September 30,
1994, 1995 and 1996 and the Three Months Ended December
31, 1995 and 1996 (unaudited).......................... F-41
Notes to Financial Statements............................. F-42
</TABLE>
F-1
<PAGE> 58
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To First Sierra Financial, Inc.:
We have audited the accompanying consolidated balance sheets of First
Sierra Financial, Inc., and subsidiaries as of December 31, 1995 and 1996, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the period from inception (June 3, 1994) through December 31, 1994 and
for the years ended December 31, 1995 and 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 financial statements referred to above present fairly,
in all material respects, the financial position of First Sierra Financial,
Inc., and subsidiaries as of December 31, 1995 and 1996, and the results of
their operations and their cash flows for the period from inception (June 3,
1994) through December 31, 1994, and for the years ended December 31, 1995 and
1996, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
February 27, 1997
F-2
<PAGE> 59
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1995 1996
------- -------
<S> <C> <C>
LEASE FINANCING RECEIVABLES, net........ $67,322 $61,270
INVESTMENT IN TRUST CERTIFICATES........ -- 9,534
GOODWILL AND OTHER INTANGIBLE ASSETS,
net................................... -- 3,615
CASH AND CASH EQUIVALENTS............... 876 2,598
FURNITURE AND EQUIPMENT, net............ 262 1,049
OTHER ASSETS............................ 884 1,276
------- -------
Total assets.................. $69,344 $79,342
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
DEBT:
Warehouse credit facilities........... $55,827 $52,380
Subordinated note payable............. 9,000 9,000
OTHER LIABILITIES:
Holdback reserve payable.............. 1,969 6,523
Accounts payable and accrued
liabilities........................ 1,238 3,929
Deferred income taxes................. -- 1,366
------- -------
Total liabilities............. 68,034 73,198
------- -------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK.............. -- 3,890
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value,
25,000,000 shares authorized,
5,470,000 shares and 5,696,310
shares issued and outstanding,
respectively....................... 55 57
Additional paid-in capital............ 945 730
Retained earnings..................... 310 1,467
------- -------
Total stockholders' equity.... 1,310 2,254
------- -------
Total liabilities and
stockholders' equity......... $69,344 $79,342
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 60
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 3, 1994) YEAR ENDED
THROUGH DECEMBER 31
DECEMBER 31, --------------------
1994 1995 1996
-------------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME......................... $ 181 $3,053 $6,323
GAIN ON SALE OF LEASE FINANCING
RECEIVABLES........................... -- 3,259 3,456
SERVICING INCOME........................ 6 323 1,050
OTHER INCOME............................ -- 16 535
------- ------ ------
Total revenues................ 187 6,651 11,364
------- ------ ------
INTEREST EXPENSE........................ 157 2,616 5,014
SALARIES AND BENEFITS................... 312 1,346 1,987
PROVISION FOR CREDIT LOSSES............. 28 392 537
DEPRECIATION AND AMORTIZATION........... 6 100 286
OTHER GENERAL AND ADMINISTRATIVE........ 522 803 1,531
------- ------ ------
Total expenses................ 1,025 5,257 9,355
------- ------ ------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES...................... (838) 1,394 2,009
PROVISION (BENEFIT) FOR INCOME TAXES.... (323) 569 792
------- ------ ------
NET INCOME (LOSS)....................... (515) 825 1,217
PREFERRED STOCK DIVIDENDS............... -- -- 60
------- ------ ------
NET INCOME (LOSS) ALLOCATED TO COMMON
STOCKHOLDERS.......................... $ (515) $ 825 $1,157
======= ====== ======
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE...................... $ (0.08) $ 0.13 $ 0.19
======= ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 61
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL RETAINED TOTAL
NUMBER PAID-IN (DEFICIT) STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
INITIAL ISSUANCE OF COMMON STOCK, June
3, 1994............................. 5,470,000 $55 $945 $ -- $1,000
Net loss............................ -- -- -- (515) (515)
--------- --- ---- ------ ------
BALANCE, December 31, 1994............ 5,470,000 55 945 (515) 485
Net income.......................... -- -- -- 825 825
--------- --- ---- ------ ------
BALANCE, December 31, 1995............ 5,470,000 55 945 310 1,310
Net income.......................... -- -- -- 1,217 1,217
Issuance of common stock............ 854,736 8 139 -- 147
Repurchase and retirement of common
stock............................ (628,426) (6) (354) -- (360)
Preferred stock dividends........... -- -- -- (60) (60)
--------- --- ---- ------ ------
BALANCE, December 31, 1996............ 5,696,310 $57 $730 $1,467 $2,254
========= === ==== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 62
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 3,
1994) YEAR ENDED
THROUGH DECEMBER 31
DECEMBER 31, ---------------------
1994 1995 1996
------------ --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income (loss)..................................... $ (515) $ 825 $ 1,217
Reconciliation of net income (loss) to cash provided
by (used in) operations --
Depreciation and amortization...................... 6 100 286
Provision for credit losses........................ 28 392 537
Gain on sale of lease financing receivables........ -- (3,259) (3,456)
Decrease (increase) in other assets................ (938) 233 (273)
Increase in accounts payable and accrued
liabilities...................................... 510 728 1,964
Increase in holdback reserve payable............... 120 1,850 4,554
Deferred income tax provision (benefit)............ (323) 144 792
Funding of lease financing receivables............. (4,520) (66,390) (172,740)
Principal payments received on lease financing
receivables...................................... -- 3,167 13,977
Proceeds from sales of lease financing receivables,
net of trust certificates retained............... -- 28,623 159,354
Purchase of VGC lease portfolio.................... (25,364) -- --
-------- --------- --------
Net cash provided by (used in) operations..... (30,996) (33,587) 6,212
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to furniture and equipment.................. (136) (231) (761)
Cash used in acquisitions, net of cash acquired....... -- -- (69)
-------- --------- --------
Net cash used in investing activities......... (136) (231) (830)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) warehouse credit
facilities, net.................................... 23,437 32,389 (3,447)
Proceeds from issuance of subordinated note payable... 9,000 -- --
Proceeds from initial issuance of common stock........ 1,000 -- --
Proceeds from issuance of common stock................ -- -- 147
Repurchase of common stock............................ -- -- (360)
-------- --------- --------
Net cash provided by (used in) financing
activities.................................. 33,437 32,389 (3,660)
-------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... 2,305 (1,429) 1,722
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........ -- 2,305 876
-------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............. $ 2,305 $ 876 $ 2,598
======== ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid.................................. $ -- $ 357 $ 10
======== ========= ========
Interest paid...................................... $ 35 $ 2,736 $ 4,763
======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 63
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Organization
First Sierra Financial, Inc. ("First Sierra" or the "Company") is a
specialized finance company that was formed in June 1994 to acquire and
originate, sell and service equipment leases. The underlying leases financed by
the Company relate to a wide range of equipment, including computers and
peripherals, computer software, medical, dental and diagnostic,
telecommunications, office, automotive servicing, hotel security, food services,
tree service and industrial, as well as specialty vehicles. The equipment
generally has a purchase price of less than $250,000 (with an average of
approximately $17,000.) The Company initially funds the acquisition or
origination of its leases through its warehouse credit facilities and, upon
achieving a sufficient portfolio size, sells such receivables in the public and
private markets, principally through its securitization program.
The Company acquires and originates leases primarily through its Private
Label, Broker and Vendor programs. Under the Private Label program, the Company
is provided protection from credit losses on defaulted leases through a first
lien security interest in the underlying equipment, recourse to the source of
the lease (the "Source"), holdback reserves withheld from amounts paid to the
Source upon purchase of the lease, or a combination of the above. Leases
acquired through the Broker and Vendor programs are originated through
relationships with vendors, manufacturers, brokers and dealers of equipment. In
addition, the Company has in the past generated, and may in the future generate,
gain on sale income through the acquisition of lease portfolios and the
subsequent sale of such portfolios at a premium.
Initial Public Offering
The Company is in the process of filing a registration statement on Form
S-1 with the Securities and Exchange Commission ("SEC") for an initial public
offering of its common stock (the "Offering"). Proceeds of the Offering,
assuming an issuance price of $9.00 per share and net of underwriters' discounts
and commissions and estimated offering expenses, will be approximately $16.0
million. The Company intends to use the proceeds from the Offering to repay all
outstanding indebtedness under a $9.0 million subordinated note and a portion of
the amounts outstanding under the Company's warehouse facilities and to fund the
cash portion of the consideration in a pending acquisition as further described
in Note 12.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of First Sierra
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles and conform to practices within the equipment leasing industry.
Use of Estimates in the Preparation of Financial Statements
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 the
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.
Lease Financing Receivables
The Company records the sum of the future minimum lease payments,
unguaranteed residual value and initial direct costs as the gross investment in
the lease. The difference between gross investment in the lease
F-7
<PAGE> 64
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and the cost of the lease is defined as "unearned income." Unearned income and
initial direct costs incurred in connection with the acquisition or origination
of the lease are amortized over the related lease term using the interest
method. Amortization of unearned income and initial direct costs is suspended
if, in the opinion of management, full payment of the contractual amount due
under the lease agreement is doubtful, typically upon a payment becoming 90 days
past due, unless such payment is guaranteed pursuant to recourse or holdback
provisions of the lease acquisition agreements.
In conjunction with the acquisition and origination of leases, the Company
may retain a residual interest in the underlying equipment upon termination of
the lease. The value of such interests is estimated at inception of the lease
and evaluated periodically for impairment.
Gain on Sale of Lease Financing Receivables
The Company generally sells the leases it acquires or originates through
securitization transactions and other structured finance techniques. In a
securitization transaction, the Company sells and transfers a pool of leases to
a wholly-owned, bankruptcy remote, special purpose subsidiary. This subsidiary
in turn simultaneously sells and transfers its interest in the leases to a trust
which issues beneficial interests in the leases in the form of senior and
subordinated securities. The Company generally retains the right to receive any
excess cash flows of the trust (the "Trust Certificate").
Gain on sale of leases sold through securitization transactions is recorded
as the difference between the proceeds received from the sale of senior and
subordinated securities, net of related issuance expenses, and the cost basis of
the leases allocated to the securities sold. The cost basis of the leases is
allocated to the senior and subordinated securities and the Trust Certificate on
a relative fair value basis on the date of sale. The fair value of the senior
and subordinated securities is based on the price at which such securities are
sold through public issuances and private placement transactions, while the fair
value of the Trust Certificate is based on the Company's estimate of its fair
value using a discounted cash flow approach.
Gain on portfolio sales of leases is calculated as the difference between
the proceeds received, net of related selling expenses, and the carrying amount
of the related leases adjusted for ongoing recourse obligations of the Company,
if any. At December 31, 1996, the Company has no recourse obligations related to
receivables sold through portfolio sales.
Investment in Trust Certificates
Trust Certificates are initially recorded based upon the allocated cost
basis of the leases sold through securitization transactions as discussed above.
The Company's investment in Trust Certificates is amortized over the estimated
lives of the underlying leases using the interest method. The cash flows
allocable to the Trust Certificate are calculated as the difference between (a)
cash flows received from the leases and (b) the sum of (i) interest and
principal payable to the holders of the senior and subordinated securities, (ii)
trustee fees, (iii) third party credit enhancement fees, (iv) service fees, and
(v) backup service fees. The Company's right to receive this excess cash flow is
subject to certain conditions specified in the related trust documents designed
to provide additional credit enhancement to holders of the senior and
subordinated securities. The Company estimates the expected levels of cash flows
to the Trust Certificate taking into consideration estimated prepayments,
defaults, recoveries and other factors which may affect the cash flows to the
holder of the Trust Certificate. The cash flows ultimately available to the
Trust Certificate are largely dependent upon the actual default rates and
recoveries experienced on the leases held by the Trust. Increases in default
rates above, or reduction in recoveries below, the Company's estimates could
materially reduce the cash flows available to the Trust Certificate. To the
extent events occur which cause actual Trust Certificate cash flows to be
materially below those originally estimated, the Company would be required to
reduce the carrying amount of its Trust Certificates and record a charge to
earnings. Such charge would be recorded in the period in which the event
occurred or became known to management.
F-8
<PAGE> 65
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Exposure to Credit Losses
Management evaluates the collectibility of leases acquired or originated
based on the level of recourse provided, if any, delinquency statistics,
historical loss experience, current economic conditions and other relevant
factors. The Company provides an allowance for credit losses for leases which
are considered impaired during the period from the funding of the leases through
the date such leases are sold through the Company's securitization program.
Estimated losses on leases that are considered impaired and have been sold
through the Company's securitization program are taken into consideration in the
valuation of the Company's investment in the Trust Certificates retained in the
securitization transaction.
The following table sets forth certain information as of December 31, 1995
and 1996, with respect to leases which were held by the Company in its portfolio
or serviced by the Company pursuant to its securitization program (dollars in
thousands):
<TABLE>
<CAPTION>
1996
---------------------------------------
PRIVATE
1995 LABEL BROKER VENDOR
TOTAL(1) PROGRAM PROGRAM PROGRAM TOTAL
-------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Gross leases outstanding............. $83,687 $244,049 $9,715 $3,470 $257,234
31 - 60 days past due................ 2.53% 2.46% 1.69% 0.00% 2.40%
61 - 90 days past due................ 0.45% 0.81% 0.29% 0.00% 0.78%
Over 90 days past due................ 0.08% 0.35% 0.00% 0.00% 0.33%
------- -------- ------ ------ --------
Total past due............. 3.06% 3.62% 1.98% 0.00% 3.51%
</TABLE>
- ---------------
(1) All leases outstanding at December 31, 1995 were acquired or originated
under the Company's Private Label program.
In assessing the Company's exposure to credit losses, management generally
segregates the leases acquired under its Private Label program from those
acquired or originated under its Broker and Vendor programs due to the differing
levels of credit protection available to the Company under the various lease
funding programs.
The following table sets forth the Company's allowance for credit losses
for its Private Label program and its Broker and Vendor programs as of December
31, 1994 and for the years ended December 31, 1995 and 1996 (in thousands):
<TABLE>
<CAPTION>
BROKER
PRIVATE AND
LABEL VENDOR
PROGRAM PROGRAMS(1) TOTAL
------- ----------- -----
<S> <C> <C> <C>
Balance at December 31, 1994.................... $ 28 $ -- $ 28
Provision for credit losses..................... 392 -- 392
Charge-offs, net of recoveries.................. -- -- --
----- ---- -----
Balance at December 31, 1995.................... 420 -- 420
Provision for credit losses..................... 326 211 537
Charge-offs, net of recoveries.................. (25) -- (25)
Reduction of allowance for leases sold.......... (407) -- (407)
----- ---- -----
Balance at December 31, 1996.................... $ 314 $211 $ 525
===== ==== =====
</TABLE>
- ---------------
(1) The Company established its Broker and Vendor programs in 1996 through the
acquisitions of GIC in July 1996 and CCL in October 1996.
F-9
<PAGE> 66
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the Private Label program, the Company seeks to minimize its losses
through a first lien security interest in the equipment funded, recourse to the
Private Label source, holdback reserves withheld from the Private Label Source
upon purchase of the lease, or a combination of the above. The recourse
provisions generally require the Private Label Source to repurchase a receivable
when it becomes 90 days past due. The recourse commitment generally ranges from
10% to 20% of the aggregate purchase price of all leases acquired from the
Private Label Source. Holdback reserves withheld from the purchase price
generally range from 1% to 10% of the aggregate purchase price of the leases
acquired from the Private Label Source. In determining whether a lease acquired
pursuant to the Private Label program which is considered impaired will result
in a loss to the Company, management takes into consideration the ability of the
Private Label Source to honor its recourse commitments and the holdback reserves
withheld from the Private Label Source upon purchase of the lease, as well as
the credit quality of the underlying lessee and the related equipment value. At
December 31, 1995 and 1996, the Company had holdback reserves of $2.0 million
and $6.5 million, respectively, relating to leases, acquired pursuant to the
Private Label program. Such amounts have been classified as liabilities in the
accompanying financial statements.
The following table sets forth certain aggregate information regarding the
level of credit protection afforded the Company pursuant to the recourse and
holdback provisions of the Private Label program as of December 31, 1995 and
1996 (dollars in thousands):
<TABLE>
<CAPTION>
1995 1996
------- --------
<S> <C> <C>
Leases outstanding under the Private Label program (1)...... $67,322 $202,523
======= ========
Recourse to Sources available............................... $ 5,744 $ 19,480
Holdback reserves outstanding............................... 1,969 6,523
------- --------
Total recourse and holdback reserves available.............. $ 7,713 $ 26,003
======= ========
Ratio of recourse and holdback reserves outstanding to total
leases outstanding under the Private Label program(2)..... 11.46% 12.84%
======= ========
</TABLE>
- ---------------
(1) Represents net principal balance of leases held by the Company in its
portfolio as well as leases serviced by the Company pursuant to its
securitization program.
(2) The specific level of credit protection varies for each Private Label
Source. Specific levels of credit protection by Source are considered by
management in determining the allowance for credit losses.
F-10
<PAGE> 67
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the experience of the Company with respect
to leases acquired pursuant to the Private Label program for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION TO YEAR ENDED DECEMBER 31,
DECEMBER 31, -----------------------
1994 1995 1996
------------ -------- ---------
<S> <C> <C> <C>
Average balance of leases acquired pursuant to the Private
Label program outstanding during the period(1).......... $ 1,442 $30,561 $124,592
======= ======= ========
Total amount of leases triggering action under recourse
and holdback provisions during the period............... $ -- $ 266 $ 1,855
Amounts recovered under recourse provisions............... -- 238 1,694
Amounts recovered pursuant to holdback reserves........... -- 28 136
------- ------- --------
Total amounts recovered................................... -- 266 1,830
------- ------- --------
Net loss experienced on leases acquired pursuant to the
Private Label program................................... $ -- $ -- $ 25
======= ======= ========
Net default ratio......................................... --% 0.00% 0.02%
======= ======= ========
</TABLE>
- ---------------
(1) Represents net principal balance of leases held by the Company in its
portfolio as well as leases serviced by the Company pursuant to its
securitization program.
At December 31, 1996, the Company's outstanding net principal balance of
leases acquired or originated under its Broker and Vendor programs was $10.5
million. Such leases had been outstanding for less than two months on a weighted
average basis as of such date. Management analyzes the collectibility of leases
acquired or originated pursuant to its Broker and Vendor programs based on its
underwriting criteria, delinquency statistics, historical loss experience,
current economic conditions and other relevant factors. While the Company owns
the underlying equipment, it does not have any recourse or holdback reserves
with respect to any leases acquired or originated pursuant to its Broker and
Vendor programs. Management believes however, that the relatively short holding
period between the time that leases are acquired or originated and the time that
such leases are sold minimizes the Company's exposure to credit losses.
Accordingly, management believes that an allowance for credit losses of $211,000
is adequate to cover estimated losses incurred on leases considered to be
impaired as of December 31, 1996.
The Company's allowance for credit losses and its valuation of the Trust
Certificates retained in its securitization transactions are based on estimates
and qualitative evaluations, and ultimate losses will vary from current
estimates. These estimates are reviewed periodically and as adjustments, either
positive or negative, become necessary, they are reported in earnings in the
period in which they become known.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates applied to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under SFAS No.
109, the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in the period in which the change is enacted.
F-11
<PAGE> 68
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost over the fair value of
identifiable net assets of businesses acquired and is amortized on a straight
line basis over 20 years. The Company periodically assesses the recoverability
of goodwill by evaluating whether the future cash flows expected to be generated
from the businesses acquired are greater than the carrying amount of the related
goodwill. If such future cash flows are not expected to exceed the carrying
amount of the related goodwill, an impairment is deemed to have occurred and a
write down would be recorded currently in earnings. At December 31, 1996, no
impairment was deemed to have occurred. Other intangible assets consist of
amounts paid for noncompete agreements which are amortized on a straight line
basis over the term of the agreement. At December 31, 1996, accumulated
amortization related to amounts recorded for goodwill and amounts paid pursuant
to noncompete agreements was approximately $92,000.
Furniture and Equipment
Furniture and equipment are carried at cost, less accumulated depreciation.
Such assets are depreciated using accelerated and straight line methods over the
estimated useful lives of the respective assets.
Cash and Cash Equivalents
The Company considers all significant investments which mature within three
months of the date of purchase to be cash equivalents.
Interest Rate Management Activities
Leases acquired and originated by the Company require payments to be made
by the lessee at fixed rates for specified terms. The rates charged by the
Company are based on interest rates prevailing in the market at the time of
lease approval. Because the Company generally finances its acquisition or
origination of leases through its warehouse credit facilities which bear
interest at floating rates, the Company is exposed to risk of loss from adverse
interest rate movements during the period from the date of acquisition or
origination of the leases until the leases are securitized or otherwise sold.
The Company seeks to minimize its exposure to adverse interest rate movements
during this period through entering into amortizing swap transactions under
which the notional amount of the contract changes monthly to match the
anticipated amortization of the underlying leases. Settlements with
counterparties are accrued at period-end and either increase or decrease
interest expense reported in the statement of operations.
Earnings Per Share
Earnings per share amounts are calculated based on the net income (loss)
allocated to common stockholders after preferred dividends divided by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period, adjusted for a 5.47 to 1 stock split (see Note
9). Common stock equivalents consist of shares subject to stock options and
warrants and convertible preferred stock.
The weighted average number of common shares used for computing earnings or
loss per share was 6,308,410 for the period from June 3, 1994 (inception)
through December 31, 1994, and 6,436,324 and 5,991,127 for the years ended
December 31, 1995 and 1996, respectively,.
Supplemental net income per share for the year ended December 31, 1996, was
$.26. The calculation assumes the issuance of an adequate number of shares at
$9.00 per share such that the net proceeds therefrom, after payment of estimated
expenses incurred in connection with the Offering and underwriting discounts and
commissions, will be sufficient to repay in full the $9.0 million subordinated
note and to repay $5.6 million of the outstanding balance under the Company's
warehouse facilities. The calculation assumes the issuance of 1,832,736 shares
of Common Stock on January 1, 1996 and that the net income allocated to Common
F-12
<PAGE> 69
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stockholders has been adjusted to give effect to the elimination of interest
expense of the debt repaid, net of the income tax effect computed at the
Company's effective income tax rate.
Recent Accounting Pronouncement
In June 1996, the Financial Accounting Standards Board adopted SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Under SFAS No. 125, an entity will recognize
the financial and servicing assets it controls and the liabilities it has
incurred, derecognize financial assets when control has been surrendered and
derecognize liabilities when extinguished. Additionally, SFAS No. 125 requires
that servicing assets and other retained interests in the transferred assets be
measured by allocating the previous carrying amount between the assets sold, if
any, and retained interests, if any, based on relative fair values at the date
of transfer. SFAS No. 125 is effective for transactions occurring after December
31, 1996, and earlier or retroactive application is not permitted. If SFAS No.
125 were effective for fiscal 1996 transactions, the effect would have been to
record a servicing asset in conjunction with transactions conducted through the
Company's securitization program, decrease the allocated cost attributable to
the residual interest in securitized assets retained by the Company, and
increase retained earnings as a result of recording a larger gain on sale of
lease financing receivables through the Company's securitization program.
Reclassifications
Certain reclassifications have been made to the 1994 and 1995 amounts to
conform with the 1996 presentation.
3. ACQUISITIONS
On July 11, 1996, the Company acquired certain assets and liabilities of
General Interlease Corporation ("GIC") for an aggregate purchase price of $2.64
million. Consideration for the acquisition was effected through the issuance of
56,718 shares of Series A Preferred Stock (see Note 8). GIC is located in Fort
Lauderdale, Florida and primarily focuses on the lease broker and equipment
vendor markets in the southeastern region of the United States.
On October 31, 1996, the Company acquired the outstanding common stock of
Corporate Capital Leasing Group, Inc. ("CCL") for an aggregate purchase price of
$2.5 million. Consideration for the acquisition was effected through the
issuance of 43,691 shares of Series B Preferred Stock, 21,845 of which are held
pursuant to an escrow agreement between the former owner of CCL and the Company
(See Note 8). The escrow agreement covers an aggregate period of approximately
39 months and provides that 7,281 shares of Series B Preferred Stock will be
released from escrow per period if the CCL division of the Company meets or
exceeds a targeted income amount determined in accordance with the escrow
agreement. At December 31, 1996, no shares had been released from escrow and the
CCL acquisition has been recorded at $1.25 million, such amount representing the
number of shares not subject to the escrow agreement at such date. CCL is
located in West Chester, Pennsylvania and primarily focuses on the broker market
in the mid-Atlantic region of the United States.
The above acquisitions have been accounted for using the purchase method of
accounting. Under the purchase method of accounting, the results of acquired
businesses are included in the Company's results from their respective
acquisition dates. The allocations of the purchase price to the fair market
value of the net assets acquired is based on preliminary estimates of fair
market value and may be revised when additional information concerning asset and
liability valuations is obtained.
F-13
<PAGE> 70
FIRST SIERRA 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 the businesses acquired for the years ended
December 31, 1995 and 1996 as if the acquisitions had taken place at the
beginning of 1995 and 1996, respectively. 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>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Revenues................................................... $13,870 $14,314
Net income before income taxes............................. 2,812 2,325
Net income allocated to common stockholders................ 1,800 1,120
Income per common and common equivalent share.............. .26 .19
</TABLE>
4. LEASE FINANCING RECEIVABLES
The Company's lease financing receivable balance at December 31, 1995 and
1996, consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Minimum lease payments..................................... $ 83,373 $ 75,945
Estimated unguaranteed residual value...................... -- 1,044
Initial direct costs....................................... 733 895
Unearned income............................................ (16,364) (16,089)
Allowance for credit losses................................ (420) (525)
-------- --------
Lease financing receivables, net......................... $ 67,322 $ 61,270
======== ========
</TABLE>
Future scheduled minimum payments on the Company's lease portfolio as of
December 31, 1996, are as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $15,735
1998........................................................ 17,210
1999........................................................ 15,904
2000........................................................ 11,812
2001........................................................ 9,079
Thereafter.................................................. 6,205
-------
Total minimum payments............................ $75,945
=======
</TABLE>
At December 31, 1996, the weighted average remaining life of leases in the
Company's lease portfolio is 34 months and the implicit rate of interest is
10.23%. While contractual payments on the leases extend through 2004, management
believes that substantially all currently outstanding leases will be sold within
the next year through the Company's securitization program.
Sales of Leases
During the year ended December 31, 1996, leases with an aggregate principal
balance of $152.0 million, net of unearned income, were sold through the
Company's securitization program. Senior and subordinated certificates with an
aggregate principal balance of $148.0 million were sold in such securitization
transactions,
F-14
<PAGE> 71
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
while the Trust Certificates were retained by the Company. Gains of $2.8 million
were recognized upon sale of the senior and subordinated securities sold by the
Company.
The terms of the Company's securitization program generally provide for a
revolving period during which additional leases are sold to the securitization
trusts in amounts sufficient to maintain the collateral value, as calculated
pursuant to the trust agreements, at levels consistent with such balance as of
closing. Such additional leases are sold at prices equivalent to the present
value of the scheduled monthly payments of the additional leases contributed,
discounted at specified rates set forth in the Pooling and Servicing Agreement
for the related transaction. Gains of $633,000 have been recognized in the
accompanying financial statements relating to such additional sales of leases
subsequent to closing.
In December 1994, the Company purchased a portfolio of leases for $25.4
million. In February 1995, after receiving $2.4 million of collections, the
Company sold the majority of the leases in such portfolio for total
consideration of $27.7 million. The Company recorded a pretax gain on sale of
portfolio leases of $3.3 million in connection with such sale, net of related
closing expenses.
5. DEBT
Debt consisted of the following as of December 31, 1995 and 1996 (in
thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Warehouse credit facilities --
Prudential Securities Credit Corporation.................. $ 9,894 $40,142
First Union National Bank of North Carolina............... 45,933 12,238
------- -------
Total warehouse credit facilities........................... 55,827 52,380
Subordinated note payable................................... 9,000 9,000
------- -------
$64,827 $61,380
======= =======
</TABLE>
Warehouse Credit Facilities
The Company finances the acquisition or origination of its leases primarily
through its warehouse credit facilities. Funds borrowed through these facilities
are repaid when the Company sells its receivables through its securitization
program. Substantially all leases held by the Company are pledged as collateral
for the warehouse credit facilities. As of December 31, 1996, borrowings under
the Company's warehouse credit facilities bore interest at a weighted average
interest rate, including the effect of interest rate swap agreements, of 6.76%.
In May 1995, the Company's wholly owned subsidiary, First Sierra
Receivables, Inc., entered into a $50.0 million revolving credit and term loan
agreement with First Union National Bank of North Carolina (the "First Union
Credit Facility"). The First Union Credit Facility was subsequently increased to
$75.0 million. The First Union Credit Facility bore interest at a floating rate
equal to the 30-day LIBOR plus 1.25% at December 31, 1996. The First Union
Credit Facility also provides $25.0 million of financing available to fund the
purchase of subordinated securities issued through the Company's securitization
program, with any advances utilized for that purpose reducing the amount
available under such facility. Such advances bear interest at a floating rate
equal to the 30-day LIBOR plus 1.50%. The First Union Credit Facility is
recourse to First Sierra Receivables, Inc., but non-recourse to First Sierra
Financial, Inc. The First Union Credit Facility matures on May 1, 1997, if not
previously renewed, at which time all amounts outstanding convert to a term loan
which matures on the tenth day of the month following the date on which the last
scheduled payment on the leases pledged is due. Under the terms of the First
Union Credit Facility, the Company is required to maintain certain minimum
financial ratios. As of December 31, 1996, the Company was in compliance with
such requirements.
F-15
<PAGE> 72
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In September 1996, the Company entered into a $75.0 million warehouse
facility with Prudential Securities Credit Corporation (the "Prudential
Facility"). Borrowings under the Prudential Facility bear interest at a floating
rate of 30-day LIBOR plus 0.95%. The Prudential Facility matures on March 31,
1997. In connection with the Prudential Facility, the Company received an
engagement letter from Prudential Securities Incorporated ("Prudential
Securities") under which Prudential Securities agreed to guarantee the purchase
of the BB rated subordinated securities issued in connection with
securitizations of leases acquired or originated by the Company which would
reduce the total commitment under the Prudential Facility. The purchase price is
based on a spread over the rate on comparable term U.S. Treasury securities as
of the date of the securitization. The Company is required to maintain certain
minimum financial ratios pursuant to the terms of the Prudential Facility. As of
December 31, 1996, the Company was in compliance with such requirements.
The Company is currently negotiating the renewal and/or restructuring of
its existing warehouse credit facilities and believes such actions will be
completed on terms at least as favorable as those under its existing agreements
prior to their maturity.
The Company currently is in negotiations with two lending institutions for
an additional facility (the "Supplemental Warehouse Facility") that would
provide the Company with up to $50.0 million of additional warehouse funding.
Borrowings under the Supplemental Warehouse Facility are expected to bear
interest at a floating rate equal to 30-day LIBOR plus 1.25%. The Supplemental
Warehouse Facility would provide for the issuance of a letter of credit for the
purpose of providing credit enhancement at securitization, which would allow the
Company to issue one senior class of securities rated AAA/Aaa in an amount which
would be at least 94.0% of the present value of the remaining scheduled payments
due on the leases included in the securitization. This securitization structure
would not require the Company to obtain credit ratings on the subordinated
securities issued in the transaction and would allow the Company to enhance the
level of cash proceeds realized at securitization. There can be no assurance
that the Company will be able to complete the Supplemental Warehouse Facility.
Subordinated Note Payable
In 1994, the Company issued a $9.0 million, unsecured subordinated note due
June 6, 2004 (the "Subordinated Note") to an entity controlled by one of the
Company's stockholders. Interest on the Subordinated Note is payable monthly at
a rate of 11.00%. The Company intends to utilize a portion of the proceeds of
the Offering to repay the Subordinated Note. Upon completion of the Offering,
the Company intends to enter into a new $5.0 million subordinated revolving
credit facility with the same entity, with the commitment level thereunder
decreasing by $1.0 million per year. Advances under the facility will bear
interest at 11.00% per annum.
Interest Rate Swap Agreements
The Company is required pursuant to the terms of the First Union Credit
Facility to enter into interest rate swap agreements in amounts equal to at
least 60% of the amount of borrowings outstanding under such facility. At
December 31, 1996 and 1995, the Company had entered into amortizing swap
agreements with notional amounts of $33.9 million and $40.5 million,
respectively. These agreements effectively modified amounts outstanding under
the LIBOR-based revolving lines to fixed rate debt at rates ranging from 5.83%
to 6.29% at December 31, 1996, and at rates ranging from 5.85% to 6.60% at
December 31, 1995. The counterparties to the Company's swap agreements at
December 31, 1996 were Prudential Global Funding, Inc., an affiliate of
Prudential Securities Credit Corporation, and First Union National Bank of North
Carolina.
F-16
<PAGE> 73
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. FURNITURE AND EQUIPMENT
The following is a summary of furniture and equipment as of December 31,
1995 and 1996 (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
1995 1996 USEFUL LIFE
----------- ----------- -----------
<S> <C> <C> <C>
Furniture and fixtures................................. $ 104 $ 406 7 years
Computer and office equipment.......................... 237 885 5 years
Leasehold improvements and other....................... 26 57 3 years
------ ------
367 1,348
Accumulated depreciation............................... (105) (299)
------ ------
$ 262 $1,049
====== ======
</TABLE>
7. INCOME TAXES
The temporary differences which give rise to net deferred tax assets and
liabilities are as follows at December 31, 1995 and 1996, respectively (in
thousands):
<TABLE>
<CAPTION>
1995 1996
---- -------
<S> <C> <C>
Accruals and reserves not deductible until paid............. $ -- $ 111
Depreciation and amortization............................... 34 (6)
Cash to accrual adjustment.................................. 180 (604)
Net operating loss carryforward............................. -- 59
Equipment lease securitization.............................. (57) (1,074)
Other....................................................... 22 148
---- -------
Total deferred income tax assets/(liabilities).... $179 $(1,366)
==== =======
</TABLE>
The provision (benefit) for income taxes for the period from inception
through December 31, 1994 and for the years ended December 31, 1995 and 1996
were as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
----- ---- ----
<S> <C> <C> <C>
Current --
Federal................................................... $ -- $376 $ --
State..................................................... -- 49 --
----- ---- ----
$ -- $425 $ --
===== ==== ====
Deferred --
Federal................................................... $(285) $111 $722
State..................................................... (38) 33 70
----- ---- ----
$(323) $144 $792
===== ==== ====
Total provision (benefit)......................... $(323) $569 $792
===== ==== ====
</TABLE>
F-17
<PAGE> 74
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax expense results principally from the use of different
capital recovery and revenue and expense recognition methods for tax and
financial accounting purposes. The sources of these temporary differences and
related tax effects were as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
----- ---- ----
<S> <C> <C> <C>
Equipment lease securitizations............................. $ -- $ -- $993
Accruals not deductible until paid.......................... (34) (12) 111
Cash to accrual adjustment.................................. (145) 12 (56)
Net operating loss carryforward............................. (144) 144 (59)
Other....................................................... -- -- (197)
----- ---- ----
Total deferred provision (benefits)............... $(323) $144 $792
===== ==== ====
</TABLE>
The following is a reconciliation between the effective income tax rate and
the applicable statutory federal income tax rate for the period from inception
through December 31, 1994 and for the years ended December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
----- ---- ----
<S> <C> <C> <C>
Federal statutory rate...................................... (34)% 34 34%
State income taxes, net of federal benefit.................. (4.5) 3.2 3.2
Non-deductible expenses and other........................... -- 3.6 2.2
----- ---- ----
Effective income tax rate................................. 38.5% 40.8% 39.4%
===== ==== ====
</TABLE>
8. REDEEMABLE PREFERRED STOCK
As of December 31, 1996, the Company was authorized to issue 1,000,000
shares of preferred stock. The number of shares to be issued, classes
designated, voting rights, dividend rates, liquidation and other rights,
preferences and limitations may be set by the Company's Board of Directors
without stockholder approval.
