<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 28, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
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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<C> <C> <C>
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) 758-3622 (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. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
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==================================================================================================================
PROPOSED MAXIMUM PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SHARE(1) OFFERING PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------
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Common stock, par value $.01...... 2,300,000 shares $10.00 $23,000,000 $6,970
==================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Calculated pursuant to Rule 457(a) under the Securities Act of 1933.
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 FEBRUARY 28, 1997
PROSPECTUS
[LOGO]
2,000,000 SHARES
FIRST SIERRA FINANCIAL, INC.
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 Company intends
to apply for quotation of the Common Stock on the Nasdaq National Market under
the symbol "FSFH."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 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)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $ $ $
- -------------------------------------------------------------------------------------------------------------
Total (3)......................... $ $ $
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</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.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
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 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
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 $161.9
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 $64.6 million and $66.8 million, respectively, and the weighted
average yield on such leases (net of brokers' fees) would have been 15.29% and
17.41%, 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
<PAGE> 7
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)....................... $ (.09) $ .14 $ .20 $ .31
======= ======= ======= ========
Shares used in computing net income (loss) per common
share(3).................................................. 5,470 5,879 5,912 8,356
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 11,026 10,281(4)
Average Interest Rate................................... 9.92% 9.77% 9.48% 9.54%(4)
Principal Amount........................................ $ 4,492 $65,244 $161,946 $146,478(4)
Broker
Number(5)............................................... -- -- 371 2,555
Average Interest Rate................................... --% --% 14.29% 15.29%
Principal Amount........................................ $ -- $ -- $ 10,543 $ 64,619
Vendor
Number(5)............................................... -- -- 203 2,443
Average Interest Rate................................... --% --% 14.97% 17.41%
Principal Amount........................................ $ -- $ -- $ 7,526 $ 66,815
Total
Number.................................................. 123 2,733 11,600 15,279
Average Interest Rate................................... 9.92% 9.77% 9.99% 12.77%
Principal Amount........................................ $ 4,492 $65,244 $180,015 $277,911
Leases Portfolio Serviced(6):
Leases Serviced for Others
Number.................................................. 153 159 8,775
Principal Amount........................................ $10,687 $ 9,694 $157,003
Servicing Fee Income.................................... $ 6 $ 265 $ 1,050
Total Leases Serviced
Number.................................................. 1,428 3,026 14,266
Principal Amount........................................ $40,543 $76,706 $217,444
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.
(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 to generate cash proceeds for
repayment of 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 borrowings under 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 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 for borrowing under such facilities. Any failure by the Company to
renew its existing warehouse facilities or obtain additional warehouse
facilities or other borrowings 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 "Manage-
9
<PAGE> 11
ment's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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. 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."
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."
10
<PAGE> 12
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 9.9%, 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.
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 $180.0 million for the year ended December 31, 1996
($277.9 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
11
<PAGE> 13
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 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 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."
12
<PAGE> 14
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 the
Company's warehouse 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."
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 matures on May 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 the
Company's warehouse 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).................... $ (.09) $ .14 $ .20 $ .31
======= ======= ======= ========
Shares used in computing net income (loss) per common
share(3)............................................... 5,470 5,879 5,912 8,356
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 11,026 10,281(4)
Average Interest Rate................................... 9.92% 9.77% 9.48% 9.54%(4)
Principal Amount........................................ $ 4,492 $ 65,244 $161,946 $146,478(4)
Broker(5)
Number.................................................. -- -- 371 2,555
Average Interest Rate................................... --% --% 14.29% 15.29%
Principal Amount........................................ $ -- $ -- $ 10,543 $ 64,619
Vendor(5)
Number.................................................. -- -- 203 2,443
Average Interest Rate................................... --% --% 14.97% 17.41%
Principal Amount........................................ $ -- $ -- $ 7,526 $ 66,815
Total
Number.................................................. 123 2,733 11,600 15,279
Average Interest Rate................................... 9.92% 9.77% 9.99% 12.77%
Principal Amount........................................ $ 4,492 $ 65,244 $180,015 $277,911
Leases Portfolio Serviced(6):
Leases Serviced for Others
Number.................................................. 153 159 8,775
Principal Amount........................................ $ 10,687 $ 9,694 $157,003
Servicing Fee Income.................................... $ 6 $ 265 $ 1,050
Total Leases Serviced
Number.................................................. 1,428 3,026 14,266
Principal Amount........................................ $ 40,543 $ 76,706 $217,444
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.
(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.
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<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 9.57%. 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 $161.9
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 14.29% and
14.97%, 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 $64.6 million and $66.8 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 B1 Certificates" and
"Class B2 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.
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 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
20
<PAGE> 22
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 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
21
<PAGE> 23
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 73% increase in average lease
receivable volume, and also to interest income 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 8,775 leases with an
aggregate principal amount of $157.0 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 $180.0 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.
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
intangible assets resulting from the acquisitions of GIC and CCL.
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.
22
<PAGE> 24
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 borrows amounts under its warehouse facilities 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 recently entered into a term sheet with two lending
institutions that provides for an additional $50.0 million of warehouse
financing. The Company's warehouse facilities have advance rates that generally
do not require the Company to utilize its capital during the period that funds
are borrowed under such facilities. The financing provided under each warehouse
facility is interim in nature and generally must be repaid within six to nine
months of the date of the advance. The leases acquired or originated with
borrowings under the warehouse facilities and any interest of the Company in the
equipment are pledged to secure the repayment of the amounts borrowed. Each
warehouse facility contemplates that repayment of advances will be made from
funds received by the Company through its securitization program.
To date, proceeds received by the Company in its securitization
transactions have generally been sufficient to repay amounts borrowed under the
warehouse 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 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.
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<PAGE> 25
Warehouse Facilities
In May 1995, the Company's wholly owned subsidiary, First Sierra
Receivables, Inc., 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 were pledged as
security. 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 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.
In September 1996, the Company entered into a warehouse facility with
Prudential Securities Credit Corporation (the "Prudential Facility"). The
Prudential Facility provides the Company with $75.0 million of warehouse
financing, of which $40.1 million was outstanding at December 31, 1996. The
Prudential Facility provides 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 bear
interest at a floating rate equal to the 30-day LIBOR plus 0.95%. The Prudential
Facility matures on March 31, 1997. 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. In
connection with the Prudential Facility, the Company received an engagement
letter from Prudential Securities Incorporated under which Prudential Securities
Incorporated agreed to guarantee the purchase of the BB rated subordinated
securities issued in connection with securitizations of leases acquired or
originated by the Company using funds advanced under the Prudential Facility.
The purchase price is based on a spread over the rate on comparable U.S.
Treasury securities as of the date of the securitization.
The Company is currently negotiating the renewal and/or restructuring of
its existing warehouse facilities and believes that such renewals or
restructurings will be completed prior to maturity of the existing facilities on
terms at least as favorable as those contained in the existing facilities.
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.
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. Management believes that other small
ticket lease finance companies which have securitized their lease portfolios
typically retain a
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12.0% to 18.0% Trust Certificate in a securitization, and thus generate cash
proceeds before issuance costs from the securitization in the range of 82.0% to
88.0% of the present value of the remaining scheduled payments of the equipment
leases which, in most cases, is not sufficient to cover the issuer's investment
in the equipment leases. 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 142 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 B1 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).................. 142 125
Class B2 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............................................ $4,501 $4,804
% of Total........................................ 6.0% 6.5%
</TABLE>
- ---------------
(1) In May 1996, Duff & Phelps assigned a "B" rating to the Class B2
Certificates which were retained by the Company. In November 1996, such
Class B2 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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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
$161.9 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 $64.6 million and
$66.8 million, respectively, and the weighted average yield on such leases (net
of brokers' fees) would have been 15.29% and 17.41%, 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
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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.
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
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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.
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
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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%.
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 9.9%, 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 $49.0 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.
33
<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 $217.4 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 53% 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 $597,000 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
35
<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
36
<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 4, 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.
39
<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.
40
<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
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<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
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> 46
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of February 27, 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%
Roy H. Trice, Jr............................................ 283,423 5.0% 3.5%
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(3)......................................... -- -- --
Norman J. Metcalfe(3)....................................... -- -- --
All directors and executive officers as a group (8
persons).................................................. 5,149,748 90.4% 63.3%
</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) To be elected following completion of the Offering.
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<PAGE> 47
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 February 27, 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 February 27, 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 February 27, 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> 48
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.
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<PAGE> 49
SERIES B PREFERRED STOCK
As of February 27, 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 February 27, 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 February 27, 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 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 February
27, 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.
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<PAGE> 50
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 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) upon the occurrence of certain events,
including an event of default under the First Union Credit Facility or May 8,
2001.
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
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<PAGE> 51
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 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.
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TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is .
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 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. On February 18, 1996, the Commission approved amendments to Rule
144 that shorten the holding periods for restricted securities. The amendments
permit limited resales of restricted securities 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.
The amendments will be effective 60 days after publication in the Federal
Register.
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.
Certain holders of the Company's securities have been granted certain
demand and "piggy-back" registration rights if the Company proposes to undertake
a public offering. Such holders 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.
51
<PAGE> 53
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
52
<PAGE> 54
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 .
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 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.
53
<PAGE> 55
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> 56
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> 57
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> 58
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...................... $ (0.09) $ 0.14 $ 0.20
======= ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 59
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> 60
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> 61
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> 62
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> 63
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> 64
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> 65
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> 66
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 5,470,000 for the period from June 3, 1994 (inception)
through December 31, 1994, and 5,879,250 and 5,911,879 for the years ended
December 31, 1995 and 1996, respectively,.
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,
F-12
<PAGE> 67
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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> 68
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> 69
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> 70
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> 71
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> 72
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> 73
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> 74
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> 75
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> 76
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> 77
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> 78
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> 79
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.................... .31
=======
Weighted average number of
common and common
equivalent shares........ 8,356(HH)
=======
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Consolidated Financial Statements.
F-25
<PAGE> 80
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> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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. The range of potential loss as a
result of this action cannot be presently determined. Management, with the
advice of counsel, believes the Company has meritorious defenses and the
likelihood of unfavorable outcome is remote.
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> 92
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> 93
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> 94
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> 95
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> 96
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> 97
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> 98
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> 99
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> 100
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> 101
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> 102
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> 103
======================================================
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
Data................................ 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 28
Management............................ 40
Certain Transactions.................. 44
Principal Stockholders................ 45
Description of Capital Stock.......... 47
Shares Eligible for Future Sale....... 51
Underwriting.......................... 52
Legal Matters......................... 53
Experts............................... 53
Index to Consolidated 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.
======================================================
======================================================
[LOGO]
2,000,000 SHARES
FIRST SIERRA
FINANCIAL, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
, 1997
======================================================
<PAGE> 104
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.......................................... *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue Sky fees and expenses (including legal fees)........... *
Printing expenses........................................... *
Transfer Agent fees......................................... *
Miscellaneous............................................... *
------
TOTAL............................................. $ *
======
</TABLE>
- ---------------
* To be provided by amendment.
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> 105
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 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> <C>
*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 -- 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> 106
<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>
- ---------------
* To be filed by amendment.
(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> 107
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston,
State of Texas, on the 28th day of February, 1997.
FIRST SIERRA FINANCIAL, INC.
By /s/ THOMAS J. DEPPING
-----------------------------------
Thomas J. Depping
President and Chief Executive
Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas J. Depping and Sandy B. Ho, or either of
them, his true and lawful attorney-in-fact and agent, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement and any additional registration statement
pursuant to Rule 462(b), and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and ratifying
and confirming all that said attorney-in-fact and agent or his substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this 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 February 28, 1997
- ----------------------------------------------------- Officer and Chairman of
(Thomas J. Depping) the Board of Directors
(principal executive
officer)
/s/ SANDY B. HO Executive Vice President and February 28, 1997
- ----------------------------------------------------- Chief Financial Officer
(Sandy B. Ho) (principal financial
officer)
/s/ CRAIG M. SPENCER Senior Vice President and February 28, 1997
- ----------------------------------------------------- Chief Accounting Officer
(Craig M. Spencer) (principal accounting
officer)
/s/ DAVID C. SHINDELDECKER Director February 28, 1997
- -----------------------------------------------------
(David C. Shindeldecker)
/s/ DAVID L. SOLOMON Director February 28, 1997
- -----------------------------------------------------
(David L. Solomon)
</TABLE>
II-4
<PAGE> 108
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 -- 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>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
FIRST SIERRA FINANCIAL, INC.
First Sierra Financial, Inc., a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:
A. The name of the Corporation is First Sierra Financial, Inc. The
Certificate of Incorporation of the Corporation was originally filed with the
Secretary of State of the State of Delaware on June 3, 1994, and amended on May
8, 1995, May 21, 1996 and July 9, 1996.
B. This Restated Certificate of Incorporation has been duly adopted
in accordance with Sections 242 and 245 of the General Corporation Law of the
State of Delaware (the "DGCL") and, pursuant to such provisions, this Restated
Certificate of Incorporation restates and integrates and further amends the
provisions of the Certificate of Incorporation of the Corporation.
C. The text of the Certificate of Incorporation of the Corporation
is hereby restated and further amended to read in its entirety as set forth on
Exhibit A hereto and in Exhibits B and C hereto containing the Certificates of
Designation, Preferences, Rights and Limitations of the Corporation's Series A
Preferred Stock and Series B Convertible Preferred Stock, respectively.
<PAGE> 2
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
signed by the undersigned authorized officers of the Corporation this 27th day
of February, 1997.
FIRST SIERRA FINANCIAL, INC.
By: /s/ THOMAS J. DEPPING
--------------------------------
Name: Thomas J. Depping
--------------------------------
Title: President
--------------------------------
ATTEST:
/s/ SANDY B. HO
- ---------------------------
<PAGE> 3
EXHIBIT A
RESTATED CERTIFICATE OF INCORPORATION
OF
FIRST SIERRA FINANCIAL, INC.
ARTICLE I.
The name of the Corporation is First Sierra Financial, Inc.
ARTICLE II.
The registered office of the Corporation in the State of Delaware is
located at Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of the registered agent of the
Corporation at such address is The Corporation Trust Company.
ARTICLE III.
The purpose for which the Corporation is organized is to engage in any
and all lawful acts and activity for which corporations may be organized under
the General Corporation Law of Delaware. The Corporation will have perpetual
existence.
ARTICLE IV.
The total number of shares of stock that the Corporation shall have
authority to issue is, 26,000,000 shares of capital stock, consisting of (i)
25,000,000 shares of common stock, par value $.01 per share ("Common Stock")
and (ii) 1,000,000 shares of preferred stock, par value $.01 per share
("Preferred Stock").
The designations and the powers, preferences, rights, qualifications,
limitations, and restrictions of the Common Stock and the Preferred Stock are
as follows:
1. Provisions Relating to the Common Stock.
(a) Dividends. Subject to the prior rights and preferences, if any,
applicable to shares of the Preferred Stock or any class or series thereof,
each share of Common Stock shall entitle the holder of record thereof to
receive dividends (payable in cash, stock, or otherwise) out of funds legally
available therefor, when, as and if declared by the board of directors of the
Corporation with respect to any of such class of stock.
<PAGE> 4
(b) Liquidation Rights. The holders of Common Stock shall be
entitled to participate in the net assets of the Corporation remaining after
any dissolution, liquidation or winding up of the affairs of the Corporation,
whether voluntary or involuntary, and after payment or provision for the
payment of the debts and liabilities of the Corporation and payment of the
liquidation preference of any shares of capital stock of the Corporation having
such a preference, ratably in proportion to the number of shares of Common
Stock held by them. A dissolution, liquidation or winding-up of the
Corporation, as such terms are used in this paragraph (b), shall not be deemed
to be occasioned by or to include any consolidation or merger of the
Corporation with or into any other corporation or corporations or other entity
or a sale, lease, exchange, or conveyance of all or a part of the assets of the
Corporation.
2. Provisions Relating to the Preferred Stock.
(a) The Preferred Stock may be issued from time to time in one or
more classes or series, the shares of each class or series to have any
designations and powers, preferences, and rights, and qualifications,
limitations, and restrictions thereof as are stated and expressed in this
Article IV and in the resolution or resolutions providing for the issue of such
class or series adopted by the board of directors of the Corporation as
hereafter prescribed.
(b) Authority is hereby expressly granted to and vested in the board
of directors of the Corporation to authorize the issuance of the Preferred
Stock from time to time in one or more classes or series, and with respect to
each class or series of the Preferred Stock, to state by the resolution or
resolutions from time to time adopted providing for the issuance thereof the
following:
(i) whether or not the class or series is to have voting
rights, special, or limited, or is to be without voting rights, and whether or
not such class or series is to be entitled to vote as a separate class either
alone or together with the holders of one or more other classes or series of
stock;
(ii) the number of shares to constitute the class or series and
the designations thereof;
(iii) the preferences and relative, participating, optional, or
other special rights, if any, and the qualifications, limitations, or
restrictions thereof, if any, with respect to any class or series;
(iv) whether or not the shares of any class or series shall be
redeemable at the option of the Corporation or the holders thereof or upon the
happening of any specified event, and, if redeemable, the redemption price or
prices (which may be payable in the form of cash, notes, securities, or other
property), and the time or times at which, and the terms and conditions upon
which, such shares shall be redeemable and the manner of redemption;
<PAGE> 5
(v) whether or not the shares of a class or series shall be
subject to the operation of retirement or sinking funds to be applied to the
purchase or redemption of such shares for retirement, and, if such retirement
or sinking fund or funds are to be established, the periodic amount thereof,
and the terms and provisions relative to the operation thereof;
(vi) the dividend rate, whether dividends are payable in cash,
stock of the Corporation, or other property, the conditions upon which and the
times when such dividends are payable, the preference to or the relation to the
payment of dividends payable on any other class or classes or series of stock,
whether or not such dividends shall be cumulative or noncumulative, and if
cumulative, the date or dates from which such dividends shall accumulate;
(vii) the preferences, if any, and the amounts thereof which the
holders of any class or series thereof shall be entitled to receive upon the
voluntary or involuntary dissolution of, or upon any distribution of the assets
of, the Corporation;
(viii) whether or not the shares of any class or series, at the
option of the Corporation or the holder thereof or upon the happening of any
specified event, shall be convertible into or exchangeable for the shares of
any other class or classes or of any other series of the same or any other
class or classes of stock, securities, or other property of the Corporation and
the conversion price or prices or ratio or ratios or the rate or rates at which
such conversion or exchange may be made, with such adjustments, if any, as
shall be stated and expressed or provided for in such resolution or
resolutions; and
(ix) any other special rights and protective provisions with
respect to any class or series as may be deemed advisable by the board of
directors of the Corporation.
(c) The shares of each class or series of the Preferred Stock may
vary from the shares of any other class or series thereof in any or all of the
foregoing respects and in any other manner. The board of directors of the
Corporation may increase the number of shares of the Preferred Stock designated
for any existing class or series by a resolution adding to such class or series
authorized and unissued shares of the Preferred Stock not designated for any
other class or series. The board of directors of the Corporation may decrease
the number of shares of the Preferred Stock designated for any existing class
or series by a resolution subtracting from such class or series authorized and
unissued shares of the Preferred Stock designated for such existing class or
series, and the shares so subtracted shall become authorized, unissued, and
undesignated shares of the Preferred Stock.
3. General.
(a) Subject to the foregoing provisions of this Restated Certificate
of Incorporation, the Corporation may issue shares of its Preferred Stock and
Common Stock from time to time for such consideration (not less than the par
value thereof) as may be fixed by the board of directors of the Corporation,
which is expressly authorized to fix the same in its absolute discretion
subject to the foregoing conditions. Shares so issued for which the
consideration shall have been paid or delivered to the Corporation shall be
deemed fully paid stock and shall not be liable to any further
<PAGE> 6
call or assessment thereon, and the holders of such shares shall not be liable
for any further payments in respect of such shares.
(b) The Corporation shall have authority to create and issue rights
and options entitling their holders to purchase shares of the Corporation's
capital stock of any class or series or other securities of the Corporation,
and such rights and options shall be evidenced by instrument(s) approved by the
board of directors of the Corporation. The board of directors of the
Corporation shall be empowered to set the exercise price, duration, times for
exercise, and other terms of such rights or options; provided, however, that
the consideration to be received for any shares of capital stock subject
thereto shall not be less than the par value thereof.
ARTICLE V.
The number, classification, and terms of the board of directors of the
Corporation and the procedures to elect directors, to remove directors, and to
fill vacancies in the board of directors shall be as follows:
(a) The number of directors that shall constitute the whole board of
directors shall from time to time be fixed exclusively by the board of
directors by a resolution adopted by a majority of the whole board of directors
serving at the time of that vote. In no event shall the number of directors
that constitute the whole board of directors be fewer than three. No decrease
in the number of directors shall have the effect of shortening the term of any
incumbent director. Directors of the Corporation need not be elected by
written ballot unless the bylaws of the Corporation otherwise provide.
(b) The board of directors of the Corporation shall be divided into
three classes designated Class I, Class II, and Class III, respectively, all as
nearly equal in number as possible, with each director then in office receiving
the classification that at least a majority of the board of directors
designates. The initial term of office of directors of Class I shall expire at
the annual meeting of stockholders of the Corporation in 1998, of Class II
shall expire at the annual meeting of stockholders of the Corporation in 1999,
and of Class III shall expire at the annual meeting of stockholders of the
Corporation in 2000, and in all cases as to each director until his successor
is elected and qualified or until his earlier death, resignation or removal.
At each annual meeting of stockholders beginning with the annual meeting of
stockholders in 1998, each director elected to succeed a director whose term is
then expiring shall hold his office until the third annual meeting of
stockholders after his election and until his successor is elected and
qualified or until his earlier death, resignation or removal. If the number of
directors that constitutes the whole board of directors is changed as permitted
by this Article V, the majority of the whole board of directors that adopts the
change shall also fix and determine the number of directors comprising each
class; provided, however, that any increase or decrease in the number of
directors shall be apportioned among the classes as equally as possible.
(c) Vacancies in the board of directors resulting from death,
resignation, retirement, disqualification, removal from office, or other cause
and newly-created directorships resulting from any increase in the authorized
number of directors may be filled by no less than a majority vote of the
remaining directors then in office, though less than a quorum, who are
designated to
<PAGE> 7
represent the same class or classes of stockholders that the vacant position,
when filled, is to represent or by the sole remaining director (but not by the
stockholders except as required by law), and each director so chosen shall
receive the classification of the vacant directorship to which he has been
appointed or, if it is a newly-created directorship, shall receive the
classification that at least a majority of the board of directors designates
and shall hold office until the first meeting of stockholders held after his
election for the purpose of electing directors of that classification and until
his successor is elected and qualified or until his earlier death, resignation,
or removal from office.
(d) A director of any class of directors of the Corporation may be
removed before the expiration date of that director's term of office, only for
cause, by an affirmative vote of the holders of not less than eighty percent
(80%) of the votes of the outstanding shares of the class or classes or series
of stock then entitled to be voted at an election of directors of that class or
series, voting together as a single class, cast at the annual meeting of
stockholders or at any special meeting of stockholders called by a majority of
the whole board of directors for this purpose.
(e) Notwithstanding any other provisions of this Restated Certificate
of Incorporation or any provision of law that might otherwise permit a lesser
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the capital stock of the Corporation required by
law or by this Restated Certificate of Incorporation, the affirmative vote of
the holders of not less than eighty percent (80%) of the votes of the
outstanding shares of the Corporation then entitled to be voted in an election
of directors, voting together as a single class, shall be required to amend or
repeal, or to adopt any provision inconsistent with, this Article V.
ARTICLE VI.
All of the power of the Corporation, insofar as it may be lawfully
vested by this Restated Certificate of Incorporation in the board of directors,
is hereby conferred upon the board of directors of the Corporation. In
furtherance of and not in limitation of that power or the powers conferred by
law, (1) a majority of directors then in office (or such higher percentage as
may be specified in the bylaws with respect to any provision thereof) shall
have the power to adopt, amend, and repeal the bylaws of the Corporation; (2)
the stockholders of the Corporation shall have no power to appoint or remove
directors as members of committees of the board of directors, nor to abrogate
the power of the board of directors to establish any such committees or the
power of any such committee to exercise the powers and authority of the board
of directors; (3) the stockholders of the Corporation shall have no power to
elect or remove officers of the Corporation nor to abrogate the power of the
board of directors to elect and remove officers of the Corporation; and (4)
notwithstanding any other provision of this Restated Certificate of
Incorporation or any provision of law that might otherwise permit a lesser or
no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the capital stock of the Corporation required by
law or by this Restated Certificate of Incorporation, the bylaws of the
Corporation shall not be adopted, altered, amended or repealed by the
stockholders of the Corporation except in accordance with the provisions of the
bylaws and by the vote of the holders of not less than two-thirds of the
outstanding shares of stock then entitled to vote upon the election of
directors, voting together as a single class, or such higher vote as is set
forth in the bylaws. In the event of a direct conflict between the bylaws of
the Corporation and this Restated Certificate
<PAGE> 8
of Incorporation, the provisions of this Restated Certificate of Incorporation
shall be controlling. Notwithstanding any other provisions of this Restated
Certificate of Incorporation or any provision of law that might otherwise
permit a lesser or no vote, but in addition to any affirmative vote of the
holders of any particular class or series of the capital stock of the
Corporation required by law or by this Restated Certificate of Incorporation,
the affirmative vote of the holders of not less than eighty percent (80%) of
the votes of the shares of the Corporation then entitled to be voted in an
election of directors, voting together as a single class, shall be required to
amend or repeal, or to adopt any provision inconsistent with, this Article VI.
ARTICLE VII.
Any action required or permitted to be taken by the stockholders of the
Corporation may be taken without a meeting if a consent in writing, setting
forth the action so taken, is signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted.
ARTICLE VIII.
Special meetings of the stockholders of the Corporation, and any
proposals to be considered at such meetings, may be called and proposed
exclusively by the board of directors, pursuant to a resolution approved by a
majority of the members of the board of directors at the time in office, and no
stockholder of the Corporation shall require the board of directors to call a
special meeting of common stockholders or to propose business at a special
meeting of stockholders. Except as otherwise required by law or regulation, no
business proposed by a stockholder to be considered at an annual meeting of the
stockholders (including the nomination of any person to be elected as a
director of the Corporation) shall be considered by the stockholders at that
meeting unless, no later than sixty (60) days before the annual meeting of
stockholders or (if later) ten days after the first public notice of that
meeting is sent to stockholders, the Corporation receives from the stockholder
proposing that business a written notice that sets forth (1) the nature of the
proposed business with reasonable particularity, including the exact text of
any proposal to be presented for adoption, and the reasons for conducting that
business at the annual meeting; (2) with respect to each such stockholder, that
stockholder's name and address (as they appear on the records of the
Corporation), business address and telephone number, residence address and
telephone number, and the number of shares of each class of stock of the
Corporation beneficially owned by that stockholder; (3) any interest of the
stockholder in the proposed business; (4) the name or names of each person
nominated by the stockholder to be elected or re-elected as a director, if any;
and (5) with respect to each nominee, that nominee's name, business address and
telephone number, and residence address and telephone number, the number of
shares, if any, of each class of stock of the Corporation owned directly and
beneficially by that nominee, and all information relating to that nominee that
is required to be disclosed in solicitations of proxies for elections of
directors, or is otherwise required, pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (or any
provision of law subsequently replacing Regulation 14A), together with a duly
acknowledged letter signed by the nominee stating his or her acceptance of the
nomination by that stockholder, stating his or her intention to serve as a
director if elected, and consenting to
<PAGE> 9
being named as a nominee for director in any proxy statement relating to such
election. The person presiding at the annual meeting shall determine whether
business (including the nomination of any person as a director) has been
properly brought before the meeting and, if the facts so warrant, shall not
permit any business (or voting with respect to any particular nominee) to be
transacted that has not been properly brought before the meeting.
Notwithstanding any other provisions of this Restated Certificate of
Incorporation or any provision of law that might otherwise permit a lesser or
no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the capital stock of the Corporation required by
law or by this Restated Certificate of Incorporation, the affirmative vote of
the holders of not less than eighty percent (80%) of the shares of the
Corporation then entitled to be voted in an election of directors, voting
together as a single class, shall be required to amend or repeal, or to adopt
any provision inconsistent with, this Article VIII.
ARTICLE IX.
Notwithstanding any other provisions of this Restated Certificate of
Incorporation or any provision of law that might otherwise permit a lesser or
no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the capital stock of the Corporation required by
law or by this Restated Certificate of Incorporation, the affirmative vote of
the holders of not less than two-thirds (66 2/3%) of the shares of the
Corporation then entitled to be voted in an election of directors, voting
together as a single class, shall be required to approve any of the following
proposed transactions:
(a) a merger or consolidation in which the Corporation shall not be
the surviving entity or shall survive only as a subsidiary of an entity;
(b) a sale, lease or exchange or an agreement to sell, lease or
exchange all or substantially all of the assets of the Corporation to any other
person or entity; or
(c) the dissolution or liquidation of the Corporation.
Notwithstanding any other provisions of this Restated Certificate of
Incorporation or any provision of law that might otherwise permit a lesser or
no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the capital stock of the Corporation required by
law or by this Restated Certificate of Incorporation, the affirmative vote of
the holders of not less than eighty percent (80%) of the shares of the
Corporation then entitled to be voted in an election of directors, voting
together as a single class, shall be required to amend or repeal, or to adopt
any provision inconsistent with, this Article IX.
ARTICLE X.
No contract or transaction between the Corporation and one or more of
its directors, officers, or stockholders or between the Corporation and any
person (as used herein "person" means any corporation, partnership,
association, firm, trust, joint venture, political subdivision, or
instrumentality) or other organization in which one or more of its directors,
officers, or stockholders are directors, officers, or stockholders, or have a
financial interest, shall be void or
<PAGE> 10
voidable solely for this reason, or solely because the director or officer is
present at or participates in the meeting of the board or any committee thereof
which authorizes the contract or transaction, or solely because his, her, or
their votes are counted for such purpose, if: (i) the material facts as to his
or her relationship or interest and as to the contract or transaction are
disclosed or are known to the board of directors or the committee, and the
board of directors or the committee in good faith authorizes the contract or
transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or
(ii) the material facts as to his or her relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders entitled
to vote thereon, and the contract or transaction is specifically approved in
good faith by majority vote of the stockholders; or (iii) the contract or
transaction is fair as to the Corporation as of the time it is authorized,
approved, or ratified by the board of directors, a committee thereof, or the
stockholders. Interested directors may be counted in determining the presence
of a quorum at a meeting of the board of directors or of a committee which
authorizes the contract or transaction.
ARTICLE XI.
The Corporation shall indemnify and hold harmless any person who was,
is, or is threatened to be made a party to a proceeding (as hereinafter
defined) by reason of the fact that he or she (i) is or was a director or
officer of the Corporation or (ii) while a director or officer of the
Corporation, is or was serving at the request of the Corporation 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 Delaware General
Corporation Law, as the same exists or may hereafter be amended. Such right
shall be a contract right and as such shall run to the benefit of any director
or officer who is elected and accepts the position of director or officer of
the Corporation or elects to continue to serve as a director or officer of the
Corporation while this Article XI is in effect. Any repeal or amendment of
this Article XI shall be prospective only and shall not limit the rights of any
such director or officer or the obligations of the Corporation with respect to
any claim arising from or related to the services of such director or officer
in any of the foregoing capacities prior to any such repeal or amendment to
this Article XI. Such right shall include the right to be paid by the
Corporation expenses incurred in defending any such proceeding in advance of
its final disposition to the maximum extent permitted under the Delaware
General Corporation Law, as the same exists or may hereafter be amended. If a
claim for indemnification or advancement of expenses hereunder is not paid in
full by the Corporation within sixty (60) days after a written claim has been
received by the Corporation, the claimant may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim, and if
successful in whole or in part, the claimant shall also be entitled to be paid
the expenses of prosecuting such claim. It shall be a defense to any such
action that such indemnification or advancement of costs of defense are not
permitted under the Delaware General Corporation Law, but the burden of proving
such defense shall be on the Corporation. Neither the failure of the
Corporation (including its board of directors, independent legal counsel, or
stockholders) to have made its determination prior to the commencement of such
action that indemnification of, or advancement of costs of defense to, the
claimant is permissible in the circumstances nor an actual determination by the
Corporation (including its board of directors, independent legal counsel, or
stockholders) that such indemnification or advancement is not
<PAGE> 11
permissible shall be a defense to the action or create a presumption that such
indemnification or advancement is not permissible. In the event of the death
of any person having a right of indemnification under the foregoing provisions,
such right shall inure to the benefit of his or her heirs, executors,
administrators, and personal representatives. The rights conferred above shall
not be exclusive of any other right which any person may have or hereafter
acquire under any statute, bylaw, resolution of stockholders or directors,
agreement, or otherwise.
The Corporation may additionally indemnify any employee or agent of the
Corporation to the fullest extent permitted by law.
As used herein, the term "proceeding" means any threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal, administrative,
arbitrative, or investigative, any appeal in such an action, suit, or
proceeding, and any inquiry or investigation that could lead to such an action,
suit, or proceeding.
ARTICLE XII.
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. Any repeal or amendment of this Article XII by the
stockholders of the Corporation shall be prospective only, and shall not
adversely affect any limitation on the personal liability of a director of the
Corporation arising from an act or omission occurring prior to the time of such
repeal or amendment. In addition to the circumstances in which a director of
the Corporation is not personally liable as set forth in the foregoing
provisions of this Article XII, a director shall not be liable to the
Corporation or its stockholders to such further extent as permitted by any law
hereafter enacted, including, without limitation, any subsequent amendment to
the Delaware General Corporation Law.
<PAGE> 12
EXHIBIT B
CERTIFICATE OF DESIGNATION, PREFERENCES,
RIGHTS AND LIMITATIONS
OF
SERIES A PREFERRED STOCK
OF
FIRST SIERRA FINANCIAL, INC.
PURSUANT to Section 151(g) of the General Corporation Law of Delaware,
FIRST SIERRA FINANCIAL, INC., a corporation organized and existing under the
General Corporation Law of Delaware (herein referred to as the "Corporation"),
DOES HEREBY CERTIFY:
That, pursuant to authority conferred upon the Board of Directors of
the Corporation by its Certificate of Incorporation, and pursuant to the
provisions of Section 151(g) of the General Corporation Law of Delaware, such
Board of Directors by written unanimous consent dated June 27, 1996, duly
adopted a resolution providing for the issuance of a series of Five Hundred
Thousand (500,000) shares of the Corporation's Preferred Stock, $.01 par value
per share, to be designated "Series A Preferred Stock", and fixing the voting
powers, preferences and relative, participating, optional or other rights, and
the qualifications, limitations or restrictions thereof, which resolution is as
follows:
RESOLVED, that pursuant to the authority expressly granted
and vested in the Board of Directors of the Corporation in accordance
with the provisions of its Certificate of Incorporation, there shall be
established and authorized for issuance a series of the
Corporation's Preferred Stock, $.01 par value per share, designated
"Series A Preferred Stock" (herein referred to as "Series A Preferred
Stock"), consisting of Five Hundred Thousand (500,000) shares, each of
the par value of $.01 per share, and having the voting powers,
preferences and relative, participating, optional and other rights, and
the qualifications, limitations or restrictions set forth below:
1. Definitions. For purposes hereof, the following terms shall have the
following definitions or shall be subject to the following rules of
construction:
<PAGE> 13
(a) "Affiliate" of any person shall mean (a) any member of
the immediate family of such person, including parents, siblings,
spouse and lineal descendants (including those by adoption); the
parents, siblings, spouse, or lineal descendants (including those by
adoption) of such immediate family member; and in any such case any
trust whose primary beneficiary is such person or one or more members
of such immediate family and/or such person's lineal descendants; (b)
the legal representative or guardian of such person or of any such
immediate family members in the event such person or any such immediate
family members becomes mentally incompetent; and (c) any person,
corporation or other entity controlling, controlled by or under common
control with such person. As used in this definition, the term
"control", including the correlative terms "controlling", "controlled
by" and "under common control with" shall mean possession, directly or
indirectly, of the power to direct or cause the direction of management
or policies (whether through ownership of securities or any partnership
or other ownership interest, by contract or otherwise) of a person,
corporation or other entity.
(b) "Board of Directors" means the Board of Directors of
the Corporation.
(c) "Common Stock" means shares of the Corporation's
Common Stock, $.01 par value per share.
(d) "Conversion Rate" means the rate at which the Series A
Preferred Stock is convertible on a per share basis into Common Stock,
as shall be determined from time to time by the Board of Directors at
the time of issuance of any shares of Series A Preferred Stock. The
Conversion Rate applicable to any shares of Series A Preferred Stock
shall be recorded in the minutes of the Board of Directors at which
such shares are authorized to be issued, and shall be conclusively
evidenced (absent manifest error) by a notation to such effect on the
face of each certificate representing such shares.
(e) "Dividend Rate" shall mean an annual rate (expressed
in dollars or portions thereof) as shall be determined from time to
time by the Board of Directors at the time of issuance of any shares of
Series A Preferred Stock. The Dividend Rate applicable to any shares
of Series A Preferred Stock shall be recorded in the minutes of the
Board of Directors at which such shares are authorized to be issued,
and shall be conclusively evidenced (absent manifest error) by a
notation to such effect on the face of each certificate representing
such shares.
(f) "Preferred Stock" means shares of any series of the
Corporation's Preferred Stock, $.01 par value per share.
2
<PAGE> 14
(g) "Securities Act" means the Securities Act of 1933, as
amended.
(h) "Redemption Price" means the rate at which the Series
A Preferred Stock shall be redeemed as shall be determined from time to
time by the Board of Directors at the time of issuance of any shares of
Series A Preferred Stock. The Redemption Price applicable to any
series of Series A Preferred Stock shall be recorded in the minutes of
the Board of Directors at which such shares are authorized to be
issued, and shall be conclusively evidenced (absent manifest error) by
a notation to such effect on the face of each certificate representing
such shares.
(i) "Underlying Stock" means all shares of Common Stock
into which the Series A Preferred Stock is convertible, and all other
shares of capital stock received on account of such shares of Series A
Preferred Stock or Common Stock in respect of any stock split, stock
dividend, recapitalization, reorganization or other similar corporate
events.
(j) All accounting terms used herein and not expressly
defined herein shall have the meanings given to them in accordance with
generally accepted accounting principles consistently applied and in
effect as of the date of the relevant calculation.
2. Dividends.
(a) Series A Preferred Stock. The holders of Series A
Preferred Stock, in preference to the holders of Common Stock, shall be
entitled to receive, but only out of any funds legally available for
the declaration of dividends, non-cumulative, preferential dividends in
cash at an annual rate equal to the Dividend Rate, payable at such
times as shall be determined by the Board of Directors at the time of
issuance of the Series A Preferred Stock. So long as any shares of
Series A Preferred Stock remain outstanding, no dividends or
distributions (other than dividends or distributions on Common Stock
payable in Common Stock) shall be paid upon, or declared or set apart
for, the Common Stock.
(b) Other Stock. Subject to paragraph (a) above, (i)
dividends may be declared and paid on the Common Stock and any other
class or series of the Corporation's capital stock, and (ii) Common
Stock or such other capital stock may be purchased, retired or
otherwise acquired, when and as determined by the Board of Directors,
out of any funds legally available for such purposes.
3. Redemption.
3
<PAGE> 15
(a) Mandatory Redemption. On December 31, 2001, the
Corporation shall redeem all of the shares of Series A Preferred Stock
then outstanding (subject, however, to the right of the holders of the
Series A Preferred Stock to convert their shares pursuant to Section 5
by providing the written conversion notice referred to in Section 5(c)
below on or before November 30, 2001), at the Redemption Price.
(b) General. From and after the effective date of
redemption and the setting aside of the funds necessary for redemption,
notwithstanding that any certificate for shares of Series A Preferred
Stock so called for redemption shall not have been surrendered for
cancellation, the shares to be redeemed shall no longer be deemed
outstanding, and the holders of certificates representing such shares
shall have with respect to such shares no rights in or with respect to
the Corporation except the right to receive, upon the surrender of such
certificates, the Redemption Price therefor. Shares of Series A
Preferred Stock redeemed by the Corporation pursuant to this Section 3,
or shares of Series A Preferred Stock otherwise purchased by the
Corporation, shall not be reissued and shall be cancelled and retired
in the manner provided by the laws of the State of Delaware, and no
other shares of Series A Preferred Stock shall be issued in lieu
thereof.
4. Preference on Liquidation, Dissolution or Winding Up.
(a) Definition. A consolidation or merger of the
Corporation, a sale or transfer of substantially all of its assets as
an entirety, or any purchase or redemption of capital stock of the
Corporation of any class, shall not be regarded as "liquidation,
dissolution or winding up of the affairs of the Corporation" within the
meaning of this Section 4.
(b) Series A Preferred Stock. During any proceedings for
the voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Corporation, the holders of the Series A Preferred
Stock shall be entitled to receive, before any distribution of the
assets of the Corporation shall be made in respect of the outstanding
Common Stock, an amount in cash for each share of Series A Preferred
Stock equal to the Redemption Price or funds necessary for such payment
shall have been set aside in trust for the account of the holders of
the outstanding Series A Preferred Stock so as to be and continue
available therefor. If upon such liquidation, dissolution or winding
up, the assets distributable to the holders of the Series A Preferred
Stock as aforesaid shall be insufficient to permit the payment to them
the Redemption Price, the assets of the Corporation shall be
distributed to the holders of the Series A Preferred Stock until they
shall have received the full amount to which they would otherwise be
entitled. If the assets of the Corporation are sufficient to permit
the payment of such amounts to the holders of the Series A Preferred
Stock, the remainder of the assets of the Corporation, if any, after
the distributions as aforesaid shall be distributed and
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<PAGE> 16
divided ratably among the holders of the Common Stock then outstanding
according to their respective shares. In calculating any amount
distributable to the holders of the Series A Preferred Stock as
aforesaid, there shall be credited against such amount any sums
distributed or payable to such holders other than pursuant to the terms
hereof, whether under any letter of credit, security or other similar
right or interest.
5. Conversion. The Series A Preferred Stock shall be convertible into
Common Stock in accordance with the following provisions of this
Section 5.
(a) Optional Conversion. Subject to and upon compliance
with the provisions of this Section 5, each holder of shares of Series
A Preferred Stock shall have the right at such holder's option, at any
time or from time to time, from and after the date of original issuance
to convert all (but not less than all) of his shares of Series A
Preferred Stock into fully paid and nonassessable shares of Common
Stock, at the Conversion Rate in effect on the Conversion Date, upon
the terms hereinafter set forth.
(b) Conversion Rate. Each share of Series A Preferred
Stock shall be convertible at the Conversion Rate.
(c) Mechanics of Conversion. The holder of any shares of
Series A Preferred Stock may exercise the optional conversion right
specified in paragraph (a) above by surrendering to the Corporation or
any transfer agent of the Corporation the certificate or certificates
for the shares to be converted, accompanied by written notice stating
that the holder elects to convert all of the shares represented
thereby. Optional conversion under paragraph (a) shall be deemed to
have been effected on the date when notice of an election to convert
and certificates for the shares to be converted has been delivered; any
such date is referred to herein as the "Conversion Date". As promptly
as practicable thereafter the Corporation shall issue and deliver to or
upon the written order of such holders a certificate or certificates
for the number of full shares of Common Stock to which such holders are
entitled rounded down to the next whole share as provided in paragraph
(d) below. The person in whose name the certificate or certificates of
Common Stock are to be issued shall be deemed to have become a holder
of record of such Common Stock on the Conversion Date.
(d) Fractional Shares. No fractional shares of Common
Stock or scrip shall be issued upon conversion of shares of Series A
Preferred Stock. Instead of any fractional shares of Common Stock
which would otherwise be issuable upon conversion of any shares of
Series A Preferred Stock, the number of full shares of Common Stock
issuable upon conversion thereof shall be reduced to the next lowest
number of whole shares, and the Corporation will pay a cash adjustment
in
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<PAGE> 17
respect of any surrendered shares of Series A Preferred Stock not
converted into Common Stock in an amount equal to the Redemption Price
divided by the number of shares of Series A Preferred Stock so held by
such holder.
(e) Conversion Amount Adjustments. The Conversion Rate
shall be subject to adjustment from time to time as follows:
(i) Stock Dividends. If the number of shares of
Common Stock outstanding at any time after the issuance of any
Series A Preferred Stock is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or
split-up of shares of Common Stock, then immediately after the
record date fixed for the determination of holders of Common
Stock entitled to receive such stock dividend or the effective
date of such subdivision or split-up, as the case may be, the
Conversion Rate shall be appropriately increased so that the
holders of any shares of Series A Preferred Stock shall be
entitled to receive the number of shares of Common Stock of
the Corporation which they would have owned immediately
following such action had such shares of Series A Preferred
Stock been converted immediately prior thereto.
(ii) Reorganizations. In case of any capital
reorganization of the Corporation, or of any reclassification
of the Common Stock, or in case of the consolidation of the
Corporation with or the merger of the Corporation with or into
any other corporation, partnership or other business entity in
which the Corporation is not the survivor, or of the sale,
lease or other transfer of all or substantially all of the
assets of the Corporation to any other corporation,
partnership or other business entity, each share of Series A
Preferred Stock shall, effective simultaneously with such
capital reorganization, reclassification, consolidation,
merger, sale or lease, be convertible into the number of
shares of stock or other securities or property to which the
Common Stock issuable (at the time of such capital
reorganization, reclassification, consolidation, merger, sale
or lease) upon conversion of such share of Series A Preferred
Stock would have been entitled immediately following such
capital reorganization, reclassification, consolidation,
merger, sale or lease in place of (or in addition to, in the
case of any such event after which Common Stock remains
outstanding) the shares of Common Stock into which such share
of Series A Preferred Stock would otherwise have been
convertible; and in any such case, if necessary, the
provisions set forth herein with respect to the rights and
interests thereafter of the holders of the shares of Series A
Preferred Stock shall be appropriately adjusted so as to be
applicable, as nearly as may reasonably be, to any share of
stock or other securities or property thereafter deliverable
on the conversion of the shares of Series A Preferred Stock.
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<PAGE> 18
(f) Notice to Holders. In the event the Corporation
proposes to take any action of the type described in paragraph (e)
above, the Corporation shall give notice to each holder of the Series A
Preferred Stock and to the Corporation's transfer agent by mail, first
class postage prepaid, at his or its address appearing on the
Corporation's records. Such notice shall specify the record date, if
any, with respect to any such action and the approximate date on which
such action is to take place. Such notice shall also set forth such
facts with respect thereto as shall be reasonably necessary to indicate
the effect of such action (to the extent such effect may be known at
the date of such notice) on the Conversion Rate and the number, kind or
class of shares or other securities or property which shall be
deliverable or purchasable upon the occurrence of such action or
deliverable upon conversion of the Series A Preferred Stock. In the
case of any action which would require the fixing of a record date,
such notice shall be given at least 10 days prior to the date so fixed,
and in case of all other action, such notice shall be given at least 15
days prior to the taking of such proposed action. The Corporation
shall also provide to each such holder notice of the consummation of
such action.
(g) Costs. The Corporation shall pay all documentary,
stamp, transfer or other transactional taxes attributable to the
issuance or delivery of shares of Common Stock of the Corporation or
other securities or property upon conversion of the shares of Series A
Preferred Stock; provided, however, that the Corporation shall not be
required to pay any taxes which may be payable in respect of any
transfer involved in the issuance or delivery of any certificate for
such shares or securities in the name other than that of the holder of
the shares of Series A Preferred Stock in respect of which such shares
are being issued.
(h) Reservation of Shares. The Corporation shall reserve
at all times so long as any shares of Series A Preferred Stock remain
outstanding, free from preemptive rights, out of its treasury stock or
its authorized but unissued shares of Common Stock, or both, solely for
the purpose of effecting the conversion of shares of Series A Preferred
Stock, sufficient shares of Common Stock to provide for the conversion
of all outstanding shares of Series A Preferred Stock and set aside and
keep available any other property deliverable upon conversion of all
outstanding shares of Series A Preferred Stock.
(i) Valid Issuance. All shares of Common Stock or other
securities which may be issued upon conversion of the shares of Series
A Preferred Stock will upon issuance by the Corporation be duly and
validly issued, fully paid and nonassessable and free from all taxes,
liens and charges with respect to the issuance thereof and the
Corporation shall take no action which will cause a contrary result.
6. Voting Rights. At any annual or special meeting of shareholders or
otherwise in respect of any matter submitted for the vote of
shareholders generally, each share
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<PAGE> 19
of Series A Preferred Stock shall entitle the holder to such number of
votes per share as shall equal the number of shares of Common Stock
(rounded to the nearest whole share) into which such shares of Series A
Preferred Stock is then convertible. The provisions of this Section 6
shall apply to any shares of Series A Preferred Stock so long as such
shares are outstanding, and shall terminate with respect to such shares
when such shares are no longer outstanding, whether by repurchase,
conversion into Common Stock, or otherwise.
7. Certain Transferability Rights and Restrictions.
(a) Application. The following provisions of this Section
7 apply to all shares of Series A Preferred Stock as well as all shares
of Underlying Stock relating thereto (collectively, "Stock"). Such
provisions shall continue to bind all shares of Stock, and each
original holder of such shares and each transferee thereof agrees by
acceptance of any certificate representing such shares to be so bound
by such provisions, notwithstanding the conversion of the Series A
Preferred Stock into Common Stock or that no shares of Series A
Preferred Stock may be outstanding at any given time, from the date of
issuance until the earlier to occur of (i) the dissolution or
termination of existence of the Corporation, or (ii) the written
consent of the Board of Directors and the holders of 66-2/3% of the
outstanding Stock. Every certificate representing shares of Stock
shall be inscribed with a legend referring to the restrictions set
forth in this Section 7.
(b) General. Without the prior approval of the Board of
Directors in each instance, no shares of Stock subject may be sold,
assigned, pledged, encumbered, transferred or otherwise hypothecated in
any manner (by gift, pursuant to any marital dissolution, in any
bankruptcy or insolvency proceeding, or otherwise), except as provided
in this Section 7.
(c) Right of First Refusal. If any holder of Stock
desires to sell, assign, transfer or otherwise dispose of any shares of
Stock, then such holder (for purposes of this paragraph (c), the
"Selling Shareholder"), prior to making any such sale, shall first
offer such shares of Stock (for purposes of this paragraph (c), the
"Option Shares") for sale to the Corporation, in accordance with the
following provisions of this paragraph (c).
(i) Option Price; Terms; Offering Notices. The
price per Option Share at which the Selling Shareholder shall
be required to offer the Option Shares (for purposes of this
paragraph (c), the "Option Price") and the terms of such
offer, shall be the price at which and the terms upon which
any proposed third party purchaser shall have offered to
purchase the Option Shares from the Selling Shareholder and
which the Selling Shareholder is prepared to accept. Each
offer required to be made by the
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<PAGE> 20
Selling Shareholder pursuant to this paragraph (c) shall be
made by a written notice (for purposes of this paragraph (C),
the "Offering Notice") which shall state that the offer is
being made pursuant to this paragraph (c) and which shall set
forth the number of Option Shares, the name or names of the
proposed purchaser or purchasers of the Option Shares, the
price per share offered by such proposed purchaser or
purchasers for the Option Shares, the method of payment of the
purchase price and the scheduled date of consummation of such
proposed sale. A copy of the written offer from any proposed
third-party purchaser shall be attached to each Offering
Notice.
(ii) Offer to the Corporation. The Selling
Shareholder shall offer the Option Shares to the Corporation
by delivering an Offering Notice to the Corporation. Within
30 days following the Corporation's receipt of such Offering
Notice, the Corporation shall deliver to the Selling
Shareholder a written reply notice accepting the offer of the
Selling Shareholder with respect to all (but not less than
all) of the Option Shares or rejecting such offer. If by such
written reply notice the Corporation accepts the offer made by
the Selling Shareholder, the reply notice shall constitute an
agreement binding on the Selling Shareholder and the
Corporation to sell and purchase the Option Shares at a price
per share equal to the Option Price. If within such 30-day
period, the Corporation shall have failed to deliver a reply
notice accepting the offer of the Selling Shareholder as to
all of the Option Shares, the Corporation shall be deemed to
have rejected such offer.
(iii) Lapse of Option. If the foregoing offer to
sell Option Shares has been made by the Selling Shareholder
and has not been accepted by the Corporation, then the Selling
Shareholder may sell not less than all of the Option Shares at
any time within, but not subsequent to, 60 days after the
lapse of the option granted pursuant to this paragraph (c);
provided, however, that no sale of the Option Shares shall be
made at any price lower than the Option Price or on terms
materially different from those specified in the Offering
Notice or to any person or persons other than the persons
specified in the Offering Notice or to any person or persons
other than the persons specified in the Offering Notice. If
after the lapse of such 60-day period the Option Shares shall
not have been sold, all of the provisions of this paragraph
(c) shall apply to any future sale or other disposition of
shares of Stock owned by the Selling Shareholder.
(iv) Consummation of Purchases. Each transaction
of purchase and sale of Option Shares pursuant to this
paragraph (c) shall be completed by delivery of the stock
certificates representing the Option Shares endorsed
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<PAGE> 21
in blank, or accompanied by duly executed stock powers, and by
actual registration of the transfer of the Option Shares on
the books of the Corporation upon payment of the purchase
price to the Selling Shareholder (the Corporation agreeing to
effect such registration upon the tender of such certificates,
endorsed or accompanied by such executed stock powers). Any
such transaction shall be closed at such time and place as
shall be agreed upon by the parties thereto, or, if no such
agreement is reached, at the principal office of the
Corporation on the 30th day following the date of delivery of
the last reply notice given in connection with such
transaction or, if such day shall not be a business day, on
the first business day thereafter during normal business
hours.
(v) Certain Permitted Dispositions. Subject to
the restrictions set forth in paragraph (b) above, transfers
by holders of Stock to Affiliates, upon the death of any such
holder to such holder's estate or other legal representative,
or the pledge of Stock by such holder (but not any disposition
in foreclosure or other remedy) shall not be subject to the
right of first refusal under this paragraph (c), provided,
however, that the provisions of this Section 7 shall continue
to bind the shares of Stock held by any such transferee. The
foregoing provisions of this paragraph (c) shall also not
apply to any disposition pursuant to an effective registration
statement under the Securities Act or under Rule 144.
8. Registration Rights. Subject to paragraph (h) below and the other
provisions of this Section 8, the holders of the Series A Preferred
Stock shall be entitled to have their respective shares of Common Stock
issuable upon conversion of their Series A Preferred Stock included in
any registration of Common stock under the Securities Act proposed by
the Corporation.
(a) Piggyback Rights. If at any time or from time to time
the Corporation proposes to file with the Securities and Exchange
Commission (the "Commission") a registration statement (whether on Form
S-1, S-2 or S-3, SB-1, SB-2, or any equivalent form then in effect) for
the registration under the Securities Act of any shares of Common Stock
for sale to the public by the Corporation or on behalf of a shareholder
of the corporation for cash (excluding any shares of Common Stock
issuable by the Corporation upon the exercise of employee or director
stock options or in connection with the merger or consolidation of the
Corporation or one of its subsidiaries with one or more other
corporations if the Corporation is the surviving corporation), the
Corporation shall give each holder of the Series A Preferred Stock at
least 30 days' prior written notice of the filing of the proposed
registration statement. The notice shall include a list of the states
and foreign jurisdictions, if any, in which the Corporation intends to
qualify such shares, and shall also include the Corporation's estimate
of the range of the
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<PAGE> 22
offering price per share of Common Stock. On the written request of
any holder of the Series A Preferred Stock received by the Corporation
within 15 days after the date of the Corporation's notice, the
Corporation shall, subject to the conditions and in accordance with the
procedures set forth in paragraphs (b) and (c) below, and at its own
expense as provided in paragraph (e) below, include in the coverage of
such registration statement and qualify for sale under the blue sky or
securities laws of the various states, the number of shares (but not
less than 5,000 shares, subject to adjustment to give effect to any
stock dividends, splits or combinations, recapitalizations or other
similar corporate events) of Common Stock (herein called the "Specified
Shares") held and so requested to be registered by each such holder;
provided that if the managing underwriter for the Corporation indicates
its belief in writing that the effect of including in the coverage of
such registration statement all or part of the Specified Shares and the
shares of Common Stock requested to be so included by other
stockholders having contractual registration rights ("Other Requesting
Stockholders") will materially and adversely affect the sale of the
shares of Common Stock proposed to be sold by the Corporation (which
statement of the managing underwriter shall also state the maximum
number of shares (herein called the "Maximum Shares"), if any, which
can be sold by such all such holders without materially and adversely
affecting the sale of the shares proposed to be sold by the
Corporation), then the number of Specified Shares which the holders of
the Series A Preferred Stock and the Other Requesting Stockholders
shall collectively have the right to include in such registration
statement shall be reduced to the number of Maximum Shares set forth in
such statement of the managing underwriter, such reduction to be
effected on a pro rata basis in accordance with the number of all such
shares requested to be so registered by the holders of the Series A
Preferred Stock and the Other Requesting Stockholders.
Except as provided in paragraph (c) below, in no event shall
the Corporation be required to amend any registration statement filed
pursuant to this Section 8 after it has become effective or to amend or
supplement any prospectus to permit the continued disposition of shares
of Common Stock registered under any registration statement.
The Corporation shall have the right to select any
underwriters, including the managing underwriter, of any public
offering of shares of Common Stock subject to the provisions of this
paragraph (a). Nothing in this paragraph (a) shall create any
liability on the part of the Corporation to the holders of the Series A
Preferred Stock if the Corporation for any reason should decide not to
file such a registration statement.
The Corporation may withdraw any registration statement and
abandon any proposed offering initiated by the Corporation without the
consent of any holder of the Series A Preferred Stock, notwithstanding
the request of any such holder to
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<PAGE> 23
participate therein in accordance with this paragraph (a), if the
Corporation determines that such action is in the best interests of the
Corporation.
(b) Certain Registration Conditions. Any holder of Series
A Preferred Stock requesting registration of Common Stock into which
such holder's Series A Preferred Stock is convertible pursuant to
paragraph (a) of this Section 8 is hereafter referred to as a "Selling
Stockholder." Anything in this Agreement to the contrary
notwithstanding, the Corporation shall not be required to effect a
registration of any Common Stock of any Selling Stockholder pursuant to
paragraph (a) of this Section 8, or file any post-effective amendment
thereto:
(i) unless such Selling Stockholder agrees (x) to
sell and distribute a portion or all of his Common Stock in
accordance with the customary plan or plans of distribution
adopted by and through underwriters, if any, acting for the
Corporation, and (y) to bear a pro rata share of underwriter's
discounts and commissions;
(ii) unless the Corporation and the underwriters
for the Corporation shall have received from such Selling
Stockholder all such information as the Corporation and such
underwriters may reasonably request from him concerning such
Selling Stockholder to enable the Corporation to include in
the registration statement all material facts required to be
disclosed therein. Notwithstanding the foregoing, a Selling
Stockholder shall not be required to furnish to the
Corporation any personal financial information of such Selling
Stockholder unrelated to his holdings of Common Stock, Series
A Preferred Stock or other securities of the Corporation held
by him, provided that each Selling Stockholder shall
nonetheless be required to furnish all information reasonably
requested by any such underwriter;
(iii) unless such Selling Stockholder is then
entitled to convert his shares of Series A Preferred Stock
into Common Stock and such Selling Stockholder in fact
delivers to the Corporation, contemporaneously with the notice
given by such Selling Stockholder under paragraph (a) hereof
of his intention to convert the Series A Preferred Stock into
Common Stock subject to and upon the effectiveness of the
registration statement; and
(iv) unless such Selling Stockholder, at the
request of the Corporation or its managing underwriter, agrees
or acknowledges that such Selling Stockholder (x) has a
present intention to sell such shares; (y) agrees to execute
all consents, powers of attorney, registration statements and
other documents required in order to cause such registration
statement to become effective; and (z) agrees, if the offering
is at the market, to give the
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<PAGE> 24
Corporation written notice of the first bona fide offering of
such shares and to use the prospectus forming a part of such
registration statement for only a period of 90 days (or such
longer period provided for in paragraph (c) below) unless such
registration statement is on a form that complies with Rule
415.
(c) Covenants and Procedures. If the Corporation becomes
obligated under the provisions of paragraph (a) of this Section 8 to
effect registration of shares of Common Stock on behalf of any Selling
Stockholder, the following shall apply:
(i) The Corporation, at its own expense as
provided in paragraph (e), shall prepare and file with the
Commission a registration statement covering such shares of
Common Stock and use its best efforts to cause such
registration statement to become effective; and the
Corporation will file such post-effective amendments to such
registration statement (and use its best efforts to cause them
to be effective) and such supplements as are necessary so that
current prospectuses are at all times available for a period
of at least 90 days after the effective date of such
registration statement or for such longer period, not to
exceed 180 days, as may be required by the Corporation or the
managing underwriter under the plan or plans of distribution
set forth in such registration statement. Each Selling
Stockholder shall promptly provide the Corporation with such
information with respect to such Selling Stockholder's shares
of Common Stock to be so registered and, if applicable, the
proposed terms of the offering thereof as is required for such
registration. Further, if the shares of Common Stock to be
covered by the registration statement are not to be sold to or
through underwriters acting for the Corporation, the
Corporation shall (x) deliver to each Selling Stockholder as
promptly as practicable as many copies of preliminary
prospectuses as such Selling Stockholder may reasonably
request, and such Selling Stockholder shall keep a written
record of the distribution of such preliminary prospectuses
and shall refrain from delivery of such preliminary
prospectuses in any manner or under any circumstances which
would violate the Securities Act or the securities laws of any
other jurisdiction, including the various states of the United
States, (y) deliver to each Selling Stockholder, as soon as
practicable after the effective date of the registration
statement, and from time to time thereafter during such 90-
day period, or such longer period as is herein provided, as
many copies of the prospectuses required to be delivered in
connection with the sale of shares of Common Stock registered
under the registration statement as such Selling Stockholder
may reasonably request, and (z) in case of the happening,
after the effective date of such registration statement and
during such 90- day period (or such longer period specified
above), of
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<PAGE> 25
any event or occurrence which would be set forth in an
amendment of or supplement to such prospectus to make any
statements therein not misleading or to correct any misleading
omissions, give each Selling Stockholder written notice
thereof and prepare and furnish to such Selling Stockholder,
in such quantities as he may reasonably request, copies of
such amended prospectus or of such supplement to be attached
to the prospectus in order that the prospectus, as so amended
or supplemented, will not contain any untrue statement of a
material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made,
not misleading.
(ii) On or prior to the date on which the
registration statement is declared effective, the Corporation
shall use its best efforts to register or qualify, and
cooperate with each Selling Stockholder, the underwriter or
underwriters, if any, and their counsel, in connection with
the registration or qualification of the Common Stock covered
by the registration statement for offer and sale under the
securities or blue sky laws of each state and other
jurisdiction of the United States as such Selling Stockholder
or underwriter reasonably requests, to use its best efforts to
keep each such registration or qualification effective,
including through new filings, or amendments or renewals,
during the period such registration statement is required to
be kept effective and to do any and all other acts or things
necessary or advisable to enable the disposition in all such
jurisdictions of the Common Stock covered by the applicable
registration statement, provided that the Corporation will not
be required to qualify generally to do business in any
jurisdiction where it is not then so qualified.
(iii) The Corporation shall use its best efforts to
cause all of each Selling Stockholder's Common Stock included
in such registration statement to be listed, by the date of
the first sale of such Common Stock pursuant to such
registration statement, on each securities exchange on which
the Common Stock of the Corporation is then listed or proposed
to be listed, if any.
(iv) The Corporation shall make generally
available to each Selling Stockholder and any underwriter
participating in the offering conducted pursuant to the
registration statement an earnings statement satisfying the
provisions of Section 11(a) of the Securities Act no later
than 45 days after the end of the 12-month period beginning
with the first day of the Corporation's first fiscal quarter
commencing after the effective date of the registration
statement, which earnings statement shall cover said 12-month
period, which requirement will be deemed to be satisfied if
the
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<PAGE> 26
Corporation timely files complete and accurate information on
Forms 10-Q, 10-K, and 8-K under the Securities Exchange Act of
1934, as amended, and otherwise complies with Rule 158 under
the Securities Act as soon as feasible.
(v) The Corporation shall cooperate with each
Selling Stockholder and the managing underwriter or
underwriters, if any, to facilitate the timely preparation and
delivery of certificates (not bearing any restrictive legends)
representing Common Stock to be sold under the registration
statement, and enable such securities to be in such
denominations and registered in such names as the managing
underwriter or underwriters, if any, or such Selling
Stockholder may request, subject to the underwriters'
obligation to return any certificates representing securities
not sold.
