<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Sections 240.14a-11(c) or
Section 240.14a-12
Filing By:
First Sierra Financial, Inc. (File No. 0-22525)
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11:
(1) Title of each class of securities to which transaction applies:
First Sierra Financial, Inc. Common Stock, $.01 par value.
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(2) Aggregate number of securities to which transaction applies(1):
3,160,000 shares
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11(2) (set forth the amount on which the filing
fee is calculated and state how it was determined):
$5.52
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(4) Proposed maximum aggregate value of transaction:
$17,448,000
- --------------------------------------------------------------------------------
(5) Total fee paid:
$3,490
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
- ---------------
(1) The estimated number of shares of First Sierra Financial, Inc. ("First
Sierra") Common Stock to which the Proxy Statement relates.
(2) Estimated pursuant to Rule 0-11(c)(1) and 0-11(a)(4) under the Exchange Act
solely for the purpose of calculating the filing fee, based on the book
value of the shares of Oliver-Allen Corporation, Inc. Common Stock
multiplied by the 600 shares of Oliver-Allen Corporation, Inc. Common Stock
to be exchanged in connection with the Merger.
<PAGE> 2
FIRST SIERRA FINANCIAL, INC.
600 TRAVIS STREET, SUITE 7050
HOUSTON, TEXAS 77002
, 1998
Dear Stockholder of First Sierra Financial, Inc.:
You are invited to attend a Special Meeting of Stockholders of First Sierra
Financial, Inc. ("First Sierra") to be held on , 1998 at 10:00 a.m.,
Central Time. The Special Meeting will be held at , Houston,
Texas.
At the Special Meeting you will be asked to consider and vote upon (i) the
issuance of shares of Common Stock of First Sierra (the "First Sierra Common
Stock") pursuant to an Agreement and Plan of Merger, dated as of June 10, 1998
(the "Merger Agreement"), by and among First Sierra, Sierra Acquisition
Corporation I ("Subsidiary"), a wholly-owned subsidiary of First Sierra, and
Oliver-Allen Corporation, Inc. ("OAC" or "Oliver-Allen") (the "Merger Proposal";
(ii) a proposal to amend First Sierra's Restated Certificate of Incorporation to
increase its authorized shares of Common Stock from 25,000,000 shares to
100,000,000 shares (the "Charter Proposal"); and (iii) a proposal to amend First
Sierra's 1997 Stock Option Plan to increase the number of shares reserved for
issuance thereunder to 20% of the shares of First Sierra Common Stock
outstanding at any given time (the "Option Plan Proposal").
The Merger Agreement provides, among other things, for the merger of
Subsidiary with and into OAC (the "Merger"), pursuant to which OAC would become
a wholly-owned subsidiary of First Sierra and each outstanding share of common
stock of OAC, par value $10 per share ("OAC Common Stock"), would be converted
into a number of shares of First Sierra Common Stock, determined by dividing (i)
$79,000,000 minus any transaction fees in excess of $5,100,000 by (ii) $25 and
then dividing the quotient thereof by the aggregate number of shares of OAC
Common Stock issued and outstanding at the effective time of the Merger (the
"Exchange Ratio"). In addition, each option to purchase OAC Common Stock that is
outstanding at the Effective Time (an "OAC Option") shall be converted into an
option to purchase the number of shares of First Sierra Common Stock equal to
the number of shares of OAC Common Stock subject to the OAC Option multiplied by
the Exchange Ratio at an exercise price equal to the exercise price under the
OAC Option divided by the Exchange Ratio (the "Adjusted Exchange Ratio"). Upon
consummation of the Merger, First Sierra would issue approximately 3,160,000
shares of First Sierra Common Stock to the stockholders of OAC, representing
approximately 20.0% of the total shares of First Sierra Common Stock to be
outstanding immediately after the Merger, based upon the number of shares of
First Sierra Common Stock outstanding as of July 9, 1998. On , 1998,
the last reported sale price of First Sierra Common Stock on the Nasdaq National
Market was $ per share.
The Merger is subject to a number of conditions, including obtaining the
approval of the stockholders of First Sierra and obtaining any necessary
regulatory waivers or approvals. A summary of the basic terms and conditions of
the Merger, certain financial and other information relating to First Sierra and
OAC and a copy of the Merger Agreement are set forth in the accompanying Proxy
Statement. The affirmative vote of a majority of the total votes cast in person
or by proxy at the Special Meeting is necessary to approve the issuance of
shares of First Sierra Common Stock in connection with the Merger. The Merger
Agreement has previously been approved by the stockholders of OAC. If the
requisite approval of the stockholders of First Sierra is received, the Merger
is expected to be consummated on , 1998.
Your Board of Directors has unanimously approved the terms and conditions
of the Merger and the Merger Agreement. In addition, the Board of Directors has
received an opinion from Friedman, Billings, Ramsey & Co., Inc. (a copy of which
is included in the accompanying Proxy Statement) that the Exchange Ratio is fair
to First Sierra from a financial point of view. THE BOARD OF DIRECTORS OF FIRST
SIERRA BELIEVES THAT THE PROPOSED MERGER WITH OAC IS IN THE BEST INTERESTS OF
FIRST SIERRA AND ITS STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
APPROVAL OF THE ISSUANCE OF SHARES OF FIRST SIERRA COMMON STOCK IN CONNECTION
WITH THE MERGER.
<PAGE> 3
The amendment to First Sierra's Restated Certificate of Incorporation to
increase the number of authorized shares of Common Stock from 25,000,000 to
100,000,000 will provide First Sierra with additional shares for issuance at the
Board of Directors' discretion in connection with future acquisitions, stock
splits and stock dividends equity financings, employee benefit plans and other
corporate purposes.
The affirmative vote of the holders of a majority of the outstanding shares
of First Sierra Common Stock is necessary to approve the Charter Proposal. THE
BOARD OF DIRECTORS OF FIRST SIERRA HAS UNANIMOUSLY APPROVED THE CHARTER PROPOSAL
AND RECOMMENDS THAT YOU VOTE IN FAVOR OF THE CHARTER PROPOSAL.
The Board of Directors of First Sierra believes that an increase in the
number of shares of First Sierra Common Stock available for grant under the
First Sierra Financial, Inc. 1997 Stock Option Plan is necessary in order to be
able to attract and retain valuable employees through the grant of stock
options. The affirmative vote of a majority of the total votes cast in person or
by proxy at the Special Meeting is necessary to approve the Option Plan
Proposal. THE BOARD OF DIRECTORS OF FIRST SIERRA UNANIMOUSLY APPROVED THE OPTION
PLAN PROPOSAL AND RECOMMENDS THAT YOU VOTE IN FAVOR OF THE OPTION PLAN PROPOSAL.
You should read carefully the accompanying Notice of Special Meeting of
Stockholders and the Proxy Statement for details of the Merger, the Charter
Proposal and the Option Plan Proposal.
Regardless of the number of shares you hold or whether you plan to attend
the Special Meeting, we urge you to complete, sign, date, and return the
enclosed proxy card immediately. If you attend the Special Meeting, you may vote
in person if you wish, even if you have previously returned your proxy card.
Sincerely,
/s/ THOMAS J. DEPPING
Thomas J. Depping
Chairman of the Board
<PAGE> 4
FIRST SIERRA FINANCIAL, INC.