At December 31, 1996, 56,718 shares of Series A Preferred Stock (the
"Series A Preferred Stock") were issued and outstanding. Each share of the
Series A Preferred Stock is convertible at the holder's option at any time into
5.47 shares of the Company's common stock. Holders of the Series A Preferred
Stock are entitled to an annual, non-cumulative dividend of $1.86 per share.
Each outstanding share of Series A Preferred Stock entitles the holder thereof
to 5.47 votes on any matter submitted to a vote of the stockholders. If not
previously converted, the Company is required to redeem all outstanding Series A
Preferred Stock on December 31, 2001, at an aggregate redemption price of $2.6
million.
At December 31, 1996, 43,691 shares of Series B Convertible Preferred Stock
(the "Series B Preferred Stock") were outstanding. Each share of Series B
Preferred Stock is convertible, at the option of the holder, at any time into
5.47 shares of the Company's common stock. In addition, shares of Series B
Preferred Stock will be automatically converted by the Company into Common Stock
if the Company's common stock trades at or above $12.33 per share for twenty
consecutive trading days in a public market and certain other conditions are
met. Each share of the Series B Preferred Stock entitles the holder thereof to
5.47 votes on all matters submitted to a vote of stockholders. Holders of the
Series B Preferred Stock are entitled to receive annual, cumulative dividends
ranging from $1.14 to $2.29 per share based on criteria set forth in an escrow
agreement between the Company and the holder of such stock (the "Escrow
Agreement"). If not previously converted, the Series B Preferred Stock is
mandatorily redeemable on December 31, 2001, at an aggregate redemption price
ranging from $1.3 million to $2.5 million based on criteria set forth in the
Escrow Agreement. At December 31, 1996, holders of the Series B Preferred Stock
were entitled to receive dividends at the rate of $1.14 per share and the
aggregate redemption value was $1.3 million.
Concurrent with the issuance of the Series A Preferred Stock and the Series
B Preferred Stock, irrevocable standby letters of credit, issued by a financial
institution and guaranteed by an affiliate of the
F-18
<PAGE> 75
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company, were given to the holders of the preferred stock and can be drawn upon
if certain events occur, including the failure of the Company to pay dividends
when due, the failure of the Company to redeem the shares on the designated
mandatory redemption date or the occurrence of a liquidation, dissolution or
winding up of the Company. As of December 31, 1996, letters of credit of
approximately $5.1 million were outstanding.
The Company may issue one or more series of preferred stock in the future
in conjunction with its acquisition strategy or otherwise. Any such issuances
may adversely affect, among other things, the voting power of holders of the
Company's common stock and then outstanding preferred stock. The Series A
Preferred Stock and the Series B Preferred Stock have been reflected as
Redeemable Preferred Stock in the accompanying financial statements.
9. STOCKHOLDERS' EQUITY
Common Stock
In February 1997, the Company increased the authorized shares of common
stock of the Company to 25.0 million shares. On February 27, 1997, the Board of
Directors of the Company approved a stock split whereby 5.47 shares of common
stock were issued for each outstanding share of common stock. All share and per
share amounts included in the accompanying financial statements and footnotes
have been restated to reflect the stock split.
From June 1994 through January 1995, options to purchase common stock of
the Company at the estimated fair value on the date of the grant were offered to
certain key officers and a director of the Company in conjunction with the
formation of the Company and pursuant to the employees' respective employment
agreements. During the year ended December 31, 1996, such employees and the
director exercised these options and acquired 854,736 shares of common stock of
the Company for $146,941.
In May 1996, the Company acquired 628,426 shares of its common stock from a
stockholder for $360,000. Additionally, the Company had entered into a two year
consulting agreement for $75,000 per year with such shareholder in conjunction
with the formation of the Company. Such consulting agreement terminated in June
1996.
Each of the stockholders of the Company is party to a stockholders
agreement dated as of June 3, 1994 (the "Stockholders Agreement"), which
contains provisions for, among other things, voting of shares, election of
directors, restrictions on transfer of shares and certain demand and piggyback
registration rights. The Stockholders Agreement is expected to be terminated
prior to completion of the Offering. Upon completion of the Offering, the
Company and the holders of 100% of the Common Stock outstanding prior to the
Offering will enter into a Registration Rights Agreement providing such
stockholders with certain demand and piggyback registration rights.
Warrants
In May 1995, the Company issued warrants to purchase a total of 198,397
shares of the Company's common stock at a price of $.0018 per share, which
approximated the estimated fair value of the underlying stock to one of its
lenders, First Union National Bank of North Carolina (see Note 5). The warrants
are currently exercisable and have an expiration date of May 8, 2005. The
Company has a right of first refusal to purchase the warrants should the holder
thereof wish to dispose of such warrants. The Company has the option to purchase
the warrants at the fair value of the Company's common stock upon the occurrence
of certain events including an event of default under the First Union Credit
Facility or May 8, 2001. At December 31, 1996, no warrants had been exercised.
F-19
<PAGE> 76
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Options
At December 31, 1996, the Company did not have any outstanding options, nor
were there any stock option plans in place.
10. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has entered into various operating lease agreements, primarily
for office space. Rent expense under all operating leases for the period from
inception through December 31, 1994 and for the years ended December 31, 1995
and 1996 was $19,000, $162,000 and $246,000, respectively. For the subsequent
five years, minimum annual rental payments under noncancelable operating leases
are as follows (in thousands):
<TABLE>
<S> <C>
1997.................................... $354
1998.................................... 238
1999.................................... 172
2000.................................... 88
2001.................................... 64
----
Total minimum payments........ $916
====
</TABLE>
Concentration of Credit Risks
The Company acquires or originates a majority of its leases from lease
origination Sources operating in five states: Texas, Florida, New York, New
Jersey and California. Although the Company's portfolio of leases includes
lessees located throughout the United States, such lessees' ability to honor
their contracts may be substantially dependent on economic conditions in these
states. All such contracts are collateralized by the related equipment. The
recourse and holdback provisions of the Private Label program mitigate, but do
not eliminate, a significant portion of any economic risk not recoverable
through the sale of the related equipment.
On a pro forma basis after giving effect to the acquisitions of GIC, CCL,
Heritage and Lease Pro, two of the Company's Private Label Sources accounted for
12.5% and 9.8%, respectively, of all equipment leases acquired or originated by
the Company during 1996. No other Source accounted for more than 5% of the
equipment leases acquired or originated by the Company during 1996. In the event
that the Company's significant Private Label Sources were to substantially
reduce the number of leases sold to the Company, and the Company was not able to
replace the lost lease volume, such reduction could have a material adverse
effect on the Company's financial condition and results of operations.
Additionally, a substantial portion of the Company's leases are
concentrated in certain industries, including, the medical industry, the dental
industry and the veterinary industry. To the extent that the economic or
regulatory conditions prevalent in such industries change, the lessees' ability
to honor their lease obligations may be adversely impacted.
Employee Benefit Plan
The Company established a 401(k) defined contribution plan in October 1996
which is generally available to everyone who was employed by the Company as of
October 1, 1996. Employees may generally contribute up to 15 percent of their
salary each year; and the Company, at its discretion, may match up to 50% of the
first 8% contributed by the employee. During the year ended December 31, 1996,
the Company recognized $5,000 of expense related to the 401(k) plan. The Company
does not offer any other post-employment or post-retirement benefits.
F-20
<PAGE> 77
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employment Agreements
The Company has entered into employment agreements with certain key members
of management. The terms of such agreements provide for salaries and bonuses as
set forth in the agreements and upon achieving certain performance objectives.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
Much of the information used to determine fair value is highly subjective and
judgmental in nature and, therefore, may not be precise. Because the fair value
is estimated as of the balance sheet date, the amounts which will actually be
realized or paid upon settlement or maturity of the various instruments could be
significantly different. The following table summarizes the carrying amounts and
estimated fair values of the Company's financial instruments at December 31,
1995 and 1996 (in thousands):
<TABLE>
<CAPTION>
1995 1996
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Financial assets --
Lease financing receivables, net............. $67,322 $71,724 $61,270 $64,417
Investment in Trust Certificates............. -- -- 9,534 9,778
Cash and cash equivalents.................... 876 876 2,598 2,598
Financial liabilities --
Warehouse credit facilities.................. 55,827 55,827 52,380 52,380
Subordinated note payable.................... 9,000 9,000 9,000 9,000
Off balance sheet instruments --
Interest rate swap agreements................ -- 719 -- 96
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
such value.
Lease Financing Receivables. The fair value was estimated by discounting
expected future cash flows at a risk adjusted rate of return deemed to be
appropriate for investors in such instruments. Expected cash flows take into
consideration management's estimates of prepayments, defaults and recoveries.
Investment in Trust Certificates. The fair value was estimated by discounting
expected future cash flows allocable to the holder of the Trust Certificate at a
risk adjusted rate of return deemed to be appropriate for investors in such
investment. Expected cash flows take into consideration management's estimates
of prepayments, defaults and recoveries.
Cash and Cash Equivalents. The carrying amounts approximate fair value because
of the short maturity and market interest rates of those instruments.
Warehouse Credit Facilities. The carrying amounts approximate fair value due to
the floating rate nature of the credit facilities.
Subordinated Note Payable. The carrying amount of the subordinated note payable
approximates its fair value based on estimated yields which would be required
for similar types of debt instruments.
Interest Rate Swap Agreements. The fair value represents the payment the Company
would have made to the swap counterparties to terminate the swap agreements on
the indicated dates.
F-21
<PAGE> 78
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENTS:
On February 4, 1997, the Company acquired certain assets and liabilities of
Lease Pro, Incorporated ("Lease Pro") for approximately $900,000 in cash. Lease
Pro is located in Atlanta, Georgia and has a significant presence in the
national market for veterinary equipment financing.
In February 1997, the Company signed a letter of intent to acquire the
outstanding common stock of Heritage Credit Services, Inc. ("Heritage") in
exchange for $6.4 million, consisting of $1.4 million in cash, the issuance of a
$1.0 million subordinated note bearing interest at 9.00% per annum and 444,444
shares of Common Stock (assuming an initial public offering price of $9.00 per
share). Such acquisition is contingent upon, and will close simultaneously with,
the Offering. Heritage is located near Sacramento, California and is principally
involved in the broker market on the U.S. west coast and has a significant
vendor base in California.
F-22
<PAGE> 79
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth the unaudited pro forma consolidated
statement of operations of the Company for the year ended December 31, 1996, and
the unaudited pro forma balance sheet of the Company as of December 31, 1996,
after giving effect to the acquisitions made during 1996 (General Interlease
Corporation ("GIC") and Corporate Capital Leasing Group, Inc. ("CCL")), the
acquisition of Lease Pro, Inc. ("Lease Pro") which was completed in February
1997, and the acquisition of Heritage Credit Services, Inc. ("Heritage"), which
is expected to be consummated concurrently with the closing of the Offering
(collectively the "Acquisitions"). The unaudited pro forma financial statements
present a subtotal column which reflects the effect of the Acquisitions. In
addition, the unaudited pro forma financial statements reflect certain
adjustments (the "Offering Adjustments") which give effect to transactions
related to the sale of the Company's common stock offered hereby (the
"Offering") and the application of the net proceeds therefrom. The "as adjusted"
columns in the unaudited pro forma consolidated financial statements include the
effects of the Acquisitions and the Offering Adjustments. The unaudited pro
forma consolidated statement of operations assumes that these transactions
occurred as of January 1, 1996 and the unaudited pro forma consolidated balance
sheet assumes that the Lease Pro acquisition, the Heritage acquisition and the
Offering occurred as of December 31, 1996. The pro forma adjustments assume that
the cash, debt, common stock and/or preferred stock used as consideration to
effect the Acquisitions was outstanding as of January 1, 1996.
The following unaudited pro forma consolidated financial statements should
be read in conjunction with the consolidated financial statements of the Company
and the related notes thereto, and the financial statements of Heritage and CCL
and the related notes thereto included elsewhere herein. Such pro forma
information is based on historical data with respect to the Company and the
acquired businesses. The pro forma information is not necessarily indicative of
the results that might have occurred had such transactions actually taken place
as of January 1, 1996 and is not intended to be a projection of future results.
The pro forma information presented herein is provided to comply with the
requirements of the Securities and Exchange Commission ("Commission"). The
information reflects the historical operations of each acquired entity, as
adjusted to reflect certain adjustments, primarily relating to: (i) amortization
of non-compete agreements and goodwill arising in connection with the
Acquisitions, (ii) interest expense related to debt incurred to fund the
Acquisitions and (iii) preferred stock dividends related to the Acquisitions.
The unaudited pro forma consolidated statement of operations does not
assume any additional profitability resulting from the application of the
Company's revenue or yield enhancement measures or cost containment programs to
the historical results of the acquired businesses, nor does it assume increases
in corporate general and administrative expenses which may have resulted from
the Company managing the acquired businesses for the year ended December 31,
1996. The unaudited pro forma consolidated financial statements are based on
management's estimates, available information and certain assumptions that
management deems appropriate. The pro forma information does not reflect any
adjustments to reflect the manner in which the acquired entities are being or
will be operated under the control of the Company.
F-23
<PAGE> 80
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA (UNAUDITED)
-------------------------------------------------------
HISTORICAL OFFERING
CONSOLIDATED ACQUISITIONS SUBTOTAL ADJUSTMENTS AS ADJUSTED
------------ ------------ -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
LEASE FINANCING RECEIVABLES, net........ $61,270 $20,077(A) $ 81,347 $ -- $ 81,347
INVESTMENT IN TRUST CERTIFICATES........ 9,534 -- 9,534 -- 9,534
CASH AND CASH EQUIVALENTS............... 2,598 251(A) 2,849 -- 449
(2,400)(A) (2,400) --
GOODWILL AND OTHER INTANGIBLE ASSETS,
net................................... 3,615 4,626(A) 8,241 -- 8,241
FURNITURE AND EQUIPMENT, net............ 1,049 404(A) 1,453 -- 1,453
OTHER ASSETS............................ 1,276 1,665(A) 2,941 (134)(B) 2,807
------- ------- -------- -------- --------
Total Assets.................. $79,342 $24,623 $103,965 $ (134) $103,831
======= ======= ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEBT:
Warehouse Credit Facilities........... $52,380 $17,435(A) $ 69,815 $ (7,134)(B) $ 62,681
Subordinated Notes Payable............ 9,000 1,000(A) 10,000 (9,000)(B) 1,000
OTHER LIABILITIES:
Holdback Reserve Payable.............. 6,523 -- 6,523 -- 6,523
Deferred Income Taxes................. 1,366 -- 1,366 -- 1,366
Accounts Payable and Accrued
Liabilities........................ 3,929 2,188(A) 6,117 -- 6,117
------- ------- -------- -------- --------
Total Liabilities............. 73,198 20,623 93,821 (16,134) 77,687
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK.............. 3,890 -- 3,890 -- 3,890
STOCKHOLDERS' EQUITY:
Common Stock.......................... 57 4(A) 61 20(B) 81
Additional Paid-in Capital............ 730 3,996(A) 4,726 15,980(B) 20,706
Retained Earnings..................... 1,467 1,467 -- 1,467
------- ------- -------- -------- --------
Total Stockholders' Equity.... 2,254 4,000 6,254 16,000 22,254
------- ------- -------- -------- --------
Total Liabilities and
Stockholders' Equity........ $79,342 $24,623 $103,965 $ (134) $103,831
======= ======= ======== ======== ========
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Consolidated Financial Statements.
F-24
<PAGE> 81
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA UNAUDITED
-------------------------------------------------------------
OFFERING
FIRST SIERRA ACQUISITIONS SUBTOTAL ADJUSTMENTS AS ADJUSTED
------------ ------------ -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Interest Income............ $ 6,323 $ 2,593(AA) $ 8,916 $ -- $ 8,916
Gain on Sale of Lease
Financing Receivables.... 3,456 3,275(AA) 6,731 -- 6,731
Servicing Income........... 1,050 1,050 -- 1,050
Other Income............... 535 7,589(AA) 8,124 -- 8,124
------- ------- ------- ------- -------
Total Revenues... 11,364 13,457 24,821 -- 24,821
------- ------- ------- ------- -------
Interest Expense........... 5,014 1,610(AA)(CC) 6,624 (1,500)(FF) 5,124
Salaries and Benefits...... 1,987 3,426(AA) 5,413 -- 5,413
Provision for Credit
Losses................... 537 646(AA) 1,183 -- 1,183
Depreciation and
Amortization............. 286 571(AA)(BB) 857 -- 857
Other General and
Administrative........... 1,531 6,211(AA) 7,742 -- 7,742
------- ------- ------- ------- -------
Total Expenses... 9,355 12,464 21,819 (1,500) 20,319
------- ------- ------- ------- -------
Income Before Income
Taxes.................... 2,009 993 3,002 1,500 4,502
Provision for Income
Taxes.................... 792 397(AA)(EE) 1,189 600(GG) 1,789
------- ------- ------- ------- -------
Net Income (Loss)........ 1,217 596 1,813 900 2,713
Preferred Stock
Dividends............. (60) (92)(DD) (152) -- (152)
------- ------- ------- ------- -------
Net Income Allocable to
Shareholders............. $ 1,157 $ 504 $ 1,661 $ 900 $ 2,561
======= ======= ======= ======= =======
Earnings per common
share.................... .30
=======
Weighted average number of
common and common
equivalent shares........ 8,436(HH)
=======
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Consolidated Financial Statements.
F-25
<PAGE> 82
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS
The accompanying unaudited pro forma consolidated balance sheet as of
December 31, 1996 gives effect to the Heritage and Lease Pro acquisitions and
the Offering Adjustments. The estimated fair market values reflected below are
based on preliminary estimates and assumptions and are subject to revision as
more information becomes available. In management's opinion, the preliminary
allocations are not expected to be materially different from the final
allocations.
(A) Reflects the Company's acquisition of Lease Pro which was completed in
February 1997 and Heritage, which is deemed probable of completion as of the
effective date of this Registration Statement, as if such acquisitions had
occurred on December 31, 1996. Such acquisitions have or will be funded by an
aggregate of $2.4 million in cash (including transaction costs), $1.0 million of
debt and $4.0 million of the Company's common stock. In conjunction with both of
these acquisitions, the key employees and former owners of the acquired
businesses have entered or will enter into employment and non-compete agreements
with the Company. The estimated fair market value of the assets and liabilities
of these acquisitions are as follows:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- ------
(IN
THOUSANDS)
<S> <C>
Net assets acquired:
Lease financing receivables, net...... 20,077
Cash and cash equivalents............. 251
Goodwill and other intangible assets,
net................................ 4,626
Furniture and equipment, net.......... 404
Other assets.......................... 1,665
Debt.................................. (17,435)
Accounts payable and accrued
liabilities........................ (2,188)
Consideration paid:
Cash.................................. (2,400)
Debt.................................. (1,000)
Common Stock.......................... (4,000)
--------
$ 0
--------
</TABLE>
(B) Reflects the issuance of 2,000,000 shares of the Company's Common
Stock, par value $0.01 per share, at a price of $9.00 per share, in the
Offering, resulting in a combined increase to common stock and additional
paid-in capital of $16.0 million, net of associated transaction costs of $2.0
million. Of such proceeds, $9.0 million will be used to repay the subordinated
note in full, with the remaining available proceeds of $7.1 million being
applied to reduce outstanding indebtedness under the warehouse facilities. Also
reflects the removal of $134,000 of deferred costs attributable to the Offering
which had been capitalized at December 31, 1996.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS ADJUSTMENTS
The accompanying unaudited pro forma consolidated statement of operations
for the year ended December 31, 1996 gives effect to the Acquisitions and the
Offering Adjustments. The results of operations for Heritage and Lease Pro for
the years ended September 30, 1996 and December 31, 1996, respectively, have
been included in the unaudited pro forma consolidated statement of operations.
In addition, the pre-acquisition results of operations for GIC for the period
from January 1, 1996 to the date of acquisition of GIC by the Company, July 11,
1996, and CCL for the ten month period ended October 31, 1996 (the date of the
acquisition of CCL by the Company) have been included in the unaudited pro forma
consolidated statement of operations.
F-26
<PAGE> 83
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
(i) Notes (AA)-(EE) represent adjustments made relating to the acquisitions
which took place subsequent to January 1, 1996 and to the acquisition of
Heritage, which is deemed probable of completion, as if they had occurred
January 1, 1996.
(AA) Reflects the combined results of operations, prior to
acquisition, of the businesses acquired by the Company, subsequent to
January 1, 1996, or deemed probable of acquisition, in transactions
accounted for as purchases, as if the businesses had been acquired as of
January 1, 1996.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
(IN THOUSANDS)
<S> <C>
Interest income............................................. $ 2,593
Gain on sale of lease financing receivables................. 3,275
Other income................................................ 7,589
Interest expense............................................ 1,334
Salaries and benefits....................................... 3,426
Provision for credit losses................................. 646
Depreciation and amortization............................... 186
Other general and administrative expenses................... 6,211
Provision (benefit) for income taxes........................ (103)
</TABLE>
(BB) Reflects adjustments for increased depreciation and amortization
expense relative to the Company's new basis in the net assets of businesses
acquired after January 1, 1996 or which are deemed probable of completion
as of the date of this filing, as if such acquisitions had taken place as
of January 1, 1996. Pro forma depreciation has been recorded using the
depreciable lives and methods utilized by the Company. Pro forma
amortization has been recorded using the contract lives to reflect the
expense related to non-compete agreements and a 20 year life to amortize
goodwill associated with such acquisitions (in thousands).
<TABLE>
<CAPTION>
DESCRIPTION
-----------
<S> <C>
Additional depreciation..................................... $ 11
Additional amortization..................................... 374
----
Total depreciation and amortization adjustment.............. $385
====
</TABLE>
(CC) Reflects additional interest expense of $276,000 for the year
ended December 31, 1996, which would have been incurred by the Company
assuming the acquisitions made by the Company subsequent to January 1,
1996, or deemed probable of completion as of the date of this filing, had
been made as of January 1, 1996.
(DD) Reflects pro forma dividends on the Company's Series A and B
Preferred Stock actually issued in connection with certain acquisitions
completed subsequent to January 1, 1996 as if the related stock issuances
had occurred on January 1, 1996. A total of $5.1 million of Series A and B
Preferred Stock has been utilized to fund acquisitions subsequent to
January 1, 1996, and such shares would have required additional preferred
stock dividends of $92,000 for the year ended December 31, 1996, had such
acquisitions been completed on January 1, 1996. The Series A and B
Preferred Stock are common stock equivalents.
(EE) Reflects an adjustment to the tax provision of $500,000 which has
been made to reflect a normal effective tax rate for the Company of
approximately 40% for federal and state taxes that the Company estimates it
would have incurred on January 1, 1996. Management has not considered the
use
F-27
<PAGE> 84
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
of any available net operating loss carryforwards in this unaudited pro
forma consolidated statement of operations.
(ii) Notes (FF)-(HH) represent the Offering Adjustments.
(FF) Reflects the elimination of $1,500,000 of interest expense for
1996 related to the application of the estimated net proceeds of the
Offering to retire the $9.0 million subordinated note, the elimination of
pro forma interest expense relative to an aggregate of $3.9 million of debt
which would have been incurred as of January 1, 1996, had the acquisitions
described above been completed as of January 1, 1996, and the application
of $3.1 million to reduce amounts outstanding under warehouse credit
facilities.
(GG) Reflects the provision of $600,000 of federal and state income
taxes at an effective rate of 40% on Offering Adjustments consistent with
management's assumption that this rate would be indicative of the Company's
tax position assuming the Acquisitions and the Offering were completed as
of the beginning of the period.
(HH) Pro forma earnings per share is computed based on the weighted
average number of common and common equivalent shares outstanding as if the
Acquisitions and Offering had occurred as of January 1, 1996. Weighted
average common and common equivalent shares are calculated as more fully
discussed in Note 2 of the Company's Consolidated Financial Statements.
F-28
<PAGE> 85
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Stockholder
Corporate Capital Leasing Group, Inc.
West Chester, Pennsylvania
We have audited the accompanying balance sheets of Corporate Capital
Leasing Group, Inc. as of December 31, 1995 and October 31, 1996, and the
related statements of income, stockholder's equity, and cash flows for the
periods then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 financial statements are free of material
misstatement. An audit 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 financial statements referred to above present fairly,
in all material respects, the financial position of Corporate Capital Leasing
Group, Inc. as of December 31, 1995 and October 31, 1996, and the results of its
operations and its cash flows for the periods then ended in conformity with
generally accepted accounting principles.
/s/ MacDADE ABBOTT LLP
Paoli, Pennsylvania
November 20, 1996
F-29
<PAGE> 86
CORPORATE CAPITAL LEASING GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
1995 1996
------------ -----------
<S> <C> <C>
ASSETS
Current Assets
Cash...................................................... $ 637,921 $ 10,852
Broker receivables........................................ -- 9,696
Residual receivable....................................... 12,215 --
Commissions receivable.................................... 139,823 60,787
Leases funded............................................. 247,060 344,500
Net investment in direct financial leases................. 13,022 4,528
---------- --------
1,050,041 430,363
Non-current Assets
Deposits.................................................. 2,430 2,430
Net investment in direct financing leases................. -- 2,098
Property and equipment, net of accumulated depreciation..... 137,161 105,090
---------- --------
$1,189,632 $539,981
========== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Note payable.............................................. $ -- $200,000
Current maturities of long-term liabilities............... 64,029 63,673
Accounts payable.......................................... 42,203 46,046
Accrued expenses.......................................... 63,065 31,428
Accrued compensation and related taxes.................... 15,823 15,605
Advance payments.......................................... 102,677 151,877
---------- --------
287,797 508,629
Long-term Liabilities
Notes payable............................................. 26,951 --
Capital lease obligations................................. 56,759 30,671
---------- --------
83,710 30,671
Stockholder's Equity
Common stock, $1 par value, authorized 1,000 shares;
issued and outstanding 100 shares...................... 100 100
Additional paid-in capital................................ 26,143 26,143
Retained earnings (deficit)............................... 791,882 (25,652)
---------- --------
818,125 591
---------- --------
$1,189,632 $539,891
========== ========
</TABLE>
See notes to financial statements.
F-30
<PAGE> 87
CORPORATE CAPITAL LEASING GROUP, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE FOR THE TEN
YEAR ENDED MONTHS ENDED
DECEMBER 31, OCTOBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Gross Revenues.............................................. $4,853,621 $4,062,479
Cost of Leases.............................................. 2,462,944 2,195,257
---------- ----------
Gross Profit...................................... 2,390,677 1,867,222
Expenses
Salaries and employee benefit............................. 743,438 587,363
Depreciation.............................................. 30,163 42,252
Other selling, general and administrative................. 610,956 481,798
Interest.................................................. 4,655 11,683
---------- ----------
1,389,212 1,123,096
---------- ----------
Net income........................................ $1,001,465 $ 744,126
========== ==========
Earnings per Share:
Net income per share of common stock...................... $10,014.65 $ 7,441.26
========== ==========
</TABLE>
See notes to financial statements.
F-31
<PAGE> 88
CORPORATE CAPITAL LEASING GROUP, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Balance, January 1, 1995........................ $100 $26,143 $ 216,334 $ 242,577
Net income...................................... -- -- 1,001,465 1,001,465
Cash dividends declared at $4,259.17 per
share......................................... -- -- (425,917) (425,917)
---- ------- ----------- ----------
Balance, December 31, 1995...................... 100 26,143 791,882 818,125
Net income...................................... -- -- 744,126 744,126
Cash dividends declared at $15,616.60 per
share......................................... -- -- (1,561,660) (1,561,660)
---- ------- ----------- ----------
Balance, October 31, 1996....................... $100 $26,143 $ (25,652) $ 591
==== ======= =========== ==========
</TABLE>
See notes to financial statements.
F-32
<PAGE> 89
CORPORATE CAPITAL LEASING GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE TEN
YEAR ENDED MONTHS ENDED
DECEMBER 31, OCTOBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income................................................ $1,001,465 $ 744,126
Adjustments to reconcile net income to net cash provided
by operations
Depreciation........................................... 30,163 42,252
Amortization........................................... 4,545 2,074
Changes in current assets and liabilities:
Broker receivables................................... -- (9,696)
Commission receivable................................ (139,823) 79,036
Accounts payable..................................... 41,722 3,843
Accrued expenses..................................... 28,628 (31,637)
Accrued compensation and related taxes............... 4,977 (218)
Advance payments..................................... (26,550) 49,200
---------- -----------
Cash Provided by Operating Activities....................... 945,127 878,980
Cash Flows from Investing Activities
Lease payments collected.................................. 26,845 16,537
Purchase of equipment for leases.......................... (104,802) (97,440)
Purchase of property and equipment........................ (59,037) (10,181)
---------- -----------
Cash Used in Investing Activities........................... (136,994) (91,084)
Cash Flows from Financing Activities
Payment of notes payable.................................. (65,210) (30,268)
Proceeds from note payable................................ -- 200,000
Payment of capital lease obligations...................... (6,153) (23,037)
Dividends paid............................................ (425,917) (1,561,660)
---------- -----------
Cash Used in Financing Activities........................... (497,280) (1,414,965)
---------- -----------
Net (decrease) increase in cash............................. 310,853 (627,069)
Cash, beginning of period................................... 327,068 637,921
---------- -----------
Cash, end of period......................................... $ 637,921 $ 10,852
========== ===========
</TABLE>
See notes to financial statements.
F-33
<PAGE> 90
CORPORATE CAPITAL LEASING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Corporate Capital Leasing Group, Inc. (the "Company") was incorporated in
the Commonwealth of Pennsylvania on December 20, 1990. The Company is an
equipment leasing broker to a wide range of customers in various industries in
North America.
Revenue Recognition
The Company's primary revenue is from brokers' fees. Revenue is recognized
when the fee is earned.
Property and Equipment
Property and equipment are carried at cost and include expenditures for new
facilities and those which substantially increase the life of existing property
and equipment. Maintenance, repairs and minor renewals are expensed as incurred.
When properties are retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the respective accounts and any profit
or loss on disposition is credited or charged to income.
The Company provides for depreciation of property and equipment at rates
designed to allocate the cost over the estimated useful lives of the assets.
Depreciation is computed principally on accelerated methods using lives of 3 to
7 years.
Advance Payments
Advance payments represent payments on deposits pending approval of lease
commitment.
Income Taxes
The Company, with the consent of its shareholder, is taxed as an S
Corporation under provisions of the Internal Revenue Code, and the Commonwealth
of Pennsylvania tax laws. In lieu of Federal and state corporation income tax,
the shareholders of an S Corporation are taxed on their proportionate share of
the Company's taxable income. Therefore, Federal and state income taxes are not
provided for in the financial statements.
Fair Value of Financial Instruments
The Financial Accounting Standards Board has issued FAS No. 107 Disclosures
About Fair Value of Financial Instruments, which requires disclosure of the fair
value of financial instruments. The fair value of the Company's assets and
liabilities which qualify as financial instruments under FAS No. 107 approximate
the carrying amounts presented in the balance sheet.
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.
F-34
<PAGE> 91
CORPORATE CAPITAL LEASING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- NET INVESTMENT IN DIRECT FINANCING LEASES
The detail of the components of the net investment in direct financing
leases are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
1995 1996
------------ -----------
<S> <C> <C>
Total minimum lease payments receivable..................... $ 18,282 $ 9,287
Less unearned income........................................ (5,260) (2,661)
-------- -------
13,022 6,626
Less current portion........................................ (13,022) (4,528)
-------- -------
Net investment in direct financing leases......... $ -- $ 2,098
======== =======
</TABLE>
NOTE C -- FUTURE MINIMUM LEASE PAYMENTS RECEIVABLE
The maturities of the future minimum lease payments receivable under direct
financing leases are as follows:
<TABLE>
<S> <C>
Years ending:
For the two month period ending December 31, 1996......... $1,107
December 31, 1997......................................... 6,263
December 31, 1998......................................... 1,917
------
$9,287
======
</TABLE>
NOTE D -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
1995 1996
------------ -----------
<S> <C> <C>
Furniture and fixtures...................................... $ 73,870 $ 74,938
Office equipment............................................ 143,308 152,421
Accumulated depreciation.................................... (80,017) (122,269)
-------- ---------
$137,161 $ 105,090
======== =========
</TABLE>
NOTE E -- LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
1995 1996
------------ -----------
<S> <C> <C>
Note payable to bank secured by certain equipment with
monthly payments of $391, including interest at 12.00% to
June 1996................................................. $ 2,307 $ --
Note payable to an individual secured by certain equipment
with monthly payments of $3,199, including interest at
10.00% to July 1997....................................... 60,788 32,828
-------- --------
63,095 32,828
Amounts classified as current liabilities................... (36,144) (32,828)
-------- --------
$ 26,951 $ --
======== ========
</TABLE>
F-35
<PAGE> 92
CORPORATE CAPITAL LEASING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Line of Credit
The Company has a line of credit, payable on demand and guaranteed by the
sole stockholder of the Company, totaling $500,000 for use as working capital.
At December 31, 1995 and October 31, 1996, $500,000 and $300,000 was available,
respectively. Interest is at the bank's prime lending rate plus 1.25% and was
9.75% at December 31, 1995 and October 31, 1996.