(vi) The Corporation shall use its best efforts to
cause each Selling Stockholder's Common Stock covered by the
registration statement to be registered with or approved by
such other governmental agencies or authorities within the
United States as may be necessary to enable such Selling
Stockholder or the underwriter or underwriters, if any, to
consummate the disposition of such Common Stock.
(vii) The Corporation shall make available for
inspection by each Selling Stockholder, any underwriter
participating in any disposition pursuant to such registration
statement, and any attorney, accountant or other agent
retained by such Selling Stockholder or any such underwriter
(collectively, the "Inspectors"), all financial and other
records, pertinent corporate documents and properties of the
Corporation, as shall be reasonably necessary to enable them
to exercise their due diligence, responsibility, and cause the
Corporation's officers, directors and employees to supply all
nonconfidential information reasonably requested by any such
Inspector in connection with such registration statement. As
a condition to providing such access, the Corporation may
require that any and all Inspectors execute and deliver
confidentiality agreement, in form and substance acceptable to
the Corporation, and that confidentiality procedures be
observed, all with respect to such information.
(viii) The Corporation shall use its best efforts to
obtain a "cold comfort" letter from the Corporation's
independent public accountants, and an opinion of counsel for
the Corporation, each in customary form and covering such
matters of the type customarily covered by cold comfort
letters and opinions of counsel in connection with public
offerings of securities, as each Selling Stockholder
reasonably requests.
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<PAGE> 27
(d) Indemnification.
(i) Indemnification by the Corporation. In the
event of any registration under the Securities Act pursuant to
this Section 8 of shares of Common Stock held by any Selling
Stockholder, the Corporation will hold harmless each Selling
Stockholder and each underwriter of such securities and each
other person, if any, who controls each Selling Stockholder or
such underwriter within the meaning of the Securities Act,
against any losses, claims, damages or liabilities (including
legal fees and costs of court), joint or several, to which
such Selling Stockholder or such underwriter or controlling
person may become subject under the Securities 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, on the effective
date thereof, in any registration statement under which such
securities were registered under the Securities Act, any
preliminary prospectus or final prospectus contained therein,
or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statements therein not misleading; and will reimburse
each Selling Stockholder and each such underwriter and each
such controlling person for any legal or any other expenses
reasonably incurred by them in connection with investigating
or defending any such loss, claim, damage or liability;
provided, however, that the Corporation shall not be liable to
any Selling Stockholder or his underwriters or controlling
persons in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or
alleged omission made in such registration statement,
preliminary prospectus or final prospectus or such amendment
or supplement in reliance upon and in conformity with
information furnished to the Corporation through a written
instrument duly executed by such Selling Stockholder or such
underwriter specifically for use in the preparation thereof.
(ii) Indemnification by Selling Stockholders. It
shall be a condition precedent to the obligation of the
Corporation to include in any registration statement any
shares of Common Stock then held by a Selling Stockholder that
the Corporation shall have received an undertaking reasonably
satisfactory to it and its counsel from such selling
Stockholder to severally indemnify and hold harmless (in the
same manner and to the same extent as set forth in
subparagraph (i) above) the Corporation, each director of the
Corporation, each officer of the Corporation who shall sign
such registration statement, each underwriter of such
securities and any
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<PAGE> 28
person who controls the Corporation or such underwriter within
the meaning of the Securities Act, with respect to any
statement or omission from such registration statement, any
preliminary prospectus or final prospectus contained therein,
or any amendment or supplement thereto, if such statement or
omission was made in reliance upon and in conformity with
information furnished to the Corporation through a written
instrument duly executed by such Selling Stockholder
specifically for use in the preparation of such registration
statement, preliminary prospectus or final prospectus or such
amendment or supplement thereto.
(iii) Indemnification Procedures. Promptly after
receipt by an indemnified party of notice of the commencement
of any action involving a claim referred to in the preceding
subparagraphs (i) and (ii), such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying
party, give written notice to the indemnifying party of the
commencement of such action. In case any such action is
brought against an indemnified party, the indemnifying party
will be entitled to participate in and to assume the defense
thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume
the defense thereof, and provided that the indemnifying party
in fact assumes such defense, the indemnifying party will not
be liable to such indemnified party for any legal or other
expenses incurred after the date of such notice by the latter
in connection with the defense thereof. Whether or not such
defense is assumed by the indemnifying party, the indemnifying
party will not be subject to any liability for any settlement
made without its consent. No indemnifying party will consent
to entry of any judgment or enter into any settlement which
does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such indemnified party of a
release from all liability in respect of such claim or
litigation. The indemnified party shall be entitled to
participate with his own counsel (at his own expense) if
reasonably necessary to avoid a conflict of interest.
(iv) Contribution. If the indemnification
provided for in this paragraph (d) from the indemnifying party
is unavailable to an indemnified party hereunder in respect of
any losses, claims, damages, liabilities or expenses referred
to therein, then the 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 or expenses in
such proportion as is appropriate to reflect the relative
fault of the indemnifying party and indemnified parties in
connection with the actions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other
relevant equitable
17
<PAGE> 29
considerations. The relative fault of such indemnifying party
and indemnified parties shall be determined by reference to,
among other things, whether any action in question, including
any untrue or alleged untrue statement of a material fact or a
material omission, has been made by, or relates to information
supplied by, such indemnifying party or indemnified parties,
and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action.
The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include any legal or other fees or
expenses reasonably incurred by such party in connection with
any investigation or proceeding. For purposes of the
foregoing, it would not be just and equitable if contribution
pursuant to this paragraph (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. Notwithstanding the
provisions of this subparagraph (iv), no Selling Stockholder
shall be required to contribute any amount in excess of the
amount by which the total price at which the Common Stock of
such Selling Stockholder was offered to the public exceeds the
amount of any damages which such Selling Stockholder has
otherwise been required to pay by reason of such untrue
statement or 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.
(e) Expenses. All expenses incurred by the Corporation in
connection with any registration statement covering shares of Common
Stock offered by the Selling Stockholders, including, without
limitation, all registration and filing fees (including all expenses
incident to filing with the National Association of Securities Dealers,
Inc.), printing expenses, fees and disbursements of counsel for the
Corporation and of its independent certified public accountants, the
reasonable fees and disbursements of one counsel for collectively all
Selling Stockholders and Other Requesting Stockholders whose stock is
included in such registration, and the expense of qualifying such
shares under state blue sky laws, shall be borne by the Corporation;
provided, however, that all underwriter's discounts and commissions
relating to the shares of Common Stock to be sold by the Selling
Stockholders shall be borne by the Selling Stockholders.
(f) Dispositions During Registration. Upon written
request by the Corporation, the Selling Stockholders will agree, upon
the registration of any of each such Selling Stockholder's shares of
Common Stock or the Common Stock issued by the Corporation, not to sell
or otherwise dispose of any shares of Stock (other than Common Stock
covered by such registration, which may be sold in
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<PAGE> 30
accordance with the plan or plans of distribution described in the
registration statement) owned by each such Selling Stockholder for a
period of 90 days following the effective date of such registration
statement or for such longer period (not to exceed 180 days) as may be
required under the plan or plans of distribution set forth in such
registration statement. Each holder of the Series A Preferred Stock
shall comply with the foregoing requirements even if his Common Stock
issuable upon the conversion thereof is not being included in such
registration, if (i) at such time such holder (together with his
Affiliates) owns five percent (5%) or more of the Common Stock not
being registered by such registration and (ii) other holders of five
percent or more of the Common Stock not being registered by such
registration are similarly bound.
(g) Term of Registration Rights. The registration rights
granted pursuant to this Section 8 shall be effective for a period
commencing upon the date of original issuance thereof and ending on (i)
as to any holder of Series A Preferred Stock, upon either (A) such
holder's written consent, (B) the date such holder holds, together with
such holder's Affiliates, less than 5,000 shares (subject to adjustment
as described in paragraph (g) above) of Common Stock determined on a
fully diluted basis, or (c) the date such holder is able to dispose of
his shares of Common Stock that such holder may acquire upon conversion
of the Series A Preferred Stock under Rule 144 promulgated under the
Securities Act; and (ii) upon redemption on December 31, 2001.
9. Exclusion of Other Rights. Unless otherwise required by law, the
shares of Series A Preferred Stock shall not have any voting powers,
preferences or relative, participating, optional or other special
rights other than those specifically set forth herein.
19
<PAGE> 31
EXHIBIT C
AMENDED AND RESTATED
CERTIFICATE OF DESIGNATION, PREFERENCES,
RIGHTS AND LIMITATIONS
OF
SERIES B CONVERTIBLE PREFERRED STOCK
OF
FIRST SIERRA FINANCIAL, INC.
PURSUANT to Section 151(g) of the General Corporation Law of the State
of Delaware, FIRST SIERRA FINANCIAL, INC., a corporation organized and existing
under the General Corporation Law of the State of Delaware (herein referred to
as the "Corporation"), DOES HEREBY CERTIFY:
That, pursuant to authority conferred upon the Board of Directors of
the Corporation by its Certificate of Incorporation, and pursuant to the
provisions of Section 151(g) of the General Corporation Law of the State of
Delaware, such Board of Directors by written unanimous consent dated as of
October 31, 1996, duly adopted a resolution providing for the creation and
issuance of a series of 43,691 shares of the Corporation's Preferred Stock,
$.01 par value per share, to be designated the "Series B Convertible Preferred
Stock", and fixing the voting powers, preferences and relative, participating,
optional or other rights, and the qualifications, limitations or restrictions
thereof, which resolution is as follows:
RESOLVED, that pursuant to the authority expressly granted and
vested in the Board of Directors of the Corporation in accordance with
the provisions of its Certificate of Incorporation, a series of
Preferred Stock of the Corporation be, and it hereby is, created out
of the authorized but unissued shares of the Preferred Stock of the
Corporation, such series to be designated "Series B Convertible
Preferred Stock" (the "Series B Preferred Stock"), to consist of
43,691 shares, par value $0.01 per share, and having the voting
powers, preferences and relative, participating, optional and other
rights, and the qualifications, limitations and restrictions (in
addition to those set forth in the Certificate of Incorporation) set
forth below:
1. Definitions. For purposes hereof, each of the following terms shall
have the meaning ascribed to it below:
(a) "Affiliate" of any person shall mean (a) any member
of the immediate family of such person, including parents, siblings,
spouse and lineal descendants (including those by adoption); the
parents, siblings, spouse or lineal descendants (including those by
adoption) of such immediate family member; and in any such case any
trust whose primary beneficiary is such person or one or more members
of such immediate family and/or such
<PAGE> 32
person's lineal descendants; (b) the legal representative or guardian
of such person or of any such immediate family members in the event
such person or any such immediate family members becomes mentally
incompetent; and (c) any person, corporation or other entity
controlling, controlled by or under common control with such person.
As used in this definition, the term "control", including the
correlative terms "controlling", "controlled by" and "under common
control with", shall mean possession, directly or indirectly, of the
power to direct or cause the direction of management or policies
(whether through ownership of securities or any partnership or other
ownership interest, by contract or otherwise) of a person, corporation
or other entity.
(b) "Board of Directors" means the Board of Directors of
the Corporation.
(c) "Common Stock" means shares of the Corporation's
Common Stock, $.01 par value per share.
(d) "Conversion Rate" has the meaning ascribed to it in
Section 5(c) below.
(e) "Dividend Rate" has the meaning ascribed to it in
Section 2(b).
(f) "Escrow Agreement" means that certain Escrow
Agreement to be entered into among the Corporation, Valerie A. Hayes
and an escrow agent mutually acceptable to the Corporation and Valerie
A. Hayes.
(g) "Preferred Stock" means shares of any series of the
Corporation's Preferred Stock, $.01 par value per share.
(h) "Securities Act" means the Securities Act of 1933, as
amended.
(i) "Redemption Acceleration Event" means the occurrence
of any one of the following:
(i) The filing by the Corporation of a petition
for liquidation, reorganization, arrangement or adjudication as a
bankrupt or similar relief under bankruptcy, insolvency or similar
laws of the United States or any state or territory thereof;
(ii) The filing against the Corporation of a
petition for liquidation, reorganization, arrangement or adjudication
as a bankrupt or similar relief under bankruptcy, insolvency or
similar laws of the United States or any state thereof and the failure
of the Corporation to secure dismissal of any such petition filed
against it within 90 days of such filing;
(iii) The institution by the Corporation of any
type of insolvency proceeding (under the Bankruptcy Code or otherwise)
for the dissolution or liquidation of, settlement of claims against,
or winding up of the affairs of the Corporation;
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(iv) The failure of the Corporation to provide a
renewal or extension of the Letter of Credit described in Section
2(c)(vi) of the Agreement and Plan of Reorganization dated as of
October 15, 1996 between Valerie A. Hayes, Corporate Capital Leasing
Group, Inc., First Sierra Financial, Inc. and First Sierra
Pennsylvania, Inc. (the "Reorganization Agreement"), in accordance
with the terms of such Section 2(c)(vi) of the Reorganization
Agreement; or
(v) Failure of the Corporation to pay any
dividends on the Series B Preferred Stock when required pursuant to
the terms of Section 2(c)(ii) of the Reorganization Agreement and such
failure continues beyond the cure period referenced in such Section
2(c)(ii) of the Reorganization Agreement.
(i) "Redemption Price" has the meaning ascribed to it in
Section 3(a) below.
(j) "Required Conversion Shares" means, as of each day on
which the Trading Level Event occurs, those outstanding shares of the
Series B Preferred Stock (a) that are not held in the Escrow and (b)
as to which there is a currently effective registration statement
under the Securities Act of 1933 and applicable state law and a
prospectus covering the immediate resale of the shares of Common Stock
(and, if applicable, the Underlying Stock relating to such shares)
into which such shares of Series B Preferred Stock are convertible.
(k) "Released Preferred B Shares" means those shares of
the Series B Preferred Stock that at any time prior to any date of
determination were deposited and held in escrow pursuant to the Escrow
Agreement and that as of such date of determination have been released
from such escrow pursuant to the terms of the Escrow Agreement.
(l) "Trading Level Event" means, as of any particular day
of determination, that the Common Stock of the Corporation is listed
on the New York Stock Exchange, the American Stock Exchange or The
Nasdaq National Market or The Nasdaq Small Cap Market and such Common
Stock has traded at or above 120% of the Target Per Share Price for
the 20 consecutive trading days preceding such day.
(m) "Underlying Stock" means all shares of Common Stock
into which the Series B Preferred Stock is convertible, and all other
shares of capital stock received on account of such shares of Series B
Preferred Stock or Common Stock in respect of any stock split, stock
dividend, recapitalization, reorganization or other similar corporate
event.
All accounting terms used herein and not expressly defined herein shall have
the meanings given to them in accordance with generally accepted accounting
principles consistently applied and in effect as of the date of the relevant
calculation.
2. Dividends.
(a) Series B Preferred Stock. Holders of Series B Preferred Stock
shall be entitled to receive, but only out of any funds legally available for
the declaration of dividends, cumulative
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dividends, on each share of the Series B Preferred Stock at an annual rate
equal to the Dividend Rate payable at such times as shall be determined by the
Board of Directors. Dividends shall accrue at the Dividend Rate whether or not
there are profits, surplus or other funds of the Corporation legally available
for the payment of dividends.
(b) Dividend Rate. The term "Dividend Rate" means, subject to
adjustment pursuant to the following provisions of this paragraph (b), $1.14
per share of Series B Preferred Stock during any period prior to the aggregate
Released Preferred B Shares exceeding 21,846; $1.53 per share of Series B
Preferred Stock during any period prior to the aggregate Released Preferred B
Shares exceeding 29,127; $1.91 per share of Series B Preferred Stock during any
period prior to the aggregate Released Preferred B Shares exceeding 36,409; and
$2.29 per share of Series B Preferred Stock during any period following the
aggregate Released Preferred B Shares exceeding 36,409.
(c) Restriction on Dividends. During such time as (i) dividends
on the Series B Preferred Stock shall be in arrears or (ii) the Corporation
shall be obligated to and shall have failed to redeem any shares of Series B
Preferred Stock pursuant to Section 3(a), the Corporation may not declare or
pay any dividend on shares of Common Stock or any other stock ranking junior to
the Series B Preferred Stock (other than a distribution payable exclusively in
shares of such stock). Should dividends not be paid in full on the Series B
Preferred Stock and any other preferred stock ranking on a parity as to
dividends with the Series B Preferred Stock, all dividends declared on the
Series B Preferred Stock and any other preferred stock ranking on a parity as
to dividends with the Series B Preferred Stock will be declared pro rata, so
that the amount of dividends declared per share on the Series B Preferred Stock
and such other preferred stock will bear to each other the same ratio that
accumulated dividends per share on the shares of the Series B Preferred Stock
and such other preferred stock bear to each other. For purposes of this
Section 2(c), the Series B Preferred Stock shall rank on a parity as to
dividends with the Corporation's Series A Convertible Preferred Stock and any
subsequently issued series of the Corporation's Preferred Stock so designated
as being on parity with the Series B Preferred Stock. In connection with each
dividend that the Corporation intends to declare on the Corporation's Common
Stock while any shares of the Series B Preferred Stock are outstanding, the
Corporation shall give notice thereof to the record holder(s) of the Series B
Preferred Stock (at the address(s) of such holder(s) as reflected in the
records of the Corporation) no less than ten days prior to the effective date
of such dividend.
(d) Other Stock. Subject to paragraph (c) above, (i) dividends
may be declared and paid on the Common Stock and any other class or series of
the Corporation's capital stock, and (ii) Common Stock or such other capital
stock may be purchased, retired or otherwise acquired, when and as determined
by the Board of Directors, out of any funds legally available for such
purposes.
3. Redemption.
(a) Mandatory Redemption. (i) On December 31, 2001, the
Corporation shall redeem all of the shares of Series B Preferred Stock then
outstanding (subject, however, to the right of the holders of the Series B
Preferred Stock to convert all, but not less than all, of their shares pursuant
to Section 5 by providing the written conversion notice referred to in Section
5(c) on or before November 30, 2001), at a per share price equal to the
Redemption Price. Subject to adjustment
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pursuant to Section 3(c), the "Redemption Price" shall be $28.61 per share of
Series B Preferred Stock during any period prior to the aggregate Released
Preferred B Shares exceeding 21,846 plus any accrued but unpaid dividends on
such share; $38.15 per share of Series B Preferred Stock during any period
prior to the aggregate Released Preferred B Shares exceeding 29,127 plus any
accrued but unpaid dividends on such share; $48.00 per share of Series B
Preferred Stock during any period prior to the aggregate Released Preferred B
Shares exceeding 36,409 plus any accrued but unpaid dividends on such share;
and $57.22 per share of Series B Preferred Stock during any period following
the aggregate Released Preferred B Shares exceeding 36,409 plus any accrued but
unpaid dividends on such shares.
(ii) If a Redemption Acceleration Event occurs prior to
December 31, 2001, each holder of the then outstanding shares of Series B
Preferred Stock may elect to require the Corporation to redeem all (but not
less than all) of the shares of Series B Preferred Stock held by such holder at
the per share Redemption Price then in effect. The Corporation or a
representative of the Corporation shall give written notice of the occurrence
of a Redemption Acceleration Event to each such holder (the "Redemption
Acceleration Notice"). Each holder receiving such notice may elect to require
the Corporation to redeem all (but not less than all) of such holder's shares
of Series B Preferred Stock by giving written notice of such election to the
Corporation no later than 30 days following such holder's receipt of the
Redemption Acceleration Notice. If within such 30 day period any holder fails
to give the Corporation written notice of such holder's decision to require the
Corporation to redeem such holder's shares of the Series B Preferred Stock,
then such holder shall have no further rights pursuant to this Section
3(a)(ii).
(b) General. If any draw is made on the Letter of Credit, the
amount(s) so drawn shall be applied against the amounts required to be paid by
the Corporation pursuant to Section 3(a) above or (as applicable) Section 4(b)
below. From and after the effective date of redemption and the setting aside
of the funds necessary for redemption, notwithstanding that any certificate for
shares of Series B Preferred Stock (and, if applicable, any certificate for
shares of Common Stock into which shares of Series B Preferred Stock shall
have been converted) so called for redemption shall not have been surrendered
for cancellation, the shares to be redeemed shall no longer be deemed
outstanding, and the holders of certificates representing such shares shall
have with respect to such shares no rights in or with respect to the
Corporation except the right to receive, upon the surrender of such
certificates, the Redemption Price therefor. Shares of Series B Preferred
Stock redeemed by the Corporation pursuant to this Section 3, or shares of
Series B Preferred Stock otherwise purchased by the Corporation, shall not be
reissued and shall be cancelled and retired in the manner provided by the laws
of the State of Delaware, and no other shares of Series B Preferred Stock shall
be issued in lieu thereof.
4. Preference on Liquidation, Dissolution or Winding Up.
(a) Definition. A consolidation or merger of the Corporation, a
sale or transfer of substantially all of its assets as an entirety, or any
purchase or redemption of capital stock of the Corporation of any class, shall
not be regarded as "liquidation, dissolution or winding up of the affairs of
the Corporation" within the meaning of this Section 4.
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<PAGE> 36
(b) Series B Preferred Stock. During any proceedings for the
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Corporation other than in connection with a Redemption Acceleration
Event (a "Liquidation"), the holders of the Series B Preferred Stock shall be
entitled to receive (and shall not be entitled to any other payment) an amount
in cash for each share of Series B Preferred Stock equal to the Redemption
Price (the "Liquidation Preference") or funds necessary for such payment shall
have been set aside in trust for the account of the holders of the outstanding
Series B Preferred Stock so as to be and continue available therefor, before
any distribution shall be made to the holders of any stock ranking junior to
the Series B Preferred Stock upon the Liquidation of the Corporation. If the
net assets of the Corporation are insufficient to pay the Liquidation
Preference on all outstanding shares of the Series B Preferred Stock and all
outstanding shares of any other preferred stock ranking on a parity as to
Liquidation with the Series B Preferred Stock in the amounts to which the
holders of such shares are entitled, then the entire net assets of the
Corporation will be distributed ratably among the holders of the Series B
Preferred Stock and any other preferred stock ranking on a parity as to
Liquidation with the Series B Preferred Stock, based upon the aggregate amount
of the Liquidation Preference due on such shares. In calculating any amount
distributable to the holders of the Series B Preferred Stock as aforesaid,
there shall be credited against such amount any sums distributed or payable to
such holders other than pursuant to the terms hereof, whether under any letter
of credit, security or other similar right or interest.
5. Conversion. The Series B Preferred Stock shall be convertible into
Common Stock in accordance with the following provisions of this Section 5.
(a) Optional Conversion. Subject to and upon compliance with the
provisions of this Section 5, each holder of shares of Series B Preferred Stock
shall have the right at such holder's option, at any time or from time to time,
from and after the date of original issuance to convert all or less than all
(but not less than 5,000 shares per conversion) of such holder's shares of
Series B Preferred Stock into fully paid and nonassessable shares of Common
Stock, at the Conversion Rate in effect on the Conversion Date, upon the terms
hereinafter set forth. To the extent any such shares so converted are held in
escrow pursuant to the Escrow Agreement at the time of conversion, then the
converted shares of the Series B Preferred Stock so held in escrow shall be
released upon the deposit into such escrow of the shares of Common Stock into
which such shares were converted.
(b) Automatic Conversion. (i) Subject to adjustment pursuant to
the following provisions, the "Target Per Share Price" shall be $56.22. If the
number of shares of Common Stock outstanding at any time after the issuance of
the Series B Preferred Stock is increased by stock dividend payable in shares
of Common Stock or by subdivision or split-up of shares of Common Stock (each,
an "Increasing Adjustment Event"), then immediately after the record date fixed
for determination of holders of Common Stock entitled to receive the stock
dividend or the effective date of the subdivision or split-up, as the case may
be, the dollar amount then in effect pursuant to the preceding sentence shall
be reduced to equal the product resulting from the multiplication of such
dollar amount by a fraction, the numerator of such fraction being the total
number of shares of Common Stock outstanding immediately prior to such
Increasing Adjustment Event on a fully diluted basis and the denominator of
such fraction being the total number of shares of Common Stock outstanding
immediately following such Increasing Adjustment Event on a fully diluted
basis.
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<PAGE> 37
If the number of shares of Common Stock outstanding at any time after the
issuance of the Series B Preferred Stock is decreased by virtue of a reverse
stock split (a "Decreasing Adjustment Event"), then immediately after date of
the reverse stock split, the dollar amount then in effect pursuant to the
second preceding sentence shall be increased to equal the product resulting
from the multiplication of such dollar amount by a fraction, the numerator of
such fraction being the total of shares of Common Stock outstanding immediately
following such Decreasing Adjustment Event on a fully diluted basis and the
denominator of such fraction being the total number of shares of Common Stock
outstanding immediately prior to such Decreasing Adjustment Event on a fully
diluted basis.
(ii) If as of any day on which the Trading Level Event has
occurred there are outstanding any Required Conversion Shares, then each share
of the Series B Preferred Stock comprising such Required Conversion Shares
shall automatically be converted, without any further act of the Corporation or
its shareholders, into fully paid and non-assessable shares of Common Stock of
the Corporation at the Conversion Rate in effect as of such day upon the terms
hereinafter set forth and unlegended certificate(s) for such shares (and, if
applicable, the Underlying Stock relating to such shares) shall be delivered to
the holders thereof within two business days thereafter.
(c) Conversion Rate. On or about the date of this Amended and
Restated Certificate the outstanding shares of Common Stock will be subdivided
or split-up on a 5.47 to one basis in anticipation of the initial public
offering of the Common Stock (the "IPO Subdivision"). Upon the occurrence of
and following the IPO Subdivision, each share of Series B Preferred Stock shall
be convertible into 5.47 shares of the Common Stock (subject to subsequent
adjustment pursuant to Section 5(g), the "Conversion Rate").
(d) Mechanics of Conversion. The holder of any shares of Series B
Preferred Stock may exercise the optional conversion right specified in
paragraph (a) above by surrendering to the Corporation or any transfer agent of
the Corporation the certificate or certificates for the shares to be converted,
accompanied by written notice stating that the holder elects to convert all of
the shares represented thereby. Optional conversion under paragraph (a) shall
be deemed to have been effected on the date when notice of an election to
convert and certificates for the shares to be converted has been delivered.
Upon an automatic conversion pursuant to Section 5(b), then on the Conversion
Date, the outstanding shares of the Series B Preferred Stock shall be converted
automatically without any action by the holders of such shares and whether or
not the certificates representing such shares are surrendered to the
Corporation or its transfer agent; provided, the Corporation shall not be
obligated to issue to any holder certificates representing the shares of Common
Stock issuable upon such conversion unless certificates representing the shares
of Series B Preferred Stock, endorsed directly or through stock powers to the
Corporation or in blank and accompanied when appropriate with evidence of the
signatory's authority, are delivered to the Corporation or any transfer agent
of the Corporation. Each date on which the Corporation has received a notice
regarding optional conversion and the date upon which an automatic conversion
occurs under paragraph (b) above is referred to herein as a "Conversion Date".
As promptly as practicable after a Conversion Date the Corporation shall issue
and deliver to or upon the written order of the applicable holders a
certificate or certificates for the number of full shares of Common Stock to
which such holders are entitled rounded down to the next whole share as
provided in paragraph (e) below. The person in whose
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name the certificate or certificates of Common Stock are to be issued shall be
deemed to have become a holder of record of such Common Stock on the Conversion
Date.
(e) Fractional Shares. No fractional shares of Common Stock or
scrip shall be issued upon conversion of shares of Series B Preferred Stock.
Instead of any fractional shares of Common Stock which would otherwise be
issuable upon conversion of any shares of Series B Preferred Stock, the number
of full shares of Common Stock issuable upon conversion thereof shall be
reduced to the next lowest number of whole shares, and the Corporation will pay
a cash adjustment in respect of any surrendered shares of Series B Preferred
Stock not converted into Common Stock in an amount equal to the Redemption
Price of such shares.
(f) Partial Conversion. Upon conversion of only a portion of the
number of shares covered by a certificate representing shares of Series B
Preferred Stock surrendered for conversion (in the case of conversion pursuant
to Section 5(a)), the Corporation shall issue and deliver to or upon the
written order of the holder of the certificate so surrendered for conversion,
at the expense of the Corporation, a new certificate representing the number of
shares of the Series B Preferred Stock representing the unconverted portion of
the certificate so surrendered.
(g) Conversion Rate Adjustments. The Conversion Rate shall be
subject to adjustment from time to time as follows:
(i) Stock Dividends. If the number of shares of Common
Stock outstanding at any time after the IPO Subdivision is increased
by a stock dividend payable in shares of Common Stock or by a
subdivision or split-up of shares of Common Stock, then immediately
after the record date fixed for the determination of holders of Common
Stock entitled to receive such stock dividend or the effective date of
such subdivision or split-up, as the case may be, the Conversion Rate
shall be proportionately adjusted so that the holder of any shares of
Series B Preferred Stock surrendered for conversion after such date
shall be entitled to receive the number of shares of Common Stock of
the Corporation which such holder would have owned and been entitled
to receive immediately following such action had such shares of Series
B Preferred Stock been converted immediately prior thereto. If the
number of shares of Common Stock outstanding at any time after the IPO
Subdivision is decreased by a reverse stock split, then immediately
after the effective date of such reverse stock split the Conversion
Rate shall be proportionately adjusted so that the holder of any
shares of Series B Preferred Stock surrendered for conversion after
such date shall be entitled to receive the number of shares of Common
Stock of the Corporation which such holder would have owned and been
entitled to receive immediately following such action had such shares
of Series B Preferred Stock been converted immediately prior thereto.
(ii) Reorganizations. In case of any capital
reorganization of the Corporation, or of any reclassification of the
Common Stock, or in case of the consolidation of the Corporation with
or the merger of the Corporation with or into any other corporation,
partnership or other business entity in which the Corporation is not
the survivor, or of the sale, lease or other transfer of all or
substantially all of the assets of the Corporation to any other
corporation, partnership or other business entity, each share of
Series B Preferred Stock
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shall, effective simultaneously with such capital reorganization,
reclassification, consolidation, merger, sale or lease, be convertible
into the number of shares of stock or other securities or property to
which the Common Stock issuable (at the time of such capital
reorganization, reclassification, consolidation, merger, sale or
lease) upon conversion of such share of Series B Preferred Stock would
have been entitled immediately following such capital reorganization,
reclassification, consolidation, merger, sale or lease in place of (or
in addition to, in the case of any such event after which Common Stock
remains outstanding) the shares of Common Stock into which such share,
of Series B Preferred Stock would otherwise have been convertible; and
in any such case, if necessary, the provisions set forth herein with
respect to the rights and interests thereafter of the holders of the
shares of Series B Preferred Stock shall be appropriately adjusted so
as to be applicable, as nearly as may reasonably be, to any share of
stock or other securities or property thereafter deliverable on the
conversion of the shares of Series B Preferred Stock.
(h) Notice to Holders. If the Corporation proposes to take any
action of the type described in paragraph (g) above, the Corporation shall give
notice to each holder of the Series B Preferred Stock and to the Corporation's
transfer agent by mail, first class postage prepaid, at such holder's address
appearing on the Corporation's records. Such notice shall specify the record
date, if any, with respect to any such action and the approximate date on which
such action is to take place. Such notice shall also set forth such facts with
respect thereto as shall be reasonably necessary to indicate the effect of such
action (to the extent such effect may be known at the date of such notice) on
the Conversion Rate and the number, kind or class of shares or other securities
or property which shall be deliverable or purchasable upon the occurrence of
such action or deliverable upon conversion of the Series B Preferred Stock. In
the case of any action which would require the fixing of a record date, such
notice shall be given at least ten days prior to the date so fixed, and in case
of all other action, such notice shall be given at least 15 days prior to the
taking of such proposed action. The Corporation shall also provide to each
such holder notice of the consummation of such action.
(i) Costs. The Corporation shall pay all documentary, stamp,
transfer or other transactional taxes attributable to the issuance or delivery
of shares of Common Stock of the Corporation or other securities or property
upon conversion of the shares of Series B Preferred Stock; provided, that the
Corporation shall not be required to pay any taxes which may be payable in
respect of any transfer involved in the issuance or delivery of any certificate
for such shares or securities in the name other than that of the holder of the
shares of Series B Preferred Stock in respect of which such shares are being
issued.
(j) Reservation of Shares. The Corporation shall reserve at all
times so long as any shares of Series B Preferred Stock remain outstanding,
free from preemptive rights, out of its treasury stock or its authorized but
unissued shares of Common Stock, or both, solely for the purpose of effecting
the conversion of shares of Series B Preferred Stock, sufficient shares of
Common Stock to provide for the conversion of all outstanding shares of Series
B Preferred Stock and set aside and keep available any other property
deliverable upon conversion of all outstanding shares of Series B Preferred
Stock.
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<PAGE> 40
(k) Valid Issuance. All shares of Common Stock or other
securities which may be issued upon conversion of the shares of Series B
Preferred Stock will upon issuance by the Corporation be duly and validly
issued, fully paid and nonassessable and free from all taxes, liens and charges
with respect to the issuance thereof and the Corporation shall take no action
which will cause a contrary result.
6. Voting Rights. At any annual or special meeting of shareholders or
otherwise in respect of any matter submitted for the vote of shareholders
generally, each share of Series B Preferred Stock shall entitle the holder to
such number of votes per share as shall equal the number of shares of Common
Stock (rounded to the nearest whole share) into which such shares of Series B
Preferred Stock is then convertible. The provisions of this Section 6 shall
apply to any shares of Series B Preferred Stock so long as such shares are
outstanding, and shall terminate with respect to such shares when such shares
are no longer outstanding, whether by repurchase, conversion into Common Stock,
or otherwise.
7. Certain Transferabilitv Rights and Restrictions.
(a) Application. The following provisions of this Section 7 apply
to all shares of Series B Preferred Stock (collectively, "Stock"). Such
provisions shall continue to bind all shares of Stock, and each original holder
of such shares and each transferee thereof agrees by acceptance of any
certificate representing such shares to be so bound by such provisions, from
the date of issuance until the earlier to occur of (i) the dissolution or
termination of existence of the Corporation, (ii) the written consent of the
Board of Directors and the holders of 66-2/3% of the outstanding Stock, and
(iii) as to any particular share of Series B Preferred Stock, the conversion of
such share into Common Stock. Every certificate representing shares of Stock
shall be inscribed with a legend referring to the restrictions set forth in
this Section 7.
(b) General. Without the prior approval of the Board of Directors
in each instance, no shares of Stock subject may be sold, assigned, pledged,
encumbered, transferred or otherwise hypothecated in any manner (by gift,
pursuant to any marital dissolution, in any bankruptcy or insolvency
proceeding, or otherwise), except as provided in this Section 7.
(c) Right of First Refusal. If any holder of Stock desires to
sell, assign, transfer or otherwise dispose of any shares of Stock (other than
pursuant to Sections 3 or 4), then such holder (for purposes of this paragraph
(c), the "Selling Shareholder"), prior to making any such sale, shall first
offer such shares of Stock (for purposes of this paragraph (c), the "Option
Shares") for sale to the Corporation, in accordance with the following
provisions of this paragraph (c).
(i) Option Price: Terms: Offering Notices. The price per
Option Share at which the Selling Shareholder shall be required to
offer the Option Shares (for purposes of this paragraph (c), the
"Option Price") and the terms of such offer, shall be the price at
which and the terms upon which any proposed third party purchaser
shall have offered to purchase the Option Shares from the Selling
Shareholder and which the Selling Shareholder is prepared to accept.
Each offer required to be made by the Selling Shareholder pursuant to
this paragraph (c) shall be made by a written notice (for purposes of
this paragraph (c), the
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"Offering Notice") which shall state that the offer is being made
pursuant to this paragraph (c) and which shall set forth the number of
Option Shares, the name or names of the proposed purchaser or
purchasers of the Option Shares, the price per share offered by such
proposed purchaser or purchasers for the Option Shares, the method of
payment of the purchase price and the scheduled date of consummation
of such proposed sale. A copy of the written offer from any proposed
third-party purchaser shall be attached to each Offering Notice.
(ii) Offer to the Corporation. The Selling Shareholder
shall offer the Option Shares to the Corporation by delivering an
Offering Notice to the Corporation. Within 30 days following the
Corporation's receipt of such Offering Notice, the Corporation shall
deliver to the Selling Shareholder a written reply notice accepting
the offer of the Selling Shareholder with respect to all (but not less
than all) of the Option Shares or rejecting such offer. If by such
written reply notice the Corporation accepts the offer made by the
Selling Shareholder, the reply notice shall constitute an agreement
binding on the Selling Shareholder and the Corporation to sell and
purchase, respectively, the Option Shares at a price per share equal
to the Option Price. If within such 30-day period, the Corporation
shall have failed to deliver a reply notice accepting the offer of the
Selling Shareholder as to all of the Option Shares, the Corporation
shall be deemed to have rejected such offer.
(iii) Lapse of Option. If the foregoing offer to sell
Option Shares has been made by the Selling Shareholder and has not
been accepted by the Corporation, then the Selling Shareholder may
sell not less than all of the Option Shares at any time within, but
not subsequent to, 60 days after the lapse of the option granted
pursuant to this paragraph (c); provided, no sale of the Option Shares
shall be made at any price lower than the Option Price or on terms
materially different from those specified in the Offering Notice or to
any person or persons other than the persons specified in the Offering
Notice or to any person or persons other than the persons specified in
the Offering Notice. If after the lapse of such 60-day period the
Option Shares shall not have been sold, all of the provisions of this
paragraph (c) shall apply to any future sale or other disposition of
shares of Stock owned by the Selling Shareholder.
(iv) Consummation of Purchases. Each transaction of
purchase and sale of Option Shares pursuant to this paragraph (c)
shall be completed by delivery of the stock certificates representing
the Option Shares endorsed in blank, or accompanied by duly executed
stock powers, and by actual registration of the transfer of the Option
Shares on the books of the Corporation upon payment of the purchase
price to the Selling Shareholder (the Corporation agreeing to effect
such registration upon the tender of such certificates, endorsed or
accompanied by such executed stock powers). Any such transaction
shall be closed at such time and place as shall be agreed upon by the
parties thereto, or, if no such agreement is reached, at the principal
office of the Corporation on the 30th day following the date of
delivery of the last reply notice given in connection with such
transaction or, if such day shall not be a business day, on the first
business day thereafter during normal business hours.
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<PAGE> 42
(v) Certain Permitted Dispositions. Subject to the
restrictions set forth in paragraph (b) above, transfers by holders of
Stock to Affiliates, upon the death of any such holder to such
holder's estate or other legal representative, or the pledge of Stock
by such holder (but not any disposition in foreclosure or other
remedy) shall not be subject to the right of first refusal under this
paragraph (c), provided, the provisions of this Section 7 shall
continue to bind the shares of Stock held by any such transferee.
8. Registration Rights. Subject to paragraph (g) below and the other
provisions of this Section 8, the holders of the Series B Preferred Stock shall
be entitled to have the shares of Common Stock issuable upon conversion of
their Series B Preferred Stock included in any registration of Common stock
under the Securities Act filed by the Corporation with the Securities and
Exchange Commission (the "Commission").
(a) Piggyback Rights; Demand Rights. (1) If at any time or from
time to time the Corporation proposes to file with the Commission a
registration statement (whether on Form S-1, S-2 or S-3, SB-1, SB-2, or any
equivalent form then in effect) for the registration under the Securities Act
of any shares of Common Stock for sale to the public by the Corporation or on
behalf of a shareholder of the Corporation for cash (excluding any shares of
Common Stock issuable by the Corporation upon the exercise of employee or
director stock options or in connection with the merger or consolidation of the
Corporation or one of its subsidiaries with one or more other corporations if
the Corporation is the surviving corporation), the Corporation shall give each
holder of the Series B Preferred Stock at least 15 days' prior written notice
of the filing of the proposed registration statement. The notice shall include
a list of the states and foreign jurisdictions, if any, in which the
Corporation intends to qualify such shares, and shall also include the
Corporation's estimate of the range of the offering price per share of Common
Stock. On the written request of any holder of the Series B Preferred Stock
received by the Corporation within 15 days after the date of the Corporation's
notice, the Corporation shall, subject to the conditions and in accordance with
the procedures set forth in paragraphs (b) and (c) below, and at its own
expense as provided in paragraph (e) below, include in the coverage of such
registration statement and qualify for sale under the blue sky or securities
laws of the various states, the number of shares (but not less than 5,000
shares, subject to adjustment to give effect to any stock dividends, splits or
combinations, recapitalizations or other similar corporate events) of Common
Stock (herein called the "Specified Shares") held and so requested to be
registered by each such holder; provided, if the managing underwriter for the
Corporation indicates its belief in writing that the effect of including in the
coverage of such registration statement all or part of the Specified Shares and
the shares of Common Stock requested to be so included by other stockholders
having contractual registration rights ("Other Requesting Stockholders") will
materially and adversely affect the sale of the shares of Common Stock proposed
to be sold by the Corporation (which statement of the managing underwriter
shall also state the maximum number of shares, herein called the "Maximum
Shares"), if any, which can be sold by such all such holders without materially
and adversely affecting the sale of the shares proposed to be sold by the
Corporation), then the number of Specified Shares which the holders of the
Series B Preferred Stock and the Other Requesting Stockholders shall
collectively have the right to include in such registration statement shall be
reduced to the number of Maximum Shares set forth in such statement of the
managing underwriter, such reduction to be effected on a pro rata basis in
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accordance with the number of all such shares requested to be so registered by
the holders of the Series B Preferred Stock and the Other Requesting
Stockholders.
Except as provided in paragraph (c) below, in no event shall the
Corporation be required to amend any registration statement filed pursuant to
this Section 8 after it has become effective or to amend or supplement any
prospectus to permit the continued disposition of shares of Common Stock
registered under any registration statement.
The Corporation shall have the right to select any underwriters,
including the managing underwriter, of any public offering of shares of Common
Stock subject to the provisions of this paragraph (a). Nothing in this
paragraph (a) shall create any liability on the part of the Corporation to the
holders of the Series B Preferred Stock if the Corporation for any reason
should decide not to file or to withdraw such a registration statement.
The Corporation may withdraw any registration statement and abandon
any proposed offering initiated by the Corporation without the consent of any
holder of the Series B Preferred Stock, notwithstanding the request of any such
holder to participate therein in accordance with this paragraph (a), if the
Corporation determines that such action is in the best interests of the
Corporation.
(2) (aa) At any time during the period commencing as
of 12 months following the expiration of the Corporation's initial public
offering of its Common Stock and ending 48 months thereafter (the "Demand
Period"), any holder or holders of shares of the Series B Preferred Stock who
shall have the right to acquire upon conversion of shares of the Series B
Preferred Stock 25% or more of the aggregate amount of shares of Common Stock
issuable upon conversion of the Series B Preferred Stock, may notify the
Corporation of such holder's demand for registration pursuant to this Section
8(a)(2), in which case the provisions of this Section 8(a)(2) shall apply.
Such demand shall include the number of shares of Series B Preferred Stock
owned by such holder or holders and the number of shares of Common Stock
issuable upon conversion of the Series B Preferred Stock. If any holder of
shares of Series B Preferred Stock makes a demand pursuant to this Section
8(a)(2), then all of the then outstanding shares of Series B Preferred Stock
shall be deemed covered by such demand even if part of such shares are owned by
another holder. If the demand referred to in the preceding provisions is not
made within the Demand Period, then the provisions of this Section 8(a)(2)
shall have no further force or effect (and the holders of the Series B
Preferred Stock shall have no further rights under this Section 8(a)(2)) as of
the expiration of the Demand Period.
(bb) As soon as reasonably practicable following
any demand pursuant to clause (2)(aa) preceding being made timely in accordance
with such clause, the Corporation shall (i) provide written notice of the
demand having been made and offering to include the shares of Common Stock
issuable upon conversion of shares of Series B Preferred Stock owned by each
holder not included in the demand prepare and file with the Commission a
registration statement, whether on "shelf" or other form, which form the
Corporation shall have the right to choose (as the same may be amended, the
"Registration Statement") pursuant to which all of the shares of Common Stock
issuable upon conversion of the Series B Preferred Stock then outstanding (such
shares being hereinafter, in this clause (2)(bb), referred to as the "Subject
Shares") are registered for immediate
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<PAGE> 44
sale, in one or more transactions (which may involve block transactions), in
special offerings, exchange distributions and/or secondary distributions, in
the over-the-counter market, in negotiated transactions, or a combination of
such methods of sale, at market prices prevailing at the time of sale, at
prices related to such market prices or at negotiated prices; provided, such
transactions shall not include an underwritten public offering unless the
Corporation so elects in its sole discretion.
(cc) The Corporation shall use commercially
reasonably best efforts to cause the Registration Statement to become effective
within 60 days following its receipt of the demand notice. Further, the
Corporation shall use commercially reasonable efforts to cause the Registration
Statement to remain effective continuously for a three month period.
(dd) The Corporation will pay all expenses
incurred by it in complying with its registration obligations pursuant to this
clause (2), including, without limitation, all registration and filing fees,
blue sky fees and expenses, printing expenses, fees and disbursements of its
counsel and independent public accountants for the Corporation, and fees of
transfer agents and registrars, but excluding any selling commissions or
discounts allocable to the sale of the Subject Shares, fees and disbursements
of counsel and other representatives for any holder of the Subject Shares and
any stock transfer taxes payable by reason of the sale of the Subject Shares,
all of which shall be for the account of each holder of the Subject Shares.
(b) Certain Registration Conditions. Any holder of Series B
Preferred Stock for whom shares of Common Stock into which such holder's Series
B Preferred Stock is convertible are included in any registration statement
filed with the Commission pursuant to paragraph (a) of this Section 8 is
hereafter referred to as a "Selling Stockholder." Anything in this Agreement to
the contrary notwithstanding, the Corporation shall not be required to effect a
registration of any Common Stock of any Selling Stockholder pursuant to this
Section 8, or file any post-effective amendment thereto:
(i) unless such Selling Stockholder agrees (if such
shares are included pursuant to paragraph (a) of this Section 8) (x)
to sell and distribute a portion or all of such stockholder's Common
Stock in accordance with the plan or plans of distribution adopted by
and through underwriters, if any, acting for the Corporation, and (y)
to bear a pro rata share of underwriter's discounts and commissions;
(ii) unless the Corporation and the underwriters for the
Corporation, if any, shall have received from such Selling Stockholder
all such information as the Corporation and such underwriters may
reasonably request concerning such stockholder to enable the
Corporation to include in the registration statement all material
facts required to be disclosed therein. Notwithstanding the
foregoing, a Selling Stockholder shall not be required to furnish to
the Corporation any personal financial information of such stockholder
unrelated to such stockholder's holdings of Common Stock, Series B
Preferred Stock or other securities of the Corporation, provided that
each Selling Stockholder shall nonetheless be required to furnish all
information reasonably requested by any such underwriter;
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<PAGE> 45
(iii) unless such Selling Stockholder is then entitled to
convert such stockholder's shares of Series B Preferred Stock into
Common Stock and such Selling Stockholder in fact delivers to the
Corporation, contemporaneously with the notice given by such Selling
Stockholder under paragraph 8(a) hereof of their desire to have shares
of Common Stock included in such registration statement, notice of
such Stockholder's intention to convert the Series B Preferred Stock
into Common Stock subject to and upon the effectiveness of the
registration statement; and
(iv) unless such Selling Stockholder, at the request of
the Corporation or its managing underwriter, if any, agrees or
acknowledges that such Selling Stockholder (x) has a present intention
to sell such shares; and (y) agrees to execute all consents, powers of
attorney, registration statements and other documents required in
order to cause such registration statement to become effective.
(c) Covenants and Procedures. If the Corporation becomes
obligated under the provisions of paragraph (a) of this Section 8 to effect
registration of shares of Common Stock on behalf of any Selling Stockholder,
the following shall apply:
(i) The Corporation, at its own expense as provided in
paragraph (e), shall prepare and file with the Commission a
registration statement covering such shares of Common Stock and use
its best efforts to cause such registration statement to become
effective; and the Corporation will file such post-effective
amendments to such registration statement (and use its best efforts to
cause them to be effective) and such supplements as are necessary so
that current prospectuses are at all times available for a period of
at least 90 days after the effective date of such registration
statement. Each Selling Stockholder shall promptly provide the
Corporation with such information with respect to such Selling
Stockholder's shares of Common Stock to be so registered and, if
applicable, the proposed terms of the offering thereof as is required
for such registration. Further, if the shares of Common Stock to be
covered by the registration statement are not to be sold to or through
underwriters acting for the Corporation, the Corporation shall (x)
deliver to each Selling Stockholder as promptly as practicable as many
copies of preliminary prospectuses as such Selling Stockholder may
reasonably request, and such Selling Stockholder shall keep a written
record of the distribution of such preliminary prospectuses and shall
refrain from delivery of such preliminary prospectuses in any manner
or under any circumstances which would violate the Securities Act or
the securities laws of any other jurisdiction, including the various
states of the United States, (y) deliver to each Selling Stockholder,
as soon as practicable after the effective date of the registration
statement, and from time to time thereafter during such 90 day period,
as many copies of the prospectuses required to be delivered in
connection with the sale of shares of Common Stock registered under
the regish stockholder may reasonably request, copies of such amended
prospectus or of such supplement to be attached to the prospectus in
order that the prospectus, as so amended or supplemented, will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading.
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<PAGE> 46
(ii) On or prior to the date on which the
registration statement is declared effective, the Corporation shall use
its best efforts to register or qualify, and cooperate with each
Selling Stockholder, and their counsel, in connection with the
registration or qualification of the Common Stock covered by the
registration statement for offer and sale under the securities or blue
sky laws of each state and other jurisdiction of the United States as
such Selling Stockholder or underwriter reasonably requests, to use
commercially reasonable best efforts to keep each such registration or
qualification effective, including through new filings, or amendments
or renewals, during the period such registration statement is required
to be kept effective and to do any and all other acts or things
necessary or advisable to enable the disposition in all such
jurisdictions of the Common Stock covered by the applicable
registration statement, provided that the Corporation will not be
required to qualify generally to do business in any jurisdiction where
it is not then so qualified.
(iii) The Corporation shall use commercially reasonable
best efforts to cause all of each Selling Stockholder's Common Stock
included in such registration statement to be listed, by the date of
the first sale of such Common Stock pursuant to such registration
statement, on each securities exchange on which the Common Stock of
the Corporation is then listed or proposed to be listed, if any.
(iv) The Corporation shall make generally available to
each Selling Stockholder an earnings statement satisfying the
provisions of Section 11(a) of the Securities Act no later than 45
days after the end of the 12-month period beginning with the first day
of the Corporation's first fiscal quarter commencing after the
effective date of the registration statement, which earnings statement
shall cover said 12-month period, which requirement will be deemed to
be satisfied if the Corporation timely files complete and accurate
information on Forms 10-Q, 10-K and 8-K under the Securities Exchange
Act of 1934, as amended, and otherwise complies with Rule 158 under
the Securities Act as soon as feasible.
(v) The Corporation shall cooperate with each Selling
Stockholder to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legends) representing Common
Stock to be sold under the registration statement, and enable such
securities to be in such denominations and registered in such names as
the managing underwriter or underwriters, if any, or such Selling
Stockholder may request, subject to the underwriters' obligation to
return any certificates representing securities not sold.
(vi) The Corporation shall make available for inspection
by each Selling Stockholder and any attorney, accountant or other
agent retained by such Selling Stockholder (collectively, the
"Inspectors"), all financial and other records, pertinent corporate
documents and properties of the Corporation, as shall be reasonably
necessary to enable them to exercise their due diligence,
responsibility, and cause the Corporation's officers, directors and
employees to supply all nonconfidential information reasonably
requested by any such Inspector in connection with such registration
statement. As a condition to providing such access, the Corporation
may require that any and all Inspectors execute and deliver
confidentiality agreement, in form and substance acceptable to the
Corporation, and that confidentiality procedures be observed, all with
respect to such information.
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(vii) The Corporation shall use commercially reasonable
best efforts to obtain a "cold comfort" letter from the Corporation's
independent public accountants, and an opinion of counsel for the
Corporation, each in customary form and covering such matters of the
type customarily covered by cold comfort letters and opinions of
counsel in connection with public offerings of securities.
(d) Indemnification.
(i) Indemnification by the Corporation. In the event of
any registration under the Securities Act pursuant to this Section 8
of shares of Common Stock held by any Selling Stockholder, the
Corporation will hold harmless each Selling Stockholder and each
person, if any, who controls each Selling Stockholder within the
meaning of the Securities Act, against any losses, claims, damages or
liabilities (including legal fees and costs of court), joint or
several, to which such Selling Stockholder or controlling person may
become subject under the Securities 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, on the effective date
thereof, in any registration statement under which such securities
were registered under the Securities Act, any final prospectus
contained therein, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading; and will reimburse each
Selling Stockholder and each such controlling person for any legal or
any other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage or liability;
provided, the Corporation shall not be liable to any such Selling
Stockholder or controlling persons in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or
alleged omission made in such registration statement or final
prospectus or such amendment or supplement in reliance upon and in
conformity with information furnished to the Corporation through a
written instrument duly executed by such Selling Stockholder or
controlling person specifically for use in the preparation thereof.
(ii) Indemnification by Selling Stockholders. It shall be
a condition precedent to the obligation of the Corporation to include
in any registration statement any shares of Common Stock then held by
a Selling Stockholder that the Corporation shall have received an
undertaking reasonably satisfactory to it and its counsel from such
Selling Stockholder to severally indemnify and hold harmless (in the
same manner and to the same extent as set forth in subparagraph (i)
above) the Corporation, each director of the Corporation, each officer
of the Corporation who shall sign such registration statement, each
underwriter of such securities and any person who controls the
Corporation or such underwriter within the meaning of the Securities
Act, with respect to any statement or omission from such registration
statement, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereto, if such statement or
omission was made in reliance upon and in conformity with information
furnished to the Corporation through a written instrument duly
executed by such Selling Stockholder specifically for use in the
preparation
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of such registration statement, preliminary prospectus or final
prospectus or such amendment or supplement thereto.
(iii) Indemnification Procedures. Promptly after receipt
by an indemnified party of notice of the commencement of any action
involving a claim referred to in the preceding subparagraphs (i) and
(ii), such indemnified party will, if a claim in respect thereof is to
be made against an indemnifying party, give written notice to the
indemnifying party of the commencement of such action. In case any
such action is brought against an indemnified party, the indemnifying
party will be entitled to participate in and to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified
party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof,
and provided that the indemnifying party in fact assumes such defense,
the indemnifying party will not be liable to such indemnified party
for any legal or other expenses incurred after the date of such notice
by the latter in connection with the defense thereof. Whether or not
such defense is assumed by the indemnifying party, the indemnifying
party will not be subject to any liability for any settlement made
without its consent. No indemnifying party will consent to entry of
any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to
such indemnified party of a release from all liability in respect of
such claim or litigation. The indemnified party shall be entitled to
participate with its own counsel (at the indemnified party's own
expense) if reasonably necessary to avoid a conflict of interest.
(iv) Contribution. If the indemnification provided for
in this paragraph (d) from the indemnifying party is unavailable to an
indemnified party hereunder in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then the 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 or expenses in
such proportion as is appropriate to reflect the relative fault of the
indemnifying party and indemnified parties in connection with the
actions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The
relative fault of such indemnifying party and indemnified parties
shall be determined by reference to, among other things, whether any
action in question, including any untrue or alleged untrue statement
of a material fact or a material omission, has been made by, or
relates to information supplied by, such indemnifying party or
indemnified parties, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
action. The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and expenses referred to above
shall be deemed to include any legal or other fees or expenses
reasonably incurred by such party in connection with any investigation
or proceeding. For purposes of the foregoing, it would not be just
and equitable if contribution pursuant to this paragraph (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. Notwithstanding the
provisions of this subparagraph (iv), no Selling Stockholder shall be
required to contribute any amount in excess of the amount by which the
total price at which the Common Stock of such Selling
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<PAGE> 49
Stockholder was offered to the public exceeds the amount of any
damages which such Selling Stockholder has otherwise been required to
pay by reason of such untrue statement or 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.
(e) Expenses. All expenses incurred by the Corporation in
connection with any registration statement covering shares of Common Stock
offered by the Selling Stockholders, including, without limitation, all
registration and filing fees (including all expenses incident to filing with
the National Association of Securities Dealers, Inc.), printing expenses, fees
and disbursements of counsel for the Corporation and of its independent
certified public accountants, the reasonable fees and disbursements of one
counsel for collectively all Selling Stockholders and Other Requesting
Stockholders whose stock is included in such registration, and the expense of
qualifying such shares under state blue sky laws, shall be borne by the
Corporation; provided, all underwriter's discounts and commissions relating to
the shares of Common Stock to be sold by the Selling Stockholders shall be
borne by the Selling Stockholders.
(f) Dispositions During Registration. Upon written request by the
Corporation, the Selling Stockholders will agree, upon the registration of any
of each such Selling Stockholder's shares of Common Stock or the Common Stock
issued by the Corporation, not to sell or otherwise dispose of any shares of
Stock (other than Common Stock covered by such registration, which may be sold
in accordance with the plan or plans of distribution described in the
registration statement) owned by each such Selling Stockholder for a period of
90 days following the effective date of such registration statement or for such
longer period (not to exceed 180 days) as may be required under the plan or
plans of distribution set forth in such registration statement. Each holder of
the Series B Preferred Stock shall comply with the foregoing requirements even
if such holder's Common Stock issuable upon the conversion thereof is not being
included in such registration, if (i) at such time such holder (together with
such holder's Affiliates) owns 5% or more of the Common Stock not being
registered by such registration and (ii) other holders of 5% or more of the
Common Stock not being registered by such registration are similarly bound.
(g) Term of Registration Rights. The registration rights granted
pursuant to this Section 8 shall be effective for a period commencing upon the
date of original issuance thereof and ending on, as to any holder of shares of
Series B Preferred Stock, upon either (i) such holder's written consent or (ii)
the redemption of all of such holder's shares of Series B Preferred Stock.
9. Exclusion of Other Rights. Unless otherwise required by law, the
shares of Series B Preferred Stock shall not have any voting powers,
preferences or relative, participating, optional or other special rights other
than those specifically set forth herein.
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<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
FIRST SIERRA FINANCIAL, INC.
A Delaware Corporation
Date of Adoption:
February 27, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE . . . . . . . . . . . . . . . . . . . 1
SECTION 2. OTHER OFFICES . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II
STOCKHOLDERS
SECTION 1. PLACE OF MEETINGS . . . . . . . . . . . . . . . . . . . 1
SECTION 2. QUORUM; REQUIRED VOTE FOR STOCKHOLDER ACTION;
ADJOURNMENT OF MEETINGS . . . . . . . . . . . . . . . . 1
SECTION 3. ANNUAL MEETINGS . . . . . . . . . . . . . . . . . . . . 2
SECTION 4. SPECIAL MEETINGS . . . . . . . . . . . . . . . . . . . 2
SECTION 5. RECORD DATE . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 6. NOTICE OF MEETINGS . . . . . . . . . . . . . . . . . . 4
SECTION 7. VOTING LIST . . . . . . . . . . . . . . . . . . . . . . 4
SECTION 8. PROXIES . . . . . . . . . . . . . . . . . . . . . . . . 4
SECTION 9. VOTING; INSPECTORS; ELECTIONS . . . . . . . . . . . . . 5
SECTION 10. CONDUCT OF MEETINGS . . . . . . . . . . . . . . . . . . 5
SECTION 11. TREASURY SHARES . . . . . . . . . . . . . . . . . . . . 6
SECTION 12. ACTION BY WRITTEN CONSENT . . . . . . . . . . . . . . . 6
ARTICLE III
BOARD OF DIRECTORS
SECTION 4. QUORUM; REQUIRED VOTE FOR DIRECTOR ACTION . . . . . . . 8
SECTION 5. MEETINGS; ORDER OF BUSINESS . . . . . . . . . . . . . . 8
SECTION 6. FIRST MEETING . . . . . . . . . . . . . . . . . . . . . 8
SECTION 8. REGULAR MEETINGS . . . . . . . . . . . . . . . . . . . 9
SECTION 9. SPECIAL MEETINGS . . . . . . . . . . . . . . . . . . . 9
SECTION 10. REMOVAL . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 11. VACANCIES; INCREASES IN THE NUMBER OF DIRECTORS . . . . 9
SECTION 14. COMPENSATION . . . . . . . . . . . . . . . . . . . . . 10
SECTION 15. ACTION WITHOUT A MEETING; TELEPHONE CONFERENCE MEETING . 10
ARTICLE IV
COMMITTEES
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
ARTICLE V
OFFICERS
SECTION 1. NUMBER, TITLES AND TERM OF OFFICE . . . . . . . . . . . 12
SECTION 2. SALARIES . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 3. REMOVAL . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 4. VACANCIES . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 5. POWERS AND DUTIES OF THE CHIEF EXECUTIVE OFFICER . . . 12
SECTION 6. POWERS AND DUTIES OF THE CHAIRMAN OF THE BOARD . . . . 13
SECTION 7. POWERS AND DUTIES OF THE PRESIDENT . . . . . . . . . . 13
SECTION 8. VICE PRESIDENTS . . . . . . . . . . . . . . . . . . . . 13
SECTION 9. TREASURER . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 10. ASSISTANT TREASURERS . . . . . . . . . . . . . . . . . 13
SECTION 11. SECRETARY . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 12. ASSISTANT SECRETARIES . . . . . . . . . . . . . . . . . 14
SECTION 13. ACTION WITH RESPECT TO SECURITIES OF OTHER
CORPORATIONS . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE VI
CAPITAL STOCK
SECTION 1. CERTIFICATES OF STOCK . . . . . . . . . . . . . . . . . 14
SECTION 2. TRANSFER OF SHARES . . . . . . . . . . . . . . . . . . 15
SECTION 3. OWNERSHIP OF SHARES . . . . . . . . . . . . . . . . . . 15
SECTION 4. REGULATIONS REGARDING CERTIFICATES . . . . . . . . . . 15
SECTION 5. LOST, STOLEN, DESTROYED OR MUTILATED CERTIFICATES . . . 15
ARTICLE VII
MISCELLANEOUS PROVISIONS
SECTION 1. FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 2. CORPORATE SEAL . . . . . . . . . . . . . . . . . . . . 16
SECTION 3. NOTICE AND WAIVER OF NOTICE . . . . . . . . . . . . . . 16
SECTION 4. RESIGNATIONS . . . . . . . . . . . . . . . . . . . . . 16
SECTION 5. FACSIMILE SIGNATURES . . . . . . . . . . . . . . . . . 16
SECTION 6. RELIANCE UPON BOOKS, REPORTS AND RECORDS . . . . . . . 17
</TABLE>
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<PAGE> 4
AMENDED AND RESTATED BYLAWS
OF
FIRST SIERRA FINANCIAL, INC.
A Delaware Corporation
PREAMBLE
These Amended and Restated Bylaws (the "bylaws") are subject to, and
governed by, the General Corporation Law of the State of Delaware (the
"Delaware General Corporation Law") and the certificate of incorporation of
First Sierra Financial, Inc., a Delaware corporation (the "Corporation"). In
the event of a direct conflict between the provisions of these bylaws and the
mandatory provisions of the Delaware General Corporation Law or the provisions
of the restated certificate of incorporation of the Corporation (the "Restated
Certificate of Incorporation"), such provisions of the Delaware General
Corporation Law or the Restated Certificate of Incorporation, as the case may
be, will be controlling.
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the
Corporation required by the Delaware General Corporation Law to be maintained
in the State of Delaware, shall be the registered office named in the original
Certificate of Incorporation, or such other office (which need not be a place
of business or principal office of the Corporation) as may be designated from
time to time by the Board of Directors in the manner provided by law.
SECTION 2. OTHER OFFICES. The Corporation may have other offices,
either within or outside of the State of Delaware, at such place or places as
the Board of Directors may from time to time designate or the business of the
Corporation may require.
ARTICLE II
STOCKHOLDERS
SECTION 1. PLACE OF MEETINGS. All meetings of the stockholders shall
be held at the principal office of the Corporation, or at such other place
within or without the State of Delaware as shall be specified or fixed in the
notices (or waivers of notice) thereof.
SECTION 2. QUORUM; REQUIRED VOTE FOR STOCKHOLDER ACTION; ADJOURNMENT
OF MEETINGS. Unless otherwise required by law, the Restated Certificate of
Incorporation or these bylaws, the presence, in person or by proxy, of
stockholders holding a majority of the outstanding
<PAGE> 5
shares entitled to vote on a matter shall constitute a quorum at all meetings
of the stockholders. When a quorum is present at any meeting, the vote of the
holders of at least a majority of the outstanding shares entitled to vote who
are present, in person or by proxy, shall decide any question brought before
such meeting, unless the question is one on which, by express provision of
statute, the Restated Certificate of Incorporation, or these bylaws, a
different vote is required, in which case such express provision shall govern
and control the decision of such question. The stockholders present at a duly
organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of sufficient stockholders to leave less than a
quorum.