600 TRAVIS STREET, SUITE 7050
HOUSTON, TEXAS, 77002
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1998
To the Stockholders of First Sierra Financial, Inc.:
Notice is hereby given that a Special Meeting of Stockholders of First
Sierra Financial, Inc. ("First Sierra") will be held at ,
Houston, Texas, on , 1998, at 10:00 a.m., Central Time, to consider
and act upon the following proposals (the "Proposals"):
1. To approve the issuance of shares of Common Stock of First Sierra
("First Sierra Common Stock") pursuant to an Agreement and Plan of Merger,
dated as of June 10, 1998 (the "Merger Agreement"), by and among
Oliver-Allen Corporation, Inc. ("OAC") and Sierra Acquisition Corporation I
("Subsidiary"), a wholly-owned subsidiary of First Sierra, providing for,
among other things, the merger of Subsidiary with and into OAC (the
"Merger") and the conversion of each outstanding share of OAC common stock,
par value $10 per share, into a number of shares of First Sierra Common
Stock, determined by dividing (i) $79,000,000 minus any transaction fees in
excess of $5,100,000 by (ii) $25 and then dividing the quotient thereof by
the aggregate number of shares of common stock of OAC issued and
outstanding as of the effective time of the Merger (the "Merger Proposal");
2. To approve an amendment to First Sierra's Restated Certificate of
Incorporation to increase its authorized shares of Common Stock from
25,000,000 to 100,000,000 (the "Charter Proposal"); and
3. To approve an amendment to First Sierra's 1997 Stock Option Plan to
increase the number of shares of First Sierra Common Stock reserved for
issuance thereunder to 20% of the shares of First Sierra Common Stock
outstanding at any given time (the "Option Plan Proposal").
The meeting may be postponed or adjourned from time to time, and at any
reconvened meeting actions with respect to the matters specified in this notice
may be taken without further notice to stockholders unless required by the
Bylaws of First Sierra.
Only stockholders of record at the close of business on ,
1998, are entitled to notice of and to vote on the Proposals at the Special
Meeting and any postponements or adjournments thereof. The approval and adoption
of the Merger Proposal and the Option Plan Proposal each require the affirmative
vote of a majority of the total votes cast in person or by proxy at the Special
Meeting. The approval and adoption of the Charter Proposal requires the
affirmative vote of the holders of a majority of the shares of First Sierra
Common Stock outstanding on the record date. The Merger Proposal, the Charter
Proposal, the Option Plan Proposal and other related matters are more fully
described in the accompanying Proxy Statement and the Appendices thereto, which
form a part of this notice and should be read carefully by all stockholders.
By Order of the Board of Directors,
/s/ SANDY B. HO
Sandy B. Ho
Corporate Secretary
Houston, Texas
, 1998
WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE SPECIAL MEETING, PLEASE SIGN AND
DATE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED PREPAID ENVELOPE. IF YOU
ATTEND THE SPECIAL MEETING, YOU MAY VOTE EITHER IN PERSON OR BY YOUR PROXY.
<PAGE> 5
FIRST SIERRA FINANCIAL, INC.
PROXY STATEMENT
This Proxy Statement is being furnished to the stockholders of First Sierra
Financial, Inc., a Delaware corporation ("First Sierra"), in connection with the
solicitation of proxies by its Board of Directors to be voted at a special
meeting of stockholders of First Sierra (the "Special Meeting") scheduled to be
held on , 1998, at 10:00 a.m., Central Time, at ,
Houston, Texas, and at any adjournment or postponement thereof.
At the Special Meeting, the holders of common stock, par value $.01 per
share of First Sierra ("First Sierra Common Stock"), will be asked to consider
and vote upon a proposal to approve the issuance of shares of First Sierra
Common Stock pursuant to an Agreement and Plan of Merger, dated as of June 10,
1998 (the "Merger Agreement"), among First Sierra, Sierra Acquisition
Corporation I, a wholly-owned subsidiary of First Sierra ("Subsidiary"), and
Oliver-Allen Corporation, Inc. ("OAC") providing for the merger of Subsidiary
with and into OAC (the "Merger"). Such approval is a condition to consummating
the Merger. Upon consummation of the Merger, OAC will become a wholly-owned
subsidiary of First Sierra and each outstanding share of common stock of OAC,
par value $10 per share ("OAC Common Stock"), will be converted into a number of
shares of First Sierra Common Stock determined by dividing (i) $79,000,000 minus
any transaction fees in excess of $5,100,000 by (ii) $25 and then dividing the
quotient thereof by the aggregate number of shares of OAC Common Stock issued
and outstanding at the effective time of the Merger (the "Exchange Ratio"). See
"The Plan of Merger and Terms of the Merger." A copy of the Merger Agreement is
attached hereto as Appendix A and incorporated herein by reference.
On , 1998, the last reported sale price of First Sierra Common
Stock on the Nasdaq National Market ("Nasdaq") was $ per share. Based on
such closing price, the consideration to be received by stockholders of OAC
pursuant to the Merger would be approximately $ per share of OAC Common
Stock. Based upon the number of shares of First Sierra Common Stock outstanding
as of July 9, 1998, approximately 15.8 million shares of First Sierra Common
Stock will be outstanding after the Merger is consummated, of which
approximately 20.0% will be owned by former stockholders of OAC and
approximately 80.0% will be owned by current stockholders of First Sierra.
At the Special Meeting, the holders of First Sierra Common Stock also will
be asked to vote upon (i) a proposal to amend First Sierra's Restated
Certificate of Incorporation to increase its authorized shares of Common Stock
from 25,000,000 shares to 100,000,000 shares (the "Charter Proposal") and (ii) a
proposal to amend First Sierra's 1997 Stock Option Plan to increase the number
of shares of First Sierra Common Stock reserved for issuance thereunder to 20%
of the shares of First Sierra Common Stock outstanding at any given time (the
"Option Plan Proposal").
This Proxy Statement and the accompanying form of proxy are first being
mailed to stockholders of First Sierra on or about , 1998. A
stockholder who has given a proxy may revoke it at any time prior to its
exercise.
The date of this Proxy Statement is , 1998.
<PAGE> 6
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY FIRST SIERRA OR OAC. THIS PROXY STATEMENT DOES NOT CONSTITUTE A
SOLICITATION OF A PROXY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT
IS UNLAWFUL TO MAKE SUCH A SOLICITATION. THE DELIVERY OF THIS PROXY STATEMENT
SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF FIRST SIERRA OR OAC SINCE THE DATE HEREOF OR THAT THE
INFORMATION IN THIS PROXY STATEMENT IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF. ALL INFORMATION HEREIN WITH RESPECT TO FIRST SIERRA AND SUBSIDIARY
HAS BEEN FURNISHED BY FIRST SIERRA, AND ALL INFORMATION HEREIN WITH RESPECT TO
OAC HAS BEEN FURNISHED BY OAC.
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION.......................................
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE...........
FORWARD-LOOKING STATEMENTS..................................
SUMMARY.....................................................
The Companies.............................................
The Special Meeting.......................................
The Merger................................................
THE MEETING.................................................
Date, Time and Place of the Meeting.......................
Purpose of the Meeting....................................
Record Date and Outstanding Shares........................
Voting and Revocation of Proxies..........................
Vote Required for Approval................................
Solicitation of Proxies...................................
Other Matters.............................................
THE MERGER AND RELATED TRANSACTIONS.........................
General Description of the Merger.........................
Background of the Merger..................................
First Sierra's Reasons for the Merger.....................
Recommendation of the Board of Directors of First
Sierra.................................................
OAC's Reasons For the Merger..............................
Opinion of Financial Advisor to First Sierra..............
Certain Federal Income Tax Consequences...................
Accounting Treatment......................................
Government and Regulatory Approvals.......................
Interests of Certain Persons in the Merger................
Restrictions On Resales By Affiliates.....................
Federal Securities Law Consequences; Resale Registration
Statement..............................................
AMENDMENT TO FIRST SIERRA RESTATED CERTIFICATE OF
INCORPORATION.............................................
APPROVAL OF AMENDMENT TO THE COMPANY'S 1997 STOCK OPTION
PLAN......................................................
General...................................................
Summary of 1997 Stock Option Plan.........................
Options Granted in 1997 Under the 1997 Stock Option
Plan...................................................
Federal Income Tax Consequences of the Plan...............
Board Recommendation......................................
THE PLAN OF MERGER AND TERMS OF THE MERGER..................
Effective Time of the Merger..............................
Manner and Basis for Converting Shares....................
Conditions to the Merger..................................
Cooperation...............................................
Representations and Warranties of First Sierra and OAC....
Conduct of the Business of the Combined Companies
Following the Merger...................................
Termination or Amendment..................................
Transaction Fees..........................................
Indemnification...........................................
Other Agreements..........................................
</TABLE>
i
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
BUSINESS OF OAC.............................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF OAC..........................
SECURITIES BENEFICIALLY OWNED BY PRINCIPAL STOCKHOLDERS AND
MANAGEMENT OF FIRST SIERRA................................