Letter of Credit
At October 31, 1996, the Company had a standby letter of credit in the
amount of $57,200. Fees are charged based on credit issuance.
NOTE F -- LEASES
Capital Leases
The Company leases computer and office furniture under capital leases. The
leased assets are capitalized using interest rates appropriate at the inception
of each lease. Future minimum payments, by year and in the aggregate, are as
follows:
<TABLE>
<S> <C>
For the two month period ending December 31, 1996........... $ 5,885
December 31, 1997........................................... 35,311
December 31, 1998........................................... 27,004
--------
Total minimum lease payments................................ 68,200
Less amount representing interest........................... 6,684
--------
Present value of net minimum lease payments................. 61,516
Less current maturities..................................... (30,845)
--------
Long-term obligation under capital lease.................... $ 30,671
========
</TABLE>
At December 31, 1995 and October 31, 1996 equipment under capital leases
was $90,797, and accumulated depreciation was $4,526 and $30,923, respectively.
Operating Leases
The Company leases office facilities under non-cancelable operating leases.
Future minimum payments, by period and in the aggregate, under all
non-cancelable operating leases with initial or remaining terms of one year or
more consisted of the following:
<TABLE>
<S> <C>
For the two month period ending December 31, 1996........... $13,500
October 31, 1997............................................ $67,500
</TABLE>
NOTE G -- PENSION PLAN
The Company has a Salary Reduction/Simplified Employee Pension Plan
covering substantially all employees. Under the provision of the plan, the
Company makes contributions based upon a percentage of each qualified
participant's salary to their respective account. Employees become eligible for
participation when they meet certain requirements, which include attainment of
age 21 and one year of full time service. For the periods ended December 31,
1995 and October 31, 1996, the Company incurred pension expense of $23,491 and
$-0-, respectively.
F-36
<PAGE> 93
CORPORATE CAPITAL LEASING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during the periods ended December 31, 1995 and October 31,
1996 was $15,541 and $10,829, respectively.
Non-cash investing and financing activities consisted of capital lease
obligations of $90,797 incurred in the acquisition of computer equipment and
office furniture during the period ended December 31, 1995.
NOTE I -- LITIGATION
The Company is a defendant in a complaint based on an alleged breach of
contract for broker fees and other amounts. Management, after consultation with
legal counsel, believes the ultimate liability, if any, arising from such
complaint would not have a materially adverse effect on the Company's financial
position or results of operations.
NOTE J -- SUBSEQUENT EVENT
Effective November 1, 1996, 100% of the Company's common stock was acquired
by First Sierra Financial, Inc. of Houston, Texas.
F-37
<PAGE> 94
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Director and Shareholder of
Heritage Credit Services, Inc.
We have audited the accompanying balance sheets of Heritage Credit
Services, Inc. (the "Company") as of September 30, 1995 and 1996 and the related
statements of income and retained earnings, and cash flows for each of the three
years in the period ended September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Heritage Credit Services,
Inc. at September 30, 1995 and 1996, and the results of its operations and cash
flows for each of the three years in the period ended September 30, 1996, in
conformity with generally accepted accounting principles.
/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
November 27, 1996
Seattle, Washington
F-38
<PAGE> 95
HERITAGE CREDIT SERVICES, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------- DECEMBER 31,
1995 1996 1996
------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................. $ 462 $ 251 $ 1,181
Net investment in leases and equipment financing
agreements (Notes 2 and 3)......................... 17,036 20,986 29,037
Other receivables..................................... 390 743 1,069
Furniture, equipment and vehicles, net of accumulated
depreciation of $84, $141 and $155................. 205 245 282
Restricted cash (Note 3).............................. 293 746 749
Other assets.......................................... 161 176 309
------- ------- -------
Total assets.................................. $18,547 $23,147 $32,627
======= ======= =======
LIABILITIES
Checks issued in excess of deposits................... $ 743 $ 693 $ 1,336
Accrued liabilities................................... 61 237 264
Vendor payables....................................... 388 633 2,536
Notes payable -- recourse (Note 3).................... 7,808 7,632 7,731
Notes payable -- non-recourse (Note 3)................ 6,857 9,803 16,818
Security deposits..................................... 294 625 729
------- ------- -------
Total liabilities............................. 16,151 19,623 29,414
------- ------- -------
SHAREHOLDER'S EQUITY
Common stock, no par value, 100,000 shares authorized,
7,975 shares issued and outstanding................ 25 25 25
Retained earnings..................................... 2,371 3,499 3,188
------- ------- -------
Total Shareholder's equity.................... 2,396 3,524 3,213
------- ------- -------
Total Liabilities and shareholder's equity.... $18,547 $23,147 $32,627
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-39
<PAGE> 96
HERITAGE CREDIT SERVICES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------- --------------------------
1994 1995 1996 1995 1996
------ ------ ------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Lease revenue from discounting....... $1,931 $2,475 $2,543 $ 649 $ 844
Equipment finance income............. 821 1,975 3,275 813 825
Residual income...................... 572 684 949 212 224
Broker fee income.................... 207 288 565 129 345
Other income......................... 127 174 423 230 86
------ ------ ------ ------ ------
Total revenues............... 3,658 5,596 7,755 2,033 2,324
------ ------ ------ ------ ------
Salaries and related expenses.......... 609 900 1,262 266 352
Commission and broker fees............. 1,323 2,023 1,954 498 629
Provision for credit losses............ 103 279 646 200 625
Depreciation and amortization.......... 20 35 58 12 14
Other selling, general and
administrative expenses.............. 778 1,216 1,407 309 575
------ ------ ------ ------ ------
Total expenses 2,833 4,453 5,327 1,285 2,195
------ ------ ------ ------ ------
Earnings before interest and tax....... 825 1,143 2,428 748 129
Interest expense....................... 399 1,136 1,300 397 440
------ ------ ------ ------ ------
Earnings (loss) before income tax...... 426 7 1,128 351 (311)
Income tax provision (benefit) (Note
4)................................... 98 (255) - - -
------ ------ ------ ------ ------
Net Income (loss)...................... 328 262 1,128 351 (311)
RETAINED EARNINGS --
Beginning of period.................. 1,781 2,109 2,371 2,371 3,499
------ ------ ------ ------ ------
End of period........................ $2,109 $2,371 $3,499 $2,722 $3,188
====== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE> 97
HERITAGE CREDIT SERVICES, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
----------------------------- ------------------
1994 1995 1996 1995 1996
------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................. $ 328 $ 262 $ 1,128 $ 351 $ (311)
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Lease revenue from discounting................... (1,931) (2,475) (2,543) (649) (844)
Amortization of initial direct costs............. 296 1,062 1,126 203 239
Provision for credit losses...................... 103 279 646 200 625
Depreciation..................................... 20 35 58 12 14
Deferred income tax provision (benefit).......... 98 (255) - - -
Change in operating assets and liabilities:
Increase (decrease) in checks issued in excess of
deposits....................................... 162 581 (50) 50 643
Increase in restricted cash...................... - (293) (453) (26) (3)
Other............................................ (68) (68) 178 95 8
------- -------- -------- ------- --------
Net Cash Provided by (Used) in Operating
Activities......................................... (992) (872) 90 236 355
------- -------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment for lease.................... (22,383) (37,811) (36,762) (8,982) (12,048)
Proceeds from discounting of leases................ 16,005 23,262 24,229 4,578 4,432
Lease payments received............................ 4,743 9,850 8,378 1,010 2,272
Initial direct costs incurred...................... (505) (2,734) (2,707) (618) (1,106)
Purchase of furniture, equipment and vehicles...... (54) (147) (101) (5) (60)
Other.............................................. - (20) (42) (42) (42)
------- -------- -------- ------- --------
Net Cash Used in Investing Activities................ (2,194) (7,600) (7,005) (4,059) (6,552)
------- -------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings on lines of credit........ 17,921 37,841 32,673 8,670 22,337
Repayments on lines of credit...................... (14,726) (29,122) (26,306) (4,984) (15,223)
Decrease (increase) in security deposits........... 10 84 331 (46) 104
Other.............................................. 23 (36) 6 10 (91)
------- -------- -------- ------- --------
Net Cash Provided by Financing Activities............ 3,228 8,767 6,704 3,650 7,127
------- -------- -------- ------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents........................................ 42 295 (211) (173) 930
Cash and Cash Equivalents, beginning of period....... 125 167 462 462 251
------- -------- -------- ------- --------
Cash and Cash Equivalents, end of period............. $ 167 $ 462 $ 251 $ 289 $ 1,181
======= ======== ======== ======= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest............................. $ 399 $ 1,136 $ 1,280 $ 397 $ 433
======= ======== ======== ======= ========
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE> 98
HERITAGE CREDIT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Heritage Credit Services, Inc. (the "Company"), incorporated in 1988, is a
California corporation owned by an individual. The Company's operations consist
primarily of obtaining and writing leases on various types of business equipment
and providing equipment financing arrangements for commercial entities. The
Company conducts its operations under the names Heritage Financial Services,
Oakmont Financial Services and Heritage Software Finance, with the majority of
business activities concentrated in the Western United States and Florida. The
Company's headquarters is located in Rancho Cordova, California.
Concentration of Credit and Financial Instrument Risk -- The Company
controls its credit risk through credit standards, limits on exposure, and by
monitoring the financial condition of its lessees. The Company uses a credit
scoring system in evaluating the credit risk of applicants. The Company
generally requires the leased assets to serve as collateral for the leases and
requires all lessees to provide adequate collateral protection and liability
insurance throughout the lease contract term. Additionally, the Company controls
its credit exposure to any one client or industry through the sale of leases.
Inherent to leasing is the residual value risk associated with lease
contracts. The Company manages this residual risk through adherence to a
residual valuation procedure at lease inception.
Cash Equivalents -- The Company considers all short-term investments with
an initial maturity of three months or less to be cash equivalents.
Furniture, Equipment and Vehicles -- Furniture, equipment, and vehicles are
stated at cost. Depreciation is computed using accelerated methods over
estimated useful lives of the related assets ranging from three to seven years.
Use of Estimates -- The financial statements are prepared in conformity
with generally accepted accounting principles which requires management to make
estimates and assumptions that affect reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the financial statement
date, and of revenue and expenses during the reporting period. Actual results
could differ from these estimates.
Fair Value of Financial Instruments -- The Company's financial instruments
include cash and cash equivalents, net investment in leases and equipment
financing agreements, and notes payable. Amounts recorded for these instruments
approximate fair value due to either their maturity or the nature of these
instruments.
Lease Accounting and Revenue Recognition -- The Company's leases are
classified and accounted for as direct financing leases. Under this accounting
method, the total minimum lease rentals to be received and the estimated
residual value of equipment at lease end are recorded as assets. The excess of
these assets over the related equipment cost is recorded as unearned revenue,
which is recognized as equipment finance income over the lease term utilizing
the interest method of accounting, such method resulting in a constant rate of
return on the Company's net investment in the lease. The allowance method is
used to account for uncollectible lease receivables.
The Company has discounted certain of its lease transactions, which
involves the assignment of minimum lease payments with a retention of residual
value rights. Retained residual value property rights are recognized over the
underlying lease contract term utilizing the interest method. The assignee
typically has no recourse against the Company. Proceeds received from the
assignee are not recorded as a liability of the Company, but rather as an offset
to the assignment of minimum lease payments. The Company accounts for these
discounted lease transactions, pursuant to which control of future economic
benefits have been surrendered to the assignee, in accordance with Statement of
Financial Accounting Standards No. 77, "Reporting by Transferors for Transfers
of Receivables with Recourse," and records the difference between proceeds and
the Company's net investment in the lease as lease revenue from discounting upon
receipt.
F-42
<PAGE> 99
HERITAGE CREDIT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company also engages in transactions involving the assignment of
minimum lease payments, pursuant to which the Company does not surrender control
of future economic benefits. These transactions are accounted for as borrowings.
These transactions also involve the assignment of minimum lease payments with a
retention of the residual value rights. The assignee typically has no recourse
against the Company. Retained residual value property rights are recognized over
the underlying lease contract term utilizing the interest method. These
non-recourse borrowings and the related minimum lease payments receivable are
recorded on the balance sheet.
In some of the transactions involving the assignment of minimum lease
payments, the assignee retains a portion of the proceeds in a reserve account as
a credit enhancement. This cash is restricted as to withdrawal and has been
presented as restricted cash in the accompanying balance sheet.
The Company also is involved in transactions in which it serves as broker
relating to leasing transactions. In these transactions the Company prepares
required lease documentation and then refers the transaction to another leasing
Company in exchange for a fee. During the years ended September 30, 1994, 1995
and 1996, the Company received approximately $207,000, $288,000 and $565,000 in
commissions for brokering leases of approximately $2.5 million, $4.0 million and
$5.0 million, respectively.
Initial Direct Costs -- Initial direct costs of acquiring a lease are
capitalized and amortized over the life of the lease utilizing the interest
method.
Income Taxes -- The Company accounts for income taxes utilizing the
liability method, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in financial statements or tax returns. Deferred taxes are determined
on the difference between the financial statement and tax bases of assets and
liabilities as measured by applying current statutory tax rates to the period in
which the differences are expected to reverse and by giving effect to available
net operating loss carryforwards. The Company has established a valuation
allowance against its deferred tax assets where there is uncertainty as to
whether such benefits will be utilizable.
Effects of Recently Issued Accounting Standards -- Recently issued
accounting standards having relevant applicability to the Company consist
primarily of Statement of Financial Accounting Standards No. 125 ("FASB No.
125") "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," which is to be effective for transactions
occurring after December 31, 1996, and is to be applied prospectively. Earlier
or retroactive application is not permitted. In November 1996, an exposure draft
was issued proposing to defer, for one year, the effective date of certain
provisions of FASB No. 125. The Company does not expect the adoption of FASB No.
125 to have a material effect on the Company's financial condition or results of
operation.
Reclassifications -- Certain prior year financial statement amounts have
been reclassified to conform with current year classifications.
Interim Financial Statements -- The interim financial data as of and for
the three months ended December 31, 1995 and 1996 is unaudited; however, in the
opinion of Company management, the interim data includes all adjustments,
consisting only of normal recurring adjustments necessary for a fair statement
of results for the interim periods. The 1996 interim period results of
operations are not necessarily indicative of results for the entire year.
F-43
<PAGE> 100
HERITAGE CREDIT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2: NET INVESTMENT IN LEASES AND EQUIPMENT FINANCING AGREEMENTS
The Company's net investments in leases and equipment financing agreements
have been pledged as collateral for certain recourse or non-recourse notes
payable borrowings. The net investment in leases and equipment financing
agreements presented on a basis by type of borrowing for which the investment is
pledged as collateral, is summarized as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------- DECEMBER 31,
1995 1996 1996
------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Recourse
Minimum lease and equipment financing
receivables................................ $10,977 $ 9,990 $10,305
Estimated residual value...................... 356 292 126
Unearned revenue.............................. (3,004) (2,489) (3,356)
------- ------- -------
Total Recourse........................ 8,329 7,793 7,075
------- ------- -------
Non-Recourse
Minimum lease and equipment financing
receivables................................ 8,280 13,880 23,920
Estimated residual value...................... 2,627 3,007 3,319
Unearned revenue.............................. (3,412) (4,809) (6,587)
------- ------- -------
Total Non-Recourse.................... 7,495 12,078 20,652
------- ------- -------
15,824 19,871 27,727
Allowance for uncollectible accounts............ (178) (352) (728)
Initial direct costs, net....................... 1,390 1,467 2,038
------- ------- -------
$17,036 $20,986 $29,037
======= ======= =======
</TABLE>
Accumulated amortization of initial direct costs was $1,141,000, and
$1,834,000 at September 30, 1995 and 1996, respectively.
Allowance for uncollectible accounts activity is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED
------------------------- DECEMBER 31,
1994 1995 1996 1996
----- ------ ------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE, beginning of year.................. $ 50 $ 70 $ 178 $ 352
Provision for credit losses............... 103 279 646 625
Charge-offs............................... (83) (176) (554) (249)
Recoveries................................ - 5 82 --
---- ----- ----- -----
BALANCE, end of year........................ $ 70 $ 178 $ 352 $ 728
==== ===== ===== =====
</TABLE>
At September 30, 1996, minimum lease payments receivables are as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30,
-------------
<S> <C>
1997.................................................... $ 8,200
1998.................................................... 7,002
1999.................................................... 4,917
2000.................................................... 2,836
2001.................................................... 915
-------
$23,870
=======
</TABLE>
F-44
<PAGE> 101
HERITAGE CREDIT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3: NOTES PAYABLE
Notes payable are collateralized by leased equipment, generally due as
collateralized lease payments are scheduled to be received and, for certain
recourse notes, guaranteed by the Company's shareholder. Notes payable for which
the lender has recourse against the Company are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------ DECEMBER 31,
1995 1996 1996
------ ------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Recourse:
Notes payable with interest at rates ranging
from prime (8.25% at September 30, 1996)
plus 1.25% to prime plus 2.25%............. $2,836 $4,591 $4,553
Note payable drawn on a $10 million credit
line; interest at the bank's reference rate
(8.25% at September 30, 1996) plus 3.00%
(increasing to 4.50% beginning 300 days
after borrowing)........................... 2,437 16 --
Notes payable with interest at 11.0%.......... 839 1,346 1,231
Notes payable with interest at rates ranging
from 8.60% to 10.70%....................... 420 272 220
Notes payable drawn on 6 separate warehouse
lines of credit totaling $2.7 million;
interest at prime plus .50% to 2.00%....... 1,243 1,403 1,727
Other......................................... 33 4 --
------ ------ ------
Total Recourse Notes Payable.......... $7,808 $7,632 $7,731
====== ====== ======
</TABLE>
Notes payable for which the lender has no recourse against the Company are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------ DECEMBER 31,
1995 1996 1996
------ ------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Non-Recourse:
Notes payable with interest at the two year
T-bill rate plus 2.25% to 3.50% (rates
ranging from 8.40% to 9.40%)................ $6,770 $ -- $ --
Notes payable with interest at 8.25% and
8.50%....................................... 87 9,803 5,672
Notes payable with interest at 8.75%........... -- -- 648
Lease-backed floating rate revolving note with
interest at LIBOR plus .375%................ -- -- 10,498
------ ------ -------
Total Non-Recourse Notes Payable....... $6,857 $9,803 $16,818
====== ====== =======
</TABLE>
The $10.0 million credit line is available through March 1997. The other
credit lines are generally available from March through June 1997. Terms of
certain credit agreements require, among other things, that the Company maintain
certain financial ratios and net worth, as defined. The Company was in
compliance with these restrictive covenants at September 30, 1996.
F-45
<PAGE> 102
HERITAGE CREDIT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Annual principal payments (on both recourse and non-recourse debt) during
future years are estimated as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING NON-
SEPTEMBER 30, RECOURSE RECOURSE TOTAL
- ------------- -------- -------- -------
<S> <C> <C> <C> <C>
1997................................................. $3,124 $ 3,696 $ 6,821
1998................................................. 2,856 1,804 4,660
1999................................................. 2,084 1,257 3,341
2000................................................. 1,328 745 2,073
2001................................................. 411 130 540
------ -------- -------
$9,803 $ 7,632 $17,435
====== ======== =======
</TABLE>
Information concerning borrowings on both recourse and non-recourse debt is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1994 1995 1996
------ ------- -------
<S> <C> <C> <C>
Average balance........................................ $4,222 $10,406 $13,305
Average interest rate.................................. 9.50% 10.9% 9.80%
Maximum month-end balance.............................. $7,553 $14,665 $17,435
</TABLE>
NOTE 4: INCOME TAXES
The provision (benefit) for federal and state income taxes consists of the
following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1994 1995 1996
----- ------ -----
<S> <C> <C> <C>
Deferred tax provision...................................... $168 $ $ --
Deferred tax benefit........................................ (70) (255) --
---- ----- ----
$ 98 $(255) $ --
==== ===== ====
</TABLE>
During fiscal year 1995, the Company recorded a net deferred tax benefit of
$255,000 due to the recognition of tax operating loss carryforwards in an amount
sufficient to fully offset deferred tax liabilities recorded in prior years. As
a result of the recognition of deferred tax assets relating to tax operating
loss carryforwards, the Company recorded no net tax provision or benefit for
income taxes during fiscal year 1996. The tax provision or benefit differs from
that computed by applying the statutory corporate tax rate due primarily to the
recognition of operating loss carryforwards to the extent not reduced by a
valuation allowance.
F-46
<PAGE> 103
HERITAGE CREDIT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets relate primarily to operating loss carryforwards and
deferred tax liabilities relate primarily to accounting for certain leases as
true leases for tax which results in additional deductions, primarily
depreciation, as compared to direct financing leases for financial reporting.
Deferred tax assets and liabilities are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1995 1996
------ ------
<S> <C> <C>
Deferred tax liabilities:
True lease deductions..................................... $ 914 $1,235
------ ------
914 1,235
------ ------
Deferred tax assets:
Net operating loss carryovers............................. 1,015 1,297
Allowance for credit losses............................... 72 141
------ ------
1,087 1,438
------ ------
Valuation allowance......................................... (173) (203)
------ ------
Total....................................................... $ -- $ --
====== ======
</TABLE>
Since September 30, 1996, the Company, for income tax purposes, has had net
operating loss carryforwards approximating $3 million available to offset future
taxable income. The loss carryforwards begin to expire in 2009.
NOTE 5: RELATED PARTY TRANSACTIONS
The Company's shareholder is a 50% owner of another business in the
equipment leasing industry. During the years ended September 30, 1994, 1995 and
1996, the Company paid broker fees to this related party of approximately
$60,000, $163,000 and $109,000, respectively.
NOTE 6: LEASE COMMITMENT
The Company occupies a facility pursuant to an operating lease agreement,
providing for monthly rents of approximately $3,800. The Company occupies
another facility under an operating lease agreement expiring December 31, 1998,
providing for monthly rents of $1,150. In July 1996, the Company began occupying
a third facility pursuant to an operating lease agreement, providing for monthly
rents of $2,000. Rent expense for the years ended September 30, 1994, 1995 and
1996 approximated $51,000, $68,000 and $74,000, respectively. All leases are
month to month and can be terminated with written notice.
NOTE 7: STOCK PURCHASE AND EMPLOYEE BENEFIT PLANS
In February 1995, the Company adopted a stock purchase plan to offer
selected employees an opportunity to acquire an interest in the Company by
purchasing shares of stock. The plan provides for the direct award or sale of
shares and for the grant of options to purchase shares. During the year ended
September 30, 1995, the Company granted stock options for the purchase of 1,600
shares at an exercise price of $827 per share, an amount determined by the
Company's Board of Directors to not be less than the estimated fair value per
share at date of grant. Options have a term of 10 years, vesting 20% per year.
There were no grants, exercises or cancellations of stock options during the
year ended September 30, 1996.
The Company maintains an employee benefit plan pursuant to Section 401(k)
of the Internal Revenue Code. The Plan covers all eligible employees and has a
salary deferral feature and an employer matching component. The matching
contribution is discretionary and determined annually by the Company's Board of
F-47
<PAGE> 104
HERITAGE CREDIT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Directors. Company contributions for the years ended September 30, 1994, 1995
and 1996 approximated $21,000, $24,000 and $33,000, respectively.
NOTE 8: SUBSEQUENT EVENT
The Company has entered into a financing arrangement providing for, among
other things, the issuance of up to $25 million of lease backed notes and the
related securitization of underlying lease collateral. In connection with the
financing arrangement, in November 1996, the Company entered into an asset
securitization transaction pursuant to which certain lease contracts and related
assets were contributed, transferred and assigned by the Company to a newly
formed subsidiary, Heritage Finance Corp. I ("HFC"). These lease assets were
then together collateralized as a separate pool as security for non-recourse
debt issued by HFC. Proceeds of the borrowing approximated $10.8 million and
were utilized to pay approximately $10.5 million of non-recourse debt and to pay
certain transactional expenses. The underlying collateral for such debt are
lease contracts representing interests in lease receivables of approximately $13
million and related equipment. The initial interest rate on this borrowing is
approximately 6.7%. The assets of HFC are not available to pay creditors of the
Company and the Company has also pledged all of its interests in HFC as security
for the borrowings.
NOTE 9: EVENT (UNAUDITED) SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
In February 1997, the Company's shareholder signed a letter of intent for
the sale of all of the Company's issued and outstanding common stock to First
Sierra Financial, Inc., subject to, among other things, the closing of an
initial public offering by First Sierra Financial, Inc.
F-48
<PAGE> 105
======================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION 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 THE SOLICITATION OF AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION WHERE IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
---------------------
TABLE OF CONTENTS
---------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Prospectus Summary.................... 3
Risk Factors.......................... 8
Use of Proceeds....................... 13
Dividend Policy....................... 14
Capitalization........................ 15
Dilution.............................. 16
Selected Consolidated Financial and
Operating Data...................... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 28
Management............................ 40
Certain Transactions.................. 45
Principal Stockholders................ 46
Description of Capital Stock.......... 47
Shares Eligible for Future Sale....... 51
Underwriting.......................... 53
Legal Matters......................... 54
Experts............................... 54
Index to Financial Statements......... F-1
</TABLE>
---------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
2,000,000 SHARES
FIRST SIERRA FINANCIAL, INC.
COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
, 1997
======================================================
<PAGE> 106
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses of the offering are estimated to be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 6,970
NASD filing fee............................................. 2,800
Nasdaq listing fee.......................................... 37,852
--------
Legal fees and expenses..................................... 270,000
Accounting fees and expenses................................ 260,000
Blue Sky fees and expenses (including legal fees)........... 1,000
Printing expenses........................................... 95,000
Miscellaneous............................................... 66,378
--------
TOTAL............................................. $740,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company, a Delaware corporation, is empowered by Section 145 of the
Delaware General Corporation Law (the "DGCL"), subject to the procedures and
limitations stated therein, to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding by reason of the fact that such person is or was a director,
officer, employee or agent of the Company, or is or was serving at the request
of the Company as a director, officer, employee or agent of another corporation
or other enterprise, against reasonable expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually incurred by him in
connection with such action, suit or proceeding, if such director, officer,
employee or agent acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Company and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The Company is required by Section 145 to indemnify any
person against reasonable expenses (including attorneys' fees) actually incurred
by him in connection with an action, suit or proceeding in which he is a party
because he is or was a director, officer, employee or agent of the Company or is
or was serving at the request of the Company as a director, officer, employee or
agent of another corporation or other enterprise, if he has been successful, on
the merits or otherwise, in the defense of the action, suit or proceeding.
Section 145 also allows a corporation to purchase and maintain insurance on
behalf of any such person against any liability asserted against him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of Section 145. In addition, Section 145 provides that
indemnification pursuant to its provisions is not exclusive of other rights of
indemnification to which a person may be entitled under any bylaw, agreement,
vote of shareholders or disinterested directors, or otherwise.
Article XI of the Company's Restated Certificate of Incorporation (the
"Charter") provides that the Company shall indemnify and hold harmless any
person who was, is, or is threatened to be made a party to a proceeding by
reason of the fact that he or she (i) is or was a director or officer of the
Company or (ii) while a director or officer of the Company, is or was serving at
the request of the Company as a director, officer, partner, venturer,
proprietor, trustee, employee, agent, or similar functionary of another foreign
or domestic corporation, partnership, joint venture, sole proprietorship, trust,
employee benefit plan, or other enterprise, to the fullest extent permitted
under the DGCL. The right to indemnification under Article XI of the Charter is
a contract right which includes, with respect to directors and officers, the
right to be paid by the Company the expenses incurred in defending any such
proceeding in advance of its disposition.
II-1
<PAGE> 107
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On June 3, 1994, the Company sold an aggregate of 5,470,000 shares of
Common Stock to the four stockholders of the Company for $0.18 per share in
connection with the initial capitalization of the Company.
On March 31, 1996, pursuant to employment agreements dated as of January
1995, the Company completed the previously committed sale of an aggregate of
707,369 shares of Common Stock to three employees of the Company for $0.17 per
share.
On April 15, 1996, the Company sold 147,367 shares of Common Stock pursuant
to an option agreement dated as of June 1994 to a stockholder of the Company for
$0.18 per share.
On June 28, 1996, the Company sold 56,718 shares of Series A Preferred
Stock, valued at $46.55 per share, to the former owners of GIC as part of the
consideration for the acquisition of GIC.
On October 15, 1996, the Company sold 43,691 shares of Series B Preferred
Stock, valued at $57.22 per share, to the former owner of CCL as part of the
consideration for the acquisition of CCL.
The Company relied on an exemption under Section 4(2) of the Securities Act
in effecting each of the transactions described above.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<S> <S>
*1.1 -- Form of Underwriting Agreement
3.1 -- Restated Certificate of Incorporation of the Company
3.2 -- Amended and Restated Bylaws of the Company
*4.1 -- Specimen Common Stock certificate
*5.1 -- Opinion of Vinson & Elkins L.L.P.
*10.1 -- 1997 Stock Option Plan
*10.2 -- Executive Incentive Compensation Plan
*10.3 -- Form of Registration Rights Agreement
10.4 -- Asset Purchase Agreement dated June 28, 1996 between the
Company, First Sierra Acquisition, Inc. and General
Interlease Corporation and Eric Barash and Daniel Dengate
10.5 -- Agreement and Plan of Reorganization dated October 15,
1996 among Valerie A. Hayes, Corporate Capital Leasing
Group, Inc., the Company and First Sierra Pennsylvania,
Inc.
10.6 -- Asset Purchase Agreement, dated February 4, 1997, between
Lease Pro, Inc., Charles E. Lester and the Company
10.7 -- First Amendment to Agreement and Plan of Reorganization
dated February 27, 1997 among Valerie A. Hayes, Corporate
Capital Leasing Group, Inc., the Company and First Sierra
Pennsylvania, Inc.
10.8 -- Agreement and Plan of Merger between Oren M. Hall,
Charles E. Brazier, Greg E. McIntosh, Brent M. Hall,
Heritage Credit Services, Inc., the Company and First
Sierra California, Inc. dated as of February 1, 1997
10.9 -- Form of Registration Rights Agreement between the Company
and Oren M. Hall
*10.10 -- Employment Agreement between Thomas J. Depping and the
Company
*10.11 -- Employment Agreement between Sandy B. Ho and the Company
*10.12 -- Employment Agreement between Robert H. Quinn, Jr. and the
Company
*11.1 -- Computation of Earnings per share
</TABLE>
II-2
<PAGE> 108
<TABLE>
<S> <C>
21.1 -- Subsidiaries of the Company
*23.1 -- Consent of Arthur Andersen LLP
*23.2 -- Consent of BDO Seidman LLP
*23.3 -- Consent of MacDade Abbott LLP
23.4 -- Consent of Vinson & Elkins L.L.P. (contained in Exhibit
5.1 hereto)
23.5 -- Consent of Richard J. Campo, as about to be named a
director of the Company
23.6 -- Consent of Norman J. Metcalfe, as about to be named a
director of the Company
24.1 -- Powers of Attorney (included on the signature page to
this Registration Statement)
27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith.
All other exhibits have been previously filed.
(b) Consolidated Financial Statement Schedules
All schedules are omitted because the required information is inapplicable
or the information is presented in the Consolidated Financial Statements or
related notes.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
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 Securities 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 Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, 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 pursuant to 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 it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, 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-3
<PAGE> 109
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Houston, State of Texas, on the 15th day of April, 1997.
FIRST SIERRA FINANCIAL, INC.
By /s/ THOMAS J. DEPPING
-----------------------------------
Thomas J. Depping
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to the Registration Statement 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/ THOMAS J. DEPPING President, Chief Executive April 15, 1997
- ----------------------------------------------------- Officer and Chairman of the
(Thomas J. Depping) Board of Directors
(principal executive
officer)
/s/ SANDY B. HO Executive Vice President and April 15, 1997
- ----------------------------------------------------- Chief Financial Officer
(Sandy B. Ho) (principal financial
officer)
/s/ CRAIG M. SPENCER Senior Vice President and April 15, 1997
- ----------------------------------------------------- Chief Accounting Officer
(Craig M. Spencer) (principal accounting
officer)
* Director April 15, 1997
- -----------------------------------------------------
(David C. Shindeldecker)
* Director April 15, 1997
- -----------------------------------------------------
(David L. Solomon)
*By /s/ SANDY B. HO
-------------------------------------------------
Sandy B. Ho
as attorney-in-fact
</TABLE>
II-4
<PAGE> 110
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<C> <S>
*1.1 -- Form of Underwriting Agreement
3.1 -- Restated Certificate of Incorporation of the Company
3.2 -- Amended and Restated Bylaws of the Company
*4.1 -- Specimen Common Stock certificate
*5.1 -- Opinion of Vinson & Elkins L.L.P.
*10.1 -- 1997 Stock Option Plan
*10.2 -- Executive Incentive Compensation Plan
*10.3 -- Form of Registration Rights Agreement
10.4 -- Asset Purchase Agreement dated June 28, 1996 between the
Company, First Sierra Acquisition, Inc. and General
Interlease Corporation and Eric Barash and Daniel Dengate
10.5 -- Agreement and Plan of Reorganization dated October 15,
1996 among Valerie A. Hayes, Corporate Capital Leasing
Group, Inc., the Company and First Sierra Pennsylvania,
Inc.
10.6 -- Asset Purchase Agreement, dated February 4, 1997, between
Lease Pro, Inc., Charles E. Lester and the Company
10.7 -- First Amendment to Agreement and Plan of Reorganization
dated February 27, 1997 among Valerie A. Hayes, Corporate
Capital Leasing Group, Inc., the Company and First Sierra
Pennsylvania, Inc.
10.8 -- Agreement and Plan of Merger between Oren M. Hall,
Charles E. Brazier, Greg E. McIntosh, Brent M. Hall,
Heritage Credit Services, Inc., the Company and First
Sierra California, Inc. dated as of February 1, 1997
10.9 -- Form of Registration Rights Agreement between the Company
and Oren M. Hall
*10.10 -- Employment Agreement between Thomas J. Depping and the
Company
*10.11 -- Employment Agreement between Sandy B. Ho and the Company
*10.12 -- Employment Agreement between Robert H. Quinn, Jr. and the
Company
*11.1 -- Computation of Earnings per share
21.1 -- Subsidiaries of the Company
*23.1 -- Consent of Arthur Andersen LLP
*23.2 -- Consent of BDO Seidman LLP
*23.3 -- Consent of MacDade Abbott LLP
23.4 -- Consent of Vinson & Elkins L.L.P. (contained in Exhibit
5.1 hereto)
23.5 -- Consent of Richard J. Campo, as about to be named a
director of the Company
23.6 -- Consent of Norman J. Metcalfe, as about to be named a
director of the Company
24.1 -- Powers of Attorney (included on the signature page to
this Registration Statement)
27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith.