Notwithstanding other provisions of the Restated Certificate of
Incorporation or these bylaws, the chairman of the meeting of stockholders or
the holders of a majority of the issued and outstanding stock, present in
person or represented by proxy and entitled to vote thereat, whether or not a
quorum is present, shall have the power to adjourn such meeting from time to
time, without any notice other than announcement at the meeting of the time and
place of the holding of the adjourned meeting. If the adjournment is for more
than thirty (30) days, or if subsequent to the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at such meeting. At such
adjourned meeting at which a quorum shall be present or represented by proxy,
any business may be transacted which might have been transacted at the meeting
as originally called.
SECTION 3. ANNUAL MEETINGS. An annual meeting of the stockholders,
for the election of directors to succeed those whose terms expire and for the
transaction of such other business as may properly be considered at the
meeting, shall be held each calendar year at such place, within or without the
State of Delaware, on such date, and at such time as the Board of Directors
shall fix and set forth in the notice of the meeting or in a duly executed
waiver of notice of such meeting. If the Board of Directors has not fixed a
place for the holding of the annual meeting of stockholders in accordance with
this Article II, Section 3, such annual meeting shall be held at the principal
place of business of the Corporation.
SECTION 4. SPECIAL MEETINGS. A special meeting of the stockholders
of the Corporation, and any proposals to be considered at such meetings, may be
called and proposed exclusively by the board of directors, pursuant to a
resolution approved by a majority of the members of the board of directors at
the time in office, and no stockholder of the Corporation shall require the
board of directors to call a special meeting of stockholders or to propose
business at a special meeting of stockholders. A special meeting shall be held
on such date and at such time as shall be designated by the person(s) calling
the meeting and stated in the notice of the meeting or in a duly executed
waiver of notice of such meeting. Only such business shall be transacted at a
special meeting as may be stated or indicated in the notice of such meeting or
in a duly executed waiver of notice of such meeting.
SECTION 5. RECORD DATE. For the purpose of determining stockholders
entitled to notice of or to vote at any meeting of stockholders, or any
adjournment thereof, or entitled to express consent to corporate action in
writing without a meeting, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in
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<PAGE> 6
connection with any change, conversion or exchange of stock, or for the purpose
of any other lawful action, the Board of Directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing such
record date is adopted by the Board of Directors, and which record date shall
not be more than sixty (60) nor less than ten (10) days prior to the date of
such meeting.
If no record date is fixed by the Board of Directors, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the
day on which notice of such meeting is given, or, if notice is waived in
accordance with Article VIII, Section 3 of these bylaws, at the close of
business on the day next preceding the day on which the meeting of stockholders
is held.
If, in accordance with the Restated Certificate of Incorporation,
corporate action without a meeting of stockholders is to be taken, the Board of
Directors may fix a record date for determining stockholders entitled to
consent in writing to such corporate action, which record date shall not
precede the date upon which the resolution fixing the record date is adopted by
the Board of Directors, and which record date shall not be more than ten (10)
days subsequent to the date upon which the resolution fixing the record date is
adopted by the Board of Directors.
If no record date has been fixed by the Board of Directors, the record
date for determining stockholders entitled to consent to corporate action in
writing without a meeting, when no prior action by the Board of Directors is
required by law, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
Corporation by delivery to its registered office, its principal place of
business, or to an officer or to an agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded.
Delivery made to the Corporation's registered office shall be by hand or by
certified or registered mail, return receipt requested. If no record date has
been fixed by the Board of Directors and prior action by the Board of Directors
is required by law, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting shall be the close of
business on the day on which the Board of Directors adopts the resolution
taking such prior action.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
SECTION 6. NOTICE OF MEETINGS. Written or printed notice stating the
place, day and hour of all meetings and, in the case of a special meeting, the
purpose or purposes for which the meeting is called, shall be delivered not
less than ten (10) nor more than sixty (60) days prior to the date of the
meeting, either personally or by mail, by or at the direction of the President,
the Secretary or the officer or person calling the meeting, to each stockholder
entitled to vote at such meeting. If mailed, such notice shall be deemed to
have been given when addressed to the stockholder, at his address as it appears
on the stock ledger of the Corporation, postage prepaid, and deposited in the
United States mail. An affidavit of the Secretary, an Assistant Secretary or
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<PAGE> 7
the transfer agent of the Corporation that the notice has been given shall, in
the absence of fraud, be prima facie evidence of the facts stated therein.
SECTION 7. VOTING LIST. The officer or agent having charge of the
stock ledger of the Corporation shall prepare and make, at least ten (10) days
prior to each meeting of stockholders, a complete list of the stockholders
entitled to vote at such meeting or any adjournment thereof, arranged in
alphabetical order, with the address of and the number of shares held by each,
which list, for a period of ten (10) days prior to such meeting, shall be kept
on file at the registered office or principal place of business of the
Corporation and shall be subject to inspection by any stockholder at any time
during usual business hours. Such list shall also be produced and kept open at
the time and place of the meeting and shall be subject to inspection by any
stockholder during the course of the meeting. The original stock ledger shall
be prima facie evidence as to the identity of those stockholders entitled to
examine such voting list or transfer records or to vote at any meeting of
stockholders. Failure to comply with the requirements of this Article II,
Section 7 shall not affect the validity of any action taken at such meeting.
SECTION 8. PROXIES. Each stockholder entitled to vote at a meeting
of stockholders or to express consent, or dissent to a corporate action in
writing without a meeting, may authorize another person or persons to act for
him by proxy. Proxies for use at any meeting of stockholders shall be filed
with the Secretary, or such other officer as the Board of Directors may from
time to time determine by resolution, prior to or at the time of such meeting.
All proxies shall be received and taken charge of and all ballots shall be
received and canvassed by the secretary of the meeting who shall also decide
all questions with respect to the validity of such proxies, the qualification
of voters, and the acceptance or rejection of votes, unless an inspector or
inspectors shall have been appointed by the chairman of the meeting, in which
event such inspector or inspectors shall decide all such questions.
No proxy shall be valid after three (3) years from the date of its
execution, unless such proxy provides for a longer period. Each proxy, unless
expressly provided therein to be irrevocable and coupled with an interest
sufficient in law to support an irrevocable power, shall be revocable.
Should a proxy designate two or more persons to act as proxies, unless
such instrument shall expressly provide otherwise, a majority of such persons
present at any meeting at which their powers thereunder are to be exercised
shall have and may exercise all the powers of voting or consent thereby
conferred, or if only one be present, then such powers may be exercised by that
one; or, if an even number attend and a majority cannot agree on any particular
issue, the Corporation shall not be required to recognize such proxy with
respect to such issue, if such proxy does not specify how the shares that are
the subject of such proxy are to be voted with respect to such issue.
SECTION 9. VOTING; INSPECTORS; ELECTIONS. Unless otherwise required
by law or provided in the Restated Certificate of Incorporation, each
stockholder shall, on each matter submitted to a vote at a meeting of
stockholders, have one vote for each share of stock entitled to vote
-4-
<PAGE> 8
thereon, which is registered in his name on the record date for such meeting.
Shares registered in the name of another corporation, domestic or foreign, may
be voted by such officer, agent or proxy as the bylaws (or comparable
instrument) of such corporation may prescribe, or in the absence of such
provision, as the Board of Directors (or comparable body) of such corporation
may determine. Shares registered in the name of a deceased person may be voted
by his executor or administrator, either in person or by proxy.
All voting, except as otherwise required by law or the Restated
Certificate of Incorporation, may be by a voice vote; provided, upon demand by
stockholders holding a majority of the issued and outstanding stock present in
person or by proxy at any meeting of stockholders, a stock vote shall be taken.
Every stock vote shall be taken by written ballot, each of which shall state
the name of the stockholder or proxy voting and such other information as may
be required under the procedure established for the meeting. All elections of
directors shall be by stock vote, unless otherwise provided in the Restated
Certificate of Incorporation.
At any meeting at which a vote is taken by ballot, the chairman of such
meeting may appoint one or more inspectors, each of whom shall sign an oath or
affirmation to faithfully execute, to the best of his ability and with strict
impartiality, the duties of inspector at such meeting. Such inspector shall
receive the ballots, count the votes and make and sign a certificate of the
result thereof. The chairman of the meeting may appoint any person to serve as
inspector, provided, no candidate for the office of director shall be appointed
as an inspector.
Unless otherwise provided in the Restated Certificate of Incorporation,
cumulative voting for the election of directors shall be prohibited.
SECTION 10. CONDUCT OF MEETINGS. All meetings of the stockholders
shall be presided over by the chairman of the meeting, who shall be the
Chairman of the Board (if any) or if he is not present, the President, or if
neither the Chairman of the Board (if any) nor President is present, a chairman
elected at such meeting. The Secretary of the Corporation, if present, shall
act as secretary of such meetings, or if he is not present, an Assistant
Secretary (if any) shall so act; if neither the Secretary nor an Assistant
Secretary (if any) is present, then a secretary shall be appointed by the
chairman of the meeting. The chairman of any meeting of stockholders shall
determine the order of business and the procedure at the meeting, including
such regulation of the manner of voting and the conduct of discussion, as seem
to him in order. Unless the chairman of the meeting shall otherwise determine,
the order of business shall be as follows:
(a) Calling of meeting to order.
(b) Election of a chairman and the appointment of a secretary if
necessary.
(c) Presentation of proof of the due calling of the meeting.
(d) Presentation and examination of proxies and determination of a
quorum.
(e) Reading and settlement of the minutes of the previous meeting.
(f) Reports of officers and committees.
(g) The election of directors, if an annual meeting or a meeting
called for that purpose.
-5-
<PAGE> 9
(h) Unfinished business.
(i) New business.
(j) Adjournment.
SECTION 11. TREASURY SHARES. Neither the Corporation nor any other
person shall vote, directly or indirectly, at any meeting of stockholders,
shares of the Corporation's own stock owned by the Corporation, shares of the
Corporation's own stock owned by another corporation the majority of the voting
stock of which is owned or controlled by the Corporation, or shares of the
Corporation's own stock held by the Corporation in a fiduciary capacity; and
such shares shall not be counted for quorum purposes or in determining the
number of outstanding shares.
SECTION 12. ACTION BY WRITTEN CONSENT. Unless otherwise provided in
the Restated Certificate of Incorporation, any action permitted or required to
be taken at a meeting of stockholders by law, the Restated Certificate of
Incorporation or these bylaws, may be taken without a meeting, without prior
notice and without a vote, if a consent or consents in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock
holding not less than the minimum number of votes that would have been
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted and such consent shall be
delivered to the Corporation's registered office, its principal place of
business, or to an officer or agent of the Corporation having custody of the
book in which the proceedings of meetings of stockholders are recorded.
Delivery made to a Corporation's registered office shall be by hand or by
certified or registered mail, return receipt requested. Every written consent
shall bear the date of signature thereto and no written consent shall be
effective to take the corporate action referred to therein unless, within sixty
(60) days of the first consent delivered to the Corporation in the manner
required by this Article II, Section 12, written consents signed by a
sufficient number of holders to take action are delivered to the Corporation.
Prompt notice of the taking of corporate action without a meeting, by
less than a unanimous written consent, shall be given by the Secretary to those
stockholders who did not consent in writing.
SECTION 13. NOMINATIONS FOR ELECTION AS A DIRECTOR. Only persons who
are nominated in accordance with the procedures set forth in these bylaws and
qualify for nomination pursuant to Article III, Section 2 shall be eligible for
election by stockholders as, and to serve as, directors. Nominations of
persons for election to the Board of Directors of the Corporation may be made
at a meeting of stockholders (a) by or at the direction of the Board of
Directors or (b) by any stockholder of the Corporation who is a stockholder of
record at the time of giving of notice provided for in this Article II, Section
13, who shall be entitled to vote for the election of directors at the meeting
and who complies with the notice procedures set forth in this Article II,
Section 13. Such nominations, other than those made by or at the direction of
the Board of Directors, shall be made pursuant to timely notice in writing to
the Secretary of the Corporation. To be timely, a stockholder's notice shall
be delivered to or mailed and received at the principal executive offices of
the Corporation (i) with respect to an election to be held at the annual
meeting of the stockholders of the Corporation, not less than ninety (90) days
prior to the anniversary date of the
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<PAGE> 10
immediately preceding annual meeting of stockholders of the Corporation,
and (ii) with respect to an election to be held at a special meeting of
stockholders of the Corporation for the election of directors not later than
the close of business on the tenth (10th) day following the day on which notice
of the date of the special meeting was mailed to stockholders of the
Corporation as provided in Section 2.4 or public disclosure of the date of the
special meeting was made, whichever first occurs. Such stockholder's notice to
the Secretary shall set forth (x) as to each person whom the stockholder
proposes to nominate for election or re-election as a director, all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (including
such person's written consent to being named in the proxy statement as a
nominee and to serve as a director if elected), and (y) as to the stockholder
giving the notice (i) the name and address, as they appear on the Corporation's
books, of such stockholder and (ii) the class and number of shares of voting
stock of the Corporation which are beneficially owned by such stockholder. At
the request of the Board of Directors, any person nominated by the Board of
Directors for election as a director shall furnish to the Secretary of the
Corporation that information required to be set forth in a stockholder's notice
of nomination which pertains to the nominee. In the event that a person is
validly designated as a nominee to the Board of Directors in accordance with
the procedures set forth in this Article II, Section 13 and shall thereafter
become unable or unwilling to stand for election to the Board of Directors, the
Board of Directors or the stockholder who proposed such nominee, as the case
may be, may designate a substitute nominee. Other than directors chosen
pursuant to the provisions of Article III, Section 11, no person shall be
eligible to serve as a director of the Corporation unless nominated in
accordance with the procedures set forth in this Article II, Section 13. The
presiding officer of the meeting of stockholders shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by these bylaws, and if he should so
determine, he shall so declare to the meeting and the defective nomination
shall be disregarded. Notwithstanding the foregoing provisions of this Article
II, Section 13, a stockholder shall also comply with all applicable
requirements of the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder with respect to the matters set forth in this
Article II, Section 13.
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. MANAGEMENT. The business and property of the Corporation
shall be managed by the board of directors. Subject to the restrictions
imposed by law, the Restated Certificate of Incorporation, or these bylaws, the
board of directors may exercise all the powers of the Corporation.
SECTION 2. NUMBER; QUALIFICATION; ELECTION; TERM. The number of
directors which shall constitute the entire board of directors shall be not
less than three nor more than nine. Within the limits above specified, the
number of directors which shall constitute the entire board of directors shall
be determined by resolution adopted by a majority of the members of the board
of directors. Except as otherwise required by law or the Restated Certificate
of Incorporation, the
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directors shall be elected at an annual meeting of stockholders at which a
quorum is present. Directors shall be elected by a plurality of the votes of
the shares present in person or represented by proxy and entitled to vote on
the election of directors. Each director so chosen shall hold office until his
term expires as provided in the Restated Certificate of Incorporation and until
his successor is elected and qualified or, if earlier, until his death,
resignation, or removal from office. None of the directors need be a
stockholder of the Corporation or a resident of the State of Delaware. Each
director must have attained the age of majority.
SECTION 3. CHANGE IN NUMBER. No decrease in the number of directors
constituting the entire board of directors shall have the effect of shortening
the term of any incumbent director.
SECTION 4. QUORUM; REQUIRED VOTE FOR DIRECTOR ACTION. Unless
otherwise required by law or provided in the Restated Certificate of
Incorporation or these bylaws, a majority of the total number of directors
fixed by these bylaws shall constitute a quorum for the transaction of business
at a meeting of the Board of Directors, and the act of a majority of the
directors present at such meeting at which a quorum is present shall be the act
of the Board of Directors.
SECTION 5. MEETINGS; ORDER OF BUSINESS. The directors may hold their
meetings and may have an office and keep the books of the Corporation, except
as otherwise provided by law, in such place or places, within or without the
State of Delaware, as the Board of Directors may from time to time determine by
resolution. At all meetings of the Board of Directors business shall be
transacted in such order as shall from time to time be determined by the
Chairman of the Board (if any) or in his absence by the President or by
resolution of the Board of Directors.
SECTION 6. FIRST MEETING. In connection with any annual meeting of
stockholders at which directors are elected the Board of Directors may, if a
quorum is present, hold its first meeting for the transaction of business
immediately after and at the place of such annual meeting of the stockholders.
Notice of such meeting, at such time and place, shall not be required.
SECTION 7. ELECTION OF OFFICERS. At the first meeting of the board
of directors after each annual meeting of stockholders at which a quorum shall
be present, the board of directors shall elect the officers of the Corporation.
SECTION 8. REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held at such times and places as shall be designated from
time to time by resolution of the Board of Directors. Notice of such regular
meetings shall not be required.
SECTION 9. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by the Chairman of the Board (if any), the President
or, upon written request of any two directors, by the Secretary, in each case
on at least twenty-four (24) hours personal, written, telegraphic, cable or
wireless notice to each director. Such notice, or any waiver thereof pursuant
to Article VIII, Section 3 hereof, need not state the purpose or purposes of
such meeting, except as may otherwise be required by law, the Restated
Certificate of Incorporation or these bylaws.
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SECTION 10. REMOVAL. Except as otherwise provided in the Restated
Certificate of Incorporation, at any meeting of stockholders called expressly
for that purpose, any director or the entire board of directors may be removed
only for cause and only by a vote of the holders of at least eighty percent
(80%) of the shares then entitled to vote on the election of directors.
SECTION 11. VACANCIES; INCREASES IN THE NUMBER OF DIRECTORS. Vacancies
and newly-created directorships resulting from any increase in the authorized
number of directors may be filled by a majority of the directors then in
office, though less than a quorum, or by the sole remaining director, and each
director so chosen shall hold office until his term expires as provided in the
Restated Certificate of Incorporation and until his successor is duly elected
and qualified or, if earlier, until his death, resignation, or removal from
office. If there are no directors in office, an election of directors may be
held in the manner provided by statute. Except as otherwise provided in the
Restated Certificate of Incorporation, when one or more directors shall resign
from the board of directors, effective at a future date, a majority of the
directors then in office, including those who have so resigned, shall have the
power to fill such vacancy or vacancies, the vote thereon to take effect when
such resignation or resignations shall become effective, and each director so
chosen shall hold office as provided in these bylaws with respect to the
filling of other vacancies.
SECTION 12. PROCEDURE. At meetings of the board of directors,
business shall be transacted in such order as from time to time the board of
directors may determine. The Chairman of the Board, if such office has been
filled, and, if not or if the Chairman of the Board is absent or otherwise
unable to act, the President shall preside at all meetings of the board of
directors. In the absence or inability to act of either such officer, a
chairman shall be chosen by the board of directors from among the directors
present. The Secretary of the Corporation shall act as the secretary of each
meeting of the board of directors unless the board of directors appoints
another person to act as secretary of the meeting. The board of directors
shall keep regular minutes of its proceedings which shall be placed in the
minute book of the Corporation.
SECTION 13. PRESUMPTION OF ASSENT. A director of the Corporation who
is present at a meeting of the board of directors at which action on any
corporate matter is taken shall be presumed to have assented to the action
unless his dissent shall be entered in the minutes of the meeting or unless he
shall file his written dissent to such action with the person acting as
secretary of the meeting before the adjournment thereof or shall forward any
dissent by certified or registered mail to the Secretary of the Corporation
immediately after the adjournment of the meeting. Such right to dissent shall
not apply to a director who voted in favor of such action.
SECTION 14. COMPENSATION. Unless otherwise provided in the Restated
Certificate of Incorporation, the Board of Directors shall have the authority
to fix the compensation, if any, of directors; provided, that nothing contained
herein shall be construed to preclude any director from serving the Corporation
in any other capacity or receiving compensation therefor.
SECTION 15. ACTION WITHOUT A MEETING; TELEPHONE CONFERENCE MEETING.
Unless otherwise provided in the Restated Certificate of Incorporation, any
action required or permitted
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to be taken at any meeting of the Board of Directors, or any committee
designated by the Board of Directors, may be taken without a meeting if all
members of the Board of Directors or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors or committee. Such consent shall have
the same force and effect as a unanimous vote at a meeting, and may be stated
as such in any document or instrument filed with the Secretary of State of
Delaware.
Unless otherwise provided in the Restated Certificate of Incorporation,
subject to the requirement for notice of such meetings, members of the Board of
Directors, or members of any committee designated by the Board of Directors,
may participate in a meeting of such Board of Directors or committee, as the
case may be, by means of a conference telephone or similar communications
equipment, by means of which all persons participating in the meeting can hear
each other, and participation in such meeting shall constitute presence in
person at the meeting, except where a person participates in the meeting for
the express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened.
ARTICLE IV
COMMITTEES
SECTION 1. DESIGNATION. The board of directors may, by resolution
adopted by a majority of the entire board of directors, designate one or more
committees.
SECTION 2. NUMBER; QUALIFICATION; TERM. Each committee shall consist
of one or more directors appointed by resolution adopted by a majority of the
entire board of directors. The number of committee members may be increased or
decreased from time to time by resolution adopted by a majority of the entire
board of directors. Each committee member shall serve as such until the
earliest of (i) the expiration of his term as director, (ii) his resignation as
a committee member or as a director, or (iii) his removal as a committee member
or as a director.
SECTION 3. AUTHORITY. Each committee, to the extent expressly
provided in the resolution establishing such committee, shall have and may
exercise all of the authority of the board of directors in the management of
the business and property of the Corporation except to the extent expressly
restricted by law, the Restated Certificate of Incorporation, or these bylaws.
SECTION 4. COMMITTEE CHANGES. The board of directors shall have the
power at any time to fill vacancies in, to change the membership of, and to
discharge any committee.
SECTION 5. ALTERNATE MEMBERS OF COMMITTEES. The board of directors
may designate one or more directors as alternate members of any committee. Any
such alternate member may replace any absent or disqualified member at any
meeting of the committee. If no alternate committee members have been so
appointed to a committee or each such alternate committee member is absent or
disqualified, the member or members of such committee present at any meeting
and not disqualified from voting, whether or not he or they constitute a
quorum, may
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<PAGE> 14
unanimously appoint another member of the board of directors to act at the
meeting in the place of any such absent or disqualified member.
SECTION 6. REGULAR MEETINGS. Regular meetings of any committee may
be held without notice at such time and place as may be designated from time to
time by the committee and communicated to all members thereof.
SECTION 7. SPECIAL MEETINGS. Special meetings of any committee may
be held whenever called by any committee member. The committee member calling
any special meeting shall cause notice of such special meeting, including
therein the time and place of such special meeting, to be given to each
committee member at least two days before such special meeting. Neither the
business to be transacted at, nor the purpose of, any special meeting of any
committee need be specified in the notice or waiver of notice of any special
meeting.
SECTION 8. QUORUM; MAJORITY VOTE. At meetings of any committee, a
majority of the number of members designated by the board of directors shall
constitute a quorum for the transaction of business. If a quorum is not
present at a meeting of any committee, a majority of the members present may
adjourn the meeting from time to time, without notice other than an
announcement at the meeting, until a quorum is present. The act of a majority
of the members present at any meeting at which a quorum is in attendance shall
be the act of a committee, unless the act of a greater number is required by
law, the Restated Certificate of Incorporation, these bylaws or the resolutions
creating the committee.
SECTION 9. MINUTES. Each committee shall cause minutes of its
proceedings to be prepared and shall report the same to the board of directors
upon the request of the board of directors. The minutes of the proceedings of
each committee shall be delivered to the Secretary of the Corporation for
placement in the minute books of the Corporation.
SECTION 10. COMPENSATION. Committee members may, by resolution of the
board of directors, be allowed a fixed sum and expenses of attendance, if any,
for attending any committee meetings or a stated salary.
SECTION 11. RESPONSIBILITY. The designation of any committee and the
delegation of authority to it shall not operate to relieve the board of
directors or any director of any responsibility imposed upon it or such
director by law.
ARTICLE V
OFFICERS
SECTION 1. NUMBER, TITLES AND TERM OF OFFICE. The officers of the
Corporation shall be a President, one or more Vice Presidents (any one or more
of whom may be designated Executive Vice President or Senior Vice President), a
Treasurer, a Secretary and, if the Board of Directors so elects, a Chairman of
the Board and such other officers as the Board of Directors may
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<PAGE> 15
from time to time elect or appoint. Each officer shall hold office until his
successor shall be duly elected and shall qualify or until his death or until
he shall resign or shall have been removed in the manner hereinafter provided.
Any number of offices may be held by the same person, unless the Restated
Certificate of Incorporation provides otherwise. Except for the Chairman of
the Board, if any, no officer need be a director.
SECTION 2. SALARIES. The salaries or other compensation, if any, of
the officers and agents of the Corporation shall be fixed from time to time by
the Board of Directors; provided, however, that the Board of Directors may
delegate the power to determine the compensation of any officer and agent
(other than the officer to whom such power is delegated) to a committee of the
Board of Directors, the Chairman of the Board or the President..
SECTION 3. REMOVAL. Any officer or agent elected or appointed by the
Board of Directors may be removed by the Board of Directors; provided, such
removal shall be without prejudice to the contractual rights, if any, of the
person so removed. Election or appointment of an officer or agent shall not of
itself create contractual rights.
SECTION 4. VACANCIES. Any vacancy occurring in any office of the
Corporation may be filled by the Board of Directors.
SECTION 5. POWERS AND DUTIES OF THE CHIEF EXECUTIVE OFFICER. The
President shall be the chief executive officer of the Corporation. Subject to
the control of the Board of Directors, the chief executive officer shall have
general executive charge, management and control of the properties, business
and operations of the Corporation in a manner consistent with the business plan
of the Corporation from time to time adopted by the Board of Directors with all
such powers as may be reasonably incident to such responsibilities; subject to
such control of the Board of Directors, he may agree upon and execute all
leases, contracts, evidences of indebtedness and other obligations in the name
of the Corporation and may sign all certificates for shares of capital stock of
the Corporation; and he shall have such other powers and duties as may be
assigned to him from time to time by the Board of Directors.
SECTION 6. POWERS AND DUTIES OF THE CHAIRMAN OF THE BOARD. The
Chairman of the Board (if any) shall preside at all meetings of the
stockholders and of the Board of Directors; and he shall have such other powers
and duties as designated in accordance with these bylaws and as may be assigned
to him from time to time by the Board of Directors.
SECTION 7. POWERS AND DUTIES OF THE PRESIDENT. Subject to the
control of the Board of Directors, the President shall have the authority to
agree upon and execute all leases, contracts, evidences of indebtedness and
other obligations in the name of the Corporation and he shall, in the absence
of the Chairman of the Board or if there be no Chairman of the Board, preside
at all meetings of the stockholders and the Board of Directors; and the
President shall have such other powers and duties as may be assigned to him
from time to time by the Board of Directors.
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SECTION 8. VICE PRESIDENTS. Each Vice President shall perform such
duties and have such powers as the Board of Directors may from time to time
prescribe. In addition, in the absence of the Chairman of the Board (if any)
or President, or in the event of their inability or refusal to act, a Vice
President designated by the Board of Directors or, in the absence of such
designation, the Vice President who is present and who is senior in terms of
time as a Vice President of the Corporation, shall perform the duties of the
Chairman of the Board (if any) or the President, as the case may be, and when
so acting shall have all the powers of and be subject to all the restrictions
upon the Chairman of the Board (if any) or the President, as the case may be;
provided, that such Vice President shall not preside at meetings of the Board
of Directors unless he is a director.
SECTION 9. TREASURER. The Treasurer shall have responsibility for
the custody and control of all the funds and securities of the Corporation, and
he shall have such other powers and duties as designated in accordance with
these bylaws and as may be prescribed from time to time by the Board of
Directors. He shall perform all acts incident to the position of Treasurer,
subject to the control of the chief executive officer and the Board of
Directors; the Treasurer shall, if required by the Board of Directors, give
such bond for the faithful discharge of his duties in such form as the Board of
Directors may require.
SECTION 10. ASSISTANT TREASURERS. Each Assistant Treasurer (if any)
shall have the usual powers and duties pertaining to his office, together with
such other powers and duties as designated in accordance with these bylaws and
as may be prescribed from time to time by the Treasurer, the chief executive
officer or the Board of Directors. The Assistant Treasurers shall exercise the
powers of the Treasurer during the Treasurer's absence or inability or refusal
to act.
SECTION 11. SECRETARY. The Secretary shall keep the minutes of all
meetings of the Board of Directors, committees of directors and of the
stockholders in books provided for such purpose; he shall attend to the giving
and serving of all notices; he may in the name of the Corporation affix the
seal of the Corporation to all contracts of the Corporation and attest thereto;
he may sign with the other appointed officers all certificates for shares of
capital stock of the Corporation; he shall have charge of the certificate
books, transfer books and stock ledgers, and such other books and papers as the
Board of Directors may direct, all of which shall at all reasonable times be
open to inspection by any director upon application at the office of the
Corporation during business hours; he shall have such other powers and duties
as designated in accordance with these bylaws and as may be prescribed from
time to time by the Board of Directors; and he shall in general perform all
acts incident to the office of Secretary, subject to the control of the chief
executive officer and the Board of Directors.
SECTION 12. ASSISTANT SECRETARIES. Each Assistant Secretary (if any)
shall have the usual powers and duties pertaining to his office, together with
such other powers and duties as designated in accordance with these bylaws and
as may be prescribed from time to time by the chief executive officer, the
Board of Directors or the Secretary. The Assistant Secretaries shall exercise
the powers of the Secretary during the Secretary's absence or inability or
refusal to act.
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SECTION 13. ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS.
Unless otherwise determined by the Board of Directors, the Chairman of the
Board or the President of the Corporation shall have the power to vote and to
otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of security holders of any other corporation, or with respect to any
action of security holders thereof, in which this Corporation may hold
securities and otherwise to exercise any and all rights and powers which this
Corporation may possess by reason of its ownership of securities in such other
corporation.
ARTICLE VI
CAPITAL STOCK
SECTION 1. CERTIFICATES OF STOCK. The shares of the capital stock of
the Corporation shall be represented by certificates, provided, the Board of
Directors may determine by resolution that some or all of any or all the
classes or series of the Corporation's stock shall be uncertificated shares.
Any such resolution shall not apply to shares represented by a certificate
until such certificate is surrendered to the Corporation. Notwithstanding the
adoption of such a resolution by the Board of Directors, every holder of stock
represented by certificates and, upon request, every holder of uncertificated
shares shall be entitled to have a certificate signed by, or in the name of the
Corporation by the Chairman of the Board of Directors (if any) or the President
or Vice President, and by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary of the Corporation representing the number
of shares registered in certificate form. Any or all the signatures on the
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, such certificate may be issued by the
Corporation with the same effect as if such person were such officer, transfer
agent or registrar at the date of issue.
SECTION 2. TRANSFER OF SHARES. The shares of stock of the
Corporation shall only be transferable on the books of the Corporation by the
holders thereof in person or by their duly authorized attorneys or legal
representatives, upon surrender and cancellation of certificates for a like
number of shares (or upon compliance with the provisions of Article VI, Section
5 hereof, if applicable). Upon surrender to the Corporation or a transfer
agent of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer (or upon compliance
with the provisions of Article VI, Section 5 hereof, if applicable) and of
compliance with any transfer restrictions applicable thereto contained in any
agreement to which the Corporation is a party, or of which the Corporation has
knowledge by reason of a legend with respect thereto placed upon any such
surrendered stock certificate, it shall be the duty of the Corporation to issue
a new certificate to the person entitled thereto, cancel the old certificate
and record the transaction upon its books.
SECTION 3. OWNERSHIP OF SHARES. The Corporation shall be entitled to
treat the holder of record of any share or shares of capital stock of the
Corporation as the owner in fact thereof at that time for purposes of voting
such shares, receiving distributions thereon or notices in respect
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thereof, transferring such shares, exercising rights of dissent, exercising or
waiving any preemptive rights, or giving proxies with respect to such shares;
and, neither the Corporation nor any of its officers, directors, employees, or
agents shall be liable for regarding that person as the owner of those shares
at that time for those purposes, regardless of whether or not that person
possesses a certificate for those shares.
SECTION 4. REGULATIONS REGARDING CERTIFICATES. The Board of
Directors shall have the power and authority to make all such rules and
regulations as it may deem expedient concerning the issue, transfer and
registration or the replacement of certificates for shares of capital stock of
the Corporation.
SECTION 5. LOST, STOLEN, DESTROYED OR MUTILATED CERTIFICATES. The
Board of Directors may determine the conditions upon which a new certificate of
stock may be issued in place of any certificate which is alleged to have been
lost, stolen, destroyed or mutilated; and may, in its discretion, require the
owner of such certificate or his legal representative to give bond, with
sufficient surety, to indemnify the Corporation and each transfer agent and
registrar against any and all losses or claims which may arise by reason of the
issuance of a new certificate in the place of the one so lost, stolen,
destroyed or mutilated.
SECTION 6. LEGENDS. The board of directors shall have the power and
authority to provide that certificates representing shares of stock bear such
legends as the board of directors deems appropriate to assure that the
Corporation does not become liable for violations of federal or state
securities laws or other applicable law.
ARTICLE VII
MISCELLANEOUS PROVISIONS
SECTION 1. FISCAL YEAR. The fiscal year of the Corporation shall be
such as established from time to time by the Board of Directors; provided, that
if such fiscal year is not fixed by the board of directors and the selection of
the fiscal year is not expressly deferred by the board of directors, the fiscal
year shall be the calendar year.
SECTION 2. CORPORATE SEAL. The Board of Directors may provide a
suitable seal containing the name of the Corporation. The Secretary shall have
charge of the seal (if any). If and when so directed by the Board of Directors
or a committee thereof, duplicates of the seal may be kept and used by the
Treasurer or by the Assistant Secretary or Assistant Treasurer.
SECTION 3. NOTICE AND WAIVER OF NOTICE. Whenever any notice is
required to be given by law, the Restated Certificate of Incorporation or these
bylaws, except with respect to notices of meetings of stockholders (with
respect to which the provisions of Article II, Section 6 hereof apply) and
except with respect to notices of special meetings of directors (with respect
to which the provisions of Article III, Section 6 hereof apply) said notice
shall be deemed to be sufficient if given (i) by telegraphic, cable or wireless
transmission or (ii) by deposit of such postage prepaid
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notice, in a post office box addressed to the person entitled thereto at his
address as it appears on the records of the Corporation. Such notice shall be
deemed to have been given on the day of such transmission or mailing, as the
case may be.
Whenever notice is required to be given by law, the Restated Certificate
of Incorporation or these bylaws, a written waiver thereof, signed by the
person entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to notice. Attendance of a person,
including without limitation a director, at a meeting shall constitute a waiver
of notice of such meeting, except when the person attends a meeting for the
express purpose of objecting, at the beginning of such meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders, directors, or a committee of
directors need be specified in any written waiver of notice, unless so required
by the Restated Certificate of Incorporation or these bylaws.
SECTION 4. RESIGNATIONS. Any director, member of a committee or
officer may resign at any time. Such resignation shall be made in writing and
shall take effect at the time specified therein, or if no time be specified, at
the time of its receipt by the chief executive officer or Secretary. The
acceptance of such resignation shall not be necessary for its effectiveness,
unless expressly so provided in the resignation.
SECTION 5. FACSIMILE SIGNATURES. In addition to the provisions for
the use of facsimile signatures specifically authorized elsewhere in these
bylaws, facsimile signatures of any officer or officers of the Corporation may
be used as determined by the Board of Directors.
SECTION 6. RELIANCE UPON BOOKS, REPORTS AND RECORDS. A member of the
Board of Directors, or a member of any committee thereof, shall be fully
protected in relying in good faith upon the records of the Corporation and upon
such information, opinions, reports or statements presented to the Corporation
by any of its officers or employees, or committees of the Board of Directors,
or by any other person as to matters the director reasonably believes are
within such other person's professional or expert competence and who has been
selected with reasonable care by or on behalf of the Corporation, as to the
value and amount of the assets, liabilities and/or net profits of the
Corporation, or any other facts pertinent to the existence and amount of
surplus or other funds from which dividends might properly be declared and
paid, or with which the Corporation's stock might properly be purchased or
redeemed.
SECTION 7. DIVIDENDS. Subject to provisions of law and the Restated
Certificate of Incorporation, dividends may be declared by the board of
directors at any regular or special meeting and may be paid in cash, in
property, or in shares of stock of the Corporation. Such declaration and
payment shall be at the discretion of the board of directors.
SECTION 8. RESERVES. There may be created by the board of directors
out of funds of the Corporation legally available therefor such reserve or
reserves as the directors from time to time, in their discretion, consider
proper to provide for contingencies, to equalize dividends, or
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to repair or maintain any property of the Corporation, or for such other
purpose as the board of directors shall consider beneficial to the Corporation,
and the board of directors may modify or abolish any such reserve in the manner
in which it was created.
SECTION 9. BOOKS AND RECORDS. The Corporation shall keep correct and
complete books and records of account, shall keep minutes of the proceedings of
its stockholders and board of directors and shall keep at its registered office
or principal place of business, or at the office of its transfer agent or
registrar, a record of its stockholders, giving the names and addresses of all
stockholders and the number and class of the shares held by each.
SECTION 10. INVALID PROVISIONS. If any part of these bylaws shall be
held invalid or inoperative for any reason, the remaining parts, so far as it
is possible and reasonable, shall remain valid and operative.
SECTION 11. MORTGAGES, ETC. With respect to any deed, deed of trust,
mortgage, or other instrument executed by the Corporation through its duly
authorized officer or officers, the attestation to such execution by the
Secretary of the Corporation shall not be necessary to constitute such deed,
deed of trust, mortgage, or other instrument a valid and binding obligation
against the Corporation unless the resolutions, if any, of the board of
directors authorizing such execution expressly state that such attestation is
necessary.
SECTION 12. HEADINGS. The headings used in these bylaws have been
inserted for administrative convenience only and do not constitute matter to be
construed in interpretation.
SECTION 13. REFERENCES. Whenever herein the singular number is used,
the same shall include the plural where appropriate, and words of any gender
shall include each other gender where appropriate.
SECTION 14. AMENDMENTS. These bylaws may be altered, amended, or
repealed or new bylaws may be adopted by the board of directors, or by the
affirmative vote of the holders of not less than two-thirds of the shares of
the Corporation then entitled to be voted in an election of directors, voting
together as a single class.
The undersigned, the Secretary of the Corporation, hereby
certifies that the foregoing bylaws were adopted by unanimous consent by the
stockholders of the Corporation as of February 27, 1997.
/s/ SANDY B. HO
-------------------------------
Sandy B. Ho, Secretary
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EXHIBIT 10.4
ASSET PURCHASE AGREEMENT
Between
FIRST SIERRA FINANCIAL, INC.
("FIRST SIERRA"),
FIRST SIERRA ACQUISITION, INC.
("NEWCO")
and
GENERAL INTERLEASE CORPORATION
("GIC")
and
ERIC BARASH AND DANIEL DENGATE
(THE "STOCKHOLDERS")
Dated: June 28, 1996
<PAGE> 2
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is made and entered into as of this 28th
day of June, 1996, by and among GENERAL INTERLEASE CORPORATION ("GIC"), a
Florida corporation, and its shareholders, ERIC J. BARASH and DANIEL DENGATE
(the "Stockholders") and FIRST SIERRA FINANCIAL, INC. ("First Sierra"), a
Delaware corporation, and its wholly owned subsidiary, FIRST SIERRA
ACQUISITION, INC. ("NEWCO"), a Delaware corporation.
Premises
WHEREAS, GIC is engaged in the business of leasing revenue producing
equipment and rolling stock to businesses; and
WHEREAS, the Stockholders are the record and beneficial owners and
holders of all of the issued and outstanding shares of Common Stock ("GIC
Common Stock"), of GIC; and
WHEREAS, the parties desire that Newco acquire substantially all of
the assets of GIC in a reorganization that complies with the terms of Section
368(a)(1)(C) of the Internal Revenue Code of 1986, as amended, and upon the
terms and conditions and for the consideration herein set forth;
AGREEMENT
NOW, THEREFORE, on the stated premises and for and in consideration of
the mutual covenants and agreements hereinafter set forth and the mutual
benefits to the parties to be derived herefrom, it is hereby agreed as follows:
SECTION 1
PURCHASE AND SALE OF ACQUIRED ASSETS
1.1 Acquired Assets. On the Closing Date, in accordance
with this Agreement, GIC shall sell, transfer, assign and convey, and Newco
will purchase, all assets of every kind and character of GIC used by GIC in the
operation of its business (the "Acquired Assets"), such Acquired Assets to
include, without limitation:
(a) That certain real property lease of GIC's business location at
1510 Southeast 17th Street Causeway, Fort Lauderdale, Florida,
which lease is attached hereto as Schedule 3.15 (the "Real
Property Lease");
(b) All of GIC's leases and lease/financing arrangements,
including without limitation, the Leases (as defined in
Section 3.9 hereof), the Lease Documents (as defined in
Section 3.9 hereof), all rights in and to the Equipment (as
defined in Section 3.9
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hereof), and all rights in and to the Scheduled Payments (as
defined in Section 3.9 hereof);
(c) All rights in and to the residual values of the Leases;
(d) All accounts receivable, notes receivable and other
receivables, as well as all other rights of GIC to payment
under the Leases or for the sale or lease of any property or
for services rendered, including without limitation those
which are not evidenced by instruments or chattel paper,
whether or not they have been earned by performance or have
been written off or reserved against as a bed debt or doubtful
account in any financial statements of the GIC; together with
all instruments and all documents of title representing any of
the foregoing, all rights in any merchandise or goods which
any of the same represent, and all rights, title, security and
guarantees in favor of the Seller with respect to any of the
foregoing, including without limitation, any right of stoppage
in transit (the "Receivables"). The Receivables include all
accounts, notes and other receivables of GIC as of May 31,
1996 (as listed on Schedule 3.13) as well as all additions
thereto made in the ordinary course of GIC's business between
May 31, 1996 and the Closing, but excludes all payments
thereon and reductions thereto made in the ordinary course of
GIC's business during the latter period which do not violate
the terms of this Agreement.
(e) All cash on deposit in GIC's bank accounts, including all
uncleared deposits in such accounts, the petty cash of GIC,
all temporary cash investments and instruments representing
same and all other cash and cash equivalents of GIC;
(f) All automobiles, trucks, trailers and other vehicles described
in the attached Schedule 1.1(f) (the "Vehicles");
(g) All furniture, equipment, machinery, appliances, implements,
spare parts, supplies, and other tangible personal property of
every kind and description (other than the Vehicles and the
Equipment) located either in GIC's business offices or
elsewhere insofar as any of the foregoing relates to the
operations and business of GIC (the "Furniture and
Equipment"). The Furniture and Equipment includes all
Furniture and Equipment owned or leased by GIC as of May 31,
1996 (as listed on Schedule 3.16) as well as all additions
thereto made in the ordinary course of business between May
31, 1996 and the Closing, but excludes all conveyances or
other dispositions thereof made in the ordinary course of
GIC's business during the latter period which do not violate
the terms of this Agreement;
(h) All patents, licenses, trademarks, tradenames, servicemarks,
copyrights, technology, know-how, data, covenants by others
not to compete, rights and privileges used by GIC in the
conduct of its operations and business, including the
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right to recover for infringement thereof, including without
limitation everything listed and described on the attached
Schedule 3.14;
(i) To the extent transferable by GIC, all federal, state and
local permits, authorizations, certificates, approvals,
registrations, variances, exemptions, rights-of-way,
franchises, rights of other kind and character which are
required by law with respect to the operations and business of
GIC as it is now being conducted;
(j) All agreements, contracts, understandings, plans, obligations,
commitments and other documents which are material to and/or
utilized by GIC in its operations and business;
(k) All right, title and interest of GIC in and to all deposits,
prepaid expenses (including without limitation prepaid
insurance, maintenance and rent, and all security deposits
underlying leases), and other current assets;
(l) All insurance proceeds and insurance claims of GIC, relating
to all or any part of GIC's business or the Acquired Assets
and, to the extent transferable by GIC, the benefit of and the
right to enforce the covenants and warranties, if any, which
GIC is entitled to enforce with respect to its business or the
Acquired Assets;
(m) All books, records, papers and instruments of what ever nature
and wherever located which (i) relate to and/or are utilized
in the operations or business of GIC or the Acquired Assets,
or (ii) are required or necessary in order for Newco to
conduct the operations and business of GIC from and after the
Closing in the manner in which it is presently being
conducted, including, without limitation, blueprints, plans,
specifications, plats, maps, surveys, building and machinery
diagrams, drawings, accounting and financial records,
maintenance and production records, operations and management
reports, personnel and labor relations records, environmental
records and reports, copies of sales and property tax records
and returns, customer lists, sales records and other customer
data relating to the operations and business of GIC; provided,
however, that GIC shall retain all corporate minute books,
stock registers, corporate kit, and any other documents
related to GIC's internal corporate matters.
(n) The name "General Interlease Corporation"; and
(o) All other or additional privileges, rights, claims, interests,
properties, options and assets of GIC of every kind and
description and wherever located which are used or intended
for use in connection with, or which are necessary to the
continued conduct of, the operations and business of GIC as
presently being conducted; provided, however, that GIC shall
retain all rights relating to any causes of action
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existing or accruing prior to the Closing Date in which GIC is
the plaintiff or is otherwise entitled to remedies.
1.2 Purchase Price. In consideration of the sale, assignment, and
delivery of GIC's business and the Acquired Assets, Newco shall pay to GIC and
GIC shall receive, subject to the terms of this Agreement, Fifty-six thousand
seven hundred eighteen (56,718) shares of Series A Convertible Preferred Stock,
$.01 par value, of First Sierra (the "Series A Preferred Stock"), which shall
be paid as follows:
(i) Twenty-eight thousand three hundred fifty-nine
(28,359) shares of the Series A Preferred Stock
(representing $1,320,000 of the purchase price) shall
be delivered at Closing to GIC;
(ii) Twenty-eight thousand three hundred fifty-nine
(28,359) shares of Series A Preferred Stock
(representing $1,320,000 of the purchase price) (the
"Escrowed Stock") will be placed into escrow pursuant
to the terms of Section 6.7, and such Escrowed Stock
to be maintained as security for purposes of any
indemnification claims under Section 6.1.
1.3 Terms of Series A Preferred Stock. The terms and provisions
of the Series A Preferred Stock shall be as provided in the Certificate of
Designation, Preferences, Rights and Limitations of the Series A Preferred
Stock, a copy of which is attached hereto as Exhibit "A" (the "Series A
Designation"). Subject to the terms of the Series A Designation, and subject
to Section 6.7 of this Agreement with respect to the Escrowed Stock, the rights
and preferences of the Series A Preferred Stock are as follows:
(a) Conversion Rate. Each share of the Series A Preferred Stock
issuable to the Stockholder shall be convertible into one (1)
share of First Sierra Common Stock (the "Conversion Rate").
(b) Dividends. The holders of the Series A Preferred Stock shall
be entitled to receive, subject to the terms of the Series A
Designation, when and as declared by the First Sierra Board of
Directors, dividends at a per annum rate of $1.86 per share
(4% per annum of the $2,640,000 Series A Preferred Stock)
(the "Dividend Rate"), such dividends being non-cumulative.
The first dividend payment (and each dividend payment
thereafter) shall be declared and paid by First Sierra unless
Newco (or if the assets of Newco are ever sold to First
Sierra, the division of First Sierra consisting of such
assets, which shall be referred to herein as the "GIC
Division") does not obtain a margin of $3,750,000 from all
income generated by the GIC Division during the first 15
months after Closing, after being increased by the amount, if
any, by which the actual overhead for the GIC Division exceeds
$125,000 per month (the "Minimum Dividend Performance
Results"). As an example of the foregoing, if the actual
overhead during a 12 month period is
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$150,000 per month, the margin requirement would be $4,050,000
(=$3,750,000 + $300,000). In instances where First Sierra is
the ultimate funding source, fee income would be calculated by
taking the present value of the lease generated by the GIC
Division at a discount rate equal to the average 2 year
Treasury rate during the month the GIC Division's leases were
generated plus 250 basis points. Subject to the provisions of
Section 6.7, the first dividend payable to the Stockholder
would be paid on the sixteen (16) month anniversary of the
Closing Date. All future dividends would be calculated on a
twelve (12) month basis to determine if the Minimum Dividend
Performance Results have been achieved, and will be paid
within one month after each successive twelve (12) month
period thereafter until such time as the Preferred Stock is
fully converted. If the Minimum Dividend Performance Results
are met for the periods described above, then First Sierra
shall pay (and the Board of Directors will be required to
declare) the dividends described in this Section 1.3(b).
(c) Redemption. Unless the shares of Series A Preferred Stock
have been converted prior to such time, First Sierra shall be
obligated to redeem the Series A Preferred Stock on December
31, 2001, at an aggregate redemption price for all the shares
of $2,640,000.
(d) Letters of Credit. First Sierra agrees that its obligations
under the terms of the Series A Designation to distribute
assets on a preferential basis to the holders of the Series A
Preferred Shares in connection with the dissolution,
liquidation or winding up of the affairs of First Sierra, and
to redeem the Series A Preferred Shares on December 31, 2001,
shall, at all times while the Series A Preferred Shares are
outstanding, be secured by one or more irrevocable standby
letters of credit (together, with any and all renewals and
replacements, the "Letter of Credit") to be issued by Wells
Fargo, a national banking association, for the account of the
Stockholders, as beneficiaries under the Letter of Credit (the
"Beneficiary"), in an amount equal to the aggregate redemption
price for the Series A Preferred Shares then outstanding. The
Letter of Credit is in the form attached hereto as Exhibit
"B". In the event First Sierra consummates an initial public
offering of its Common Stock, then the Letter of Credit shall
terminate if at any time the fair market value of the Common
Stock of First Sierra into which the Series A Preferred Stock
is convertible equals or exceeds one hundred twenty percent
(120%) of the value of the Series A Preferred Stock and the
Common Stock into which the Series A Preferred Stock is
convertible can be traded on the open market without
restriction or can be sold pursuant to Rule 144 promulgated
under the Securities Act of 1933. For purposes of this
subsection 1.3(d), the fair market value of the First Sierra
Common Stock shall be the closing price if the First Sierra
Common Stock is traded on a national stock exchange or is
traded over-the-counter and reported on the NASDAQ National
Market System. For purposes of this subsection 1.3(d), the
value of the Series A Preferred Stock shall be based upon the
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total amount of Series A Preferred Stock issued hereunder to
the Stockholder having a value of $2,640,000. The initial
Letter of Credit shall have an expiry date of no earlier than
one year from its date of issue and shall provide that, if
within 15 days prior to its expiry date, it is not renewed,
replaced or extended for an additional period of at least one
year (but in no event for any period extending past December
31, 2001) in the amount calculated above, the Stockholders
shall be entitled to draw as therein provided. Any replacement
Letter of Credit may be issued by Wells Fargo or another
institution having combined capital, surplus and undivided
profits of at least $100 million. First Sierra will notify
the Stockholders of any replacement or renewal of the Letter
of Credit within 15 days of the expiry date. It is a
condition to any conversion of the Series A Preferred Shares
into Common Stock of the Purchaser pursuant to the Series A
Designation that the holders thereof have surrendered the
Letter of Credit without replacement, extension or renewal.
1.4 Allocation. The purchase price for the Acquired Assets shall
be allocated for all purposes in accordance with Schedule 1.4.
1.5 Taxes. Except as specifically provided in Section 1.6,
neither Newco nor First Sierra shall be responsible for a tax of any kind
related to any period prior to the Closing Date (and any period [or portion
thereof] which ends on the Closing Date) or arising by virtue of this
transaction.
1.6 Assumed Liabilities. Newco shall not assume or be bound by
any duties, responsibilities, obligations or liabilities, known or unknown,
contingent or otherwise, of GIC of any kind whatsoever unless expressly assumed
hereunder. Newco shall assume or agree to pay only the following debts,
liabilities and obligations of GIC, Seller, and none other: (i) Those accounts
payable and accrued expenses of GIC and the non-recourse debt of GIC, all as
reflected in the May 31, 1996 unaudited balance sheet of GIC, and all other
such accounts payable, accrued expenses, and non- recourse debt arising since
May 31, 1996 in the ordinary course of the business of GIC through the Closing
Date; and (ii) Deferred income tax liability associated with the GIC lease
assets purchased by Newco which involve accounting methods adopted by GIC for
such lease assets, in a total amount not to exceed $683,000 (the "Closing Date
Deferred Taxes"). The term "Closing Date Deferred Taxes" is inclusive of any
Federal and state income taxes reported in the tax returns of either Newco or
First Sierra which relate to any issue or tax return reporting position adopted
by GIC which is required to be continued by Newco or First Sierra, by virtue of
this transaction, in tax periods after the Closing Date and which relates to
any lease transaction which was consummated prior to the Closing. "Closing
Date Deferred Taxes" also includes any interest and/or penalties which may
result from an examination of the income tax returns of either Newco or First
Sierra to the extent that such examination involves any issue or tax return
reporting position adopted by GIC which is required to be continued by Newco or
First Sierra, by virtue of this transaction, in tax periods after the Closing
Date and which relates to any lease transaction which was consummated prior to
the Closing. The parties agree to work together to prepare the
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day immediately prior to Closing (and failing such, as soon as practicable
after Closing, but in any event before July 31, 1996), an accurate list of the
accounts payable, accrued expenses, and non-recourse debt of GIC as of the
Closing Date (the "Closing Date Liabilities").
1.7 Liabilities Not Assumed. Except as otherwise expressly
provided in Section 1.6, Newco does not assume, agree to pay, perform or
discharge or otherwise have any responsibility for any liability or obligation
of GIC, fixed or contingent, and whether arising or to be performed prior to,
on or after the Closing. Without in any way limiting the generality of the
foregoing, Newco does not assume, and GIC shall pay, perform, discharge, and
GIC and the Stockholders indemnify Newco and First Sierra against:
(a) any recourse debt;
(b) any federal, state, local or foreign income, sales, real or
personal property, gross receipts, estimated income, transfer,
use franchise, profits, stamp, employment taxes (whether
payable directly or via withholding) or other taxes,
assessments, fees, levies, imposts, duties, deductions or
other charges of any nature whatsoever (including without
limitation interest and penalties) imposed by any law, rule or
regulation (collectively, the "Taxes") which are attributable
or related to the Acquired Assets or the operations and
business of GIC for any periods ending on or before the
Closing, or which may be applicable because of GIC's sale of
its business or any of the Acquired Assets to the Newco
(collectively, the "Tax Obligations"), as well as any
liability in excess of Closing Date Deferred Taxes for Federal
or state income taxes, interest or penalties attributable any
issue or tax return reporting position adopted by GIC which is
required to be continued by Newco or First Sierra, by virtue
of this transaction, in tax periods after the Closing Date;
(c) (i) any obligation to bring, or liability for failure to have
brought, any of the Acquired Assets or GIC's business in
compliance with any building, zoning, environmental, health or
safety laws if the conditions giving rise to such obligation
or liability exist by reason of actions or inactions with
respect to such Acquired Assets or GIC's business prior to the
Closing; (ii) any obligation or liability with respect to the
clean-up of hazardous materials arising from GIC's actions;
and (iii) any obligation or liability which Seller may have to
third parties resulting from any violation by GIC of any such
laws or from a breach or a default by GIC under any permit;
(d) any liability or obligation under any of GIC's employee
benefit plan;
(e) any liability or obligation resulting from or arising out of
claims based on the service, work performed, product
manufactured or distributed, in whole or in part,
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by GIC, arising out of any act, omission, event, occurrence or
circumstance that existed on or before Closing, or relating to
any service or work performed.
(f) any liability or obligation arising from the breach by GIC of
any representation or warranty to any of its funding sources,
lenders, customers, or lessees;
(g) any liabilities or obligations incurred, arising from or out
of or in connection with any alleged or actual defect in the
Equipment (as defined in Section 3.9) or in connection with
any alleged or actual breach of warranty (whether express or
implied) in relation to any Equipment, where the facts giving
rise to such liabilities or such obligations occur prior to
the Closing Date;
(h) any liability based on any injury incurred prior to the
Closing Date to any of GIC's employees (which term when used
in this Section 1.7 shall include any such employee's
dependents, heirs, successors and assigns), whether or not
working, retired, laid off or deceased as of the Closing Date,
including but not limited to employee-employer discrimination
claims, any worker's compensation laws of any state, any
employment security laws or similar laws of any state, the
Jones Acts, the Longshoreman's and Harbor Worker's
Compensation Act, or any other choses in action that may be
vested or may vest in any of the employees (collectively,
"Worker's Compensation Liabilities"); and
(i) any other liability or obligation except to the extent
expressly set forth in Section 1.6.
1.8 Procedures before Closing. The parties shall cooperate fully
in an orderly transition of the Acquired Assets and shall establish mutually
agreeable procedures: (i) to appropriately effect the transfer of the Acquired
Assets (including the Leases); and (ii) to allocate costs, expenses, and
revenues as of the Closing Date.
1.9 Tax Effect of Merger Transaction. It is the intention of the
parties that the Merger constitute a "reorganization" within the meaning of
Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the
"Code"). The parties agree to file all of their respective tax returns and
reports in a manner consistent with such intention, and to not take any filing
position in a manner inconsistent with such intention unless compelled to do so
by court order or administrative decree. Each party agrees to furnish such
information and take such action as may be reasonably requested of the other
party in connection with the foregoing (which action shall not include any
change in the commercial terms of this Agreement and the other transactions
incident thereto). In no event, however, shall First Sierra or Newco be
required to incur any out-of-pocket expenses in defending such position or
providing such information or taking such action, nor shall the foregoing
constitute a warranty or guaranty that the transactions contemplated by this
Agreement will, in fact constitute such a reorganization.
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1.10 Stockholder Consents. The Stockholders, in their capacity as
the only shareholders of GIC, and First Sierra, in its capacity as the sole
shareholder of Newco, hereby consents to this Agreement and the transactions
contemplated hereby.
1.11 Further Assurances. Each party agrees to execute and deliver
from time to time after the Closing Date, at the reasonable request of the
other party or parties, and without further consideration, such additional
instruments of conveyance and transfer, and to take such other action as the
other party or parties may reasonably require to more effectively carry out the
terms and provisions of this Agreement.
SECTION 2 - OTHER AGREEMENTS
2.1 Taxes and Utilities. Any and all ad valorem taxes, rents,
utilities, and any other costs and expenses associated with the Acquired Assets
shall be prorated as of the Closing Date.
2.2 Sales Taxes. GIC agrees to furnish to Newco a status letter
from the state taxing authorities as evidence that all sales and use tax
liabilities of GIC as of the most recent available date have been fully
satisfied or provided for.
2.3 Name Change. GIC shall change its name immediately after the
Closing Date to a name that will not prevent Newco from utilizing the name
"General Interlease Corporation."
2.4 Employees. GIC will in good faith cooperate with Newco in
Newco's attempt to retain the employees of GIC (such employees are referred to
herein as the "Employees"). With regard to the Employees, Newco shall credit
the Employees with their length of service with GIC prior to Closing. Newco
shall credit the Employees for any accrued and untaken vacations and holidays
that such Employees may have had as employees of GIC immediately prior to the
Closing. Set forth hereto as Schedule 3.21 is a list of all such Employees,
along with a complete description of all vacation, holiday, and sick leave
policies, all incentive compensation policies, and any other policies of GIC
relating to Employees. Group health insurance will be provided by Newco
effective the date of Closing to all Employees comparable to current coverage.
Employee records for current employees, including payroll and wage and hour
records, will become the property of Newco which agrees to preserve the records
for any time required by governmental regulations.
2.5 Litigation Costs. Newco agrees to pay, up to an aggregate
amount not to exceed $2,000 per month, litigation costs and expenses of GIC in
defending those claims described in Section 3.26; provided, however, that such
litigation costs and expenses so paid shall be amounts for which Newco shall be
entitled to indemnification under Section 6 hereunder.
SECTION 3 - REPRESENTATIONS AND WARRANTIES
OF GIC AND STOCKHOLDERS
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GIC and the Stockholders hereby jointly and severally make the
following representations and warranties to Newco and First Sierra as of the
date hereof, and all such representations and warranties shall survive the
Closing Date:
3.1 Ownership of Shares. The Stockholders are the record and
beneficial owners of all of the issued and outstanding capital stock of GIC
(the "Shares"). The Shares are not subject to, nor were they issued in
violation of, any preemptive rights. The Stockholders own and hold good and
valid title to the Shares, free and clear of all liens, encumbrances, pledges,
options, proxies, voting trusts, voting agreements, charges or assessments of
any kind whatsoever.
3.2 Corporate Organization, Authorization, etc. GIC is a
corporation duly organized, validly existing and in good standing under laws of
the State of Florida and has all requisite corporate power and authority to
conduct its business as it is now being conducted and to own or lease the
properties and assets it now owns or holds under lease; is duly qualified or
licensed to do business and is in good standing in every other state of the
United States and other jurisdictions where the character of its business or
the nature of its properties make such qualification or licensing necessary,
other than those in which the failure to be so qualified would not have a
material adverse effect on the current financial condition, business, or
operations of GIC. True, correct and complete copies of the Articles of
Incorporation, as amended to date and certified by the Florida Secretary of
State, and Bylaws, as amended to date, of GIC, certified by its corporate
secretary, as are now in effect are attached hereto as Schedule 3.2.
3.3 Capitalization. The issued and outstanding capital stock of
GIC consists of 100 shares of Common Stock, $5 par value. All of such issued
shares are validly issued, fully paid and nonassessable. GIC does not have
outstanding, and is not bound by, any subscriptions, options, warrants, calls,
commitments or agreements to issue any additional shares of its capital stock,
including any right of conversion or exchange under any outstanding security or
other instrument, and GIC is not obligated to issue any shares of its capital
stock for any purpose. There are no unsatisfied preemptive rights in respect
of GIC's capital stock.
3.4 Due Execution and Enforceability. GIC and the Stockholder
have full power and authority to execute and deliver this Agreement and all
other agreements contemplated hereby, and to consummate the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
the Stockholders and by GIC and constitutes the valid, binding and legally
enforceable obligation of the Stockholders and GIC, enforceable in accordance
with its terms, except to the extent that enforcement may be affected by
bankruptcy, insolvency, reorganization, moratorium or other laws relating to or
affecting the enforcement of the rights and remedies of creditors generally and
general equitable principles.
3.5 Approval of Transactions. The Stockholders, as the owners of
100% of the voting stock of GIC, have (i) approved the transactions and
agreements herein to which GIC is a party and (ii) authorized the officers and
directors of GIC to take such actions as any of them may deem appropriate in
order to accomplish the transactions contemplated hereby.
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3.6 Validity of Contemplated Transactions. Neither the execution
and delivery of this Agreement by GIC and the Stockholders nor the consummation
of the transactions contemplated hereby will violate, require any filing,
consent or approval under, be in conflict with, or constitute a default under
(i) any law, ordinance or governmental rule or regulation to which GIC or the
Stockholders is subject, (ii) any judgment or order of any court or any other
governmental authority which is applicable to GIC or the Stockholders, or (iii)
the Articles of Incorporation or Bylaws of GIC. Such execution, delivery and
consummation will not violate, be in conflict with, or constitute a default
under (with or without the giving of notice or lapse of time, or both) any
note, lease, loan agreement, or other agreement, instrument, document, or
understanding (written or oral) to which GIC or the Stockholders is a party or
by which any of their properties or other assets may be subject, except for any
violations, conflicts or defaults which in the aggregate would not materially
hinder or impair the consummation of the transactions contemplated hereby.
3.7 Subsidiaries, Affiliates, etc. GIC does not own any shares of
stock or other security of any corporation or any equity interest in a
partnership, joint venture or other business entity, and GIC does not control
any other corporation, partnership, joint venture or other business entity by
means of ownership, management contract or otherwise.
3.8 Financial Statements. The Stockholders have delivered to
First Sierra and Newco as set out below the following financial statements of
GIC as Schedule 3.8:
(a) An unaudited balance sheet of GIC as of June 30, 1994, and the
related unaudited income statement and statement of cash flows
for the year then ended;
(b) An unaudited balance sheet of GIC as of June 30, 1995, and the
related income statement and statement of cash flows for the
year then ended; and
(c) An unaudited balance sheet of GIC (the "Balance Sheet") as of
May 31, 1996 (the "Balance Sheet Date") and GIC's unaudited
income statement for the period ended May 31, 1996.
All of the financial statements referred to in this Paragraph 3.8 have been
prepared in accordance with generally accepted accounting principles in the
United States consistently applied throughout the periods involved; and they
present fairly the financial positions to which they relate at the respective
dates thereof, the related results of operations for the periods therein
referred to, and the related changes in financial position for such periods.