INDEPENDENT ACCOUNTANTS.....................................
PROPOSALS OF STOCKHOLDERS FOR ANNUAL MEETING................
OTHER MATTERS...............................................
INDEX TO FINANCIAL STATEMENTS...............................
APPENDIX A -- Agreement and Plan of Merger.................. A-1
APPENDIX B -- Opinion of Friedman, Billings, Ramsey & Co.,
Inc....................................................... B-1
</TABLE>
ii
<PAGE> 9
AVAILABLE INFORMATION
First Sierra is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements, and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements, and other information may be inspected and copied at the offices of
the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and the Regional Offices of the Commission in Chicago, Illinois at
Citicorp Center, 500 W. Madison, Suite 1400, Chicago, Illinois 60661-2511 and in
New York, New York at 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such materials may be obtained from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission maintains a site on
the World Wide Web that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission (http://www.sec.gov). First Sierra's securities are listed on Nasdaq
and the reports, proxy statements and other information of First Sierra
described above may also be inspected at The Nasdaq Stock Market, Inc., 1735 K
Street, Washington, D.C. 20006.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
First Sierra incorporates herein by reference the following documents filed
by it with the Commission (File No. 0-22525) pursuant to the Exchange Act:
(i) its Annual Report on Form 10-K for the year ended December 31,
1997;
(ii) its Quarterly Report on Form 10-Q for the quarter ended March 31,
1998;
(iii) its Current Report on Form 8-K dated July 16, 1998.
All documents filed by First Sierra pursuant to Section 13(a), 13(c), 14,
or 15(d) of the Exchange Act subsequent to the date of this Proxy Statement and
prior to the date of the Special Meeting shall be deemed to be incorporated by
reference in this Proxy Statement and to be part hereof from the date of filing
of such documents. All information appearing in this Proxy Statement is
qualified in its entirety by the information and financial statements (including
notes thereto) appearing in the documents incorporated by reference herein.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be modified or superseded, for purposes
of this Proxy Statement, to the extent that a statement contained herein or in
any subsequently filed document that is deemed to be incorporated herein
modifies or supersedes any such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. FIRST SIERRA HEREBY UNDERTAKES TO
PROVIDE, BY FIRST CLASS MAIL OR OTHER EQUALLY PROMPT MEANS WITHIN ONE BUSINESS
DAY OF RECEIPT OF A REQUEST, WITHOUT CHARGE, TO EACH PERSON TO WHOM A COPY OF
THIS PROXY STATEMENT HAS BEEN DELIVERED, UPON THE WRITTEN OR ORAL REQUEST OF ANY
SUCH PERSON, A COPY OF ANY AND ALL OF THE DOCUMENTS REFERRED TO ABOVE THAT HAVE
BEEN OR MAY BE INCORPORATED INTO THIS PROXY STATEMENT BY REFERENCE, OTHER THAN
EXHIBITS TO SUCH DOCUMENTS (UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED
BY REFERENCE INTO SUCH DOCUMENTS). DOCUMENTS RELATING TO FIRST SIERRA ARE
AVAILABLE UPON REQUEST FROM FIRST SIERRA FINANCIAL, INC., 600 TRAVIS STREET,
SUITE 7050, HOUSTON, TEXAS 77002, ATTENTION: CORPORATE SECRETARY, TELEPHONE
NUMBER (713) 221-8822. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY
REQUEST SHOULD BE MADE BY , 1998.
---------------------
iii
<PAGE> 10
FORWARD-LOOKING STATEMENTS
Certain statements in the Summary and under the captions "The Merger and
Related Transactions -- Background of the Merger," "-- First Sierra's Reasons
for the Merger," "-- Recommendation of the Board of Directors of First Sierra,"
and elsewhere in this Proxy Statement, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance, or achievements
of the combined company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. These forward-looking statements were based on various factors and
were derived utilizing numerous important assumptions and other important
factors that could cause actual results to differ materially from those in the
forward-looking statements. Important assumptions and other important factors
that could cause actual results to differ materially from those in the
forward-looking statements include, but are not limited to: uncertainty as to
the combined company's future profitability; the combined company's ability to
develop and implement operational and financial systems to manage rapidly
growing operations; competition in First Sierra's and OAC's existing and
potential future lines of business; the combined company's ability to integrate
and successfully operate acquired businesses and the risks associated with such
businesses; the combined company's ability to obtain financing on acceptable
terms to finance the combined company's growth strategy and for the combined
company to operate within the limitations imposed by financing arrangements;
uncertainty as to the future profitability of acquired businesses; trends in the
lease finance industry; competitive pressures; changes in relationships with
lease sources; changes in the regulatory environment; and the impact of
accounting policies required to be adopted in the future. In addition, First
Sierra stockholders should consider carefully the information set forth under
the captions "Business -- Competition," "-- Safe Harbor Statement Under the
Private Securities Litigation Reform Act of 1995," and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in Parts I and II
of First Sierra's Annual Report on Form 10-K for the fiscal year ended December
31, 1997, which is incorporated by reference herein. Other factors and
assumptions not identified above were also involved in the derivation of these
forward-looking statements, and the failure of such other assumptions to be
realized as well as other factors may also cause actual results to differ
materially from those projected. First Sierra assumes no obligation to update
these forward-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting such forward-looking
statements.
iv
<PAGE> 11
SUMMARY
The following is a summary of certain information contained elsewhere or
incorporated by reference in this Proxy Statement. The information contained in
this summary is qualified in its entirety by, and should be read in conjunction
with, the more detailed information appearing elsewhere in this Proxy Statement
and the documents incorporated herein by reference.
THE COMPANIES
First Sierra Financial, Inc. and Sierra Acquisition Corporation I
First Sierra is a specialized finance company that acquires and originates,
sells and services equipment leases. The underlying leases financed by First
Sierra 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 $20,000
from inception through March 31, 1998), and thus First Sierra's leases are
commonly referred to as "small ticket leases." First Sierra initially funds the
acquisition or origination of its leases through its warehouse facilities or
from working capital and, upon achieving a sufficient portfolio size, sells such
receivables in the public and private markets, principally through its
securitization program. First Sierra 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.
First Sierra 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 First Sierra obtains access to equipment
leases (collectively, "Sources"). First Sierra 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 First Sierra's state-of-the-art computer system.
First Sierra views acquisitions of equipment leasing companies as a
fundamental part of its growth strategy. Since July 1996, First Sierra has
completed 19 acquisitions of equipment leasing companies. First Sierra's
acquisitions have substantially increased its ability to generate lease
origination volume and have allowed it to introduce new programs and enter new
markets. First Sierra intends to continue to seek acquisition opportunities in
additional markets to further expand its business.
Subsidiary is a wholly-owned subsidiary of First Sierra organized for the
purpose of effecting a transaction such as the Merger. Subsidiary has no
material assets and has not engaged in any activities except in connection with
the Merger. The principal executive offices of First Sierra and Subsidiary are
located at 600 Travis Street, Suite 7050, Houston, Texas 77072 and the telephone
number is (713) 221-8822.
Additional information concerning First Sierra is included in First
Sierra's reports filed under the Exchange Act that are incorporated by reference
in this Proxy Statement. See "Available Information" and "Incorporation of
Certain Information by Reference."
Oliver-Allen Corporation, Inc.
OAC is an information technology leasing company that provides technology
and financing solutions to middle-market companies throughout the United States.
OAC specializes in configuring and leasing mid-range systems, such as IBM
AS/400s, and networking systems, including personal computers, servers, hubs and
routers. OAC had lease originations of $88 million for the nine months ended
March 31, 1998 and a lease portfolio at original equipment cost of $246 million
at March 31, 1998. OAC also derives a small portion of its revenue from computer
sales activities. OAC has offices in Larkspur, California, approximately 15
miles north of San Francisco, in Southern California and in the Minneapolis,
Minnesota area. The principal executive offices of OAC are located at 801
Larkspur Landing, Larkspur, California 94939 and the telephone number is (415)
461-4600.