All other exhibits have been previously filed.
<PAGE> 1
FIRST SIERRA FINANCIAL, INC.
2,000,000 SHARES1
COMMON STOCK
UNDERWRITING AGREEMENT
________, 1997
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
As Representative of the Several Underwriters
Dear Sirs:
First Sierra Financial, Inc., a Delaware corporation (the "Company")
hereby confirms its agreement with the several underwriters named in Schedule 1
hereto (the "Underwriters"), for whom you have been duly authorized to act as
representative (in such capacity, the "Representative"), as set forth below.
If you are the only Underwriter, all references herein to the Representative
shall be deemed to be to the Underwriters.
The Company has agreed to acquire Heritage Credit Services, Inc.
("Heritage"). The closing of such acquisition (the "Heritage Acquisition") is
expected to occur concurrently with the closing of the transactions
contemplated herein.
1. Securities. Subject to the terms and conditions herein
contained, the Company proposes to issue and sell to the several Underwriters
an aggregate of 2,000,000 shares (the "Firm Securities") of the Company's
Common Stock, $0.01 par value per share (the "Common Stock"). The Company also
proposes to issue and sell to the several Underwriters not more than 300,000
additional shares of Common Stock if requested by the Representative as
provided in Section 3 of this Agreement. Any and all shares of Common Stock to
be purchased by the Underwriters pursuant to such option are referred to herein
as the "Option Securities." The Firm Securities and any Option Securities are
collectively referred to herein as the "Securities."
__________________________________
1 Plus an option to purchase from First Sierra Financial, Inc. up to 300,000
additional shares to cover over-allotments.
<PAGE> 2
2. Representations and Warranties of the Company.
(a) The Company represents and warrants to, and agrees
with, each of the several Underwriters that:
(i) A registration statement on Form S-1
(File No. 333 - 22629 with respect to the Securities, including a
prospectus subject to completion, has been filed by the Company with
the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"), and one or more
amendments to such registration statement may have been so filed.
After the execution of this Agreement, the Company will file with the
Commission either (i) if such registration statement, as it may have
been amended, has been declared by the Commission to be effective
under the Act, either (A) if the Company relies on Rule 434 under the
Act, a Term Sheet (as hereinafter defined) relating to the Securities,
that shall identify the Preliminary Prospectus (as hereinafter
defined) that it supplements containing such information as is
required or permitted by Rules 434, 430A and 424(b) under the Act or
(B) if the Company does not rely on Rule 434 under the Act, a
prospectus in the form most recently included in an amendment to such
registration statement (or, if no such amendment shall have been
filed, in such registration statement), with such changes or
insertions as are required by Rule 430A under the Act or permitted by
Rule 424(b) under the Act, and in the case of either clause (i)(A) or
(i)(B) of this sentence, as have been provided to and approved by the
Representative prior to the execution of this Agreement, or (ii) if
such registration statement, as it may have been amended, has not been
declared by the Commission to be effective under the Act, an amendment
to such registration statement, including a form of prospectus, a copy
of which amendment has been furnished to and approved by the
Representative prior to the execution of this Agreement. The Company
may also file a related registration statement with the Commission
pursuant to Rule 462(b) under the Act for the purpose of registering
certain additional Securities, which registration statement shall be
effective upon filing with the Commission. As used in this Agreement,
the term "Original Registration Statement" means the registration
statement initially filed with the Commission relating to the
Securities, as amended at the time when it was or is declared
effective, including any financial schedules and all exhibits thereto
and including any information omitted therefrom pursuant to Rule 430A
under the Act and included in the Prospectus (as hereinafter defined).
The term "Rule 462(b) Registration Statement" means any registration
statement filed with the Commission pursuant to Rule 462(b) under the
Act (including the Original Registration Statement
-2-
<PAGE> 3
and any Preliminary Prospectus or Prospectus incorporated therein at
the time such registration statement becomes effective). The term
"Registration Statement" includes both the Original Registration
Statement and any Rule 462(b) registration statement. The term
"Preliminary Prospectus" means each prospectus subject to completion
filed with any Registration Statement or any amendment thereto
(including the prospectus subject to completion, if any, included in
the Registration Statement or any amendment thereto at the time it was
or is declared effective). The term "Prospectus" means: (A) if the
Company relies on Rule 434 under the Act, the Term Sheet relating to
the Securities that is first filed with the Commission pursuant to
Rule 424(b)(7) under the Act, together with the Preliminary Prospectus
identified therein that such Term Sheet supplements; (B) if the
Company does not rely on Rule 434 under the Act, the prospectus first
filed with the Commission pursuant to Rule 424(b) under the Act; or
(C) if the Company does not rely on Rule 434 under the Act and if no
prospectus is required to be filed pursuant to Rule 424(b) under the
Act, the prospectus included in the Registration Statement. The term
"Term Sheet" means any term sheet that satisfies the requirements of
Rule 434 under the Act. Any reference herein to the "date" of a
Prospectus that includes a Term Sheet shall mean the date of such Term
Sheet.
(ii) The Commission has not issued any
order preventing or suspending the use of any Preliminary Prospectus.
When the Preliminary Prospectus included in the Registration Statement
at the time it was or is declared effective was filed with the
Commission it (A) contained all statements required to be stated
therein in accordance with, and complied in all material respects with
the requirements of, the Act and the rules and regulations of the
Commission thereunder and (B) did not include any untrue statement of
a material fact or omit to state any material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made, not misleading. When the Registration
Statement or any amendment thereto was or is declared effective, it
(A) contained or will contain all statements required to be stated
therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (B) did not or will not
include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading.
When the Prospectus or any Term Sheet that is a part thereof or any
amendment or supplement to the Prospectus is filed with the Commission
pursuant to Rule 424(b) (or, if the Prospectus or any Term Sheet that
is a part thereof or such amendment or supplement is not required to
be so filed,
-3-
<PAGE> 4
when the Registration Statement or the amendment thereto containing
such amendment or supplement to the Prospectus was or is declared
effective) and on the Firm Closing Date and any Option Closing Date
(both as hereinafter defined), the Prospectus, as amended or
supplemented at any such time, (A) contained or will contain all
statements required to be stated therein in accordance with, and
complied or will comply in all material respects with the requirements
of, the Act and the rules and regulations of the Commission thereunder
and (B) did not or will not include any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading. The foregoing provisions of this paragraph
(ii) do not apply to statements or omissions made in any Preliminary
Prospectus, the Registration Statement or any amendment thereto or the
Prospectus or any amendment or supplement thereto in reliance upon and
in conformity with written information furnished to the Company by any
Underwriter through the Representative specifically for use therein.
(iii) If the Company has elected to rely on Rule
462(b) and the Rule 462(b) Registration Statement has not been
declared effective (i) the Company will prepare and file with the
Commission a Rule 462(b) Registration Statement in compliance with,
and that is effective upon filing pursuant to, Rule 462(b) and (ii)
the Company has paid or will give irrevocable instructions for
transmission of the applicable filing fee in connection with the
filing of the Rule 462(b) Registration Statement, in compliance with
Rule 111 promulgated under the Act.
(iv) The Company does not own or control, directly
or indirectly, any corporation, association or other entity other than
the subsidiaries listed in Exhibit 21.1 to the Registration Statement.
The Company and each of its subsidiaries, and to the Company's
knowledge Heritage, have been duly incorporated and are validly
existing as corporations in good standing under the laws of their
respective jurisdictions of incorporation and are duly qualified to
transact business as foreign corporations and are in good standing
under the laws of all other jurisdictions where the ownership or
leasing of their respective properties or the conduct of their
respective businesses requires such qualification, except where the
failure to be so qualified would not result in a material adverse
change in the financial condition, business, net worth or results of
operations of the Company, its subsidiaries and Heritage, considered
as one enterprise (a "Material Adverse Effect").
-4-
<PAGE> 5
(v) The Company and each of its subsidiaries,
and to the Company's knowledge Heritage, have full power (corporate
and other) to own or lease their respective properties and conduct
their respective businesses as described in the Registration Statement
and the Prospectus, and the Company has corporate power to enter into
this Agreement and to carry out all the terms and provisions hereof to
be carried out by it.
(vi) The issued shares of capital stock of each
of the Company's subsidiaries have been duly authorized and validly
issued, are fully paid and non-assessable and are, and the issued
shares of capital stock of Heritage will be upon closing of the
Heritage Acquisition, owned beneficially by the Company free and clear
of any security interests, liens, encumbrances, equities or claims.
(vii) The Company has an authorized, issued and
outstanding capitalization as set forth in the Prospectus. All of the
issued shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable.
The Firm Securities and the Option Securities have been duly
authorized and at the Firm Closing Date or the Option Closing Date (as
the case may be), after payment therefor in accordance herewith, will
be validly issued, fully paid and nonassessable. At the Firm Closing
Date or the Option Closing Date, no holders of outstanding shares of
capital stock of the Company will be entitled as such to any
preemptive or other rights to subscribe for any Common Stock, and no
holder of securities of the Company has any right which has not been
fully exercised or waived to require the Company to register the offer
or sale of any securities owned by such holder under the Act in the
public offering contemplated by this Agreement.
(viii) The capital stock of the Company conforms in
all material respects to the description thereof contained in the
Prospectus.
(ix) Except as disclosed in the Prospectus, there
are no outstanding (A) securities or obligations of the Company or any
of its subsidiaries convertible into or exchangeable for any capital
stock of the Company or any such subsidiary, (B) warrants, rights or
options to subscribe for or purchase from the Company or any such
subsidiary any such capital stock or any such convertible or
exchangeable securities or obligations, or (C) obligations of the
Company or any such subsidiary to issue any shares of capital stock,
any such convertible or exchangeable securities or obligations, or any
such warrants, rights or options.
-5-
<PAGE> 6
(x) The consolidated financial statements and
schedules of the Company and the financial statements of Heritage and
Corporate Capital Leasing Group, Inc. ("CCL") included in the
Registration Statement and the Prospectus fairly present the financial
position of the Company and its consolidated subsidiaries and, to the
Company's knowledge, Heritage and CCL, respectively, and the results
of operations and cash flows of the Company and its consolidated
subsidiaries and, to the Company's knowledge, Heritage and CCL as of
the dates and periods therein specified. Such financial statements
and schedules of the Company, and to the Company's knowledge, such
financial statements of Heritage and CCL, have been prepared in
accordance with generally accepted accounting principles ("GAAP")
consistently applied throughout the periods involved (except as
otherwise noted therein). The selected financial data set forth under
the captions "Capitalization" and "Selected Consolidated Financial
Data" in the Prospectus fairly present, in accordance with GAAP on the
basis stated in the Prospectus (or such Preliminary Prospectus), the
information included therein.
(xi) Arthur Andersen, L.L.P., BDO Seidman, LLP
and MacDade Abbott LLP, who have audited certain financial statements
of the Company and its consolidated subsidiaries and Heritage and CCL,
respectively, and delivered their reports with respect to the audited
consolidated financial statements included in the Registration
Statement and the Prospectus, are independent public accountants as
required by the Act and the applicable rules and regulations
thereunder.
(xii) The execution and delivery of this Agreement
have been duly authorized by the Company and this Agreement has been
duly executed and delivered by the Company.
(xiii) No legal or governmental proceedings are
pending to which the Company or any of its subsidiaries or to the
Company's knowledge Heritage is a party or to which the property of
the Company or any of its subsidiaries or to the Company's knowledge,
Heritage is subject that are required to be described in the
Registration Statement or the Prospectus and are not described
therein, and to the Company's knowledge, no such proceedings have been
threatened against the Company, any of its subsidiaries or Heritage or
with respect to any of their respective properties; and no contract or
other document is required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement that is not described therein or filed as
required.
-6-
<PAGE> 7
(xiv) The issuance, offering and sale of the
Securities to the Underwriters by the Company pursuant to this
Agreement, the compliance by the Company with the other provisions of
this Agreement and the consummation of the other transactions herein
contemplated do not (A) require the consent, approval, authorization,
registration or qualification of or with any governmental authority,
except such as have been obtained, such as may be required under state
securities or blue sky laws, such as may be required by the National
Association of Securities Dealers, Inc. (the "NASD") and, if the
Registration Statement filed with respect to the Securities (as
amended) is not effective under the Act as of the time of execution
hereof, such as may be required (and shall be obtained as provided in
this Agreement) under the Act, or (B) conflict with or result in a
breach or violation of any of the terms and provisions of, or
constitute a default under, any indenture, mortgage, deed of trust,
lease or other agreement or instrument to which the Company or any of
its subsidiaries is a party or by which the Company or any of its
subsidiaries or any of their respective properties are bound, or the
charter documents or bylaws of the Company or any of its subsidiaries,
or any statute or any judgment, decree, order, rule or regulation of
any court or other governmental authority or any arbitrator applicable
to the Company or any of its subsidiaries.
(xv) 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, nor to
the Company's knowledge, Heritage, has sustained any loss or
interference with its business or properties which is reasonably
likely to have or result in a Material Adverse Effect from fire,
flood, hurricane, accident or other calamity, whether or not covered
by insurance, or from any labor dispute or any legal or governmental
proceeding and there has not been any event, circumstance, or
development that results in, or that the Company believes is
reasonably likely to result in, a Material Adverse Effect, except in
each case as described in or contemplated by the Prospectus.
(xvi) The Company has not, directly or indirectly
(except for the sale of Securities under this Agreement) (i) taken any
action designed to cause or to result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Securities, or (ii) since the filing of the
Registration Statement (A) sold, bid for, purchased or paid anyone any
compensation for soliciting purchases of, the Securities or (B) paid
or agreed to pay to any person any
-7-
<PAGE> 8
compensation for soliciting another to purchase any other securities
of the Company.
(xvii) Neither the Company nor any of its
subsidiaries nor any employee of the Company or its subsidiaries has
made any payment of funds of the Company or its subsidiaries
prohibited by law and no funds of the Company or its subsidiaries have
been set aside to be used for any payment prohibited by law.
(xviii) (a) The Company and its subsidiaries possess
all certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct
their respective businesses except where the failure to possess any
such item is not reasonably likely to have a Material Adverse Effect,
and (b) neither the Company nor any such subsidiary has received any
notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit that, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or
finding, is reasonably likely to have a Material Adverse Effect,
except as described in or contemplated by the Prospectus.
(xix) The Company is not an investment company
under the Investment Company Act of 1940, as amended (the "1940 Act"),
and this transaction will not cause the Company to become an
investment company subject to registration under the 1940 Act.
(xx) The Company and each of its subsidiaries has
filed all foreign, federal, state and local tax returns that are
required to be filed or has requested extensions thereof (except in
any case in which the failure so to file is not reasonably likely to
have a Material Adverse Effect) and has paid all taxes required to be
paid by it and any other assessment, fine or penalty levied against
it, to the extent that any of the foregoing is due and payable, except
for any such assessment, fine or penalty that is currently being
contested in good faith or as described in or contemplated by the
Prospectus and which would not result in a Material Adverse Effect.
(xxi) To the Company's knowledge, Heritage does not
own any shares of stock or any other equity securities of any
corporation or have any equity interest in any firm, partnership,
association or other entity.
(xxii) The Company and each of its subsidiaries
maintain a system of internal accounting controls sufficient
-8-
<PAGE> 9
to provide reasonable assurance that (A) transactions are executed in
accordance with management's general or specific authorizations; (B)
transactions are recorded as necessary to permit preparation of
financial statements in conformity with GAAP and to maintain asset
accountability; (C) access to assets is permitted only in accordance
with management's general or specific authorization; and (D) the
recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(xxiii) Except as described in the Registration
Statement and the Prospectus, no default exists, and no event has
occurred that, with notice or lapse of time or both, is reasonably
likely to constitute a default, in the due performance and observance
of any term, covenant or condition of any indenture, mortgage, deed of
trust, lease or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which the Company, any of its
subsidiaries or any of their respective properties is bound or may be
affected, in any respect that would have a Material Adverse Effect.
(xxiv) The Company has not distributed and, prior to
the later of (A)the Firm Closing Date or any Option Closing Date and
(B) the completion of the distribution of the Securities, will not
distribute any offering material in connection with the offering and
sale of the Securities other than the Registration Statement or any
amendment thereto, any Preliminary Prospectus, the Prospectus or Term
Sheet or any amendment or supplement thereto, or other materials, if
any, permitted by the Act.
(xxv) Neither the Company, nor any of its
subsidiaries, nor to the Company's knowledge Heritage owns any items
of real property, and each of them has marketable title to all
personal property owned by it, in each case free and clear of any
security interests, liens, encumbrances, equities, claims and other
defects, except as shown on the financial statements set forth in the
Registration Statement and which do not interfere with the use made or
proposed to be made of such property by the Company, such subsidiary
or Heritage, and any real property and buildings held under lease by
the Company, any such subsidiary or to the Company's knowledge
Heritage are held under valid, subsisting and enforceable leases, with
such exceptions as are not material and do not interfere with the use
made or proposed to be made of such property and buildings by the
Company, such subsidiary or Heritage, in each case except as described
in or contemplated by the Prospectus.
-9-
<PAGE> 10
(xxvi) No labor dispute with the employees of the
Company, any of its subsidiaries or to the Company's knowledge
Heritage exists or, to the Company's knowledge, is threatened or
imminent that is reasonably likely to result in a Material Adverse
Effect, except as described in or contemplated by the Prospectus.
(xxvii) The Company, its subsidiaries and to the
Company's knowledge Heritage own or possess, or can acquire on
reasonable terms, all material trademarks, service marks, trade names,
licenses, copyrights and proprietary or other confidential information
currently employed by them in connection with their respective
businesses, and neither the Company, nor any such subsidiary nor to
the Company's knowledge Heritage has received any notice of
infringement of or conflict with asserted rights of any third party
with respect to any of the foregoing which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling, or
finding, is reasonably likely to have a Material Adverse Effect,
except as described in or contemplated by the Prospectus.
(xxviii) The Company, each of its
subsidiaries and to the Company's knowledge Heritage are insured by
insurers of recognized financial responsibility against such losses
and risks and in such amounts as are prudent and customary in the
businesses in which they are engaged; and neither the Company, nor any
such subsidiary nor to the Company's knowledge Heritage has any reason
to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its
business at a cost that is not reasonably likely to have a Material
Adverse Effect, except as described in or contemplated by the
Prospectus.
(xxix) Neither the Company nor any of its
Subsidiaries nor to the Company's knowledge Heritage has violated any
foreign, Federal, state or local law or regulation relating to the
protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants, nor any
Federal or state law relating to discrimination in the hiring,
promotion or pay of employees nor any applicable Federal or state
wages and hours laws, nor any provisions of the Employee Retirement
Income Security Act or the rules and regulations promulgated
thereunder except where any such violations would not, singly or in
the aggregate, have a Material Adverse Effect.
-10-
<PAGE> 11
(xxx) subsequent to the respective dates as of
which information is given in the Registration Statement and the
Prospectus, (A) neither the Company, nor any of its Subsidiaries nor
to the Company's knowledge Heritage has incurred any material
liability or obligation, direct or contingent, or entered into any
material transaction not in the ordinary course of business; and (B)
the Company has not purchased any of its outstanding capital stock,
nor declared, paid or otherwise made any dividend or distribution of
any kind on its capital stock, except in each case as described in or
contemplated by the Prospectus;
(b) Any certificate signed by any officer of the Company
and delivered to the Representative 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 the Securities.
(a) On the basis of the representations, warranties,
agreements and covenants herein contained and subject to the terms and
conditions herein set forth, the Company agrees to sell to each of the
Underwriters, and each of the Underwriters, severally and not jointly, agrees
to purchase from the Company, at a purchase price of $[_____________] per
share, the number of Firm Securities set forth opposite the name of such
Underwriter in Schedule 1 hereto. One or more certificates in definitive form
for the Firm Securities that the several Underwriters have agreed to purchase
hereunder, and in such denomination or denominations and registered in such
name or names as the Representative requests upon notice to the Company at
least 48 hours prior to the Firm Closing Date, shall be delivered by or on
behalf of the Company to the Representative for the respective accounts of the
Underwriters, against payment by or on behalf of the Underwriters of the
aggregate purchase price therefor by wire transfer in same day funds (the
"Wired Funds") to an account specified by the Company. Documents required to
be delivered pursuant to this Agreement in connection with such delivery of and
payment for the Firm Securities shall be made at the offices of Vinson & Elkins
L.L.P., 2300 First City Tower, 1001 Fannin, Houston, Texas 77002-6760 at 9:00
a.m., Central time, on April [____], 1997, or at such other place, time or date
as the Representative and the Company may agree upon or as the Representative
may determine pursuant to Section 9 hereof, such time and date of delivery
against payment being herein referred to as the "Firm Closing Date." The
Company will make such certificate or certificates for the Firm Securities
available for checking and packaging by the Representative at the location in
New York, New York specified by the Representative at least 24 hours prior to
the Firm Closing Date.
-11-
<PAGE> 12
(b) For the sole purpose of covering any over-allotments
in connection with the distribution and sale of the Firm Securities as
contemplated by the Prospectus, the Company hereby grants to the several
Underwriters an option to purchase, severally and not jointly, the Option
Securities. The purchase price to be paid for any Option Securities shall be
the same price per share as the price per share for the Firm Securities set
forth above in paragraph (a) of this Section 3. The option granted hereby may
be exercised as to all or any part of the Option Securities from time to time
within thirty days after the date of the Prospectus (or, if such 30th day shall
be a Saturday or Sunday or a holiday, on the next business day thereafter when
the Nasdaq National Market is open for trading). The Underwriters shall not be
under any obligation to purchase any of the Option Securities prior to the
exercise of such option. The Representative may from time to time exercise the
option granted hereby by giving notice in writing or by telephone (confirmed
within 24 hours in writing) to the Company setting forth the aggregate number
of Option Securities as to which the several Underwriters are then exercising
the option and the date and time for delivery of and payment for such Option
Securities. Any such date of delivery shall be determined by the
Representative but shall not be earlier than two business days or later than
five business days after such exercise of the option and, in any event, shall
not be earlier than the Firm Closing Date. The time and date set forth in such
notice, or such other time on such other date as the Representative and the
Company may agree upon or as the Representative may determine pursuant to
Section 9 hereof, is herein called the "Option Closing Date" with respect to
such Option Securities. Upon exercise of the option as provided herein, the
Company shall become obligated to sell to each of the several Underwriters,
and, subject to the terms and conditions herein set forth, each of the
Underwriters (severally and not jointly) shall become obligated to purchase
from the Company, the same percentage of the total number of the Option
Securities as to which the several Underwriters are then exercising the option
as such Underwriter is obligated to purchase of the aggregate number of Firm
Securities, as adjusted by the Representative in such manner as it deems
advisable to avoid fractional shares. If the option is exercised as to all or
any portion of the Option Securities, one or more certificates in definitive
form for such Option Securities, and payment therefor, shall be delivered on
the related Option Closing Date in the manner, and upon the terms and
conditions, set forth in paragraph (a) of this Section 3, except that reference
therein to the Firm Securities and the Firm Closing Date shall be deemed, for
purposes of this paragraph 3(b), to refer to such Option Securities and Option
Closing Date, respectively.
(c) It is understood that you, individually and not as
the Representative, may (but shall not be obligated to) make payment on behalf
of any Underwriter or Underwriters for any of the
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<PAGE> 13
Securities to be purchased by such Underwriter or Underwriters. No such
payment shall relieve such Underwriter or Underwriters from any of its or their
obligations hereunder.
(d) The Company hereby acknowledges that the wire
transfer by or on behalf of the Underwriters of the purchase price for any
Securities does not constitute closing of a purchase and sale of the
Securities. Only execution and delivery of a receipt (by facsimile or
otherwise) for the Securities by the Underwriters indicates completion of the
closing of a purchase of the Securities from the Company. Furthermore, in the
event that the Underwriters wire funds to the Company prior to the completion
of the closing of a purchase of Securities, the Company hereby acknowledges
that until the Underwriters execute and deliver a receipt for the Securities,
by facsimile or otherwise, the Company will not be entitled to the wired funds
and shall return the wired funds to the Underwriters as soon as practicable (by
wire transfer of same-day funds) upon demand. In the event that the closing of
a purchase of Securities is not completed and the wire funds are not returned
by the Company to the Underwriters on the same day the wired funds were
received by the Company, the Company agrees to pay to the Underwriters, in
respect of each day the wire funds are not returned by it, in same-day funds,
interest at the Prime Rate as stated in the Wall Street Journal on the date
hereof on the amount of such wired funds.
4. Offering by the Underwriters. Upon your authorization of the
release of the Firm Securities, the several Underwriters propose to offer the
Firm Securities for sale to the public upon the terms set forth in the
Prospectus.
5. Covenants of the Company. The Company covenants and agrees
with each of the Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, to become effective as promptly as possible. If required, the
Company will file the Prospectus or any Term Sheet that constitutes a part
thereof and any amendment or supplement thereto with the Commission in the
manner and within the time period required by Rules 434 and 424(b) under the
Act. During any time when a prospectus relating to the Securities is required
to be delivered under the Act, the Company (i) will comply with all
requirements imposed upon it by the Act and the rules and regulations of the
Commission thereunder to the extent necessary to permit the continuance of
sales of or dealings in the Securities in accordance with the provisions hereof
and of the Prospectus, as then amended or supplemented, and (ii) will not file
with the Commission the Prospectus, Term Sheet or the amendment referred to in
the second sentence of Section 2(a) hereof, any amendment or
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<PAGE> 14
supplement to such Prospectus, Term Sheet or any amendment to the Registration
Statement of which the Representative shall not previously have been advised
and furnished with a copy for a reasonable period of time prior to the proposed
filing and as to which filing the Representative shall reasonably object. The
Company will prepare and file with the Commission, in accordance with the rules
and regulations of the Commission, promptly upon request by the Representative
or counsel for the Underwriters, any amendments to the Registration Statement
or amendments or supplements to the Prospectus that may be necessary or
advisable in connection with the distribution of the Securities by the several
Underwriters, and will use its best efforts to cause any such amendment to the
Registration Statement to be declared effective by the Commission as promptly
as possible. The Company will advise the Representative, promptly after
receiving notice thereof, of the time when the Registration Statement or any
amendment thereto has been filed or declared effective or the Prospectus or any
amendment or supplement thereto has been filed and will provide to the
Representative copies of each such filing.
(b) The Company will advise the Representative, promptly
after receiving notice or obtaining knowledge thereof, of (i) the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement or any
amendment thereto or any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, (ii) the suspension of the qualification of the Securities for
offering or sale in any jurisdiction, (iii) the institution, threatening or
contemplation of any proceeding for any such purpose, or (iv) any request made
by the Commission for amending the Registration Statement, for amending or
supplementing the Prospectus or for additional information. The Company will
use its best efforts to prevent the issuance of any such stop order and, if any
such stop order is issued, to obtain the withdrawal thereof as promptly as
possible.
(c) If, at any time prior to the later of (i) the final
date when a prospectus relating to the Securities is required to be delivered
under the Act or (ii) the Option Closing Date, any event occurs as a result of
which the Prospectus, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if for any other reason it is
necessary at any time to amend or supplement the Prospectus to comply with the
Act or the rules or regulations of the Commission thereunder, the Company will
promptly notify the Representative thereof and, subject to Section 5(a) hereof,
will prepare and file with the Commission, at the Company's expense, an
amendment to the
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<PAGE> 15
Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
(d) The Company will, without charge, provide (i) to the
Representative and to counsel for the Underwriters a signed copy of the
registration statement originally filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto) and any Rule 462(b)
Registration Statement, (ii) to each other Underwriter, a conformed copy of
such registration statement and any Rule 462(b) Registration Statement and each
amendment thereto (in each case without exhibits thereto) and (iii) so long as
a prospectus relating to the Securities is required to be delivered under the
Act, as many copies of each Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto as the Representative may reasonably request;
without limiting the application of clause (iii) of this sentence, the Company,
not later than _______ P.M., Eastern Time, on the business day following the
date of determination of the public offering price, will deliver to the
Underwriters, without charge, as many copies of the Prospectus and any
amendment or supplement thereto as the Representative may reasonably request
for purposes of confirming orders that are expected to settle on the Firm
Closing Date. The Company will provide or cause to be provided to the
Representative a copy of each report on Form SR filed by the Company as
required by Rule 463 under the Act.
(e) If the Company elects to rely on Rule 462(b), the
Company shall both file a Rule 462(b) Registration Statement with the
Commission in compliance with Rule 462(b) and pay or make arrangements for the
payment of the applicable fees in accordance with Rule 111 promulgated under
the Act not later than 10:00 P.M., Eastern Time on the date of this Agreement.
(f) The Company, as soon as practicable, will make
generally available to its securityholders and to the Representative a
consolidated earnings statement of the Company and its subsidiaries that
satisfies the provisions of Section 11(a) of the Act and Rule 158 thereunder.
(g) The Company will apply the net proceeds from the sale
of the Securities as set forth under "Use of Proceeds" in the Prospectus.
(h) The Company will not, directly or indirectly, without
the prior written consent of the Representative, on behalf of the Underwriters,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, pledge, grant of any option to purchase or other sale
or
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<PAGE> 16
disposition) of any shares of Common Stock or any securities convertible into,
or exchangeable or exercisable for, shares of Common Stock for a period of 180
days after the date hereof, except shares issued pursuant to this Agreement,
shares issued pursuant to the exercise of conversion rights, warrants, or
employee stock options outstanding on the date hereof and shares issued in
connection with any acquisition described in the Prospectus.
(i) The Company will not, directly or indirectly, (i)
take any action designed to cause or to result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Securities or (ii)(A) sell, bid for, purchase, or pay anyone
any compensation for soliciting purchases of, the Securities or (B) pay or
agree to pay to any person any compensation for soliciting another to purchase
any other securities of the Company.
(j) The Company will obtain the lockup agreements
described in Section 7(e) hereof prior to the Firm Closing Date.
(k) The Company will, for a period of five (5) years from
the date hereof, deliver to the Underwriters copies of annual reports and all
other documents, reports and information furnished by the Company to its
securityholders or filed with any securities exchange or automated quotation
system pursuant to the requirements of such exchange or automated quotation
system or filed with the Commission pursuant to the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The Company will deliver to the
Underwriters similar reports with respect to "significant subsidiaries," as
that term is defined in the rules and regulations of the Commission, which are
not consolidated in the Company's financial statements.
(l) The Company will cause the Securities to be duly
included for quotation on the Nasdaq National Market prior to the Firm Closing
Date. The Company will use its best efforts to ensure that the Securities
remain included for quotation on the Nasdaq National Market following the Firm
Closing Date.
6. Expenses. The Company will pay all costs and expenses
incident to the performance of its obligations under this Agreement, whether or
not the transactions contemplated herein are consummated or this Agreement is
terminated pursuant to Section 11 hereof, including all costs and expenses
incident to (i) the printing or other production of documents with respect to
the transactions, including any costs of printing the Registration Statement
originally filed with respect to the Securities and any amendment thereto, any
Rule 462(b) Registration Statement, any Preliminary Prospectus and the
Prospectus and any amendment or
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<PAGE> 17
supplement thereto, this Agreement and any blue sky memoranda, (ii) all
arrangements relating to the delivery to the Underwriters of copies of the
foregoing documents, (iii) the fees and disbursements of the counsel, the
accountants and any other experts or advisors retained by the Company, (iv) the
filing of the Registration Statement with the Commission, including filing fees
and other fees and expenses incident thereto, (v) preparation, issuance and
delivery to the Underwriters of any certificates evidencing the Securities,
including transfer agent's and registrar's fees, (vi) the qualification of the
Securities under state securities and blue sky laws, including filing fees and
fees and disbursements of counsel for the Underwriters relating thereto, (vii)
the filing of the Registration Statement and Prospectus with the National
Association of Securities Dealers, Inc. relating to the Securities, including
the fees and disbursements of counsel for the Underwriters relating to such
filing, and (viii) the quotation of the Securities on the Nasdaq National
Market. If the sale of the Securities provided for herein is not consummated
because any condition to the obligations of the Underwriters set forth in
Section 7 hereof is not satisfied, because this Agreement is terminated
pursuant to Section 11(a) or 11(a)(i) hereof or because of any failure, refusal
or inability on the part of the Company to perform all obligations and satisfy
all conditions on its part to be performed or satisfied hereunder other than by
reason of a default by any of the Underwriters, the Company will reimburse the
Representative upon demand for all reasonable out-of-pocket expenses (including
counsel fees and disbursements) that shall have been incurred by it in
connection with the proposed purchase and sale of the Securities. The Company
shall not in any event be liable to any of the Underwriters for the loss of
anticipated profits from the transactions covered by this Agreement.
7. Conditions of the Underwriters' Obligations. The obligations
of the several Underwriters to purchase and pay for the Firm Securities shall
be subject to the accuracy of the representations and warranties of the Company
contained herein as of the date hereof, and as of the Firm Closing Date, as if
made on and as of the Firm Closing Date, the accuracy of the statements of the
Company's officers made pursuant to the provisions hereof, the performance by
the Company of its covenants and agreements hereunder and the following
additional conditions:
(a) If the Original Registration Statement has not been
declared effective as of the time of execution hereof, the Original
Registration Statement shall have been declared effective not later than 11:00
A.M., Eastern Time, on the business day after the date hereof, or such later
time and date as shall have been consented to by the Representative; if
required, the Prospectus or any Term Sheet that constitutes a part thereof and
any amendment or supplement thereto shall have been filed with the Commission
in the
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<PAGE> 18
manner and within the time period required by Rules 434 and 424(b) under the
Act; no stop order suspending the effectiveness of the Registration Statement
or any amendment thereto shall have been issued, and no proceedings for that
purpose shall have been instituted or threatened or, to the knowledge of the
Company or the Representative, shall be contemplated by the Commission; and the
Company shall have complied with any request of the Commission for additional
information to be included in the Registration Statement or the Prospectus or
otherwise.