Except as and to the extent disclosed and specifically reserved for or against
in the Balance Sheet or disclosed in the notes thereto or as incurred by GIC in
the ordinary course of business (and not in violation of any representation,
warranty or other term or provision of this Agreement) since the date of the
Balance Sheet, GIC has not incurred or become liable for and is not subject to
any liability or obligation of any kind, whether accrued, absolute, fixed,
contingent or otherwise, and whether due or to become due. Except as set forth
in Schedule 3.8, there is no oral or written guarantee, assurance or other
credit maintenance arrangement by GIC of any obligation of any person or entity
for the borrowing of
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money, for the payment of any monetary obligation of any nature whatsoever
(whether due or to become due), or for the performance of any obligation of any
nature whatsoever or otherwise. As of Closing, the net book value of GIC is no
less than the net book value as reflected on the Balance Sheet, and there have
been no cash distributions to shareholders of GIC except as disclosed to First
Sierra.
3.9 Condition of Assets. Schedule 3.9 hereto sets forth GIC's
leases/financing arrangements as of May 31, 1996 (which, together with all
other lease/financing arrangements entered into by GIC between such date and
the Closing Date, are referred to herein as the "Leases"). As used herein, the
term "Lease Documents" shall mean and refer to the lease agreements and
financing contracts evidencing the leases/financing arrangements described in
Schedule 3.9, together with all related documents and agreements including,
without limitation, master lease agreements, schedules or other addenda to such
lease agreements and financing contracts, certificates of delivery and
acceptance, UCC financing statements, remarketing agreements, residual guaranty
agreements, insurance policies, and guaranty agreements and other credit
supports. As used herein, the term "Equipment" shall mean and refer to all
equipment, inventory, and other property described as being leased pursuant to
or in which GIC is granted a security interest in pursuant to a Lease. As used
herein, the term "Obligor" shall mean and refer to any lessee party or other
party obligated to pay or perform any obligations under or in respect of a
Lease or the Equipment covered by a Lease (excluding the lessor party
thereunder, but otherwise including, without limitation, any guarantor of a
Lease or any vendor, manufacturer or similar party under a remarketing
agreement, residual guaranty or similar agreement). As used herein, the term
"Scheduled Payments" means the monthly rental payments or installments of
principal and interest under the terms of the Leases.
(a) There is no restriction or limitation in any of the Lease
Documents or otherwise restricting GIC from executing this
Agreement, terminating the Lease Documents, or otherwise
entering into the transaction contemplated by this Agreement,
or if the Lease Documents require the consents of the Obligors
to the transactions contemplated by this Agreement, such
consents have been obtained.
(b) (i) GIC either owns the Equipment covered by each Lease
that has a booked residual amount relating to the
same as indicated on Schedule 3.9 or GIC has a right
to purchase the Equipment at the end of the lease
term for a nominal amount.
(ii) As to all other Equipment, GIC owns such Equipment or
has a first perfected security interest in such
Equipment; and to the best knowledge of Stockholders,
such interest is a first priority perfected interest.
(c) With respect to each Lease, only one original of such Lease
exists.
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<PAGE> 14
(d) Each Lease is genuine and in full force and effect in
accordance with its terms, and nothing has occurred or failed
to be performed which would or might permit any Obligor to
terminate such Lease or suspend or reduce any payments or
obligations due or to become due in respect of such Lease or
the related Lease Documents by reason of default by the lessor
party under such Lease. Except as set forth on Schedule 3.9,
to the best knowledge of the Shareholders none of the Obligors
in respect of a Lease or the related Lease Documents is the
subject of a bankruptcy, insolvency or other similar
proceeding.
(e) Except for the delinquency in the payment of any Scheduled
Payment that is not more than 60 days past due, there does not
exist any default in the payment of any Scheduled Payments due
under any Lease or the related Lease Documents; and to the
best knowledge of the Shareholders there does not exist any
other default, breach, violation or event permitting
acceleration, termination or repossession under any Lease or
the related Lease Documents (or under any other agreement
between the Obligor(s) in respect of such Lease and the
Company) or any event which, with notice and the expiration of
any applicable grace or cure period, would constitute such a
default, breach, violation or event permitting acceleration,
termination or repossession under such Lease or the related
Lease Documents (or under any other agreement between the
Obligor(s) in respect of such Lease and the Company).
(f) All requirements of any federal, state or local law, including
without limitation, usury laws, applicable to each Lease
(including the origination, acquisition and servicing thereof)
have been complied with in all material respects.
(g) Each Lease has the following characteristics:
(i) such Lease was originated in the United States and
the Scheduled Payments thereunder are payable in U.S.
dollars by Obligors domiciled in the United States;
(ii) at least one Scheduled Payment has been made by the
Obligor under each such Lease that was entered into
by GIC prior to the Closing Date;
(iii) no Obligor in respect of such Lease is an affiliate
of GIC or the Stockholder;
(iv) the lessee party under such Lease has unconditionally
accepted the Equipment covered by such Lease;
(v) such Lease was not in GIC's "legal" account category
as of May 31, 1996; and
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<PAGE> 15
(vi) such Lease is not currently in GIC's "legal" account
category.
(h) Each Lease and the related Lease Documents are valid, binding
and legally enforceable obligations of the parties thereto,
enforceable in accordance with their respective terms (subject
to bankruptcy, insolvency and other similar laws).
(i) Each item of Equipment is subject to a Lease.
(j) Each Lease is a fixed rate lease contract.
(k) Pursuant to the terms of the Lease Documents related to each
Lease, as of the Closing the lessee in respect of such Lease
is absolutely required to make to GIC or GIC's designee all
payments and perform all obligations under such Lease and the
related Lease Documents without abatement, deferment or
defense of any kind or for any reason. No Lease or any
related Lease Document is subject to any right of rescission,
set-off, counterclaim, abatement or defense, including
(without limitation) any defense of usury, nor will the
operation of any of the terms of any Lease or any related
Lease Document or the exercise of any right or remedy
thereunder render such Lease or any related Lease Document or
the obligations thereunder unenforceable, or subject the same
to any right of rescission, set-off, counterclaim, abatement
or defense. No Obligor in respect of a Lease has asserted any
such right of rescission, set-off, counterclaim, abatement or
defense to its obligations under its Lease or any related
Lease Document, or under any other Lease (or any related Lease
Document) to which such Obligor is a party.
(l) None of the Leases or their related Lease Documents has been
modified, amended or extended (in the manner of an extension
in the maturity date, a change in the amount or time of
payment of any installment of rent or otherwise), no
indulgences or waivers have been granted in respect of the
obligations of any Obligor under any Lease, and neither GIC
nor any affiliate of GIC has advanced any monies on behalf of
or to cure any breach or default by any Obligor.
(m) Each Lease requires the Obligor thereunder at its own cost and
expense to maintain the Equipment leased thereunder in good
repair, condition and working order, and each Obligor under a
Lease is currently in compliance with such requirement.
(n) Each Lease requires the Obligor thereunder to pay all fees,
taxes (except income taxes), and other charges or liabilities
arising with respect to the Equipment leased thereunder or the
use thereof, to keep the Equipment free and clear of any and
all liens, security interests and other encumbrances (other
than the security interest of the Company), to hold harmless
the lessor thereunder and its successors and assigns against
the imposition of any such fees, charges, liabilities and
encumbrances, to bear all risk of loss associated with the
Equipment covered by or
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<PAGE> 16
securing the obligations under such Lease during the term of
such Leases and to maintain at the cost of the Obligor public
liability and casualty insurance in respect of such Equipment
covered by the Lease.
(o) Except for Leases relating to rolling stock, each Lease
prohibits without the lessor's prior written consent any
relocation of the Equipment covered by such Lease and requires
the Obligor thereunder to execute such agreements and
documents (including without limitation any UCC-1 financing
statements or amendments thereto) as may reasonably be
requested by the lessor in connection with any such
relocation.
(p) All federal, state and local sales, use, property and other
similar taxes (and penalties and interest thereon) payable by
GIC as lessor, in respect to the Leases, any Equipment covered
by or securing the obligations under the Leases, or any
payments on the Leases, that have become due and payable have
been paid to every applicable governmental authority.
(q) As to each Lease, at the time the Lease was entered into, the
interest of GIC in respect of the Equipment covered by or
securing the obligations under such Lease was duly perfected
by the filing or recording in applicable jurisdictions of UCC
financing statements or other documents sufficient to perfect
GIC's interest in such Equipment, and GIC has not taken any
action on its behalf to change such perfected status. All
Equipment is located within the United States.
(r) Each Lease involves either the lease of tangible personal
property owned by GIC or the loan of money secured by a
security interest in tangible personal property owned by the
Obligor thereunder.
(s) Except as disclosed on Schedule 3.25 or 3.26, GIC has not
received any notice challenging its ownership or the priority
of its security interest in the Equipment covered by each
Lease, and there are no proceedings pending before any court
or governmental entity or, to the best of the Shareholders'
knowledge, threatened by any Obligor or other party, (i)
asserting the invalidity of any Lease or any of the related
Lease Documents, (ii) seeking to prevent payment and
performance by any Obligor of any Lease or any of the terms
and provisions of the related Lease Document or any other
agreement between such Obligor and GIC, or (iii) seeking any
determination or ruling that might adversely affect the
validity or enforceability of any Lease or any of the terms
and provisions of the related Lease Documents.
(t) As to each Lease, there are no agreements or understandings
between GIC and the Obligors in respect of such Lease or
otherwise binding on GIC other than as expressly set forth in
the related Lease Documents.
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<PAGE> 17
(u) None of the Obligors is a governmental entity with leases
containing "non-appropriation" and/or "essential use" clauses.
(v) Schedule 3.9-A attached hereto is a true and complete list as
of May 31, 1996, of the maturity date by lease of all
residuals and the balances of all residuals. GIC owns all
rights in and to such residuals as listed on Schedule 3.9-A as
well as all residuals of GIC from the time of such date
through Closing. All such residuals are listed at 10% of
original equipment cost unless otherwise noted, there are no
"side" or other agreements, arrangements, or understandings
relating to such residuals, and the provisions of the Leases
relating to such residuals do not permit the lesee or any
other person to purchase the Equipment under such Lease for an
amount less than the amount listed on Schedule 3.9-A for such
residual.
3.10 Lease Volume. Schedule 3.10 hereto sets forth the lease
volumes generated by GIC for the periods indicated thereon, and GIC and the
Stockholder represent and warrant that Schedule 3.10 is accurate in all
respects and that such volumes were generated for the periods indicated.
3.11 Lease Funding. GIC is in compliance with all of the terms and
covenants of each agreement, contract, understanding or arrangement with any
funding source for the Leases referred to in Section 3.11 and GIC is not in
default of or in breach of any representation or warranty in any agreement,
contract, understanding or arrangement with any such funding source. GIC is
not in default or in breach of any representation or warranty or in violation
of any covenant or agreement, contained in GIC's Pegasus Service Center
Agreement. The execution of this Agreement by GIC and the consummation of the
transactions contemplated hereby will not be a violation of GIC's Pegasus
Service Center Agreement or any other agreement, contract, arrangement or
understanding with any of GIC's funding sources.
3.12 Liabilities. Schedule 3.12 is a true and complete list, as of
May 31, 1996, of all known liabilities of GIC of any nature, character and
description, except (i) obligations under contracts or commitments described in
Schedule 3.17 or under contracts and commitments which are not required to be
disclosed thereon (but not liabilities for breaches thereof), (ii) liabilities
reflected on the liabilities side of the Balance Sheet, (iii) contingent or
liquidated liabilities described on Schedule 3.25 or 3.26, (iv) liabilities
which have arisen after the date of the Balance Sheet in the ordinary course of
business or otherwise in accordance with the terms and conditions of this
Agreement (none of which is a liability for breach of contract, breach of
warranty, tort or infringement, or a claim or lawsuit, or an environmental
liability).
3.13 Accounts and Notes Receivable. GIC and the Stockholder have
delivered to First Sierra and Newco a true and complete list (Schedule 3.13),
as of May 31, 1996, of the accounts receivable and notes receivable of GIC.
Except to the extent collected prior to the date hereof, all of GIC's accounts
and notes (without reserves) are collectable in the amounts shown on Schedule
3.13 and the accounts and notes receivable reflected on the books and records
of GIC
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<PAGE> 18
as outstanding on the Closing Date (including those on Schedule 3.13) are valid
debts owing to GIC arising in the ordinary course of business, and such
accounts and notes receivable are by their terms payable within ninety (90)
days of the invoice date of each such receivable. As of May 31, 1996, the cash
and cash equivalents of GIC were $447,416 and such cash and cash equivalents
have been utilized since May 31, 1996 only for the proper conduct of GIC's
business, in the ordinary course of its business. "Cash equivalents" shall
mean liquid investments with maturities of three (3) months or less. The
Stockholders have no knowledge that any single customer represents fifteen
percent (15%) or more of the revenues of GIC.
3.14 Patents, Trademarks, Copyrights, etc.
(a) "Proprietary Rights" shall mean all of the following items
owned by or licensed to GIC, and any and all corresponding
rights that, now or prior to Closing, may be secured by GIC:
(i) patents, patent applications, patent disclosures and
inventions (whether or not patentable and whether or not
reduced to practice) and any reissue, continuation,
continuation-in-part, division, revision, extension or
reexamination thereof; (ii) trademarks, service marks, trade
dress, logos, trade names and corporate names together with
all goodwill associated therewith, copyrights registered or
unregistered and copyrightable works and mask works; (iii) all
registrations, applications and renewals for any of the
foregoing; (iv) trade secrets and confidential information
(including, without limitation, ideas, formulae, compositions,
know-how, manufacturing and production processes and
techniques, research and development information, drawings,
specifications, designs, plans, proposals, technical data,
financial, business and marketing plans, and customer and
supplier lists and related information); (v) computer software
and software systems (including, without limitation, data,
databases, related documentation and the Lease Team lease
accounting software); (vi) other proprietary rights; (vii)
licenses or other agreements to or from third parties
regarding the foregoing; and (viii) all copies and tangible
embodiments of the foregoing (in whatever form or medium), in
each case including, without limitation, the items set forth
on Schedule 3.14.
(b) GIC does not own any patents, trademarks, service marks,
copyrights or trade secrets.
(c) GIC has not infringed, misappropriated or otherwise conflicted
with any Proprietary Rights of any third parties and the
Stockholders are not aware of any infringement,
misappropriation or conflict which shall occur as a result of
the continued operation of GIC's business as currently
conducted or as currently proposed to be conducted.
3.15 Real Property. Schedule 3.15 to this Agreement is a true and
complete copy of the lease of the real property leased by GIC. Schedule 3.15
contains a summary description of all
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<PAGE> 19
buildings, fixtures and other improvements located on this leased real
property. The lease listed on Schedule 3.15 is valid and in full force, and
there does not exist any default by GIC or event that with notice or lapse of
time, or both, would constitute a default under the lease.
3.16 Furniture and Equipment. Schedule 3.16 to this Agreement is a
true and complete schedule describing and specifying the location of all
furniture equipment owned by, in the possession of, or used by GIC in
connection with its business. The property listed in Schedule 3.16 constitutes
all such tangible personal property presently utilized by GIC in its business
as now conducted. All items of such equipment are in reasonably good operating
condition, order and repair, subject to ordinary wear and tear, and have been
maintained in accordance with standard industry practice, (ii) are adequate for
the purposes for which they are being used in the operations and business of
GIC as presently being conducted without present need for repair or replacement
except in the ordinary course of the operations and business of GIC, (iii) to
the best knowledge and belief of GIC, conform in all material respects with all
applicable legal requirements, and (iv) in the aggregate provide the capacity
to enable GIC to engage in commercial operation on a continuous basis subject
to normal maintenance and repair outages in the ordinary course of its
business.
3.17 Material Contracts. Schedule 3.17 is an accurate list, as of
the date hereof, of all contracts, agreements, and understandings to which GIC
is a party or by which it or any of its property is bound with respect to
which the obligations of or the benefits to be received by GIC could reasonably
be expected to have a value in excess of $5,000 in any consecutive 12 month
period (each a "Material Agreement"). Schedule 3.17 does not include the
Leases listed on Schedule 3.9, those insurance policies listed on Schedule 3.20
or those employment agreements listed on Schedule 3.21, but does include all
(if any) other contracts, agreements, and understandings to which GIC is a
party including, but not limited to, joint venture or partnership agreements,
contracts with municipalities and labor organizations, loan agreements,
pension agreements, bonds, mortgages, liens, pledges, guaranties or other
security agreements, noncompetition agreements, license or royalty agreements,
agreements with respect to investing funds, contracts relating to the
distribution, marketing or sales of its services or products, and warranty
agreements with respect to its services or products, and the Stockholder has
delivered true copies of such agreements to First Sierra. Except to the extent
set forth on Schedule 3.17, GIC and, to the knowledge of the Stockholder, all
other respective parties thereto have complied with all material commitments
and obligations under all such contracts and agreements and there are not any
pending unresolved claims of which GIC has received notice.
3.18 Title and Condition of Property. GIC has good and marketable
title to all property, assets and leasehold estates, real and personal, owned
and used in its business, subject to no mortgage, pledge, lien, conditional
sales agreement, encumbrance or charge, except for liens in favor of funding
sources relating to the leases in which GIC is the original lessor and
statutory liens for taxes not yet due or delinquent. There are no claims
against GIC and the Stockholder is not aware of any facts or circumstances
which could reasonably be expected to lead to any claims, which would if
determined adversely to GIC result in a lien against any of the assets or
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<PAGE> 20
property of GIC. All buildings, structures, and material equipment currently
utilized in normal operations of GIC are suitable for the purposes for which
they are used, and are in reasonably good working order and in reasonable
repair.
3.19 Insurance. Schedule 3.19 is a true and complete list, as of
the date hereof, of all insurance policies carried by GIC (with a notation as
to the status of premiums paid or payable thereon, specifying the insurer, the
amount of coverage, the deductible amount, the type of insurance, the policy
number, the cash surrender value, the owner, the beneficiary, the loss payee,
and all pending claims thereunder). GIC has not been refused any insurance by
any insurance carrier to which it has applied for insurance during the past
three years because of unacceptable risk.
3.20 Employee Arrangements. Schedule 3.21 is a true and complete
list showing all officers and directors of GIC and the rate of compensation
(and the portions thereof attributable to salary, commissions and bonuses,
respectively) of the officers and key employees of GIC, as of the date of this
Agreement, and showing all employment contracts and compensation arrangements
and benefit plans and classifications of employees covered thereby as of the
date of this Agreement. The Stockholders have provided First Sierra true and
complete copies of all of GIC's employment contracts and compensation
arrangements with its employees, and all non-compete agreements with employees,
and a copy of GIC's current major medical and employee health plans.
3.21 Employee Benefit, Pension, Bonus Plans, etc. Except for the
plans and agreements listed in Schedule 3.21 hereto, GIC is not and has not
within the last three years been a party to or obligated under any material
plan, program, trust, contract, agreement, or arrangement, either oral or
written, for the benefit of employees of GIC, whether a single employer or
multi-employer plan, and including welfare, fringe benefit, pension, profit
sharing, retirement and deferred compensation plans. There has not been any
(i) termination of any "defined benefit plan" within the meaning of ERISA
maintained by GIC or any person, firm or corporation ("Affiliate") which is
under "common control" (within the meaning of Section 4001(b) of ERISA) with
GIC, or (ii) commencement of any proceeding to terminate any such plan pursuant
to ERISA, or otherwise or (iii) written notice given to GIC or any affiliate of
the intention to commence or seek the commencement of any such proceeding. GIC
does not maintain or contribute to any multi-employer plan within the meaning
of Section 3(37) of ERISA or any defined benefit plan within the meaning of
Section 3(35) of ERISA.
3.22 Employee Relations. Except as disclosed in Schedule 3.22,
there are no controversies pending or, to the knowledge of the Stockholders,
threatened between GIC and any employee, former employee or job applicant of
GIC or any association or any group of current or former employees of GIC, and
the general relationship between GIC and its employees is good. To the
knowledge of the Stockholders, no salesman or other key employee is currently
intending to leave or has informed the Stockholders that he or she will leave
upon consummation of this Agreement. Except as set forth on Schedule 3.22, GIC
has not entered into any labor contracts
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with any bargaining agency or union representing its employees, and no union is
known to be organizing or attempting to organize any of the employees of GIC
who are not already members of a labor union. To the knowledge of the
Stockholders, the services of all essential employees of GIC will continue to
be available on substantially the same terms and at the same locations for the
continuation of the business of Newco after the Closing. The Stockholders have
delivered to First Sierra true and complete copies of all employment
agreements, collective bargaining and labor agreements to which GIC is a party.
GIC has complied in all material respects with all laws applicable to it
relating to the employment of labor, including any provisions relating to
wages, hours, collective bargaining and the payment of social security and
other taxes.
3.23 Bank or Other Accounts. Schedule 3.23 is a true and complete
list showing as of the date of this Agreement (i) the name of each institution
in which GIC has funds, certificates representing deposits, accounts, safe
deposit boxes or securities, (ii) the names in which the funds, certificates,
boxes or securities are held and (iii) the names of each person authorized to
draw thereon or have access thereto.
3.24 Tax Matters. All federal, state and local tax returns of GIC
that are required to be filed on or before the Closing Date have been (or will
have been by the Closing Date) timely filed (subject to any extensions that
have been obtained) with the appropriate governmental authorities. All income,
gross receipts, sales, transfer, use, employment, franchise, profits, property,
stamp and other taxes of any kind whatsoever (whether payable directly or via
withholding), together with any interest thereon and any penalties, additions
to tax or additional amounts imposed by any governmental authority responsible
for the imposition of any such tax, including, without limitation, estimated
taxes and those taxes that are shown on the tax returns described in the
preceding sentence as due from GIC (collectively, "taxes"), have been (or will
have been by the Closing Date) properly accrued (in accordance with GAAP), paid
or deposited. The accruals for taxes contained in GIC's Financial Statements
as of the date of the most recent balance sheet included in such financial
statements are adequate to cover the material tax liabilities of GIC taken as a
whole as of that date and include adequate provisions for all material deferred
taxes, and nothing has occurred subsequent to such date to make such accruals
materially inadequate. Except as set forth on Schedule 3.24, GIC has not
received any knowledge of any notice of deficiency or assessment in connection
with any tax returns, and there are not any pending tax examinations of, or tax
claims asserted against GIC. GIC has not extended, nor waived the application
of, any statute of limitations of any jurisdiction regarding the assessment or
collection of any taxes. There are no requests for rulings or determinations
in respect of any taxes pending between GIC and the Internal Revenue Service or
any other taxing authority. GIC has not filed a consent under Section 341(f)
of the Code concerning collapsible corporations. GIC has not made any payments
nor is obligated to make any payments, nor is a party to any agreement that
under certain circumstances could obligate it to make any payments that will
not be deductible under Section 280G of the Code. There is no lien for taxes
(other than any lien for current taxes not due and payable) on or with respect
to any assets of GIC. GIC has not been a party to any tax allocation or
sharing agreement. None of the shareholders are a "foreign person" for
purposes of U.S. income taxation. GIC has never been a member of an affiliated
group within the meaning of Section 1504(a) of the
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Code. GIC made all deposits required by law to be made with respect to
employees' withholding and other employment taxes. GIC is responsible for the
timely preparation and filing of all current GIC income tax returns and the
payment of all related income taxes for the current tax periods (or "short" tax
periods) ending prior to or on the Closing Date. Copies of the current income
tax returns will be provided to First Sierra at the time they are signed and
filed with the related taxing authorities. "Income taxes" as used herein
include (but may not be limited to) all federal, state taxes based upon income,
gross receipts, net capital, profits, intangible assets, etc.).
3.25 No Defaults under Contracts. All contracts, agreements,
plans, leases, licenses, certificates, insurance policies, permits and
franchise agreements listed in any schedule provided to First Sierra hereunder
are valid and in full force and effect, except to the extent disclosed in any
schedule hereto. Except as set forth in Schedule 3.25, GIC has not breached
any material provision of, nor is in default in any material respect under the
terms of, any such contract, agreement, lease, license, or permit, and GIC is
not in default in any material respect as to its performance on any such
contracts.
3.26 Litigation, Defaults under Laws, etc. Except as set forth in
Schedule 3.26, GIC has complied in all material respects with and is not in
default in any material respect under, any law, rule, permit, regulation,
ordinance, order, writ, injunction or court decree applicable to it. Except as
set forth in Schedule 3.26, GIC is not subject to any order, ruling, decree or
judgment, having continuing effect, of any court, arbitrator or governmental
agency or instrumentality. Except as set forth in Schedule 3.27, there are no
claims, actions, suits, arbitrations, investigations, disputes or other
proceedings against GIC, pending or, to the knowledge of the Stockholders,
threatened; and the Stockholders have no knowledge of any factual basis
existing that could reasonably be expected to result in any such claim, action,
suit, arbitration, investigation, dispute or other proceeding.
3.27 No Consents Required. Except as set forth on Schedule 3.28,
no consents are required by GIC in connection with the execution and delivery
of this Agreement and the consummation of the transactions contemplated herein,
or to avoid or prevent any acceleration of maturity or performance under, or
any default or breach of, or any material adverse effect with respect to any
indebtedness, contract, right, franchise, permit or other privilege to which
GIC is a party or by which any of its assets are bound.
3.28 Brokers and Finders. The parties have agreed that the
Stockholder and First Sierra will equally share (up to $35,000 each) any fees
due to Bruce Kropschot. No other broker or finder has acted directly or
indirectly for GIC or the Stockholders in connection with this Agreement or the
transactions contemplated hereby, and no other broker or finder is entitled to
any brokerage or finder's fee or other commission in respect thereof based in
any way on agreements, arrangements or understandings made by or on behalf of
GIC or the Stockholders.
3.29 Absence of Changes. Since the Balance Sheet Date, there has
been no adverse change in the business, results of operations, prospects,
financial condition or liabilities (accrued,
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absolute, contingent or otherwise), of GIC. Since the Balance Sheet Date, the
following events have not occurred, except as have been previously disclosed in
writing to First Sierra:
(a) the issuance, sale or delivery, split, reclassification,
combination, or other adjustment, or any agreement to do the
same, of any stock, bonds or other corporate securities of
which GIC is the issuer (whether authorized and unissued or
held in treasury), or the granting or issuance, or agreement
to grant or issue, any options, warrants or other rights
(including convertible securities) calling for the issue
thereof;
(b) the borrowing, or agreement to borrow, of any funds or the
voluntary incurrence, or assumption, whether directly or by
way of guarantee or otherwise, of any obligation or liability
(absolute or contingent), except with respect to accounts
payable arising out of the ordinary course of business;
(c) the mortgage or pledge of any of GIC's assets, tangible or
intangible;
(d) except for the sale of inventory and other operating assets in
the ordinary course of business, the sale, lease, exchange or
other transfer, or the entering into of any agreement to sale,
lease, exchange or otherwise transfer, any of the GIC's
assets, property or rights or cancel, or the agreement to
cancel, any debts or claims;
(e) the entering into, or any agreement to enter into, any
agreement or arrangement granting any preferential rights to
purchase any of the assets, property or rights of GIC or
requiring the consent of any party to the transfer or
assignment of any such assets, property or rights;
(f) the making or permitting of any amendment or termination of
any contract, agreement or license to which it is a party;
(g) the making of any change in, or adoption of, any
profit-sharing bonus, deferred compensation, insurance,
pension, retirement, severance or other employee benefit plan,
payment or arrangement or the entering into of any employment,
consulting or management contract;
(h) the entering into of any employment, labor or collective
bargaining agreement;
(i) the increase of the compensation payable or to become payable
to any officer, employee or agent, or the making of any bonus
or other type of compensation payment to any such person;
(j) the merger or consolidation with any other corporation, the
acquisition of control of any other corporation or business
entity, or the taking of any steps incident to,
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or in furtherance of, any of such actions, whether by entering
into an agreement providing therefor or otherwise;
(k) the entering into of any contract, agreement or course of
action which (i) may materially increase its liabilities or
(ii) which requires or will require expenditure of more than
$5,000 in the singular or $10,000 in the aggregate;
(l) except as required by law, the making of any alteration in the
manner of keeping its books, accounts or records, or in the
accounting practices therein reflected;
(m) the solicitation, either directly or indirectly, or the
initiation or encouragement of any offer for the purchase or
acquisition of GIC or any of its assets by any party other
than First Sierra or the investigation of any unsolicited
offer or the entering into of any negotiations with any party
other than Purchaser concerning any such acquisition;
(n) the declaration, setting aside or payment of any dividend on
its stock in cash, stock or property, or directly or
indirectly, the redemption, purchase or other acquisition of
any of its own stock, or any other distribution of its assets
to its stockholders, or the reclassification,
recapitalization, splitting up or otherwise adjusting any of
its capital stock;
(o) the amendment or alteration of the certificate of
incorporation or bylaws of GIC; or
(p) the entering into of any other transaction other than in the
ordinary course of business.
3.30 Environmental. Except as specifically set forth in Schedule
3.30 attached hereto and incorporated herein:
(a) the occupancy of and operations by GIC at its leased
properties (the "Properties") are and were in material
compliance with applicable federal, state, local, or foreign
health, safety and environmental laws;
(b) to the Stockholders' best knowledge, the Properties are not
currently under investigation by any governmental agencies
under any laws pertaining to health, safety or the
environment;
(c) there are no lawsuits or administrative proceedings by third
parties or governmental agencies involving health, safety or
environmental matters with respect to any of the Properties;
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(d) the uses and operations conducted by GIC employees at any of
the Properties do not presently involve, and have not
previously involved, the treatment, storage, disposal,
incineration or recycling of Hazardous Materials;
(e) to the Stockholders' best knowledge, the Properties have never
been used for industrial or commercial operations involving
Hazardous Materials;
(f) there are no aboveground or, to the best knowledge of the
Stockholders, underground storage tanks on the Properties;
(g) to the best knowledge of the Stockholders, there are no
asbestos containing materials on or in any structures,
improvements or equipment on or in the Properties;
(h) to the best knowledge of the Stockholder, there are no PCBs or
PCB containing electrical equipment on or in the Properties;
(i) any waste generated from the uses and operations conducted at
the Properties has been and is being stored and disposed of in
compliance with all applicable environmental laws; and
(j) there are no discharges of industrial wastewater on or from
the Premises.
As used herein, the term "Hazardous Materials" shall mean (i)
asbestos, polychlorinated biphenyls, urea formaldehyde, lead based paint, radon
gas, petroleum, oil, solid waste, pollutants and contaminants, and (ii) any
chemicals, materials, wastes or substances which are defined, regulated,
determined or identified as toxic or hazardous in any environmental laws,
including but not limited to substances defined as "hazardous substances,"
"hazardous materials," or "hazardous waste" in SARA; the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Sec.
9601, et. seq.; the Hazardous Materials Transportation Act, 49 U.S.C. Sec.
1801, et. seq.; the Resource Conservation and Recovery Act, 42 U.S.C. Sec.
6901, et. seq.; or comparable state and local statutes or in the regulations
adopted and publications promulgated pursuant to said statutes.
3.31 Worker's Compensation Claims. Schedule 3.31 contains a true
and complete listing of all pending worker's compensation claims (including all
such claims that have arisen in the past two years). All possible worker's
compensation claims of which the Stockholders have received notice or is aware
of are also listed. The Stockholders are not aware of any events that are not
generally applicable to similar businesses which would cause its workmen's
compensation insurance premiums to increase or of any notifications of
increases or possible increases.
3.32 Product Warranties. There is no claim against or liability of
GIC on account of product warranties or with respect to the manufacture,
licensing, sale or rental of defective
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products (except minor claims arising in the ordinary course of business and
which may be satisfied at only a nominal cost), and, there is no basis for any
such claim on account of defective products heretofore manufactured, licensed,
sold or rented which is not fully covered by insurance.
3.33 Acquisition of Series A Preferred Shares. The Series A
Preferred Shares to be acquired by GIC pursuant to this Agreement and required
to be distributed to the Stockholders as part of the reorganization will be
held for investment purposes only and not with the present intention or view
to, or resale in connection with, any distribution thereof within the meaning
of the Securities Act of 1933, as amended. The Stockholders understand that
except as provided by its terms, such Series A Preferred Shares will not be
registered under such Securities Act or any state securities or blue sky laws,
that transferability of such Series A Preferred Shares will be restricted in
accordance with applicable state and federal securities laws, and that a
restrictive legend to such effect will be inscribed on each certificate
representing such Series A Preferred Shares. Prior to the Closing, the
Stockholders will have had full opportunity to receive such information and ask
such questions of representatives of First Sierra concerning First Sierra, its
subsidiaries and their business, operations, assets and prospects, and
concerning an investment in the Series A Preferred Shares, as the Stockholders
will then have deemed appropriate in order to make an informed investment
decision with respect to the Series A Preferred Shares.
3.34 Disclosure. No representation or warranty by the Stockholders
or GIC in this Agreement, nor in any exhibit or schedule delivered herewith,
nor any statement or certificate furnished or to be furnished by or on behalf
of the Stockholders or GIC pursuant to this Agreement or in connection with the
consummation of the transactions herein contemplated, contains, or will
contain, any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements herein and therein not
misleading. Notwithstanding any investigation made at any time by or on behalf
of First Sierra or Newco, and notwithstanding any actual or implied knowledge
or notice of any facts or circumstances which First Sierra or Newco may have as
a result of such investigation or otherwise, the Stockholder or GIC by its
execution and delivery of this Agreement acknowledges that the accuracy of such
representations, warranties, schedules, exhibits, statements and certificates
have been relied upon by First Sierra or Newco in entering into and in
performing and observing the obligations pursuant to this Agreement.
SECTION 4 - REPRESENTATIONS AND WARRANTIES OF FIRST SIERRA
AND NEWCO
First Sierra and Newco hereby jointly and severally make the following
representations and warranties to Sellers as of the date hereof, and all such
representations and warranties shall be true, complete and correct as of the
Closing Date:
4.1 Due Incorporation and Good Standing of First Sierra and Newco.
First Sierra is a corporation duly incorporated, validly existing and in good
standing under the laws of the State
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of Delaware. Newco is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Delaware. Newco is a wholly owned
subsidiary of First Sierra.
4.2 Corporate Authorization. First Sierra and Newco each have
full power and authority to enter into this Agreement and have all requisite
corporate power and authority to conduct its business as it is now being
conducted and to own or lease the properties and assets it now owns or holds
under lease. First Sierra and Newco are authorized to do business and are in
good standing in every state of the United States and other jurisdictions where
the character of its business or the nature of its properties make such
qualification or licensing necessary, other than those in which the failure to
be so qualified would not have a material adverse effect on the current
financial condition, business, or operations. True, correct and complete
copies of the Articles of Incorporation, as amended to date and certified by
the Delaware Secretary of State, and Bylaws, as amended to date, of GIC,
certified by its corporate secretary, have been (or will be before Closing)
delivered to GIC. Neither the execution nor delivery of this Agreement by
First Sierra or Newco, nor First Sierra's or Newco's performance hereunder will
result in a violation or breach of any term or provision, or constitute a
default or accelerate the performance required under, any indenture, mortgage,
deed of trust, or other contract or agreement to which First Sierra or Newco is
a party or by which First Sierra or Newco is bound or under any provision of
their respective Charter or Bylaws. The execution, delivery and performance by
each of First Sierra and Newco of this Agreement have been duly authorized by
the Board of Directors of First Sierra and Newco, respectively, and no further
corporate action is necessary on the part of First Sierra or Newco to make this
Agreement valid and binding upon First Sierra and Newco and enforceable in
accordance with its terms.
4.3 Capitalization. The authorized capital stock of First Sierra
consists of 1,000,000 authorized shares of Common Stock, $.01 par value per
share, and 500,000 shares of Preferred Stock, $.01 par value. There are no
unsatisfied preemptive rights in respect of First Sierra's capital stock. Upon
issuance to the Stockholders, the shares of the Series A Preferred Stock will
be duly issued, validly authorized and non-assessable.
4.4 Financial Statements. First Sierra has delivered to the
Stockholders an audited balance sheet of First Sierra as of December 31, 1995,
and the related audited income statement and statement of cash flows for the
year then ended. Such financial statements have been prepared in accordance
with generally accepted accounting principles in the United States consistently
applied throughout the periods involved; and they present fairly the financial
positions to which they relate at the respective dates thereof, the related
results of operations for the periods therein referred to, and the related
changes in financial position for such periods.
4.5 No Conflict. No provision exists in any article, document or
instrument to which First Sierra or Newco is a party or by which either First
Sierra or Newco is bound which would be violated by consummation of the
transaction as contemplated by this Agreement.
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4.6 Governmental Authorities and Consents. No consent, approval
or authorization of any governmental or regulatory authority or any other party
or person is required to be obtained by First Sierra or Newco in connection
with its execution, delivery and performance of this Agreement and the other
agreements contemplated hereby to which First Sierra or Newco is a party or the
transactions contemplated hereby or thereby.
4.7 Litigation. There are no actions, suits, proceedings, orders
or investigations pending or, to First Sierra's or Newco's knowledge,
threatened against or involving the assets of First Sierra or Newco at law or
in equity, or before or by any federal, state, provincial, municipal or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, which would adversely affect First Sierra's or Newco's
performance under this Agreement and the other agreements contemplated hereby
to which First Sierra or Newco is a party or the consummation of the
transactions contemplated hereby or thereby.
4.8 Disclosure. No representation or warranty by First Sierra or
Newco in this Agreement, nor in any exhibit or schedule delivered herewith, nor
any statement or certificate furnished or to be furnished by or on behalf of
First Sierra or Newco pursuant to this Agreement or in connection with the
consummation of the transactions herein contemplated, contains, or will
contain, any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements herein and therein not
misleading. Notwithstanding any investigation made at any time by or on behalf
of the Stockholder, and notwithstanding any actual or implied knowledge or
notice of any facts or circumstances which the Stockholder may have as a result
of such investigation or otherwise, each of First Sierra or Newco by its
execution and delivery of this Agreement acknowledges that the accuracy of such
representations, warranties, schedules, exhibits, statements and certificates
have been relied upon by the Stockholder in entering into and in performing and
observing the obligations pursuant to this Agreement.
SECTION 5 - NONCOMPETITION AGREEMENTS; OTHER AGREEMENTS
5.1 Prohibition Against Certain Activities. In consideration of
the mutual covenants and agreements provided for in this Agreement, and in
further consideration of the amounts paid to the Stockholder for the covenants
described herein as set forth in Section 1.2, each Stockholder hereby covenants
and agrees that he will not, directly or indirectly, except in connection with
such Stockholder's duties of employment with Newco, either through any form of
ownership, or as a director, officer, principal, agent, employee, employer,
advisor, consultant, partner or in any individual or representative capacity
whatsoever, either for his own benefit or for the benefit of any other person,
without the prior written consent of the Board of Directors, for a period of
six (6) years from on the Closing Date or for the period provided under Article
V of the Employment Agreement for such Stockholder executed on the Closing
Date, whichever is shorter, within a geographic area in which Newco or First
Sierra is engaged in business, engage in any of the following acts, which acts
shall be considered violations of this Section 5.1:
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(a) Engage in the business of leasing and/or financing revenue
producing equipment and rolling stock;
(b) Request or advise any customer of Newco or First Sierra to
withdraw, curtail or cancel any of its business with Newco or
First Sierra;
(c) Assist any person in soliciting any customer of Newco or First
Sierra for the performance of any type of work performed by
Newco or First Sierra;
(d) Induce or attempt to influence any employee of Newco or First
Sierra to terminate his or her employment with Newco or First
Sierra;
(e) Disclose or communicate to any other person, firm, or
corporation the names of any customers of GIC, Newco or First
Sierra or other knowledge of the operations and business of
GIC, Newco or First Sierra, unless such information is
publicly known, has been disclosed by First Sierra in a
disclosure that was not intended to be confidential, or unless
otherwise required by law;
(f) Employ or cause to be employed any individual employed by GIC
at any time prior to the Closing Date or Newco or First Sierra
during the term of this Agreement;
(g) Overtly do or perform any act that is designed or intended to
materially and adversely affect the goodwill or operation and
business of Newco or First Sierra;
(h) Request, advise or attempt to influence any person which is a
source of materials, supplies, personnel, services, funds or
information for Newco or First Sierra to withdraw, cancel or
curtail the sale or furnishing of such items to Newco or First
Sierra; or
(i) Use for his own benefit or otherwise, or communicate to,
divulge to, or use for the benefit of, any other person
Confidential Information (as defined in Section 5.6 below),
and/or trade secrets disclosed to, discovered by or otherwise
known by such Stockholder through his employment and/or
association with (a) GIC prior to the Closing and (b) Newco or
First Sierra after the Closing which is not generally known in
the businesses in which Newco or First Sierra is engaged during
the term of this Agreement, it being the intent of this
subsection (i) that the Stockholder will honor the Confidential
Information and will not, directly or indirectly, use the
Confidential Information in such a way as to adversely affect
Newco or First Sierra or their business relations.
5.2 Acknowledgement of Need for Covenants. Insofar as the
covenants set out in Section 5.1 are concerned, each Stockholder specifically
acknowledges and agrees as follows:
<PAGE> 30
(a) The covenants are reasonable and necessary to protect the
goodwill and the operations and business of Newco or First
Sierra;
(b) The time duration of the covenants are reasonable and
necessary to protect the goodwill and the operations and
business of Newco or First Sierra;
(c) The geographical area limitations of the covenants are
reasonable and necessary to protect the goodwill and the
operations and business of Newco or First Sierra;
(d) The covenants are not oppressive to such Stockholder and do
not impose a greater restraint on such Stockholder than is
necessary to protect the goodwill and the operations and
business of Newco or First Sierra.
5.3 Damages. In the event any Stockholder violates any of the
covenants set out in Section 5.1, Newco and First Sierra shall suffer
irreparable damage and shall be entitled to full injunctive relief or such
other relief against the Stockholder as may be provided by law or in equity
together with such damages as may be provided at law or in equity. Newco and
First Sierra shall be entitled as a matter of right to specific performance of
the requirements of Section 5.1 or to temporary or permanent injunctive relief
against any breach of any provision of Section 5.1 by the Stockholder. Such
Stockholder will be responsible for all court costs and reasonable attorneys'
fees incurred by Newco and First Sierra if it obtains specific performance of,
or any injunction against violation of, the requirements of Section 5.1, and if
Newco or First Sierra is unable to obtain specific performance or an
injunction, they shall be responsible for all court costs and reasonable
attorneys fees of such Stockholders.
5.4 Judicial Modification. It is the express intention of the
parties to comply with all laws which may be applicable to the covenants
contained in Section 5.1. Therefore, the parties have attempted to limit the
Stockholder's right to compete only to the extent necessary to protect (i)
Newco and First Sierra from unfair competition, and (ii) Newco's and First
Sierra's goodwill and its operations and business. The parties recognize,
however, that reasonable people may differ in making such a determination.
Consequently, the parties hereby specifically agree that, in the event that any
covenant contained in Section 5.1 shall be determined by any court or other
constituted legal authority to be effective in any particular area or
jurisdiction only if such covenant is modified to limit its duration or scope,
such covenant may be reformed or modified by the judgment or order of such
court or authority to reflect a lawful and enforceable duration or scope. Such
covenant shall automatically be deemed to be amended and modified with respect
to that particular area or jurisdiction so as to comply with the judgment or
order of such court or authority and, as to all other areas and jurisdictions
covered by this Agreement, the terms and provisions hereof shall remain in full
force and effect as originally written.
5.5 Void or Unenforceable. In the event any covenants contained
in Section 5.1 shall be held by any court or other constituted legal authority
to be void or otherwise unenforceable in any particular area or jurisdiction
notwithstanding the operation of Section 5.1, such covenant
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automatically shall be deemed to be amended so as to eliminate therefrom that
particular area or jurisdiction as to which such covenant is so held void or
otherwise unenforceable and, as to all other areas and jurisdictions covered by
Section 5.1, the terms and provisions hereof shall remain in full force and
effect as originally written.
5.6 Confidential Information. As used in this Agreement, the term
"Confidential Information" shall mean information of any kind, nature or
description which is disclosed to, discovered by or otherwise known to a person
by reason of such person's employment and/or association, whether past, present
or future, with another person and/or its affiliates, which information is not
generally known in the businesses in which the latter person and/or its
affiliates were or are engaged. Such information includes but is not limited
to ideas, discoveries, inventions, techniques, methods, practices, processes,
formulas, technical information, data, information concerning products, goods,
services and manufacturing methods, customers, customer requirements, marketing
methods and plans as well as any other information regarding a person's methods
of conducting its business, whether patentable or not, and whether implemented
or not, provided, that such information shall not include information which is
or becomes generally available to the public other than as a result of a
disclosure in breach of this Agreement.
5.7 Regular Course of Business of the Company. The Stockholders
and GIC covenant and agree that from the date hereof to and including the
Closing Date GIC will:
(a) carry on its business in substantially the same manner as it
has heretofore;
(b) maintain its properties and facilities in as good working
order and condition as at present, ordinary wear and tear
excepted;
(c) perform all its obligations under agreements relating to or
affecting its assets, properties and rights;
(d) keep in full force and effect present insurance policies or
other comparable insurance coverage; and
(e) in the ordinary course of its business, maintain and preserve
its business organization intact, retain its present employees
and maintain its relationship with suppliers, customers and
others having business relations with it.
5.8 Restricted Activities and Transactions of Stockholder and GIC.
The Stockholders and GIC covenant and agree that from the date hereof to and
including the Closing Date, GIC shall not, except with the express written
consent of Newco and First Sierra:
(a) issue, sell or deliver, split, reclassify, combine or
otherwise adjust, or agree to issue, sell or deliver, split,
reclassify, combine or otherwise adjust, any stock,
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bonds or other corporate securities of which GIC is the issuer
(whether authorized and unissued or held in treasury), or grant
or issue, or agree to grant or issue, any options, warrants or
other rights (including convertible securities) calling for the
issue thereof;
(b) borrow, or agree to borrow, any funds or voluntarily incur,
assume or become subject to, whether directly or by way of
guarantee or otherwise, any obligation or liability (absolute
or contingent), in excess of $5,000 except in the ordinary
course of business;
(c) mortgage or pledge any of its assets, tangible or intangible;
(d) except for the sale of inventory and other operating assets in
the ordinary course of business, sell, lease, license,
exchange or otherwise transfer, or agree to sell, lease,
license, exchange or otherwise transfer, any of its assets,
property or rights or cancel, or agree to cancel, any debts or
claims;
(e) enter, or agree to enter, into any agreement or arrangement
granting any preferential rights to purchase any of the
assets, property or rights of the Company or requiring the
consent of any party to the transfer or assignment of any such
assets, property or rights;
(f) except in ordinary course of business, make or permit any
amendment or termination of any material contract, agreement
or license to which it is a party;
(g) except in ordinary course of business, make any change in, or
adopt, any profit-sharing bonus, deferred compensation,
insurance, pension, retirement, severance or other employee
benefit plan, payment or arrangement or enter into any
employment, consulting or management contract;
(h) except in ordinary course of business, enter into any
employment, labor or collective bargaining agreement;
(i) except in the ordinary and normal course of business
consistent with past practices, increase or agree to increase
the compensation payable or to become payable to any officer,
employee or agent, or, make any bonus or other type of
compensation payment to any such person;
(j) merge or consolidate with any other corporation, acquire
control of any other corporation or business entity, or take
any steps incident to, or in furtherance of, any of such
actions, whether by entering into an agreement providing
therefor or otherwise;
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(k) except in the normal and ordinary course of business
consistent with past practices, enter into any contract,
agreement or course of action which (i) may materially
increase its liabilities or (ii) which requires or will
require expenditure of more than $5,000 in the singular or
$10,000 in the aggregate;
(l) except as required by law, make any alteration in the manner
of keeping its books, accounts or records, or in the
accounting practices therein reflected;
(m) solicit, either directly or indirectly, initiate or encourage
any offer for the purchase or acquisition of GIC or any of its
assets by any party other than First Sierra or investigate any
unsolicited offer or enter into any negotiations with any
party other than First Sierra concerning any such acquisition;
(n) declare, set aside or pay any dividend on its stock in cash,
stock or property or directly or indirectly redeem, purchase
or otherwise acquire any of its own stock, or make any other
distributions of its assets to its stockholders, or
reclassify, recapitalize, split up or otherwise adjust any of
its capital stock, or become obligated to do any of the
foregoing;
(o) amend or alter the certificate of incorporation or bylaws of
GIC;
(p) make, or agree to make, any investment in, advance to, or
acquisition of securities of any entity or person or provide,
or agree to provide, any guarantee of, assurance or support
arrangement involving any obligation of any person except in
the ordinary course of business;
(q) enter into any other transaction other than in the ordinary
course of business.
5.9 No Further Negotiations. Unless this Agreement is closed or
sooner terminated, from the date of this Agreement until 5:00 p.m., Central
Standard Time, on July 31, 1996, the Stockholders and GIC will not, directly or
indirectly, whether through any of GIC's officers, directors, employees, or
shareholders, or through any of their or GIC's affiliates, representatives,
agents or otherwise, encourage or solicit any inquiries or proposals by or
engage in any discussions or negotiations with, or furnish any non-public
information to any person concerning, or cause any other merger, consolidation,
asset acquisition, disposition or tender offer involving GIC, and the
Stockholders will promptly communicate to First Sierra the substance of any
inquiry or proposal concerning any such transaction which may be received.
SECTION 6 - INDEMNIFICATION
6.1 Indemnification by the Stockholders. The Stockholders hereby
jointly and severally covenant and agree that they will indemnify and hold
harmless Newco and First Sierra at all times from and after the date of this
Agreement against any loss, liability, damage or expense (including
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attorney's fees) which Newco or First Sierra may suffer, sustain or become
subject to as a result of: (i) any breach of any representation or warranty, or
nonfulfillment of any covenant or agreement on the part of the Stockholder or
GIC under this Agreement, or from any misrepresentation or omission in
connection with any list, schedule, certificate, or other instrument furnished
or to be furnished to Newco or First Sierra pursuant to the terms of this
Agreement; (ii) notwithstanding any qualifications, notifications, or
limitations set forth in any representation or warranty under this Agreement or
in any of the items referred to in Section 6.1(i), to the extent not covered by
Section 6.1 (i) above, any and all debts, liabilities or obligations of GIC,
direct or indirect, fixed, contingent or otherwise, which exist at or as of the
Closing or which arise after the Closing but which are based upon or arise from
any act, omission, transaction, circumstance, sale of goods or services, state
of facts or other condition which occurred or existed on or before the date of
the Closing, whether or not known or unknown, due or payable, except to the
extent expressly assumed by Newco pursuant to the terms of this Agreement; (iii)
claims relating to or arising out of the events, circumstances, facts or
occurrences giving rise to the litigation disclosed in Section 3.26 of this
Agreement, including but not limited to the litigation involving Recomm
International Display, Ltd., including, without limitation, claims by third
party plaintiffs and claims by Colonial Pacific seeking recourse for any leases
arising from the facts giving rise to the Recomm litigation; (iv) claims by
Colonial Pacific that GIC has violated or is in breach of the Pegasus Service
Center Agreement or any other agreement between GIC or the Stockholder and
Colonial Pacific; and (v) all actions, suits, proceedings, demands, assessments,
adjustments, costs and expenses, including, but not limited to attorneys' fees
and court costs, incident to any of the foregoing. It is expressly understood
and agreed that First Sierra and Newco shall be entitled to indemnification
hereunder from the Stockholders for a breach of the representation and
warranties set forth in Section 3.9(v), notwithstanding any investigations of
First Sierra or any actual or implied knowledge First Sierra or Newco may have
as a result of such investigation.
6.2 Indemnification by First Sierra and Newco. First Sierra and
Newco shall indemnify GIC and the Stockholders and hold GIC and the
Stockholders harmless from any and all claims, costs, damages, losses, costs,
expenses, obligations, liabilities, recoveries, suits, causes of action, and
deficiencies, including interest, penalties and reasonable attorneys' fees,
that it or they shall incur or suffer, which arise, result from or relate to
any breach of, or failure by the First Sierra and Newco to perform, any of its
representations, warranties, covenants or agreements in this Agreement or in
any schedule, certificate, exhibit or other instrument furnished or to be
furnished by or on behalf of the First Sierra and Newco under this Agreement,
or for any debts, liabilities, claims or obligations of First Sierra or Newco
arising from the operations of their businesses after the Closing Date (except
to the extent such gives rise to an indemnifiable claim by First Sierra or
Newco under Section 6.1).
6.3 Third-Party Claims. The indemnified party under Section 6.1
or 6.2 above (the "Indemnified Party") shall give the indemnifying party (the
"Indemnifying Party") written notice within ten (10) days of receiving written
notice of any loss for which the Indemnified Party is entitled to
indemnification pursuant to this Section 6 (an "Indemnifiable Claim") resulting
from the assertion of liability by third parties. The Indemnifying Party shall
have thirty (30) days after
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receipt of notice to (i) cooperate in its defense or (ii) assume its defense
with counsel satisfactory to both parties. If, within thirty (30) days of
receipt of notice of an Indemnifiable Claim, the Indemnifying Party fails to
cooperate or assume such defense, the Indemnified Party shall have the right to
undertake the defense, compromise or settlement of such Indemnifiable Claim on
behalf of and for the account, risk and cost of the Indemnifying Party.
6.4 Other Claims. Indemnified Party shall give Indemnifying Party
written notice of any Indemnifiable Claim other than an Indemnifiable Claim
resulting from the assertion of liability by third parties. Indemnifying Party
shall have thirty (30) days following receipt of such notice to remedy the
inaccuracy, breach or misrepresentation on which the Indemnifiable Claim is
based, including, without limitation, providing monetary payment or
reimbursement to the Indemnified Party.
6.5 Closing Date Deferred Taxes. Newco is assuming Closing Date
Deferred Taxes (as defined in Section 1.6 hereof) in an amount not to exceed
$683,000. In the event the Closing Date Deferred Taxes exceed $683,000, GIC
and the Stockholders shall indemnify and hold First Sierra and Newco harmless
from and against any such excess amount (the "Non-Assumed Closing Date
Deferred Taxes"), and GIC and the Stockholders shall, at least twenty (20) days
prior to the date a tax return is due relating to the Closing Date Deferred
Taxes, pay to Newco or First Sierra in full the amount of the Non-Assumed
Closing Date Deferred Taxes.
6.6 Limitation on Indemnity. The indemnity obligations of the
Stockholder hereunder shall be limited to $1,400,000 (the "Cap Amount"). The
parties agree that the Cap Amount shall be reduced by an amount equal to the
result of the following calculation: (x) the amount, if any, by which the
actual performance results of the GIC Division (determined over the first 15
months after Closing and every 12 months thereafter) minus the Minimum Dividend
Performance Results (as defined in Section 1.6(b)) exceeds the amount of the
aggregate of the Indemnifiable Claims for such applicable 15 month or 12 month
period, (y) multiplied by 66%. If the Cap Amount is reduced below $1,320,000
pursuant to the terms of this Section, then the Escrowed Stock (as defined in
Section 6.7) shall be released dollar-for-dollar as such Cap Amount is reduced
in accordance with this Section. New business generated by Eric J. Barash that
is not part of the GIC division shall be counted toward the reduction in the
Cap amount upon notice and approval by First Sierra in amounts to be agreed
upon on a transaction-by-transaction basis. Any Indemnifiable Claim that does
not result from the assertion of liablity by a third party shall expire unless
notice of such claim is provided to the Indemnifying Party within three (3)
years of the date of this Agreement.
6.7 Escrow. The parties hereto have agreed that 28,359 shares of
Series A Preferred Stock to be paid to the Stockholders (the "Escrowed Stock")
will be held in escrow with and will be held subject to the terms of the Escrow
Agreement attached hereto as Exhibit H. In addition to any other rights and
remedies that First Sierra and Newco may have at law or in equity or under this
Agreement, any amounts for which First Sierra and Newco are entitled to
indemnification under this Section 6 may be paid from such Escrowed Stock. If
the Stockholder contests First
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<PAGE> 36
Sierra's and Newco's right to such Indemnifiable Claim, and such dispute cannot
be settled within 90 days of the offset, the matter shall be submitted to
binding arbitration in Houston, Texas, in accordance with the rules of the
American Arbitration Association. On December 31, 2001, the Escrow Agent shall
deliver the full amount of all remaining Escrowed Stock, less any portion
thereof for which a notice of an Indemnifiable Claim has been delivered and
which remains unresolved, to the Stockholders in accordance with their
respective interests, and such portion so retained shall continue to be held and
maintained and disbursed as described in the Escrow Agreement.
SECTION 7 - CONDITIONS PRECEDENT
TO OBLIGATIONS OF FIRST SIERRA AND NEWCO
Each and every obligation of First Sierra and Newco under this
Agreement is subject to the fulfillment, on or before the Closing Date, of each
of the following conditions, any one or more of which may, in the absolute
discretion of First Sierra and Newco, be waived by First Sierra and Newco in
writing:
7.1 Schedules and Exhibits. The timely receipt by First Sierra
and Newco of all schedules, exhibits, documents and related information as
described in this Agreement.
7.2 Representations and Warranties. The representations and
warranties of GIC and the Stockholders contained in this Agreement and in the
exhibits and schedules delivered hereunder shall be deemed to have been made
again at and as of the Closing Date and shall then be true and correct in all
material respects. GIC and the Stockholders shall have performed and complied
in all material respects with all agreements and conditions required by this
Agreement to be performed or complied with by them prior to or on the Closing
Date, and First Sierra and Newco shall have been furnished a certificate of GIC
and the Stockholders, dated the Closing Date, certifying to the fulfillment of
the foregoing conditions.
7.3 No Governmental or Other Proceeding or Litigation. No order
of any court or administrative agency shall be in effect which restrains or
prohibits the transactions contemplated hereby or which restricts the right of
Newco to own or operate any part of the business of GIC, and no suit, action,
investigation, inquiry or proceeding by any governmental body or other person
or legal or administrative proceeding shall have been instituted or threatened
which questions the validity or legality of the transactions contemplated
hereby or which challenges the right of GIC or Newco to own or operate any part
of the business of GIC.
7.4 No Material Adverse Change. No material adverse change in the
results of operations, financial condition or business of GIC shall have
occurred, and GIC shall not have suffered any material loss to its properties
or assets, whether or not covered by insurance, since the Balance Sheet Date,
which change, loss or damage affects or impairs its ability to conduct its
business.
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<PAGE> 37
7.5 Approval and Consents. All approvals of applications to
public authorities, federal, state, foreign or local, and all approvals and
consents of any private persons, including all major suppliers and any banks or
other lending institutions, if any, the granting of which is necessary for the
consummation of this Agreement.
7.6 Opinion of the Stockholders' and GIC's Counsel. GIC and the
Stockholder shall have delivered to First Sierra and Newco the opinion of
Adorno & Zeder, counsel for GIC and the Stockholders, dated the Closing Date,
in form and substance satisfactory to First Sierra, Newco and its counsel, in
substantially the same form as set forth in Exhibit "F" hereto.
7.7 Resolutions. GIC shall have delivered to First Sierra and
Newco copies of the resolutions of its Board of Directors and Shareholders,
authorizing and approving the execution of this Agreement and the consummation
of the transactions contemplated hereby, certified as true and correct on the
Closing Date by its Secretary.
7.8 Employment Agreements. First Sierra and Newco shall have
entered into the Employment Agreements set forth respectively in Exhibits "C",
"D" and "E".
SECTION 8 - CONDITIONS PRECEDENT TO OBLIGATIONS OF THE STOCKHOLDER
Each and every obligation of the Stockholders under this Agreement is
subject to the fulfillment, on or before the Closing Date, of each of the
following conditions, any one or more of which may, in the absolute discretion
of the Stockholders, be waived in writing:
8.1 Representations and Warranties. The representations and
warranties of First Sierra and Newco contained in this Agreement and in the
exhibits and schedules delivered hereunder shall be deemed to have been made
again at and as of the Closing Date and shall then be true and correct in all
material respects. First Sierra and Newco shall have performed and complied in
all material respects with all agreements and conditions required by this
Agreement to be performed or complied with prior to or on the Closing Date, and
the Stockholders shall have been furnished a certificate of First Sierra and
Newco, dated the Closing Date, certifying to the fulfillment of the foregoing
conditions.
8.2 No Litigation. No suit, action or other proceeding shall be
pending or threatened before any court or other governmental agency in which it
is sought to restrain or prohibit or to obtain damages or other relief in
connection with this Agreement or the consummation of the transactions
contemplated hereby.
8.3 No Material Adverse Change. No material adverse change in the
results of operations, financial condition or business of First Sierra and
Newco shall have occurred, and neither First Sierra nor Newco shall have
suffered any material loss to its properties or assets, whether or not covered
by insurance, since the date of its most recent audited balance sheet, which
change, loss or damage affects or impairs its ability to conduct its business.
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<PAGE> 38
8.4 Approval and Consents. All approvals of applications to
public authorities, federal, state, foreign or local, and all approvals and
consents of any private persons, including all major suppliers and any banks or
other lending institutions, if any, the granting of which is necessary for the
consummation of this Agreement.
8.5 Opinion of First Sierra's and Newco's Counsel. First Sierra
and Newco shall have delivered to the Stockholder the opinion of Ryan & Sudan,
L.L.P., counsel for First Sierra and Newco, dated the Closing Date, in form and
substance satisfactory to the Stockholder and its counsel, in substantially the
same form as set forth in Exhibit "G" hereto.
8.6 Resolutions. First Sierra and Newco shall have delivered to
the Stockholder copies of the resolutions of their Boards of Directors,
authorizing and approving the execution of this Agreement and the consummation
of the transactions contemplated hereby, certified as true and correct on the
Closing Date by their respective Secretary.
8.7 Employment Agreements. Eric J. Barash, Daniel Dengate and
Stephen Interlicchio shall have entered into the Employment Agreements set
forth respectively on Exhibits "C", "D" and "E."
8.8 Consideration. First Sierra and Newco shall have delivered to
GIC and to the Escrow Agent the purchase price described in Section 1.2 to be
delivered as of the Closing Date.
SECTION 9
CLOSING
9.1 Closing and Effective Date. Closing of the transactions
provided for in this Agreement (the "Closing") shall take place on or before
July 12, 1996 or at such other later date as the parties may agree upon in
writing (the "Closing Date"). The closing shall take place at the offices of
First Sierra Financial, Inc., Texas Commerce Tower, 70th Floor, 600 Travis
Street, Houston, Texas 77002, or at such other place as the parties may agree
upon in writing. For all purposes the transactions provided for in this
Agreement shall be effective as of the Closing Date and all revenues and
expenses incurred and accruing from and after such date shall be deemed to be
for the account of Newco, save and except any expense incurred without Newco's
consent in violation of this Agreement which shall be for the account of GIC
incurring such expense.
9.2 Delivery by GIC at the Closing. At the Closing, GIC shall
deliver to Newco (or shall ensure is delivered):
(a) General warranty deeds, bills of sale, instruments of
transfer, assignment and conveyance, and other instruments in
form and substance reasonably required and satisfactory to
Newco and Newco's counsel and sufficient to convey, transfer
and
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<PAGE> 39
assign to Newco and effectively vest in Newco all right, title
and interest in the Acquired Assets, together with possession
of the Acquired Assets;
(b) All Lease Documents duly assigned or otherwise duly
transferred to Newco, including, without limitation:
(i) manually executed lease agreements together with the
manually executed equipment schedules or other
instruments that constitute the chattel paper
original or counterpart of each Lease and all
amendments, addenda, exhibits and riders thereto; and
(ii) all guaranties or other support arrangements relating
to the Leases.
(c) At GIC's offices, the files of GIC (and the contents of such
files; the file relating to each Lease to include at a
minimum, the manually executed original of the lease
agreement, the certificate of delivery and acceptance, and any
guaranty agreement, residual guaranty or remarketing agreement
relating to such Lease, and the original or a copy of the
invoice covering GIC's purchase of the Equipment covered by
such Lease) in respect of the Acquired Assets. Each of the
original lease agreements will be stamped on the front page
thereof to reflect the assignment and transfer of such lease
agreement to Newco.