1
<PAGE> 12
THE SPECIAL MEETING
The Special Meeting will be held at 10:00 a.m., Central Time on
, 1998, at , Houston, Texas, for the purpose of
considering and acting upon the Merger Proposal, the Charter Proposal and the
Option Plan Proposal and to transact such other business as may be properly
brought before the meeting or any adjournment thereof.
Only those stockholders of First Sierra of record at the close of business
on , 1998 (the "Record Date") are entitled to notice of, and to vote
at, the Special Meeting.
Approval of each of the Merger Proposal and the Option Plan Proposal
require the affirmative vote of a majority of the total votes cast, in person or
by proxy, at the Special Meeting. At the close of business on the Record Date,
there were approximately million shares of First Sierra Common
Stock outstanding and entitled to vote at the Special Meeting. The affirmative
vote of the holders of a majority of the shares of First Sierra Common Stock
issued and outstanding on the Record Date is required to approve the Charter
Proposal. As of the Record Date, shares of First Sierra Common
Stock were outstanding. Holders of First Sierra Common Stock are entitled to one
vote per share. All executive officers and directors of First Sierra who are
stockholders of First Sierra and who, as of the Record Date, collectively had
the right to vote approximately million shares of First Sierra
Common Stock, representing approximately % of the shares outstanding as of
such date, have indicated to First Sierra that they intend to vote the shares of
First Sierra Common Stock over which they have voting control in favor of the
Merger Proposal, the Charter Proposal and the Option Plan Proposal. See "The
Special Meeting -- Vote Required for Approval."
THE MERGER
Recommendations of the Board of Directors of First Sierra
The Board of Directors of First Sierra has unanimously approved the
issuance of shares of First Sierra Common Stock pursuant to the Merger Agreement
and has directed that such issuance be submitted to the stockholders of First
Sierra. The Board of Directors of First Sierra recommends that the stockholders
of First Sierra approve the issuance of shares of First Sierra Common Stock
pursuant to the Merger Agreement. See "The Merger and Related
Transactions -- Background of the Merger," "-- First Sierra's Reasons for the
Merger" and "-- Recommendation of the Board of Directors of First Sierra."
Opinion of Financial Advisor
On June 9, 1998, the Board of Directors of First Sierra received an opinion
from Friedman, Billings, Ramsey & Co., Inc. ("FBR") to the effect that, as of
such date, the Exchange Ratio was fair to First Sierra from a financial point of
view. The full text of the written opinion of FBR, which sets forth assumptions
made, matters considered and limitations on the review undertaken in connection
with the opinion, is attached to this Proxy Statement as Appendix B and is
incorporated herein by reference. HOLDERS OF FIRST SIERRA COMMON STOCK ARE URGED
TO, AND SHOULD, READ SUCH OPINION IN ITS ENTIRETY. See "The Merger and Related
Transactions -- Opinion of Financial Advisor to First Sierra."
Certain Terms of The Merger
Exchange Ratio and Conversion of OAC Options. At the Effective Time (as
defined below), Subsidiary will merge with and into OAC, and OAC will become a
wholly-owned subsidiary of First Sierra. In the Merger, each outstanding share
of OAC Common Stock will be converted into the right to receive, without
interest, a number of shares of First Sierra Common Stock determined by dividing
(i) $79,000,000 minus any transaction fees in excess of $5,100,000 by (ii) $25
and then dividing the quotient thereof by the aggregate number of shares of OAC
Common Stock issued and outstanding at the Effective Time (the "Exchange
Ratio"). In addition, each option to purchase OAC Common Stock that is
outstanding at the Effective Time, whether or not exercisable (an "OAC Option"),
will be converted into an option to purchase the number of shares of First
Sierra Common Stock equal to the number of shares of OAC Common Stock subject to
the
2
<PAGE> 13
OAC Option multiplied by the Exchange Ratio at an exercise price equal to the
exercise price under the OAC Option divided by the Exchange Ratio (the "Adjusted
Exchange Ratio") and First Sierra will assume each OAC Option in accordance with
the stock option agreement by which it is evidenced. As of July 9, 1998, John M.
Howe, an executive officer of OAC, held an option to acquire 150 shares of OAC
Common Stock, at an exercise price of $25,000 per share, pursuant to the terms
of a stock option agreement. See "The Merger and Related
Transactions -- Conflicts of Interest." There are no other outstanding OAC
Options. At the Effective Time, each issued and outstanding share of common
stock, par value $.01 per share, of Subsidiary ("Subsidiary Common Stock") will
be converted into one share of common stock, par value $.01 per share, of the
corporation surviving the Merger (the "Surviving Corporation").
Based upon the number of shares of First Sierra Common Stock outstanding as
of July 9, 1998, approximately 15.8 million shares of First Sierra Common Stock
will be outstanding immediately after the Effective Time, of which approximately
3.2 million shares, representing approximately 20.0% of the total number of
outstanding shares, will be held by former holders of OAC Common Stock. See "The
Plan of Merger and Terms of the Merger -- Manner and Basis for Converting
Shares".
On June 9, 1998, the last trading day prior to announcement by First Sierra
and OAC that they had reached an agreement concerning the Merger, the last
reported sale price of First Sierra Common Stock as reported on Nasdaq was
$24.00 per share. Assuming the Merger had occurred on such date, the equivalent
market value per share of OAC Common Stock, calculated by multiplying the
closing sale price of First Sierra Common Stock by the Exchange Ratio, would
have been $ .
On , 1998, the closing sale price of First Sierra Common Stock
as reported on Nasdaq was per share. The market price of First Sierra
Common Stock is subject to fluctuation. The Merger Agreement may be terminated
by First Sierra or OAC if the Average Closing Price (as defined herein) is less
than $21.00 per share. See "The Plan of Merger and Terms of the
Merger -- Termination or Amendment." Subject to this termination right, the
market price of First Sierra Common Stock on the Closing Date may be more or
less than the price of First Sierra Common Stock as of the date of this Proxy
Statement.
Fractional Shares. No certificates or scrip for fractional shares of First
Sierra Common Stock will be issued in the Merger and no First Sierra Common
Stock dividend, stock split or interest will relate to any fractional security.
Fractional interests will not entitle the owner thereof to vote or to any other
rights of a security holder.
Effective Time of the Merger. The Merger will become effective at such time
(the "Effective Time") as shall be stated in certificates of merger to be filed
with the Secretary of State of the State of California and the Secretary of
State of the State of Delaware (the "Certificates of Merger") in accordance with
the California General Corporation Law (the "GCL") and the Delaware General
Corporation Law (the "DGCL"), respectively. Assuming the requisite stockholder
approval of the issuance of shares of First Sierra Common Stock pursuant to the
Merger Agreement is obtained, it is anticipated that the Effective Time of the
Merger will occur as soon as practicable following the Special Meeting. If all
other conditions to the Merger have not been satisfied or waived prior to the
Special Meeting, however, it is expected that the Merger will occur as soon as
practicable after such conditions have been satisfied or waived.
Indemnification. The Merger Agreement provides that (i) the indemnification
provisions of the Articles of Incorporation of OAC as in effect at the Effective
Time will not be amended, repealed or otherwise modified for a period of six
years from the Effective Time in any manner that would adversely affect the
rights thereunder of individuals who, at the Effective Time, were directors,
officers, employees or agents of OAC, and (ii) after the Effective Time, First
Sierra will indemnify and hold harmless each present and former director or
officer of OAC and each person who served at the request of OAC as a director,
officer, partner, fiduciary, employee or agent of OAC against all costs and
expenses (including reasonable attorneys fees), judgments, fines, losses,
claims, damages, liabilities and settlement amounts paid in connection with any
claim, action, suit, proceeding or investigation (whether arising before or
after the Effective Time), whether civil, administrative or investigative,
arising out of or relating to any action or omission in their capacity as an
officer, director, employee, agent or other person to whom such provision
applies, in each case occurring before
3
<PAGE> 14
the Effective Time (including the transactions contemplated by the Merger
Agreement). See "The Plan of Merger and Terms of the Merger -- Indemnification."