(b) The Representative shall have received an opinion,
dated the Firm Closing Date, of Vinson & Elkins L.L.P., counsel for the
Company, to the effect that:
(i) the Company and each of its subsidiaries
(the "Subsidiaries") have been duly incorporated and are validly
existing as corporations in good standing under the laws of their
respective jurisdictions of incorporation and are duly qualified to
transact business as foreign corporations and are in good standing
under the laws of all other jurisdictions where the ownership or
leasing of their respective properties or the conduct of their
respective businesses requires such qualification, except where the
failure to be so qualified is not reasonably likely to have a Material
Adverse Effect;
(ii) the Company and each of the Subsidiaries
have the corporate power to own or lease their respective properties
and conduct their respective businesses as described in the
Registration Statement and the Prospectus, and the Company has the
corporate power to enter into this Agreement and to carry out all the
terms and provisions hereof to be carried out by it;
(iii) the issued and outstanding shares of capital
stock of each of the Subsidiaries have been duly authorized and
validly issued, are fully paid and non-assessable and are owned by the
Company free and clear of any security interests, liens, encumbrances
or claims;
(iv) the Company has an authorized, issued and
outstanding capitalization as set forth in the Prospectus; all of the
issued shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable,
and, to the knowledge of such counsel, were not issued in violation of
or subject to any preemptive rights or other rights to subscribe for
or purchase securities; the Firm Securities have been duly authorized
by all necessary corporate action of the Company and, when issued and
delivered to and paid for by the Underwriters pursuant to this
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<PAGE> 19
Agreement, will be validly issued, fully paid and nonassessable; to
the knowledge of such counsel, no holders of outstanding shares of
capital stock of the Company are entitled as such to any preemptive or
other rights to subscribe for any of the Securities; and, to the
knowledge of such counsel, no holders of securities of the Company
have any rights which have not been fully exercised or waived to have
such securities registered under the Registration Statement;
(v) the statements set forth under the headings
"Management - Stock Option Plan," and "Description of Capital Stock"
in the Prospectus, insofar as such statements purport to summarize
certain documents or matters of law, are accurate in all material
respects;
(vi) the execution and delivery of this
Agreement have been duly authorized by all necessary corporate action
of the Company and this Agreement has been duly executed and delivered
by the Company;
(vii) to the knowledge of such counsel, (A) no
legal or governmental proceedings are pending to which the Company or
any of the Subsidiaries is a party or to which the property of the
Company or any of the Subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus and are not
described therein and no such proceedings have been threatened against
the Company or any of the Subsidiaries or with respect to any of their
respective properties and (B) no contract or other document is
required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement
that is not described therein or filed as required;
(viii) the issuance, offering and sale of the
Securities to the Underwriters by the Company pursuant to this
Agreement, the compliance by the Company with the other provisions of
this Agreement and the consummation of the other transactions herein
contemplated do not (A) require the consent, approval, authorization,
registration or qualification of or with any governmental authority,
except such as have been obtained and such as may be required under
state securities or blue sky laws and by the NASD, or (B) conflict
with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, lease or other agreement or instrument known to such
counsel to which the Company or any of the Subsidiaries is a party or
by which the Company or any of the Subsidiaries or any of their
respective properties are bound, or the charter documents or bylaws of
the Company or any of the Subsidiaries, or, so far as it is known to
such
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<PAGE> 20
counsel, any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any
arbitrator having jurisdiction over the Company or any of the
Subsidiaries, except, in each case, where such conflict, breach,
violation or default is not reasonably likely to have a Material
Adverse Effect other than Federal or state securities or blue sky
laws, as to which such counsel need not express an opinion in this
paragraph;
(ix) the Registration Statement is effective
under the Act; any required filing of the Prospectus, or any Term
Sheet that constitutes a part thereof, pursuant to Rules 434 and
424(b) has been made in the manner and within the time period required
by Rules 434 and 424(b); and no stop order suspending the
effectiveness of the Registration Statement or any amendment thereto
has been issued, and no proceedings for that purpose have been
instituted or threatened or are contemplated by the Commission;
(x) the Company is not, and the transactions
contemplated by this Agreement will not cause the Company to become,
an investment company subject to registration under the 1940 Act; and
(xi) the specimen stock certificate of the Company
filed as an exhibit to the Registration Statement is in due and proper
form to evidence shares of Common Stock, has been duly authorized and
approved by the Board of Directors of the Company and complies with
all legal requirements applicable under the Delaware General
Corporation Law.
In addition, such counsel shall state that such counsel is of the
opinion that the Registration Statement and the Prospectus (except the
financial statements and notes thereto, supporting schedules and other
information of a financial or statistical nature included therein, as to which
such counsel need not express any opinion) comply as to form in all material
respects with the requirements of the Act and the applicable rules and
regulations thereunder. In passing upon the form of the Registration Statement
and the Prospectus, such counsel has necessarily assumed the correctness and
completeness of the statements made therein. Such counsel is not passing upon
and does not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement or the
Prospectus (except to the extent set forth in subparagraph (v) above), and such
counsel has not independently verified the accuracy, completeness or fairness
of such statements (except as aforesaid). Without limiting the foregoing, such
counsel assumes no responsibility for and has not independently verified the
accuracy, completeness or fairness of the financial statements and notes
thereto and other
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<PAGE> 21
financial and statistical data included in the Registration Statement and has
not examined the financial records from which such statements and data are
derived. Such counsel notes that, although certain portions of the
Registration Statement have been included therein on the authority of "experts"
within the meaning of the Act, such counsel is not an expert with respect to
any portion of the Registration Statement. However, such counsel shall state
that such counsel has participated in conferences with officers and other
representatives of the Company, representatives of the independent accountants
of the Company, and with the underwriters' representatives and counsel, at
which the contents of the Registration Statement and Prospectus and related
matters were discussed. Such counsel has also reviewed certain corporate
documents furnished to them by the Company. Based on such participation and
review (relying as to materiality to a certain extent upon the officers and the
other representatives of the Company), and subject to the limitations described
above, such counsel shall state that no information has come to such counsel's
attention that causes them to believe that the Registration Statement, at the
time it became effective or as of the Closing Date, contained or contains an
untrue statement of a material fact or omitted or omits to state a material
fact required to be stated therein or necessary to make the statements therein
no misleading, or that the Prospectus, as of its date or as of the Closing
Date, included or includes an untrue statement of a material fact or omitted or
omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
The opinions of such counsel relate solely to, are based solely upon
and are limited exclusively to the laws of the State of Delaware and the
federal laws of the United States of America, to the extent applicable.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deem(s) proper, on certificates of responsible
officers of the Company and public officials and opinions of such other counsel
as are reasonably acceptable to the Representative.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the date of
such opinion.
(c) The Representative shall have received from Arthur
Andersen LLP, BDO Seidman, LLP and MacDade Abbott LLP a letter or letters
dated, respectively, the date hereof and the Firm Closing Date, in form and
substance reasonably satisfactory to the Representative.
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<PAGE> 22
In the event that the letters referred to above set forth any such
changes, decreases or increases which, in the reasonable discretion of the
Representative, are reasonably likely to result in a Material Adverse Effect,
it shall be a further condition to the obligations of the Underwriters that
such letters shall be accompanied by a written explanation of the Company as to
the significance thereof, unless the Representative deems such explanation
unnecessary.
References to the Registration Statement and the Prospectus in this
paragraph (c) with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
(d) The Representative shall have received a certificate,
dated the Firm Closing Date, of Thomas J. Depping and Sandy B. Ho in their
capacities as the principal executive officer and the principal financial
officer, respectively, 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 on and as of the Firm Closing Date; the
Registration Statement, as amended as of the Firm Closing Date, does
not include any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein not
misleading, and the Prospectus, as amended or supplemented as of the
Firm Closing Date, does not include any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; and the Company has performed all covenants
and agreements and satisfied all conditions on its part to be
performed or satisfied at or prior to the Firm Closing Date;
(ii) no stop order suspending the
effectiveness of the Registration Statement or any amendment thereto
has been issued, and no proceedings for that purpose have been
instituted or threatened or, to the best of the Company's knowledge,
are contemplated by the Commission;
(iii) 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
sustained any loss or interference with their respective businesses or
properties reasonably likely to have or result in a Material Adverse
Effect from fire, flood, hurricane, accident or other calamity,
whether or not covered by insurance, or from any labor dispute or any
legal or
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<PAGE> 23
governmental proceeding, and there has not been any event,
circumstance, or development that has resulted in, or that the Company
believes is reasonably likely to result in, a Material Adverse Effect,
except in each case as described in or contemplated by the Prospectus
(exclusive of any amendment or supplement thereto); and
(iv) subsequent to the respective dates as of
which information is given in the Registration Statement and the
Prospectus, (A) neither the Company, nor any of its Subsidiaries nor
to the Company's knowledge Heritage has incurred any material
liability or obligation, direct or contingent, or entered into any
material transaction not in the ordinary course of business; and (B)
the Company has not purchased any of its outstanding capital stock,
nor declared, paid or otherwise made any dividend or distribution of
any kind on its capital stock, except in each case as described in or
contemplated by the Prospectus.
(e) The Representative shall have received from each
person who is a director or officer of the Company or who owns more than 2,000
shares of Common Stock or convertible Preferred Stock (as calculated on the
Firm Closing Date) an agreement to the effect that such person will not
directly or indirectly, without the prior written consent of the
Representative, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract of sale, pledge,grant of an option to purchase or other
sale or disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Common Stock
for a period of 180 days after the date of this Agreement.
(f) On or before the Firm Closing Date, the
Representative and counsel for the Underwriters shall have received such
further certificates, documents or other information as they may have
reasonably requested from the Company.
(g) Prior to the commencement of the offering of the
Securities, the Securities shall have been included for trading on the Nasdaq
National Market.
(h) The Representative shall have received an opinion,
dated the Firm Closing Date, of McDermott, Will & Emery, counsel for the
Underwriters, with respect to the issuance and sale of the Firm Securities, the
Registration Statement and Prospectus, and such other related matters as the
Representative may reasonably require, and the Company shall have furnished to
such counsel such documents as they may reasonably request for the purpose of
enabling them to pass upon such matters.
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<PAGE> 24
All opinions, certificates, letters and documents delivered pursuant
to this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representative and
counsel for the Underwriters. The Company shall furnish to the Representative
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representative and counsel for the Underwriters shall
reasonably request.
The respective obligations of the several Underwriters to purchase and
pay for any Option Securities shall be subject, in their discretion, to each of
the foregoing conditions to purchase the Firm Securities, except that all
references to the Firm Securities and the Firm Closing Date shall be deemed to
refer to such Option Securities and the related Option Closing Date,
respectively.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against
any losses, claims, damages or liabilities to which such Underwriter or such
controlling person may become subject under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto or the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and the Company will reimburse, as incurred, each Underwriter and
each such controlling person for any legal or other expenses reasonably
incurred by such Underwriter or such controlling person in connection with
investigating, defending against or appearing as a third-party witness in
connection with any such loss, claim, damage, liability or action; provided,
however, that the Company will not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon
any untrue statement or alleged untrue statement or omission or alleged
omission made in such Registration Statement or any amendment thereto, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto
in reliance upon and in conformity with written information furnished to the
Company by any Underwriter through the Representative specifically for use
therein; and provided, further that with respect to any untrue statement or
omission or alleged
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<PAGE> 25
untrue statement or omission made in any Preliminary Prospectus the indemnity
agreement contained in this Section 8(a) shall not inure to the benefit of any
such indemnified Underwriter or its respective officers, shareholders,
employees, directors and agents, and the Company shall not be liable to any
such indemnified Underwriter or its respective officers, shareholders,
employees, directors and agents, from whom the person asserting any such
losses, claims, expense, damage or liabilities purchased the Securities
concerned, to the extent that any such loss, claim, expense, damage or
liability of such indemnified Underwriter or its respective officers,
shareholders, employees, directors and agents results from the fact that there
was not sent or given to such person at or prior to the written confirmation of
the sale of such securities to such person, a copy of the Prospectus, as the
same may be amended or supplemented, and the untrue statement or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact in such Preliminary Prospectus was corrected in such Prospectus
and the Company had previously furnished copies thereof to such indemnified
Underwriter on a timely basis to permit the Prospectus (as the same may be
amended or supplemented) to be sent or given. This indemnity agreement will be
in addition to any liability that the Company may otherwise have. The Company
will not, without the prior written consent of the Representative, settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action, suit or proceeding in respect of which indemnification may be
sought hereunder (whether or not any Underwriter or any person who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act is a party to such claim, action, suit or proceeding), unless such
settlement, compromise or consent includes an unconditional release of all of
the Underwriters and such controlling persons from all liability arising out of
such claim, action, suit or proceeding.
(b) Each Underwriter, severally and not jointly, will
indemnify and hold harmless the Company, each of its directors, each of its
officers who signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act against any losses, claims, damages or liabilities to which
the Company or any such director, officer of the Company, or controlling person
of the Company may become subject under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon (i) any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or any Application or (ii) the omission or the alleged
omission to state therein a material fact required to be stated in the
Registration Statement or any amendment thereto, any
-25-
<PAGE> 26
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or any Application, 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 reliance upon and in conformity with written information furnished
to the Company by such Underwriter through the Representative specifically for
use therein; and, subject to the limitation set forth immediately preceding
this clause, will reimburse, as incurred, any legal or other expenses
reasonably incurred by the Company or any such director, officer or controlling
person in connection with investigating or defending any such loss, claim,
damage, liability or any action in respect thereof. This indemnity agreement
will be in addition to any liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under
this Section 8 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party of the
commencement thereof, but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 8. In case any such action is brought against
any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party; provided, however, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded or
shall have been advised by its counsel that there may be one or more legal
defenses available to it and/or other indemnified parties that conflict with
those available to the indemnifying party, the indemnifying party shall not
have the right to direct the defense of such action on behalf of such
indemnified party or parties and such indemnified party or parties shall have
the right to select separate counsel to defend such action on behalf of such
indemnified party or parties. After notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof and approval
by such indemnified party of counsel appointed to defend such action, the
indemnifying party will not be liable to such indemnified party under this
Section 8 for any legal or other expenses, other than reasonable costs of
investigation, subsequently incurred by such indemnified party in connection
with the defense thereof, unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that in connection with such action the
indemnifying party shall not be
-26-
<PAGE> 27
liable for the expenses of more than one separate counsel (in addition to local
counsel) in any one action or separate but substantially similar actions in the
same jurisdiction arising out of the same general allegations or circumstances,
designated by the Representative in the case of paragraph (a) of this Section
8, representing the indemnified parties under such paragraph (a) who are
parties to such action or actions) or (ii) the indemnifying party does not
promptly retain counsel satisfactory to the indemnified party or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. After such notice from the
indemnifying party to such indemnified party, the indemnifying party will not
be liable for the costs and expenses of any settlement of such action effected
by such indemnified party without the consent of the indemnifying party.
(d) In circumstances in which the indemnity agreement
provided for in the preceding paragraphs of this Section 8 is unavailable or
insufficient, for any reason, to hold harmless an indemnified party in respect
of any losses, claims, damages or liabilities (or actions in respect thereof),
each indemnifying party, in order to provide for just and equitable
contribution, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
(i) the relative benefits received by the indemnifying party or parties on the
one hand and the indemnified party on the other hand from the offering of the
Securities or (ii) if the allocation provided by the foregoing clause (i) is
not permitted by applicable law, not only such relative benefits but also the
relative fault of the indemnifying party or parties on the one hand and the
indemnified party on the other hand in connection with the statements or
omissions or alleged statements or omissions that resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), 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 hand shall be deemed
to be in the same proportion as the total proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters. The relative fault of
the parties 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, the parties' relative intents, knowledge,
access to information and opportunity to correct or prevent such statement or
omission, and any other equitable considerations appropriate in the
circumstances. The Company and the Underwriters agree that it would not be
equitable if the amount of such contribution were
-27-
<PAGE> 28
determined by pro rata or per capita allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
that does not take into account the equitable considerations referred to above
in this paragraph (d). Notwithstanding any other provision of this paragraph
(d), no Underwriter shall be obligated to make contributions hereunder that in
the aggregate exceed the total amount of underwriting commissions received by
such Underwriter in connection with the Securities underwritten by it and
distributed to the public, less the aggregate amount of any damages that such
Underwriter has otherwise been required to pay in respect of the same or any
substantially similar claim, and 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 to contribute hereunder are
several in proportion to their respective underwriting obligations and not
joint, and contributions among Underwriters shall be governed by the provisions
of the Representative's Agreement Among Underwriters. For the purposes of this
paragraph 8(d), each person, if any, who controls an Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have
the same rights to contribution as such Underwriter, and each director of the
Company, each officer of the Company who signed the Registration Statement, and
each person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20 of the Exchange Act, shall have the same rights to
contribution as the Company.
9. Default of Underwriters. If one or more Underwriters default
in their obligations to purchase Firm Securities or Option Securities hereunder
and the aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, then the other Underwriters may
make arrangements satisfactory to the Representative for the purchase of such
Securities by other persons (who may include one or more of the nondefaulting
Underwriters, including the Representative), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or
Option Securities that such defaulting Underwriter or Underwriters agreed but
failed to purchase. If one or more Underwriters so default with respect to an
aggregate number of Securities that is more than ten percent of the aggregate
number of Firm Securities or Option Securities, as the case may be, to be
purchased by all of the Underwriters at such time hereunder, and if
arrangements satisfactory to the Representative are not made within 36 hours
after such default for the purchase by other persons (who
-28-
<PAGE> 29
may include one or more of the nondefaulting Underwriters, including the
Representative) of the Securities with respect to which such default occurs,
this Agreement will terminate without liability on the part of any
non-defaulting Underwriter or the Company other than as provided in Section 10
hereof. In the event of any default by one or more Underwriters as described
in this Section 9, the Representative shall have the right to postpone the Firm
Closing Date or the Option Closing Date, as the case may be, established as
provided in Section 3 hereof for not more than seven business days in order
that any necessary changes may be made in the arrangements or documents for the
purchase and delivery of the Firm Securities or Option Securities, as the case
may be. As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 9. Nothing herein shall
relieve any defaulting Underwriter from liability for its default.
10. Survival. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company, its
officers and the several Underwriters set forth in this Agreement or made by or
on behalf of them, respectively, pursuant to this Agreement shall remain in
full force and effect, regardless of (i) any investigation made by or on behalf
of the Company, any of its officers or directors, any Underwriter or any
controlling person referred to in Section 8 hereof and (ii) delivery of and
payment for the Securities. The respective agreements, covenants, indemnities
and other statements set forth in Sections 6 and 8 hereof shall remain in full
force and effect, regardless of any termination or cancellation of this
Agreement.
11. Termination.
(a) This Agreement may be terminated with respect to the
Firm Securities or any Option Securities in the sole discretion of the
Representative by notice to the Company given prior to the Firm Closing Date or
the related Option Closing Date, respectively, in the event that the Company
shall have failed, refused or been unable to perform all obligations and
satisfy all conditions on its part to be performed or satisfied hereunder at or
prior thereto or, if at or prior to the Firm Closing Date or such Option
Closing Date, respectively,
(i) the Company, any of its subsidiaries or
Heritage shall have, in the sole judgment of the Representative,
sustained any loss or interference with their respective businesses or
properties having or resulting in a Material Adverse Effect from fire,
flood, hurricane, accident or other calamity, whether or not covered
by insurance, or from any labor dispute or any legal or governmental
proceeding or there shall have been any event, circumstance of
-29-
<PAGE> 30
development that results in, or that the Company believes would result
in, a Material Adverse Effect, except in each case as described in or
contemplated by the Prospectus (exclusive of any amendment or
supplement thereto);
(ii) trading in the Common Stock shall have been
suspended by the Commission or the Nasdaq National Market or trading
in securities generally on the New York Stock Exchange or Nasdaq
National Market shall have been suspended or minimum or maximum prices
shall have been established on either such exchange or market system;
(iii) a banking moratorium shall have been declared
by New York or United States authorities; or
(iv) there shall have been (A) an outbreak or
escalation of hostilities between the United States and any foreign
power, (B) an outbreak or escalation of any other insurrection or
armed conflict involving the United States or (C) any other calamity
or crisis or material adverse change in general economic, political or
financial conditions having an effect on the U.S. financial markets
that, in the sole judgment of the Representative, makes it impractical
or inadvisable to proceed with the public offering or the delivery of
the Securities as contemplated by the Registration Statement, as
amended as of the date hereof.
(b) Termination of this Agreement pursuant to this
Section 11 shall be without liability of any party to any other party except as
provided in Section 10 hereof.
12. Information Supplied by Underwriters. The statements set
forth in (i) the last paragraph on the front cover page, (ii) under the heading
"Underwriting" in any Preliminary Prospectus or the Prospectus and (iii) on
page 2 in any Preliminary Prospectus or the Prospectus pertaining to
stabilization (to the extent such statements relate to the Underwriters)
constitute the only information furnished by any Underwriter through the
Representative to the Company for the purposes of Sections 2(b) and 8 hereof.
The Underwriters confirm that such statements (to such extent) are correct.
13. Notices. All communications hereunder shall be in writing
and, if sent to any of the Underwriters, shall be delivered or sent by mail,
telex or facsimile transmission and confirmed in writing to Friedman, Billings,
Ramsey & Co., Inc., Potomac Tower, 1001 Nineteenth Street North, Arlington,
Virginia 22209, Attention: James Kleeblatt; and if sent to the Company, shall
be delivered or sent by mail, telex or facsimile, transmission and confirmed in
-30-
<PAGE> 31
writing to the Company at Texas Commerce Tower, Suite 7050, 600 Travis Street,
Houston, Texas 77002, Attention: Thomas J. Depping.
14. Successors. This Agreement shall inure to the benefit of and
shall be binding upon the several Underwriters, the Company and their
respective successors and legal representatives, and nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any other
person any legal or equitable right, remedy or claim under or in respect of
this Agreement, or any provisions herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole
and exclusive benefit of such persons and for the benefit of no other person
except that (i) the indemnities of the Company contained in Section 8 of this
Agreement shall also be for the benefit of any person or persons who control
any Underwriter within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act and (ii) the indemnities of the Underwriters contained in
Section 8 of this Agreement shall also be for the benefit of the directors of
the Company, the officers of the Company who have signed the Registration
Statement and any person or persons who control the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act. No purchaser of
Securities from any Underwriter shall be deemed a successor because of such
purchase.
15. Applicable Law. The validity and interpretation of this
Agreement, and the terms and conditions set forth herein, shall be governed by
and construed in accordance with the laws of the Commonwealth of Virginia,
without giving effect to any provisions relating to conflicts of laws.
16. Consent to Jurisdiction and Service of Process. All judicial
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the Commonwealth of
Virginia, and by execution and delivery of this Agreement, the Company accepts
for itself and in connection with its properties, generally and
unconditionally, the nonexclusive jurisdiction of the aforesaid courts and
waives any defense of forum non conveniens and irrevocably agrees to be bound
by any judgment rendered thereby in connection with this Agreement. The
Company designates and appoints Thomas J. Depping and such other persons as may
hereafter be selected by the Company irrevocably agreeing in writing to so
serve, as its agent to receive on its behalf service of all process in any such
proceedings in any such court, such service being hereby acknowledged by the
Company to be effective and binding service in every respect. A copy of any
such process so served shall be mailed by registered mail to the Company at its
address provided in Section 13 hereof, provided, however, that, unless
otherwise provided by applicable law, any failure to mail such copy shall not
affect the validity of service of such process. If any agent
-31-
<PAGE> 32
appointed by the Company refuses to accept service, the Company hereby agrees
that service of process sufficient for personal jurisdiction in any action
against the Company in the Commonwealth of Virginia may be made by registered
or certified mail, return receipt requested, to the Company at its address
provided in Section 13 hereof, and the Company hereby acknowledges that such
service shall be effective and binding in every respect. Nothing herein shall
affect the right to serve process in any other manner permitted by law or shall
limit the right of any Underwriter to bring proceedings against the Company in
the courts of any other jurisdiction.
17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
-32-
<PAGE> 33
If the foregoing correctly sets forth our understanding please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company and
each of the several Underwriters.
Very truly yours,
FIRST SIERRA FINANCIAL, INC.
By:___________________________________
Thomas J. Depping
President and Chief Executive
Officer
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By:
By:_________________________________
Name:
Title:
For itself and as the Representative.
-33-
<PAGE> 34
Schedule 1
UNDERWRITERS
<TABLE>
Number of Firm
Underwriting Securities to be Purchased
- ------------ --------------------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc. ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
============
</TABLE>
-34-
<PAGE> 1
================================================================================
NUMBER SHARES
[FIRST SIERRA LOGO APPEARS HERE]
CUSIP 335944 10 4
FIRST SIERRA FINANCIAL, INC.
Incorporated Under the Laws of the State of Delaware
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT
Is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE,
OF
FIRST SIERRA FINANCIAL, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney, upon surrender of this Certificate properly
endorsed. This certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
IN WITNESS WHEREOF, the Corporation has caused the facsimile signatures
of its duly authorized officers and its facsimile seal to be affixed hereto.
Dated:
Countersigned and Registered:
HARRIS TRUST AND SAVINGS BANK
Transfer Agent and Registrar
[CORPORATE SEAL]
/s/ SANDY B. HO /s/ THOMAS J. DEPPING
By Secretary President
Authorized Officer
================================================================================
<PAGE> 2
FIRST SIERRA FINANCIAL, INC.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ____________ Custodian ____________
(Cust) (Minor)
TEN ENT -- as tenants by the entireties under Uniform Gifts to Minors
JT TEN -- as joint tenants with right of
survivorship and not as tenants Act _________________________
in common (State)
Additional abbreviations may also be used though not in the above list.
For value received, _________________________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------------------------------------
of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint
- ------------------------------------------------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution
in the premises.
Dated
--------------------------
X
-------------------------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND WITH
THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR CHANGE WHATEVER.
X
----------------------------------------------------------
ALL GUARANTEES MUST BE MADE BY A FINANCIAL INSTITUTION
(SUCH AS A BANK OR BROKER) WHICH IS A PARTICIPANT IN THE
SECURITIES TRANSFER AGENTS MEDALLION PROGRAM ("STAMP"),
THE NEW YORK STOCK EXCHANGE, INC. MEDALLION SIGNATURE
PROGRAM ("MSP"), OR THE STOCK EXCHANGES MEDALLION PROGRAM
("SEMP") AND MUST NOT BE DATED. GUARANTEES BY A NOTARY
PUBLIC ARE NOT ACCEPTABLE
---------------------------------------------------------
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS A STATEMENT OF THE POWERS,
DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR
SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS.
</TABLE>
<PAGE> 1
EXHIBIT 5.1
[VINSONS & ELKINS L.L.P. LETTERHEAD]
WRITER'S TELEPHONE WRITER'S FAX
(713) 758-3622 (713) 615-5522
April 11, 1997
First Sierra Financial, Inc.
Texas Commerce Tower, Suite 7050
600 Travis Street
Houston, Texas 77002
Ladies and Gentlemen:
We are acting as counsel for First Sierra Financial, Inc., a Delaware
corporation (the "Company"), in connection with the proposed offer and sale by
the Company to the Underwriters (the "Underwriters"), pursuant to the
prospectus forming a part of a Registration Statement on Form S-1, File No.
333-22629, originally filed with the Securities and Exchange Commission (the
"S.E.C.") on February 28, 1997 (such Registration Statement, as amended at the
effective date thereof being referred to herein as the "Registration
Statement"), of an aggregate of 2,000,000 shares of Common Stock, par value
$.01 per share ("Common Stock"), of the Company, together with a maximum of
300,000 shares of Common Stock which may be sold to the Underwriters pursuant
to the over-allotment option provided in the Underwriting Agreement and such
additional shares of Common Stock, representing up to 20% of the maximum
aggregate offering price set forth in the Registration Statement, which may be
sold to the Underwriters and which would be registered with the S.E.C.
pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as
amended (the "Securities Act"), (collectively, said shares of Common Stock are
referred to herein as the "Shares"). Capitalized terms used but not defined
herein have the meanings set forth in the Registration Statement.
We are rendering this opinion as of the time the Registration
Statement becomes effective in accordance with Section 8(a) of the Securities
Act.
In connection with the opinion expressed herein, we have examined,
among other things, the Restated Certificate of Incorporation and the Amended
and Restated Bylaws of the Company, the records of corporate proceedings that
have occurred prior to the date hereof with respect to such offering, the
Registration Statement and the form of Underwriting Agreement to be executed
among the Company and Friedman, Billings, Ramsey & Co., Inc., as Representative
of the several Underwriters. We have also reviewed such questions of law as we
have deemed necessary or appropriate.
<PAGE> 2
First Sierra Financial, Inc.
Page 2
April 11, 1997
Based upon the foregoing, we are of the opinion that the Shares
proposed to be sold by the Company to the Underwriters have been validly
authorized for issuance and, upon the issuance and delivery thereof in
accordance with the provisions of the Underwriting Agreement (assuming that it
is executed in the form reviewed by us) and as set forth in the Registration
Statement, will be validly issued, fully paid and nonassessable.
This opinion is limited in all respects to the General Corporation Law
of the State of Delaware.
We hereby consent to the statements with respect to us under the
heading "Legal Matters" in the prospectus forming a part of the Registration
Statement and to the filing of this opinion as an exhibit to the Registration
Statement and the incorporation by reference of this opinion and consent in a
registration statement filed to register additional shares of Common Stock
pursuant to Rule 462(b) promulgated under the Securities Act, but we do not
thereby admit that we are within the class of persons whose consent is required
under the provisions of the Securities Act of 1933, as amended, or the rules
and regulations of the S.E.C. issued thereunder.
Very truly yours,
/s/ VINSON & ELKINS L.L.P.
<PAGE> 1
EXHIBIT 10.1
FIRST SIERRA FINANCIAL, INC.
1997 STOCK OPTION PLAN
1. PURPOSE
The purpose of the FIRST SIERRA FINANCIAL, INC. 1997 STOCK OPTION PLAN
(the "Plan") is to provide a means through which FIRST SIERRA FINANCIAL, INC.,
a Delaware corporation (the "Company"), and its subsidiaries may attract able
persons to serve as directors, consultants, or advisors or to enter the employ
of the Company and to provide a means whereby those individuals upon whom the
responsibilities of the successful administration and management of the Company
rest, and whose present and potential contributions to the welfare of the
Company are of importance, can acquire and maintain stock ownership, thereby
strengthening their concern for the welfare of the Company. A further purpose
of the Plan is to provide such individuals with additional incentive and reward
opportunities designed to enhance the profitable growth of the Company.
Accordingly, the Plan provides that the Company may grant to certain employees,
consultants, advisors, or directors the option to purchase shares of Common
Stock of the Company, as hereinafter set forth. Options granted under the Plan
may be either Incentive Stock Options or options that do not constitute
Incentive Stock Options.
2. DEFINITIONS
The following definitions shall be applicable throughout the Plan
unless specifically modified by any paragraph:
a. "BOARD" means the Board of Directors of the Company.
b. "CODE" means the Internal Revenue Code of 1986, as
amended. Reference in the Plan to any section of the
Code shall be deemed to include any amendments or
successor provisions to such section and any
regulations under such section.
c. "COMMITTEE" means a committee of the Board that is
selected by the Board as provided in Paragraph IV(a).
d. "COMMON STOCK" means the common stock, par value
$0.01 per share, of the Company.
e. "COMPANY" means First Sierra Financial, Inc., a
Delaware corporation.
<PAGE> 2
f. "CONSULTANT" means any person who is not an
employee and who is providing advisory or consulting
services to the Company or any parent or subsidiary
corporation (as defined in section 424 of the Code).
g. "DIRECTOR" means an individual electQed to the Board
by the stockholders of the Company or by the Board under
applicable corporate law who is serving on the Board on
the date the Plan is adopted by the Board or is elected
to the Board after such date.
h. An "EMPLOYEE" means any person (including a
Director) in an employment relationship with the Company
or any parent or subsidiary corporation (as defined in
section 424 of the Code).
i. "FAIR MARKET VALUE" means, as of any specified
date, the mean of the high and low sales prices of the
Common Stock (i) reported by the National Market System
of NASDAQ on that date or (ii) if the Common Stock is
listed on a national stock exchange, reported on the
stock exchange composite tape on that date; or, in
either case, if no prices are reported on that date, on
the last preceding date on which such prices of the
Common Stock are so reported. If the Common Stock is
traded over the counter at the time a determination of
its fair market value is required to be made hereunder,
its fair market value shall be deemed to be equal to the
average between the reported high and low or closing bid
and asked prices of Common Stock on the most recent date
on which Common Stock was publicly traded. In the event
Common Stock is not publicly traded at the time a
determination of its value is required to be made
hereunder, the determination of its fair market value
shall be made by the Committee in such manner as it
deems appropriate. Notwithstanding the foregoing, the
Fair Market Value of a share of Common Stock on the date
of an initial public offering of Common Stock shall be
the offering price under such initial public offering.
j. "INCENTIVE STOCK OPTION" means an incentive stock
option within the meaning of section 422 of the Code.
k. "1934 ACT" means the Securities Exchange Act of
1934, as amended.
l. "OPTION" means an option granted under Paragraph
VII of the Plan and includes both Incentive Stock
Options to purchase Common Stock and Options that do not
constitute Incentive Stock Options to purchase Common
Stock.
-2-
<PAGE> 3
m. "OPTION AGREEMENT" means a written agreement
between the Company and an Optionee with respect to an
Option.
n. "OPTIONEE" means an employee, Consultant, or
Director who has been granted an Option.
o. "PLAN" means the First Sierra Financial, Inc. 1997
Stock Option Plan, as amended from time to time.
p. "RULE 16B-3" means SEC Rule 16b-3 promulgated under
the 1934 Act, as such may be amended from time to time,
and any successor rule, regulation or statute
fulfilling the same or a similar function.
3. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall become effective upon the date of its adoption by the
Board, provided the Plan is approved by the stockholders of the Company within
twelve months thereafter. Notwithstanding any provision in the Plan or in any
Option Agreement, no Option shall be exercisable prior to such stockholder
approval. No further Options may be granted under the Plan after ten years
from the date the Plan is adopted by the Board. The Plan shall remain in
effect until all Options granted under the Plan have been satisfied or expired.
4. ADMINISTRATION
a. COMPOSITION OF COMMITTEE. The Plan shall be
administered by a committee of, and appointed by, the
Board, and such committee shall be comprised solely of
two or more outside Directors (within the meaning of
section 162(m) of the Code and applicable interpretive
authority thereunder).
b. POWERS. Subject to the express provisions of the
Plan, the Committee shall have authority, in its
discretion, to determine which employees, Consultants,
or Directors shall receive an Option, the time or times
when such Option shall be granted, whether an Incentive
Stock Option or nonqualified Option shall be granted,
and the number of shares to be subject to each Option.
In making such determinations, the Committee shall take
into account the nature of the services rendered by the
respective employees, Consultants, or Directors, their
present and potential contribution to the Company's
success and such other factors as the Committee in its
discretion shall deem relevant.