(d) The certificate or certificates referred to in Section 7.2;
(e) The legal opinion referred to in Section 7.6;
(f) All consents, approvals, authorizations or orders obtained by
Seller;
(g) Certified copies of the resolutions, duly adopted by the Board
of Directors of GIC and by the Stockholders, that shall be in
full force and effect on the Closing Date, authorizing the
execution, delivery and performance of this Agreement and all
instruments and documents contemplated by this Agreement;
(h) Simultaneously with the consummation of the transfer as
contemplated herein, Seller, through its officers, agents and
employees, will put Newco into full possession and enjoyment
of all Acquired Assets;
(i) All books and records, memoranda, data and other documents
related to the Acquired Assets;
(j) The Employment Agreements with Eric J. Barash, Daniel Dengate,
and Stephen Interlicchio;
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(k) A certificate from the Secretary of State of Florida
certifying the due incorporation and existence of GIC, and a
status letter from the Florida taxing authority to the effect
that GIC has paid all franchise taxes owed as of the Closing
Date, and has paid as of the last reporting period all sales
and use taxes;
(l) Executed Amendments to the Articles of Incorporation of GIC
and each of its subsidiaries, if any, that, when filed, will
change the name of each corporation so that none of the names
contain "General Interlease Corporation," and a certificate
from the secretary of each corporation certifying that the
name changes have been approved by a majority of the Board of
Directors and the holders of at least a majority of all issued
and outstanding shares of each corporation; and
(m) Such other instruments and documents relating to the
transactions contemplated by this Agreement as may reasonably
be requested by the Newco.
9.3 Delivery by Newco and First Sierra at the Closing. At the
Closing, Newco and First Sierra shall deliver (or cause to be delivered) to
GIC.
(a) The certificates for Series A Preferred Shares to GIC and into
escrow as described in Section 1.2;
(b) The certificate or certificates referred to in Section 8.1;
(c) The legal opinion referred to in Section 8.5;
(d) All consents, approvals, authorizations or orders obtained by
Newco;
(e) Certified copies of the resolutions duly adopted by the Board
of Directors of First Sierra and Newco, authorizing the
execution, delivery and performance of this Agreement and all
instruments and documents contemplated by this Agreement;
(f) Such other instruments and documents relating to the
transactions contemplated by this Agreement as may reasonably
be requested by GIC; and
(g) The Letters of Credit referred to in Section 1.3(d).
SECTION 10 - MISCELLANEOUS PROVISIONS
10.1 Expenses. Each of the parties shall be responsible for its
own expenses in connection with this transaction, including but not limited to
legal expenses and out-of-pocket costs. All attorneys' fees and other costs
and expenses incurred by GIC in the preparation, negotiation and execution of
this Agreement shall be the financial responsibility of the Stockholder and
will not be charged to GIC, and the Stockholders, by their execution and
delivery of this
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<PAGE> 41
Agreement, agrees to, and shall indemnify and hold harmless First Sierra and
Newco from and against any and all liabilities or claims with respect to any
such expenses, costs or fees. Notwithstanding the foregoing, in the event the
parties do not close this transaction because of the failure of any of the
conditions to close set forth in Section 7, or because the Stockholders or GIC
refuses to close for a reason other than a failure of the conditions to close
set forth in Section 8, then the parties will share equally all reasonable costs
and expenses associated with the negotiation and preparation of this Agreement
and the costs and expenses of Arthur Andersen, LLP, in conducting its due
diligence of GIC for First Sierra and in preparing its comfort letter of GIC's
annual volumes.
10.2 Assignment. This Agreement and the rights of the Stockholders
hereunder may not be assigned (except by operation of law) and shall be binding
upon and shall inure to the benefit of the parties hereto, and their heirs,
successors and assigns. First Sierra or Newco may assign its rights under this
Agreement for collateral security purposes to any lenders providing financing
to First Sierra and Newco, and any such lender may exercise all of the rights
and remedies of the First Sierra and Newco hereunder. First Sierra and Newco
may assign its rights under this Agreement, in whole or in part, to any
subsequent purchaser of First Sierra and Newco, any of their divisions or any
material portion of their assets (whether such sale is structured as a sale of
stock, a sale of assets, a merger or otherwise).
10.3 Entire Agreement. This Agreement (including the schedules and
exhibits hereto) and the documents delivered pursuant thereto constitute the
entire agreement and understanding between the parties hereto, and supersede
any prior agreement or understanding relating to the subject matter of this
Agreement. This Agreement may be modified and amended only by a written
instrument executed by all parties hereto.
10.4 Multiple Counterparts. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original and all of which together shall constitute but one and the same
instrument.
10.5 Remedies Cumulative. The rights and remedies granted herein
are cumulative and not exclusive of any other right or remedy granted herein or
provided by law.
10.6 Notice. Any notice or communication required or permitted
hereunder shall be in writing and shall be deemed received (a) when personally
delivered to the relevant party at such party's address as set forth below, or
(b) if sent by mail, on the third day following the date when deposited in the
United States mail, certified or registered mail, postage prepaid, to the
relevant party at its or his address indicated below:
(a) If to First Sierra or Newco:
First Sierra Financial, Inc.
Texas Commerce Tower, 70th Floor
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<PAGE> 42
600 Travis Street
Houston, Texas 77002
Attn: Mr. Thomas J. Depping
Chief Executive Officer
With copy to:
Robert C. Beasley
Ryan & Sudan, LLP
Two Houston Center, Suite 3900
Houston, Texas 77010
(b) If to the Stockholders:
Eric J. Barash
__________________________
__________________________
Daniel Dengate
__________________________
__________________________
With copy to:
Mr. Michael Axman
Adorno & Zeder
__________________________
Each party may change its, his or her address for purposes of this Section 10.6
by proper notice to the other parties.
10.7 Cooperation of the Stockholder. The Stockholders will
cooperate and use their best efforts to have the present officers, directors
and employees of GIC cooperate with First Sierra on and after the Closing Date
in furnishing information, evidence, testimony and other assistance in
connection with any actions, proceedings, arrangements or disputes of any
nature with respect to matters pertaining to all periods prior to the Closing
Date.
10.8 Choice of Law. This Agreement shall be construed and
enforced in accordance with the laws of the State of Texas.
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10.9 Section and Section Headings. The section and section
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement.
10.10 Separability. If any covenant, condition or other provision
of this Agreement is declared by a court of last resort to be invalid and not
binding on the parties, such declaration shall in no way effect the validity of
the other and remaining covenants, conditions and provisions of this Agreement.
10.11 Waiver. No delay in the exercise of any right under this
Agreement shall waive such right.
10.12 Schedules and Exhibits. All Schedules and Exhibits attached
to this Agreement are hereby incorporated in and made a part of this Agreement.
10.13 Attorneys' Fees. In the event of any action for the breach of
this Agreement, the prevailing party shall be entitled to reasonable attorneys'
fees, and other costs and expenses incurred in any such action.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first written above.
"FIRST SIERRA"
FIRST SIERRA FINANCIAL, INC.
By: /s/ THOMAS J. DEPPING
-----------------------------------
Thomas J. Depping
Chief Executive Officer
"NEWCO"
FIRST SIERRA ACQUISITION, INC.
By: /s/ THOMAS J. DEPPING
-----------------------------------
Thomas J. Depping
Chief Executive Officer
"STOCKHOLDERS"
/s/ ERIC J. BARASH
--------------------------------------
Eric J. Barash
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<PAGE> 44
/s/ DANIEL DENGATE
-------------------------------------
Daniel Dengate
"GIC"
GENERAL INTERLEASE CORPORATION
By: /s/ ERIC J. BARASH
----------------------------------
Eric J. Barash
President
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<PAGE> 45
ASSET PURCHASE AGREEMENT
List of Schedules and Exhibits
SCHEDULES:
<TABLE>
<S> <C>
1.1(f) Vehicles
1.4 Allocation of Purchase Price (to be attached after Closing)
3.2 Company's Articles of Incorporation and Bylaws
3.8 Financial Statements of Company
3.9 Schedule of Leases and Leased Equipment as of ________, 1996
3.9-A Schedule of Balance of Residuals (at Fair Market Value) and Maturity Date by Lease of all Residuals
3.10 Lease Volumes
3.12 Schedule of Liabilities
3.13 Accounts and Notes Receivables and Cash
3.14 List of all Patents, Trademarks, Copyrights, Patent Applications, etc.; Infringements of same
3.15 Description of Real Property and Improvements
3.16 Furniture and Equipment
3.17 Material Contracts
3.18 List of Liens, Pledges and Encumbrances
3.19 List of all Insurance Policies
3.20 Employment Arrangements
-List of all officers, directors, and key employees (with compensation and bonuses)
-List of all employee contracts and benefit plans for key employees
3.21 List of Employee Benefit, Pension, Bonus, Profit Sharing Plans
</TABLE>
<PAGE> 46
<TABLE>
<S> <C>
3.22 -Employee or Labor Controversies or Disputes
3.23 Bank or Other Accounts and Persons Authorized to Draw on Accounts
3.24 Tax Disputes or Contingencies
3.25 Defaults under Contracts and Agreements
3.26 Litigation, Claims, or Investigations
3.29 Consents Required
3.30 Environmental Matters
3.31 Worker's Compensation Claims
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
A Certificate of Designation, Preferences, Rights and Limitations of Series A Preferred Stock
B Letter of Credit
C Employment Agreement with Eric J. Barash
D Employment Agreement with Daniel Dengate
E Employment Agreement with Stephen Interlicchio
F Opinion of Stockholder's and GIC's Counsel
G Opinion of First Sierra's and Newco's Counsel
H Escrow Agreement
</TABLE>
<PAGE> 1
EXHIBIT 10.5
AGREEMENT AND PLAN OF REORGANIZATION
between
VALERIE A. HAYES,
CORPORATE CAPITAL LEASING GROUP, INC.,
FIRST SIERRA FINANCIAL, INC.
and
FIRST SIERRA PENNSYLVANIA, INC.
October 15, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Purchase Transaction . . . . . . . . . . . . . . . . . . . . . . . . 6
(a) Basic Transaction . . . . . . . . . . . . . . . . . . . . . . 6
(b) Merger Consideration . . . . . . . . . . . . . . . . . . . . . 6
(c) Terms of the Preferred Stock. . . . . . . . . . . . . . . . . 6
(d) Tax Effect of Transaction. . . . . . . . . . . . . . . . . . . 13
(e) Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(f) The Closing . . . . . . . . . . . . . . . . . . . . . . . . . 14
(g) Deliveries at the Closing . . . . . . . . . . . . . . . . . . 14
3. Representations and Warranties of Shareholder. . . . . . . . . . . . 14
(a) Organization, Qualification, and Corporate Power. . . . . . . 14
(b) Capitalization. . . . . . . . . . . . . . . . . . . . . . . . 15
(c) Authorization of Transaction . . . . . . . . . . . . . . . . . 15
(d) Noncontravention . . . . . . . . . . . . . . . . . . . . . . . 15
(e) Brokers' Fees . . . . . . . . . . . . . . . . . . . . . . . . 15
(f) Investment . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(g) Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . 16
(h) Financial Statements . . . . . . . . . . . . . . . . . . . . . 16
(i) Events Subsequent to Most Recent Fiscal Year End . . . . . . . 16
(j) Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . 16
(k) Legal Compliance . . . . . . . . . . . . . . . . . . . . . . . 16
(l) Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . 16
(m) Title to Assets . . . . . . . . . . . . . . . . . . . . . . . 17
(n) Real Property . . . . . . . . . . . . . . . . . . . . . . . . 17
(o) Intellectual Property . . . . . . . . . . . . . . . . . . . . 17
(p) Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . 18
(q) Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . 18
(r) Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 18
(s) Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 18
(t) Labor Matters. . . . . . . . . . . . . . . . . . . . . . . . . 19
(u) Employee Benefits . . . . . . . . . . . . . . . . . . . . . . 19
(v) Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . 19
(w) Environment, Health, and Safety . . . . . . . . . . . . . . . 19
(x) Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . 20
4. Representations and Warranties of First Sierra. . . . . . . . . . . . 20
(a) Organization of First Sierra . . . . . . . . . . . . . . . . . 20
(b) Authorization of Transaction . . . . . . . . . . . . . . . . . 20
(c) Noncontravention . . . . . . . . . . . . . . . . . . . . . . . 20
(d) Brokers' Fees . . . . . . . . . . . . . . . . . . . . . . . . 20
(e) Investment . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C> <C>
5. Pre-Closing Covenants . . . . . . . . . . . . . . . . . . . . . . . . 20
(a) General . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(b) Notices and Consents . . . . . . . . . . . . . . . . . . . . . 20
(c) Operation of Business . . . . . . . . . . . . . . . . . . . . 21
(d) Preservation of Business . . . . . . . . . . . . . . . . . . . 21
(e) Full Access . . . . . . . . . . . . . . . . . . . . . . . . . 21
(f) Notice of Developments . . . . . . . . . . . . . . . . . . . . 21
(g) Exclusivity . . . . . . . . . . . . . . . . . . . . . . . . . 21
(h) Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 21
(i) Distribution of Assets. . . . . . . . . . . . . . . . . . . . 21
(j) Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6. Post-Closing Covenants . . . . . . . . . . . . . . . . . . . . . . . 22
(a) General . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
(b) Litigation Support . . . . . . . . . . . . . . . . . . . . . . 22
(c) Transition . . . . . . . . . . . . . . . . . . . . . . . . . . 22
(d) Confidentiality . . . . . . . . . . . . . . . . . . . . . . . 22
(e) Covenant Not to Compete . . . . . . . . . . . . . . . . . . . 23
7. Conditions to Obligation to Close . . . . . . . . . . . . . . . . . . 23
(a) Conditions to Obligation of First Sierra . . . . . . . . . . . 23
(b) Conditions to Obligation of Shareholder . . . . . . . . . . . 24
8. Remedies for Breaches of This Agreement . . . . . . . . . . . . . . . 25
(a) Survival of Representations and Warranties . . . . . . . . . . 25
(b) Indemnification Provisions for Benefit of First Sierra . . . . 25
(c) Indemnification Provisions for Benefit of Shareholder . . . . 26
(d) Matters Involving Third Parties . . . . . . . . . . . . . . . 26
(e) Claims for Indemnification. . . . . . . . . . . . . . . . . . 27
(f) Determination of Adverse Consequences . . . . . . . . . . . . 27
(g) Recoupment Under Preferred Stock . . . . . . . . . . . . . . . 28
(h) Other Indemnification Provisions . . . . . . . . . . . . . . . 28
9. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
(a) Press Releases and Public Announcements . . . . . . . . . . . 29
(b) No Third-Party Beneficiaries . . . . . . . . . . . . . . . . . 29
(c) Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . 29
(d) Succession and Assignment . . . . . . . . . . . . . . . . . . 29
(e) Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 29
(f) Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
(g) Governing Law . . . . . . . . . . . . . . . . . . . . . . . . 30
(h) Amendments and Waivers . . . . . . . . . . . . . . . . . . . . 30
(i) Severability . . . . . . . . . . . . . . . . . . . . . . . . . 30
(j) Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
(k) Construction . . . . . . . . . . . . . . . . . . . . . . . . . 30
(l) Incorporation of Exhibits, Annexes, and Schedules . . . . . . 30
(m) Specific Performance . . . . . . . . . . . . . . . . . . . . . 31
(n) Submission to Jurisdiction . . . . . . . . . . . . . . . . . . 31
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C> <C>
(o) Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . 31
Exhibit A - List of FF&E
Exhibit B - Certificate of Designation, Preferences, Rights and
Limitations
of the Series B Convertible Preferred Stock
Exhibit C - Form of Letter of Credit
Exhibit D - Financial Statements
Exhibit E - Opinion of Shareholder's Counsel
Exhibit F - Opinion of First Sierra's Counsel
Exhibit G - Agreement and Plan of Merger
Exhibit H - Form of Escrow Agreement
Exhibit I - Form of Employment Agreement
Annex I - Reasons for Being Accredited Investor
</TABLE>
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<PAGE> 5
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization is entered into as of October
15, 1996, by and between Valerie A. Hayes, a resident of Chester County,
Pennsylvania ("Shareholder"), Corporate Capital Leasing Group, Inc., a
Pennsylvania corporation (the "Company"), First Sierra Financial, Inc., a
Delaware corporation ("Parent" or "First Sierra"), and First Sierra
Pennsylvania, Inc., a Delaware corporation ("Sub"). Parent, Sub, Shareholder
and the Company are referred to collectively herein as the "Parties".
Recitals
Shareholder owns all of the outstanding capital stock of the Company.
This Agreement contemplates a transaction in which First Sierra will
purchase all of the issued and outstanding capital stock of the Company through
the consummation of a merger transaction as provided in this Agreement.
Now, therefore, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties agree as follows:
1. DEFINITIONS.
"Accredited Investor" has the meaning set forth in Regulation D
promulgated under the Securities Act.
"Adverse Consequences" means all actions, suits, proceedings,
hearings, investigations, charges, complaints, claims, demands,
injunctions, judgments, orders, decrees, rulings, damages, dues,
penalties, fines, costs, amounts paid in settlement, Liabilities,
obligations, Taxes, liens, losses, expenses and fees, including court
costs and reasonable attorneys' fees and expenses.
"Affiliate" has the meaning set forth in Rule 12b-2 of the
regulations promulgated under the Securities Exchange Act.
"Affiliated Group" means any affiliated group within the meaning
of Code Sec. 1504.
"Applicable Rate" means the corporate base rate or prime rate of
interest publicly announced from time to time by Texas Commerce Bank,
National Association, Houston, Texas plus 3.0% per annum.
"Basis" means any past or present fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event,
incident, action failure to act, or transaction that forms or could form
the basis for any specified consequences.
"Business Day" means any day that is not a Saturday, a Sunday, or
a day that is a banking holiday under United States or Texas Law.
<PAGE> 6
"First Sierra" has the meaning set forth in the preface above.
"Closing" has the meaning set forth in Section 2(c).
"Closing Date" has the meaning set forth in Section 2(c).
"Code" means the Internal Revenue Code of 1986, as amended.
"Company Share" means any share of the Common Stock, par value
$1.00 per share, of the Company.
"Confidential Information" means any information concerning the
businesses and affairs of the Company that is not already generally
available to the public and the Purchase Price and terms of payment of
the Purchase Price.
"Corporate Capital Division" has the meaning set forth in Section
2(c)(ii)(2).
"Decreasing Adjustment Event" has the meaning set forth in
Section 2(c)(iii).
"Disclosure Schedule" has the meaning set forth in Section 3.
"Earned Purchase Price Amount" has the meaning set forth in
Section 2(c)(ii)(1).
"Earnings Period" has the meaning set forth in Section
2(c)(ii)(1).
"Effective Time" means 11:59 p.m., Eastern Standard time, on
October 31, 1996.
"Employee Benefit Plan" means any (a) nonqualified deferred
compensation or retirement plan or arrangement that is an Employee
Pension Benefit Plan, (b) qualified defined contribution retirement plan
or arrangement that is an Employee Pension Benefit Plan, (c) qualified
defined benefit retirement plan or arrangement that is an Employee
Pension Benefit Plan (including any Multiemployer Plan), or (d) Employee
Welfare Benefit Plan or material fringe benefit plan or program.
"Employee Pension Benefit Plan" has the meaning set forth in
ERISA Sec. 3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in
ERISA Sec. 3(1).
"Employees" has the meaning set forth in Section 2(e).
"Employment Agreement" means the Employment Agreement to be
entered into by First Sierra and Shareholder in the form of Exhibit I.
"Environmental, Health, and Safety Laws" means the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the
Resource Conservation and Recovery Act of 1976, and the Occupational
Safety and Health Act of 1970, each as amended, together with all other
Laws concerning pollution or protection of the environment, public
health and safety, or employee health and safety, including Laws
relating to emissions, discharges,
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<PAGE> 7
releases, or threatened releases of pollutants, contaminants, or
chemical, industrial, hazardous, or toxic materials or wastes into
ambient air, surface water, ground water, or lands or otherwise relating
to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of pollutants, contaminants, or
chemical, industrial, hazardous, or toxic materials or wastes.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Escrow" has the meaning set forth in Section 2(b)(ii).
"Escrow Agreement" means that certain Escrow Agreement
substantially in the form of Exhibit H attached hereto to be entered
into by Shareholder, First Sierra and the escrow agent thereunder in
connection with or promptly following the Closing.
"Escrowed Shares" means the 21,845 shares of the Preferred Stock
placed in the Escrow in connection with the Closing, together with all
shares of First Sierra Common Stock into which such shares of the
Preferred Stock may be convertible or converted into while in the Escrow
and all subscription and other rights incident thereto.
"Extremely Hazardous Substance" has the meaning set forth in Sec.
302 of the Emergency Planning and Community Right-to-Know Act of 1986,
as amended.
"FF&E" means those items of tangible personal property leased or
owned currently by the Company and listed on Exhibit A attached hereto.
"Financial Statements" has the meaning set forth in Section 3(h).
"GAAP" means United States generally accepted accounting
principles as in effect from time to time.
"Governmental Authority" means any government or any department,
agency, political subdivision, or court thereof.
"Income Amount" has the meaning set forth in Section 2(c)(ii)(2).
"Increasing Adjustment Event" has the meaning set forth in
Section 2(c)(iii).
"Indemnified Party" has the meaning set forth in Section 8(d).
"Indemnifying Party" has the meaning set forth in Section 8(d).
"Intellectual Property" means (a) all inventions (whether
patentable or unpatentable and whether or not reduced to practice), all
improvements thereto, and all patents, patent applications, and patent
disclosures together with all reissuances, continuations, continuations-
in-part, revisions, extensions, and reexaminations thereof, (b) all
trademarks, service marks, trade dress, logos, trade names, and
corporate names, together with all translations, adaptations,
derivations, and combinations thereof and including all goodwill
associated therewith, and all applications, registrations, and renewals
in connection therewith, (d) all mask
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<PAGE> 8
works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas,
compositions, manufacturing and production processes and techniques,
technical data, designs, drawings, specifications, customer and supplier
lists, pricing and cost information, and business and marketing plans
and proposals), (f) all computer software (including data and related
documentation), (g) all other proprietary rights, and (h) all copies and
tangible embodiments thereof (in whatever form or medium).
"Knowledge" means actual knowledge after reasonable
investigation.
"Law" means any constitution, statute, code, regulation, rule,
injunction, judgment, order, decree, ruling, charge, or other
restriction of any applicable Governmental Authority.
"Liability" means any liability (whether known or unknown,
whether asserted or unasserted, whether absolute or contingent, whether
accrued or unaccrued, whether liquidated or unliquidated, and whether
due or to become due), including any liability for Taxes.
"leases" has the meaning set forth in Section 2(c)(ii)(2).
"Margin Requirement" has the meaning set forth in Section
2(c)(ii)(2).
"Merger Agreement" has the meaning set forth in Section 2(a).
"Most Recent Balance Sheet" means the balance sheet contained
within the Most Recent Financial Statements.
"Most Recent Financial Statements" has the meaning set forth in
Section 3(h).
"Most Recent Fiscal Month End" has the meaning set forth in
Section 3(h).
"Most Recent Fiscal Year End" has the meaning set forth in
Section 3(h).
"Multiemployer Plan" has the meaning set forth in ERISA Sec.
3(37).
"Office Lease" means that certain Lease Agreement dated September
28, 1993, as amended, among the Company, as tenant, and Evans Street
Associates, as landlord.
"Ordinary Course of Business" means the ordinary course of
business consistent with past custom and practice (including with
respect to quantity and frequency).
"Party" has the meaning set forth in the preface above.
"Per Share Sales Amount" has the meaning set forth in Section
2(c)(vii)(1).
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an
unincorporated organization, or a Governmental Authority.
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<PAGE> 9
"Preferred Stock" has the meaning set forth in Section 2(b).
"Purchase Price" has the meaning set forth in Section 2(b).
"Released Preferred Share" has the meaning set forth in Section
2(c)(ii).
"Remaining Liabilities" means (a) the following described
indebtedness owed by the Company under the following described loan
documents: (i) Term Loan having an outstanding principal balance of
$50,340.95 and $435.05 in accrued but unpaid interest as of October 31,
1996 payable to First National Bank of Westchester, (ii) Term Loan
having an outstanding principal balance of $11,265.49 and $93.72 in
accrued but unpaid interest as of October 31, 1996 payable to First
National Bank of Westchester, (iii) Term Loan having an outstanding
principal balance of $32,827.51 and $273.56 in accrued but unpaid
interest as of October 31, 1996 payable to Dale Krapf, (iv) Revolving
Credit Note having an outstanding principal balance of $200,000 and
$52.06 in accrued but unpaid interest as of October 31, 1996 payable to
First Sterling Bank, and (v) Letter of Credit reimbursement obligations
in an aggregate amount of up to $57,200 as of October 31, 1996, payable
to First Sterling Bank.; (b) the rental and other obligations of the
Company under the Office Lease that are attributable to periods after
the Effective Time; and (c) payment and other obligations under the
contracts and agreements referenced in Section 3(q) of the Disclosure
Schedule and that are attributable to periods after the Effective Time.
"Required Sale Proceeds Amount" has the meaning set forth in
Section 2(c)(vii)(1).
"Sale Proceeds" has the meaning set forth in Section
2(c)(vii)(1).
"Securities Act" means the Securities Act of 1933, as amended.
"Security Interest" means any mortgage, pledge, lien,
encumbrance, charge, or other security interest, other than (a)
mechanic's, materialmen's, and similar liens, (b) liens for Taxes not
yet due and payable or for Taxes that the taxpayer is contesting in good
faith through appropriate proceedings, (c) purchase money liens and
liens securing rental payments under capital lease arrangements, and (d)
other liens arising in the Ordinary Course of Business and not incurred
in connection with the borrowing of money.
"Series B Designation" has the meaning set forth in Section 2(c).
"Share Number" has the meaning set forth in Section 2(c)(v)(2).
"Shareholder" has the meaning set forth in the preface above.
"Subsidiary" means any corporation with respect to which a
specified Person (or a Subsidiary thereof) owns a majority of the common
stock or has the power to vote or direct the voting of sufficient
securities to elect a majority of the directors.
"Tax" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium windfall profits, environmental (including taxes
under Code Sec. 59A), customs duties, capital stock, franchise,
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<PAGE> 10
profits, withholding, social security (or similar), unemployment,
disability, real property, personal property, sales, use, transfer,
registration, value added, alternative or add-on minimum, estimated, or
other tax of any kind whatsoever, including any interest, penalty, or
addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for
refund, or information return or statement relating to Taxes, including
any schedule or attachment thereto, and including any amendment thereof.
"Third Party Claim" has the meaning set forth in Section 8(d).
"Trading Level Event" has the meaning ascribed to such term in
the Series B Designation.
"Trading Event Notice" has the meaning set forth in Section
2(c)(vi)(2).
2. PURCHASE TRANSACTION.
(a) BASIC TRANSACTION. On and subject to the terms and conditions of
this Agreement, at the Closing the Company will be merged with Sub with the
Company being the surviving corporation pursuant to the Agreement and Plan of
Merger ("Merger Agreement") attached hereto as Exhibit G.
(b) MERGER CONSIDERATION. In consideration of the Shareholder
approving the Merger, First Sierra shall pay to Shareholder and Shareholder
shall receive, subject to the terms of this Agreement, a purchase price
("Purchase Price") of $2,500,000, payable by the issuance to Shareholder of
43,691 shares of Series B Convertible Preferred Stock, $.01 par value, of First
Sierra (the "Preferred Stock"), which shall be paid and delivered as follows:
(i) 21,846 shares of the Preferred Stock (representing
$1,250,000 of the Purchase Price) shall be issued and delivered at
Closing to Shareholder; and
(ii) 21,845 shares of the Preferred Stock (representing
$1,250,000 of the Purchase Price and constituting the initial Escrowed
Shares) shall be issued, placed into escrow (the "Escrow") and subject
to distribution pursuant to the terms of Section 2(c)(iii) and the terms
of the Escrow Agreement, and while in escrow the Escrowed Shares shall
serve as security for purposes of any indemnification claims under
Section 8(g).
(c) TERMS OF THE PREFERRED STOCK. The terms and provisions of the
Preferred Stock shall be as provided in the Certificate of Designation,
Preferences, Rights and Limitations of the Series B Convertible Preferred
Stock, a copy of which is attached hereto as Exhibit B (the "Series B
Designation"). Subject to the terms of the Series B Designation, and subject
to the terms of the Escrow Agreement with respect to the Escrowed Shares, the
rights and preferences of the Preferred Stock are as follows:
(i) Conversion Rate. As referenced in Section 5(c) of the
Series B Designation, each share of the Preferred Stock shall be
convertible into one share of First Sierra Common Stock (subject to
adjustment pursuant to Section 5(g) of the Series B Designation).
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<PAGE> 11
(ii) Dividends. The holder of each share of the Preferred
Stock shall be entitled to receive, subject to the terms of the Series B
Designation, when and as declared by the First Sierra Board of Directors
(as further described below), dividends per share at a per annum rate
equal to the Dividend Rate defined in and calculated pursuant to Series
B Designation. The Dividend Rate shall be based on the number of
Released Preferred B Shares outstanding during the applicable period. A
"Released Preferred Share" shall mean each of the 21,846 shares of the
Preferred Stock issued to Shareholder at the Closing and each additional
Escrowed Share that is released from Escrow to Shareholder pursuant to
Section 2(c)(iii) below from and after (but not before) such Escrowed
Share is so released. Commencing as of the first business day of the
second month of the second Earnings Period and on the first business day
of the second month of each succeeding Earnings Period, First Sierra
agrees with Shareholder that the dividend payment shall be declared by
the Board of Directors of First Sierra and paid by First Sierra (subject
to funds being legally available for the declaration of dividends).
First Sierra will not be in default under this Section 2(c)(ii) unless
and until First Sierra is given written notice by Shareholder of First
Sierra's failure to pay the required dividend and within ten days
following receipt of such notice First Sierra fails to pay the dividend
or deliver to Shareholder an opinion of counsel to the effect that First
Sierra is unable to pay the dividend as a result of a lack of legally
sufficient funds for the declaration of dividends.
(iii) Earnout. (1) An "Earnings Period" shall mean, as
applicable, the 15 month period commencing as of the November 1, 1996
and each successive 12 month period. The "Earned Purchase Price
Amount" shall be $1,250,000 as of November 1, 1996 (November 1, 1996
being the first day of the first Earnings Period) and shall be increased
by $416,666 as of the first day of each of the three successive Earnings
Periods if and only if the aggregate Income Amount for the immediately
preceding Earnings Period is equal to or greater than the Margin
Requirement applicable to such Earnings Period. Following the
expiration of each Earnings Period a determination shall be made as to
whether the division of First Sierra headed by Shareholder (herein
called the "Corporate Capital Division", although such division may be
given a different name within First Sierra) obtained an aggregate Income
Amount with regard to such Earnings Period equal to or in excess of the
Margin Requirement with regard to such Earnings Period with respect to
all new leases/financing instruments (collectively, "leases") booked by
the Corporate Capital Division during such Earnings Period. In
instances where First Sierra acquires the lease, the Income Amount with
respect to each such lease booked by the Corporate Capital Division will
be equal to the excess of (aa) the present value of the scheduled rental
payments under such lease during its initial term, such present value to
be determined using a discount rate equal to the average yield to
maturity on the 2 year U.S. Treasury security during the month such
lease was generated plus 250 basis points, over (bb) the total amount
funded by First Sierra in respect of such lease including, without
limitation, equipment cost, software license fees and fees and
commissions paid to brokers. In instances where First Sierra does not
acquire the lease but rather acts as a broker in respect of the lease,
the Income Amount with respect to each such lease booked by the
Corporate Capital Division will be equal to the profit realized by First
Sierra with respect to such lease. The "Margin Requirement" for each
Earnings Period shall be equal to the sum of (cc) $3,814,000 plus (dd)
the amount, if any, that operating expenses incurred by First Sierra
during such Earnings Period that are directly associated with the
Corporate Capital Division exceed an average of $100,000 per month. For
purposes of the preceding sentence, fees and commissions paid to brokers
shall not be considered operating expenses. By way of example, if the
actual average monthly operating expenses incurred by First Sierra
during the first
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<PAGE> 12
Earnings Period that are directly associated with the Corporate Capital
Division is $150,000, then the Margin Requirement for the first Earnings
Period would be $4,564,000 (i.e., $3,814,00 plus $750,000).
(2) As soon as practicable following the expiration of
an Earnings Period, First Sierra will provide to Shareholder a
calculation of the Margin Requirement and aggregate Income Amount for
such Earnings Period. If according to First Sierra's calculation the
aggregate Income Amount for such Earnings Period is less than the Margin
Requirement applicable to such period and if Shareholder has any
questions regarding the calculation of or particular items comprising
the Margin Requirement or Income Amount, then First Sierra will make
available for inspection by Shareholder the relevant parts of its books
and records. If according to First Sierra's calculation the aggregate
Income Amount for such Earnings Period is less than the Margin
Requirement applicable to such period and if Shareholder believes any
part of the Margin Requirement or Income Amount was incorrectly
calculated, Shareholder shall give First Sierra written notice thereof
within 30 days following Shareholder's receipt from First Sierra of the
calculation of such Margin Requirement and Income Amount; and if no such
notice is given by Shareholder to First Sierra within such 30 day
period, then Shareholder shall be deemed to have agreed with the
calculation of such Margin Requirement and aggregate Income Amount. If
Shareholder does so notify First Sierra (an "Audit Notice"), and
Shareholder and First Sierra are unable to resolve the disputed
calculation within 30 days following receipt by First Sierra of the
Audit Notice, then First Sierra's independent auditors (currently Arthur
Andersen) shall be engaged to determine whether the part of the Margin
Requirement or Income Amount alleged by Shareholder to be incorrectly
calculated was in fact incorrectly calculated, and the determination of
such auditors shall be conclusive and binding on Shareholder and First
Sierra. Shareholder and First Sierra agree that the submission to such
independent auditors of disputes regarding the calculation of and items
comprising the Margin Requirement and aggregate Income Amount shall be
the sole method of resolving such disputes. If, pursuant to the
preceding provisions, as to a particular Earnings Period the calculation
of the Margin Requirement and aggregate Income Amount (or any part
thereof) for such period is submitted to the independent auditors and
the final determination by such independent auditors results in the
aggregate Income Amount for such period equaling or exceeding the Margin
Requirement applicable to such period, then the fees of such auditors
shall be paid by First Sierra, otherwise such fees shall be paid by
Shareholder.
(3) If pursuant to Section 2(c)(iii)(1) the Earned
Purchase Price Amount increases by $416,666 as of the first day of the
second, third and/or fourth Earnings Period, then in connection with the
first such increase Shareholder will be entitled to have released from
the Escrow 7,281 shares of the Preferred Stock; in connection with the
second such increase Shareholder will be entitled to have released from
the Escrow 7,282 shares of the Preferred Stock; and in connection with
the third such increase Shareholder will be entitled to have released
from the Escrow 7,282 shares of the Preferred Stock; provided, each such
release shall be subject to the terms of Section 8(g). If the number of
shares of First Sierra Common Stock outstanding at any time after the
issuance of the Preferred Stock is increased by stock dividend payable
in shares of First Sierra Common Stock or by subdivision or split-up of
shares of First Sierra Common Stock (each an "Increasing Adjustment
Event"), then immediately after the record date fixed for the
determination of holders of First Sierra Common Stock entitled to
receive the stock dividend or the effective date of the subdivision or
split-up, as the case may be, each of the Preferred Stock share numbers
then in effect pursuant to the
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<PAGE> 13
preceding sentence shall be increased to equal the product resulting
from the multiplication of such share number then in effect by a
fraction, the numerator of such fraction being the total number of
shares of First Sierra Common Stock outstanding immediately following
such Increasing Adjustment Event on a fully diluted basis and the
denominator of such fraction being the total number of shares of First
Sierra Common Stock outstanding immediately prior to such Increasing
Adjustment Event on a fully diluted basis. If the number of shares of
First Sierra Common Stock outstanding at any time after the issuance of
the Preferred Stock is decreased by a reverse stock split (a "Decreasing
Adjustment Event"), then immediately after the effective date of the
reserve stock split, each of the Preferred Stock share numbers then in
effect pursuant to the second preceding sentence shall be decreased to
equal the product resulting from the multiplication of such share number
then in effect by a fraction, the numerator of such fraction being the
total number of shares of First Sierra Common Stock outstanding
immediately prior to such Decreasing Adjustment Event on a fully diluted
basis and the denominator of such fraction being the total number of
shares of First Sierra Common Stock outstanding immediately following
such Decreasing Adjustment Event on a fully diluted basis. If pursuant
to this clause (3) any Escrowed Shares are required to be released from
the Escrow, then Shareholder and First Sierra shall take such actions as
may be necessary to cause such release to occur including the
cancellation of existing stock certificates held by the escrow agent and
the issuance of new stock certificates to the escrow agent and
Shareholder.
(4) Reference is made to the Employment Agreement to be
entered into between First Sierra and Shareholder in connection with the
Closing. If (aa) Shareholder resigns her employment with First Sierra
prior to the expiration of the last Earnings Period or (bb) pursuant to
the terms of such Employment Agreement First Sierra terminates
Shareholder's employment for cause at any time prior to the expiration
of the last Earnings Period, then from and after the date of such
resignation or termination First Sierra shall have the right and option
to shut down the Corporate Capital Division, to cause the business of
the Corporate Capital Division to be conducted by another division or an
affiliate of First Sierra or to take such other action as determined by
First Sierra even though such action or the foregoing described events
are intended by First Sierra to reduce the aggregate Income Amount for
the Earnings Period in which such resignation or termination occurs or
for any period commencing as of or following the date of such
resignation or termination to a level below the corresponding Margin
Requirement, or increase the Margin Requirement for the Earnings Period
in which such resignation or termination occurs or for any period
commencing as of or following the date of such resignation or
termination to a level above the corresponding aggregate Income Amount,
and in no such event shall Shareholder have any claim or cause of action
against First Sierra arising out of or any manner attributable to any
such action or event, the same being hereby expressly waived and
released by Shareholder.
(iv) Cancellation of Escrowed Shares. If the aggregate Income
Amount for any of the first three Earnings Periods is less than the
Margin Requirement for such Earnings Period (as to each, a "Reduction
Period"), then (1) if the first Earnings Period is a Reduction Period,
effective automatically as of the expiration of such first Earnings
Period 7,281 of the Escrowed Shares shall be deemed canceled and not
earned by Shareholder, (2) if the second Earnings Period is a Reduction
Period, effective automatically as of the expiration of such second
Earnings Period 7,282 of the Escrowed Shares shall be deemed cancelled
and not earned by Shareholder, (3) if the third Earnings Period is a
Reduction Period, effective automatically as of the expiration of such
third Earnings Period 7,282 of the Escrowed Shares shall be deemed
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<PAGE> 14
cancelled and not earned by Shareholder. If an Increasing Adjustment
Event occurs, then immediately after the record date fixed for the
determination of holders of First Sierra Common Stock entitled to
receive the stock dividend or the effective date of the subdivision or
split-up, as the case may be, each of the Escrowed Share numbers then in
effect pursuant to the preceding sentence shall be increased to equal
the product resulting from the multiplication of such share number then
in effect by a fraction, the numerator of such fraction being the total
number of shares of First Sierra Common Stock outstanding immediately
following such Increasing Adjustment Event on a fully diluted basis and
the denominator of such fraction being the total number of shares of
First Sierra Common Stock outstanding immediately prior to such
Increasing Adjustment Event on a fully diluted basis. If a Decreasing
Adjustment Event occurs, then immediately after the effective date of
the reserve stock split, each of the Preferred Stock share numbers then
in effect pursuant to the second preceding sentence shall be decreased
to equal the product resulting from the multiplication of such share
number then in effect by a fraction, the numerator of such fraction
being the total number of shares of First Sierra Common Stock
outstanding immediately prior to such Decreasing Adjustment Event on a
fully diluted basis and the denominator of such fraction being the total
number of shares of First Sierra Common Stock outstanding immediately
following such Decreasing Adjustment Event on a fully diluted basis. If
pursuant to this clause any Escrowed Shares are cancelled, then
Shareholder and First Sierra shall take such actions as may be necessary
to evidence of such cancellation including the cancellation of existing
stock certificates held by the escrow agent and the issuance of new
stock certificates to the escrow agent.
(v) Redemption. Unless all of the shares of the Preferred
Stock shall have been converted prior to such time, First Sierra shall
be obligated to redeem all outstanding shares of the Preferred Stock on
December 31, 2001 at the "Redemption Price" specified in and determined
pursuant to the Series B Designation. In addition, in the event a
Redemption Acceleration Event (as defined in the Series B Designation)
occurs, First Sierra shall be obligated to redeem all outstanding shares
of the Preferred Stock on the Redemption Acceleration Event Purchase
Date (as defined in the Series B Designation) at the Redemption Price
specified in and determined pursuant to the Series B Designation.
(vi) Letter of Credit. (1) First Sierra agrees that its
obligations under the terms of the Series B Designation to distribute
assets on a preferential basis to the holders of the Preferred Stock in
connection with any Redemption Acceleration Event (as defined in the
Certificate), and to redeem the Redemption Shares on December 31, 2001
shall, at all times while the Preferred Stock is outstanding, be secured
by one or more irrevocable standby letters of credit (together, with any
and all renewals and replacements, the "Letter of Credit") to be issued
by Wells Fargo, a national banking association, for the account of
Shareholder as the beneficiary under the Letter of Credit (the
"Beneficiary"), in an amount as determined below. The Letter of Credit
shall be in an initial face amount of $2,500,000 and shall be in the
form attached hereto as Exhibit C.
(2) If (aa) the aggregate Income Amount for any
Earnings Period is less than the Margin Requirement for such Earnings
Period, then effective as of the first day of the immediately succeeding
Earnings Period the Letter of Credit will be reduced by $416,666, (bb)
if a resignation or termination of Shareholder's employment as described
in Section 2(c)(iii)(4) occurs, then the amount of the Letter of Credit
shall be reduced by an amount equal to $2,500,000 multiplied by the
Reduction Percentage, (cc) upon any conversion of the shares of
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<PAGE> 15
Preferred Stock into First Sierra Common Stock less than all of the
outstanding shares of Preferred Stock are being so converted, then the
amount of the Letter of Credit shall be reduced by an amount equal to
$2,500,000 multiplied by the Reduction Percentage , and (dd) as of any
day (x) the Trading Level Event has occurred and (y) there is a
currently effective registration statement under the Securities Act of
1933 and applicable state law and a prospectus covering the immediate
resale of the shares of Common Stock (and, if applicable, the Underlying
Stock relating to such shares) into which the Escrowed Shares then in
Escrow are convertible and the Corporation has given notice thereof to
Shareholder (a "Trading Event Notice"), and if within two business days
following the receipt by Shareholder of the Trading Event Notice
Shareholder has not notified the Corporation of her election to convert
all of the Escrowed Shares, then the amount of the Letter of Credit
shall be reduced effective as of the expiration of such two business day
period by an amount equal to $2,500,000 multiplied by the Reduction
Percentage. In the case of a reduction resulting from a resignation or
termination of Shareholder's employment as described in Section
2(c)(iii)(4) or in the case of a reduction resulting from a Trading
Level Event pursuant to clause (dd) preceding, the "Reduction
Percentage" shall be determined by dividing the number of Escrowed
Shares then in Escrow by the Share Number, with the result being
expressed as a percentage. In the case of a reduction resulting from a
conversion of shares of Preferred Stock into First Sierra Common Stock,
the "Reduction Percentage" shall be determined by dividing the number of
shares of Preferred Stock being so converted by the Share Number, with
the result being expressed as a percentage. The "Share Number" shall be
43,691, subject to adjustment as provided in the following two
sentences. If an Increasing Adjustment Event occurs, then immediately
after the record date fixed for the determination of holders of First
Sierra Common Stock entitled to receive the stock dividend or the
effective date of the subdivision or split-up, as the case may be, then
the Share Number then in effect pursuant to the preceding sentence shall
be increased to equal the product resulting from the multiplication of
such Share Number then in effect by a fraction, the numerator of such
fraction being the total number of shares of First Sierra Common Stock
outstanding immediately following such Increasing Adjustment Event on a
fully diluted basis and the denominator of such fraction being the total
number of shares of First Sierra Common Stock outstanding immediately
prior to such Increasing Adjustment Event on a fully diluted basis. If a
Decreasing Adjustment Event occurs, then immediately after the effective
date of the reverse stock split, the Share Number then in effect
pursuant to the second preceding sentence shall be decreased to equal
the product resulting from the multiplication of such Share Number then
in effect by a fraction, the numerator of such fraction being the total
number of shares of First Sierra Common Stock outstanding immediately
prior to such Decreasing Adjustment Event on a fully diluted basis and
the denominator of such fraction being the total number of shares of
First Sierra Common Stock outstanding immediately following such
Decreasing Adjustment Event on a fully diluted basis.
(3) To the extent the Beneficiary is entitled pursuant
to the provisions of clause (c)(v) preceding or pursuant to clause
(c)(vi)(6) below to make a draw on the Letter of Credit, then
Beneficiary shall be entitled to make a draw for the entire amount then
available under the Letter of Credit after taking into account any
required reductions to the Letter of Credit pursuant to clause
(c)(vi)(2) preceding.
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<PAGE> 16
(4) If pursuant to the preceding provisions the amount
of the Letter of Credit is required to be reduced, then promptly
following request each of Shareholder and First Sierra shall execute and
deliver to the issuer of the Letter of Credit such instructions and
amendatory documents as may be necessary to cause the Letter of Credit
to be so reduced.
(5) The Letter of Credit shall terminate and no further
draws shall be permitted thereon, and the Letter of Credit shall be
returned to First Sierra, upon the earlier to occur of (aa) the
voluntary conversion by the holders of the Preferred Stock of all of the
Preferred Stock into First Sierra Common Stock, and (bb) the conversion
of all of the Preferred Stock into First Sierra Common Stock pursuant to
Section 5 of the Series B Designation.
(6) The initial Letter of Credit shall have an expiry
date of no earlier than one year from its date of issue and shall
provide that, if within 15 days prior to its expiration date, it is not
renewed, replaced or extended for an additional period of at least one
year (but in no event required to have an expiration date beyond January
31, 2002) in the amount calculated above, the Beneficiary shall be
entitled to draw as therein provided. Any replacement Letter of Credit
may be issued by Wells Fargo or another institution having combined
capital, surplus and undivided profits of at least $100 million. First
Sierra will notify Shareholder of any replacement or renewal of the
Letter of Credit within 15 days of the expiry date.
(7) Any draw upon the Letter of Credit pursuant to the
terms of this Section 2(c) shall be in complete redemption and
cancellation of the Preferred Stock, and the Beneficiary agrees to
surrender (and cause all other holders of shares of the Preferred Stock
to surrender) to First Sierra the original or all certificate(s)
representing the Preferred Stock promptly following such draw. If
pursuant to the terms of this Section 2(c) the Beneficiary is entitled
to make a draw upon the Letter of Credit, then the Beneficiary shall be
entitled to make such draw regardless of any limitation under the
General Corporation Law of the State of Delaware or any other law on the
power or ability of First Sierra to redeem the Preferred Stock.
(vii) Sale of Escrowed Shares. (1) If at any time any part of
the Escrowed Shares constitute First Sierra Common Stock that are
covered by a currently effective registration statement under the
Securities Act of 1933 and applicable state law and a prospectus
covering the immediate resale of such shares, then Shareholder shall
have the right to notify First Sierra of her election to cause all or a
part of such shares to be sold pursuant to such registration statement.
In the event of the sale of any such shares, the proceeds resulting from
such sale shall be deposited into the Escrow (the "Sale Proceeds"). If
at the time of any required release of Escrowed Shares pursuant to
Section 2(c)(iii)(3) there are any Sale Proceeds contained in the
Escrow, then such release from Escrow shall be accomplished first by a
release of the Required Sale Proceeds Amount (as hereinafter defined)
and the balance with Escrowed Shares. If at the time of any required
cancellation of Escrowed Shares pursuant to Section 2(c)(iv) there are
any Sale Proceeds contained in the Escrow, then such cancellation shall
be accomplished first by the cancellation of Escrowed Shares and the
balance by distributing to First Sierra the Required Sale Proceeds
Amount. In the case of a release pursuant to Section 2(c)(iii)(3), the
"Required Sale Proceeds Amount" shall be determined by multiplying the
number of Escrowed Shares to be so released times the then effective Per
Share Sales Amount. In the case of a cancellation pursuant Section
2(c)(iv), the "Required Sales Proceeds Amount" shall be
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<PAGE> 17
determined by the number of Escrowed Shares still needed to satisfy the
required cancellation times the then effective Per Share Sales Amount.
The "Per Share Sales Amount" shall equal the product resulting from
dividing the aggregate amount of Sale Proceeds by the number of Escrowed
Shares sold, such amount being subject to adjustment pursuant to the
provisions of clause (2) below.
(2) If an Increasing Adjustment Event occurs at any
time following the first sale of Escrowed Shares, then immediately after
the record date fixed for the determination of holders of First Sierra
Common Stock entitled to receive the stock dividend or the effective
date of the subdivision or split-up, as the case may be, the Per Share
Sales Amount number in effect immediately prior to such record date or
effective date shall be decreased to equal the product resulting from
the multiplication of such Per Share Sales Amount number then in effect
by a fraction, the numerator of such fraction being the total number of
shares of First Sierra Common Stock outstanding immediately prior to
such Increasing Adjustment Event on a fully diluted basis and the
denominator of such fraction being the total number of shares of First
Sierra Common Stock outstanding immediately following such Increasing
Adjustment Event on a fully dilated basis. If a Decreasing Adjustment
Event occurs at any time following the first sale of Escrowed Shares,
then immediately after the effective date of the reverse stock split,
the Per Share Sales Amount number in effect immediately prior to such
effective date shall be increased to equal the product resulting from
the multiplication of such Per Share Sales Amount number then in effect
by a fraction, the numerator of such fraction being the total number of
shares of First Sierra Common Stock outstanding immediately following
such Decreasing Adjustment Event on a fully diluted basis and the
denominator of such fraction being the total number of shares of First
Sierra Common Stock outstanding immediately prior to such Decreasing
Adjustment Event on a fully diluted basis.
(d) TAX EFFECT OF TRANSACTION. It is the intention of the parties
that the transaction contemplated by this Agreement constitute a reverse
triangular Type A reorganization within the meaning of Sections 368(a)(9)(A)
and 368(a)(ii)(E) of the Code. The parties agree to file all of their
respective tax returns and reports in a manner consistent with such intention,
and to not take any filing position in a manner inconsistent with such
intention unless compelled to do so by court order or administrative decree.
Each party agrees to furnish such information and take such action as may be
reasonably requested of the other party in connection with the foregoing (which
action shall not include any change in the commercial terms of this Agreement
and the other transactions incident thereto). In no event, however, shall
First Sierra be required to incur any out-of-pocket expenses in defending such
position or providing such information or taking such action, nor shall the
foregoing constitute a warranty or guaranty that the transactions contemplated
by this Agreement will, in fact, constitute such a Type B reorganization.
(e) EMPLOYEES. (1) Shareholder will in good faith cooperate with
First Sierra in First Sierra's attempt to retain the employees of the Company
as new employees of First Sierra (such employees are referred to herein as the
"Employees"). With regard to the Employees who become employees of First
Sierra, First Sierra shall credit such Employees with their length of service
with the Company prior to Closing. In addition, First Sierra shall credit such
Employees for any accrued and untaken vacations and holidays that such
Employees may have had as employees of the Company immediately prior to the
Closing. Set forth in Section 2(e) of the Disclosure Schedule is a list of all
Employees together with a complete description of all vacation, holiday, and
sick leave policies, all
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<PAGE> 18
incentive compensation policies, and any other policies of the Company relating
to the Employees. Group health insurance will be provided by First Sierra
effective as of the Closing Date to all Employees who become employees of First
Sierra, such insurance to be consistent with the health insurance provided to
the other employees of First Sierra or to be the same group health insurance
currently maintained by the Company. Employee records for the Employees who
become employees of First Sierra, including payroll and wage and hour records,
will become the property of First Sierra who will preserve the records for any
time required by applicable governmental regulations.
(2) In connection with the Closing First Sierra and
Shareholder shall enter into an Employment Agreement in the form of Exhibit I.
In addition, First Sierra shall use reasonable efforts to reach an agreement
with three other key Employees designated by Shareholder regarding their terms
of employment and, subject to reaching an agreement on such terms, in
connection with the Closing First Sierra will enter into employment agreements
with such Employees that incorporate the agreed upon terms.
(f) THE CLOSING. The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place on a date as First Sierra and
Shareholder may mutually determine (the "Closing Date"), with the Closing to be
effective all purposes as of the Effective Time.
(g) DELIVERIES AT THE CLOSING. At the Closing, (i) Shareholder will
deliver to First Sierra the various certificates, instruments, and documents
referred to in Section 7(a), (ii) First Sierra will deliver to Shareholder the
various certificates, instruments, and documents referred to in Section 7(b),
(iii) Shareholder will deliver to First Sierra any stock certificates or other
documents called for pursuant to the Merger Agreement and (iv) First Sierra
will deliver to Shareholder the consideration specified in Section 2(b),
subject to the terms of the Escrow Agreement.
3. REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER.
Shareholder represents and warrants to First Sierra that the statements
contained in this Section 3 are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout this Section 3), except as set forth in the disclosure
schedule delivered by Shareholder to First Sierra on the date hereof and
initialed by Shareholder and First Sierra (the "Disclosure Schedule"). Nothing
in the Disclosure Schedule shall be deemed adequate to disclose an exception to
a representation or warranty made herein, however, unless the Disclosure
Schedule identifies the exception with reasonable particularity and describes
the relevant facts in reasonable detail. Without limiting the generality of
the foregoing, the mere listing (or inclusion of a copy) of a document or other
item shall not be deemed adequate to disclose an exception to a representation
or warranty made herein (unless the representation or warranty has to do with
the existence of the document or other item itself). The Disclosure Schedule
will be arranged in paragraphs corresponding to the lettered and numbered
paragraphs contained in this Section 3, and the inclusion of an item as an
exception in one portion of the Disclosure Schedule shall not cause such item
to be an exception under any other portion of the Disclosure Schedule.
(a) ORGANIZATION, QUALIFICATION, AND CORPORATE POWER. The Company
is a corporation duly organized, validly existing, and in good standing under
the laws of the State of Pennsylvania. The Company is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required. The Company has full corporate power and
authority
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<PAGE> 19
and all licenses, permits, and authorizations necessary to carry on the
businesses in which it is engaged and to own and use the properties owned and
used by it. Section 3(a) of the Disclosure Schedule lists all directors,
officers and employees of the Company and their respective official capacities
(if any) in the Company. Shareholder has delivered to First Sierra correct and
complete copies of the charter and bylaws of the Company (as amended to date).
The minute books (containing the records of meetings of the stockholders, the
board of directors, and any committees of the board of directors), the stock
certificate books, and the stock record books of the Company are correct and
complete. The Company is not in default under or in violation of any provision
of its charter or bylaws.
(b) CAPITALIZATION. The entire authorized capital stock of the
Company consists of 1,000 Company Shares, of which 100 Company Shares are
issued and outstanding. All of the issued and outstanding Company Shares have
been duly authorized, are validly issued, fully paid, and nonassessable, and
are held of record and owned beneficially by Shareholder, free and clear of any
Taxes, Security Interests, equities, claims, and demands and any restrictions
on transfer (other than any restrictions under the Securities Act and state
securities laws), options, warrants, purchase rights, conversion rights,
exchange rights, or other contracts or commitments that could require
Shareholder to sell, transfer, or otherwise dispose of any capital stock of the
Company (other than this Agreement). There are no outstanding or authorized
options, warrants, purchase rights, conversion rights, exchange rights, or
other contracts or commitments that could require the Company to issue, sell,
or otherwise cause to become outstanding any of its capital stock. There are
no outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to the Company. There are no
voting trusts, proxies, or other agreements or understandings with respect to
the voting of the capital stock of the Company.
(c) AUTHORIZATION OF TRANSACTION. The Company has full corporate
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder. This Agreement constitutes the valid and legally
binding obligation of Shareholder and the Company, enforceable in accordance
with its terms and conditions. Except as set forth in Section 3(c) of the
Disclosure Schedule and except for the filing of the Merger Agreement with the
applicable Governmental Authority and consents that have already been obtained,
neither Shareholder nor the Company need to give any notice to, make any filing
with, or obtain any authorization, consent, or approval of any Governmental
Authority or any other party in order to consummate the transactions
contemplated by this Agreement.
(d) NONCONTRAVENTION. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any Law to which either of Shareholder or the Company is subject or
any provision of the charter or bylaws of the Company or (ii) conflict with,
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which either of Shareholder or the Company
is a party or by which any of them is bound or to which any of the assets of
any of them is subject (or result in the imposition of any Security Interest
upon any such assets).
(e) BROKERS' FEES. Shareholder has no Liability or obligation to pay
any fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which First Sierra could become
liable or obligated, and the Company has no Liability or obligation to pay any
fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement.
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<PAGE> 20
(f) INVESTMENT. Shareholder (i) understands that the Preferred Stock
has not been, and will not be, registered under the Securities Act, or under
any state securities laws, and are being offered and sold in reliance upon
federal and state exemptions for transactions not involving any public
offering, (ii) is acquiring the Preferred Stock solely for its own account for
investment purposes, and not with a view to the distribution thereof, (iii) is
a sophisticated investor with knowledge and experience in business and
financial matters, (iv) has received certain information concerning First
Sierra and has had the opportunity to obtain additional information as desired
in order to evaluate the merits and the risks inherent in holding the Preferred
Stock, (v) is able to bear the economic risk and lack of liquidity inherent in
holding the Preferred Stock, and (vi) is an Accredited Investor for the reasons
set forth in Annex I.
(g) SUBSIDIARIES. The Company has no Subsidiaries.
(h) FINANCIAL STATEMENTS. Attached hereto as Exhibit D are the
following financial statements (collectively the "Financial Statements"): (i)
audited balance sheets and statements of income, changes in stockholders'
equity, and cash flow as of and for the fiscal year ended 12-31-95 (the "Most
Recent Fiscal Year End") for the Company; and (ii) unaudited balance sheet and
statement of income, change in stockholders' equity, and cash flow (the "Most
Recent Financial Statements") as of and for the nine months ended 10-30-96 (the
"Most Recent Fiscal Month End") for the Company. The Financial Statements
(including the notes thereto) have been prepared in accordance with GAAP
applied on a consistent basis throughout the periods covered thereby, present
fairly the financial condition of the Company as of such dates and the results
of operations of the Company for such periods, are correct and complete, and
are consistent with the books and records of the Company (which books and
records are correct and complete).
(i) EVENTS SUBSEQUENT TO MOST RECENT FISCAL YEAR END. Since the Most
Recent Fiscal Year End, there has not been any material adverse change in the
business, financial condition, operations, results of operations, or future
prospects of any of the Company.
(j) UNDISCLOSED LIABILITIES. The Company has no Liability (and there
is no Basis for any present or future action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand against any of them giving
rise to any Liability), except for (i) Liabilities set forth on the face of the
Most Recent Balance Sheet (rather than in any notes thereto) and (ii)
Liabilities that have arisen after the Most Recent Fiscal Month End in the
Ordinary Course of Business (none of which results from, arises, out of,
relates to, is in the nature of, or was caused by any breach of contract,
breach of warranty, tort, infringement, or violation of Law).
(k) LEGAL COMPLIANCE. The Company has complied with all applicable
Laws, and no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand, or notice has been filed or commenced against any of
them alleging any failure so to comply.
(l) TAX MATTERS.
(i) At all times since its incorporation, the Company has
elected to be and has constituted a Subchapter S corporation under the
Code.
(ii) The Company has filed all Tax Returns that it was required
to file. All such Tax Returns were correct and complete in all
respects. All Taxes that have become due and
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<PAGE> 21
payable by the Company (whether or not shown on any Tax Return) have
been paid. The Company currently is not the beneficiary of any
extension of time within which to file any Tax Return. There are no
Security Interests on any of the assets of any of the Company that arose
in connection with any failure (or alleged failure) to pay any Tax.
(iii) The Company has withheld and paid all Taxes required to
have been withheld and paid in connection with amounts paid or owing to
any employee, independent contractor, creditor, stockholder, or other
third party.
(iv) Neither Shareholder nor any director or officer of the
Company expects any authority to assess any additional Taxes for any
period for which Tax Returns have been filed. There is no dispute or
claim concerning any Tax Liability of any of the Company either (1)
claimed or raised by any authority in writing or (2) as to which any of
Shareholder and the directors and officers of the Company has Knowledge
based upon personal contact with any agent of such authority. Section
3(l) of the Disclosure Schedule lists all (if any) state and local
income Tax Returns filed with respect to the Company for taxable periods
ended on or prior to 9-30-96 and that have been audited or are currently
the subject of audit.
(v) The Company has not waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to a
Tax assessment or deficiency.
(vi) The Company (1) has not been a member of an Affiliated
Group filing a consolidated federal income Tax Return or (2) has any
Liability for the Taxes of any Person (other than any of the Company)
under Treas. Reg. Section 1.1502-6 (or any similar provision of state,
local, or foreign law), as a transferee or successor, by contract, or
otherwise.
(vii) The unpaid Taxes of the Company (1) did not, as of the
Most Recent Fiscal Month End, exceed the reserve for Tax Liability
(rather than any reserve for deferred Taxes established to reflect
timing differences between book and Tax income) set forth on the face of
the Most Recent Balance Sheet (rather than in any notes thereto) and (2)
do not exceed that reserve as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the
Company in filing its Tax Returns.
(m) TITLE TO ASSETS. The Company has good and marketable title to or
valid leasehold interest in the FF&E and a valid leasehold interest in the
office premises described in the Office Lease.
(n) REAL PROPERTY. The Company does not own or lease any real
property other than the office premises leased pursuant to the Office Lease.
(o) INTELLECTUAL PROPERTY.
(i) The Company owns or has the right to use pursuant to
license, sublicense, agreement, or permission all Intellectual Property
necessary for the operation of the businesses of the Company as
presently conducted. The Company has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or
uses.
(ii) The Company has not interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual
Property rights of third parties. To the
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<PAGE> 22
Knowledge of Shareholder and the directors and officers (and employees
with responsibility for Intellectual Property matters) of the Company,
no third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of
any of the Company.
(p) CONTRACTS. As of the Closing Date the Company will not be a
party or bound by any agreement or commitment requiring the payment of monies
or other consideration or the performance of obligations following the Closing
Date other than the Office Lease and those agreements listed in Section 3(q) of
the Disclosure Schedule.
(q) POWERS OF ATTORNEY. There are no outstanding powers of attorney
executed on behalf of the Company.
(r) INSURANCE. Section 3(r) of the Disclosure Schedule sets forth
the following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which any of the Company has been
a party, a named insured, or otherwise the beneficiary of coverage at any time
within the past one year:
(i) the name, address, and telephone number of the agent;
(ii) the name of the insurer, the name of the policyholder, and
the name of each covered insured;
(iii) the policy number and the period of coverage;
(iv) the scope (including an indication of whether the coverage
was on a claims made, occurrence, or other basis) and amount (including
a description of how deductibles and ceilings are calculated and
operate) of coverage; and
(v) a description of any retroactive premium adjustments or
other loss-sharing arrangements.
With respect to each such insurance policy: (1) the policy is legal, valid,
binding, enforceable, and in full force and effect; (2) the policy will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby; (3) neither the Company nor any other party to the policy is in breach
or default (including with respect to the payment of premiums or the giving of
notices), and no event has occurred which, with notice or the lapse of time,
would constitute such a breach or default, or permit termination, modification,
or acceleration, under the policy; and (4) no party to the policy has
repudiated any provision thereof. The Company has been covered during the past
six years by insurance in scope and amount customary and reasonable for the
businesses in which it has engaged during the aforementioned period. Section
3(r) of the Disclosure Schedule describes any self-insurance arrangements
affecting the Company.
(s) LITIGATION. Section 3(s) of the Disclosure Schedule sets forth
each instance in which the Company (i) is subject to any outstanding
injunction, judgment, order, decree, ruling, or charge or (ii) is a party or is
threatened to be made a party to any action, suit, proceeding, hearing, or
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<PAGE> 23
investigation of, in, or before any court of quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction or before any
arbitrator.
(t) LABOR MATTERS. The Company has not committed any unfair labor
practice. None of Shareholder and the directors and officers of the Company
has any knowledge of any organizational effort presently being made or
threatened by or on behalf of any labor union with respect to employees of any
of the Company.
(u) EMPLOYEE BENEFITS.
Except as otherwise set forth in Section 3(u) of the Disclosure
Statement:
(i) The Company has never maintained or contributed to and
does not currently maintain or contribute to any Employee Benefit Plan;
(ii) The Company does not contribute to, never has contributed
to, and never has been required to contribute to any Multiemployer Plan
or has any Liability (including withdrawal Liability) under any
Multiemployer Plan; and
(iii) The Company does not maintain and never has maintained or
contributed to, and never has been required to contribute to, any
Employee Welfare Benefit Plan providing medical health, or life
insurance or other welfare-type benefits for current or future retired
or terminated employees, their spouses, or their dependents.
(v) GUARANTIES. The Company is not a guarantor or otherwise liable
for any Liability or obligation (including indebtedness) of any other Person.
(w) ENVIRONMENT, HEALTH, AND SAFETY.
(i) The Company has complied with all Environmental, Health,
and Safety Laws, and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been
filed or commenced against the Company alleging any failure so to
comply.