Conditions to the Merger
Certain Federal Income Tax Consequences. It is a condition to OAC's
obligation to consummate the Merger that OAC shall have received an opinion of
its counsel to the effect that (i) the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), (ii) no gain or loss will be recognized by First Sierra,
OAC or Subsidiary as a result of the Merger and (iii) no gain or loss will be
recognized by the holders of OAC Common Stock upon the exchange of their OAC
Common Stock solely for shares of First Sierra Common Stock, except for gain or
loss attributable to cash received in lieu of fractional shares. See "The Merger
and Related Transactions -- Certain Federal Income Tax Consequences."
Accounting Treatment. It is a condition to each party's obligation to
consummate the Merger that First Sierra shall have received a letter from Arthur
Andersen LLP, dated as of the date on which the transactions contemplated by the
Merger Agreement are consummated (the "Closing Date"), to the effect that the
Merger will qualify for pooling of interests accounting treatment under
Accounting Principles Board Opinion No. 16 ("APB No. 16") if closed and
consummated in accordance with the Merger Agreement. Furthermore, it is a
condition to each party's obligation to consummate the Merger that each of the
parties to the Merger Agreement shall have received a letter dated the Closing
Date, addressed to OAC, from Ernst & Young LLP, regarding such firm's
concurrence with OAC's management's conclusions that no conditions exist related
to OAC that would preclude First Sierra's accounting for the Merger with OAC as
a pooling of interests under APB No. 16 if closed and consummated in accordance
with the Merger Agreement. See "The Merger and Related
Transactions -- Accounting Treatment."
Governmental and Regulatory Approvals. Consummation of the Merger is
conditioned upon the expiration or termination of the applicable waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"). On , 1998, First Sierra and OAC filed notification
reports under the HSR Act with the Federal Trade Commission and the Antitrust
Division of the Department of Justice. The waiting period will expire on
, 1998, unless extended or earlier terminated. Consummation of the
Merger is also conditioned upon receipt, prior to the Effective Time, of all
necessary material governmental waivers, consents, orders and approvals and all
necessary material consents from lenders. See "The Merger and Related
Transactions -- Government and Regulatory Approvals."
No Statute or Injunction Preventing Merger. Consummation of the Merger is
subject to the condition that no statute, rule or regulation shall have been
enacted by any state or federal government or governmental agency in the United
States which would prevent the consummation of the Merger or make the Merger
illegal, and no injunction, preliminary or permanent, or other order or decree
by any federal or state court which prevents the consummation of the Merger
shall have been issued and remain in effect.
Other Conditions to the Merger. In addition to the approval and adoption of
the issuance of shares of First Sierra Common Stock pursuant to the Merger
Agreement by the requisite vote of holders of First Sierra Common Stock and the
satisfaction of the conditions described above, the respective obligations of
First Sierra and OAC to effect the Merger are subject to the satisfaction or
waiver, where permissible, of certain other conditions, including, without
limitation, (i) conditions relating to the accuracy of each party's
representations and warranties and compliance with each party's covenants and
(ii) a condition to the effect that an additional listing application shall have
been filed with Nasdaq with respect to the shares of First Sierra Common Stock
issuable in connection with the Merger and those to be reserved for issuance
upon the exercise of stock options. Additionally, the obligation of OAC to
effect the Merger is further subject to satisfaction or waiver of (i) the
condition that a resale registration statement covering the resale by holders of
OAC Common Stock (the "OAC Stockholders") of the shares of First Sierra Common
Stock issued to them in connection with the Merger (the "Resale Registration
Statement") shall have been declared effective by the Commission, and (ii)
certain conditions relating to delivery of First Sierra stock certificates and a
legal opinion of counsel to First Sierra. The obligations of First Sierra and
Subsidiary to effect the Merger are
4
<PAGE> 15
further subject to satisfaction or waiver of (i) the condition that John M. Howe
shall have terminated his employment with OAC and John F. Allen and John M. Howe
shall have entered into new employment agreements with First Sierra; (ii) the
condition that all necessary consents under OAC's Loan Agreement dated June 19,
1995 with Fleet Bank and other banks signatory thereto (the "Loan Agreement")
shall have been obtained or all outstanding indebtedness thereunder shall have
been repaid; and (iii) certain conditions relating to the delivery of OAC
financial statements, stock certificates and a legal opinion of counsel to OAC
and the OAC Stockholders. See "The Plan of Merger and Terms of the
Merger -- Conditions to the Merger."
No Solicitation
The Merger Agreement provides that, after the date of the Merger Agreement
and prior to the Effective Time or earlier termination of the Merger Agreement,
OAC will not, and will not permit its subsidiaries to, initiate, solicit,
negotiate, encourage, or provide information to facilitate, and OAC will use its
reasonable efforts to cause any officer, director, or employee of OAC, or any
attorney, accountant, investment banker, financial advisor or other agent
retained by OAC or any of its subsidiaries not to initiate, solicit, negotiate,
encourage, or provide information to facilitate, any proposal or offer to
acquire all or any substantial part of the business or properties or any capital
stock of OAC whether by merger, purchase of assets, tender offer or otherwise,
whether for cash, securities or any other consideration or any combination
thereof (an "Acquisition Transaction").
Termination or Amendment of Merger Agreement
Termination. The Merger Agreement may be terminated under certain
circumstances, including (a) by the mutual written consent of First Sierra and
OAC or (b) either by First Sierra or OAC at any time prior to the Closing Date
(i) upon a breach of a representation or warranty by the other party (the
"Non-Terminating Party") which is not cured in all material respects and which
has or is likely to have a material adverse effect on the Non-Terminating Party
and causes certain conditions set forth in the Merger Agreement to be incapable
of being satisfied; (ii) if the Merger is not completed by December 31, 1998,
(unless due to a delay or default on the part of the party requesting
termination (the "Terminating Party")); (iii) if the Merger is enjoined by a
final, unappealable court order not entered at the request or with the support
of the Terminating Party and if the Terminating Party shall have used reasonable
efforts to prevent entry of such order; or (iv) if the average of the daily
closing prices per share of First Sierra Common Stock during the 20 consecutive
trading days in which such shares are traded on Nasdaq ending at the close of
trading on the fifth trading day preceding any then scheduled Closing Date (the
"Average Closing Price") is less than $21.00. Additionally, OAC may terminate
the Merger Agreement (i) if First Sierra (a) fails to perform in any material
respect any of its covenants in the Merger Agreement and (b) does not cure such
default in all material respects within 30 days after written notice of such
default specifying such default in reasonable detail is given to First Sierra by
OAC; or (ii) if the stockholders of First Sierra fail to approve the issuance of
shares of First Sierra Common Stock pursuant to the Merger Agreement at a duly
held meeting of stockholders called for such purpose or any adjournment thereof.
Amendment. The Merger Agreement may be amended or supplemented by an
instrument in writing signed on behalf of each party and in compliance with
applicable law. Such amendment may occur at any time prior to the Closing Date,
and, subject to applicable law, whether before or after approval by the First
Sierra stockholders of the issuance of shares of First Sierra Common Stock
pursuant to the Merger Agreement. See "The Plan of Merger and Terms of the
Merger -- Termination or Amendment."
Transaction Fees. First Sierra and OAC have agreed that the purchase price
of $79,000,000 will be reduced by the amount of any Transaction Fees in excess
of $5,100,000. For purposes of the Merger Agreement, "Transaction Fees" means
the sum of (i) all legal, accounting, tax, consulting and financial advisory and
other fees and expenses incurred by OAC and its stockholders in connection with
the transactions contemplated by the Merger Agreement that are not paid by OAC
or its stockholders on or prior to the Closing Date and (ii) all amounts that,
solely as a result of the Merger, OAC or First Sierra will be obligated to pay
(including loans that OAC or First Sierra will be required to forgive) after the
Effective Time to persons who were employees of OAC prior to the Effective Time
pursuant to provisions in their employment,
5
<PAGE> 16
executive compensation, or other similar agreements relating to incentive
bonuses or loan forgiveness payable in connection with the employee's
continuation of employment after a change in control. See "The Plan of Merger
and Terms of the Merger -- Transaction Fees."