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<PAGE> 4
c. ADDITIONAL POWERS. The Committee shall have such
additional powers as are delegated to it by the other
provisions of the Plan. Subject to the express
provisions of the Plan, this shall include the power to
construe the Plan and the respective agreements executed
hereunder, to prescribe rules and regulations relating
to the Plan, and to determine the terms, restrictions
and provisions of the agreement relating to each Option,
including such terms, restrictions and provisions as
shall be requisite in the judgment of the Committee to
cause designated Options to qualify as Incentive Stock
Options, and to make all other determinations necessary
or advisable for administering the Plan. The Committee
may correct any defect or supply any omission or
reconcile any inconsistency in the Plan or in any
agreement relating to an Option in the manner and to the
extent it shall deem expedient to carry it into effect.
The determinations of the Committee on the matters
referred to in this Paragraph IV shall be conclusive.
5. GRANT OF OPTIONS; SHARES SUBJECT TO THE PLAN
a. STOCK GRANT AND OPTION LIMITS. The Committee may
from time to time grant Options to one or more
employees, Consultants, or Directors determined by it to
be eligible for participation in the Plan in accordance
with the provisions of Paragraph VI. Subject to
adjustment in the same manner as provided in Paragraph
VIII with respect to shares of Common Stock subject to
Options then outstanding, the aggregate number of shares
of Common Stock that may be issued under the Plan shall
not exceed 1,800,000 shares. Shares shall be deemed to
have been issued under the Plan only (i) to the extent
actually issued and delivered pursuant to an Option or
(ii) to the extent an Option is settled in cash. To the
extent that an Option lapses or the rights of an
Optionee terminate, any shares of Common Stock subject
to such Option shall again be available for the grant of
an Option to the extent permitted under Rule 16b-3.
Notwithstanding any provision in the Plan to the
contrary, the maximum number of shares of Common Stock
that may be subject to Options granted to any one
individual during any calendar year may not exceed
500,000 shares of Common Stock (subject to adjustment in
the same manner as provided in Paragraph VIII with
respect to shares of Common Stock subject to Options
then outstanding). The limitation set forth in the
preceding sentence shall be applied in a manner which
will permit compensation generated under the Plan to
constitute "performance-based" compensation for purposes
of section 162(m) of the Code, including, without
limitation, counting against such maximum number of
shares, to the extent required under section 162(m) of
the Code and applicable interpretive authority
thereunder, any shares subject to Options that are
canceled or repriced.
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b. STOCK OFFERED. The stock to be offered pursuant to
the grant of an Option may be authorized but unissued
Common Stock or Common Stock previously issued and
outstanding and reacquired by the Company. Any of such
shares which remain unissued and which are not subject
to outstanding Options at the termination of the Plan
shall cease to be subject to the Plan, but, until
termination of the Plan, the Company shall at all times
make available a sufficient number of shares to meet the
requirements of the Plan.
6. ELIGIBILITY
Options may be granted only to persons who, at the time of
grant, are employees, Consultants, or Directors. An Option may be granted on
more than one occasion to the same person, and, subject to the limitations set
forth in the Plan, such Option may include an Incentive Stock Option or an
Option that is not an Incentive Stock Option or any combination thereof.
7. STOCK OPTIONS
a. OPTION PERIOD. The term of each Option shall be
as specified by the Committee at the date of grant.
b. LIMITATIONS ON EXERCISE OF OPTION. An Option shall
be exercisable in whole or in such installments and at
such times as determined by the Committee.
c. SPECIAL LIMITATIONS ON INCENTIVE STOCK OPTIONS.
An Incentive Stock Option may be granted only to an
individual who is an employee at the time the Option is
granted. To the extent that the aggregate Fair Market
Value (determined at the time the respective Incentive
Stock Option is granted) of Common Stock with respect to
which Incentive Stock Options granted after 1986 are
exercisable for the first time by an individual during
any calendar year under all incentive stock option plans
of the Company and its parent and subsidiary
corporations exceeds $100,000, such Incentive Stock
Options shall be treated as Options which do not
constitute Incentive Stock Options. The Committee shall
determine, in accordance with applicable provisions of
the Code, Treasury Regulations and other administrative
pronouncements, which of an Optionee's Incentive Stock
Options will not constitute Incentive Stock Options
because of such limitation and shall notify the Optionee
of such determination as soon as practicable after such
determination. No Incentive Stock Option shall be
granted to an individual if, at the time the Option is
granted, such individual owns stock possessing more than
10% of the total combined voting power of all classes of
stock of the Company or of its parent or subsidiary
corporation, within the meaning of section 422(b)(6) of
the Code, unless (i) at the time such Option is granted
the option price is at least 110% of the Fair Market
Value of the
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<PAGE> 6
Common Stock subject to the Option and (ii) such Option
by its terms is not exercisable after the expiration of
five years from the date of grant. An Incentive Stock
Option shall not be transferable otherwise than by will
or the laws of descent and distribution, and shall be
exercisable during the Optionee's lifetime only by such
Optionee or the Optionee's guardian or legal
representative.
d. OPTION AGREEMENT. Each Option shall be evidenced
by an Option Agreement in such form and containing such
provisions not inconsistent with the provisions of the
Plan as the Committee from time to time shall approve,
including, without limitation, provisions to qualify an
Incentive Stock Option under section 422 of the Code.
Each Option Agreement shall specify the effect of
termination of (i) employment, (ii) the consulting or
advisory relationship, or (iii) membership on the Board,
as applicable, on the exercisability of the Option. An
Option Agreement may provide for the payment of the
option price, in whole or in part, by the delivery of a
number of shares of Common Stock (plus cash if
necessary) having a Fair Market Value equal to such
option price. Moreover, an Option Agreement may provide
for a "cashless exercise" of the Option by establishing
procedures whereby the Optionee, by a properly executed
written notice, directs (i) an immediate market sale or
margin loan respecting all or a part of the shares of
Common Stock to which he is entitled upon exercise
pursuant to an extension of credit by the Company to the
Optionee of the option price, (ii) the delivery of the
shares of Common Stock from the Company directly to a
brokerage firm, and (iii) the delivery of the option
price from sale or margin loan proceeds from the
brokerage firm directly to the Company. The terms and
conditions of the respective Option Agreements need not
be identical.
e. OPTION PRICE AND PAYMENT. The price at which a
share of Common Stock may be purchased upon exercise of
an Option shall be determined by the Committee but,
subject to adjustment as provided in Paragraph VIII, (i)
in the case of an Incentive Stock Option, such purchase
price shall not be less than the Fair Market Value of a
share of Common Stock on the date such Option is
granted, and (ii) in the case of an Option that does not
constitute an Incentive Stock Option, such purchase
price shall not be less than the Fair Market Value of a
share of Common Stock on the date such Option is
granted. The Option or portion thereof may be exercised
by delivery of an irrevocable notice of exercise to the
Company. The purchase price of the Option or portion
thereof shall be paid in full in the manner prescribed
by the Committee. Separate stock certificates shall be
issued by the Company for those shares acquired pursuant
to the exercise of an Incentive Stock Option and for
those shares acquired pursuant to the exercise of any
Option that does not constitute an Incentive Stock
Option.
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<PAGE> 7
f. STOCKHOLDER RIGHTS AND PRIVILEGES. The Optionee
shall be entitled to all the privileges and rights of a
stockholder only with respect to such shares of Common
Stock as have been purchased under the Option and for
which certificates of stock have been registered in the
Optionee's name.
g. OPTIONS AND RIGHTS IN SUBSTITUTION FOR STOCK OPTIONS
GRANTED BY OTHER CORPORATIONS. Options may be granted
under the Plan from time to time in substitution for
stock options held by individuals employed by
corporations who become employees as a result of a
merger or consolidation of the employing corporation
with the Company or any subsidiary, or the acquisition
by the Company or a subsidiary of the assets of the
employing corporation, or the acquisition by the
Company or a subsidiary of stock of the employing
corporation with the result that such employing
corporation becomes a subsidiary.
8. RECAPITALIZATION OR REORGANIZATION
a. The existence of the Plan and the Options granted
hereunder shall not affect in any way the right or power
of the Board or the stockholders of the Company to make
or authorize any adjustment, recapitalization,
reorganization or other change in the Company's capital
structure or its business, any merger or consolidation
of the Company, any issue of debt or equity securities
ahead of or affecting Common Stock or the rights
thereof, the dissolution or liquidation of the Company
or any sale, lease, exchange or other disposition of all
or any part of its assets or business or any other
corporate act or proceeding.
b. The shares with respect to which Options may be
granted are shares of Common Stock as presently
constituted, but if, and whenever, prior to the
expiration of an Option theretofore granted, the Company
shall effect a subdivision or consolidation of shares of
Common Stock or the payment of a stock dividend on
Common Stock without receipt of consideration by the
Company, the number of shares of Common Stock with
respect to which such Option may thereafter be exercised
(i) in the event of an increase in the number of
outstanding shares shall be proportionately increased,
and the purchase price per share shall be
proportionately reduced, and (ii) in the event of a
reduction in the number of outstanding shares shall be
proportionately reduced, and the purchase price per
share shall be proportionately increased. Any
fractional share resulting from such adjustment shall be
rounded up to the next whole share.
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<PAGE> 8
c. If the Company recapitalizes, reclassifies its
capital stock, or otherwise changes its capital
structure (a "recapitalization"), the number and class
of shares of Common Stock covered by an Option
theretofore granted shall be adjusted so that such
Option shall thereafter cover the number and class of
shares of stock and securities to which the Optionee
would have been entitled pursuant to the terms of the
recapitalization if, immediately prior to the
recapitalization, the Optionee had been the holder of
record of the number of shares of Common Stock then
covered by such Option. If (i) the Company shall not be
the surviving entity in any merger or consolidation (or
survives only as a subsidiary of an entity), (ii) the
Company sells, leases or exchanges or agrees to sell,
lease or exchange all or substantially all of its assets
to any other person or entity, (iii) the Company is to
be dissolved and liquidated, (iv) any person or entity,
including a "group" as contemplated by Section 13(d)(3)
of the 1934 Act, acquires or gains ownership or control
(including, without limitation, power to vote) of more
than 50% of the outstanding shares of the Company's
voting stock (based upon voting power), or (v) as a
result of or in connection with a contested election of
Directors, the persons who were Directors of the Company
before such election shall cease to constitute a
majority of the Board (each such event is referred to
herein as a "Corporate Change"), no later than (x) ten
days after the approval by the stockholders of the
Company of such merger, consolidation, reorganization,
sale, lease or exchange of assets or dissolution or such
election of Directors or (y) thirty days after a
Corporate Change of the type described in clause (iv),
the Committee, acting in its sole discretion without the
consent or approval of any Optionee, shall effect one or
more of the following alternatives, which alternatives
may vary among individual Optionees and which may vary
among Options held by any individual Optionee: (1)
accelerate the time at which Options then outstanding
may be exercised so that such Options may be exercised
in full for a limited period of time on or before a
specified date (before or after such Corporate Change)
fixed by the Committee, after which specified date all
unexercised Options and all rights of Optionees
thereunder shall terminate, (2) require the mandatory
surrender to the Company by selected Optionees of some
or all of the outstanding Options held by such Optionees
(irrespective of whether such Options are then
exercisable under the provisions of the Plan) as of a
date, before or after such Corporate Change, specified
by the Committee, in which event the Committee shall
thereupon cancel such Options and pay to each Optionee
an amount of cash per share equal to the excess, if any,
of the amount calculated in Subparagraph (d) below (the
"Change of Control Value") of the shares subject to such
Option over the exercise price(s) under such Options for
such shares, (3) make such adjustments to Options then
outstanding as the Committee deems appropriate to
reflect such Corporate Change (provided, however, that
the Committee may determine in its sole discretion that
no adjustment is necessary to Options then outstanding),
or (4) provide that the number and class of shares of
Common Stock covered by an Option theretofore
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<PAGE> 9
granted shall be adjusted so that such Option shall
thereafter cover the number and class of shares of stock
or other securities or property (including, without
limitation, cash) to which the Optionee would have been
entitled pursuant to the terms of the agreement of
merger, consolidation or sale of assets and dissolution
if, immediately prior to such merger, consolidation or
sale of assets and dissolution, the Optionee had been
the holder of record of the number of shares of Common
Stock then covered by such Option.
d. For the purposes of clause (2) in Subparagraph (c)
above, the "Change of Control Value" shall equal the
amount determined in clause (i), (ii) or (iii),
whichever is applicable, as follows: (i) the per share
price offered to stockholders of the Company in any such
merger, consolidation, sale of assets or dissolution
transaction, (ii) the price per share offered to
stockholders of the Company in any tender offer or
exchange offer whereby a Corporate Change takes place,
or (iii) if such Corporate Change occurs other than
pursuant to a tender or exchange offer, the fair market
value per share of the shares into which such Options
being surrendered are exercisable, as determined by the
Committee as of the date determined by the Committee to
be the date of cancellation and surrender of such
Options. In the event that the consideration offered to
stockholders of the Company in any transaction described
in this Subparagraph (d) or Subparagraph (c) above
consists of anything other than cash, the Committee
shall determine the fair cash equivalent of the portion
of the consideration offered which is other than cash.
e. In the event of changes in the outstanding Common
Stock by reason of recapitalization, reorganizations,
mergers, consolidations, combinations, exchanges or
other relevant changes in capitalization occurring after
the date of the grant of any Option and not otherwise
provided for by this Paragraph VIII, any outstanding
Options and any agreements evidencing such Options shall
be subject to adjustment by the Committee at its
discretion as to the number and price of shares of
Common Stock or other consideration subject to such
Options. In the event of any such change in the
outstanding Common Stock, the aggregate number of shares
available under the Plan may be appropriately adjusted
by the Committee, whose determination shall be
conclusive.
f. Any adjustment provided for in the above
Subparagraphs shall be subject to any required
stockholder action.
g. Except as hereinbefore expressly provided, the
issuance by the Company of shares of stock of any class
or securities convertible into shares of stock of any
class, for cash, property, labor or services, upon
direct sale, upon the exercise of rights or warrants to
subscribe therefor, or upon conversion of shares or
obligations of the
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<PAGE> 10
Company convertible into such shares or other
securities, and in any case whether or not for fair
value, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number of
shares of Common Stock subject to Options theretofore
granted or the purchase price per share, if
applicable.
9. AMENDMENT AND TERMINATION OF THE PLAN
The Board in its discretion may terminate the Plan at any time
with respect to any shares of Common Stock for which Options have not
theretofore been granted. The Board shall have the right to alter or amend the
Plan or any part thereof from time to time; provided that no change in any
Option theretofore granted may be made which would impair the rights of the
Optionee without the consent of the Optionee, and provided, further, that the
Board may not, without approval of the stockholders, amend the Plan to increase
the maximum aggregate number of shares that may be issued under the Plan or
change the class of individuals eligible to receive Options under the Plan.
10. MISCELLANEOUS
a. NO RIGHT TO AN OPTION. Neither the adoption of the
Plan nor any action of the Board or of the Committee
shall be deemed to give an employee, Consultant, or
Director any right to be granted an Option or any other
rights hereunder except as may be evidenced by an Option
Agreement duly executed on behalf of the Company, and
then only to the extent and on the terms and conditions
expressly set forth therein. The Plan shall be
unfunded. The Company shall not be required to
establish any special or separate fund or to make any
other segregation of funds or assets to assure the
payment of any Option.
b. NO EMPLOYMENT/MEMBERSHIP RIGHTS CONFERRED. Nothing
contained in the Plan shall (i) confer upon any employee
or Consultant any right with respect to continuation of
employment or of a consulting or advisory relationship
with the Company or any subsidiary or (ii) interfere in
any way with the right of the Company or any subsidiary
to terminate his or her employment or consulting or
advisory relationship at any time. Nothing contained in
the Plan shall confer upon any Director any right with
respect to continuation of membership on the Board.
c. OTHER LAWS; WITHHOLDING. The Company shall not be
obligated to issue any Common Stock pursuant to any
Option granted under the Plan at any time when the
shares covered by such Option have not been registered
under the Securities Act of
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<PAGE> 11
1933 and such other state and federal laws, rules or
regulations as the Company or the Committee deems
applicable and, in the opinion of legal counsel for the
Company, there is no exemption from the registration
requirements of such laws, rules or regulations
available for the issuance and sale of such shares. No
fractional shares of Common Stock shall be delivered,
nor shall any cash in lieu of fractional shares be
paid. The Company shall have the right to deduct in
connection with all Options any taxes required by law
to be withheld and to require any payments required to
enable it to satisfy its withholding obligations.
d. NO RESTRICTION ON CORPORATE ACTION. Nothing contained
in the Plan shall be construed to prevent the Company or
any subsidiary from taking any corporate action which is
deemed by the Company or such subsidiary to be
appropriate or in its best interest, whether or not such
action would have an adverse effect on the Plan or any
Option granted under the Plan. No employee, Consultant,
Director, beneficiary or other person shall have any
claim against the Company or any subsidiary as a result
of any such action.
e. RESTRICTIONS ON TRANSFER. An Option (other than an
Incentive Stock Option, which shall be subject to the
transfer restrictions set forth in Paragraph VII(c))
shall not be transferable otherwise than (i) by will or
the laws of descent and distribution, (ii) pursuant to a
qualified domestic relations order as defined by the
Code or Title I of the Employee Retirement Income
Security Act of 1974, as amended, or the rules
thereunder, or (iii) with the unanimous consent of the
Board of Directors.
f. RULE 16B-3. It is intended that the Plan and any
grant of an Option made to a person subject to Section
16 of the 1934 Act meet all of the requirements of Rule
16b- 3. If any provision of the Plan or any such Option
would disqualify the Plan or such Option under, or would
otherwise not comply with, Rule 16b-3, such provision or
Option shall be construed or deemed amended to conform
to Rule 16b-3.
g. GOVERNING LAW. THE PLAN SHALL BE CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE.
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EXHIBIT 10.2
FIRST SIERRA FINANCIAL, INC.
EXECUTIVE INCENTIVE COMPENSATION PLAN
I. PURPOSE
FIRST SIERRA FINANCIAL, INC. EXECUTIVE INCENTIVE COMPENSATION PLAN
(the "Plan") is intended to provide a means through which FIRST SIERRA
FINANCIAL, INC. (the "Company") may attract able persons to enter the employ
of the Company and its subsidiaries and to retain those employees upon whom the
responsibilities of the successful administration and management of the Company
rest. A further purpose of the Plan is to provide such employees with
additional reward and incentive opportunities designed to enhance profitable
growth of the Company, thereby encouraging teamwork among such employees and
aligning the interests of such employees with those of the shareholders.
II. DEFINITIONS
Where the following words and phrases appear in the Plan, they shall
have the respective meanings set forth below unless their context clearly
indicates to the contrary:
(a) AFTER-TAX CONSOLIDATED BASE EARNINGS: For each Fiscal Year,
the Company's consolidated income after federal income taxes for such Fiscal
Year as determined in accordance with GAAP; provided, however, that After-Tax
Consolidated Base Earnings shall be determined without regard to any payments
made or to be made pursuant to Article V, Paragraph (b).
(b) ALLOCATION PERCENTAGE: For each Fiscal Year, the percentage
of the Incentive Pool for such Fiscal Year to be allocated and paid to an
individual who was a Participant at any time during such Fiscal Year.
(c) AVERAGE COMMON EQUITY: For each Fiscal Year, an amount
determined by summing the Common Equity as of the last day of each month during
such Fiscal Year and dividing the result by the number of such months.
(d) BOARD: The Board of Directors of the Company.
(e) CEO: The individual who serves, from time to time, as the
Chief Executive Officer of the Company.
(f) COMMITTEE: The term "Committee" shall have the meaning
assigned to such term in Article III, Paragraph (a).
<PAGE> 2
(g) COMMON EQUITY: The total stockholders' equity that is
attributable to the outstanding common stock of the Company (including par
value of common stock, additional paid in capital of common stock, and retained
earnings) as determined in accordance with GAAP and as reflected in the
consolidated financial statements of the Company.
(h) COMPANY: First Sierra Financial, Inc., a Delaware
corporation.
(i) COMPENSATION COMMITTEE: The Compensation Committee of the
Board.
(j) EXECUTIVE MANAGEMENT TEAM: The group of officers consisting
of the CEO and each Executive Vice President of the Company.
(k) FISCAL YEAR: The twelve-consecutive month period commencing
January 1 of each year.
(l) GAAP: Generally accepted accounting principles, or, where
none apply, such other sound accounting methodology as the Compensation
Committee may select.
(m) INCENTIVE POOL: For each Fiscal Year, an amount equal to the
product of (i) twelve percent (12%) and (ii) the excess, if any, of (a) the
Pre-Tax Consolidated Base Earnings for such Fiscal Year over (b) twenty percent
(20%) times the Average Common Equity for such Fiscal Year; provided, however,
that if (1) the After-Tax Consolidated Base Earnings for such Fiscal Year does
not exceed (2) twenty percent (20%) times the Average Common Equity for such
Fiscal Year, the Incentive Pool shall be equal to zero dollars.
(n) PARTICIPANT: For each Fiscal Year, each individual (whether
or not a director) who is a member of the Executive Management Team or a senior
management employee of the Company or any subsidiary of the Company at any time
during such Fiscal Year.
(o) PLAN: First Sierra Financial, Inc. Executive Incentive
Compensation Plan, as amended from time to time.
(p) PRE-TAX CONSOLIDATED BASE EARNINGS: For each Fiscal Year, the
Company's consolidated income before federal income taxes for such Fiscal Year
as determined in accordance with GAAP; provided, however, that Pre-Tax
Consolidated Base Earnings shall be determined without regard to any payments
made or to be made pursuant to Article V, Paragraph (b).
III. ADMINISTRATION OF THE PLAN
(a) GENERAL. The Plan shall be administered by the Compensation
Committee or by a committee of three or more individuals appointed by the
Compensation Committee (the
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<PAGE> 3
"Committee"). The Committee shall have all of the powers and duties specified
for it under the Plan. The Committee may from time to time establish rules and
procedures for the administration of the Plan which are not inconsistent with
the provisions of the Plan, and any such rules and procedures shall be
effective as if included in the Plan.
(b) MEETINGS. A majority of the members of the Committee shall
constitute a quorum for the transaction of business. All action taken by the
Committee at a meeting shall be by vote of a majority of those present at such
meeting, but any action may be taken by the Committee without a meeting upon
written consent signed by all of the members of the Committee. Members of the
Committee may participate in a meeting by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear and speak to each other. No member of the Committee shall
vote on any matter directly affecting the amounts payable under the Plan to
such member.
(c) COMMITTEE DETERMINATIONS. Except as otherwise expressly
provided herein, the Committee shall make all determinations necessary or
advisable for the administration of the Plan, including, without limitation,
determinations as to the right of any person to a payment under the Plan and
the amount of such payment in accordance with the allocation percentage
assigned by the CEO and approved by the Compensation Committee pursuant to
Article V and the construction or interpretation of any provision of the Plan.
Any determination made by the Committee shall be final, binding, and conclusive
upon all persons.
IV. ALLOCATION PERCENTAGES
On or before the date that is 31 days after the last day of each
Fiscal Year which begins on or after January 1, 1997, the CEO shall assign an
Allocation Percentage for such Fiscal Year to each individual who was a
Participant at any time during such Fiscal Year; provided, however, that the
aggregate sum of all Allocation Percentages assigned for a particular Fiscal
Year shall equal one hundred percent (100%); and provided further that the
aggregate sum of all Allocation Percentages assigned for a particular Fiscal
Year to individuals who were members of the Executive Management Team at any
time during such Fiscal Year shall be equal to at least eight-five percent
(85%). The Allocation Percentage assigned to a Participant may be higher or
lower than the Allocation Percentage assigned to another Participant, and a
Participant (including a member of the Executive Management Team) may be
assigned an Allocation Percentage of zero percent. The Allocation Percentages
assigned to Participants by the CEO for each Fiscal Year shall be subject to
approval by a majority of the members of the Compensation Committee; provided,
however, that no member of the Compensation Committee may vote on Allocation
Percentage. Upon such approval by the Compensation Committee, all
determinations as to which Participants shall be assigned Allocation
Percentages and the amount of such Allocation Percentages shall be final,
binding, and conclusive on all persons.
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<PAGE> 4
V. PAYMENTS FROM INCENTIVE POOL
(a) DETERMINATION OF INCENTIVE POOL: As soon as administratively
feasible after the last day of each Fiscal Year, the Board shall cause the
amount of the Incentive Pool relating to such Fiscal Year to be determined.
The Company shall keep proper books and records of account so that as of the
end of each Fiscal Year the amount of the Incentive Pool for such Fiscal Year
may be readily determined. A determination of the amount of the Incentive Pool
for a Fiscal Year, which shall be supported by audited financial statements of
the Company, shall be made no later than two months and 15 days after the last
day of such Fiscal Year.
(b) PAYMENTS FROM INCENTIVE POOL: On or before the date which is
two months and 15 days after the last day of a Fiscal Year, the amount of the
Incentive Pool for such Fiscal Year shall be paid by the Company to the
Participants for such Fiscal Year. Each payment pursuant to the preceding
provisions of this Paragraph shall be allocated and paid among the Participants
based on their Allocation Percentages for such Fiscal Year.
(c) PAYMENTS TO DECEASED PARTICIPANTS: Any payment required to be
paid to a deceased Participant shall be paid to such Participant's executor or
administrator or to his heirs-at-law if there is no administration of such
Participant's estate.
(d) WITHHOLDING: All payments provided for hereunder shall be
made by the Company as provided herein and shall be reduced by any amount
required to be withheld by the Company under applicable local, state, or
federal withholding requirements.
VI. AMENDMENT AND TERMINATION OF THE PLAN
The Board may amend, suspend, or terminate the Plan at any time or
from time to time; provided, however, that, after the last day of a Fiscal
Year, the Board may not amend the Plan to reduce benefits or rights to benefits
or suspend or terminate the Plan for such Fiscal Year without the prior written
consent of more than fifty percent of the individuals (or their
representatives) who are members of the Executive Management Team as of the
later of the adoption or effective date of such amendment, suspension, or
termination.
VII. NATURE OF THE PLAN
The establishment of the Plan shall not be deemed to create a trust.
The Plan shall constitute an unfunded, unsecured liability of the Company to
make payments in accordance with the provisions of the Plan, and no individual
shall have any security or other interest in any assets of the Company, in
shares of stock of the Company or otherwise.
-4-
<PAGE> 5
VIII. EMPLOYMENT RELATIONSHIP
Nothing in the adoption of this Plan nor the payment of any amounts
hereunder shall confer on any individual the right to continued employment by
the Company or any of its subsidiaries, or affect in any way the right of the
Company or any such subsidiary to terminate his employment at any time.
IX. GOVERNING LAW
All provisions of the Plan shall be construed in accordance with the
laws of Texas.
IN WITNESS WHEREOF, the undersigned officer of the Company has
executed this instrument on this ______ day of ________________________, 1997.
FIRST SIERRA FINANCIAL, INC.
BY:
-------------------------------------
NAME:
--------------------------------
TITLE:
-------------------------------
-5-
<PAGE> 1
EXHIBIT 10.3
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") dated as of
________________, 1997, is between FIRST SIERRA FINANCIAL, INC., a Delaware
corporation (the "Company"), and each of the undersigned stockholders (each a
"Holder").
W I T N E S S E T H:
WHEREAS, the Company has undertaken to participate in an initial
public offering (the "Offering") of shares of common stock, par value $.01 per
share (the "Common Stock") of the Company; and
WHEREAS, after the Offering, each Holder will own a substantial
number of shares of Common Stock; and
WHEREAS, the Common Stock will be registered under Section 12 of the
Securities and Exchange Act of 1934 (the "Exchange Act"); and
WHEREAS, under the provisions of the Securities Act of 1933 (the
"Securities Act") and the General Rules and Regulations promulgated by the
Securities and Exchange Commission (the "SEC") thereunder, each Holder is or
may be limited in the manner of selling the shares of Common Stock owned by
each Holder, absent registration under the Securities Act of the sale of such
shares or the availability of another exemption from the registration
requirements of the Securities Act; and
WHEREAS, the Holders are parties to a Stockholders Agreement dated as
of June 3, 1994 and the Holders desire to replace such Stockholders Agreement
with this Registration Rights Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, the parties hereto hereby agree as
follows:
1. Demand Registration.
(A) Request for Registration. As used in this Agreement,
"Restricted Stock" shall mean all shares of Common Stock owned by the
Holders after the Offering, together with any securities issued or
issuable with respect to any such Common Stock by way of stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization, or
otherwise. As to any particular shares of Restricted Stock, such
securities shall cease to be Restricted Stock when (a) a registration
statement with respect to the sale of such securities shall have
become effective under the Securities Act and such
securities shall have been disposed of in accordance with such
registration statement, (b) such securities shall have been
distributed to the public pursuant
<PAGE> 2
to Rule 144 (or any successor provision) under the Securities Act, (c)
such securities shall have been otherwise transferred, new
certificates representing such securities not bearing a legend
restricting transfer shall have been delivered by the Company and
subsequent disposition of such securities shall not require
registration or qualification of such securities under the Securities
Act or any similar state law then in force, (d) such securities shall
have ceased to be outstanding, or (e) the Holder or Holders thereof
shall agree in writing to terminate this Agreement (each Holder and
any permitted assignee of such Holder's rights and duties hereunder
are referred to herein as the "Holders" or individually as a
"Holder"). Subject to the conditions and limitations set forth in
Section 4 of this Agreement, at any time after the Offering, each of
Redstone Group, Ltd. ("Redstone") and Thomas J. Depping ("Depping")
may make a written request for registration under the Securities Act
of all or part of its or their Restricted Stock pursuant to this
Section 1 (a "Demand Registration"), provided that at least 400,000
shares of Restricted Stock shall be registered in such offering. Such
request will specify the aggregate number of shares of Restricted
Stock proposed to be sold and will also specify the intended method of
disposition thereof. Within ten days after receipt of such request,
the Company will give written notice of such registration request to
all other Holders of Restricted Stock and include, subject to the
provisions of Section 1(B) hereof, in such registration all Restricted
Stock with regard to which the Company has received written requests
for inclusion therein within 15 business days after the receipt by the
applicable Holders of the Company's notice. Each such request will
also specify the aggregate number of shares of Restricted Stock to be
registered and the intended method of disposition thereof. The
Company may delay for a maximum of 90 days the filing of a
registration statement upon request from a Holder pursuant to this
Section 1 when, it its good faith judgment the Company reasonably
believes that the filing thereof at the time requested, or the
offering of securities pursuant thereto, would materially and
adversely affect a pending or proposed public offering of securities
of the Company, an acquisition, merger, recapitalization,
consolidation, reorganization or similar transaction relating to the
Company or negotiations, discussions or pending proposals with respect
thereto or require premature disclosure of information not otherwise
required to be disclosed to the potential detriment of the Company.
(B) Priority on Demand Registrations. If a registration
pursuant to this Section 1 involves an underwritten offering and the
managing underwriter shall advise the Company that, in its judgment,
the number of shares proposed to be included in such offering should
be limited due to market conditions, then the Company will promptly so
advise each Holder of Restricted Stock that has requested
registration, and the shares of the Company to be included in the
offering, in any, shall first be excluded from such offering to the
extent necessary to meet such limitation; and if further exclusions
are necessary to meet such limitation, the shares shall be excluded in
the following order until such limitation has been met: (i)
Restricted Stock requested to be registered pursuant to Section 1(A)
held by Holders other than Depping or Redstone shall be excluded pro
rata, based on the respective numbers of shares of Common Stock as to
which registration shall have been requested by such Holders, and (ii)
Restricted Stock requested to be registered pursuant to Section 1(A)
by Depping and Redstone shall be excluded pro rata, based on the
respective numbers of shares of Common Stock as to which registration
has been requested by such Holders. To the
2
<PAGE> 3
extent shares of Restricted Stock so requested to be registered by
Depping or Redstone are excluded from such offering, then Depping
and/or Redstone, as the case may be, shall have the right to one
additional Demand Registration under this Section with respect to such
Restricted Stock, provided that the failure of such Restricted Stock
to be registered is through no fault of such Holder.
(C) Selection of Underwriters and Counsel. The Company
will select and obtain the services of the investment banker or
investment bankers and manager or managers that will administer the
offering and the counsel to such investment bankers and managers;
provided that such investment bankers, managers and counsel must be
approved by the Holders of a majority in number of the shares of
Restricted Stock to be registered, which approval shall not be
unreasonably withheld.
2. Piggyback Registration. If the Company proposes to file a
registration statement under the Securities Act with respect to an offering for
its own account of any class of its equity securities (other than a
registration statement on Form S-8 (or any successor form) or any other
registration statement relating solely to director and/or employee benefit
plans or filed in connection with an exchange offer, a transaction to which
Rule 145 (or any successor rule) under the Securities Act applies, a
transaction relating solely to an exchange offering, a transaction relating
solely to an acquisition of assets or property for securities or an offering of
securities solely to the Company's existing stockholders), then the Company
shall in each case give written notice of such proposed filing to the Holders
of Restricted Stock as soon as practicable (but no later than 15 business days)
before the anticipated filing date, and such notice shall offer such Holders
the opportunity to register such number of shares of Restricted Stock as each
such Holder may request. Each Holder of Restricted Stock desiring to have such
holder's Restricted Stock included in such registration statement shall so
advise the Company in writing within five business days after the date of the
Company's notice, setting forth the amount of such Holder's Restricted Stock
for which registration is requested. If the Company's offering is to be an
underwritten offering, the Company shall, subject to the further provisions of
this Agreement, use its reasonable efforts to cause the managing underwriter or
underwriters of a proposed underwritten offering to permit the Holders of the
Restricted Stock requested to be included in the registration for such offering
to include such securities in such offering on the same terms and conditions as
any similar securities of the Company included therein. Moreover, if the
registration of which the Company gives notice does involve an underwriting,
the right of each Holder to registration pursuant to this Section 2 shall,
unless the Company otherwise agrees, be conditioned upon such Holder's
participation as a seller in such underwriting and its execution of an
underwriting agreement with the managing underwriter or underwriters selected
by the Company. Notwithstanding the foregoing, if the managing underwriter of
such offering advises the Company that the total number of shares of Common
Stock which the Holders, other than the Company, intend to include in such
offering will in the good faith opinion of such managing underwriter adversely
affect the terms or pricing of such offering, then the number of shares of
Common Stock to be offered for the account of the Holders shall be reduced on a
pro rata basis based on the number of shares proposed to be sold by the Holders
to the extent necessary to reduce the total number of shares of Common Stock to
be included in such offering for the Holders other than the Company to the
number of shares recommended by such managing underwriter. Any Restricted
Stock excluded from an underwriting shall be withdrawn from
3
<PAGE> 4
registration and shall not, without the consent of the Company and the manager
of the underwriting, be transferred in a public distribution prior to the
earlier of 90 days (or such other shorter period of time as the manager of the
underwriting may require) after the effective date of the registration
statement or 120 days after the date the Holders of such Restricted Stock are
notified of such exclusion.