(ii) The Company has no Liability (and the Company has not
handled or disposed of any substance, arranged for the disposal of any
substance, exposed any employee or other individual to any substance or
condition, or owned or operated any property or facility in any manner
that could form the Basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand
against the Company giving rise to any Liability) for damage to any
site, location, or body of water (surface or subsurface), for any
illness or personal injury to any employee or other individual, or for
any reason under any Environmental, Health and Safety Law.
(iii) All properties and equipment used in the business of the
Company have been free of asbestos, PCB's, methylene chloride,
trichloroethylene, transdichloroethylene, dioxins, dibenzofurans, and
Extremely Hazardous Substances.
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<PAGE> 24
(x) DISCLOSURE. The representations and warranties contained in this
Section 3 do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Section 3 not misleading.
4. REPRESENTATIONS AND WARRANTIES OF FIRST SIERRA. First Sierra represents
and warrants to Shareholder that the statements contained in this Section 4 are
correct and complete as of the date of this Agreement and will be correct and
complete as of the Closing Date (as though made then and as though the Closing
Date were substituted for the date of this Agreement throughout this Section
4).
(a) ORGANIZATION OF FIRST SIERRA. First Sierra is a corporation duly
organized, validly existing, and in good standing under the laws of the State
of Delaware.
(b) AUTHORIZATION OF TRANSACTION. First Sierra has full corporate
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder. This Agreement constitutes the valid and legally
binding obligation of First Sierra, enforceable in accordance with its terms
and conditions. Except for the filing of the Merger Agreement with the
applicable Governmental Authority and consents that have already been obtained,
First Sierra need not give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any Governmental Authority or any other
party in order to consummate the transactions contemplated by this Agreement.
(c) NONCONTRAVENTION. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any Law to which First Sierra is subject or any provision of its
charter or bylaws or (ii) conflict with, result in a breach of, constitute a
default under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which First Sierra is a party or by which it is bound or to which any of its
assets is subject.
(d) BROKERS' FEES. First Sierra has no Liability or obligation to
pay any fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which any Shareholder could
become liable or obligated.
(e) INVESTMENT. First Sierra is acquiring the Company for its own
account for investment purposes and not with a view to offering for sale or
distribution any of the capital stock of the Company.
5. PRE-CLOSING COVENANTS. The Parties agree as follows with respect to the
period between the execution of this Agreement and the Closing.
(a) GENERAL. Each of the Parties will use commercially reasonable
best efforts to take all actions and to do all things necessary, proper or
advisable in order to consummate and make effective the transactions
contemplated by this Agreement (including satisfaction, but not waiver, of the
closing conditions set forth in Section 7).
(b) NOTICES AND CONSENTS. To the extent, if any, noted in Section
3(c) of the Disclosure Schedule as being required, Shareholder will give and
cause to give any notices to third parties, and will use and cause the Company
to use all reasonable efforts to obtain any third-party consents, that First
Sierra may request in connection with the matters referred to in Section 3(c).
Each of the Parties
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will (and Shareholder will cause the Company to) give any notices to, make any
filings with, and use all reasonable efforts to obtain any authorizations,
consents, and approvals of Governmental Authorities in connection with the
matters referred to in Sections 3(c) and 4(c).
(c) OPERATION OF BUSINESS. Shareholder will not cause or permit the
Company to engage in any practice, take any action, or enter into any
transaction outside the Ordinary Course of Business except as otherwise
contemplated pursuant to Sections 5(h), (i) and (j).
(d) PRESERVATION OF BUSINESS. The Company will keep its business and
properties substantially intact (subject to Sections 5(h), (i) and (j)),
including its present operations, physical facilities, working conditions, and
relationships with lessors, vendors, brokers, licensors, suppliers, customers,
and employees.
(e) FULL ACCESS. Shareholder and the Company will permit
representatives of First Sierra to have full access at all reasonable times
following reasonable prior notice, and in a manner so as not to interfere with
the normal business operations of the Company, to all premises, properties,
personnel, books, records (including Tax records), contracts, and documents of
or pertaining to each of the Company.
(f) NOTICE OF DEVELOPMENTS. Each Party will give prompt written
notice to the other of any material adverse development causing a breach of any
of its own representations and warranties in Sections 3 and 4. No disclosure
by any Party pursuant to this Section 5(f), however, shall be deemed to amend
or supplement Annex I or the Disclosure Schedule or to prevent or cure any
misrepresentation, breach of warranty, or breach of covenant.
(g) EXCLUSIVITY. Shareholder and the Company will not (i) solicit,
initiate, or encourage the submission of any proposal or offer from any Person
relating to the acquisition of any capital stock or other voting securities, or
any substantial portion of the assets of, the Company (including any
acquisition structured as a merger, consolidation, or share exchange) or (ii)
participate in any discussions or negotiations regarding, furnish any
information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any Person to do or seek any of the
foregoing. Shareholder will not vote the Company Shares in favor of any such
acquisition structured as a merger, consolidation, or share exchange.
Shareholder will notify First Sierra immediately if any Person makes any
proposal, offer, inquiry, or contact with respect to any of the foregoing.
(h) LIABILITIES. Prior to the Closing Shareholder and the Company
shall cause all Liabilities of the Company known to Shareholder or the Company
to be paid off, retired, settled, released and otherwise discharged other than
the Remaining Liabilities. Prior to the Closing Shareholder shall provide to
First Sierra a listing of such Liabilities and the actions taken by Shareholder
to the release and discharge the same.
(i) DISTRIBUTION OF ASSETS. Prior to the Closing Shareholder may
cause the Company to convey or distribute to Shareholder all cash and other
assets of the Company other than the FF&E and the Office Lease.
(j) EMPLOYEES. Prior to the Closing Shareholder shall request that
each Employee to tender to the Company his or her resignation as an employee of
the Company effective as of the Closing, such resignation to include a release
by such Employee in favor of the Company (and
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Shareholder and First Sierra shall jointly prepare a form of resignation and
release letter). If any such Employee shall fail to so resign, prior to the
Closing Shareholder shall cause the Company to terminate such Employee's
employment by the Company and pursuant to Section 8(b) Shareholder shall
indemnify the Company and First Sierra against any severance pay or other
amounts (if any) due to or claims asserted by such Employee.
6. POST-CLOSING COVENANTS. The Parties agree as follows with respect to
the period following the Closing.
(a) GENERAL. In case at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request all at the sole cost and expense of the requesting Party
(unless the requesting Party is entitled to indemnification therefor under
Section 8).
(b) LITIGATION SUPPORT. In the event and for so long as any Party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Company, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Section 8).
(c) TRANSITION. Shareholder and the Company will not take any action
that is designed or intended to have the effect of discouraging any lessor,
vendor, broker, customer, supplier, or other business associate of the Company
from maintaining the same business relationships with the Company or First
Sierra after the Closing as it maintained with the Company prior to the
Closing. Shareholder will refer all customer inquiries relating to the
businesses of the Company to First Sierra from and after the Closing.
(d) CONFIDENTIALITY. Shareholder will treat and hold as such all of
the Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
First Sierra or destroy, at the request and option of First Sierra, all
tangible embodiments (and all copies) of the Confidential Information that are
in its possession. In the event that Shareholder is requested or required (by
oral question or request for information or documents in any legal proceeding,
interrogatory, subpoena, civil investigative demand, or similar process) to
disclose any Confidential Information, Shareholder will notify First Sierra
promptly of the request or requirement so that First Sierra may seek an
appropriate protective order or waive compliance with the provisions of this
Section 6(d). If, in the absence of a protective order or the receipt of a
waiver hereunder, Shareholder is, on the advice of counsel, compelled to
disclose any Confidential Information to any tribunal or else stand liable for
contempt, Shareholder may disclose the Confidential Information to the
tribunal; provided, Shareholder shall use all reasonable efforts to obtain, at
the reasonable request of First Sierra, an order or other assurance that
confidential treatment will be accorded to such portion of the Confidential
Information required to be disclosed as First Sierra shall designate. The
foregoing provisions shall not apply to any Confidential Information that is
generally available to the public immediately prior to the time of disclosure.
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<PAGE> 27
(e) COVENANT NOT TO COMPETE. For the period commencing as of the
Closing Date and terminating upon the earlier to occur of (i) the expiration of
one year following the termination pursuant to the Employment Agreement of
Shareholder's employment without cause and (ii) the expiration of four years
following the Closing Date, Shareholder hereby agrees that she shall not,
directly or indirectly, either through any form of ownership, or as a director,
officer, principal, agent, employee, employer, advisor, consultant, partner or
in any individual or representative capacity whatsoever, either for her own
benefit or for the benefit of any other person or entity, without the prior
written consent of the Board of Directors of First Sierra, within any
geographic area that First Sierra does business, engage in any equipment or
software lease or financing business in which First Sierra or any of its
subsidiaries engages in during such four year period. If the final judgment of
a court of competent jurisdiction declares that any term or provision of this
Section 6(e) is invalid or unenforceable, the Parties agree that the court
making the determination of invalidity or unenforceability shall have the power
to reduce the scope, duration, or area of the term or provision, to delete
specific words or phrases, or to replace any invalid or unenforceable term or
provision with a term or provision that is valid and enforceable and that comes
closest to expressing the intention of the invalid or unenforceable term or
provision, and this Agreement shall be enforceable as so modified after the
expiration of the time within which the judgment may be appealed.
(f) REMAINING LIABILITIES GUARANTEED BY SHAREHOLDER. With respect to
all remaining liabilities and obligations of the Company which have been
personally guaranteed by Shareholder (the same being listed and described in
Section 6(f) of the Disclosure Schedule), the Company shall at all times after
the Closing Date repay such obligations only in the ordinary course of the
Company's business in accordance with the terms of the underlying loan
documents and the Company shall not at any time prepay any such obligation
prior to its scheduled maturity except as contemplated by or permitted pursuant
to the underlying loan documentation. Nothing in this Section 6(f) shall
prohibit the Company from repaying lines of credit in the ordinary course of
the Company's business from profits, working capital or through the refinancing
of such obligations. In addition, nothing shall prohibit Shareholder from
notifying the payee of any such obligations that Shareholder will not be liable
for any future obligation incurred by the Company which might otherwise be
covered by Shareholder's personal guarantee.
7. CONDITIONS TO OBLIGATION TO CLOSE.
(a) CONDITIONS TO OBLIGATION OF FIRST SIERRA. The obligation of
First Sierra to consummate the transactions to be performed by it in connection
with the Closing is subject to satisfaction of the following conditions:
(i) the representations and warranties set forth in Section 3
shall be true and correct in all material respects at and as of the
Closing Date;
(ii) Shareholder and the Company shall have performed and
complied with all of their respective covenants hereunder in all
material respects through the Closing;
(iii) First Sierra, Shareholder and the Company shall have
procured all of their third party consents specified in Section 5(b);
(iv) no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative agency
of any federal, state, local, or foreign jurisdiction
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wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation,
(C) affect adversely the right of First Sierra to own the Company Shares
and to control the Company, or (D) affect adversely the right of First
Sierra to conduct the business previously engaged in by the Company (and
no such injunction, judgment, order, decree, ruling, or charge shall be
in effect);
(v) Shareholder shall have delivered to First Sierra a
certificate to the effect that each of the conditions specified above in
Section 7(a)(i)-(iv) is satisfied in all respects;
(vi) all the Parties shall have received all other
authorizations, consents, and approvals of Governmental Authorities
referred to in Sections 3(c) and 4(c);
(vii) First Sierra shall have received from Blank, Rome, Comisky
& McCauley, counsel to Shareholder, an opinion in form and substance as
set forth in Exhibit E attached hereto, addressed to First Sierra, and
dated as of the Closing Date;
(viii) First Sierra shall have received the resignations,
effective as of the Closing, of each director and officer of the
Company;
(ix) Shareholder shall have released all claims and causes of
action she has against the Company as the sole shareholder of the
Company and as a director and officer of the Company, excluding,
however, the indemnification obligations owed by the Company to
Shareholder (in her capacity as a director and officer) pursuant to
Section ___ of the Company's Bylaws;
(x) Shareholder shall have executed and delivered to First
Sierra the Employment Agreement; and
(xi) all actions to be taken by Shareholder in connection with
consummation of the transactions contemplated hereby and all
certificates, opinions, instruments, and other documents required to
effect the transactions contemplated hereby will be reasonably
satisfactory in form and substance to First Sierra.
First Sierra may waive any condition specified in this Section 7(a) if it
executes a writing so stating at or prior to the Closing.
(b) CONDITIONS TO OBLIGATION OF SHAREHOLDER. The obligation of
Shareholder to consummate the transactions to be performed by it in connection
with the Closing is subject to satisfaction of the following conditions:
(i) the representations and warranties set forth in Section 4
shall be true and correct in all material respects at and as of the
Closing Date;
(ii) First Sierra shall have performed and complied with all of
its covenants hereunder in all material respects through the Closing;
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<PAGE> 29
(iii) First Sierra, Shareholder and the Company, shall have
procured all of their third party consents specified in Section 5(b);
(iv) no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative agency
of any federal, state, local, or foreign jurisdiction wherein an
unfavorable injunction, judgment, order, decree, ruling, or charge would
prevent consummation of any of the transactions contemplated by this
Agreement to be rescinded following consummation (and no such
injunction, judgment, order, decree, ruling, or charge shall be in
effect);
(v) First Sierra shall have delivered to Shareholder a
certificate to the effect that each of the conditions specified above in
Section 7(b)(i)-(iv) is satisfied in all respects;
(vi) the Parties shall have received all other authorizations,
consents, and approvals of Governmental Authorities referred to in
Sections 3(c) and 4(c);
(vii) Shareholder shall have received from Vinson & Elkins,
L.L.P., counsel to First Sierra, an opinion in form and substance as set
forth in Exhibit F attached hereto, addressed to Shareholder, and dated
as of the Closing Date;
(viii) First Sierra shall have executed and delivered to
Shareholder the Employment Agreement; and
(ix) all actions to be taken by First Sierra in connection with
consummation of the transactions contemplated hereby and all
certificates, opinions, instruments, and other documents required to
effect the transactions contemplated hereby will be reasonably
satisfactory in form and substance to Shareholder.
Shareholder may waive any condition specified in this Section 7(b) if it
executes a writing so stating at or prior to the Closing.
8. REMEDIES FOR BREACHES OF THIS AGREEMENT.
(a) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the
representations and warranties of the Parties contained in Sections 3 and 4
shall survive the Closing hereunder (even if the damaged Party had Knowledge of
or had reason to know of any misrepresentation or breach of warranty at the
time of Closing).
(b) INDEMNIFICATION PROVISIONS FOR BENEFIT OF FIRST SIERRA.
(i) If Shareholder or the Company breaches any of its
representations and warranties in Section 3, then Shareholder agrees to
indemnify First Sierra from and against the entirety of any Adverse
Consequences that First Sierra or the Company may suffer through and
after the date of the claim for indemnification resulting from, arising
out of or relating to, or caused by such breach.
(ii) Shareholder agrees to indemnify First Sierra and the
Company from and against the entirety of any Adverse Consequences First
Sierra or the Company may suffer resulting
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from, arising out of or relating to (1) any and all Liabilities of the
Company attributable to any act, omission, condition or event occurring
prior to the Effective Time including, without limitation, any of the
litigation, claims or other matters referenced in Section 3(s) of the
Disclosure Schedule, (2) without limiting the generality of clause (1)
preceding, any and all Liabilities of the Company under contracts,
agreements or commitments to which the Company is or was a party, or any
part of its property is or was bound, as of or prior to the Effective
Time, including (without limitation) any Liabilities under any agreement
with Colonial Pacific Leasing Company and any repurchase obligations in
respect of leases sold or brokered by the Company prior to the Effective
Time, and (3) without limiting the generality of clause (1) preceding,
any and all Liabilities of the Company with respect to employees of the
Company that are attributable to periods prior to the Effective Time;
excluding, however, in the case of each of clauses (1), (2) and (3)
preceding, the Remaining Liabilities.
(c) INDEMNIFICATION PROVISIONS FOR BENEFIT OF SHAREHOLDER. If First
Sierra breaches any of its representations and warranties in Section 4, then
First Sierra agrees to indemnify Shareholder from and against the entirety of
any Adverse Consequences Shareholder may suffer through and after the date of
the claim for indemnification resulting from, arising out of, relating to, or
caused by such breach.
(d) MATTERS INVOLVING THIRD PARTIES.
(i) If any third party shall notify any Party (the
"Indemnified Party") with respect to any matter (a "Third Party Claim")
that may give rise to a claim for indemnification against any other
Party (the "Indemnifying Party") under this Section 8, then the
Indemnified Party shall promptly notify the Indemnifying Party thereof
in writing; provided, no delay on the part of the Indemnified Party in
notifying the Indemnifying Party shall relieve the Indemnifying Party
from any obligation hereunder unless (and then solely to the extent) the
Indemnifying Party thereby is prejudiced.
(ii) The Indemnifying Party will have the right to defend the
Indemnified Party against the Third Party Claim with counsel of its
choice reasonably satisfactory to the Indemnified Party so long as (1)
the Indemnifying Party notifies the Indemnified Party in writing within
15 days after the Indemnified Party has give notice of the Third Party
Claim that the Indemnifying Party will indemnify the Indemnified Party
from and against the entirety of any Adverse Consequences the
Indemnified Party may suffer resulting from, arising out of, relating
to, in the nature of, or caused by the Third Party Claim, (2) the
Indemnifying Party provides the Indemnified Party with evidence
reasonably acceptable to the Indemnified Party that the Indemnifying
Party will have the financial resources to defend against the Third
Party Claim and fulfill its indemnification obligations hereunder, (3)
the Third Party Claim involves only money damages and does not seek an
injunction or other equitable relief, (4) settlement of, or an adverse
judgment with respect to, the Third Party Claim is not in the good faith
judgment of the Indemnified Party, likely to establish a precedential
custom or practice materially adverse to the continuing business
interests of the Indemnified Party, and (5) the Indemnifying Party
conducts the defense of the Third Party Claim actively and diligently.
(iii) So long as the Indemnifying Party is conducting the
defense of the Third Party Claim in accordance with Section 8(d)(ii),
(1) the Indemnified Party may retain separate co-counsel at its sole
cost and expense and participate in the defense of the Third Party
Claim, (2)
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<PAGE> 31
the Indemnified Party will not consent to the entry of any judgment or
enter into any settlement with respect to the Third Party Claim without
the prior written consent of the Indemnifying Party (not to be withheld
unreasonably), and (3) the Indemnifying Party will not consent to the
entry of any judgment or enter into any settlement with respect to the
Third Party Claim without the prior written consent of the Indemnified
Party (not to be withheld unreasonably).
(iv) In the event any of the conditions in Section 8(d)(ii) is
or becomes unsatisfied, however, (1) the Indemnified Party may defend
against, and consent to the entry of any judgment or enter into any
settlement with respect to, the Third Party Claim in any manner it
reasonably may deem appropriate (and the Indemnified Party need not
consult with, or obtain any consent from, the Indemnifying Party in
connection therewith), (2) the Indemnifying Party will reimburse the
Indemnified Party promptly and periodically for the costs of defending
against the Third Party Claim (including reasonable attorneys' fees and
expenses), and (3) the Indemnifying Party will remain responsible for
any Adverse Consequences the Indemnified Party may suffer resulting
from, arising out of, relating to, in the nature of, or caused by the
Third Party Claim to the fullest extent provided in this Section 8.
(e) CLAIMS FOR INDEMNIFICATION.
(i) Whenever any claim shall arise for indemnification under
Section 8(b), First Sierra shall describe such claim in a written notice
("Notice of Claim") to the Shareholder (and for purposes of this Section
8(e), a notice given by First Sierra pursuant to Section 8(d) shall
constitute a "Notice of Claim") and, when known, specify the facts
constituting the basis for such claim and the amount or an estimate of
the amount of such claim.
(ii) Following the receipt by Shareholder of each Notice of
Claim, Shareholder may give First Sierra written notice ("Notice of
Objection") (1) attaching a copy of such Notice of Claim, (2) stating
that, in the opinion of Shareholder, the claim described in such Notice
of Claim is invalid (either in whole or in specified part) under the
terms of Section 8 hereof, (3) giving the reasons for the alleged
invalidity, and (4) stating that, based on such alleged invalidity,
Shareholder objects to the payment of any portion of the amount claimed
pursuant to such Notice of Claim. If a Notice of Objection alleges that
a Notice of Claim is only partially invalid, Shareholder, within 30 days
of the receipt of such Notice of Claim, agrees to deliver to First
Sierra that portion of the amount claimed pursuant to such Notice of
Claim as to which no objection is made.
(iii) First Sierra and Shareholder agree to submit to final and
binding arbitration pursuant to Section 10(o) any and all disputes
Shareholder has specified in a Notice of Objection or First Sierra has
specified in a Notice of Claim to which Shareholder has not responded
within 30 days of receipt of such Notice of Claim. If pursuant to any
such arbitration proceeding it is determined that Shareholder is
obligated to make payment to First Sierra, then such payment shall be
made to First Sierra no later than 30 days following such determination.
(f) DETERMINATION OF ADVERSE CONSEQUENCES. There shall be taken into
account the time cost of money (using the Applicable Rate as the discount rate)
in determining Adverse Consequences for purposes of this Section 8. All
indemnification payments under this Section 8 shall be deemed adjustments to
the Purchase Price.
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<PAGE> 32
(g) RECOUPMENT UNDER PREFERRED STOCK.
(i) Effective as of the Closing, Shareholder grants to First
Sierra a first priority security interest in and makes a collateral
assignment of (1) all of the Escrowed Shares, (2) the stock powers
executed in blank attached to the Escrowed Shares, (3) any common stock
of First Sierra into which any of the Escrowed Shares is converted, (4)
the income and dividends with respect to the Escrowed Shares, including
cash and stock dividends and stock splits and any exchange of any of the
Escrowed Shares for other property upon reorganization, recapitalization
or other readjustment of the First Sierra (and in the event that
Shareholder receives any property of the type described in clause (3) or
this clause (4), Shareholder agrees to promptly deliver such property to
the escrow agent under the Escrow Agreement to be held by such escrow
agent in accordance with the terms of the Escrow Agreement), and (5) all
proceeds, products, additions and substitutions of and to any and all of
the foregoing (collectively, the "Collateral"). The assignment and
security interest referred to above is granted to First Sierra to secure
the payment and performance when due of any and all obligations and
liabilities of Shareholder pursuant to this Section 8. If pursuant to
Section 8(e) it is determined or deemed that Shareholder owes an
indemnification obligation to First Sierra and Shareholder does not
satisfy such indemnification obligation by making the applicable payment
to First Sierra within the 30 day period set forth in clause (ii) or
(iii) of Section 8(e), as applicable, then First Sierra may (in its sole
discretion) at any time while such failure continues elect to sell in
one or more sales, or otherwise dispose of, any or all of the
Collateral, in such order as First Sierra may elect, and any such sale
may be made either at public or private sale at its place of business or
elsewhere, or to any brokers' board or securities exchange, either for
cash or upon credit or for future delivery, at such price as First
Sierra may deem fair, and First Sierra may be the purchaser of any and
all Collateral so sold and may hold the same thereafter in its own right
free and clear of any claim of Shareholder or right of redemption. If
any applicable provision of the Uniform Commercial Code or other law
requires First Sierra to give reasonable notice of any such sale or
disposition or other action, five days prior written notice shall
constitute reasonable notice. Any sale hereunder may be conducted by an
auctioneer or any officer or agent of First Sierra. Shareholder shall
remain liable to First Sierra for any indemnification obligations
remaining unpaid following any such sale. The aforesaid rights of First
Sierra shall be in addition to and not exclusive of any other rights
that First Sierra may have as a secured party under the Uniform
Commercial Code or other applicable law. In particular, nothing herein
shall require First Sierra to foreclose on or otherwise take any action
in respect of the Collateral; rather, First Sierra may elect to recover
any amounts owed pursuant to such indemnification obligations directly
from Shareholder and without resort to any of the Collateral.
(ii) The security interest in and collateral assignment of any
Escrowed Shares that are released from Escrow pursuant to Section
2(c)(iii) above shall be terminated and released effective as of the
release date applicable to such Escrowed Shares.
(h) OTHER INDEMNIFICATION PROVISIONS. The foregoing indemnification
provisions are in addition to, and not in derogation of, any statutory,
equitable, or common law remedy any Party may have for breach of this
Agreement.
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<PAGE> 33
9. MISCELLANEOUS.
(a) PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. No Party shall issue
any press release or make any public announcement relating to the subject
matter of this Agreement prior to the Closing without the prior written
approval of First Sierra and Shareholder; provided, either Party may make any
public disclosure it believes in good faith is required by applicable law or
any listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use all reasonable efforts to advise the
other Party prior to making the disclosure).
(b) NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer
any rights or remedies upon any Person other than the Parties and their
respective successors and permitted assigns.
(c) ENTIRE AGREEMENT. This Agreement (including the documents
referred to herein) and the Employment Agreement to be entered into between
First Sierra and the Shareholder constitutes the entire agreement among the
Parties and supersedes any prior understandings, agreements, statements, or
representations between the Parties, written or oral, to the extent they relate
in any manner to the subject matter hereof including that certain letter of
intent with attached terms dated ________.
(d) SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of other Party.
(e) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(f) NOTICES. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be sent by (i) personal delivery
(including courier service), (ii) telecopier during normal business hours to
the number indicated, or (iii) registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set
forth below (any communication shall be deemed given upon receipt):
IF TO SHAREHOLDER OR THE COMPANY:
Valerie A. Hayes
109 East Evans Street
Westchester, PA 19381-0504
Telecopier No.: 610-344-7710
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<PAGE> 34
IF TO FIRST SIERRA OR SUB:
First Sierra Financial, Inc.
Texas Commerce Tower, Suite 7050
600 Travis Street
Houston, TX 77002
Attention: Thomas J. Depping
Telecopier No.: 713-221-1818
Any Party may change its telecopier number or its address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other Party notice in the manner herein set forth.
(g) GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas.
(h) AMENDMENTS AND WAIVERS. No amendments of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by
First Sierra and Shareholder. No waiver by either Party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
(i) SEVERABILITY. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(j) EXPENSES. Each of the Parties will bear its own costs and
expenses (including legal fees and expenses) incurred in connection with this
Agreement and the transactions contemplated hereby.
(k) CONSTRUCTION. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties, and no presumption or burden of proof
shall arise favoring or disfavoring either Party by virtue of the authorship of
any of the provisions of this Agreement. Any reference to any federal, state,
local, or foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
(l) INCORPORATION OF EXHIBITS, ANNEXES, AND SCHEDULES. The Exhibits,
Annexes, and Schedules identified in this Agreement are incorporated herein by
reference and made a part hereof.
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<PAGE> 35
(m) SPECIFIC PERFORMANCE. Each of the Parties acknowledges and
agrees that the other Party would be damaged irreparably in the event any of
the provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Party shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 10(n)), in addition to any other remedy to which they may be
entitled, at law or in equity.
(n) SUBMISSION TO JURISDICTION. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in Philadelphia, Chester
County, Pennsylvania or in Houston, Texas, in any action or proceeding arising
out of or relating to this Agreement and agrees that all claims in respect of
the action or proceeding may be heard and determined in any such court. Each of
the Parties waives any defense of inconvenient forum to the maintenance of any
action or proceeding so brought and waives any bond, surety, or other security
that might be required of the other Party with respect thereto. Nothing in
this Section 10(n), however, shall affect the right to any Party to bring any
action or proceeding arising out of or relating to this Agreement in any other
court. Each Party agrees that a final judgment in any action or proceeding so
brought shall be conclusive and may be enforced by suit on the judgment or in
any other manner provided by law or at equity.
(o) ARBITRATION. If a Party makes a good faith determination that a
breach (or potential breach) of any of the confidentiality or non-competition
provisions of this Agreement by another Party may result in damages or
consequences that will be immediate, severe and incapable of adequate redress
after the fact, or First Sierra believes that a proposed draw or actual draw on
the Letter of Credit is or was not permitted pursuant to the terms of Section
2(v), that Party may seek a temporary restraining order or other immediate
injunctive relief without first seeking relief through arbitration. After the
court has ruled on the request for a temporary restraining order or injunctive
relief, the Parties will thereafter proceed with arbitration of the dispute and
stay the litigation pending arbitration. Subject to the foregoing, any dispute
arising out of this Agreement, or its performance or breach, shall be resolved
by binding arbitration under the Commercial Arbitration Rules (the "AAA Rules")
of the American Arbitration Association (the "AAA"). This arbitration
provision is expressly made pursuant to and shall be governed by the Federal
Arbitration Act, 9 U.S.C. Sections 1-14. The Parties agree that pursuant to
Section 9 of the Federal Arbitration Act, a judgment of a United States
District Court of competent jurisdiction shall be entered upon the award made
pursuant to the arbitration. A single arbitrator, who shall have the authority
to allocate the costs of any arbitration initiated under this paragraph, shall
be selected according to the AAA Rules within ten days of the submission to the
AAA of the response to the statement of claim or the date on which any such
response is due, whichever is earlier. The arbitrator shall conduct the
arbitration in accordance with the Federal Rules of Evidence. The arbitrator
shall decide the amount and extent of pre-hearing discovery which is
appropriate. The arbitrator shall have the power to enter any award of
monetary and/or injunctive relief (including the power issue permanent
injunctive relief and also the power to reconsider any prior request for
immediate injunctive relief by any of the Parties and any order as to immediate
injunctive relief previously granted or denied by a court in response to a
request therefor by any of the Parties), including the power to render an award
as provided in Rule 43 of the AAA Rules; provided, the arbitrator shall not
have the power to award any punitive or exemplary damages (the parties hereby
waiving and releasing any rights that they may have to recover punitive and
exemplary damages). The arbitrator shall award the prevailing Party its costs
and reasonable attorneys' fees, and the losing Party shall bear the entire cost
of the arbitration, including the arbitrator's fees. Any arbitration shall be
held
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<PAGE> 36
in Houston, Texas for any claim brought by the Parties hereto. In addition to
the above courts, the arbitration award may be enforced in any court having
jurisdiction over the Parties and the subject matter of the arbitration.
Notwithstanding the foregoing, the parties irrevocably submit to the
nonexclusive jurisdiction of the state and federal courts situated in Houston,
Texas in any action to enforce an arbitration award and with respect to any
request for a temporary restraining order or injunctive relief.
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<PAGE> 37
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date first above written.
FIRST SIERRA FINANCIAL, INC.
By: /s/ THOMAS J. DEPPING
------------------------------------
Thomas J. Depping
President and Chief Executive
Officer
FIRST SIERRA PENNSYLVANIA, INC.
By: /s/ THOMAS J. DEPPING
------------------------------------
Thomas J. Depping
President
/s/ VALERIE A. HAYES
---------------------------------------
VALERIE A. HAYES
CORPORATE CAPITAL LEASING GROUP, INC.
By: /s/ VALERIE A. HAYES
------------------------------------
Valerie A. Hayes
President
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<PAGE> 1
EXHIBIT 10.6
ASSET PURCHASE AGREEMENT
between
LEASE PRO, INC.,
CHARLES E. LESTER
AND
FIRST SIERRA FINANCIAL, INC.
February 4, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. The Sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(a) Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(b) Consideration . . . . . . . . . . . . . . . . . . . . . . . . 4
(d) Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(e) The Closing . . . . . . . . . . . . . . . . . . . . . . . . . 7
(f) Deliveries at the Closing . . . . . . . . . . . . . . . . . . 7
3. Representations and Warranties of the Company
and Shareholder. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(a) Organization, Qualification, and Corporate Power. . . . . . . 8
(b) Ownership of the Company. . . . . . . . . . . . . . . . . . . 8
(c) Authorization of Transaction . . . . . . . . . . . . . . . . . 8
(d) Noncontravention . . . . . . . . . . . . . . . . . . . . . . . 8
(e) Brokers' Fees . . . . . . . . . . . . . . . . . . . . . . . . 8
(f) Financial Statements . . . . . . . . . . . . . . . . . . . . . 8
(g) Events Subsequent to Most Recent Fiscal Year End . . . . . . . 9
(h) Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . 9
(i) Title to Assets . . . . . . . . . . . . . . . . . . . . . . . 9
(j) Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(k) Labor Matters. . . . . . . . . . . . . . . . . . . . . . . . . 9
(l) Employee Benefits . . . . . . . . . . . . . . . . . . . . . . 9
(m) Lease Volume . . . . . . . . . . . . . . . . . . . . . . . . . 9
(p) Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . 10
4. Representations and Warranties of First Sierra. . . . . . . . . . . . 10
(a) Organization . . . . . . . . . . . . . . . . . . . . . . . . . 10
(b) Authorization of Transaction . . . . . . . . . . . . . . . . . 10
(c) Noncontravention . . . . . . . . . . . . . . . . . . . . . . . 10
(d) Brokers' Fees . . . . . . . . . . . . . . . . . . . . . . . . 10
5. Post-Closing Covenants . . . . . . . . . . . . . . . . . . . . . . . 11
(a) General . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(b) Transition . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(c) Covenant Not to Compete . . . . . . . . . . . . . . . . . . . 11
6. Conditions to Obligation to Close . . . . . . . . . . . . . . . . . . 12
(a) Conditions to Obligation of First Sierra . . . . . . . . . . . 12
(b) Conditions to Obligation of the Company and Shareholder . . . 13
7. Remedies for Breaches of This Agreement . . . . . . . . . . . . . . . 13
(a) Survival of Representations and Warranties . . . . . . . . . . 13
(b) Indemnification Provisions for Benefit of First Sierra . . . . 13
(c) Indemnification Provisions for Benefit of the Company and
Shareholder . . . . . . . . . . . . . . . . . . . . . . . . . 14
(d) Matters Involving Third Parties . . . . . . . . . . . . . . . 14
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
(e) Claims for Indemnification. . . . . . . . . . . . . . . . . . 15
(f) Determination of Adverse Consequences . . . . . . . . . . . . 16
(g) Other Indemnification Provisions . . . . . . . . . . . . . . . 16
8. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(a) Press Releases and Public Announcements . . . . . . . . . . . 16
(b) No Third-Party Beneficiaries . . . . . . . . . . . . . . . . . 16
(c) Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . 16
(d) Succession and Assignment . . . . . . . . . . . . . . . . . . 16
(e) Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 16
(f) Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(g) Governing Law . . . . . . . . . . . . . . . . . . . . . . . . 17
(h) Amendments and Waivers . . . . . . . . . . . . . . . . . . . . 17
(i) Severability . . . . . . . . . . . . . . . . . . . . . . . . . 17
(j) Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
(k) Construction . . . . . . . . . . . . . . . . . . . . . . . . . 17
(l) Incorporation of Exhibits, Annexes, and Schedules . . . . . . 18
(m) Specific Performance . . . . . . . . . . . . . . . . . . . . . 18
(n) Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . 18
Exhibit A - Employment Agreement
Exhibit B - Financial Statements
Exhibit C - Lease Volume Information
Exhibit D - Opinion of the Company's Counsel
Exhibit E - Opinion of First Sierra's Counsel
Exhibit F - Bill of Sale
Exhibit G - Lease Assignment
Exhibit H - Release
Schedule 1 - Furniture, Fixture and Equipment
Schedule 3(n) - List of Equipment Residuals
</TABLE>
-ii-
<PAGE> 4
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement is entered into as of February 4, 1997, by
and between Charles E. Lester, a resident of Cobb County, Georgia
("Shareholder"), Lease Pro, Inc., a Georgia corporation (the "Company"), and
First Sierra Financial, Inc., a Delaware corporation ("First Sierra"). First
Sierra, Shareholder and the Company are referred to collectively herein as the
"Parties".
Recitals
Shareholder owns 74% the outstanding capital stock of the Company.
This Agreement contemplates a transaction in which First Sierra will
purchase certain assets of the Company.
Now, therefore, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties agree as follows:
1. DEFINITIONS.
"Adverse Consequences" means all actions, suits, proceedings,
hearings, investigations, charges, complaints, claims, demands,
injunctions, judgments, orders, decrees, rulings, damages, dues,
penalties, fines, costs, amounts paid in settlement, Liabilities,
obligations, Taxes, liens, losses, expenses and fees, including court
costs and reasonable attorneys' fees and expenses.
"Affiliate" has the meaning set forth in Rule 12b-2 of the
regulations promulgated under the Securities Exchange Act.
"Applicable Rate" means the corporate base rate or prime rate of
interest publicly announced from time to time by Texas Commerce Bank,
National Association, Houston, Texas plus 3.0% per annum.
"Balance Sheet" means the balance sheet contained within the
Financial Statements.
"Basis" means any past or present fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event,
incident, action, failure to act, or transaction that forms or could
form the basis for any specified consequences.
"Business Day" means any day that is not a Saturday, a Sunday, or
a day that is a banking holiday under United States or Texas Law.
"Closing" has the meaning set forth in Section 2(c).
"Closing Date" has the meaning set forth in Section 2(c).
<PAGE> 5
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the
businesses and affairs of the Company or First Sierra that is not
already generally available to the public.
"Disclosure Schedule" has the meaning set forth in Section 3.
"Employee Benefit Plan" means any (a) nonqualified deferred
compensation or retirement plan or arrangement that is an Employee
Pension Benefit Plan, (b) qualified defined contribution retirement plan
or arrangement that is an Employee Pension Benefit Plan, (c) qualified
defined benefit retirement plan or arrangement that is an Employee
Pension Benefit Plan (including any Multiemployer Plan), or (d) Employee
Welfare Benefit Plan or material fringe benefit plan or program.
"Employee Pension Benefit Plan" has the meaning set forth in
ERISA Sec. 3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in
ERISA Sec. 3(1).
"Employees" has the meaning set forth in Section 2(d).
"Employment Agreement" means the Employment Agreement to be
entered into by First Sierra and Shareholder in the form of Exhibit A.
"Environmental, Health, and Safety Laws" means the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the
Resource Conservation and Recovery Act of 1976, and the Occupational
Safety and Health Act of 1970, each as amended, together with all other
Laws concerning pollution or protection of the environment, public
health and safety, or employee health and safety, including Laws
relating to emissions, discharges, releases, or threatened releases of
pollutants, contaminants, or chemical, industrial, hazardous, or toxic
materials or wastes into ambient air, surface water, ground water, or
lands or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling
of pollutants, contaminants, or chemical, industrial, hazardous, or
toxic materials or wastes.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Extremely Hazardous Substance" has the meaning set forth in Sec.
302 of the Emergency Planning and Community Right-to-Know Act of 1986,
as amended.
"FF&E" means those items of furniture, fixtures and equipment
listed on Schedule 1, being all of the furniture, fixtures and equipment
owned by the Company as of 12-31-96.
"Financial Statements" has the meaning set forth in Section 3(h).
"First Sierra" has the meaning set forth in the preface above.
"GAAP" means United States generally accepted accounting
principles as in effect from time to time.
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<PAGE> 6
"Governmental Authority" means any government or any department,
agency, political subdivision, or court thereof.
"Indemnified Party" has the meaning set forth in Section 10(d).
"Indemnifying Party" has the meaning set forth in Section 10(d).
"Knowledge" means actual knowledge.
"Law" means any constitution, statute, code, regulation, rule,
injunction, judgment, order, decree, ruling, charge, or other
restriction of any applicable Governmental Authority.
"Liability" means any liability (whether known or unknown,
whether asserted or unasserted, whether absolute or contingent, whether
accrued or unaccrued, whether liquidated or unliquidated, and whether
due or to become due), including any liability for Taxes.
"Most Recent Fiscal Year End" has the meaning set forth in
Section 3(h).
"Multiemployer Plan" has the meaning set forth in ERISA Sec.
3(37).
"Ordinary Course of Business" means the ordinary course of
business consistent with past custom and practice.
"Party" has the meaning set forth in the preface above.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an
unincorporated organization, or a Governmental Authority.
"Purchase Price" has the meaning set forth in Section 2(b).
"Security Interest" means any mortgage, pledge, lien,
encumbrance, charge, or other security interest, other than (a)
mechanic's, materialmen's, and similar liens, (b) liens for Taxes not
yet due and payable or for Taxes that the taxpayer is contesting in good
faith through appropriate proceedings, (c) purchase money liens and
liens securing rental payments under capital lease arrangements, and (d)
other liens arising in the Ordinary Course of Business and not incurred
in connection with the borrowing of money.
"Shareholder" has the meaning set forth in the preface above.
"Specified Assets" means (a) the FF&E, (b) all tradenames,
fictitious names and assumed names of the Company including, without
limitation, the names "Lease Pro" and "Lease Pro, Inc.", (c) all vendor,
broker, dealer and customer lists of the Company, and (d) all goodwill
of the Company including, without limitation, the relationships between
the Company and its customers.
-3-
<PAGE> 7
"Subsidiary" means any corporation with respect to which a
specified Person (or a Subsidiary thereof) owns a majority of the common
stock or has the power to vote or direct the voting of sufficient
securities to elect a majority of the directors.
"Tax" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium windfall profits, environmental (including taxes
under Code Sec. 59A), customs duties, capital stock, franchise, profits,
withholding, social security (or similar), unemployment, disability,
real property, personal property, sales, use, transfer, registration,
value added, alternative or add-on minimum, estimated, or other tax of
any kind whatsoever, including any interest, penalty, or addition
thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for
refund, or information return or statement relating to Taxes, including
any schedule or attachment thereto, and including any amendment thereof.
"Third Party Claim" has the meaning set forth in Section 7(d).
2. THE SALE.
(a) ASSETS. Upon the terms and subject to the provisions of this
Agreement, the Company shall sell and assign to First Sierra, and First Sierra
will purchase from the Company, the Specified Assets.
(b) CONSIDERATION. (i) As consideration for the sale of the Assets,
First Sierra shall pay to Shareholder and Shareholder shall receive at the
Closing, subject to the terms and conditions of this Agreement, a purchase
price ("Purchase Price") payable as follows:
(1) $158,470 in cash payable to the Company at Closing
for the FF&E;
(2) $750,000 in cash payable to the Company at Closing
for all of the Specified Assets other than the FF&E;
(3) a maximum of an additional $250,000 payable to the
Company in accordance with and subject to the terms of Section
2(b)(ii).
(ii) (1) An "Earnings Period" shall mean the first 15 month
period commencing as of the Closing Date and the two succeeding 12 month
periods. Following the expiration of each Earnings Period a determination
shall be made as to the Income Amount and Margin applicable to such Earnings
Period. The Income Amount and Margin for each Earnings Period will be
determined as follows.
An "Income Amount" shall be determined for each new
lease/financing instrument (collectively, "leases") booked by the Lease Pro
Division during each Earnings Period. The "Lease Pro Division" means the
division of First Sierra headed by Shareholder, although such division may be
given a different name within First Sierra. In instances where First Sierra
acquires the lease, the Income Amount with respect to each such lease booked by
the Lease Pro Division will be equal to the excess of (a) the present value of
the scheduled rental payments under such lease during
-4-
<PAGE> 8
its initial term, such present value to be determined using a discount rate
equal to the average yield to maturity on the 2 year U.S. Treasury security
during the month such lease was generated plus 250 basis points, over (b) the
total amount funded by First Sierra in respect of such lease including, without
limitation, equipment cost, software license fees and fees and commissions paid
to brokers. In instances where First Sierra does not acquire the lease but
rather acts as a broker in respect of the lease, the Income Amount with respect
to each such lease booked by the Lease Pro Division will be equal to the profit
realized by First Sierra with respect to such lease (however, it is
acknowledged that First Sierra may decide, in its discretion, to not broker any
leases to other funding sources).
The "Margin" for each Earnings Period shall be equal to
(i) the Income Amount for such period, less (ii) the aggregate operating
expenses incurred by First Sierra during such Earnings Period that are directly
associated with the Lease Pro Division including, without limitation, the
salaries, bonuses and commissions paid to Shareholder (exclusive of this
earnout) and expenses incurred at the First Sierra corporate level (excluding
general and administrative expenses of First Sierra) that are directly
associated with the Lease Pro Division such as fees for credit bureau and Dun &
Bradstreet reports, advertising for the Lease Pro Division and credit documents
and funding costs.
(2) As soon as practicable following the expiration of
an Earnings Period, First Sierra will provide to the Company a calculation of
the Margin and aggregate Income Amount for such Earnings Period. If the
Company has any questions regarding the calculation of or particular items
comprising the Margin or Income Amount, then First Sierra will make available
for inspection by the Company the relevant parts of its books and records. If
the Company believes any part of the Margin or Income Amount was incorrectly
calculated, Shareholder shall give First Sierra written notice thereof within
30 days following Shareholder's receipt from First Sierra of the calculation of
such Margin and Income Amount; and if no such notice is given by the Company to
First Sierra within such 30 day period, then Shareholder shall be deemed to
have agreed with the calculation of such Margin and aggregate Income Amount.
If the Company does so notify First Sierra (an "Audit Notice"), and the Company
and First Sierra are unable to resolve the disputed calculation within 30 days
following receipt by First Sierra of the Audit Notice, then First Sierra's
independent auditors (currently Arthur Andersen) shall be engaged to determine
whether the part of the Margin or Income Amount alleged by the Company to be
incorrectly calculated was in fact incorrectly calculated, and the
determination of such auditors shall be conclusive and binding on the Company
and First Sierra. The Company and First Sierra agree that the submission to
such independent auditors of disputes regarding the calculation of and items
comprising the Margin and aggregate Income Amount shall be the sole method of
resolving such disputes. If, pursuant to the preceding provisions, as to a
particular Earnings Period the calculation of the Margin and aggregate Income
Amount (or any part thereof) for such period is submitted to the independent
auditors and the final determination by such independent auditors results in
the Company being entitled to additional consideration under this earnout, then
the fees of such auditors shall be paid by First Sierra, otherwise such fees
shall be paid by the Company.
(3) As to each Earnings Period, if the Margin for such
period is equal to or greater than $1,300,000, then First Sierra will pay to
the Company in cash $83,334; if the Margin for such period is less than
$1,300,000 but equal to or greater than $1,075,000, then First Sierra will pay
to the Company in cash $62,500; if the Margin for such period is less than
$1,075,000 but equal to or greater than $800,000, then First Sierra will pay to
the Company in cash $41,667; and if the Margin for such period is less than
$800,000, then First Sierra shall not be obligated to pay any amount to the
Company under this earn-out for such period.
-5-
<PAGE> 9
(4) Reference is made to the Employment Agreement to be
entered into between First Sierra and Shareholder in connection with the
Closing. If (aa) Shareholder resigns his employment with First Sierra prior to
the expiration of the last Earnings Period or (bb) pursuant to the terms of
such Employment Agreement First Sierra terminates Shareholder's employment for
cause at any time prior to the expiration of the last Earnings Period, then the
Company's rights under this Section 2(b)(ii) as to the Earnings Period in which
such termination occurs and any subsequent Earnings Period shall terminate. In
the event of a termination of Shareholder's employment by virtue of
Shareholder's death or termination of Shareholder's employment by First Sierra
without cause, the aforesaid earnout provisions will not terminate; however,
First Sierra reserves the right to restructure or otherwise modify the Lease
Pro Division (which restructuring or modification may result in a reduction in
consideration being earned pursuant to this Section 2(b)(ii), but in no event
to be less than $41,667 per each unexpired Earnings Period), and in no such
event shall the Company have any claim or cause of action against First Sierra
arising out of or any manner attributable to any such action or event, the same
being hereby expressly waived and released by the Company.
(c) MASTER AGREEMENT. As of the Closing the Company's and
Shareholder's liability under the existing private label program Master
Agreement dated _________ with First Sierra will be terminated in return for
the Company and Shareholder delivering the Release Consideration Amount (as
hereinafter defined) to First Sierra at the Closing. The "Release
Consideration Amount" shall be determined as of the day preceding the Closing
Date and shall equal the product obtained by multiplying the aggregate
principal balance of the Leases (as such term is defined in such Master
Agreement) covered by such Master Agreement as of such day multiplied by 2%,
with such resulting product to be multiplied by the weighted average life in
months of such Leases, plus $76,072 (such $76,072 amount representing the
aggregate security deposit amounts currently held by the Company applicable to
such Leases). The Parties stipulate that $293,363 constitutes the Release
Consideration Amount as determined pursuant to the preceding sentence. The
Release Consideration Amount will be funded at the Closing with the following:
(i) An assignment by the Company to First Sierra of all funds
then contained in the Reserve Pool (as such term is
defined in such Master Agreement) established pursuant to
such Master Agreement (stipulated to be $75,812);
(ii) An assignment to First Sierra of all security deposit
amounts currently held by First Sierra applicable to such
Leases (stipulated to be $72,405);
(iii) An assignment to First Sierra of the late charges
collected on such Leases during 1996 and currently owed to
the Company by First Sierra (stipulated to be $14,847) and
a release of any obligations owed to the Company by First
Sierra in respect thereof;
(iv) An assignment of the Company's residual interest in the
Equipment (as such term is defined in such Master
Agreement) covered by such Leases at the Company's book
value net of the security deposit amount described in
clause (ii) preceding (stipulated to be $123,597); and
-6-
<PAGE> 10
(v) $6,702 credited against the cash portion of the Purchase
Price payable at the Closing.
Upon payment of the Release Consideration Amount First Sierra
shall execute a written release substantially in the form of
Exhibit H.
(d) EMPLOYEES. (1) Shareholder will in good faith cooperate with
First Sierra in First Sierra's attempt to retain the employees of the Company
as new employees of First Sierra (such employees are referred to herein as the
"Employees"). Set forth in Section 2(d) of the Disclosure Schedule is a list
of all Employees together with a complete description of all vacation, holiday
and sick leave policies, all incentive compensation policies, and any other
policies of the Company relating to the Employees. Group health insurance will
be provided by First Sierra effective as of the Closing Date to all Employees
who become employees of First Sierra, such insurance either to be consistent
with the health insurance provided to the other employees of First Sierra or to
be a continuation of the existing health insurance maintained by the Company
for its employees. Employee records for the Employees who become employees of
First Sierra, including payroll and wage and hour records, will become the
property of First Sierra who will preserve the records for any time required by
applicable governmental regulations.
(2) In connection with the Closing First Sierra and
Shareholder shall enter into an Employment Agreement in the form of Exhibit A.
(e) THE CLOSING. The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place on February 4, 1997 (the
"Closing Date").
(f) DELIVERIES AT THE CLOSING. At the Closing, (i) Shareholder will
deliver to First Sierra the various certificates, instruments, and documents
referred to in Section 6(a), (ii) First Sierra will deliver to the Company the
various certificates, instruments, and documents referred to in Section 6(b),
(iii) First Sierra will pay and deliver to the Company the consideration
specified in Section 2(b), in the case of Section 2(b)(i)(3) subject to the
earn out provisions of Section 2(b)(ii).
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SHAREHOLDER.
The Company and Shareholder jointly and severally represent and warrant
to First Sierra that the statements contained in this Section 3 are correct and
complete as of the date of this Agreement and will be correct and complete as
of the Closing Date (as though made then and as though the Closing Date was
substituted for the date of this Agreement throughout this Section 3), except
as set forth in the disclosure schedule delivered by Shareholder to First
Sierra on the date hereof and initialed by Shareholder and First Sierra (the
"Disclosure Schedule"). Nothing in the Disclosure Schedule shall be deemed
adequate to disclose an exception to a representation or warranty made herein,
however, unless the Disclosure Schedule identifies the exception with
reasonable particularity and describes the relevant facts in reasonable detail.
Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein. The
Disclosure Schedule will be arranged in paragraphs corresponding to the
lettered and numbered paragraphs contained in this Section 3, and the inclusion
of an item as an exception in one portion of the Disclosure Schedule shall
cause such item to be an exception under any other portion of the Disclosure
Schedule that addresses the same issue.
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<PAGE> 11
(a) ORGANIZATION, QUALIFICATION, AND CORPORATE POWER. The Company
is a corporation duly organized, validly existing, and in good standing under
the laws of the State of Georgia. The Company is duly authorized to conduct
business and is in good standing under the laws of each jurisdiction where such
qualification is required except where the failure to qualify would not have a
material adverse effect on the financial condition of the Company. The Company
has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it except where the failure to
do so would not have a material adverse effect on the Company.
(b) OWNERSHIP OF THE COMPANY. Shareholder is the owner of 74%
outstanding capital stock of the Company.
(c) AUTHORIZATION OF TRANSACTION. The Company has full corporate
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder. This Agreement constitutes the valid and legally
binding obligation of Shareholder and the Company, enforceable in accordance
with its terms and conditions except to the extent that enforceability may be
limited by bankruptcy, insolvency and other similar laws affecting the
enforcement of creditors' rights generally and except for the application of
general principles of equity. Except as set forth in Section 3(c) of the
Disclosure Schedule and consents that have already been obtained, neither
Shareholder nor the Company need to give any notice to, make any filing with,
or obtain any authorization, consent, or approval of any Governmental Authority
or any other party in order to consummate the transactions contemplated by this
Agreement. Shareholder and the other shareholder of the Company, being Charles
E. Byrd, Annette E. Rice and Clifford G. Hoffman have consented to the Company
entering into this Agreement and consummating the transaction contemplated
hereby and a copy of such consent(s) have been delivered to First Sierra.
(d) NONCONTRAVENTION. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any Law to which either of Shareholder or the Company is subject or
any provision of the charter or bylaws of the Company or (ii) conflict with,
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any material agreement, contract, lease,
license, instrument, or other arrangement to which either of Shareholder or the
Company is a party or by which any of them is bound or to which any of the
assets of any of them is subject (or result in the imposition of any Security
Interest upon any such assets).
(e) BROKERS' FEES. Shareholder has no Liability or obligation to pay
any fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which First Sierra could become
liable or obligated, and the Company has no Liability or obligation to pay any
fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement [except as set forth in Section
3(e) of the Disclosure Schedule].
(f) FINANCIAL STATEMENTS. Attached hereto as Exhibit B are the
following financial statements (the "Financial Statements"): internally
prepared and unaudited balance sheets and statements of income, as of and for
the fiscal year ended 12-31-96 (the "Most Recent Fiscal Year End") for the
Company. The Financial Statements have been prepared on a modified cash basis
on a consistent basis throughout the periods covered thereby, present fairly
the financial condition of the
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<PAGE> 12
Company as of such dates and the results of operations of the Company for such
periods, and are correct and complete, and are consistent with the books and
records of the Company (which books and records are correct and complete).
(g) EVENTS SUBSEQUENT TO MOST RECENT FISCAL YEAR END. Since the Most
Recent Fiscal Year End, there has not been any material adverse change in the
business, financial condition, operations, results of operations, or future
prospects of the Company.
(h) TAX MATTERS. Each of the Company and Shareholder has filed all
federal income Tax Returns and all other material Tax Returns that such party
was required to file. All such Tax Returns were correct and complete in all
material respects. All previously due federal income Taxes and other material
Taxes of the Company or Shareholder attributable to periods on or prior to
12-31-96 have been paid or adequately reserved for in the Financial Statements.
(i) TITLE TO ASSETS. The Company has good and marketable title to
the Specified Assets and a valid leasehold interest in the office premises that
it occupies. The Specified Assets and the lease covering such office premises
are free and clear of any security interests, liens or other encumbrances.
(j) LITIGATION. Section 3(j) of the Disclosure Schedule sets forth
each instance in which the Company or Shareholder, (i) is subject to any
outstanding injunction, judgment, order, decree or ruling or (ii) is a party to
any action, suit, proceeding, hearing or investigation, in or before any court
or quasi-judicial or administrative agency of any federal, state, local or
foreign jurisdiction or before any arbitrator.
(k) LABOR MATTERS. The Company has not committed any unfair labor
practice which would have a material adverse effect on the Company. The
Company has no Knowledge of any organizational effort presently being made or
threatened by or on behalf of any labor union with respect to employees of the
Company.
(l) EMPLOYEE BENEFITS.
(i) The Company does not currently maintain or contribute to
any Employee Benefit Plan except those Employee Benefit Plans listed in
Section 3(l) of the Disclosure Statement;
(ii) The Company does not contribute to, never has contributed
to, and never has been required to contribute to any Multiemployer Plan
or has any Liability (including withdrawal Liability) under any
Multiemployer Plan; and
(iii) The Company does not currently maintain or contribute to
any Employee Welfare Benefit Plan providing medical health, or life
insurance or other welfare-type benefits for current or future retired
or terminated employees, their spouses, or their dependents except those
Employee Welfare Benefit Plans listed in Section 3(l) of the Disclosure
Statement.
(m) LEASE VOLUME. The information reflected on Exhibit C is true and
correct in all material respects; and without limiting the preceding, the
aggregate gross lease receivables under equipment leases and equipment finance
contracts booked by the Company during 1996 exceeded $12,000,000, and the
average implicit yield rate on such leases was not less than 18% per annum.
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<PAGE> 13
(n) RESIDUALS. Schedule 3(n) sets forth a true and accurate listing
of all Equipment covered by the Leases referenced in Section 2(c).
(o) TRADENAMES. The Company conducts its business only under the
names "Lease Pro" or "Lease Pro, Inc." and the Company has no other fictitious
or assumed names. The Company has not licensed or granted any rights in and to
the names "Lease Pro" or "Lease Pro, Inc.".
(p) DISCLOSURE. The representations and warranties contained in
this Section 3 do not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements and
information contained in this Section 3 not misleading.
4. REPRESENTATIONS AND WARRANTIES OF FIRST SIERRA. First Sierra represents
and warrants to Shareholder that the statements contained in this Section 4 are
correct and complete as of the date of this Agreement and will be correct and
complete as of the Closing Date (as though made then and as though the Closing
Date was substituted for the date of this Agreement throughout this Section 4).
(a) ORGANIZATION. First Sierra is a corporation duly organized,
validly existing, and in good standing under the laws of the State of Delaware.
First Sierra is duly authorized to conduct business and is in good standing
under the laws of each jurisdiction where such qualification is required except
where the failure to qualify would not have a material adverse effect on the
financial condition of First Sierra. First Sierra has full corporate power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it except where the failure to do so would not have a material
adverse effect on First Sierra.
(b) AUTHORIZATION OF TRANSACTION. First Sierra has full corporate
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder. This Agreement constitutes the valid and legally
binding obligation of First Sierra, enforceable in accordance with its terms
and conditions except to the extent that enforceability may be limited by
bankruptcy, insolvency and other similar laws affecting the enforcement of
creditors' rights generally and except for the application of general
principles of equity. Except for consents that have already been obtained,
First Sierra need not give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any Governmental Authority or any other
party in order to consummate the transactions contemplated by this Agreement.
(c) NONCONTRAVENTION. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any Law to which First Sierra is subject or any provision of its
charter or bylaws or (ii) conflict with, result in a breach of, constitute a
default under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which First Sierra is a party or by which it is bound or to which any of its
assets is subject.
(d) BROKERS' FEES. First Sierra has no Liability or obligation to
pay any fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which the Company or
Shareholder could become liable or obligated.
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<PAGE> 14
5. POST-CLOSING COVENANTS. If the Closing occurs, the Parties agree as
follows with respect to the period following the Closing.
(a) GENERAL. In case at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request all at the sole cost and expense of the requesting Party
(unless the requesting Party is entitled to indemnification therefor under
Section 6).
(b) TRANSITION. Shareholder and the Company will not take any action
that is designed or intended to have the effect of discouraging any lessor,
vendor, broker, customer, supplier, or other business associate of the Company
from maintaining the same business relationships with First Sierra after the
Closing as it maintained with the Company prior to the Closing.
(c) COVENANT NOT TO COMPETE. For the period commencing as of the
Closing Date and terminating upon the earlier to occur of (i) the expiration of
the one or two year period, as applicable, that First Sierra agrees to pay
Shareholder following a termination pursuant to Section 4.04 of the Employment
Agreement and (ii) the expiration of six years following the Closing Date, each
of the Company and Shareholder agree that it shall not, directly or indirectly,
either through any form of ownership, or as a director, officer, principal,
agent, employee, employer, advisor, consultant, partner or in any individual or
representative capacity whatsoever, either for his own benefit or for the
benefit of any other person or entity, without the prior written consent of the
Board of Directors of First Sierra, within any geographic area that First
Sierra does business during the five year period following the Closing Date,
engage in any equipment or software lease or financing business in which First
Sierra or any of its subsidiaries engages in during such period. If the final
judgment of a court of competent jurisdiction declares that any term or
provision of this Section 5(d) is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
(d) REPURCHASE RIGHT. The Company shall have the right to purchase
such items out of the FF&E as are needed by the Company to manage and service
the lease portfolio of the Company in existence as of the Closing Date, such
purchase to occur no later than 60 days following the Closing Date. The
purchase price for such items shall be the book value thereof on the Company's
books as of the Closing Date (estimated to be around $15,000), payable in cash.
Such items will be sold and transferred by First Sierra as-is and with all
faults, and First Sierra shall make no representation or warranty with regard
to such items except to the effect that the same are being transferred free and
clear of any lien or security interest granted by First Sierra.
(e) CORPORATE NAME. Promptly after the Closing the Company shall
change its corporate name to a name that does not include the words "Lease" or
"Pro" and that is not otherwise similar to "Lease Pro". Neither the Company
nor any of its affiliates shall conduct any business under or otherwise use any
tradename, fictitious name or assumed name that includes the words "Lease" or
"Pro" or that is otherwise similar to "Lease Pro".
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<PAGE> 15
6. CONDITIONS TO OBLIGATION TO CLOSE.
(a) CONDITIONS TO OBLIGATION OF FIRST SIERRA. The obligation of
First Sierra to consummate the transactions to be performed by it in connection
with the Closing is subject to satisfaction of the following conditions:
(i) the representations and warranties set forth in Section 3
shall be true and correct in all material respects at and as of the
Closing Date;
(ii) Shareholder and the Company shall have performed and
complied with all of their respective covenants hereunder in all
material respects through the Closing;
(iii) Shareholder and the Company shall have procured all of
consents of third parties required in connection with the consummation
of the transactions contemplated by this Agreement;
(iv) no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative agency
of any federal, state, local, or foreign jurisdiction wherein an
unfavorable injunction, judgment, order, decree, ruling, or charge would
(A) prevent consummation of any of the transactions contemplated by this
Agreement, (B) cause any of the transactions contemplated by this
Agreement to be rescinded following consummation, (C) affect adversely
the right of First Sierra to own the Specified Assets, or (D) affect
adversely the right of First Sierra to conduct the business previously
engaged in by the Company (and no such injunction, judgment, order,
decree, ruling, or charge shall be in effect);
(v) Shareholder shall have delivered to First Sierra a
certificate to the effect that each of the conditions specified above in
Section 8(a)(i)-(iv) is satisfied in all respects;
(vi) First Sierra shall have received from Clifford G. Hoffman,
counsel to Shareholder, an opinion in form and substance as set forth in
Exhibit D attached hereto, addressed to First Sierra, and dated as of
the Closing Date;
(vii) The Company shall have executed and delivered to First
Sierra a Bill of Sale and Assignment in the form of Exhibit F;
(viii) The Company shall have executed and delivered to First
Sierra a Lease Assignment in the form of Exhibit G;
(ix) Shareholder shall have executed and delivered to First
Sierra the Employment Agreement.
All actions to be taken by the Company and Shareholder in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the transactions
contemplated hereby will be reasonably satisfactory in form and substance to
First Sierra. First Sierra may waive any condition specified in this Section
6(a) if it executes a writing so stating at or prior to the Closing.
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<PAGE> 16
(b) CONDITIONS TO OBLIGATION OF THE COMPANY AND SHAREHOLDER. The
obligation of the Company and Shareholder to consummate the transactions to be
performed by such parties in connection with the Closing is subject to
satisfaction of the following conditions:
(i) the representations and warranties set forth in Section 4
shall be true and correct in all material respects at and as of the
Closing Date;
(ii) First Sierra shall have performed and complied with all of
its covenants hereunder in all material respects through the Closing;
(iii) no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative agency
of any federal, state, local, or foreign jurisdiction wherein an
unfavorable injunction, judgment, order, decree, ruling, or charge would
prevent consummation of any of the transactions contemplated by this
Agreement to be rescinded following consummation (and no such
injunction, judgment, order, decree, ruling, or charge shall be in
effect);
(iv) First Sierra shall have delivered to the Company a
certificate to the effect that each of the conditions specified above in
Section 8(b)(i)-(iii) is satisfied in all respects;
(v) The Company shall have received from Vinson & Elkins,
L.L.P., counsel to First Sierra, an opinion in form and substance as set
forth in Exhibit E attached hereto, addressed to the Company, and dated
as of the Closing Date;
(vi) First Sierra shall have executed and delivered to
Shareholder the Employment Agreement;
(viii) First Sierra shall have paid and delivered to the Company
the cash consideration required to be paid to the Company on the Closing
Date pursuant to Section 2.1(b); and
(vii) First Sierra shall have executed and delivered to Company
the Lease Assignment in the form of Exhibit G.