Dissenters' Rights
Delaware law does not require that holders of First Sierra Common Stock who
object to the issuance of shares of First Sierra Common Stock pursuant to the
Merger Agreement and who vote against or abstain from voting in favor of such
issuance be afforded any appraisal or dissenters' rights or the right to receive
cash for their shares. First Sierra does not intend to make available any such
rights to its stockholders.
Restriction on Resale of Securities Issued In the Merger
The shares of First Sierra Common Stock issued in connection with the
Merger will not be freely transferable but will constitute "restricted
securities" within the meaning of Rule 144 promulgated under the Securities Act
and, if held by an affiliate of First Sierra or OAC, will also be subject to the
restrictions on transfer agreed to by all such affiliates in connection with the
pooling-of-interests requirements. First Sierra has agreed to provide the
stockholders of OAC with certain registration rights with respect to the shares
of First Sierra Common Stock issuable to them in connection with the Merger. See
"The Merger and Related Transactions -- Federal Securities Law Consequences;
Resale Registration Statement" and "The Plan of Merger and Terms of the
Merger -- Other Agreements -- Affiliate Agreements."
OTHER PROPOSALS TO BE PRESENTED AT THE SPECIAL MEETING
At the Special Meeting, stockholders of First Sierra will also be asked to
consider and act upon the following other proposals:
Charter Proposal. To approve an amendment to the Restated Certificate of
Incorporation of First Sierra to increase the number of authorized shares of
First Sierra Common Stock from 25,000,000 shares to 100,000,000 shares. The
Board of Directors of First Sierra believes that this amendment is necessary in
order to assure that after the Merger, First Sierra will have shares available
for issuance at the Board of Directors' discretion for future acquisitions,
stock splits, stock dividends, equity financings, employee benefit plans and
other corporate purposes. THE BOARD OF DIRECTORS OF FIRST SIERRA RECOMMENDS THAT
THE STOCKHOLDERS OF FIRST SIERRA VOTE FOR THE CHARTER PROPOSAL.
Approval and adoption of the Charter Proposal requires the affirmative vote
of the holders of a majority of the outstanding shares of First Sierra Common
Stock entitled to vote on such proposal. Approval and adoption of the Charter
Proposal is not a condition to the Merger.
Stock Option Plan Proposal. To approve an amendment to the First Sierra
Financial, Inc. 1997 Stock Option Plan (the "Option Plan") to increase the
number of shares of First Sierra Common Stock reserved for issuance thereunder
to 20% of the outstanding shares of First Sierra Common Stock. The Board of
Directors of First Sierra believes that this amendment is necessary in order to
be able to attract and retain valuable employees through the grant of stock
options. THE BOARD OF DIRECTORS OF FIRST SIERRA RECOMMENDS THAT THE STOCKHOLDERS
OF FIRST SIERRA VOTE FOR THE OPTION PLAN PROPOSAL. Approval and adoption of the
Option Plan Proposal requires the affirmative vote of a majority of the total
votes cast, in person or by proxy, at the Special Meeting. Approval and adoption
of the Option Plan Proposal is not a condition to the Merger.
6
<PAGE> 17
SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
FIRST SIERRA FINANCIAL, INC.-SELECTED HISTORICAL FINANCIAL DATA
The following selected historical consolidated financial data of First
Sierra as of December 31, 1997 and 1996 and for each of the three years in the
period ended December 31, 1997 have been derived from the historical audited
consolidated financial statements of First Sierra. The selected historical
consolidated financial data of First Sierra as of December 31, 1995, and as of
and for the years ended December 31, 1993 and 1994 and as of March 31, 1998 and
for the three months ended March 31, 1997 and 1998 have been derived from the
historical unaudited condensed consolidated financial statements of First Sierra
and, in the opinion of management of First Sierra, reflect all adjustments
necessary for a fair presentation of the financial position and results of
operations of First Sierra for these periods. First Sierra's historical
financial statements referred to above have been restated for the effects of two
poolings which were consummated in the first quarter of 1998. The historical
financial data is not necessarily indicative of the results to be expected after
the Merger is consummated. The financial data should be read in conjunction with
the separate audited consolidated financial statements and the notes thereto and
the unaudited quarterly consolidated financial statements and the notes thereto
included elsewhere or incorporated by reference herein. See "Available
Information."
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------- ----------------
1993(3) 1994(3) 1995 1996 1997 1997 1998
------- ------- ------ ------- ------- ------ -------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Gain on sale of lease financing
receivables(1)................................ $ 458 $ 604 $4,176 $ 5,881 $22,476 $3,344 $ 6,550
Interest income................................. 11 181 3,053 6,323 9,018 2,315 1,395
Servicing income................................ -- 6 323 1,050 3,092 533 1,207
Other income.................................... 707 1,004 1,566 2,956 6,537 685 2,640
------ ------ ------ ------- ------- ------ -------
Total revenues............................ 1,176 1,795 9,118 16,210 41,123 6,877 11,792
------ ------ ------ ------- ------- ------ -------
Expenses:
Salaries and benefits........................... 250 652 1,881 3,548 10,010 1,458 3,661
Interest expense................................ -- 163 2,632 5,022 5,101 1,653 349
Provision for credit losses..................... -- 28 392 537 1,891 294 693
Depreciation and amortization................... 37 25 142 368 1,360 166 612
Relocation of operations center................. -- -- -- -- -- -- 885
Other general and administration................ 914 1,750 2,375 3,959 9,056 844 1,567
------ ------ ------ ------- ------- ------ -------
Total expenses............................ 1,201 2,618 7,422 13,434 27,418 4,415 7,767
------ ------ ------ ------- ------- ------ -------
Net income (loss) before provision (benefit) for
income taxes.................................. (25) (823) 1,696 2,776 13,705 2,462 4,025
Provision (benefit) for income taxes............ -- (318) 570 932 5,131 883 1,608
------ ------ ------ ------- ------- ------ -------
Net income (loss)............................... (25) (505) 1,126 1,844 8,574 1,579 2,417
Preferred stock dividends......................... -- -- -- 60 120 39 22
------ ------ ------ ------- ------- ------ -------
Net income (loss) applicable to common
shareholders.................................. $ (25) $ (505) $1,126 $ 1,784 $ 8,454 $1,540 $ 2,395
====== ====== ====== ======= ======= ====== =======
Cash dividends per common share(3)................ $ -- $ -- $ -- $ -- $ -- $ -- $ --
====== ====== ====== ======= ======= ====== =======
Earnings (loss) per common share(2)
-- Basic........................................ $ (.04) $(0.13) $ 0.19 $ 0.29 $ 1.02 $ 0.25 $ 0.21
====== ====== ====== ======= ======= ====== =======
-- Diluted...................................... $ (.04) $(0.13) $ 0.16 $ 0.27 $ 0.95 $ 0.23 $ 0.20
====== ====== ====== ======= ======= ====== =======
Weighted average shares outstanding(2)
-- Basic........................................ 586 3,749 6,059 6,137 8,249 6,283 11,250
====== ====== ====== ======= ======= ====== =======
-- Diluted...................................... 586 3,842 6,895 6,744 9,006 6,911 11,999
====== ====== ====== ======= ======= ====== =======
</TABLE>
7
<PAGE> 18
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------------------------------- MARCH 31,
1993(3) 1994 1995 1996 1997 1998
------- ------- ------- ------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Assets:
Lease financing receivables, net...................... $ 106 $29,961 $67,444 $61,405 $24,769 $ 20,743
Cash and cash equivalents............................. 6 2,307 946 2,876 13,265 47,089
Investment in Trust Certificates...................... -- -- -- 9,534 12,512 10,301
Marketable security................................... -- -- -- -- 4,020 3,771
Furniture and equipment, net.......................... 18 187 379 1,313 3,535 3,684
Goodwill and other intangible assets, net............. -- -- -- 3,615 20,162 20,035
Other assets.......................................... 7 1,265 1,181 1,913 7,570 6,193
----- ------- ------- ------- ------- --------
Total assets.................................... $ 137 $33,720 $69,950 $80,656 $85,833 $111,816
===== ======= ======= ======= ======= ========
Liabilities and Stockholders' Equity (Deficit):
Warehouse credit facilities........................... $ 168 $23,539 $56,001 $52,820 $13,070 $ 2,866
Subordinated notes payable............................ -- 9,000 9,000 9,000 6,000 1,000
Other liabilities..................................... 73 865 3,467 12,386 27,276 26,503
----- ------- ------- ------- ------- --------
Total liabilities............................... 241 33,404 68,468 74,206 46,346 30,369
Redeemable preferred stock............................ -- -- -- 3,890 2,640 1,789
Stockholders' equity (deficit)........................ (104) 316 1,482 2,560 36,847 79,658
----- ------- ------- ------- ------- --------
Total liabilities and stockholders' equity...... $ 137 $33,720 $69,950 $80,656 $85,833 $111,816
===== ======= ======= ======= ======= ========
</TABLE>
- ---------------
(1) The gain on sale of lease financing receivables in 1995 and 1997 include
gains of $3.3 million and $853,000, respectively, related to leases sold
through portfolio sales.