3. Registration Procedures. Whenever, pursuant to Section 1 or
2, any of the Holders of Restricted Stock has requested that any Restricted
Stock be registered, the Company will, subject to the provisions of Section 4,
use all reasonable efforts to effect the registration and the sale of such
Restricted Stock in accordance with the intended method of disposition thereof
as promptly as practicable, and in connection with any such request, the
Company will:
(A) in connection with a request pursuant to Section 1,
prepare and file with the SEC, not later than 60 days after receipt of
a request to file a registration statement with respect to Restricted
Stock, a registration statement on any form for which the Company then
qualifies and which counsel for the Company shall deem appropriate and
which form shall be available for the sale of such Restricted Stock in
accordance with the intended method of distribution thereof, and use
its reasonable efforts to cause such registration statement to become
effective; provided that if the Company shall furnish to the Holders
making such a request a certificate signed by either the chief
financial officer or the chief accounting officer of the Company
stating that in such officer's good faith judgment it would be
significantly disadvantageous to the Company for such a registration
statement to be filed on or before the date filing would be required,
the Company shall have an additional period of not more than 90 days
within which to file such registration statement and provided further
(i) that, before filing a registration statement or prospectus or any
amendments or supplements thereto, the Company will furnish to one
counsel selected by the Holders of a majority in number of shares of
the Restricted Stock covered by such registration statement copies of
all such documents proposed to be filed, which documents will be
subject to the review of such counsel, and (ii) that after the filing
of the registration statement, the Company will promptly notify each
of the selling Holders of Restricted Stock of any stop order issued
or, to the knowledge of the Company, threatened by the SEC and take
all reasonable actions to prevent the entry of such stop order or to
remove it if entered;
(B) in connection with a registration pursuant to Section
1, prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement
effective for a period of not less than 90 days or such shorter period
as shall terminate when all shares of Restricted Stock covered by such
registration statement have been sold, and comply with the provisions
of the Securities Act with respect to the disposition of all
securities covered by such registration statement during such period
in accordance with the intended methods of disposition by the selling
Holders thereof set forth in such registration statement;
(C) as soon as reasonably practicable, furnish to each
of the selling Holders, prior to filing a registration statement,
copies of such registration statement as proposed to be filed,
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<PAGE> 5
and thereafter furnish to such selling Holders such number of copies
of such registration statement, each amendment and supplement thereto
(in each case, if specified by such Holder, including all exhibits
thereto), the prospectus included in such registration statement
(including each preliminary prospectus) and such other documents as a
selling Holder may reasonably request in order to facilitate the
disposition of the Restricted Stock owned by such selling Holder;
(D) with reasonable promptness, use its reasonable
efforts to register or qualify (or cause to be registered or
qualified) such Restricted Stock under such other securities or blue
sky laws of such jurisdictions within the United States as any selling
Holder (or managing underwriter in the case of an underwritten
offering) reasonably (in light of such selling Holder's or managing
underwriter's intended plan of distribution) requests and do any and
all other acts and things that may be reasonably necessary or
advisable to enable such selling Holder to consummate the disposition
in such jurisdictions of the Restricted Stock owned by such selling
Holder; provided that the Company will not be required to (i) qualify
generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this subsection (D), (ii)
subject itself to taxation in any such jurisdiction or (iii) consent
to general service of process in any such jurisdiction;
(E) with reasonable promptness, use reasonable efforts to
cause the Restricted Stock covered by such registration statement to
be registered with or approved by such other governmental agencies or
authorities as may be necessary by virtue of the business and
operations of the Company to enable the selling Holder or Holders
thereof to consummate the disposition of such Restricted Stock;
(F) promptly notify each selling Holder of such
Restricted Stock, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the occurrence
of any event known to the Company requiring the preparation of a
supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Restricted Stock, such prospectus
will not contain an 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 promptly make available to each selling Holder any such
supplement or amendment;
(G) in connection with a request pursuant to Section 1,
enter into an underwriting agreement in customary form, the form and
substance of such underwriting agreement being subject to the
reasonable satisfaction of the Company;
(H) with reasonable promptness make available for
inspection by any selling Holder, any underwriter participating in any
disposition pursuant to such registration statement, and any attorney,
accountant or other agent retained by any such selling Holder or
underwriter (collectively, the "Inspectors"), all financial and other
records, pertinent corporate documents and properties of the Company
(collectively, the "Records"), as well as access at reasonable times
to the Company's executive officers, key employees and independent
accountants as shall be reasonably necessary
5
<PAGE> 6
to enable them to exercise their due diligence responsibility, and
cause the Company's officers and employees to supply all information
reasonably requested for such purpose by any such Inspector in
connection with such registration statement; provided, however, that
the selection of any Inspector other than a selling Holder shall be
subject to the consent of the Company, which shall not be unreasonably
withheld. Each Inspector that actually reviews Records supplied by
the Company that include information that the Company determines, in
good faith, to be confidential ("Confidential Information") shall be
required, prior to any such review, to execute an agreement with the
Company providing that such Inspector shall not disclose any
Confidential Information unless such disclosure is required by
applicable law or legal process. Each selling Holder of Restricted
Stock agrees that Confidential Information obtained by it as a result
of such inspections shall not be used by it as the basis for any
transactions in securities of the Company unless and until such
information is made generally available to the public. Each selling
Holder of Restricted Stock further agrees that it will, upon learning
that disclosure of Confidential Information is sought in a court of
competent jurisdiction, give notice to the Company and allow the
Company, at its expense, to undertake appropriate action to prevent
disclosure of the Confidential Information. Each selling Holder also
agrees that the due diligence investigation made by the Inspectors
shall be conducted in a manner that will not unreasonably disrupt the
operations of the Company or the work performed by the Company's
officers and employees;
(I) in the event such sale is pursuant to an underwritten
offering, use its reasonable efforts to obtain a comfort letter or
letters from the Company's independent public accountants in customary
form and covering such matters of the type customarily covered by
comfort letters as the managing underwriter reasonably requests;
(J) otherwise use its reasonable efforts to comply with
all applicable rules and regulations of the SEC, and make available to
its security holders, as soon as reasonably practicable, an earnings
statement covering a period of twelve months,
beginning within three months after the effective date of the
registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act; and
(K) with reasonable promptness, use its reasonable
efforts to cause all such Restricted Stock to be listed on each
securities exchange on which the Common Stock of the Company is then
listed, provided that the applicable listing requirements are
satisfied.
Each selling Holder of Restricted Stock agrees that, upon receipt of
any notice from the Company of the happening of any event of the kind described
in subsection (F) hereof, such selling Holder will forthwith discontinue
disposition of Restricted Stock pursuant to the registration statement covering
such Restricted Stock until such selling Holder's receipt of the copies of the
supplemented or amended prospectus contemplated by subsection (F) hereof, and,
if so directed by the Company, such selling Holder will deliver to the Company
(at the Company's expense) all copies, other than permanent file copies then in
such selling Holder's possession, of the prospectus covering such Restricted
Stock current at the time of receipt of such notice. In the event the Company
shall give any such notice, the Company shall extend the period during which
such
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<PAGE> 7
registration statement shall be maintained effective pursuant to this
Agreement (including the period referred to in subsection (B)) by the number of
days during the period from and including the date of the giving of such notice
pursuant to subsection (F) hereof to and including the date when each selling
Holder of Restricted Stock covered by such registration statement shall have
received the copies of the supplemented or amended prospectus contemplated by
subsection (F) hereof. Each selling Holder also agrees to notify the Company
if any event relating to such selling Holder occurs that would require the
preparation of a supplement or amendment to the prospectus so that such
prospectus will 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 not misleading.
4. Conditions and Limitations.
(A) The Company's obligations under Section 1 shall be
subject to the following limitations:
(i) the Company need not file a registration
statement either (x) during the period starting with the date
60 days prior to the Company's estimated date of filing of,
and ending 90 days after the effective date of, any
registration statement pertaining to securities of the Company
(other than a registration of securities in a Rule 145
transaction or exchange offer or with respect to an employee
benefit plan or dividend reinvestment plan), provided that if
such Company registration statement is not filed within 90
days after the first date on which the Company notifies a
Holder of Restricted Stock that it will delay a Demand
Registration pursuant to this clause (x), the Company may not
further postpone such Demand Registration pursuant to this
clause; or (y) during the period specified in the first proviso
of subsection (A) of Section 3;
(ii) the Company shall not be required to furnish
any audited financial statements other than those audited
statements customarily prepared at the end of its fiscal year,
or to furnish any unaudited financial information with respect
to any period other than its regularly reported interim
quarterly periods unless in the absence of such other
unaudited financial information the registration statement
would contain an untrue statement of material fact or omit to
state a material fact required to be stated therein or
necessary to make the statements therein not misleading;
(iii) except as provided in Section 1(B), the
Company shall not be required to file more than two Demand
Registrations. A registration statement will not count as a
Demand Registration until it has become effective; and
(iv) the Company shall have received the
information and documents specified in Section 5 and each
selling Holder shall have observed or performed its other
covenants and conditions contained in such section.
(B) The Company's obligation under Section 2 shall be
subject to the limitations and conditions specified in such section
and in clauses (i), (ii) and (iv) of subsection (A) of
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<PAGE> 8
this Section 4, and to the condition that the Company may at any time
terminate its proposal to register its shares and discontinue its
efforts to cause a registration statement to become or remain
effective.
5. Information from and Certain Covenants of Holders of
Restricted Stock. The Holders for whom Restricted Stock are to be registered
pursuant to this Agreement shall provide to the Company such information
regarding the Restricted Stock to be so registered, the Holder and the intended
method of disposition of such Restricted Stock as shall reasonably be required
in connection with the action to be taken. Any Holder whose Restricted Stock
is included in a registration statement pursuant to this Agreement shall
execute all consents, powers of attorney, registration statements and other
documents reasonably required to be signed by it in order to cause such
registration statement to become effective. Each selling Holder covenants
that, in disposing of such Holder's shares, such Holder will comply with Rules
l0b-2, l0b-6 and l0b-7 of the SEC adopted pursuant to the Exchange Act.
6. Registration Expenses. All Registration Expenses (as defined
herein) will be borne by the Company. Underwriting discounts and commissions
applicable to the sale of Restricted Stock shall be borne by each selling
Holder of the Restricted Stock to which such discount or commission relates,
and each selling Holder shall be responsible for the fees and expenses of any
legal counsel, accountants or other agents retained by such selling Holder and
all other out-of-pocket expenses incurred by such selling Holder in connection
with any registration under this Agreement.
As used herein, the term Registration Expenses means all expenses
incident to the Company's performance of or compliance with this Agreement
(whether or not the registration in connection with which such expenses are
incurred ultimately becomes effective), including without limitation all
registration and filing fees, fees and expenses of compliance with securities
or blue sky laws (including reasonable fees and disbursements of counsel in
connection with blue sky qualifications of the Restricted Stock), rating agency
fees, printing expenses, messenger and delivery expenses incurred by the
Company, internal expenses incurred by the Company (including, without
limitation, all salaries and expenses of its officers and employees performing
legal or accounting duties), the fees and expenses incurred in connection with
the listing of the securities to be registered on each securities exchange on
which similar securities issued by the Company are then listed, and fees and
disbursements of counsel for the Company and its independent certified public
accountants (including the expenses of any special audit or comfort letters
required by or incident to such performance), securities acts liability
insurance (if the Company elects to obtain such insurance), the reasonable fees
and expenses of any special experts retained by the Company and the fees and
expenses of other persons retained by the Company in connection with such
registration.
7. Indemnification; Contribution.
(A) Indemnification by the Company. The Company agrees
to indemnify and hold harmless each selling Holder of Restricted
Stock, its officers, directors and agents and each person, if any, who
controls such selling Holder within the meaning of either Section 15
of the Securities Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages, liabilities and expenses
(including reasonable costs of investigation)
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<PAGE> 9
arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained in any registration statement
or prospectus relating to the Restricted Stock or in any amendment or
supplement thereto or in any preliminary prospectus relating to the
Restricted Stock, or arising out of or based upon any omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages,
liabilities or expenses arise out of, or are based upon, any such
untrue statement or omission or allegation thereof based upon
information furnished in writing to the Company by such selling Holder
or on such selling Holder's behalf expressly for use therein and
provided further, that with respect to any untrue statement or
omission or alleged untrue statement or omission made in any
preliminary prospectus, the indemnity agreement contained in this
subsection shall not apply to the extent that any such loss, claim,
damage, liability or expense results from the fact that a copy of the
final prospectus was not sent or given to the person asserting any
such losses, claims, damages, liabilities or expenses at or prior to
the written confirmation of the sale of the Restricted Stock concerned
to such person if a final prospectus is made available by the Company
on a timely basis. The Company also agrees to include in any
underwriting agreement with any underwriters of the Restricted Stock
provisions indemnifying and providing for contribution to such
underwriters, their officers and directors and each person who
controls such underwriters on substantially the same basis as the
provisions of this Section 8 indemnifying and providing for
contribution to the selling Holders.
(B) Indemnification by Holders of Restricted Stock. Each
selling Holder agrees to indemnify and hold harmless the Company, its
officers, directors and agents and each person, if any, who controls
the Company within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act, from and against any and all
losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation) arising out of or based upon any
untrue statement or alleged untrue statement of a material fact
contained in any registration statement or prospectus relating to the
Restricted Stock or in any amendment or supplement thereto or in any
preliminary prospectus relating to the Restricted Stock, or arising
out of or based upon any omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, provided (i) that such losses,
claims, damages, liabilities or expenses arise out of, or are based
upon, any such untrue statement or omission or allegation thereof
based upon information furnished in writing to the Company by such
selling Holder or on such selling Holder's behalf expressly for use
therein, (ii) that with respect to any untrue statement or omission or
alleged untrue statement or omission made in any preliminary
prospectus, the indemnity agreement contained in this subsection shall
not apply to the extent that any such loss, claim, damage, liability
or expense results from the fact that a copy of the final prospectus
was not sent or given to the person asserting any such losses, claims,
damages, liabilities or expenses at or prior to the written
confirmation of the sale of the Restricted Stock concerned to such
person, and (iii) that no selling Holder shall be liable for any
indemnification under this Section 8 in an aggregate amount that
exceeds the total net proceeds (before deducting expenses) received by
such selling Holder from the offering. Each selling Holder also
agrees to include in any underwriting agreement with underwriters of
the Restricted Stock provisions indemnifying and providing for
contribution to such
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<PAGE> 10
underwriters, their officers and directors, and each person who
controls such underwriters, on substantially the same basis as the
provisions of this Section 7 indemnifying and providing for
contribution to the Company.
(C) Conduct of Indemnification Proceedings. If any
action or proceeding (including any governmental investigation) shall
be brought or asserted against any indemnified party hereunder in
respect of which indemnity may be sought from an indemnifying party,
the indemnifying party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to such indemnified
party, and shall assume the payment of all expenses. Such indemnified
party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such indemnified
party unless (i) the indemnifying party has agreed to pay such fees
and expenses or (ii) the indemnifying party shall have failed to
assume the defense of such action or proceeding and employ counsel
reasonably satisfactory to such indemnified party, or (iii) the use of
counsel chosen by the indemnifying party to represent the indemnified
party would present such counsel with a conflict of interest (in which
case the indemnifying party shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties),
in any of which events such fees and expenses shall be borne by the
indemnifying party and paid as incurred; provided that the
indemnifying party shall only be responsible for the fees and expenses
of one counsel for the indemnified party or parties hereunder. The
indemnifying party shall not be liable for any settlement of any such
action or proceeding effected without its written consent, but if
settled with its written consent, or if there is a final judgment for
the plaintiff in any such action or proceeding, the indemnifying party
agrees to indemnify and hold harmless such indemnified party from and
against any loss or liability (to the extent stated above) by reason
of such settlement or judgment.
(D) Contribution. If the indemnification provided for in
this Section 7 is unavailable to the Company or the selling Holders in
respect of any losses, claims, damages, liabilities or judgments
referred to therein, then each such indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities and judgments, in such proportion as is
appropriate to reflect the relative fault of each such party in
connection with such statements or omissions, as well as any other
relevant equitable considerations. The relative fault of each such
party 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 such party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Company and the Holders agree that it would not be just
and equitable if contribution pursuant to this Section 7(D) were
determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred
to in the immediately preceding paragraph. The amount paid or payable
by an indemnified party as a result of the losses, claims, damages,
liabilities or judgments referred
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<PAGE> 11
to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection
with investigation or defending any such action or claim.
Notwithstanding the provisions of this Section 7(D), no selling Holder
shall be required to contribute any amount in excess of the amount by
which the total price at which the Restricted Stock of such selling
Holder were offered to the public exceeds the amount of any damages
which such selling Holder 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 Securities Act) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation.
8. Amendments. This Agreement may be amended or modified upon
the written consent thereto of the Company and the Holders of not less than
66-2/3% of Restricted Stock.
9. Assignments. This Agreement shall be binding on and inure to
the benefit of the respective successors and assigns of the parties hereto.
10. Entire Agreement; Governing Law. This Agreement constitutes
the entire agreement of the parties relating to the subject matter hereof and
all prior or contemporaneous written or oral agreements are merged herein.
This Agreement shall be governed by the laws of the State of Delaware.
11. Notices. Any notice, request, instruction, correspondence or
other document to be given hereunder by either party to the other (herein
collectively called "Notice") shall be in writing and delivered personally or
mailed, postage prepaid, or by telegram or telecopier, as follows:
If to the Company:
First Sierra Financial, Inc.
Texas Commerce Tower, Suite 7050
600 Travis Street
Houston, Texas 77002
Attention: Thomas J. Depping
If to a Holder, to the address set
forth on Schedule I hereto.
Notice given by personal delivery or mail shall be effective upon actual
receipt. Notice given by telegram or telecopier shall be effective upon actual
receipt if received during the recipient's normal business hours, or at the
beginning of the recipient's next business day after receipt if not received
during the recipient's normal business hours. Any party or Holder may change
any address to which Notice is to be given to it by giving Notice as provided
above of such change of address.
11
<PAGE> 12
IN WITNESS WHEREOF, the Company and the Holder have caused this
Agreement to be signed by their respective officers thereunto duly authorized.
FIRST SIERRA FINANCIAL, INC.
By: ___________________________________
REDSTONE GROUP, LTD.
BY: Redstone, Inc., its general partner
By:_____________________________________
David L. Solomon
President
________________________________________
Thomas J. Depping
________________________________________
David L. Solomon
________________________________________
David C. Shindeldecker
________________________________________
Sandy B. Ho
________________________________________
Robert H. Quinn, Jr.
________________________________________
Roy H. Trice, Jr.
________________________________________
Frederick M. Van Etten
12
<PAGE> 13
________________________________________
Dorothy J. Simonds
________________________________________
Louis J. Depping
________________________________________
Patricia H. Depping
13
<PAGE> 1
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") made as of the ____ day of
______________, 1997 (the "Effective Date"), by and between First Sierra
Financial, Inc., a Delaware corporation (the "Employer"), and Thomas J. Depping
(the "Employee"). Employer and Employee may be referred to herein collectively
as the "Parties" and individually as a "Party".
ARTICLE I
TERM
Employer hereby employs Employee and Employee hereby accepts
employment with Employer for a period beginning on the Effective Date and
ending on the third anniversary of the Effective Date (as extended pursuant to
the following provisions, the "Term"). As of the first day of any month
following the Effective Date, the Term shall be extended for an additional one
(1) month period unless either Employee or Employer gives the other party
written notice at least ninety (90) days prior to the first day of such month
that this Agreement shall terminate on the then scheduled expiration date of
the Term. If such notice is given, this Agreement shall automatically terminate
on such expiration date. If this Agreement is extended, the terms in effect
under this Agreement immediately preceding such extension shall apply during
the extension period. If Employee's employment hereunder is terminated by
either Employer or Employee at any time for any reason, the expiration date
shall thereupon no longer be automatically extended. This Agreement replaces
all prior agreements between the parties, oral or written regarding employment
of Employee by Employer and all such prior agreements are void upon the
Effective Date of this Agreement.
ARTICLE II
DUTIES OF EMPLOYEE
2.01 Duties. Employee is engaged to be the President and Chief
Executive Officer of Employer. Employee's duties and powers as President and
Chief Executive Officer shall be determined from time to time by the Board of
Directors of Employer (the "Board of Directors"). Employee shall perform and
discharge such duties in a businesslike manner, and faithfully as an officer of
Employer, and shall be subject to the supervision and direction of the Board of
Directors.
2.02 Full Time Employment. Subject to the provisions set forth below,
Employee shall devote his productive time, ability, and attention to the
business of Employer during the Term. Employee shall not, directly or
indirectly, during the Term render any services of a business, commercial or
professional nature to any other person, corporation, firm or organization,
whether for compensation or otherwise, without the prior written consent of
Employer. Notwithstanding
<PAGE> 2
the foregoing, Employee may continue to engage in personal and family
investing conducted in a passive way.
ARTICLE III
COMPENSATION AND BENEFITS
3.01 Base Compensation. As compensation for services rendered and
Employee's covenants and agreements under this Agreement, during the Term of
this Agreement Employee shall be entitled to receive from Employer a minimum
base salary of two hundred and fifty thousand and no/100ths dollars ($250,000)
per year, payable in equal semi-monthly installments. The salary of Employee
may be increased from time to time at the sole discretion of the Board of
Directors.
3.02 Bonus. In addition, Employee may be entitled to an annual
bonus paid by Employer if and as determined in the sole discretion of the Board
of Directors.
3.03 Benefit Plans. During the Term, and thereafter, to the extent
provided in the applicable plan, Employer agrees to include Employee in any
retirement, insurance or health benefit plans adopted by Employer for the
benefit of the senior employees of Employer. Employer may enter into and revise
these plans in its sole discretion. Employee will have four weeks paid vacation
each year.
3.04 Expenses. Employer, in accordance with the rules and regulations
that the Board of Directors shall issue and revise from time to time, shall
reimburse Employee for business expenses directly and reasonably incurred in
the performance of his duties.
3.05 Automobile Allowance and Club Dues. Employee shall be entitled to
receive from Employer an automobile allowance of one thousand and no/100ths
dollars ($1,000) per month. Employer shall reimburse Employee for monthly club
dues incurred by Employee for a country club located in Harris County, Texas or
a surrounding county.
ARTICLE IV
TERMINATION
This Agreement shall terminate prior to the expiration of its Term
upon the occurrence of any one of the following events:
4.01 Disability. In the event that Employee is unable fully to perform
his duties and responsibilities hereunder to the full extent required by the
Board of Directors of Employer by reason of illness, injury or incapacity for
ninety (90) consecutive days (during such ninety (90) day period Employee shall
continue to be compensated as provided in Section 3.01 hereof), this Agreement
may be terminated by Employer, and Employer and Employee shall have no further
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<PAGE> 3
liability or obligations hereunder; provided, however, that Employer shall
continue to pay Employee the base compensation specified in Section 3.01 hereof
at the same times specified in Section 3.01 (as reduced by any payments
received by Employee under any Employer sponsored disability benefits plan in
which Employee was participating). In the event of the any dispute under this
Section 4.01, Employee shall submit to a physical examination by a licensed
physician selected by Employer.
4.02 Death. In the event that Employee dies during the Term, Employer
shall pay to Employee's executors, legal representatives or administrators the
base compensation specified in Section 3.01 hereof at the same time specified
in Section 3.01 for the remainder of the Term (as reduced by any payments
received by such executors, legal representatives and administrators under any
Employer sponsored death or disability benefits plan in which Employee was
participating).
4.03 Cause. Nothing in this Agreement shall be construed to prevent
the termination of this Agreement by Employer at any time for "cause". For
purposes of this Agreement, "cause" means (i) an act or acts of dishonesty
taken by the Employee and intended to result in substantial personal enrichment
of the Employee at the expense of the Employer or (ii) repeated violations by
the Employee of the Employee's obligations under Article II of this Agreement
which are demonstrably willful and deliberate on the Employee's part and which
result in material injury to the Employer. If the Employer wishes to terminate
the Employee's employment pursuant to clause (ii) above, the Employer shall
first give written notice of its intention to the Employee which notice shall
set forth in reasonable detail the repeated violations which are alleged by the
Employer, and the Employee shall have a 30-day period in which to cure such
violations prior to the expiration of which he may not be terminated pursuant
to such clause (ii). Upon termination for cause, Employer shall pay to Employee
all sums due to Employee through the date of such termination. Following such a
termination, Employer shall have no further duties or obligations to Employee.
4.04 Termination Without Cause by Employer. Employer, in its
discretion and for any reason, may terminate this Agreement at any time by
delivering written notice to Employee prior to such intended termination
("Termination Date"). This Agreement shall terminate on the Termination Date
and the Parties shall have no further duties or obligations to each other,
provided, however, that Employer shall pay Employee in one lump sum payment
within thirty (30) days of the Termination Date an amount equal to three times
Employee's current base annual compensation specified in Section 3.01 hereof
plus three times the amount of bonus received by Employee for the year prior to
Employee's termination of employment.
4.05 Termination by Employee Other Than For Good Reason. Employee may
terminate this Agreement at any time by delivering written notice to Employer
of Employee's intent to terminate at least 30 days prior to such intended
termination ("Departure Date"). This Agreement shall terminate on the Departure
Date and the parties shall have no further duties or obligations to each other,
provided, however, that Employee shall remain subject to all of the provisions
of
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<PAGE> 4
Article V and Employer shall pay to Employee all sums due to Employee through
the Departure Date.
4.06 Termination by Employee For Good Reason. Employee may terminate
this Agreement at any time for Good Reason (as hereinafter defined) by
delivering written notice to Employer of Employee's intent to terminate for
Good Reason at least 30 days prior to such intended termination ("Good Reason
Departure Date"). This Agreement shall terminate on the Good Reason Departure
Date and the parties shall have no further duties or obligations to each other,
provided, however, that Employer shall pay Employee in one lump sum payment
within thirty (30) days of the Good Reason Termination Date an amount equal to
three times Employee's current base annual compensation specified in Section
3.01 hereof plus three times the greater of (i) the amount of bonus received by
Employee for the year prior to Employee's termination of employment or (ii) the
amount of bonus received by Employee for the year prior to a Change in Control
(as hereinafter defined).
"Good Reason" shall mean termination of employment by Employee within
one year of the occurrence of either: (i) a Change in Control (as hereinafter
defined); or (ii) any of the following events:
(a) The assignment to Employee without Employee's written
consent of any duties inconsistent with Employee's positions, duties,
responsibilities and status with the Employer immediately prior
thereto, or a change without Employee's written consent in Employee's
reporting responsibilities, titles or offices representing, in
Employee's reasonable opinion, a reduction in position, status or
responsibilities, or any removal of Employee from, or any failure to
re-elect Employee to, any such position, including as a member of the
Board of Directors.
(b) The taking of any action by the Employer which would
directly adversely affect the amount or payment (including the time of
payment) of Employee's compensation or benefits provided in this
Agreement or his participation in, or a material reduction of,
Employee's current, future, actual or projected benefits under, any
compensation or benefit plans, programs or arrangements or which would
deprive Employee of any material fringe benefit enjoyed by Employee,
in each case immediately prior to such action. Except as specifically
set forth herein, the decisions of the Board of Directors concerning
the general operations of the Employer shall not be the basis for a
Good Reason termination.
(c) The geographic relocation of Employee's work site
location to a new location in excess of thirty miles from the location
of the Employee's work site location without Employee's written
consent.
"Change in Control" shall mean any of the following: (i) the Employer
shall not be the surviving entity in any merger, consolidation or other
reorganization (or survives only as a subsidiary of an entity other than a
previously wholly-owned subsidiary of the Employer), (ii) the Employer sells,
leases or exchanges all or substantially all of its assets to any other person
or
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<PAGE> 5
entity (other than a wholly-owned subsidiary of the Employer), (iii) the
Employer is to be dissolved and liquidated, (iv) any person or entity,
including a "group" as contemplated by Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended, other than any person, entity or group which
owned shares of Common Stock of the Company immediately prior to the initial
public offering of the Company's Common Stock, acquires or gains ownership or
control (including, without limitation, power to vote) of more than 50% of the
outstanding shares of the Employer's voting stock (based upon voting power), or
(v) during any consecutive two-year period, individuals who constituted the
Board of Directors of the Employer (together with any new directors whose
election by the Board of Directors or whose nomination for election by the
shareholders of the Employer was approved by a vote of at least three-quarters
of the directors still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors then in office.
ARTICLE V
PROPERTY RIGHTS
5.01 Non-Competition. If this Agreement is terminated other than
pursuant to Sections 4.04 or 4.06 or this Agreement otherwise expires without
extension pursuant to Article 1, then for a one (1) year period following such
termination or expiration, as applicable (the "One Year Period"), Employee
shall not, directly or indirectly, either as an employee, employer, consultant,
agent, lender, principal, partner, stockholder, corporate officer, director, or
in any other individual or representative capacity, engage or participate in
any business that is in competition in any manner whatsoever with the business
engaged in by Employer at the time of such termination or resignation. The
provisions of this Section 5.01 and those contained in Section 5.02 shall not
apply to any termination occurring pursuant to Sections 4.04 or 4.06.
5.02 Solicitation. During the One Year Period, Employee agrees not to,
directly or indirectly, (i) call on or solicit, with respect to the activities
prohibited by Section 5.01 of this Agreement, any person, firm, corporation or
other entity who or which at the time of such termination, or within two years
prior thereto, was or had been a customer, referral source or distributor of
Employer or any of its affiliates or (ii) solicit, influence or recommend the
employment of any person who was employed by Employer on a full or part-time
basis at the time of Employee's termination of employment; provided, if
requested by any employee of Employer, Employee shall have the right to give a
reference with respect to such employee.
5.03 Reasonableness of Restrictions. Employee agrees that (i) the
covenants contained in Sections 5.01 and 5.02 hereof are necessary for the
protection of Employer's business goodwill, (ii) a portion of the compensation
paid to Employee under this Agreement is paid in consideration of the covenants
herein contained, the sufficiency of which consideration is hereby
acknowledged, (iii) Employee is not, and under this Agreement will not be,
engaged in a common calling, and (iv) if the scope of any restriction contained
in Sections 5.01 and 5.02 hereof is too broad to permit enforcement of such
restriction to its full extent, then such restriction shall be enforced to
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<PAGE> 6
the maximum permitted by law, and the Parties hereto hereby consent that such
scope may be judicially modified accordingly in any proceeding brought to
enforce such restriction. The existence of any claim or cause of action of
Employee against Employer, whether predicated on this Agreement or otherwise,
shall not constitute a defense to the enforcement by Employer of these
covenants.
5.04 Enforcement. Employee acknowledges that the restrictions
contained in Sections 5.01 and 5.02 hereof are reasonable and necessary to
protect the legitimate interests of Employer and its affiliates, that Employer
would not have entered into this Agreement in the absence of such restrictions,
and that any violation of any provision of the covenants contained in Sections
5.01 or 5.02 hereof will result in irreparable injury to Employer. Employee
also acknowledges that Employer shall be entitled to preliminary and permanent
injunctive relief, without the necessity of proving actual damages as well as
an equitable accounting of all earnings, profits and other benefits arising
from any such violation, which rights shall be cumulative and in addition to
any other rights or remedies to which Employer may be entitled.
5.05 Copy of Covenants. Until the expiration of the applicable
restrictions, Employee will provide, and Employer similarly may provide, a copy
of the covenants contained in Sections 5.01 and 5.02 of this Agreement to any
business or enterprise which Employee may (i) directly or indirectly own,
manage, operate, finance, join, control or participate in the ownership,
management, operation, financing, or control of, (ii) serve as an officer,
director, employee, partner, principal, agent, representatives, consultant
leader or otherwise, or (iii) with which he may use or permit his name to be
used.
ARTICLE VI
GENERAL PROVISIONS
6.01 Notices. Any notices to be given hereunder by either Party to the
other may be effected either by personal delivery in writing or by mail,
registered or certified, postage prepaid with return receipt requested:
If to Employer:
First Sierra Financial, Inc.
Texas Commerce Tower
600 Travis, Suite 7050
Houston, Texas 77002
Attention: Chairman
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<PAGE> 7
If to Employee:
Thomas J. Depping
1811 Seven Maples
Kingwood, Texas 77345
Mailed notices shall be addressed to the Parties at the addresses set forth
above, but each Party may change his/her address by written notice in
accordance with this Section 6.01. Notices delivered personally shall be deemed
communicated as of actual receipt; mailed notices shall be deemed communicated
as of ten (10) days after mailing.
6.02 Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the employment of Employee by Employer and contains all of the covenants and
agreements between the parties with respect to such employment in any manner
whatsoever.
6.03 Certain Acknowledgments. Employee by his execution and delivery
of this Agreement represents to Employer as follows:
(i) Employee has been advised by Employer to have this Agreement
reviewed by an attorney representing Employee, and Employee
has either had this Agreement reviewed by such attorney or
has chosen not to have this Agreement reviewed because
Employee, after reading the entire Agreement, fully and
completely understands each provision and has decided not to
obtain the services of an attorney.
(ii) Employee either on his own or with the assistance and advice
of his attorney has in particular reviewed Article V and
understands and accepts (a) the restrictions imposed by
Article V and Sections 5.01 and 5.02, and (b) the
restrictions imposed upon Employee pursuant to these sections
are reasonable and necessary for the protection of the
property rights of Employer and its affiliates.
6.04 Headings. The headings or titles to Sections or Articles in this
Agreement are intended solely for convenience of the Parties and no provision
of this Agreement is to be construed by reference to the heading or title of
any section.
6.05 No Set-Off. There shall be no right of set-off or counterclaim,
in respect of any claim, debt or obligation, against the payments or benefits
to be made or provided for in this Agreement.
6.06 Amendment or Modification; Waiver. No provision of this Agreement
may be amended, modified or waived unless such amendment, modification or
waiver is authorized by the Board of Directors of Employer and is agreed to in
writing, signed by Employee and by an officer of Employer (other than Employee)
thereunto duly authorized. Except as otherwise specifically
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<PAGE> 8
provided in this Agreement, no waiver by any Party hereto of any breach by any
other party hereto of any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of a similar or
dissimilar provision or condition at the same or at any prior or subsequent
time; nor shall the receipt or acceptance of Employee's employment be deemed a
waiver of any condition or provision hereof. Employee acknowledges that from
time to time, Employer may establish, maintain and distribute employee manuals
or handbooks or personnel policy manuals, and officers or other representatives
of Employer may make written or oral statements relating to personnel policies
and procedures. Such manuals, handbooks and statements are intended only for
general guidance. No policies, procedures or statements of any nature by or on
behalf of Employer (whether written or oral, and whether or not contained in
any employee manual or handbook or personnel policy manual), and no acts or
practices of any nature shall be construed to modify this Agreement or to
create express or implied obligations of any nature to Employee.