All actions to be taken by First Sierra in connection with consummation
of the transactions contemplated hereby and all certificates, opinions,
instruments, and other documents required to effect the transactions
contemplated hereby will be reasonably satisfactory in form and substance to
Shareholder. The Company and Shareholder may waive any condition specified in
this Section 6(b) if such parties execute a writing so stating at or prior to
the Closing.
7. REMEDIES FOR BREACHES OF THIS AGREEMENT.
(a) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the
representations and warranties of the Parties contained in Sections 3 and 4
shall survive the Closing hereunder (even if the damaged Party had Knowledge of
or had reason to know of any misrepresentation or breach of warranty at the
time of Closing).
(b) INDEMNIFICATION PROVISIONS FOR BENEFIT OF FIRST SIERRA. If any
representation or warranty set forth in Section 3 or any covenant or agreement
set forth herein is made by the Company
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<PAGE> 17
or Shareholder is breached, then the Company and Shareholder jointly and
severally agree to indemnify First Sierra from and against any Adverse
Consequences that First Sierra may suffer through and after the date of the
claim for indemnification to the extent resulting from, arising out of,
relating to, or caused by such breach Other than the obligations assumed by
First Sierra pursuant to the Lease Assignment, First Sierra has not assumed
(and hereby disclaims any assumption of) any Liabilities of the Company and
accordingly the Company and Shareholder jointly and severally agree to
indemnify First Sierra from and against any Adverse Consequences that First
Sierra may suffer through and after the date of the claim for indemnification
to the extent resulting from, arising out of or relating to Liabilities of the
Company (excluding those Liabilities of the Company assumed pursuant to the
Lease Assignment and the security deposit liabilities referenced in Section
7(b) above).
(c) INDEMNIFICATION PROVISIONS FOR BENEFIT OF THE COMPANY AND
SHAREHOLDER. If First Sierra breaches any of its representations and
warranties in Section 4 or any covenant or agreement set forth herein made by
First Sierra, then First Sierra agrees to indemnify the Company and Shareholder
from and against any Adverse Consequences the Company or Shareholder may suffer
through and after the date of the claim for indemnification to the extent
resulting from, arising out of, relating to, or caused by such breach. In
addition, as to those Leases described in Sections 2(c)(ii) and (v), First
Sierra agrees to assume the obligations of the Company under such Leases
regarding the return of the security deposits described in such sections and
agrees to indemnify the Company from and against any Adverse Consequences the
Company may suffer through and after the date of claim for indemnification to
the extent resulting from, arising out of, relating to or caused by a breach of
such assumption obligation.
(d) MATTERS INVOLVING THIRD PARTIES.
(i) If any third party shall notify any Party (the
"Indemnified Party") with respect to any matter (a "Third Party Claim")
that may give rise to a claim for indemnification against any other
Party (the "Indemnifying Party") under this Section 7, then the
Indemnified Party shall promptly notify the Indemnifying Party thereof
in writing; provided, no delay on the part of the Indemnified Party in
notifying the Indemnifying Party shall relieve the Indemnifying Party
from any obligation hereunder unless (and then solely to the extent) the
Indemnifying Party thereby is prejudiced.
(ii) The Indemnifying Party will have the right to defend the
Indemnified Party against the Third Party Claim with counsel of the
former's choice reasonably satisfactory to the Indemnified Party so long
as (1) the Indemnifying Party notifies the Indemnified Party in writing
within 15 days after the Indemnified Party has give notice of the Third
Party Claim that the Indemnifying Party will indemnify the Indemnified
Party from and against the entirety of any Adverse Consequences the
Indemnified Party may suffer resulting from, arising out of, relating
to, in the nature of, or caused by the Third Party Claim, (2) the
Indemnifying Party provides the Indemnified Party with evidence
reasonably acceptable to the Indemnified Party that the Indemnifying
Party will have the financial resources to defend against the Third
Party Claim and fulfill its indemnification obligations hereunder, (3)
the Third Party Claim involves only money damages and does not seek an
injunction or other equitable relief, (4) settlement of, or an adverse
judgment with respect to, the Third Party Claim is not in the good faith
judgment of the Indemnified Party, likely to establish a precedential
custom or practice materially adverse to the continuing business
interests of the Indemnified Party, and (5) the Indemnifying Party
conducts the defense of the Third Party Claim actively and diligently.
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<PAGE> 18
(iii) So long as the Indemnifying Party is conducting the
defense of the Third Party Claim in accordance with Section 7(d)(ii),
(1) the Indemnified Party may retain separate co-counsel at its sole
cost and expense and participate in the defense of the Third Party
Claim, (2) the Indemnified Party will not consent to the entry of any
judgment or enter into any settlement with respect to the Third Party
Claim without the prior written consent of the Indemnifying Party (not
to be withheld unreasonably), and (3) the Indemnifying Party will not
consent to the entry of any judgment or enter into any settlement with
respect to the Third Party Claim without the prior written consent of
the Indemnified Party (not to be withheld unreasonably).
(iv) In the event any of the conditions in Section 7(d)(ii) is
or becomes unsatisfied, however, (1) the Indemnified Party may defend
against, and consent to the entry of any judgment or enter into any
settlement with respect to, the Third Party Claim in any manner it
reasonably may deem appropriate (and the Indemnified Party need not
consult with, or obtain any consent from, the Indemnifying Party in
connection therewith), (2) the Indemnifying Party will reimburse the
Indemnified Party promptly and periodically for the costs of defending
against the Third Party Claim (including reasonable attorneys' fees and
expenses), and (3) the Indemnifying Party will remain responsible for
any Adverse Consequences the Indemnified Party may suffer resulting
from, arising out of, relating to, in the nature of, or caused by the
Third Party Claim to the fullest extent provided in this Section 7.
(e) CLAIMS FOR INDEMNIFICATION.
(i) Whenever any claim shall arise for indemnification under
Section 7(b) or 7(c), the indemnified party shall describe such claim in
a written notice ("Notice of Claim") to the indemnifying party (and for
purposes of this Section 7(e), a notice given pursuant to Section 7(d)
shall constitute a "Notice of Claim") and, when known, specify the facts
constituting the basis for such claim and the amount or an estimate of
the amount of such claim.
(ii) Following the receipt by the indemnifying party of each
Notice of Claim, the indemnifying party may give the indemnified party
written notice ("Notice of Objection") (1) attaching a copy of such
Notice of Claim, (2) stating that, in the opinion of the indemnifying
party, the claim described in such Notice of Claim is invalid (either in
whole or in specified part) under the terms of Section 10 hereof, (3)
giving the reasons for the alleged invalidity, and (4) stating that,
based on such alleged invalidity, the indemnifying party objects to the
payment of any portion of the amount claimed pursuant to such Notice of
Claim. If a Notice of Objection alleges that a Notice of Claim is only
partially invalid, the indemnifying party within 30 days of the receipt
of such Notice of Claim, agrees to deliver to the indemnified party that
portion of the amount claimed pursuant to such Notice of Claim as to
which no objection is made.
(iii) First Sierra and Shareholder agree to submit to final and
binding arbitration pursuant to Section 11(n) any and all disputes which
have been specified in a Notice of Objection or either party has
specified in a Notice of Claim to which the other party has not
responded within 30 days of receipt of such Notice of Claim. If
pursuant to any such arbitration proceeding it is determined that any
party is obligated to make payment to the other party, then such payment
shall be made to either party no later than 30 days following such
determination.
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<PAGE> 19
(f) DETERMINATION OF ADVERSE CONSEQUENCES. There shall be taken into
account the time cost of money (using the Applicable Rate as the discount rate)
in determining Adverse Consequences for purposes of this Section 7. All
indemnification payments by Shareholder under this Section 7 shall be deemed
adjustments to the Purchase Price.
(g) OTHER INDEMNIFICATION PROVISIONS. The foregoing indemnification
provisions are in addition to, and not in derogation of, any statutory,
equitable, or common law remedy any Party may have for breach of this
Agreement.
8. MISCELLANEOUS.
(a) PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. No Party shall issue
any press release or make any public announcement relating to the subject
matter of this Agreement prior to the Closing without the prior written
approval of First Sierra and Shareholder; provided, either Party may make any
public disclosure it believes in good faith is required by applicable law and
First Sierra may include a description of the transaction, the Company, the
Company's business and Shareholder in any registration statement, prospectus or
similar document to be prepared, filed or issued in connection with the
contemplated initial public offering of shares of First Sierra's common stock.
Subject to the proviso in the preceding sentence, each Party shall keep
confidential all Confidential Information obtained from any other Party
excluding any such information that is required to be disclosed pursuant to a
legal process and except disclosures to each Party's lenders, attorneys,
accountants and other representatives and to First Sierra's underwriter.
(b) NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer
any rights or remedies upon any Person other than the Parties and their
respective successors and permitted assigns.
(c) ENTIRE AGREEMENT. This Agreement (including the documents
referred to herein) and the Employment Agreement to be entered into between
First Sierra and the Shareholder constitute the entire agreement among the
Parties and supersede any prior understandings, agreements, statements, or
representations between the Parties, written or oral, to the extent they relate
in any manner to the subject matter hereof including that certain letter of
intent dated January __, 1997.
(d) SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of other Parties.
(e) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(f) NOTICES. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be sent by (i) personal delivery
(including courier service), (ii) telecopier during normal business hours to
the number indicated, or (iii) registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set
forth below (any communication shall be deemed given upon receipt):
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<PAGE> 20
IF TO SHAREHOLDER OR THE COMPANY:
[Name of Addressee]
c/o Lease Pro, Inc.
3901 Roswell Road, Suite 200
Marietta, Georgia 30062
Attention: Charles E. Lester
Telecopier No.: 770-973-2433
IF TO FIRST SIERRA:
First Sierra Financial, Inc.
Texas Commerce Tower, Suite 7050
600 Travis Street
Houston, TX 77002
Attention: Thomas J. Depping
Telecopier No.: 713-221-1818
Any Party may change its telecopier number or its address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other Party notice in the manner herein set forth.
(g) GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas.
(h) AMENDMENTS AND WAIVERS. No amendments of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by
First Sierra, the Company and Shareholder. No waiver by either Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
(i) SEVERABILITY. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(j) EXPENSES. Each of the Parties will bear its own costs and
expenses (including legal fees and expenses) incurred in connection with this
Agreement and the transactions contemplated hereby.
(k) CONSTRUCTION. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties, and no presumption or burden of proof
shall arise favoring or disfavoring either Party by virtue of the authorship of
any of the provisions of this Agreement. Any reference to any federal, state,
local, or foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has
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<PAGE> 21
breached any representation, warranty, or covenant contained herein in any
respect, the fact that there exists another representation, warranty, or
covenant relating to the same subject matter (regardless of the relative levels
of specificity) which the Party has not breached shall not detract from or
mitigate the fact that the Party is in breach of the first representation,
warranty, or covenant.
(l) INCORPORATION OF EXHIBITS, ANNEXES, AND SCHEDULES. The Exhibits,
Annexes, and Schedules identified in this Agreement are incorporated herein by
reference and made a part hereof.
(m) SPECIFIC PERFORMANCE. Each of the Parties acknowledges and
agrees that the other Party would be damaged irreparably in the event any of
the provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Party shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter, in addition to any other remedy
to which they may be entitled, at law or in equity.
(n) ARBITRATION. If a Party makes a good faith determination that a
breach (or potential breach) of any of the confidentiality or non-competition
provisions of this Agreement by another Party may result in damages or
consequences that will be immediate, severe and incapable of adequate redress
after the fact, that Party may seek a temporary restraining order or other
immediate injunctive relief without first seeking relief through arbitration.
After the court has ruled on the request for a temporary restraining order or
injunctive relief, the Parties will thereafter proceed with arbitration of the
dispute and stay the litigation pending arbitration. Subject to the foregoing,
any dispute arising out of this Agreement, or its performance or breach, shall
be resolved by binding arbitration under the Commercial Arbitration Rules (the
"AAA Rules") of the American Arbitration Association (the "AAA"). This
arbitration provision is expressly made pursuant to and shall be governed by
the Federal Arbitration Act, 9 U.S.C. Sections 1-14. The Parties agree that
pursuant to Section 9 of the Federal Arbitration Act, a judgment of a United
States District Court of competent jurisdiction shall be entered upon the award
made pursuant to the arbitration. A single arbitrator, who shall have the
authority to allocate the costs of any arbitration initiated under this
paragraph, shall be selected according to the AAA Rules within ten days of the
submission to the AAA of the response to the statement of claim or the date on
which any such response is due, whichever is earlier. The arbitrator shall
conduct the arbitration in accordance with the Federal Rules of Evidence. The
arbitrator shall decide the amount and extent of pre-hearing discovery which is
appropriate. The arbitrator shall have the power to enter any award of
monetary and/or injunctive relief (including the power to issue permanent
injunctive relief and also the power to reconsider any prior request for
immediate injunctive relief by any of the Parties and any order as to immediate
injunctive relief previously granted or denied by a court in response to a
request therefor by any of the Parties), including the power to render an award
as provided in Rule 43 of the AAA Rules; provided, the arbitrator shall not
have the power to award any punitive or exemplary damages (the parties hereby
waiving and releasing any rights that they may have to recover punitive and
exemplary damages). The arbitrator shall award the prevailing Party its costs
and reasonable attorneys' fees, and the losing Party shall bear the entire cost
of the arbitration, including the arbitrator's fees. Any arbitration shall be
held in Houston, Texas for any claim brought by the Parties hereto. In
addition to the above courts, the arbitration award may be enforced in any
court having jurisdiction over the Parties and the subject matter of the
arbitration.
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<PAGE> 22
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date first above written.
FIRST SIERRA FINANCIAL, INC.
By: /s/ SANDY B. HO
----------------------------------
Sandy B. Ho
Chief Financial Officer
LEASE PRO, INC.
By: /s/ CHARLES E. LESTER
----------------------------------
Charles E. Lester
President
/s/ CHARLES E. LESTER
-------------------------------------
CHARLES E. LESTER
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<PAGE> 1
EXHIBIT 10.7
FIRST AMENDMENT TO AGREEMENT
AND PLAN OF REORGANIZATION
This First Amendment to Agreement and Plan of Reorganization
("Amendment") is dated as of February 27, 1997, and is entered into among
Valerie A. Hayes, Corporation Capital Leasing Group, Inc., First Sierra
Financial, Inc. and First Sierra Pennsylvania, Inc.
Recitals
Each of the parties named in the preamble are parties to that certain
Agreement and Plan of Reorganization dated as of October 15, 1996 (the
"Agreement"). The parties desire to amend the Agreement in accordance with the
terms of this Amendment. Any capitalized term used but not defined herein
shall have the meaning ascribed to such term in the Agreement.
NOW, THEREFORE, in and for the mutual covenants and agreements set forth
herein, the parties agree as follows:
1. Amendments. (a) Section 2(c)(iii)(3) is amended by deleting all
the provisions following the first sentence thereof with the exception of the
last sentence of such section.
(b) Section 2(c)(iv) is amended by deleting all of the
provisions following the first sentence thereof with the exception of the last
sentence of such section.
(c) Section 2(c)(vi)(2) is amended by deleting the last two
sentences thereof and by amending the third to last sentence by placing a
period after the number "43,691" and deleting the remaining language.
(d) Section 1 of the Agreement is amended by deleting the
definitions of "Decreasing Adjustment Event" and "Increasing Adjustment Event"
and substituting the following in lieu thereof:
"Decreasing Adjustment Event" means the reduction of the number
of shares of First Sierra Common Stock outstanding at any time after the
issuance of the Preferred Stock by virtue of a reverse stock split."
"Increasing Adjustment Event" means an increase in the number of
shares of First Sierra Common Stock outstanding at any time after the
issuance of the Preferred Stock by virtue of a stock dividend payable in
shares of First Sierra Common Stock or by virtue of a subdivision or
split-up of shares of First Sierra Common Stock."
<PAGE> 2
2. Miscellaneous. As amended herein, the Agreement is
ratified and confirmed by all parties. This Amendment may be executed
in any number of original counterparts, all of which will constitute but
one and the same instrument.
EXECUTED as of the date first above written.
/s/ VALERIE A. HAYES
-------------------------------------
VALERIE A. HAYES
CORPORATE CAPITAL LEASING GROUP, INC.
By: /s/ VALERIE A. HAYES
----------------------------------
Name: Valerie A. Hayes
--------------------------------
Title: President
-------------------------------
FIRST SIERRA FINANCIAL, INC.
By: /s/ THOMAS J. DEPPING
----------------------------------
Thomas J. Depping, President
FIRST SIERRA PENNSYLVANIA, INC.
By: /s/ THOMAS J. DEPPING
----------------------------------
Thomas J. Depping, President
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<PAGE> 1
EXHIBIT 10.8
AGREEMENT AND PLAN OF MERGER
between
OREN M. HALL,
CHARLES E. BRAZIER,
GREG E. MCINTOSH,
BRENT M. HALL,
HERITAGE CREDIT SERVICES, INC.,
FIRST SIERRA FINANCIAL, INC.,
and
FIRST SIERRA CALIFORNIA, INC.
February 1, 1997
<PAGE> 2
TABLE OF CONTENTS
1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . 1
2. The Merger. . . . . . . . . . . . . . . . . . . . . . . . . 5
(a) Effective Time of Merger. . . . . . . . . . . . . . 5
(b) Effects of the Merger. . . . . . . . . . . . . . . . 6
(c) Effect on Capital Stock. . . . . . . . . . . . . . . 6
(d) Board of Directors; Officers. . . . . . . . . . . . 6
(e) Merger Consideration . . . . . . . . . . . . . . . . 6
(f) Tax Effect of Transaction. . . . . . . . . . . . . . 7
(g) Employees. . . . . . . . . . . . . . . . . . . . . . 8
(h) The Closing . . . . . . . . . . . . . . . . . . . . 8
(i) Deliveries at the Closing . . . . . . . . . . . . . 8
3. Representations and Warranties of Shareholder. . . . . . . . 9
(a) Organization, Qualification, and Corporate Power.. . 9
(b) Capitalization. . . . . . . . . . . . . . . . . . . 9
(c) Authorization of Transaction . . . . . . . . . . . . 10
(d) Noncontravention . . . . . . . . . . . . . . . . . . 10
(e) Brokers' Fees . . . . . . . . . . . . . . . . . . . 10
(f) Investment . . . . . . . . . . . . . . . . . . . . . 10
(g) Subsidiaries . . . . . . . . . . . . . . . . . . . . 11
(h) Financial Statements . . . . . . . . . . . . . . . . 11
(i) Events Subsequent to Most Recent Fiscal Year End . . 11
(j) Undisclosed Liabilities . . . . . . . . . . . . . . 12
(k) Legal Compliance . . . . . . . . . . . . . . . . . . 12
(l) Tax Matters . . . . . . . . . . . . . . . . . . . . 13
(m) Title to Assets . . . . . . . . . . . . . . . . . . 14
(n) Real Property . . . . . . . . . . . . . . . . . . . 14
(o) Intellectual Property . . . . . . . . . . . . . . . 14
(p) Contracts . . . . . . . . . . . . . . . . . . . . . 14
(q) Notes and Accounts Receivable . . . . . . . . . . . 15
(r) Powers of Attorney . . . . . . . . . . . . . . . . . 15
(s) Insurance. . . . . . . . . . . . . . . . . . . . . . 15
(t) Litigation . . . . . . . . . . . . . . . . . . . . . 15
(u) Labor Matters. . . . . . . . . . . . . . . . . . . . 15
(v) Employee Benefits . . . . . . . . . . . . . . . . . 16
(w) Guaranties . . . . . . . . . . . . . . . . . . . . . 16
(x) Environment, Health, and Safety . . . . . . . . . . 16
(y) Trial Balance . . . . . . . . . . . . . . . . . . . 16
(z) Representations. . . . . . . . . . . . . . . . . . . 17
(aa) Disclosure . . . . . . . . . . . . . . . . . . . . 17
4. Representations and Warranties of First Sierra. . . . . . . 17
(a) Organization . . . . . . . . . . . . . . . . . . . . 17
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<PAGE> 3
(b) Authorization of Transaction . . . . . . . . . . . . 17
(c) Noncontravention . . . . . . . . . . . . . . . . . . 17
(d) Brokers' Fees . . . . . . . . . . . . . . . . . . . 17
(e) IPO Prospectus. . . . . . . . . . . . . . . . . . . 17
5. Representations and Warranties of Option Holders . . . . . . 18
(a) Sole Owner . . . . . . . . . . . . . . . . . . . . . 18
(b) Enforceability . . . . . . . . . . . . . . . . . . . 18
6. Pre-Closing Covenants . . . . . . . . . . . . . . . . . . . 18
(a) General . . . . . . . . . . . . . . . . . . . . . . 18
(b) Notices and Consents . . . . . . . . . . . . . . . . 18
(c) Operation of Business . . . . . . . . . . . . . . . 18
(d) Preservation of Business . . . . . . . . . . . . . . 18
(e) Access . . . . . . . . . . . . . . . . . . . . . . . 18
(f) Notice of Developments . . . . . . . . . . . . . . . 19
(g) Exclusivity . . . . . . . . . . . . . . . . . . . . 19
(h) Encumbered Leases. . . . . . . . . . . . . . . . . . 19
(i) New Leases . . . . . . . . . . . . . . . . . . . . . 19
(j) Incurrence of Material Liabilities . . . . . . . . . 19
(k) Employee Compensation . . . . . . . . . . . . . . . 19
(l) Assets To Be Purchased . . . . . . . . . . . . . . . 20
(m) Insurance Agreement . . . . . . . . . . . . . . . . 20
(n) Distribution of Assets. . . . . . . . . . . . . . . 20
(o) Employees. . . . . . . . . . . . . . . . . . . . . . 20
(p) Accounting Treatment . . . . . . . . . . . . . . . . 20
(q) Financial Statements . . . . . . . . . . . . . . . . 20
(r) Trial Balance . . . . . . . . . . . . . . . . . . . 20
(s) Advances. . . . . . . . . . . . . . . . . . . . . . 21
7. Post-Closing Covenants . . . . . . . . . . . . . . . . . . . 21
(a) General . . . . . . . . . . . . . . . . . . . . . . 21
(b) Litigation Support . . . . . . . . . . . . . . . . . 21
(c) Transition . . . . . . . . . . . . . . . . . . . . . 21
(d) Covenant Not to Compete . . . . . . . . . . . . . . 21
(e) Life Insurance . . . . . . . . . . . . . . . . . . . 22
8. Conditions to Obligation to Close . . . . . . . . . . . . . 22
(a) Conditions to Obligation of First Sierra . . . . . . 22
(b) Conditions to Obligation of Shareholder . . . . . . 24
(c) Conditions To Obligation of each Option Holder . . . 25
9. Termination . . . . . . . . . . . . . . . . . . . . . . . . 25
(a) Termination of Agreement . . . . . . . . . . . . . . 25
(b) Effect of Termination . . . . . . . . . . . . . . . 26
(c) IPO. . . . . . . . . . . . . . . . . . . . . . . . . 26
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<PAGE> 4
10. Remedies for Breaches of This Agreement . . . . . . . . . . . . . . . 26
(a) Survival of Representations and Warranties . . . . . . . . . . 26
(b) Indemnification Provisions for Benefit of First Sierra 26
(c) Indemnification Provisions for Benefit of Shareholder . . . . 26
(d) Matters Involving Third Parties . . . . . . . . . . . . . . . 27
(e) Claims for Indemnification. . . . . . . . . . . . . . . . . . 28
(f) Determination of Adverse Consequences . . . . . . . . . . . . 28
(g) Other Indemnification Provisions . . . . . . . . . . . . . . . 28
11. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
(a) Press Releases and Public Announcements . . . . . . . . . . . 28
(b) No Third-Party Beneficiaries . . . . . . . . . . . . . . . . . 29
(c) Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . 29
(d) Succession and Assignment . . . . . . . . . . . . . . . . . . 29
(e) Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 29
(f) Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
(g) Governing Law . . . . . . . . . . . . . . . . . . . . . . . . 30
(h) Amendments and Waivers . . . . . . . . . . . . . . . . . . . . 30
(i) Severability . . . . . . . . . . . . . . . . . . . . . . . . . 30
(j) Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
(k) Construction . . . . . . . . . . . . . . . . . . . . . . . . . 30
(l) Incorporation of Exhibits, Annexes, and Schedules . . . . . . 30
(m) Specific Performance . . . . . . . . . . . . . . . . . . . . . 30
(n) Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . 31
Exhibit A - Financial Statements
Exhibit B - Opinion of Shareholder's Counsel
Exhibit C - Opinion of First Sierra's Counsel
Exhibit D - Agreement of Merger
Exhibit E - Employment Agreement (Shareholder)
Exhibit F - Employment Agreement (Brazier)
Exhibit G - Employment Agreement (McIntosh)
Exhibit H - Employment Agreement (Hall)
Exhibit I - Registration Rights Agreement
Exhibit J - Form of Subordinated Note
Exhibit K - Assumption and Hold Harmless Agreement
Schedule 6(r) - Trial Balance as of 9/30/96
Annex I - Reasons for Being Accredited Investor
-iii-
<PAGE> 5
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of February ___,
1997, by and between Oren M. Hall, a resident of Sacramento County, California
("Shareholder"), Charles E. Brazier, a resident of Dade County, Florida, Greg
E. McIntosh, a resident of Sacramento County, California, and Brent M. Hall, a
resident of Sacramento County, California (each an "Option Holder"), Heritage
Credit Services, Inc., a California corporation (the "Company"), First Sierra
Financial, Inc., a Delaware corporation ("Parent" or "First Sierra"), and First
Sierra California, Inc., a Delaware corporation ("Sub"). Parent, Sub,
Shareholder, the Company and the Option Holders are referred to collectively
herein as the "Parties".
Recitals
Shareholder owns all of the outstanding capital stock of the Company.
This Agreement contemplates a transaction in which First Sierra will
purchase all of the issued and outstanding capital stock of the Company through
the consummation of a merger transaction as provided in this Agreement.
Now, therefore, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants herein contained, the Parties agree as follows:
1. DEFINITIONS.
"Accredited Investor" has the meaning set forth in Regulation D
promulgated under the Securities Act.
"Adverse Consequences" means all actions, suits, proceedings,
hearings, investigations, charges, complaints, claims, demands,
injunctions, judgments, orders, decrees, rulings, damages, dues,
penalties, fines, costs, amounts paid in settlement, Liabilities,
obligations, Taxes, liens, losses, expenses and fees, including court
costs and reasonable attorneys' fees and expenses.
"Affiliate" has the meaning set forth in Rule 12b-2 of the
regulations promulgated under the Securities Exchange Act.
"Affiliated Group" means any affiliated group within the
meaning of Code Sec. 1504.
"Agreement of Merger" has the meaning set forth in Section
2(a).
"Applicable Rate" means the corporate base rate or prime rate
of interest publicly announced from time to time by Texas
Commerce Bank, National Association, Houston, Texas plus 3.0% per
annum.
<PAGE> 6
"Balance Sheet" means the balance sheet contained within the
Financial Statements.
"Basis" means any past or present fact, situation,
circumstance, status, condition, activity, practice, plan, occurrence,
event, incident, action, failure to act, or transaction that forms or
could form the basis for any specified consequences.
"Business Day" means any day that is not a Saturday, a Sunday,
or a day that is a banking holiday under United States or Texas Law.
"Certificate of Merger" has the meaning set forth in Section
2(a).
"Closing" has the meaning set forth in Section 2(h).
"Closing Date" has the meaning set forth in Section 2(h).
"Code" means the Internal Revenue Code of 1986, as amended.
"Company Share" means any share of the Common Stock, no par
value per share, of the Company.
"Confidential Information" means any information concerning
the businesses and affairs of the Company or First Sierra that is not
already generally available to the public.
"Controlled Group of Corporations" has the meaning set forth
in Code Sec. 1563.
"Deferred Intercompany Transaction" has the meaning set forth
in Treas. Reg. Section 1.1502-13.
"Disclosure Schedule" has the meaning set forth in Section 3.
"Effective Time" has the meaning set forth in Section 2(a).
"Employee Benefit Plan" means any (a) nonqualified deferred
compensation or retirement plan or arrangement that is an Employee
Pension Benefit Plan, (b) qualified defined contribution retirement
plan or arrangement that is an Employee Pension Benefit Plan, (c)
qualified defined benefit retirement plan or arrangement that is an
Employee Pension Benefit Plan (including any Multiemployer Plan), or
(d) Employee Welfare Benefit Plan or material fringe benefit plan or
program.
"Employee Pension Benefit Plan" has the meaning set forth in
ERISA Sec. 3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in
ERISA Sec. 3(1).
"Employees" has the meaning set forth in Section 2(g).
"Employment Agreement" means, as applicable, the Employment
Agreement to be entered into by First Sierra and Shareholder in the
form of Exhibit E and the Employment
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<PAGE> 7
Agreement to be entered into by First Sierra and each Option Holder in
the form of Exhibits F, G and H, respectively.
"Environmental, Health, and Safety Laws" means the
Comprehensive Environmental Response, Compensation and Liability Act
of 1980, the Resource Conservation and Recovery Act of 1976, and the
Occupational Safety and Health Act of 1970, each as amended, together
with all other Laws concerning pollution or protection of the
environment, public health and safety, or employee health and safety,
including Laws relating to emissions, discharges, releases, or
threatened releases of pollutants, contaminants, or chemical,
industrial, hazardous, or toxic materials or wastes into ambient air,
surface water, ground water, or lands or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of pollutants, contaminants, or
chemical, industrial, hazardous, or toxic materials or wastes.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Excess Loss Account" has the meaning set forth in Treas. Reg.
Section 1.1502-19.
"Extremely Hazardous Substance" has the meaning set forth in
Sec. 302 of the Emergency Planning and Community Right-to-Know Act of
1986, as amended.
"Financial Statements" has the meaning set forth in Section
3(h).
"First Sierra" has the meaning set forth in the preface above.
"GAAP" means United States generally accepted accounting
principles as in effect from time to time.
"Governmental Authority" means any government or any
department, agency, political subdivision, or court thereof.
"Indemnified Party" has the meaning set forth in Section
10(d).
"Indemnifying Party" has the meaning set forth in Section
10(d).
"Insurance Agreement" has the meaning set forth in Section
7(e).
"Intellectual Property" means (a) all inventions (whether
patentable or unpatentable and whether or not reduced to practice),
all improvements thereto, and all patents, patent applications, and
patent disclosures together with all reissuances, continuations,
continuations-in-part, revisions, extensions, and reexaminations
thereof, (b) all trademarks, service marks, trade dress, logos, trade
names, and corporate names, together with all translations,
adaptations, derivations, and combinations thereof and including all
goodwill associated therewith, and all applications, registrations,
and renewals in connection therewith, (d) all mask works and all
applications, registrations, and renewals in connection therewith, (e)
all trade secrets and confidential business information (including
ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques,
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<PAGE> 8
technical data, designs, drawings, specifications, customer and
supplier lists, pricing and cost information, and business and
marketing plans and proposals), (f) all computer software (including
data and related documentation), (g) all other proprietary rights, and
(h) all copies and tangible embodiments thereof (in whatever form or
medium).
"IPO" means the firm underwritten initial public offering by
First Sierra of its Common Stock, par value $.01 per share.
"IPO Price" means the average of the per share price received
by the Company in respect of the shares of Common Stock sold pursuant
to the IPO.
"Knowledge" means actual knowledge.
"Law" means any constitution, statute, code, regulation, rule,
injunction, judgment, order, decree, ruling, charge, or other
restriction of any applicable Governmental Authority.
"Leases" means any agreement providing for the lease of
equipment or other personal property or for the loan of money secured
by equipment or other personal property.
"Letter of Intent" means that certain letter dated December 3,
1996 addressed to Shareholder and executed by Shareholder and First
Sierra.
"Liability" means any liability (whether known or unknown,
whether asserted or unasserted, whether absolute or contingent,
whether accrued or unaccrued, whether liquidated or unliquidated, and
whether due or to become due), including any liability for Taxes.
"Market Capitalization" means a dollar amount determined by
multiplying the IPO Price by the number of shares of First Sierra
Common Stock issued and outstanding immediately after giving effect to
the IPO including, without limitation, those shares to be issued to
Shareholder and the Option Holders pursuant to this Agreement.
"Most Recent Fiscal Year End" has the meaning set forth in
Section 3(h).
"Multiemployer Plan" has the meaning set forth in ERISA Sec.
3(37).
"Option Holder" has the meaning set forth in the preface
above.
"Option Plan" means the 1995 Stock Plan of Heritage Credit
Services, Inc. adopted by the Company on February 9, 1995.
"Ordinary Course of Business" means the ordinary course of
business consistent with past custom and practice.
"Party" has the meaning set forth in the preface above.
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<PAGE> 9
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an
unincorporated organization, or a Governmental Authority.
"Policy" has the meaning set forth in Section 7(e).
"Purchase Price" has the meaning set forth in Section 2(e).
"Registration Agreement" means the Registration Rights
Agreement in the form of Exhibit I.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Interest" means any mortgage, pledge, lien,
encumbrance, charge, or other security interest, other than (a)
mechanic's, materialmen's, and similar liens, (b) liens for Taxes not
yet due and payable or for Taxes that the taxpayer is contesting in
good faith through appropriate proceedings, (c) purchase money liens
and liens securing rental payments under capital lease arrangements,
and (d) other liens arising in the Ordinary Course of Business and not
incurred in connection with the borrowing of money.
"Shareholder" has the meaning set forth in the preface above.
"Subsidiary" means any corporation with respect to which a
specified Person (or a Subsidiary thereof) owns a majority of the
common stock or has the power to vote or direct the voting of
sufficient securities to elect a majority of the directors.
"Tax" means any federal, state, local, or foreign income,
gross receipts, license, payroll, employment, excise, severance,
stamp, occupation, premium windfall profits, environmental (including
taxes under Code Sec. 59A), customs duties, capital stock, franchise,
profits, withholding, social security (or similar), unemployment,
disability, real property, personal property, sales, use, transfer,
registration, value added, alternative or add-on minimum, estimated,
or other tax of any kind whatsoever, including any interest, penalty,
or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for
refund, or information return or statement relating to Taxes,
including any schedule or attachment thereto, and including any
amendment thereof.
"Third Party Claim" has the meaning set forth in Section
10(d).
2. THE MERGER.
(a) EFFECTIVE TIME OF MERGER. Upon the terms and subject to the
provisions of this Agreement, and in accordance with the California General
Corporations Law ("CGCL") and the Delaware General Corporation Law ("DGCL"), at
the Effective Time (hereinafter defined), the Company shall be merged with and
into Sub. Concurrently with the Closing, the parties shall cause the Merger to
be consummated by filing with the Secretary of State of the State of Delaware
an
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Agreement of Merger in the form attached hereto as Exhibit D (the "Agreement of
Merger") in accordance with the relevant provisions of the DGCL. The Merger
shall become effective upon the filing of the Agreement of Merger with the
Secretary of State of the State of Delaware in accordance with the DGCL (the
"Effective Time"). As soon as practicable after the acceptance and recording
of the Agreement of Merger by the Secretary of State of the State of Delaware
the parties hereto shall cause to be filed and recorded with the Secretary of
State of California a copy of the Agreement of Merger certified by the
Secretary of State of the State of Delaware or other document (the "Certificate
of Merger") in such form as is required by, and executed in accordance with,
the relevant provisions of the CGCL and this Agreement.
(b) EFFECTS OF THE MERGER. At the Effective Time, (i) the
separate existence of the Company shall cease and the Company shall be merged
with and into Sub, which shall be the surviving corporation (the "Surviving
Corporation"); (ii) the Articles of Incorporation of Sub shall be the Articles
of Incorporation of the Surviving Corporation and shall be amended to adopt the
name of the Company; (iii) the Bylaws of Sub shall be the Bylaws of the
Surviving Corporation, (iv) the directors of the Surviving Corporation shall be
as set forth in Section 2(d)(i) hereof; (v) the officers of the Surviving
Corporation shall be as set forth in Section 2(d)(ii) hereof; and (vi) the
Merger shall, from and after the Effective Time, have all the effects provided
by applicable law.
(c) EFFECT ON CAPITAL STOCK. As of the Effective Time, by virtue
of the Merger and without any action on the part of Shareholder:
(i) Capital Stock of Sub. All issued and outstanding
shares of capital stock of Sub shall continue to be issued and outstanding.
Each stock certificate of Sub evidencing ownership of any such shares shall
continue to evidence ownership of such shares of capital stock of the Surviving
Corporation.
(ii) Conversion of Company Shares. Each Company Share
issued and outstanding immediately prior to the Effective Time shall, without
any action on the part of the holder thereof, be cancelled and converted into
the right to receive the Purchase Price on the terms and conditions set forth
herein.
(d) BOARD OF DIRECTORS; OFFICERS. Upon the Effective Time:
(i) The directors of the Surviving Corporation shall be
Shareholder, Thomas J. Depping, Sandy B. Ho and Robert H. Quinn, Jr. and each
shall remain a director from the Effective Time until such director's successor
shall have been elected and shall qualify, or as otherwise provided in the
Bylaws of the Surviving Corporation.
(ii) The officers of the Surviving Corporation shall be
Thomas J. Depping, as Chief Executive Officer, Shareholder, as President, Sandy
B. Ho, as Chief Financial Officer, Vice President and Secretary, and Robert H.
Quinn, Jr., as Vice President and Assistant Secretary, and shall each hold
office from the Effective Time until such officer's successor shall have been
elected and shall qualify, or as otherwise provided in the Bylaws of the
Surviving Corporation.
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<PAGE> 11
(iii) If at the Effective Time a vacancy shall exist in the
Board of Directors or in any of the offices of the Surviving Corporation, such
vacancy may thereafter be filled in the manner provided in the Bylaws of the
Surviving Corporation.
(e) MERGER CONSIDERATION. (i) As consideration for the Merger,
First Sierra shall pay to Shareholder and Shareholder shall receive at the
Closing, subject to the terms and conditions of this Agreement, a purchase
price ("Purchase Price") of $6,000,000, payable as follows:
(1) $1,000,000 in cash payable to Shareholder at
Closing;
(2) $1,000,000 in the form of a subordinated note
with an original principal amount in the same amount issued by
First Sierra to Shareholder at the Closing, such note to be in
the form attached as Exhibit J and to accrue interest on a
simple interest basis from the Effective Time on the
outstanding principal balance at a per annum rate of 9%; and
(3) $4,000,000 by the issuance to Shareholder at
the Closing of a number of shares of First Sierra Common
Stock, $.01 par value, equal to $4,000,000 divided by the IPO
Price.
(ii) In consideration of each Option Holder agreeing to
exchange at the Closing the options held by such individual with
regard to the common stock of the Company and subject to the terms and
conditions of this Agreement, First Sierra shall pay to each Option
Holder and each Option Holder shall receive at the Closing the
following amount payable as follows:
(1) to Charles E. Brazier, $100,012.50 with
$100,012.50 of such amount being payable in cash to such
Option Holder at Closing and the remaining $-0- being payable
by the issuance to such Option Holder at the Closing of a
number of shares of First Sierra Common Stock, $.01 par value,
equal to $-0- divided by the IPO Price;
(2) to Greg E. McIntosh, $200,025.00 with
$200,025.00 of such amount being payable in cash to such
Option Holder at Closing and the remaining $-0- being payable
by the issuance to such Option Holder at the Closing of a
number of shares of First Sierra Common Stock, $.01 par value,
equal to $-0- divided by the IPO Price; and
(3) to Brent M. Hall, $139,350.75 with
$139,350.75 of such amount being payable in cash to such
Option Holder at Closing and the remaining $-0- being payable
by the issuance to such Option Holder at the Closing of a
number of shares of First Sierra Common Stock, $.01 par value,
equal to $-0- divided by the IPO Price.
(f) TAX EFFECT OF TRANSACTION. It is the intention of Shareholder
and First Sierra that the transaction contemplated by this Agreement (as to
that portion of the consideration payable to Shareholder in the form of First
Sierra Common Stock) constitute a forward triangular Type A reorganization
within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Code.
Shareholder, First Sierra and Sub agree to file all of their respective tax
returns and reports in a manner consistent with such intention, and to not take
any filing position in a manner inconsistent with such intention unless
compelled to do so by court order or administrative decree. Shareholder, First
Sierra
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<PAGE> 12
and Sub agree to furnish such information and take such action as may be
reasonably requested of the other parties in connection with the foregoing
(which action shall not include any change in the commercial terms of this
Agreement and the other transactions incident thereto). In no event, however,
shall First Sierra or Sub be required to incur any out- of-pocket expenses in
defending such position or providing such information or taking such action,
nor shall the foregoing constitute a warranty or guaranty that the transactions
contemplated by this Agreement will, in fact, constitute such a Type A
reorganization.
(g) EMPLOYEES. (1) Shareholder will in good faith cooperate with
First Sierra in First Sierra's attempt to retain the employees of the Company
as new employees of First Sierra (such employees are referred to herein as the
"Employees"). With regard to the Employees who become employees of First
Sierra, First Sierra shall credit such Employees with their length of service
with the Company prior to Closing. Immediately prior to the Closing the
Company shall provide First Sierra with an updated list of all Employees
together with a complete description of all vacation, holiday and sick leave
policies, all incentive compensation policies, and any other policies of the
Company relating to the Employees. Group health insurance will be provided by
First Sierra effective as of the Closing Date to all Employees who become
employees of First Sierra, such insurance either to be consistent with the
health insurance provided to the other employees of First Sierra or to be a
continuation of the existing health insurance maintained by the Company for its
employees.
(2) Excluding those Employees covered by
employment agreements with First Sierra, as to those Employees who accept
employment with First Sierra, First Sierra will adopt a severance policy
providing that if an employee is terminated without cause, such employee will
be entitled to severance pay in an amount equal to two weeks salary for each
year of employment with First Sierra and (without duplication by virtue of the
crediting provisions of Section 2(g)(1)) the Company.
(3) In connection with the Closing First Sierra
and Shareholder shall enter into an Employment Agreement in the form of Exhibit
E and First Sierra and each Option Holder shall enter into an Employment
Agreement in the form of Exhibits F, G and H, respectively. In addition, and
without limiting the generality of Section 6(o), First Sierra shall use
reasonable efforts to reach an agreement with Hal Haden and Mohammed Ahsan
regarding their terms of employment (at annual salaries of $48,000 plus
commissions consistent with current practice and $75,000, respectively) and,
subject to reaching an agreement on such terms, in connection with the Closing
First Sierra will enter into employment agreements with such Employees that
incorporate the agreed upon terms.
(h) THE CLOSING. The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place on the same date the IPO is
consummated (the "Closing Date").
(i) DELIVERIES AT THE CLOSING. At the Closing, (i) Shareholder
will deliver to First Sierra the various certificates, instruments, and
documents referred to in Section 8(a), (ii) First Sierra will deliver to
Shareholder the various certificates, instruments, and documents referred to in
Section 8(b), (iii) Shareholder will deliver to First Sierra any stock
certificates or other documents called for pursuant to the Merger Agreement,
(iv) Greg E. McIntosh will deliver to First Sierra the documents referred to in
Section 8(a)(ix), (v) First Sierra will pay and deliver to Shareholder the
consideration specified in Section 2(e)(i), and (vi) First Sierra will pay and
deliver to each Option Holder the consideration due such Option Holder pursuant
to Section 2(e)(ii).
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<PAGE> 13
3. REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER.
Shareholder represents and warrants to First Sierra that the
statements contained in this Section 3 are correct and complete as of the date
of this Agreement and will be correct and complete as of the Closing Date (as
though made then and as though the Closing Date was substituted for the date of
this Agreement throughout this Section 3), except as set forth in the
disclosure schedule delivered by Shareholder to First Sierra on the date hereof
and initialed by Shareholder and First Sierra (the "Disclosure Schedule") and
except, as to the representations set forth in Sections 3(a) as relates to
officers other than Shareholder and Greg E. McIntosh, (d) as relates to
agreements entered into by the Company as contemplated in Section 6, (j), (k),
(l)(iii), (o)(ii), (p)(i), (iii) and (iv), (q), (t), (u), (x) and (z) in each
case to the extent related to the period between the date of this Agreement and
the Closing Date, as affected by intervening events first occurring during the
period between the date of this Agreement and the Closing Date. Nothing in the
Disclosure Schedule shall be deemed adequate to disclose an exception to a
representation or warranty made herein, however, unless the Disclosure Schedule
identifies the exception with reasonable particularity and describes the
relevant facts in reasonable detail. Without limiting the generality of the
foregoing, the mere listing (or inclusion of a copy) of a document or other
item shall not be deemed adequate to disclose an exception to a representation
or warranty made herein (unless the representation or warranty has to do with
the existence of the document or other item itself or the existence of the
exception is otherwise clear in the context). The Disclosure Schedule will be
arranged in paragraphs corresponding to the lettered and numbered paragraphs
contained in this Section 3, and the inclusion of an item as an exception in
one portion of the Disclosure Schedule shall cause such item to be an exception
under any other portion of the Disclosure Schedule that addresses the same
issue.
(a) ORGANIZATION, QUALIFICATION, AND CORPORATE POWER. The
Company is a corporation duly organized, validly existing, and in good standing
under the laws of the State of California. The Company is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required except where the failure to qualify would
not have a material adverse effect on the financial condition of the Company.
The Company has full corporate power and authority and all licenses, permits,
and authorizations necessary to carry on the businesses in which it is engaged
and to own and use the properties owned and used by it except where the failure
to do so would not have a material adverse effect on the Company. Section 3(a)
of the Disclosure Schedule lists all directors and officers of the Company and
their respective official capacities in the Company. Shareholder has delivered
to First Sierra correct and complete copies of the charter and bylaws of the
Company (as amended to date). The minute books (containing the records of
meetings of the stockholders, the board of directors, and any committees of the
board of directors), the stock certificate books, and the stock record books of
the Company are correct and complete. The Company is not in default under or in
violation of any provision of its charter or bylaws.
(b) CAPITALIZATION. The entire authorized capital stock of the
Company consists of 100,000 Company Shares, of which 8,000 Company Shares are
issued and outstanding. All of the issued and outstanding Company Shares have
been duly authorized, are validly issued, fully paid, and nonassessable, and
are held of record and owned beneficially by Shareholder, free and clear of any
Taxes, Security Interests, equities, claims, and demands and any restrictions
on transfer (other than any restrictions under the Securities Act and state
securities laws and other than the community interest of Shareholder's wife),
options, warrants, purchase rights, conversion rights, exchange rights, or
other contracts or commitments that could require Shareholder to sell,
transfer, or otherwise dispose of any
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<PAGE> 14
capital stock of the Company (other than this Agreement and the Option Plan).
Other than the Option Plan, there are no outstanding or authorized options,
warrants, purchase rights, conversion rights, exchange rights, or other
contracts or commitments that could require the Company to issue, sell, or
otherwise cause to become outstanding any of its capital stock. There are no
outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to the Company. Other than the
Option Plan, there are no voting trusts, proxies, or other agreements or
understandings with respect to the voting of the capital stock of the Company.
The Option Holders are the only Persons that have been granted rights under the
Option Plan.
(c) AUTHORIZATION OF TRANSACTION. The Company has full corporate
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder. This Agreement constitutes the valid and legally
binding obligation of Shareholder and the Company, enforceable in accordance
with its terms and conditions except to the extent that enforceability may be
limited by bankruptcy, insolvency and other similar laws affecting the
enforcement of creditors' rights generally and except for the application of
general principles of equity. Except as set forth in Section 3(c) of the
Disclosure Schedule and except for the filing of the Merger Agreement with the
applicable Governmental Authority and consents that have already been obtained,
neither Shareholder nor the Company need to give any notice to, make any filing
with, or obtain any authorization, consent, or approval of any Governmental
Authority or any other party in order to consummate the transactions
contemplated by this Agreement.
(d) NONCONTRAVENTION. Neither the execution and the delivery of
this Agreement, nor the consummation of the transactions contemplated hereby,
will (i) violate any Law to which either of Shareholder or the Company is
subject or any provision of the charter or bylaws of the Company or (ii)
conflict with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate,
modify, or cancel, or require any notice or consent under any material
agreement, contract, lease, license, instrument, or other arrangement to which
either of Shareholder or the Company is a party or by which any of them is
bound or to which any of the assets of any of them is subject (or result in the
imposition of any Security Interest upon any such assets).
(e) BROKERS' FEES. Shareholder has no Liability or obligation to
pay any fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which First Sierra could become
liable or obligated, and the Company has no Liability or obligation to pay any
fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement.
(f) INVESTMENT. Shareholder (i) understands that the shares of
First Sierra Common Stock to be issued to Shareholder have not been, and will
not prior to the Closing be, registered under the Securities Act, or under any
state securities laws, and are being issued in reliance upon federal and state
exemptions for transactions not involving any public offering, (ii) is
acquiring such shares of Common Stock solely for his own account for investment
purposes, and not with a view to the distribution thereof, (iii) is a
sophisticated investor with knowledge and experience in business and financial
matters, (iv) has received certain information concerning First Sierra and has
had or will have prior to the Closing the opportunity to obtain additional
information as desired in order to evaluate the merits and the risks inherent
in holding such Common Stock, (v) is able to bear the economic risk and lack of
liquidity inherent in holding such Common Stock, and (vi) is an Accredited
Investor for the reasons set forth in Annex I.
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<PAGE> 15
(g) SUBSIDIARIES. The Company has no Subsidiaries except Heritage
Finance Corp. I, a Delaware corporation (the "Heritage Sub"). The Heritage Sub
was organized in connection with the Securitization (hereinafter defined), and
the only business engaged in by the Heritage Sub has been to conduct activities
contemplated for the Heritage Sub in connection with the Securitization.
(h) FINANCIAL STATEMENTS. Attached hereto as Exhibit A are the
following financial statements (the "Financial Statements"): audited balance
sheets and statements of income, changes in stockholders' equity, and cash flow
as of and for the fiscal year ended 9-30-96 (the "Most Recent Fiscal Year End")
for the Company. The Financial Statements (including the notes thereto) have
been prepared in accordance with GAAP applied on a consistent basis throughout
the periods covered thereby, present fairly consistent with GAAP the financial
condition of the Company as of such dates and the results of operations of the
Company for such periods, and are correct and complete in all material
respects, and are consistent with the books and records of the Company (which
books and records are correct and complete).
(i) EVENTS SUBSEQUENT TO MOST RECENT FISCAL YEAR END. Since the
Most Recent Fiscal Year End, there has not been any material adverse change in
the business, financial condition, operations, results of operations, or future
prospects of the Company. Without limiting the generality of the foregoing,
since that date:
(i) the Company has not sold, leased, transferred or
assigned any of its assets, tangible or intangible, other than
pursuant to the securitization (the "Securitization") that closed on
November 15, 1996 and other than for a fair consideration in the
Ordinary Course of Business;
(ii) the Company has not entered into any agreement other
than this Agreement, contract, lease or license (or series of related
agreements, contracts, lease and licenses) other than in the Ordinary
Course of Business;
(iii) the Company has not imposed any Security Interest
upon any of its assets, tangible or intangible, except as permitted
pursuant to the terms hereof;
(iv) the Company does not have any capital investment in
or any loan to any Person other than the Heritage Sub and the Company
is not a party to any agreement or commitment providing for the
acquisition of the securities or assets of any other Person, other
than agreements providing for the acquisition of Leases in the
Ordinary Course of Business and advances to Shareholder consistent
with prior practice;
(v) the Company has not issued any note, bond or other
debt security or created, incurred, assumed or guaranteed any
indebtedness for borrowed money or capitalized lease obligation other
than as permitted pursuant to Section 6 other than in connection with
the Securitization;
(vi) the Company has not delayed or postponed the payment
of accounts payable and other Liabilities outside the Ordinary Course
of Business;
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<PAGE> 16
(vii) the Company has not canceled, compromised, waived or
released any right or claim (or series of related rights and claims)
either involving more than $50,000 or outside the Ordinary Course of
Business;
(viii) there has been no change made or authorized in the
charter or bylaws of the Company;
(ix) the Company has not issued, sold or otherwise
disposed of any of its capital stock, or granted any options, warrants
or other rights to purchase or obtain (including upon conversion,
exchange or exercise) any of its capital stock;
(x) the Company has not declared, set aside or paid any
dividend or made any distribution with respect to its capital stock
(whether in cash or in kind) or redeemed, purchased or otherwise
acquired any of its capital stock;
(xi) the Company has not made any loan to, or entered into
any other transaction with, any of its directors, officers or
employees other than advances to Shareholder consistent with prior
practice;
(xii) the Company has not entered into any employment
contract or collective bargaining agreement, written or oral;
(xiii) except as otherwise contemplated by Section 6(k), the
Company has not granted any increase in the base compensation of any
of its directors, officers or employees;
(xiv) except as otherwise contemplated by Section 6(k), the
Company has not adopted, amended, modified or terminated any bonus,
profit-sharing, incentive, severance or other plan, contract or
commitment for the benefit of any of its directors, officers or
employees (or taken any such action with respect to any other Employee
Benefit Plan);
(xv) the Company has not made or pledged to make any
material charitable or other capital contribution; and
(xvi) the Company has not committed to any of the
foregoing.
(j) UNDISCLOSED LIABILITIES. The Company has no known Liability
(and to the Company's Knowledge there is no Basis for any present or future
action, suit, proceeding, hearing, investigation, charge, complaint, claim, or
demand against the Company giving rise to any material Liability), except for
(i) Liabilities set forth in the Balance Sheet (including any notes thereto)
and (ii) Liabilities that have arisen after 9-30-96 in the Ordinary Course of
Business (none of which results from, arises, out of, relates to, is in the
nature of, or was caused by any willful breach of contract, willful breach of
representation or warranty, willful tort, willful infringement, or willful
violation of Law).
(k) LEGAL COMPLIANCE. The Company has complied with all
applicable Laws except where the failure to comply would not have a material
adverse effect on the Company, and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against the Company alleging any failure so to comply except where
the failure to do so
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<PAGE> 17
would not have a material adverse effect on the Company or the matter is not
reasonably likely to be determined adversely to the Company.
(l) TAX MATTERS.
(i) The Company has filed all federal income Tax Returns
and all other material Tax Returns that it was required to file. All
such Tax Returns were correct and complete in all material respects.
All previously due federal income Taxes and other material Taxes of
the Company attributable to periods on or prior to 9-30-96 (whether or
not shown on any Tax Return) have been paid or adequately reserved for
in the Financial Statements. The Company currently is not the
beneficiary of any extension of time within which to file any Tax
Return other than extensions for income tax returns due for the fiscal
year ended 9-30-96. No material choate Security Interests encumber
any of the assets of the Company that arose in connection with any
failure (or alleged failure) to pay any Tax. No claim has been made
by an authority in a jurisdiction where the Company does not file Tax
Returns that it is or may be subject to taxation by that jurisdiction
which if successful would have a material adverse effect on the
Company.
(ii) The Company has withheld and paid all Taxes required
to have been withheld and paid in connection with amounts paid or
owing to any employee, independent contractor, creditor, stockholder
or other third party the failure of which would have a material
adverse effect on the Company.
(iii) There is no dispute or claim concerning any material
Tax Liability of the Company either (1) claimed or raised by any
authority in writing or (2) as to which any of Shareholder and the
directors and officers of the Company has Knowledge based upon
personal contact with any agent of such authority. Section 3(l) of
the Disclosure Schedule lists all (if any) federal, state and local
income Tax Returns filed with respect to the Company for taxable
periods ended on or prior to 9-30-96 currently the subject of audit or
as to which the Company has been notified that an audit is to occur.
(iv) Except as may be reflected in Section 3(l)(iv) of the
Disclosure Schedule, the Company has not waived any statute of
limitations in respect of Taxes or agreed to any extension of time
with respect to a Tax assessment or deficiency.
(v) The Company has not filed a consent under Code Sec.
341(f) concerning collapsible corporations. The Company has not made
any payments, is not obligated to make any payments, nor is a party to
any agreement that under certain circumstances could obligate it to
make any payments that will not be deductible under Code Sec. 280G.
The Company has not been a United States real property holding
corporation within the meaning of Code Sec. 897(c)(2) during the
applicable period specified in Code Sec. 897(c)(1)(A)(ii).
(vi) Section 3(l) of the Disclosure Schedule sets forth
the following information with respect to the Company as of 9-30-96:
(1) the basis of the Company in its assets; (2) the amount of any net
operating loss, net capital loss, unused investment or other credit,
unused foreign tax, or excess charitable contribution allocable to the
Company; and (3) the amount of
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<PAGE> 18
any deferred gain or loss allocable to the Company arising out of any
Deferred Intercompany Transaction.
(vii) The Company (1) as to periods prior to 9-30-96 has
not been a member of an Affiliated Group filing a consolidated federal
income Tax Return or (2) has any Liability for the Taxes of any Person
(other than the Company and the Heritage Sub) under Treas. Reg.
Section 1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
(m) TITLE TO ASSETS. The Company had good and marketable title to
or valid leasehold interest in the assets of the Company reflected in the
Balance Sheet as of the date thereof and a valid leasehold interest in the
office premises that it occupies.
(n) REAL PROPERTY. The Company does not own or lease any real
property other than the office premises leased and described in Section 3(n) of
the Disclosure Schedule.
(o) INTELLECTUAL PROPERTY.
(i) To its Knowledge the Company owns or has the right to
use pursuant to license, sublicense, agreement, or permission all
Intellectual Property necessary for the operation of the businesses of
the Company as presently conducted. To its Knowledge the Company has
taken all necessary action for the purposes of the Company to maintain
and protect each item of Intellectual Property that it owns or uses.
(ii) To its Knowledge the Company has not interfered with,
infringed upon, misappropriated, or otherwise come into conflict with
any Intellectual Property rights of third parties. To the Knowledge
of the Company no third party has interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual
Property rights of any of the Company.
(p) CONTRACTS. Section 3(p) of the Disclosure Schedule lists the
following contracts and other agreements to which the Company is a party or (as
to clause (xii)) to which Shareholder is a party:
(i) any agreement (or group of related agreements) for
the lease of personal property from any Person providing for lease
payments in excess of $25,000 per annum;
(ii) any agreement concerning a partnership or joint
venture;
(iii) any agreement (or group of related agreements), other
than those related to the Securitization, under which it has created,
incurred, assumed or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation, in excess of $100,000 or under
which it has imposed a Security Interest on any of its assets,
tangible or intangible;
(iv) any agreement (other than the Letter of Intent, this
Agreement and any related agreement) concerning confidentiality or
noncompetition;
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<PAGE> 19
(v) any agreement with Shareholder or any relative of
Shareholder other than the Insurance Agreement and Option Plan and
agreements regarding advances;
(vi) any profit sharing, stock option, stock purchase,
stock appreciation, deferred compensation, severance or other plan or
arrangement for the benefit of its current or former directors,
officers or employees other than the Insurance Agreement and Option
Plan;
(vii) any agreement for the employment of any individual
for a specified term exceeding 30 days on a full-time, part-time,
consulting or other basis;
(viii) any agreement under which it has advanced or loaned
any amount to any of its directors, officers or employees except
advances to Shareholder consistent with prior practice and an advance
to Charles E. Brazier of approximately $15,000; or
(ix) any agreement under which Shareholder has guaranteed
the repayment of any loan or other advance of monies to the Company or
any other obligations of the Company.
Shareholder has delivered to First Sierra a correct and complete copy of each
agreement listed in Section 3(p) of the Disclosure Schedule. No material
default or event that, with the passage of time, giving of notice or both,
would constitute a material default by the Company which would allow full
acceleration of the obligations of the Company shall have occurred and be
continuing under any of the agreements referenced in clause (iii) above or any
other material agreement.
(q) NOTES AND ACCOUNTS RECEIVABLE. Substantially all notes and
accounts receivable of the Company are reflected properly on its books and
records, are to the knowledge of the Company valid receivables subject to the
Knowledge of the Company to no setoffs or counterclaims, to the Knowledge of
the Company are current and collectible, and to the extent not collectible do
not exceed the reserve for bad debts set forth on the face of the Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the
Company.
(r) POWERS OF ATTORNEY. There are no outstanding powers of
attorney executed on behalf of the Company other than in the Ordinary Course of
Business.
(s) INSURANCE. The Company has been covered during the past six
years by insurance in scope and amount customary for businesses similar to
those businesses in which the Company was engaged during such period. Section
3(s) of the Disclosure Schedule describes any self-insurance arrangements with
an insurance carrier affecting the Company and a description of any retroactive
premium adjustments or other loss-sharing arrangements.
(t) LITIGATION. Section 3(t) of the Disclosure Schedule sets
forth each instance in which the Company (i) is subject to any outstanding
injunction, judgment, order, decree or ruling or (ii) is a party to any action,
suit, proceeding, hearing or investigation, in or before any court or
quasi-judicial or administrative agency of any federal, state, local or foreign
jurisdiction or before any arbitrator.
(u) LABOR MATTERS. The Company has not committed any unfair labor
practice which would have a material adverse effect on the Company. The
Company has no Knowledge of any
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<PAGE> 20
organizational effort presently being made or threatened by or on behalf of any
labor union with respect to employees of the Company.
(v) EMPLOYEE BENEFITS.
(i) The Company does not currently maintain or contribute
to any Employee Welfare Benefit Plan providing medical health, or life
insurance or other welfare-type benefits for current or future retired
or terminated employees, their spouses, or their dependents except
those Employee Welfare Benefit Plans listed in Section 3(v) of the
Disclosure Statement; and the Company has no Liability with respect to
any Employee Welfare Benefit Plan or pension plan previously
maintained or contributed to by the Company.
(ii) The Company does not contribute to, never has
contributed to, and never has been required to contribute to any
Multiemployer Plan or has any Liability (including withdrawal
Liability) under any Multiemployer Plan; and
(w) GUARANTIES. Other than in respect of the subordinate note in
the original principal amount of $466,000 to be issued by the Heritage Sub in
connection with the Securitization, the Company is not a guarantor or otherwise
liable for any Liability or obligation (including indebtedness) of any other
Person (representations and warranties made by the Company shall not be
construed as or constitute a guaranty by the Company).
(x) ENVIRONMENT, HEALTH, AND SAFETY.
(i) To the Company's Knowledge, the Company has complied
with all Environmental, Health, and Safety Laws, and to the Company's
knowledge no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand, or notice has been filed or commenced
against the Company alleging any failure so to comply.
(ii) To the Company's Knowledge, the Company has no
Liability (and the Company has not handled or disposed of any
substance, arranged for the disposal of any substance, exposed any
employee or other individual to any substance or condition, or owned
or operated any real property or facility that the Company reasonably
believes may have a reasonable likelihood in any manner to form the
Basis for any present or future action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand against the Company
giving rise to any Liability) for damage to any site, location, or
body of water (surface or subsurface), for any illness or personal
injury to any employee or other individual, or for any reason under
any Environmental, Health and Safety Law.
(iii) To the Company's Knowledge, all properties and
equipment used in the business of the Company (other than property
leased by the Company to its customers and other than office equipment
supplies and vehicle fuels and lubricants) have been free of asbestos,
PCB's, methylene chloride, trichloroethylene, transdichloroethylene,
dioxins, dibenzofurans, and Extremely Hazardous Substances.
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<PAGE> 21
(y) TRIAL BALANCE. Each Lease on the Company's books as of
9-30-96 is set forth on the trial balance attached as Schedule 6(r), and the
information reflected on such trial balance is correct and complete in all
material respects as of such date.
(z) REPRESENTATIONS. Shareholder has no Knowledge of any fact or
circumstance that would constitute a breach of a representation or warranty
made by the Company in the Ordinary Course of Business (in connection with the
sale or discounting of any Lease) and personally guaranteed by Shareholder.
(aa) DISCLOSURE. The representations and warranties contained in
this Section 3 do not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements and
information contained in this Section 3 not misleading.
4. REPRESENTATIONS AND WARRANTIES OF FIRST SIERRA. First Sierra
represents and warrants to Shareholder that the statements contained in this
Section 4 are correct and complete as of the date of this Agreement and will be
correct and complete as of the Closing Date (as though made then and as though
the Closing Date was substituted for the date of this Agreement throughout this
Section 4).
(a) ORGANIZATION. Each of First Sierra and Sub is a corporation
duly organized, validly existing, and in good standing under the laws of the
State of Delaware.
(b) AUTHORIZATION OF TRANSACTION. Each of First Sierra and Sub
has full corporate power and authority to execute and deliver this Agreement
and to perform its obligations hereunder. This Agreement constitutes the valid
and legally binding obligation of each of First Sierra and Sub, enforceable in
accordance with its terms and conditions except to the extent that
enforceability may be limited by bankruptcy, insolvency and other similar laws
affecting the enforcement of creditors' rights generally and except for the
application of general principles of equity. Except for the filing of the
Agreement of Merger with the applicable Governmental Authority and consents
that have already been obtained, First Sierra need not give any notice to, make
any filing with, or obtain any authorization, consent, or approval of any
Governmental Authority or any other party in order to consummate the
transactions contemplated by this Agreement.