(2) See Note 2 to the First Sierra audited consolidated financial statements for
a description of the computation of earnings (loss) per share.
(3) The amounts reflected during 1993 and 1994 prior to First Sierra 's
inception reflect the financial data of the two companies which were parties
to pooling-of-interests transactions with First Sierra in the first quarter
of 1998. First Sierra has never declared or paid cash dividends to common
shareholders. The amounts reflected as distribution to shareholders in First
Sierra's consolidated statements of stockholders' equity reflect cash
distributions made by the two pooled companies. These amounts were not
included in First Sierra's cash dividends per common share since First
Sierra believes that such inclusion would be misleading.
8
<PAGE> 19
OLIVER-ALLEN CORPORATION, INC. -- SELECTED HISTORICAL FINANCIAL DATA
The following selected financial data of OAC as of and for each of the
years ended May 31, 1993, 1994 and 1995, for the thirteen-month period ended
June 30, 1996 and for the year ended June 30, 1997 have been derived from the
audited financial statements of OAC. The historical financial information of OAC
as of and for the nine months ended March 31, 1997 and 1998 have been derived
from the historical unaudited condensed financial statements of OAC and, in the
opinion of management of OAC, reflect all adjustments necessary for a fair
presentation of the financial position and results of operations of OAC for
these periods. The historical financial data is not necessarily indicative of
the results to be expected after the Merger is consummated. The financial data
should be read in conjunction with the separate audited financial statements and
the notes thereto and the unaudited interim financial statements and the notes
thereto included elsewhere herein. See "Available Information."
<TABLE>
<CAPTION>
THIRTEEN
FISCAL YEAR ENDED MONTHS NINE MONTHS ENDED
--------------------------- ENDED FISCAL YEAR ---------------------
MAY 31, MAY 31, MAY 31, JUNE 30, ENDED MARCH 31, MARCH 31,
1993 1994 1995 1996 JUNE 30, 1997 1997 1998
------- ------- ------- -------- ------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Sales from sales-type leases...... $ 5,352 $10,332 $ 7,721 $ 7,064 $ 12,444 $ 4,478 $ 11,216
Finance lease income.............. 3,095 2,891 4,016 7,167 11,121 7,657 11,302
Rent from operating leases........ 4,403 2,444 3,331 3,199 3,960 2,700 5,482
Residual and remarketing income... 2,189 1,589 2,264 1,503 2,578 1,207 6,423
Sales of computer equipment....... 40,862 36,068 30,974 21,854 10,370 8,161 4,649
Fee and other income.............. 991 867 440 1,220 1,380 1,286 386
------- ------- ------- -------- -------- -------- --------
Total revenues.............. 56,892 54,191 48,746 42,007 41,853 25,489 39,458
Expenses:
Cost of sales from sales-type
leases.......................... 4,220 8,134 5,659 4,773 9,488 2,725 8,746
Interest.......................... 2,502 2,033 2,874 5,622 8,795 6,291 8,830
Depreciation and amortization..... 2,631 2,043 1,740 2,227 2,839 1,707 3,819
Cost of sales from residual
disposals....................... 1,293 538 866 648 1,735 615 5,020
Cost of computer equipment sold... 35,395 30,458 25,921 16,785 7,562 6,384 4,071
Selling, general and
administrative.................. 9,578 9,155 9,685 10,095 8,657 5,634 5,638
------- ------- ------- -------- -------- -------- --------
Total expenses.............. 55,619 52,361 46,745 40,150 39,076 23,356 36,124
------- ------- ------- -------- -------- -------- --------
Income before income taxes........ 1,273 1,830 2,001 1,857 2,777 2,133 3,334
Provision for income taxes........ 509 732 784 676 1,167 853 1,334
------- ------- ------- -------- -------- -------- --------
Net income.................. $ 764 $ 1,098 $1,217 $ 1,181 $ 1,610 $ 1,280 $ 2,000
======= ======= ======= ======== ======== ======== ========
Balance Sheet Data (at end of
period):
Total assets...................... $47,158 $47,507 $70,148 $114,509 $165,636 139,675 $183,329
Non-recourse notes payable........ 20,055 24,010 38,582 73,583 111,358 102,753 134,161
Line of credit.................... 6,200 2,850 6,550 14,710 15,050 11,475 18,950
</TABLE>
9
<PAGE> 20
SELECTED PRO FORMA FINANCIAL DATA
The following selected unaudited pro forma consolidated financial data give
effect to the Merger which is expected to be completed in the third quarter of
1998. Pursuant to the definitive agreement between First Sierra and OAC dated
June 10, 1998, First Sierra intends to issue approximately 3,160,000 shares of
First Sierra Common Stock in exchange for all of the outstanding shares of OAC
Common Stock. First Sierra will also convert an outstanding option to purchase
150 shares of OAC Common Stock into an option to purchase 790,000 shares of
First Sierra Common Stock. The unaudited pro forma consolidated financial data
have been prepared assuming the Merger is accounted for as a
pooling-of-interests. The selected unaudited pro forma consolidated balance
sheet data includes the effects of the Merger and the issuance of the shares of
First Sierra Common Stock to effect the Merger as if the Merger occurred on the
respective balance sheet dates. The selected unaudited pro forma consolidated
statements of operations data for the three years in the period ended December
31, 1997 and for the three months ended March 31, 1998 assume that First Sierra
and OAC have been combined since inception.
The following selected unaudited pro forma consolidated financial statement
data should be read in conjunction with the unaudited pro forma consolidated
financial statements and the related notes thereto, the audited and unaudited
consolidated financial statements of First Sierra and the related notes thereto,
and the audited and unaudited financial statements of OAC and the related notes
thereto included elsewhere or incorporated by reference herein. Such pro forma
information is based on historical data with respect to First Sierra and OAC.
The pro forma information is not necessarily indicative of the results that
might have occurred had this transaction actually taken place as of the
aforementioned dates and is not intended to be a projection of future results.