6.07 Assignability. Employee shall not assign, pledge or encumber any
interest in this Agreement or any part thereof without the express written
consent of Employer, this Agreement being personal to Employee. This Agreement
shall, however, inure to the benefit of Employee's estate, dependents,
beneficiaries and legal representatives. This Agreement shall not be assignable
by Employer without the written consent of Employee, but if Employer shall
merge or consolidate with or into, or transfer substantially all of its assets
to, another corporation or other form of business organization, then this
Agreement shall bind the successor of Employer resulting from such merger,
consolidation or transfer. No such merger, consolidation or transfer, however,
shall relieve Employer or Employee from liability and responsibility for the
performance of their respective duties and obligations hereunder.
6.08 Governing Law. THIS AGREEMENT HAS BEEN NEGOTIATED, EXECUTED
AND DELIVERED IN THE STATE OF TEXAS, AND SHALL IN ALL RESPECTS BE
INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE
INTERNAL SUBSTANTIVE LAW OF THE STATE OF TEXAS.
6.09 Severability. Each provision of this Agreement constitutes a
separate and distinct undertaking, covenant and/or provision hereof. In the
event that any provision of this Agreement shall finally be determined to be
unlawful, such provision shall be deemed severed from this Agreement, but every
other provision of this Agreement shall remain in full force and effect, and in
substitution for any such provision held unlawful, there shall be substituted a
provision of similar import reflecting the original intent of the Parties
hereto to the maximum extent permissible under law.
6.10 No Duress. Employee acknowledges that no force, fear or threats
or duress of any kind have been used to obtain the agreements and covenants
contained in this Agreement.
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<PAGE> 9
EXECUTED in Houston, Texas, on the day and year first above written.
"EMPLOYER"
First Sierra Financial, Inc.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
"EMPLOYEE"
-------------------------------------
Thomas J. Depping
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<PAGE> 1
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") made as of the ______ day of
___________, 1997 (the "Effective Date"), by and between First Sierra
Financial, Inc., a Delaware corporation, (the "Employer"), and Sandy B. Ho (the
"Employee"). Employer and Employee may be referred to herein collectively as
the "Parties" and individually as a "Party".
ARTICLE I
TERM
Employer hereby employs Employee and Employee hereby accepts
employment with Employer for a period beginning on the Effective Date and
ending on the third anniversary of the Effective Date. This Agreement replaces
all prior agreements between the parties, oral or written, regarding employment
of Employee by Employer and all such prior agreements are void upon the
Effective Date of this Agreement.
ARTICLE II
DUTIES OF EMPLOYEE
2.01 Duties. Employee is engaged to be the Executive Vice President
and Chief Financial Officer. Employee's duties and powers shall be determined
from time to time by the Chief Executive Officer of Employer. Employee shall
perform and discharge such duties in a businesslike manner, and faithfully as
an officer of Employer, and shall be subject to the supervision and direction
of the Chief Executive Officer of Employer and the Employer's Board of
Directors.
2.02 Full Time Employment. Subject to the provisions set forth below,
Employee shall devote her productive time, ability, and attention to the
business of Employer during the Term. Employee shall not, directly or
indirectly, during the Term render any services of a business, commercial or
professional nature to any other person, corporation, firm or organization,
whether for compensation or otherwise, without the prior written consent of the
Chief Executive Officer of Employer.
Notwithstanding the foregoing, Employee may continue to engage in
personal and family investing; provided, however, unless prior approval is
given by Employer's Chief Executive Officer, such investments may not include
equipment leases or interests in non-publicly traded entities engaged in
equipment leasing.
<PAGE> 2
ARTICLE III
COMPENSATION AND BENEFITS
3.01 Base Compensation. As compensation for services rendered and
Employee's covenants and agreements under this Agreement, Employee shall be
entitled to receive from Employer a base salary of one hundred sixty thousand
and no/100ths dollars ($160,000) per year, payable in equal semi-monthly
installments from Employer's headquarters in Texas. The salary of Employee may
be increased from time to time at the sole discretion of Employer.
3.02 Bonus. Employee may be entitled to an annual bonus paid by
Employer if and as determined in the sole discretion of the Board of Directors.
3.03 Benefit Plans. During the Term, and thereafter, to the extent
provided in the applicable plan or under applicable law, Employer agrees to
include Employee in any retirement, insurance and health benefit plans adopted
by Employer for the benefit of the senior employees of Employer. Employer may
enter into and revise these plans in its sole discretion. Employee will have
three weeks paid vacation each year.
3.04 Expenses. Employer, in accordance with the rules and regulations
Employer shall issue and may revise from time to time, shall reimburse Employee
for business expenses directly and reasonably incurred in the performance of
her duties. The Employer acknowledges that the Employee will require a travel
and entertainment budget and reimbursement for reasonable travel and
entertainment expenses. Any amounts advanced or reimbursed by Employer to
Employee for travel and entertainment expenses shall be in addition to any
other amounts payable to Employee hereunder.
ARTICLE IV
TERMINATION
This Agreement shall terminate prior to the expiration of its Term
upon the occurrence of any one of the following events:
4.01 Disability. In the event that Employee is unable fully to perform
her duties and responsibilities with reasonable accommodation hereunder to the
full extent required by Employer due to illness, injury or incapacity for
ninety (90) consecutive days (during such ninety (90) day period Employee shall
continue to be compensated as provided in Section 3.01 hereof), this Agreement
may be terminated by Employer, and Employer and Employee shall have no further
liability or obligations hereunder; provided, however, that Employer shall
continue to pay Employee the base compensation specified in Section 3.01 hereof
for the duration of the Term at the same times specified in Section 3.01 (as
reduced by any payments received by Employee under any Employer sponsored
disability
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<PAGE> 3
benefits plan in which Employee was participating). In the event of any dispute
under this Section 4.01, Employee shall submit to a physical examination by a
licensed physician selected by Employer, and acceptable to Employee. If the
physician retained by Employer is not acceptable to Employee, then physicians
selected by the Employer and the Employee shall jointly select a third
physician to perform the examination. All costs related to the physical
examination of the Employee shall be paid by the Employer.
4.02 Death. In the event that Employee dies during the Term Employer
shall pay to Employee's executors, legal representatives or administrators the
base compensation specified in Section 3.01 hereof for the remainder of the
Term at the same time specified in Section 3.01 (as reduced by any payments
received by such executors, legal representatives and administrators under any
Employer sponsored death or disability benefits plan in which Employee was
participating).
4.03 Cause. Nothing in this Agreement shall be construed to prevent
the termination of this Agreement by Employer at any time for "cause". For
purposes of this Agreement, "cause" shall mean the habitual neglect or willful
breach by Employee of her duties as the Executive Vice President and Chief
Financial Officer of Employer which results in a material loss or damage to
Employer or embezzlement by Employee of Employer funds. Upon termination for
cause, Employer shall pay to Employee all sums due to Employee through the date
of such termination. Following such a termination, Employer shall have no
further duties or obligations to Employee.
4.04 Termination Without Cause by Employer. Employer, in its
discretion and for any reason, may terminate this Agreement at any time by
delivering written notice to Employee prior to such intended termination
("Termination Date"). This Agreement shall terminate on the Termination Date
and the Parties shall have no further duties or obligations to each other,
provided, however, that (i) Employer shall for the remaining portion of the
Term following the Termination Date continue to pay Employee the base
compensation specified and as scheduled in Section 3.01, (ii) Employer shall
pay Employee for each pay period for the remaining portion of the Term an
amount equal to one/twenty-fourth of the bonus received by Employee for the
year prior to the Termination Date, and (iii) Employer shall pay Employee at
the end of the Term a lump sum amount equal to the bonus received by Employee
for the year prior to the Termination Date multiplied by a fraction the
numerator of which is the number of days in the year prior to the Termination
Date and the denominator is 365.
4.05 Termination by Employee. Employee may terminate this Agreement at
any time by delivering written notice to Employer of Employee's intent to
terminate at least 30 days prior to such intended termination ("Departure
Date"). This Agreement shall terminate on the Departure Date and the parties
shall have no further duties or obligations to each other, provided, however,
that Employee shall remain subject to all of the provisions of Article V and
Employer shall pay to Employee all sums due to Employee through the Departure
Date.
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<PAGE> 4
ARTICLE V
PROPERTY RIGHTS
5.01 Non-Competition. If this Agreement is terminated or this
Agreement otherwise expires without extension, Employee shall not for a period
of one year (the "One Year Period"), directly or indirectly, either as an
employee, employer, consultant, agent, lender, principal, partner, stockholder,
corporate officer, director, or in any other individual or representative
capacity, engage or participate in any business that is in competition in any
manner whatsoever with the business engaged in by Employer in the continental
United States at the time of such termination or resignation.
5.02 Solicitation. During the One Year Period, Employee agrees not to,
directly or indirectly, (i) call on or solicit, with respect to the activities
prohibited by Section 5.01 of this Agreement, any person, firm, corporation or
other entity who or which at the time of such termination, or within two years
prior thereto, was or had been a customer, referral source or distributor of
Employer or any of its affiliates or (ii) solicit, influence or recommend the
employment of any person who was employed by Employer on a full or part-time
basis at the time of Employee's termination of employment; provided, if
requested by any employee of Employer, Employee shall have the right to give a
reference with respect to such employee.
5.03 Confidentiality. In return for Employee's promises under this
Article V, Employee shall receive and be entrusted with certain confidential
and/or secret information of a proprietary nature, including without limitation
names and addresses of customers of the Employer and its affiliates and
business plans of the Employer. Employee shall not directly or indirectly
disclose or use, during the term of this Agreement or at any time thereafter,
any such information which is not otherwise publicly available.
5.04 Reasonableness of Restrictions. Employee agrees that (i) the
covenants contained in Sections 5.01, 5.02 and 5.03 hereof are necessary for
the protection of Employer's business goodwill, (ii) a portion of the
compensation paid to Employee under this Agreement is paid in consideration of
the covenants herein contained, the sufficiency of which consideration is
hereby acknowledged, (iii) Employee is not, and under this Agreement will not
be, engaged in a common calling, and (iv) if the scope of any restriction
contained in Sections 5.01, 5.02 and 5.03 hereof is too broad to permit
enforcement of such restriction to its full extent, then such restriction shall
be enforced to the maximum permitted by law, and the parties hereto hereby
consent that such scope may be judicially modified accordingly in any
proceeding brought to enforce such restriction. The existence of any claim or
cause of action of Employee against Employer, whether predicated on this
Agreement or otherwise, shall not constitute a defense to the enforcement by
Employer of these covenants.
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<PAGE> 5
5.05 Enforcement. If Employee is terminated pursuant to Sections 4.03,
4.04 or 4.05 and the One Year Period exceeds the Term, Employer will pay
Employee her base compensation for the portion of the One Year Period that
exceeds the Term, plus for each pay period for the portion of the One Year
Period that exceeds the Term Employer will pay Employee one/twenty-fourth of
the amount of the bonus received by Employee for the year proceeding Employee's
termination of employment. If this Agreement is not renewed at the end of its
Term Employer agrees to pay Employee her salary during the One Year Period plus
for each pay period during the One Year Period Employer will pay Employee
one/twenty-fourth of the amount of the bonus received by Employee for the year
preceding Employee's termination of employment. Employer reserves the right to
waive the provisions of Sections 5.01 and 5.02 if Employee terminates for any
reason other than under Section 4.04 and such waiver will release Employer from
any payment obligations under this Section 5.05. Employee acknowledges that the
restrictions contained in Sections 5.01, 5.02 and 5.03 hereof are reasonable
and necessary to protect the legitimate interests of Employer and its
affiliates, that Employer would not have entered into this Agreement in the
absence of such restrictions, and that any violation of any provision of the
covenants contained in Sections 5.01, 5.02 or 5.03 hereof will result in
irreparable injury to Employer. Employee also acknowledges that Employer shall
be entitled to preliminary and permanent injunctive relief, without the
necessity of proving actual damages as well as an equitable accounting of all
earnings, profits and other benefits arising from any such violation, which
rights shall be cumulative and in addition to any other rights or remedies to
which Employer may be entitled.
5.06 Copy of Covenants. Until the expiration of the applicable
restrictions, Employee will provide, and Employer similarly may provide, a copy
of the covenants contained in Sections 5.01, 5.02 and 5.03 of this Agreement to
any business or enterprise which Employee may (i) directly or indirectly own,
manage, operate, finance, join, control or participate in the ownership,
management, operation, financing, or control of, (ii) serve as an officer,
director, employee, partner, principal, agent, representative, consultant
leader or otherwise, or (iii) with which she may use or permit her name to be
used.
ARTICLE VI
GENERAL PROVISIONS
6.01 Arbitration. Employee and Employer agree that all disputes
concerning the terms of this Agreement or Employee's employment with Employer
will be subject solely to binding arbitration. The arbitrator selection and
conduct of the arbitration will be pursuant to the Commercial Arbitration Rules
of the American Arbitration Association. The place of the arbitration shall be
Houston, Texas and shall be governed by the laws of Texas.
-5-
<PAGE> 6
6.02 Notices. Any notices to be given hereunder by either party to the
other may be effected either by personal delivery in writing or by mail,
registered or certified, postage prepaid with return receipt requested:
If to Employer:
First Sierra Financial, Inc.
Texas Commerce Tower
600 Travis, Suite 7050
Houston, TX 77002
Attention: Chief Executive Officer
If to Employee:
Sandy B. Ho
245 Merrie Way
Houston, Texas 77024
Mailed notices shall be addressed to the parties at the addresses set forth
above, but each party may change his/her address by written notice in
accordance with this Section 6.02. Notices delivered personally shall be deemed
communicated as of actual receipt; mailed notices shall be deemed communicated
as of ten (10) days after mailing.
6.03 Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the employment of Employee by Employer and contains all of the covenants and
agreements between the parties with respect to such employment in any manner
whatsoever.
6.04 Certain Acknowledgments. Employee by her execution and delivery
of this Agreement represents to Employer as follows:
(i) Employee has been advised by Employer to have this Agreement
reviewed by an attorney representing Employee, and Employee
has either had this Agreement reviewed by such attorney or
has chosen not to have this Agreement reviewed because
Employee, after reading the entire Agreement, fully and
completely understands each provision and has decided not to
obtain the services of an attorney.
(ii) Employee either on her own or with the assistance and advice
of her attorney has in particular reviewed Article V and
understands and accepts (a) the restrictions imposed by
Article V and Sections 5.01 and 5.02 and (b) the restrictions
imposed upon Employee pursuant to these sections are
reasonable and necessary for the protection of the property
rights of Employer and its affiliates.
-6-
<PAGE> 7
6.05 Headings. The headings or titles to Sections or Articles in this
Agreement are intended solely for convenience of the parties and no provision
of this Agreement is to be construed by reference to the heading or title of
any section.
6.06 Amendment or Modification; Waiver. No provision of this Agreement
may be amended, modified or waived unless such amendment, modification or
waiver is authorized by the Employer and is agreed to in writing, signed by
Employee and by the Chief Executive Officer of Employer thereunto duly
authorized. Except as otherwise specifically provided in this Agreement, no
waiver by any party hereto of any breach by any other party hereto of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar provision or condition at
the same or at any prior or subsequent time; nor shall the receipt or
acceptance of Employee's employment be deemed a waiver of any condition or
provision hereof. Employee acknowledges that from time to time, Employer may
establish, maintain and distribute employee manuals or handbooks or personnel
policy manuals, and officers or other representatives of Employer may make
written or oral statements relating to personnel policies and procedures. Such
manuals, handbooks and statements are intended only for general guidance. No
policies, procedures or statements of any nature by or on behalf of Employer
(whether written or oral, and whether or not contained in any employee manual
or handbook or personnel policy manual), and no acts or practices of any nature
shall be construed to modify this Agreement or to create express or implied
obligations of Employer.
6.07 Assignability. Employee shall not assign, pledge or encumber any
interest in this Agreement or any part thereof without the express written
consent of Employer, this Agreement being personal to Employee. This Agreement
shall, however, inure to the benefit of Employee's estate, dependents,
beneficiaries and legal representatives. This Agreement shall not be assignable
by Employer without the written consent of Employee.
6.08 Governing Law. THIS AGREEMENT HAS BEEN NEGOTIATED, EXECUTED AND
DELIVERED IN THE STATE OF TEXAS, AND SHALL IN ALL RESPECTS BE INTERPRETED,
CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE STATE OF TEXAS.
6.09 Severability. Each provision of this Agreement constitutes a
separate and distinct undertaking, covenant and/or provision hereof. In the
event that any provision of this Agreement shall finally be determined to be
unlawful, such provision shall be deemed severed from this Agreement, but every
other provision of this Agreement shall remain in full force and effect, and in
substitution for any such provision held unlawful, there shall be substituted a
provision of similar import reflecting the original intent of the parties
hereto to the maximum extent permissible under law.
-7-
<PAGE> 8
6.10 No Duress. Employee acknowledges that no force, fear or threats
or duress of any kind have been used to obtain the agreements and covenants
contained in this Agreement.
EXECUTED in Houston, Texas, on the day and year first above written.
"EMPLOYER"
First Sierra Financial, Inc.
By:
------------------------------
Name: Thomas J. Depping
Title: Chief Executive Officer
"EMPLOYEE"
---------------------------------
Sandy B. Ho
-8-
<PAGE> 1
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") made as of the _____ day of
____________, 1997 (the "Effective Date"), by and between First Sierra
Financial, Inc., a Delaware corporation, (the "Employer"), and Robert H. Quinn,
Jr. (the "Employee"). Employer and Employee may be referred to herein
collectively as the "Parties" and individually as a "Party".
ARTICLE I
TERM
Employer hereby employs Employee and Employee hereby accepts
employment with Employer for a period beginning on the Effective Date and
ending on the third anniversary of the Effective Date. This Agreement replaces
all prior agreements between the parties, oral or written, regarding employment
of Employee by Employer and all such prior agreements are void upon the
Effective Date of this Agreement.
ARTICLE II
DUTIES OF EMPLOYEE
2.01 Duties. Employee is engaged to be the Executive Vice President
and Chief Credit Officer. Employee's duties and powers as Executive Vice
President and Chief Credit Officer shall be determined from time to time by the
Chief Executive Officer of Employer, including periodic meetings in Texas.
Employee shall perform and discharge such duties in a businesslike manner, and
faithfully as an officer of Employer, and shall be subject to the supervision
and direction of the Chief Executive Officer of Employer and the Employer's
Board of Directors.
2.02 Full Time Employment. Subject to the provisions set forth below,
Employee shall devote his productive time, ability, and attention to the
business of Employer during the Term. Employee shall not, directly or
indirectly, during the Term render any services of a business, commercial or
professional nature to any other person, corporation, firm or organization,
whether for compensation or otherwise, without the prior written consent of the
Chief Executive Officer of Employer.
Notwithstanding the foregoing, Employee may continue to engage in
personal and family investing; provided, however, unless prior approval is
given by Employer's Chief Executive Officer, such investments may not include
equipment leases or interests in non-publicly traded entities engaged in
equipment leasing.
<PAGE> 2
ARTICLE III
COMPENSATION AND BENEFITS
3.01 Base Compensation. As compensation for services rendered and
Employee's covenants and agreements under this Agreement, Employee shall be
entitled to receive from Employer a base salary of one hundred sixty thousand
and no/100ths dollars ($160,000) per year, payable in equal semi-monthly
installments from Employer's headquarters in Texas. The salary of Employee may
be increased from time to time at the sole discretion of Employer.
3.02 Bonus. Employee may be entitled to an annual bonus paid by
Employer if and as determined in the sole discretion of the Board of Directors
3.03 Benefit Plans. During the Term, and thereafter, to the extent
provided in the applicable plan or under applicable law, Employer agrees to
include Employee in any retirement, insurance and health benefit plans adopted
by Employer for the benefit of the senior employees of Employer. Employer may
enter into and revise these plans in its sole discretion. Employee will have
three weeks paid vacation each year.
3.04 Expenses. Employer, in accordance with the rules and regulations
Employer shall issue and may revise from time to time, shall reimburse Employee
for business expenses directly and reasonably incurred in the performance of
his duties. The Employer acknowledges that the Employee will require a travel
and entertainment budget and reimbursement for reasonable travel and
entertainment expenses. Any amounts advanced or reimbursed by Employer to
Employee for travel and entertainment expenses shall be in addition to any
other amounts payable to Employee hereunder.
ARTICLE IV
TERMINATION
This Agreement shall terminate prior to the expiration of its Term
upon the occurrence of any one of the following events:
4.01 Disability. In the event that Employee is unable fully to perform
his duties and responsibilities with reasonable accommodation hereunder to the
full extent required by Employer due to illness, injury or incapacity for
ninety (90) consecutive days (during such ninety (90) day period Employee shall
continue to be compensated as provided in Section 3.01 hereof), this Agreement
may be terminated by Employer, and Employer and Employee shall have no further
liability or obligations hereunder; provided, however, that Employer shall
continue to pay Employee the base compensation specified in Section 3.01 hereof
for the duration of the Term at the same times specified in Section 3.01 (as
reduced by any payments received by Employee under any Employer sponsored
disability benefits plan in which Employee was participating). In the event of
any dispute under this Section
-2-
<PAGE> 3
4.01, Employee shall submit to a physical examination by a licensed physician
selected by Employer, and acceptable to Employee. If the physician retained by
Employer is not acceptable to Employee, then physicians selected by the
Employer and the Employee shall jointly select a third physician to perform the
examination. All costs related to the physical examination of the Employee
shall be paid by the Employer.
4.02 Death. In the event that Employee dies during the Term Employer
shall pay to Employee's executors, legal representatives or administrators the
base compensation specified in Section 3.01 hereof for the remainder of the
Term at the same time specified in Section 3.01 (as reduced by any payments
received by such executors, legal representatives and administrators under any
Employer sponsored death or disability benefits plan in which Employee was
participating).
4.03 Cause. Nothing in this Agreement shall be construed to prevent
the termination of this Agreement by Employer at any time for "cause". For
purposes of this Agreement, "cause" shall mean the habitual neglect or willful
breach by Employee of his duties as the Executive Vice President and Chief
Credit Officer of Employer which results in a material loss or damage to
Employer or embezzlement by Employee of Employer funds. Upon termination for
cause, Employer shall pay to Employee all sums due to Employee through the date
of such termination. Following such a termination, Employer shall have no
further duties or obligations to Employee.
4.04 Termination Without Cause by Employer. Employer, in its
discretion and for any reason, may terminate this Agreement at any time by
delivering written notice to Employee prior to such intended termination
("Termination Date"). This Agreement shall terminate on the Termination Date
and the Parties shall have no further duties or obligations to each other,
provided, however, that (i) Employer shall for the remaining portion of the
Term following the Termination Date continue to pay Employee the base
compensation specified and as scheduled in Section 3.01, (ii) Employer shall
pay Employee for each pay period for the remaining portion of the Term an
amount equal to one/twenty-fourth of the bonus received by Employee for the
year prior to the Termination Date, and (iii) Employer shall pay Employee at
the end of the Term a lump sum amount equal to the bonus received by Employee
for the year prior to the Termination Date multiplied by a fraction the
numerator of which is the number of days in the year prior to the Termination
Date and the denominator is 365.
4.05 Termination by Employee. Employee may terminate this Agreement at
any time by delivering written notice to Employer of Employee's intent to
terminate at least 30 days prior to such intended termination ("Departure
Date"). This Agreement shall terminate on the Departure Date and the parties
shall have no further duties or obligations to each other, provided, however,
that Employee shall remain subject to all of the provisions of Article V and
Employer shall pay to Employee all sums due to Employee through the Departure
Date.
-3-
<PAGE> 4
ARTICLE V
PROPERTY RIGHTS
5.01 Non-Competition. If this Agreement is terminated or this
Agreement otherwise expires without extension, Employee shall not for a period
of one year (the "One Year Period"), directly or indirectly, either as an
employee, employer, consultant, agent, lender, principal, partner, stockholder,
corporate officer, director, or in any other individual or representative
capacity, engage or participate in any business that is in competition in any
manner whatsoever with the business engaged in by Employer in the continental
United States at the time of such termination or resignation.
5.02 Solicitation. During the One Year Period, Employee agrees not to,
directly or indirectly, (i) call on or solicit, with respect to the activities
prohibited by Section 5.01 of this Agreement, any person, firm, corporation or
other entity who or which at the time of such termination, or within two years
prior thereto, was or had been a customer, referral source or distributor of
Employer or any of its affiliates or (ii) solicit, influence or recommend the
employment of any person who was employed by Employer on a full or part-time
basis at the time of Employee's termination of employment; provided, if
requested by any employee of Employer, Employee shall have the right to give a
reference with respect to such employee.
5.03 Confidentiality. In return for Employee's promises under this
Article V, Employee shall receive and be entrusted with certain confidential
and/or secret information of a proprietary nature, including without limitation
names and addresses of customers of the Employer and its affiliates and
business plans of the Employer. Employee shall not directly or indirectly
disclose or use, during the term of this Agreement or at any time thereafter,
any such information which is not otherwise publicly available.
5.04 Reasonableness of Restrictions. Employee agrees that (i) the
covenants contained in Sections 5.01, 5.02 and 5.03 hereof are necessary for
the protection of Employer's business goodwill, (ii) a portion of the
compensation paid to Employee under this Agreement is paid in consideration of
the covenants herein contained, the sufficiency of which consideration is
hereby acknowledged, (iii) Employee is not, and under this Agreement will not
be, engaged in a common calling, and (iv) if the scope of any restriction
contained in Sections 5.01, 5.02 and 5.03 hereof is too broad to permit
enforcement of such restriction to its full extent, then such restriction shall
be enforced to the maximum permitted by law, and the parties hereto hereby
consent that such scope may be judicially modified accordingly in any
proceeding brought to enforce such restriction. The existence of any claim or
cause of action of Employee against Employer, whether predicated on this
Agreement or otherwise, shall not constitute a defense to the enforcement by
Employer of these covenants.
5.05 Enforcement. If Employee is terminated pursuant to Sections
4.03, 4.04 or 4.05 and the One Year Period exceeds the Term, Employer will pay
Employee his base
-4-
<PAGE> 5
compensation for the portion of the One Year Period that exceeds the Term, plus
for each pay period for the portion of the One Year Period that exceeds the
Term Employer will pay Employee one/twenty-fourth of the amount of the bonus
received by Employee for the year proceeding Employee's termination of
employment. If this Agreement is not renewed at the end of its Term Employer
agrees to pay Employee his salary during the One Year Period plus for each pay
period during the One Year Period Employer will pay Employee one/twenty-fourth
of the amount of the bonus received by Employee for the year preceding
Employee's termination of employment. Employer reserves the right to waive the
provisions of Sections 5.01 and 5.02 if Employee terminates for any reason
other than under Section 4.04 and such waiver will release Employer from any
payment obligations under this Section 5.05. Employee acknowledges that the
restrictions contained in Sections 5.01, 5.02 and 5.03 hereof are reasonable
and necessary to protect the legitimate interests of Employer and its
affiliates, that Employer would not have entered into this Agreement in the
absence of such restrictions, and that any violation of any provision of the
covenants contained in Sections 5.01, 5.02 or 5.03 hereof will result in
irreparable injury to Employer. Employee also acknowledges that Employer shall
be entitled to preliminary and permanent injunctive relief, without the
necessity of proving actual damages as well as an equitable accounting of all
earnings, profits and other benefits arising from any such violation, which
rights shall be cumulative and in addition to any other rights or remedies to
which Employer may be entitled.
5.06 Copy of Covenants. Until the expiration of the applicable
restrictions, Employee will provide, and Employer similarly may provide, a copy
of the covenants contained in Sections 5.01, 5.02 and 5.03 of this Agreement to
any business or enterprise which Employee may (i) directly or indirectly own,
manage, operate, finance, join, control or participate in the ownership,
management, operation, financing, or control of, (ii) serve as an officer,
director, employee, partner, principal, agent, representative, consultant
leader or otherwise, or (iii) with which he may use or permit his name to be
used.
ARTICLE VI
GENERAL PROVISIONS
6.01 Arbitration. Employee and Employer agree that all disputes
concerning the terms of this Agreement or Employee's employment with Employer
will be subject solely to binding arbitration. The arbitrator selection and
conduct of the arbitration will be pursuant to the Commercial Arbitration Rules
of the American Arbitration Association. The place of the arbitration shall be
Houston, Texas and shall be governed by the laws of Texas.
6.02 Notices. Any notices to be given hereunder by either party to the
other may be effected either by personal delivery in writing or by mail,
registered or certified, postage prepaid with return receipt requested:
-5-
<PAGE> 6
If to Employer:
First Sierra Financial, Inc.
Texas Commerce Tower
600 Travis, Site 7050
Houston, TX 77002
Attention: Chief Executive Officer
If to Employee:
Robert H. Quinn, Jr.
6024 Fountain Palm Drive
Jupiter, FL 33458
Mailed notices shall be addressed to the parties at the addresses set forth
above, but each party may change his/her address by written notice in
accordance with this Section 6.02. Notices delivered personally shall be deemed
communicated as of actual receipt; mailed notices shall be deemed communicated
as of ten (10) days after mailing.
6.03 Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the employment of Employee by Employer and contains all of the covenants and
agreements between the parties with respect to such employment in any manner
whatsoever.
6.04 Certain Acknowledgments. Employee by his execution and delivery
of this Agreement represents to Employer as follows:
(i) Employee has been advised by Employer to have this Agreement
reviewed by an attorney representing Employee, and Employee
has either had this Agreement reviewed by such attorney or
has chosen not to have this Agreement reviewed because
Employee, after reading the entire Agreement, fully and
completely understands each provision and has decided not to
obtain the services of an attorney.
(ii) Employee either on his own or with the assistance and advice
of his attorney has in particular reviewed Article V and
understands and accepts (a) the restrictions imposed by
Article V and Sections 5.01, 5.02 and 5.03 and (b) the
restrictions imposed upon Employee pursuant to these sections
are reasonable and necessary for the protection of the
property rights of Employer and its affiliates.
6.05 Headings. The headings or titles to Sections or Articles in this
Agreement are intended solely for convenience of the parties and no provision
of this Agreement is to be construed by reference to the heading or title of
any section.
-6-
<PAGE> 7
6.06 Amendment or Modification; Waiver. No provision of this Agreement
may be amended, modified or waived unless such amendment, modification or
waiver is authorized by the Employer and is agreed to in writing, signed by
Employee and by the Chief Executive Officer of Employer thereunto duly
authorized. Except as otherwise specifically provided in this Agreement, no
waiver by any party hereto of any breach by any other party hereto of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar provision or condition at
the same or at any prior or subsequent time; nor shall the receipt or
acceptance of Employee's employment be deemed a waiver of any condition or
provision hereof. Employee acknowledges that from time to time, Employer may
establish, maintain and distribute employee manuals or handbooks or personnel
policy manuals, and officers or other representatives of Employer may make
written or oral statements relating to personnel policies and procedures. Such
manuals, handbooks and statements are intended only for general guidance. No
policies, procedures or statements of any nature by or on behalf of Employer
(whether written or oral, and whether or not contained in any employee manual
or handbook or personnel policy manual), and no acts or practices of any nature
shall be construed to modify this Agreement or to create express or implied
obligations of Employer.
6.07 Assignability. Employee shall not assign, pledge or encumber any
interest in this Agreement or any part thereof without the express written
consent of Employer, this Agreement being personal to Employee. This Agreement
shall, however, inure to the benefit of Employee's estate, dependents,
beneficiaries and legal representatives. This Agreement shall not be assignable
by Employer without the written consent of Employee.
6.08 Governing Law. THIS AGREEMENT HAS BEEN NEGOTIATED, EXECUTED AND
DELIVERED IN THE STATE OF TEXAS, AND SHALL IN ALL RESPECTS BE INTERPRETED,
CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE STATE OF TEXAS.
6.09 Severability. Each provision of this Agreement constitutes a
separate and distinct undertaking, covenant and/or provision hereof. In the
event that any provision of this Agreement shall finally be determined to be
unlawful, such provision shall be deemed severed from this Agreement, but every
other provision of this Agreement shall remain in full force and effect, and in
substitution for any such provision held unlawful, there shall be substituted a
provision of similar import reflecting the original intent of the parties
hereto to the maximum extent permissible under law.
-7-
<PAGE> 8
6.10 No Duress. Employee acknowledges that no force, fear or threats
or duress of any kind have been used to obtain the agreements and covenants
contained in this Agreement.
EXECUTED in Houston, Texas, on the day and year first above written.
"EMPLOYER"
First Sierra Financial, Inc.
By:
---------------------------------
Name: Thomas J. Depping
Title: Chief Executive Officer
"EMPLOYEE"
------------------------------------
Robert H. Quinn, Jr.
<PAGE> 1
EXHIBIT 11.1
Computation of Earnings Per Share
Earnings per share is calculated based on the weighted average number of common
and common equivalent shares during the period. Earnings per share for the
period from inception, June 3, 1994, through December 31, 1994 and for the
years ended December 31, 1995 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
Period from Inception December 31,
June 3, 1994, through ---------------
December 31, 1994 1995 1996
--------------------- ----- -----
<S> <C> <C> <C>
Weighted average number of shares
outstanding........................... 5,470 5,470 5,550
Stock options, treasury stock method(1).. 838 838 243
Warrants, treasury stock method.......... -- 128 198
----- ----- -----
6,308 6,436 5,991
===== ===== =====
</TABLE>
- ---------------
(1) Pursuant to Staff Accounting Bulletin Topic 4D, stock and warrants issued
within a one year period prior to the initial filing of the registration
statement have been treated as outstanding for all periods reported. The
treasury stock approach has been used whereby the proceeds which would have
been received upon such issuance have assumed to have been used to
repurchase shares at the estimated IPO price of $9.00 per share.
The Company's Series A and B Preferred Stock are common stock equivalents.
However, because the effect of their assumed conversion would be anti-dilutive
for each period shown, they have not been included in Primary Earnings Per
Share. The computation of the weighted average number of common and common
equivalent shares for fully diluted earnings per share has not been presented
for the above periods because fully diluted earnings per share is not more
than 3% different from Primary Earnings per share.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As Independent Public Accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
April 14, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form S-1 of our report dated November 27, 1996,
relating to the financial statements of Heritage Credit Services, Inc., which is
contained in the Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Seattle, Washington
April 14, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As Independent Public Accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ MACDADE ABBOT LLP
Paoli, Pennsylvania
April 14, 1997