(c) NONCONTRAVENTION. Neither the execution and the delivery of
this Agreement, nor the consummation of the transactions contemplated hereby,
will (i) violate any Law to which First Sierra or Sub is subject or any
provision of its charter or bylaws or (ii) conflict with, result in a breach
of, constitute a default under, result in the acceleration of, create in any
party the right to accelerate, terminate, modify, or cancel, or require any
notice or consent under any agreement, contract, lease, license, instrument, or
other arrangement to which First Sierra or Sub is a party or by which it is
bound or to which any of its assets is subject.
(d) BROKERS' FEES. Neither First Sierra nor Sub has any Liability
or obligation to pay any fees or commissions to any broker, finder, or agent
with respect to the transactions contemplated by this Agreement for which any
Shareholder could become liable or obligated.
(e) IPO PROSPECTUS. The final prospectus to be filed with the
Securities and Exchange Commission pursuant to Rule 424(b) under the Securities
Act of 1933, as amended, in connection with the IPO, when filed will not
contain an untrue statement of a material fact or omit to state a material
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<PAGE> 22
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
5. REPRESENTATIONS AND WARRANTIES OF OPTION HOLDERS. Each Option Holder
represents and warrants to First Sierra that the statements contained in this
Section 5 are correct and complete as of the date of this Agreement and will be
correct and complete as of the Closing Date (as though made then and as though
the Closing Date was substituted for the date of this Agreement throughout this
Section 5).
(a) SOLE OWNER. The Option Holder is the sole owner and holder of
the rights stated in the Option Plan to run in favor of the Option Holder and
such rights are held by the Option Holder free and clear of any Security
Interests, equities, claims and demands.
(b) ENFORCEABILITY. This Agreement constitutes the valid and
legally binding obligation of the Option Holder, enforceable in accordance with
its terms and conditions except to the extent that enforceability may be
limited by bankruptcy, insolvency and other similar laws affecting the
enforcement of creditors' rights generally and except for the application of
general principles of equity. The Option Holder need not give any notice to,
make any filing with or obtain any authorization, consent or approval of any
Governmental Authority or any other party in order to consummate the
transactions contemplated by this Agreement.
6. PRE-CLOSING COVENANTS. The Parties agree as follows with respect to
the period between the execution of this Agreement (or such earlier time as may
be indicated) and the earlier to occur of the Closing and the termination of
this Agreement pursuant to Section 9.
(a) GENERAL. Each of the Parties will use commercially reasonable
best efforts to take all actions and to do all things necessary, proper or
advisable in order to consummate and make effective the transactions
contemplated by this Agreement (including satisfaction, but not waiver, of the
closing conditions set forth in Section 8).
(b) NOTICES AND CONSENTS. To the extent, if any, noted in Section
3(c) of the Disclosure Schedule as being required, Shareholder will give or
cause the Company to give any notices to third parties, and will use and cause
the Company to use all reasonable efforts to obtain any third-party consents
that First Sierra may request in connection with the matters referred to in
Section 3(c).
(c) OPERATION OF BUSINESS. Shareholder will not cause or permit
the Company to engage in any practice, take any action, or enter into any
transaction outside the Ordinary Course of Business except as otherwise
permitted pursuant to this Section 6. Even though the same may constitute an
Ordinary Course of Business transaction, the Company shall not make any advance
or loan to Shareholder or any officer or director of the Company other than to
Shareholder as contemplated by Section 6(s) and the currently outstanding
$15,000 loan to Charles E. Brazier.
(d) PRESERVATION OF BUSINESS. The Company will keep its business
and properties substantially intact including its present operations, physical
facilities, working conditions, and relationships with lessors, vendors,
brokers, licensors, suppliers, customers and employees.
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<PAGE> 23
(e) ACCESS. Shareholder and the Company will permit
representatives of First Sierra to have full access at all reasonable times
following reasonable prior notice, and in a manner so as not to interfere with
the normal business operations of the Company, to all premises, properties,
personnel, books, records (including Tax records), contracts, and documents of
or pertaining to the Company. First Sierra shall permit Shareholder to conduct
a due diligence examination of First Sierra, the extent of such examination to
be acceptable to First Sierra.
(f) NOTICE OF DEVELOPMENTS. Each Party will give prompt written
notice to the other of any material adverse development causing a breach of or
constituting an intervening event with respect to any of its own
representations and warranties in Sections 3 and 4. No disclosure by any Party
pursuant to this Section 6(f), however, shall be deemed to amend or supplement
Annex I or the Disclosure Schedule or to prevent or cure any misrepresentation,
breach of warranty, or breach of covenant.
(g) EXCLUSIVITY. Shareholder and the Company will not (i)
solicit, initiate, or encourage the submission of any proposal or offer from
any Person relating to the acquisition of any capital stock or other voting
securities, or any substantial portion of the assets of, the Company (including
any acquisition structured as a merger, consolidation, or share exchange) or
(ii) participate in any discussions or negotiations regarding, furnish any
information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any Person to do or seek any of the
foregoing. Shareholder will not vote the Company Shares in favor of any such
acquisition structured as a merger, consolidation, or share exchange.
Shareholder will notify First Sierra promptly if any Person makes any proposal,
offer, inquiry, or contact with respect to any of the foregoing.
(h) ENCUMBERED LEASES. The Financial Statements reflect numerous
Leases as being owned by the Company subject to full recourse indebtedness owed
by the Company and secured by such Leases. For state law purposes the leases
reflected on such financial statements may be owned by the Company or may have
been transferred to and title vested in third parties. In either case
Shareholder, the Company and First Sierra will use reasonable efforts, at the
direction of First Sierra, to reach an agreement with the holders of such
indebtedness whereby First Sierra would retire such indebtedness for amounts
satisfactory to First Sierra.
(i) NEW LEASES. Leases currently held by the Company and financed
by the Company through its existing warehouse and other collateral pledge line
facilities (collectively, the "Warehouse Facility") and Leases hereafter
acquired will be held by the Company in such Warehouse Facility or sold to
First Sierra under its private label program using a discount rate equal to the
yield on the 2 year US Treasury Security as of the date of sale plus 225 basis
points and with a 6% holdback reserve; provided, as to any Leases that do not
qualify for First Sierra's private label program, the Company may fund or
discount such Leases with other sources in a manner consistent with past
practice.
(j) INCURRENCE OF MATERIAL LIABILITIES. Following 9-30-96 the
Company will not incur any additional liabilities or indebtedness of any
material nature except in the ordinary Course of Business to fund new Leases
and the renewal of the existing, or obtaining of a new, lease of office space
(in the latter case subject to First Sierra's prior approval which as to the
contemplated Sunrise Professional Center location, First Sierra hereby
acknowledges it has given). Loans from First Sierra are excluded from this
proscription.
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<PAGE> 24
(k) EMPLOYEE COMPENSATION. Following 9-30-96 no increases in
salaries, bonuses and other benefits (other than in the Ordinary Course of
Business to non-management employees and other than the increases and bonuses
recently given to or approved for management employees and disclosed in the
written financial information provided by the Company to First Sierra) shall be
made. The salaries and bonuses in effect for officers and employees of the
Company as of the date of this Agreement have been previously disclosed to
First Sierra.
(l) ASSETS TO BE PURCHASED. Immediately prior to and in
connection with the consummation of the Closing, Shareholder shall purchase
from the Company and the Company shall sell to Shareholder all country club
memberships in the name of or for the benefit of Shareholder and all personal
automobiles owned by the Company, and the purchase price shall be in cash and
shall be equal to the book value as of the Closing of such country club
memberships and automobiles as reflected on the Company's financial statements.
(m) INSURANCE AGREEMENT. Prior to Closing, the Insurance
Agreement will be amended to limit the Company's obligations thereunder to the
payment of its part of the next two annual insurance premiums due on the Policy
as contemplated by Section 7(e).
(n) DISTRIBUTION OF ASSETS. Following 9-30-96 no sale of any
material part of the Company's assets will occur (whether in the form of a
securitization or otherwise) other than as contemplated by the proviso set
forth in Section 6(i) and other than in connection with the closing of the
Securitization (but no other Leases will be sold through such securitization
conduit). No dividends of cash or property will be made.
(o) EMPLOYEES. Prior to the Closing Shareholder shall request
each Employee to tender to the Company his or her resignation as an employee of
the Company effective as of the Closing. As of the Closing First Sierra will
make to each employee of the Company (excluding those individuals who will be
subject to employment agreements with First Sierra and excluding Shareholder's
wife) a written offer of employment with First Sierra for a position and salary
comparable to that held with and provided by the Company and providing for
benefits comparable to those offered by First Sierra to its employees with
similar positions (provided, First Sierra may maintain the Company's existing
health insurance plan). Nothing in this Section 6(o) or elsewhere in this
Agreement (i) shall create any rights on behalf of any such employees or make
any such employees a party to this Agreement or a third party beneficiary of
any rights or obligations hereunder or (ii) shall constitute any agreement,
commitment or obligation on the part of First Sierra to maintain the employment
by First Sierra of any such employees.
(p) ACCOUNTING TREATMENT. For financial accounting purposes, no
gain will be recognized on the sale of those Leases described in Section 6(i)
to First Sierra prior to the Closing.
(q) FINANCIAL STATEMENTS. As soon as practicable following
calendar year-end 1996, the Company shall cause to be prepared and delivered to
First Sierra an unaudited balance sheet and statement of income, change in
stockholder's equity and cash flow for the Company as of 12-31-96, each
prepared in accordance with GAAP certified to by the chief financial officer of
the Company.
(r) TRIAL BALANCE. No less frequently than monthly and in any
event within 20 days preceding the Closing, the trial balance attached as
Schedule 6(r) will be updated to reflect the current
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<PAGE> 25
information regarding all Leases on the Company's books at the time of such
update. In accordance with Section 6(e), First Sierra's representatives will
be given access, in the Company's offices, to the Lease files for the purpose
of performing prior to the Closing a trial balance to Lease file audit to
determine if there are any discrepancies between such trial balance and the
information contained in the Lease files.
(s) ADVANCES. To the extent the aggregate of any outstanding
advances by the Company to Shareholder and his wife for salary exceed the
accrued but unpaid salary amounts payable to Shareholder and his wife at the
rate of $225,000 per year, prorated on a monthly basis to the Closing Date,
then Shareholder shall pay such excess to the Company prior to the Closing. To
the extent there are any other outstanding loans or advances to Shareholder or
any other Option Holder, Shareholder or such Option Holder, as appropriate,
agrees to repay to the Company prior to the Closing all such outstanding loans
and advances made to such individual.
7. POST-CLOSING COVENANTS. If the Closing occurs, the Parties agree as
follows with respect to the period following the Closing.
(a) GENERAL. In case at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request all at the sole cost and expense of the requesting Party
(unless the requesting Party is entitled to indemnification therefor under
Section 8).
(b) LITIGATION SUPPORT. In the event and for so long as any Party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Company, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Section 8).
(c) TRANSITION. Shareholder and the Company will not take any
action that is designed or intended to have the effect of discouraging any
lessor, vendor, broker, customer, supplier, or other business associate of the
Company from maintaining the same business relationships with the Company or
First Sierra after the Closing as it maintained with the Company prior to the
Closing.
(d) COVENANT NOT TO COMPETE. For the period commencing as of the
Closing Date and terminating upon the earliest to occur of (i) the effective
date of termination of Shareholder's employment under Section 4.01 of
Shareholder's Employment Agreement, (ii) the expiration of the one- or two-year
period, as applicable, that First Sierra agrees to pay Shareholder following a
termination pursuant to Section 4.04 or 4.05(b) thereof, or (iii) the
expiration of four years following the Closing Date, Shareholder hereby agrees
that he shall not except as permitted in such Employment Agreement, directly or
indirectly, either through any form of ownership, or as a director, officer,
principal, agent, employee, employer, advisor, consultant, partner or in any
individual or representative capacity whatsoever, either for her own benefit or
for the benefit of any other person or entity, without
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<PAGE> 26
the prior written consent of the Board of Directors of First Sierra, within any
geographic area that First Sierra does business during the three year period
following the Closing Date, engage in any equipment or software lease or
financing business in which First Sierra or any of its subsidiaries engages in
during such period. If the final judgment of a court of competent jurisdiction
declares that any term or provision of this Section 7(d) is invalid or
unenforceable, the Parties agree that the court making the determination of
invalidity or unenforceability shall have the power to reduce the scope,
duration, or area of the term or provision, to delete specific words or
phrases, or to replace any invalid or unenforceable term or provision with a
term or provision that is valid and enforceable and that comes closest to
expressing the intention of the invalid or unenforceable term or provision, and
this Agreement shall be enforceable as so modified after the expiration of the
time within which the judgment may be appealed.
(e) LIFE INSURANCE. Reference is made to that certain
Split-Dollar Insurance Agreement dated December 31, 1994 between the Company,
Shareholder, and Brent M. Hall and Melanie H. Medina as trustees of the Hall
Family Trust, and pursuant to which the Company has agreed to pay part of the
annual premiums due on a life insurance policy (the "Policy") covering
Shareholder and his wife (the "Insurance Agreement"). With regard to the next
two annual premiums due on the Policy following the Closing, First Sierra will
cause Sub to pay (or First Sierra will pay) the part of such annual premium
that the Company has agreed to pay pursuant to the Insurance Agreement (being
$41,950 per year). No later than the fifth anniversary of the Closing Date,
Shareholder agrees to pay to First Sierra an amount equal to the amount that
the Company prior to the Closing has paid in premiums on the Policy (being
after Shareholder reimbursement $124,309) plus the total amount paid pursuant
to the preceding sentence on such premiums. First Sierra and Sub acknowledge
that such payment shall constitute satisfaction of Shareholder's reimbursement
obligations respecting Policy premiums payments by the Company, Sub or First
Sierra.
8. CONDITIONS TO OBLIGATION TO CLOSE.
(a) CONDITIONS TO OBLIGATION OF FIRST SIERRA. The obligation of
First Sierra to consummate the transactions to be performed by it in connection
with the Closing is subject to satisfaction of the following conditions:
(i) the representations and warranties set forth in
Section 3 shall be true and correct in all material respects at and as
of the Closing Date except, as to the representations set forth in
Sections 3(a) as relates to officers other than Shareholder and Greg
E. McIntosh, (d) as relates to agreements entered into by the Company
as contemplated in Section 6, (j), (k), l(iii), (o)(ii), (p)(i), (iii)
and (iv), (q), (t), (u), (x) and (z) in each case to the extent
related to the period between the date of this Agreement and the
Closing Date, as affected by intervening events, provided such
intervening events individually or in aggregate reasonably could not
reasonably be expected to have a material adverse effect on the
Company;
(ii) Shareholder and the Company shall have performed and
complied with all of their respective covenants hereunder in all
material respects through the Closing;
(iii) Shareholder and the Company shall have procured all
of their third party consents specified in Section 6(b) which if not
obtained would materially detract from the
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<PAGE> 27
value to First Sierra of the transaction contemplated hereunder or
create a default under any material agreement;
(iv) no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction wherein
an unfavorable injunction, judgment, order, decree, ruling, or charge
would (A) prevent consummation of any of the transactions contemplated
by this Agreement, (B) cause any of the transactions contemplated by
this Agreement to be rescinded following consummation, (C) affect
adversely the right of First Sierra to own the Company or to control
the Company, or (D) affect adversely the right of First Sierra to
conduct the business previously engaged in by the Company (and no such
injunction, judgment, order, decree, ruling, or charge shall be in
effect);
(v) Shareholder shall have delivered to First Sierra a
certificate to the effect that each of the conditions specified above
in Section 8(a)(i)-(iv) is satisfied in all respects;
(vi) First Sierra shall have received from Pillsbury
Madison & Sutro LLP, counsel to Shareholder, an opinion in form and
substance as set forth in Exhibit B attached hereto, addressed to
First Sierra, and dated as of the Closing Date;
(vii) First Sierra shall have received the resignations,
effective as of the Closing, of each director and officer of the
Company (such resignation as to an officer being as to such officer's
position and not as to such officer's employment unless such employee
resigns such employment as contemplated in Section 6(o));
(viii) Shareholder shall have released all claims and causes
of action he has against the Company as the sole shareholder of the
Company;
(ix) Shareholder and Greg E. McIntosh shall have executed
and delivered to First Sierra their respective Employment Agreements;
(x) the Company and (if applicable) Shareholder shall
have executed and delivered to First Sierra the Agreement of Merger
and Certificate of Merger and Shareholder shall have delivered to
First Sierra the original stock certificates representing the Company
Shares;
(xi) the Option Plan shall have been terminated and each
Option Holder shall have relinquished all rights he had thereunder;
(xii) the IPO shall have occurred and the Market
Capitalization of First Sierra shall equal or exceed $65 million;
(xiii) First Sierra shall have had delivered to it the
Financial Statements, and the Financial Statements shall reflect
after-tax income of the Company as of 9-30-96 of at least $1 million;
and
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<PAGE> 28
(xiv) The trial balance to Lease file audit performed in
accordance with Section 6(r) shall not disclose any material
discrepancies between such trial balance and the information contained
in the Lease files.
All actions to be taken by Shareholder in connection with consummation of the
transactions contemplated hereby and all certificates, opinions, instruments,
and other documents required to effect the transactions contemplated hereby
will be reasonably satisfactory in form and substance to First Sierra. First
Sierra may waive any condition specified in this Section 8(a) if it executes a
writing so stating at or prior to the Closing. Shareholder agrees to use
Shareholder's best efforts to cause the matters covered by clauses (vi) and
(vii) (as to others), and to cause the matters covered by clauses (vii) (as to
Shareholder), (viii), (ix) (as to Shareholder's execution of the Employment
Agreement) and (x) to occur. Each Option Holder agrees to execute the
Employment Agreement and relinquish his rights under the Option Plan.
(b) CONDITIONS TO OBLIGATION OF SHAREHOLDER. The obligation of
Shareholder to consummate the transactions to be performed by him in connection
with the Closing is subject to satisfaction of the following conditions:
(i) the representations and warranties set forth in
Section 4 shall be true and correct in all material respects at and as
of the Closing Date;
(ii) First Sierra shall have performed and complied with
all of its covenants hereunder in all material respects through the
Closing;
(iii) no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction wherein
an unfavorable injunction, judgment, order, decree, ruling, or charge
would prevent consummation of any of the transactions contemplated by
this Agreement or cause any of the transactions contemplated by this
Agreement to be rescinded following consummation (and no such
injunction, judgment, order, decree, ruling, or charge shall be in
effect);
(iv) First Sierra shall have delivered to Shareholder a
certificate to the effect that each of the conditions specified above
in Section 8(b)(i)-(iii) is satisfied in all respects;
(v) Shareholder shall have received from Vinson & Elkins,
L.L.P., counsel to First Sierra, an opinion in form and substance as
set forth in Exhibit C attached hereto, addressed to Shareholder, and
dated as of the Closing Date;
(vi) First Sierra shall have executed and delivered to
Shareholder and each Option Holder his Employment Agreement;
(vii) Sub and (if applicable) First Sierra shall have
executed and delivered the Agreement of Merger;
(viii) the IPO shall have occurred and the Market
Capitalization of First Sierra shall equal or exceed $65 million;
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<PAGE> 29
(ix) First Sierra shall have paid and delivered to
Shareholder the cash consideration, the note and shares of First
Sierra Common Stock required pursuant to Section 2(e)(i);
(x) First Sierra shall have paid and delivered to the
Option Holders the cash consideration and shares of First Sierra
Common Stock required pursuant to Section 2(e)(ii); and
(xi) First Sierra shall have executed and delivered to
Shareholder the Assumption and Hold Harmless Agreement (regarding
certain obligations guaranteed by Shareholder) in the form of Exhibit
K.
(xii) The officers and director of the Surviving
Corporation contemplated in Section 2(d) shall have been duly elected
and qualified and shall hold the positions indicated.
All actions to be taken by First Sierra in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the transactions
contemplated hereby will be reasonably satisfactory in form and substance to
Shareholder. Shareholder may waive any condition specified in this Section
8(b) if it executes a writing so stating at or prior to the Closing. First
Sierra agrees to use its best efforts to cause matters covered by clauses (v),
and to cause the matters covered by (vi), (vii), (ix), (x) and (xi) to occur.
(c) CONDITIONS TO OBLIGATION OF EACH OPTION HOLDER. The
obligation of each Option Holder to consummate the transactions to be performed
by him in connection with the Closing is subject to the satisfaction of the
following conditions:
(i) First Sierra shall have executed and delivered to the
Option Holder his Employment Agreement; and
(ii) First Sierra shall have paid and delivered to the
Option Holder the cash consideration and shares of First Sierra Common
Stock (as applicable) required pursuant to Section 2(e)(ii).
9. TERMINATION.
(a) TERMINATION OF AGREEMENT. This Agreement may be terminated
only as provided below:
(i) Shareholder and First Sierra may terminate this
Agreement by mutual written consent at any time prior to the Closing;
(ii) First Sierra may terminate this Agreement by giving
written notice to Shareholder at any time prior to the Closing (A) in
the event Shareholder or any Option Holder has breached any
representation, warranty or covenant on its part contained in this
Agreement in any material respect or upon the occurrence of any
intervening event or events referenced in the first sentence of
Section 3 which individually or in the aggregate could reasonably be
expected to have a material adverse effect on the Company, First
Sierra has notified Shareholder of the breach or occurrence, and the
breach or occurrence has continued without
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<PAGE> 30
cure for a period equal to the lesser of 30 days after the notice of
breach and the time until the consummation of the IPO or (B) if the
Closing shall not have occurred on or before May 16, 1997, by reason
of the failure of any condition precedent under Section 8(a) (unless
the failure results primarily from First Sierra breaching any
representation, warranty or covenant on its part contained in this
Agreement);
(iii) Shareholder may terminate this Agreement by giving
written notice to First Sierra at any time prior to the Closing (A) in
the event First Sierra has breached any representation, warranty or
covenant on its part contained in this Agreement in any material
respect, Shareholder has notified First Sierra of the breach, and the
breach has continued without cure for a period equal to the lesser of
30 days after the notice of breach and the time until the consummation
of the IPO or (B) if the Closing shall not have occurred on or before
May 16, 1997, by reason of the failure of any condition precedent
under Section 8(b) (unless the failure results primarily from
Shareholder or any Option Holder breaching any representation,
warranty or covenant on his part contained in this Agreement); and
(iv) Shareholder or First Sierra may terminate this
Agreement by giving written notice to the other party if the IPO has
not occurred by May 16, 1997.
(b) EFFECT OF TERMINATION. If this Agreement is terminated
pursuant to Section 9(a), all rights and obligations of the Parties hereunder
shall terminate without any Liability of any Party to any other Party (except
for any Liability of any Party then in breach of a covenant or knowing and
willful breach of a warranty).
(c) IPO. Notwithstanding anything to the contrary contained
herein or implied hereunder, First Sierra shall have the right, in its sole
discretion, to postpone or suspend (for a definite or indefinite period of
time) or cancel the IPO, and no such postponement, suspension or cancellation
shall give rise to any liability or obligation on the part of First Sierra or
any director, officer, employee, representative or underwriter of First Sierra
to Shareholder or any Option Holder.
10. REMEDIES FOR BREACHES OF THIS AGREEMENT.
(a) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the
representations and warranties of the Parties contained in Sections 3 and 4
shall survive the Closing hereunder (even if the damaged Party had Knowledge of
or had reason to know of any misrepresentation or breach of warranty at the
time of Closing).
(b) INDEMNIFICATION PROVISIONS FOR BENEFIT OF FIRST SIERRA.
Except as provided in Section 9(b), if Shareholder breaches any of his
representations and warranties in Section 3, then Shareholder agrees to
indemnify First Sierra from and against any Adverse Consequences that First
Sierra or the Company may suffer through and after the date of the claim for
indemnification to the extent resulting from, arising out of, relating to, or
caused by such breach; provided, Shareholder shall be fully liable for any
breach of the representation set forth in Section 3(z).
(c) INDEMNIFICATION PROVISIONS FOR BENEFIT OF SHAREHOLDER. Except
as provided in Section 9(b), if First Sierra breaches any of its
representations and warranties in Section 4, then First Sierra agrees to
indemnify Shareholder from and against any Adverse Consequences Shareholder may
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<PAGE> 31
suffer through and after the date of the claim for indemnification to the
extent resulting from, arising out of, relating to, or caused by such breach.
(d) MATTERS INVOLVING THIRD PARTIES.
(i) If any third party shall notify any Party (the
"Indemnified Party") with respect to any matter (a "Third Party
Claim") that may give rise to a claim for indemnification against any
other Party (the "Indemnifying Party") under this Section 10, then the
Indemnified Party shall promptly notify the Indemnifying Party thereof
in writing; provided, no delay on the part of the Indemnified Party in
notifying the Indemnifying Party shall relieve the Indemnifying Party
from any obligation hereunder unless (and then solely to the extent)
the Indemnifying Party thereby is prejudiced.
(ii) The Indemnifying Party will have the right to defend
the Indemnified Party against the Third Party Claim with counsel of
the former's choice reasonably satisfactory to the Indemnified Party
so long as (1) the Indemnifying Party notifies the Indemnified Party
in writing within 15 days after the Indemnified Party has give notice
of the Third Party Claim that the Indemnifying Party will indemnify
the Indemnified Party from and against the entirety of any Adverse
Consequences the Indemnified Party may suffer resulting from, arising
out of, relating to, in the nature of, or caused by the Third Party
Claim, (2) the Indemnifying Party provides the Indemnified Party with
evidence reasonably acceptable to the Indemnified Party that the
Indemnifying Party will have the financial resources to defend against
the Third Party Claim and fulfill its indemnification obligations
hereunder, (3) the Third Party Claim involves only money damages and
does not seek an injunction or other equitable relief, (4) settlement
of, or an adverse judgment with respect to, the Third Party Claim is
not in the good faith judgment of the Indemnified Party, likely to
establish a precedential custom or practice materially adverse to the
continuing business interests of the Indemnified Party, and (5) the
Indemnifying Party conducts the defense of the Third Party Claim
actively and diligently.
(iii) So long as the Indemnifying Party is conducting the
defense of the Third Party Claim in accordance with Section 10(d)(ii),
(1) the Indemnified Party may retain separate co-counsel at its sole
cost and expense and participate in the defense of the Third Party
Claim, (2) the Indemnified Party will not consent to the entry of any
judgment or enter into any settlement with respect to the Third Party
Claim without the prior written consent of the Indemnifying Party (not
to be withheld unreasonably), and (3) the Indemnifying Party will not
consent to the entry of any judgment or enter into any settlement with
respect to the Third Party Claim without the prior written consent of
the Indemnified Party (not to be withheld unreasonably).
(iv) In the event any of the conditions in Section
10(d)(ii) is or becomes unsatisfied, however, (1) the Indemnified
Party may defend against, and consent to the entry of any judgment or
enter into any settlement with respect to, the Third Party Claim in
any manner it reasonably may deem appropriate (and the Indemnified
Party need not consult with, or obtain any consent from, the
Indemnifying Party in connection therewith), (2) the Indemnifying
Party will reimburse the Indemnified Party promptly and periodically
for the costs of defending against the Third Party Claim (including
reasonable attorneys' fees and expenses), and (3) the Indemnifying
Party will remain responsible for any Adverse Consequences the
Indemnified
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<PAGE> 32
Party may suffer resulting from, arising out of, relating to, in the
nature of, or caused by the Third Party Claim to the fullest extent
provided in this Section 10.
(e) CLAIMS FOR INDEMNIFICATION.
(i) Whenever any claim shall arise for indemnification
under Section 10(b) or 10(c), the Indemnified Party shall describe
such claim in a written notice ("Notice of Claim") to the Indemnifying
Party (and for purposes of this Section 10(e), a notice given pursuant
to Section 10(d) shall constitute a "Notice of Claim") and, when
known, specify the facts constituting the basis for such claim and the
amount or an estimate of the amount of such claim.
(ii) Following the receipt by the Indemnifying Party of
each Notice of Claim, the Indemnifying Party may give the Indemnified
Party written notice ("Notice of Objection") (1) attaching a copy of
such Notice of Claim, (2) stating that, in the opinion of the
Indemnifying Party, the claim described in such Notice of Claim is
invalid (either in whole or in specified part) under the terms of
Section 10 hereof, (3) giving the reasons for the alleged invalidity,
and (4) stating that, based on such alleged invalidity, the
Indemnifying Party objects to the payment of any portion of the amount
claimed pursuant to such Notice of Claim. If a Notice of Objection
alleges that a Notice of Claim is only partially invalid, the
Indemnifying Party within 30 days of the receipt of such Notice of
Claim, agrees to deliver to the Indemnified Party that portion of the
amount claimed pursuant to such Notice of Claim as to which no
objection is made.
(iii) First Sierra and Shareholder agree to submit to final
and binding arbitration pursuant to Section 11(n) any and all disputes
which have been specified in a Notice of Objection or either party has
specified in a Notice of Claim to which the other party has not
responded within 30 days of receipt of such Notice of Claim. If
pursuant to any such arbitration proceeding it is determined that any
party is obligated to make payment to the other party, then such
payment shall be made to either party no later than 30 days following
such determination.
(f) DETERMINATION OF ADVERSE CONSEQUENCES. There shall be taken
into account the time cost of money (using the Applicable Rate as the discount
rate) in determining Adverse Consequences for purposes of this Section 10. All
indemnification payments by Shareholder under this Section 10 shall be deemed
adjustments to the Purchase Price.
(g) OTHER INDEMNIFICATION PROVISIONS. The foregoing
indemnification provisions are in addition to, and not in derogation of, any
statutory, equitable, or common law remedy any Party may have for breach of
this Agreement.
11. MISCELLANEOUS.
(a) PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. No Party shall issue
any press release or make any public announcement relating to the subject
matter of this Agreement prior to the Closing without the prior written
approval of First Sierra and Shareholder; provided, either Party may make any
public disclosure it believes in good faith is required by applicable law and
First Sierra may
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<PAGE> 33
include a description of the transaction, the Company, the Company's business,
Shareholder and each Option Holder in any registration statement, prospectus or
similar document to be prepared, filed or issued in connection with the
contemplated IPO. Subject to the proviso in the preceding sentence, each Party
shall keep confidential all Confidential Information obtained from any other
Party excluding any such information that is required to be disclosed pursuant
to a legal process and except disclosures to each Party's lenders, attorneys,
accountants and other representatives and to First Sierra's underwriter.
(b) NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer
any rights or remedies upon any Person other than the Parties and their
respective successors and permitted assigns.
(c) ENTIRE AGREEMENT. This Agreement (including the documents
referred to herein) and the Employment Agreements to be entered into between
First Sierra and the Shareholder and each Option Holder constitute the entire
agreement among the Parties and supersede any prior understandings, agreements,
statements, or representations between the Parties, written or oral, to the
extent they relate in any manner to the subject matter hereof including the
Letter of Intent.
(d) SUCCESSION AND ASSIGNMENT. This Agreement shall be binding
upon and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of other Parties.
(e) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(f) NOTICES. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be sent by (i) personal delivery
(including courier service), (ii) telecopier during normal business hours to
the number indicated, or (iii) registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set
forth below (any communication shall be deemed given upon receipt):
IF TO SHAREHOLDER, THE COMPANY OR ANY OPTION HOLDER:
[Name of Addressee]
c/o Heritage Credit Services, Inc.
2280 Vehicle Drive, Suite 100
Rancho Cordova, California 95670
Telecopier No.: 916-638-7590
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<PAGE> 34
IF TO FIRST SIERRA OR SUB:
First Sierra Financial, Inc.
Texas Commerce Tower, Suite 7050
600 Travis Street
Houston, TX 77002
Attention: Thomas J. Depping
Telecopier No.: 713-221-1818
Any Party may change its telecopier number or its address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other Party notice in the manner herein set forth.
(g) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas.
(h) AMENDMENTS AND WAIVERS. No amendments of any provision of
this Agreement shall be valid unless the same shall be in writing and signed by
First Sierra and Shareholder and, if directly affected thereby, each Option
Holder. No waiver by either Party of any default, misrepresentation, or breach
of warranty or covenant hereunder, whether intentional or not, shall be deemed
to extend to any prior or subsequent default, misrepresentation, or breach of
warranty or covenant hereunder or affect in any way any rights arising by
virtue of any prior or subsequent such occurrence.
(i) SEVERABILITY. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(j) EXPENSES. Each of the Parties will bear its own costs and
expenses (including legal fees and expenses) incurred in connection with this
Agreement and the transactions contemplated hereby.
(k) CONSTRUCTION. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties, and no presumption or burden of proof
shall arise favoring or disfavoring either Party by virtue of the authorship of
any of the provisions of this Agreement. Any reference to any federal, state,
local, or foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
(l) INCORPORATION OF EXHIBITS, ANNEXES, AND SCHEDULES. The
Exhibits, Annexes, and Schedules identified in this Agreement are incorporated
herein by reference and made a part hereof.
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<PAGE> 35
(m) SPECIFIC PERFORMANCE. Each of the Parties acknowledges and
agrees that the other Party would be damaged irreparably in the event any of
the provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Party shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter, in addition to any other remedy
to which they may be entitled, at law or in equity.
(n) ARBITRATION. If a Party makes a good faith determination that
a breach (or potential breach) of any of the confidentiality or non-competition
provisions of this Agreement by another Party may result in damages or
consequences that will be immediate, severe and incapable of adequate redress
after the fact, that Party may seek a temporary restraining order or other
immediate injunctive relief without first seeking relief through arbitration.
After the court has ruled on the request for a temporary restraining order or
injunctive relief, the Parties will thereafter proceed with arbitration of the
dispute and stay the litigation pending arbitration. Subject to the foregoing,
any dispute arising out of this Agreement, or its performance or breach, shall
be resolved by binding arbitration under the Commercial Arbitration Rules (the
"AAA Rules") of the American Arbitration Association (the "AAA"). This
arbitration provision is expressly made pursuant to and shall be governed by
the Federal Arbitration Act, 9 U.S.C. Sections 1-14. The Parties agree that
pursuant to Section 9 of the Federal Arbitration Act, a judgment of a United
States District Court of competent jurisdiction shall be entered upon the award
made pursuant to the arbitration. A single arbitrator, who shall have the
authority to allocate the costs of any arbitration initiated under this
paragraph, shall be selected according to the AAA Rules within ten days of the
submission to the AAA of the response to the statement of claim or the date on
which any such response is due, whichever is earlier. The arbitrator shall
conduct the arbitration in accordance with the Federal Rules of Evidence. The
arbitrator shall decide the amount and extent of pre-hearing discovery which is
appropriate. The arbitrator shall have the power to enter any award of
monetary and/or injunctive relief (including the power to issue permanent
injunctive relief and also the power to reconsider any prior request for
immediate injunctive relief by any of the Parties and any order as to immediate
injunctive relief previously granted or denied by a court in response to a
request therefor by any of the Parties), including the power to render an award
as provided in Rule 43 of the AAA Rules; provided, the arbitrator shall not
have the power to award any punitive or exemplary damages (the parties hereby
waiving and releasing any rights that they may have to recover punitive and
exemplary damages). The arbitrator shall award the prevailing Party its costs
and reasonable attorneys' fees, and the losing Party shall bear the entire cost
of the arbitration, including the arbitrator's fees. Any arbitration shall be
held in Houston, Texas for any claim brought by the Parties hereto. In
addition to the above courts, the arbitration award may be enforced in any
court having jurisdiction over the Parties and the subject matter of the
arbitration. Notwithstanding the foregoing but except as may be otherwise
provided in the following sentence, the parties irrevocably submit to the
nonexclusive jurisdiction of the state and federal courts situated in Houston,
Texas in any action to enforce an arbitration award and with respect to any
request for a temporary restraining order or injunctive relief.
Notwithstanding the foregoing, any action instituted by Shareholder prior to
the Closing shall be held in Sacramento, California and the non-exclusive
jurisdiction provisions for any related court proceeding shall relate to
California.
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<PAGE> 36
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement
as of the date first above written.
FIRST SIERRA FINANCIAL, INC.
By: /s/ THOMAS J. DEPPING
------------------------------------
Thomas J. Depping, President
FIRST SIERRA CALIFORNIA, INC.
By: /s/ SANDY B. HO
------------------------------------
Sandy B. Ho
President
/s/ OREN M. HALL
---------------------------------------
OREN M. HALL
HERITAGE CREDIT SERVICES, INC.
By: /s/ OREN M. HALL
------------------------------------
Oren M. Hall
President
/s/ CHARLES E. BRAZIER
---------------------------------------
CHARLES E. BRAZIER
/s/ GREG E. MCINTOSH
---------------------------------------
GREG E. MCINTOSH
/s/ BRENT M. HALL
---------------------------------------
BRENT M. HALL
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<PAGE> 1
EXHIBIT 10.9
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement ("Agreement") is entered into as of
_____________, 1997, between First Sierra Financial, Inc., a Delaware
corporation (the "Corporation") and Oren M. Hall, a resident of Sacramento
County, California ("Hall").
Recitals
As of the date of this Agreement, the Corporation has purchased all of
the issued and outstanding capital stock of Heritage Credit Services, Inc.
("Heritage") pursuant to that certain merger agreement dated as of
________________________, whereby Heritage was merged with First Sierra
California, Inc. (the "Merger"). In connection with the consummation of such
transaction, the Corporation has issued to Hall ______ shares of Common Stock,
$____ par value, of the Corporation ("Common Stock"). The foregoing shares of
Common Stock issued to Hall are hereinafter collectively referred to as the
"Shares."
The Corporation desires to grant to Hall certain registration rights
with respect to Registrable Securities (hereinafter defined) held by Hall in
accordance with and subject to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein made, the parties hereto agree as set forth below.
1. Registration Rights. Subject to the provisions of this Agreement
and in addition to the rights under Sections 3 and 4 of this Agreement, Hall
shall be entitled to have the Registrable Securities held by Hall included in
any registration of Common Stock under the Securities Act of 1933, as amended
(the "Securities Act") filed by the Corporation with the United States
Securities and Exchange Commission (the "Commission"). The term "Registrable
Securities" shall mean the Shares and any Common Stock issued as a dividend for
or other distribution, including stock splits, with respect to or in exchange
for or in replacement of any of the Shares.
2. Piggyback Rights.
(a) If at any time or from time to time following 180 days
after the closing of the Corporation's firm underwritten initial public
offering of Common Stock (the "IPO") the Corporation proposes to file with the
Commission a registration statement (whether on Form S-1, S-2 or S-3, SB-1,
SB-2, or any equivalent form then in effect) for the registration under the
Securities Act of any shares of Common Stock for sale to the public by the
Corporation or on behalf of a stockholder of the Corporation for cash
(excluding any shares
<PAGE> 2
of Common Stock issuable by the Corporation upon the exercise of employee or
director stock options or solely relating to a Rule 145 transaction or pursuant
to a shelf registration statement under Rule 415 or any successor provision
initiated by the Company), the Corporation shall give Hall at least 30 days
prior written notice of the filing of the proposed registration statement. The
notice shall include a list of the states and foreign jurisdictions, if any, in
which the Corporation intends to qualify such shares. If Hall desires to have
any part of his shares of Registrable Securities included in the coverage of
such registration statement, then Hall shall give written notice thereof to the
Corporation (a "Participation Notice"). The Participation Notice shall state
the number of Registrable Securities to be included in such registration (the
"Specified Shares"). If a Participation Notice is given to the Corporation
within 15 days after the date of the Corporation's notice, the Corporation
shall, subject to the conditions and in accordance with the procedures set
forth in Sections 5 and 6, and at its own expense as provided in Section 8,
include in the coverage of such registration statement and qualify for sale
under the blue sky or securities laws of the various states, the Specified
Shares; provided, if the registration of which the Corporation gives notice is
for a registered public offering involving an underwriting, the Corporation
shall so advise Hall, and, provided further, if the managing underwriter for
the Corporation indicates its belief in writing that the effect of including in
the coverage of such registration statement all or part of the Specified Shares
and the shares of Common Stock requested to be so included by other
stockholders having contractual registration rights ("Other Requesting
Stockholders") will materially and adversely affect the sale of the shares of
Common Stock proposed to be sold by the Corporation (which statement of the
managing underwriter shall also state the maximum number of shares, if any,
which can be sold by all such holders without materially and adversely
affecting the sale of the shares proposed to be sold by the Corporation (the
"Maximum Shares")), then the number of shares of Common Stock which Hall and
the Other Requesting Stockholders shall collectively have the right to include
in such registration statement shall be reduced to the number of Maximum Shares
set forth in such statement of the managing underwriter, such reduction to be
effected on a pro rata basis (with respect only to Hall and the Other
Requesting Stockholders who will continue to participate) in accordance with
the number of shares requested to be so registered by each holder as compared
to the total number of shares requested to be so registered by all holders.
The Corporation shall not limit the number of Registrable Securities to be
included in a registration pursuant to this Agreement in order to include
shares held by stockholders with no registration rights or to include founder's
stock or any other shares of Common Stock issued to employees, officers,
directors, or consultants pursuant to any employee benefit plan, or, with
respect to registrations under Section 3 or 4 hereof, in order to include in
such registration securities registered for the Corporation's own account or,
with respect to registrations under this Section 2, in order to include in such
registration Common Stock held by the Corporation as treasury stock.
(b) The Corporation shall have the right to select any
underwriters, including the managing underwriter, of any public offering of
shares of Common Stock subject to the provisions of this Section 2. Nothing in
this Section 2 shall create any liability on the part of the Corporation to
Hall if the Corporation should decide not to file or to withdraw such a
registration statement in accordance with the terms of this Agreement.
<PAGE> 3
(c) The Corporation may withdraw any registration statement
and abandon any proposed offering initiated by the Corporation without the
consent of Hall, notwithstanding the request of Hall to participate therein in
accordance with this Section 2, if the Corporation determines that such action
is in the best interests of the Corporation. The Corporation will promptly
advise Hall of withdrawal of the Registration Statement. The Corporation shall
have no right to withdraw any registration statement filed pursuant to Section
3 or 4 of this Agreement.
3. Demand Rights.
(a) Subject to this Section 3(a) and Section 3(d), at any time
and from time to time following 180 days after the closing of the IPO and
continuing until the expiration of the 48 months after the IPO (the "Demand
Period"), Hall may notify the Corporation of his demand for registration
pursuant to this Section 3, in which case the provisions of this Section 3
shall apply. Such demand shall be with respect to at least $500,000 of
Registrable Securities (based on the average closing price for the Common Stock
on the NASDAQ national market or such U.S. securities exchange to which the
Common Stock shall have been admitted to trading during the ten trading days
immediately preceding the date of such request). If a demand referred to in
the foregoing sentences is not made within the Demand Period, then the
provisions of this Section 3 shall have no further force or effect (and Hall
shall have no further rights under this Section 3) as of the expiration of the
Demand Period.
(b) No more than one demand may be made under this Section 3.
(c) In the event the Corporation's Board of Directors
reasonably determines in good faith that the filing of a registration statement
would be significantly disadvantageous to the Corporation, notwithstanding
anything to the contrary contained in this Agreement, the Corporation may
postpone the preparation and filing of the registration statement for such
period (up to 120 days) as the Corporation shall in good faith deem necessary.
(d) The Corporation also shall not be obligated to take any
action to effect any such registration, qualification or compliance pursuant to
this Section 3 during the period starting with the date 60 days prior to the
Corporation's estimated date of filing of, and ending on the date six months
immediately following the effective date of, any registration statement
pertaining to the securities of the Corporation (other than a registration of
securities with respect to any employee or directors stock option plan or debt
securities), provided that the Corporation is actively employing in good faith
all reasonable efforts to cause such registration statement to become
effective; provided further that such provision shall apply to a shelf
registration pursuant to Rule 415 only for 90 days after the effectiveness
thereof.
4. Registration on Form S-3.
(a) At such time as the Corporation shall be eligible to
register Common Stock on Form S-3 for sale on behalf of Hall following the IPO,
in addition to the rights contained in the provisions of Sections 2 and 3, Hall
shall have the right or from time to time
<PAGE> 4
to request registrations on Form S-3 (such requests shall be in writing and
shall state the number of shares of Registrable Securities to be disposed of
and the intended methods of disposition of such shares by Hall); provided that
no more than one such registration per calendar year may be requested under
this Section 4.
(b) If a request complying with the requirements of Section
4(a) hereof is delivered to the Corporation, the provisions of Sections 3(c),
3(d) and 6 hereof shall apply to such registration. If the registration is for
an underwritten offering, the provisions of Sections 3(c), 3(d), 5 and 6 hereof
shall apply to such registration.
5. Certain Registration Conditions. Anything in this Agreement to
the contrary notwithstanding, the Corporation shall not be required to effect a
registration of any Registrable Securities pursuant to this Agreement, or file
any post-effective amendment thereto:
(a) unless Hall agrees (if such shares are included pursuant
to Section 2) (i) to sell and distribute a portion or all of Hall's Registrable
Securities in accordance with the plan or plans of distribution adopted by and
through underwriters, if any, acting for the Corporation, and (ii) to bear a
pro rata share of underwriter's discounts and commissions based on the
proportion of shares of Registrable Securities registered; and
(b) unless the Corporation and the underwriters for the
Corporation, if any, shall have received from Hall all such information as the
Corporation and such underwriters may reasonably request concerning Hall to
enable the Corporation to include in the registration statement all material
facts required to be disclosed therein. Notwithstanding the foregoing, Hall
shall not be required to furnish to the Corporation any personal financial
information of Hall unrelated to Hall's holdings of Registrable Securities or
other securities of the Corporation, provided that Hall shall nonetheless be
required to furnish all information reasonably requested by any such
underwriter.
If a holder who has requested inclusion in such registration as provided above
does not agree to the terms of any such underwriting, such holder shall be
excluded therefrom by written notice from the Corporation, the underwriter or
the initiating holders. The securities so excluded shall also be withdrawn
from registration. If securities are so withdrawn from the registration and if
the number of securities to be included in such registration was previously
reduced as a result of marketing factors pursuant to Section 2, then the
Corporation shall offer to all holders who have retained rights to include
securities in the registration the right to include additional securities in
the registration in an aggregate amount equal to the number of shares so
withdrawn, with such shares to be allocated among such holders requesting
additional inclusion in accordance with Section 2(a) of this Agreement.
6. Covenants and Procedures. If the Corporation becomes obligated
under the provisions of Section 2, 3 or 4 to effect registration of shares of
Registrable Securities on behalf of Hall:
<PAGE> 5
(a) The Corporation, at its own expense as provided in Section
8, shall prepare a registration statement covering such shares of Registrable
Securities and use commercially reasonable efforts to cause such registration
statement to be filed with the Commission within 60 days of the demand or
request under Section 3 or 4 or receipt of a Participation Notice under Section
2 and to become effective and shall keep such registration statement effective
for a period of one hundred twenty (120) days or until the holder or holders
have completed the distribution described in the registration statement
relating thereto, whichever first occurs; provided, however, that (i) such
120-day period shall be extended for a period of time equal to the period the
holder refrains from selling any securities included in such registration at
the request of an underwriter of Common Stock (or other securities) of the
Corporation; and (ii) in the case of any registration of Registrable Securities
on Form S-3 which are intended to be offered on a continuous or delayed basis,
such 120-day period shall be extended, if necessary, to keep the registration
statement effective until all such Registrable Securities are sold, provided
that Rule 415, or any successor rule under the Securities Act, permits an
offering on a continuous or delayed basis, and provided further that applicable
rules under the Securities Act governing the obligation to file a
post-effective amendment permit, in lieu of filing a post-effective amendment
that (I) includes any prospectus required by Section 10(a)(3) of the Securities
Act or (II) reflects facts or events representing a material or fundamental
change in the information set forth in the registration statement, the
incorporation by reference of information required to be included in (I) and
(II) above to be contained in periodic reports filed pursuant to Section 13 or
15(d) of the Exchange Act in the registration statement; and the Corporation
will file such post-effective amendments to such registration statement (and
use commercially reasonable efforts to cause them to be effective) and such
supplements as are necessary so that current prospectuses are at all times
available during the period such registration statement is effective. Hall
shall promptly provide the Corporation with such information with respect to
Hall's shares of Registrable Securities to be so registered and, if applicable,
the proposed terms of the offering thereof as is required for such
registration. Further, if the shares of Registrable Securities to be covered
by the registration statement are not to be sold to or through underwriters
acting for the Corporation, the Corporation shall (i) deliver to Hall as
promptly as practicable as many copies of preliminary prospectuses as Hall may
reasonably request, and Hall shall keep a written record of the distribution of
such preliminary prospectuses and shall refrain from delivery of such
preliminary prospectuses in any manner or under any circumstances which would
violate the Securities Act or the securities laws of any other jurisdiction,
including the various states of the United States, (ii) deliver to Hall, as
soon as practicable after the effective date of the registration statement, and
from time to time thereafter while such registration statement is effective, as
many copies of the prospectuses required to be delivered in connection with the
sale of shares of Registrable Securities registered under the registration
statement as Hall may reasonably request, and (iii) in case of the happening,
after the effective date of such registration statement and during the period
it is effective, of any event or occurrence which would be set forth in an
amendment of or supplement to such prospectus to make any statements therein
not misleading or to correct any misleading omissions, give Hall written notice
thereof and prepare and furnish to Hall, in such quantities as Hall may
reasonably request, copies of such amended prospectus or of such supplement to
be attached to the prospectus in order that the prospectus, as so amended or
<PAGE> 6
supplemented, will not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading.
(b) On or prior to the date on which the registration
statement is declared effective, the Corporation shall use commercially
reasonable efforts to register or qualify, and Hall, and his counsel, shall
cooperate with the Corporation in connection with the registration or
qualification of, the Registrable Securities covered by the registration
statement for offer and sale under the securities or blue sky laws of each
state and other jurisdiction of the United States as Hall or the underwriter
reasonably requests, to use commercially reasonable efforts to keep each such
registration or qualification effective, including through new filings, or
amendments or renewals as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by
such registration statement, during the period such registration statement is
required to be kept effective and to do any and all other acts or things
necessary or advisable to enable the disposition in all such jurisdictions of
the Registrable Securities covered by the applicable registration statement,
provided that the Corporation will not be required to qualify generally to do
business in any jurisdiction where it is not then so qualified.
(c) The Corporation shall cause all of Hall's Registrable
Securities included in such registration statement to be listed, by the date of
the first sale of such Registrable Securities pursuant to such registration
statement, on each securities exchange on which the Common Stock of the
Corporation is then listed or proposed to be listed, if any.
(d) The Corporation shall provide a transfer agent and
registrar for all Registrable Securities registered pursuant to such
registration statement and a CUSIP number for all such Registrable Securities,
in each case not later than the effective date of such registration.
(e) The Corporation shall make generally available to Hall an
earnings statement satisfying the provisions of Section 11(a) of the Securities
Act no later than 45 days after the end of the 12-month period beginning with
the first day of the Corporation's first fiscal quarter commencing after the
effective date of the registration statement, which earnings statement shall
cover said 12-month period, which requirement will be deemed to be satisfied if
the Corporation timely files complete and accurate information on Forms 10-Q,
10-K and 8-K under the Exchange Act and otherwise complies with Rule 158 under
the Securities Act as soon as feasible.
(f) The Corporation shall cooperate with Hall to facilitate
the timely preparation and delivery of certificates (not bearing any
restrictive legends) representing Registrable Securities to be sold under the
registration statement, and enable such certificates to be in such
denominations and registered in such names as the managing underwriter or
underwriters, if any, or Hall may request, subject to the underwriters'
obligation to return any certificates representing Registrable Securities not
sold.
<PAGE> 7
(g) The Corporation shall make available for inspection by
Hall and any attorney, accountant or other agent retained by Hall
(collectively, the "Inspectors"), all financial and other records, pertinent
corporate documents and properties of the Corporation, as shall be reasonably
necessary to enable them to exercise their due diligence responsibility and
cause the Corporation's officers, directors and employees to supply all
nonconfidential information reasonably requested by any such Inspector in
connection with such registration statement. As a condition to providing such
access, the Corporation may require that any and all Inspectors execute and
deliver confidentiality agreement, in form and substance acceptable to the
Corporation, and that confidentiality procedures be observed with respect to
such information.
(h) The Corporation shall use commercially reasonable efforts
to obtain a "cold comfort" letter from the Corporation's independent public
accountants, and an opinion of counsel for the Corporation, each in customary
form and covering such matters of the type customarily covered by cold comfort
letters and opinions of counsel in connection with public offerings of
securities.
7. Indemnification.
(a) Indemnification by the Corporation. In the event of any
registration under the Securities Act pursuant to this Agreement of shares of
Registrable Securities held by Hall, the Corporation will hold harmless Hall
and each person, if any, who controls Hall within the meaning of the Securities
Act, against any losses, claims, damages or liabilities (including legal fees
and costs of court), joint or several, to which Hall or such controlling person
may become subject under the Securities 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, on the effective date thereof, in any registration
statement under which such Registrable Securities were registered under the
Securities Act, any final prospectus contained therein, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; and will reimburse
Hall and each such controlling person for any legal or any other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage or liability; provided, the Corporation shall not be
liable to any Hall or such controlling persons in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon
an untrue statement or alleged untrue statement or omission or alleged omission
made in such registration statement or final prospectus or such amendment or
supplement in reliance upon and in conformity with information furnished to the
Corporation through a written instrument duly executed by Hall or such
controlling person specifically for use in the preparation thereof.
(b) Indemnification by Hall. In the event of any registration
hereunder of any shares of Registrable Securities then held by Hall, Hall shall
indemnify and hold harmless (in the same manner and to the same extent as set
forth in Section 7(a)) the Corporation, each director of the Corporation, each
officer of the Corporation who shall sign
<PAGE> 8
such registration statement, each underwriter of such Registrable Securities
and any person who controls the Corporation or such underwriter within the
meaning of the Securities Act, with respect to any statement or omission from
such registration statement, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereto, if such statement or
omission was made in reliance upon and in conformity with information furnished
to the Corporation through a written instrument duly executed by Hall
specifically for use in the preparation of such registration statement,
preliminary prospectus or final prospectus or such amendment or supplement
thereto; provided, however, that Hall's liability hereunder shall not exceed
the amount of the proceeds received by Hall in connection with the sale of
Registrable Securities pursuant to such Registration Statement.
(c) Indemnification Procedures. Promptly after receipt by an
indemnified party of notice of the commencement of any action involving a claim
referred to in the preceding Section 7(a) or (b), such indemnified party will,
if a claim in respect thereof is to be made against an indemnifying party, give
written notice to the indemnifying party of the commencement of such action.
In case any such action is brought against an indemnified party, the
indemnifying party will be entitled to participate in and to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, and provided that the indemnifying
party in fact assumes such defense, the indemnifying party will not be liable
to such indemnified party for any legal or other expenses incurred after the
date of such notice by the latter in connection with the defense thereof.
Whether or not such defense is assumed by the indemnifying party, the
indemnifying party will not be subject to any liability for any settlement made
without its consent. No indemnifying party will consent to entry of any
judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect of such claim or
litigation. The indemnified party shall be entitled to participate with its
own counsel (at the indemnified party's own expense) if reasonably necessary to
avoid a conflict of interest.
(d) Contribution. If the indemnification provided for in
Sections 7(a), (b) and (c) from the indemnifying party is unavailable to an
indemnified party hereunder in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then the 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 or expenses in such proportion as is appropriate to
reflect the relative fault of the indemnifying party and indemnified parties in
connection with the actions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable
considerations. The relative fault of such indemnifying party and indemnified
parties shall be determined by reference to, among other things, whether any
action in question, including any untrue or alleged untrue statement of a
material fact or a material omission, has been made by, or relates to
information supplied by, such indemnifying party or indemnified parties, and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such action. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be
<PAGE> 9
deemed to include any legal or other fees or expenses reasonably incurred by
such party in connection with any investigation or proceeding. For purposes of
the foregoing, 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 above. Notwithstanding the provisions of this Section 7(d), Hall
shall not be required to contribute any amount in excess of the amount by which
the total price at which the Registrable Securities of Hall were offered to the
public exceeds the amount of any damages which Hall has otherwise been required
to pay by reason of such untrue statement or 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. Expenses. All expenses incurred by the Corporation in connection
with any registration statement covering Registrable Securities including,
without limitation, all registration and filing fees (including all expenses
incident to filing with the National Association of Securities Dealers, Inc.),
printing expenses, fees and disbursements of counsel for the Corporation and of
its independent certified public accountants, the reasonable fees and
disbursements of one counsel for collectively Hall and Other Requesting
Stockholders whose shares are included in such registration, and the expense of
qualifying such shares under state blue sky laws, shall be borne by the
Corporation; provided, all underwriter's discounts and commissions relating to
the shares of Registrable Securities to be sold by Hall shall be borne by Hall
pro rata based on the proportion of shares of Registrable Securities registered
on Hall's behalf.
9. Dispositions During Registration. Upon written request by the
Corporation, Hall will agree, upon the registration of any of Hall's shares of
Registrable Securities not to sell or otherwise dispose of any shares of Common
Stock (other than Registrable Securities covered by such registration, which
may be sold in accordance with the plan or plans of distribution described in
the registration statement) owned by Hall for a period of 90 days following the
effective date of such registration statement or for such longer period (not to
exceed 180 days) as may be required under the plan or plans of distribution set
forth in such registration statement. Hall shall comply with the foregoing
requirements even if the Registrable Securities are not being included in such
registration, if (a) at such time Hall (together with such holder's Affiliates)
owns 5% or more of the Common Stock not being registered by such registration
and (b) other holders of 5% or more of the Common Stock not being registered by
such registration are similarly bound. For purposes of this Agreement,
"Affiliate" shall have the meaning given such term under the Securities Act.
10. Term of Registration Rights. The registration rights granted
pursuant to this Agreement shall terminate upon either (a) Hall's written
consent or (b) the disposition of all shares of Registrable Securities (i)
pursuant to registrations effected by the Corporation pursuant to Sections 2, 3
or 4 hereof or (ii) pursuant to Rule 144; provided, the demand registration
rights granted to Hall pursuant to Section 3 shall terminate as of the
expiration of the Demand Period. Notwithstanding the foregoing, the
Corporation shall not be obligated to take any action to effect a registration
pursuant to this Agreement if, at the time of Hall's
<PAGE> 10
request pursuant to Section 3 or 4 or Participation Notice pursuant to Section
2, Hall may sell in an existing market for the Common Stock all of the
Registrable Securities requested to be included in a registration in a three-
month period in reliance upon Rule 144, or any other rule or regulation of the
Commission that may at any time permit Hall to sell securities to the public
without registration.
11. Information by Holder. Hall shall furnish to the Corporation
such information regarding Hall and the distribution proposed by Hall as the
Corporation may reasonably request in writing and as shall be reasonably
required in connection with any registration, qualification or compliance.
12. Rule 144 Reporting. With a view to making available the benefits
of certain rules and regulations of the Commission that may permit the sale of
the Registrable Securities to the public without registration, the Corporation
agrees to use its commercially reasonable efforts to:
(a) Make and keep public information regarding the Corporation
available as those terms are understood and defined in Rule 144 under the
Securities Act, at all times from and after ninety (90) days following the
effective date of the first registration under the Securities Act filed by the
Corporation for an offering of its securities to the general public;
(b) File with the Commission in a timely manner all reports
and other documents required of the Corporation under the Securities Act and
the Exchange Act at any time after it has become subject to such reporting
requirements;
(c) So long as Hall owns any Registrable Securities, furnish
to Hall forthwith upon written request a written statement by the Corporation
as to its compliance with the reporting requirements of Rule 144 (at any time
from and after ninety (90) days following the effective date of the first
registration statement filed by the Corporation for an offering of its
securities to the general public), and of the Securities Act and the Exchange
Act (at any time after it has become subject to such reporting requirements), a
copy of the most recent annual or quarterly report of the Corporation, and such
other reports and documents so filed as such holder may reasonably request in
availing itself of any rule or regulation of the Commission allowing such
holder to sell any such securities without registration.
13. Miscellaneous.
(a) Entire Agreement. This Agreement (including the documents
referred to herein) and the Employment Agreement to be entered into between the
Corporation and Hall constitute the entire agreement among the parties hereto
and supersede any prior understandings, agreements, statements, or
representations between the parties hereto, written or oral, to the extent they
relate in any manner to the subject matter hereof including that certain letter
of intent dated December 3, 1996.
<PAGE> 11
(b) Succession and Assignment. This Agreement shall be
binding upon and inure to the benefit of the parties named herein and their
respective successors and permitted assigns. Excepting Permitted Transfers
(hereinafter defined), no party may assign either this Agreement or any of its
rights, interests or obligations hereunder without the prior written approval
of the other party except that Hall may assign Hall's rights, interest or
obligations with the consent of the Corporation, which consent shall not
unreasonably be withheld. The term "Permitted Transfer" shall mean (a) any
transfer of Registrable Securities by Hall to any trust or other custodial
arrangement created primarily for the benefit of one or more of Hall, Hall's
spouse or other individuals comprising Hall's immediate family and (b) any
transfer of Registrable Securities to Hall, Hall's spouse or the individuals
comprising the immediate family of Hall upon the termination of such trust.
(c) Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(d) Notices. All notices, requests, demands, claims, and
other communications hereunder will be in writing. Any notice, request,
demand, claim, or other communication hereunder shall be sent by (i) personal
delivery (including courier service), (ii) telecopier during normal business
hours to the number indicated, or (iii) registered or certified mail, return
receipt requested, postage prepaid, and addressed to the intended recipient as
set forth below (any communication shall be deemed given upon receipt):
If to the Corporation:
First Sierra Financial, Inc.
Texas Commerce Tower, Suite 7050
600 Travis Street
Houston, TX 77002
Attention: Thomas J. Depping
Telecopier No.: 713-221-1818
If to Hall:
Oren M. Hall
c/o Heritage Credit Services, Inc.
2280 Vehicle Drive, Suite 100
Rancho Cordova, CA 95670
Telecopier No.: (916) 638-7590
Any party may change its telecopier number or its address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other party notice in the manner herein set forth.
<PAGE> 12
(e) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware. In any action
related to this Agreement the prevailing party shall be entitled to an award of
attorneys' fees and court costs incurred in such action including any appeal
thereof.
(f) Amendments and Waivers. No amendments of any provision of
this Agreement shall be valid unless the same shall be in writing and signed by
the Corporation and Hall. No waiver by any party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
(g) Severability. Any term or provision of this Agreement
that is invalid or unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the offending term or provision in
any other situation or in any other jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
FIRST SIERRA FINANCIAL, INC.
By:
----------------------------------
Thomas J. Depping, President
-------------------------------------
OREN M. HALL
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of the Company
Subsidiary State of Incorporation
- ---------- ----------------------
First Sierra Receivables Inc. Delaware
First Sierra Receivables II, Inc. Delaware
First Sierra Acquisition, Inc. Delaware
Corporate Capital Leasing Group Pennsylvania
First Sierra California, Inc. Delaware
<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
February 28, 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
February 27, 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
February 28, 1997
<PAGE> 1
EXHIBIT 23.5
CONSENT OF RICHARD J. CAMPO
I consent to being named, in the Registration Statement on Form S-1 to
be filed by First Sierra Financial, Inc., as about to become a director of
First Sierra Financial, Inc.
/s/ Richard J. Campo
- -------------------------
Richard J. Campo
Date: February 24, 1997
<PAGE> 1
EXHIBIT 23.6
CONSENT OF NORMAN J. METCALFE
I consent to being named, in the Registration Statement on Form S-1 to
be filed by First Sierra Financial, Inc., as about to become a director of
First Sierra Financial, Inc.
/s/ Norman J. Metcalfe
- -------------------------
Norman J. Metcalfe
Date: February 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 2,598
<SECURITIES> 14,425
<RECEIVABLES> 61,795
<ALLOWANCES> 525
<INVENTORY> 0
<CURRENT-ASSETS> 78,293
<PP&E> 1,348
<DEPRECIATION> 299
<TOTAL-ASSETS> 79,342
<CURRENT-LIABILITIES> 73,198
<BONDS> 0
57
3,890
<COMMON> 0
<OTHER-SE> 2,197
<TOTAL-LIABILITY-AND-EQUITY> 79,342
<SALES> 11,364
<TOTAL-REVENUES> 11,364
<CGS> 2,273
<TOTAL-COSTS> 2,273
<OTHER-EXPENSES> 1,531
<LOSS-PROVISION> 537
<INTEREST-EXPENSE> 5,014
<INCOME-PRETAX> 2,009
<INCOME-TAX> 792
<INCOME-CONTINUING> 1,217
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,217
<EPS-PRIMARY> .20
<EPS-DILUTED> 0
</TABLE>