10
<PAGE> 21
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
FISCAL 1995(1) FISCAL 1996(1) DECEMBER 31, 1997 MARCH 31, 1998
-------------- -------------- ----------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(1)
Gain on sale of lease financing
receivables....................... $ 4,176 $ 5,881 $22,476 $ 6,550
Interest income..................... 10,220 17,444 22,569 5,354
Sales from sales-type leases........ 7,064 12,444 16,373 3,705
Rent from operating leases.......... 3,199 3,960 5,307 2,365
Residual and remarketing income..... 1,503 2,578 5,864 2,129
Servicing income.................... 323 1,050 3,092 1,207
Sales of computer equipment......... 21,854 10,370 7,944 739
Other income........................ 2,786 4,336 7,315 2,855
------- ------- ------- -------
Total revenues............ 51,125 58,063 90,940 24,904
Salaries and benefits............... 7,580 7,751 13,959 4,888
Interest expense.................... 8,254 13,817 15,655 3,435
Cost of sales from sales-type
leases............................ 4,773 9,488 13,248 2,912
Depreciation and amortization....... 2,369 3,207 4,932 2,378
Cost of sales from residual and
remarketing....................... 648 1,735 4,586 1,614
Relocation of operations center..... -- -- -- 885
Cost of computer equipment sold..... 16,785 7,562 6,286 863
Provision for credit losses......... 392 537 2,561 518
Other general and administrative.... 6,771 8,413 12,674 2,320
------- ------- ------- -------
Total expenses............ 47,572 52,510 73,901 19,813
------- ------- ------- -------
Income before provision for income
taxes............................. 3,553 5,553 17,039 5,091
Provision for income taxes.......... 1,246 2,099 6,521 2,034
------- ------- ------- -------
Net income........................ 2,307 3,454 10,518 3,057
Preferred stock dividends......... -- 60 120 22
------- ------- ------- -------
Net income allocable to
common stockholders..... $ 2,307 $ 3,394 $10,398 $ 3,035
======= ======= ======= =======
Earnings per common share
-- Basic.......................... $ 0.25 $ 0.36 $ 0.91 $ 0.21
======= ======= ======= =======
-- Diluted........................ $ 0.22 $ 0.34 $ 0.84 $ 0.20
======= ======= ======= =======
Weighted average shares outstanding
-- Basic.......................... 9,256 9,337 11,408 14,410
======= ======= ======= =======
-- Diluted........................ 10,288 10,136 12,463 15,531
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
FISCAL 1995(2) FISCAL 1996(2) DECEMBER 31, 1997 MARCH 31, 1998
-------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:(2)
Total assets........................ $184,459 $ 246,292 $261,575 $295,145
Non-recourse notes payable.......... 129,584 164,178 141,750 134,161
Lines of credit..................... 14,710 15,050 17,650 21,816
Subordinated notes payable.......... 9,000 9,000 6,000 1,000
Redeemable preferred stock.......... -- 3,890 2,640 1,789
</TABLE>
- ---------------
(1) For purposes of presenting the pro forma consolidated statement of
operations data, First Sierra's historical results for the three months
ended March 31, 1998 and for the year ended December 31, 1997 have been
combined with OAC's historical results for the same periods. First Sierra's
historical results for the years ended December 31, 1996 and 1995 have been
combined with OAC's historical results for the fiscal periods ended June 30,
1997 and 1996, respectively. The pro forma consolidated statement of
operations data for the year ended December 31, 1997 and for fiscal 1996
therefore include an overlap in OAC revenues and net income of $26,417,000
and $584,000, respectively.
(2) For purposes of presenting the pro forma consolidated balance sheet data,
First Sierra's historical balance sheet data as of March 31, 1998 and
December 31, 1997 have been combined with OAC's historical balance sheet
data as of the same dates. First Sierra's historical balance sheet data as
of December 31, 1996 and 1995 have been combined with OAC's historical
balance sheet data as of June 30, 1997 and 1996, respectively.
11
<PAGE> 22
COMPARATIVE UNAUDITED PER SHARE DATA
The following table sets forth certain historical and pro forma earnings
per share and book value per share data of First Sierra after giving effect to
the Merger on a pooling-of-interests basis, assuming that 3,160,000 shares of
First Sierra Common Stock were issued in exchange for all of the outstanding
capital stock of OAC. This data should be read in conjunction with "-- Selected
Pro Forma Financial Data" and the historical audited and unaudited consolidated
financial statements of First Sierra and OAC and the notes thereto that are
included elsewhere herein or incorporated herein by reference. The selected pro
forma financial data of First Sierra and OAC is derived from and should be read
in conjunction with the Unaudited Pro Forma Consolidated Financial Statements
and Notes thereto included elsewhere herein. The unaudited pro forma information
is presented for illustrative purposes only and is not necessarily indicative of
the combined financial position or results of operations of future periods or
the results that actually would have been realized had First Sierra and OAC been
a single entity during the periods presented. Neither First Sierra nor OAC paid
any cash dividends during any of the periods presented.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
FISCAL FISCAL DECEMBER 31, MARCH 31,
1995(1) 1996(1) 1997 1998
------- ------- ------------ ------------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
First Sierra historical......................... $0.19 $0.29 $1.02 $0.21
First Sierra pro forma combined(1).............. 0.25 0.36 0.91 0.21
DILUTED EARNINGS PER SHARE:
First Sierra historical......................... $0.16 $0.27 $0.95 $0.20
First Sierra pro forma combined(1).............. 0.22 0.34 0.84 0.20
BOOK VALUE PER SHARE:(2)
First Sierra historical......................... $0.24 $0.41 $3.72 $6.34
First Sierra pro forma combined(1).............. 1.66 1.91 4.11 6.18
</TABLE>
- ---------------
(1) For purposes of presenting the pro forma earnings per share data, First
Sierra's historical results for the three months ended March 31, 1998 and
for the year ended December 31, 1997 have been combined with OAC's
historical results for the same periods. First Sierra's historical results
for the years ended December 31, 1996 and 1995 have been combined with OAC's
historical results for the fiscal periods ended June 30, 1997 and 1996,
respectively. The pro forma earnings per share data for the year ended
December 31, 1997 and for fiscal 1996 therefore include an overlap in OAC
revenues and net income of $26,417,000 and $584,000, respectively. For
purposes of presenting the pro forma book value per share data, First
Sierra's historical balance sheet data as of March 31, 1998 and December 31,
1997 have been combined with OAC's historical balance sheet data as of the
same dates. First Sierra's historical balance sheet data as of December 31,
1996 and 1995 have been combined with OAC's historical balance sheet data as
of June 30, 1997 and 1996, respectively.
(2) Historical book value per share is computed by dividing stockholders' equity
by the number of shares of common stock outstanding at the end of each
period. Pro forma combined book value per share is computed by dividing pro
forma stockholders' equity, by the pro forma number of shares of First
Sierra Common Stock that would have been outstanding had the Merger been
consummated at the end of each period.
12
<PAGE> 23
THE MEETING
DATE, TIME AND PLACE OF THE MEETING
The Special Meeting will be held at 10:00 a.m., Central Time, on ,
1998, at , Houston, Texas.
PURPOSE OF THE MEETING
The purpose of the Special Meeting is to consider and act upon the Merger
Proposal, the Charter Proposal and the Option Plan Proposal. Any other proper
business may be transacted at the Special Meeting or any adjournments thereof.
First Sierra stockholder approval of the issuance of shares of First Sierra
Common Stock pursuant to the Merger Agreement is required in accordance with
Nasdaq rules since the First Sierra Common Stock to be issued in connection with
the Merger will be in excess of 20% of the number of shares of First Sierra
Common Stock outstanding before such issuance.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of First Sierra Common Stock at the close of
business on the Record Date are entitled to notice of, and to vote at, the
Special Meeting.
On the Record Date, there were approximately holders of record of
First Sierra Common Stock and approximately shares of First Sierra
Common Stock issued and outstanding. Each share of First Sierra Common Stock
entitles the holder thereof to one vote on each matter submitted for stockholder
approval.
An automated system administered by the transfer agent of First Sierra will
be used to tabulate the votes at the Special Meeting. Abstentions, directions to
withhold authority, and broker non-votes are counted as shares present in the
determination of whether the shares of stock represented at the meeting
constitute a quorum. In the case of the Merger Proposal and the Option Plan
Proposal, abstentions will be counted as part of the total number of votes cast
on such proposals in determining whether the proposals have received the
requisite number of favorable votes, whereas broker non-votes will not be
counted as part of the total number of votes cast on such proposals. Thus,
abstentions will have the same effect as votes against any such proposal,
whereas broker non-votes will have no effect in determining whether any such
proposal has been approved by the stockholders. In the case of the Charter
Proposal, both abstentions and broker non-votes will be counted as part of the
total number of votes cast on such proposal in determining whether the proposal
has been approved by the stockholders. Thus, both abstentions and broker
non-votes will have the same effect as a vote against such proposal.
VOTING AND REVOCATION OF PROXIES
All properly executed proxies that are not revoked will be voted at the
Special Meeting in accordance with the instructions contained therein. If a
holder of First Sierra Common Stock executes and returns a proxy and does not
specify otherwise, the shares represented by such proxy will be voted FOR
approval and adoption of the Merger Proposal, FOR approval and adoption of the
Charter Proposal and FOR approval and adoption of the Option Plan Proposal. A
stockholder of First Sierra who has executed and returned a proxy may revoke it
at any time before it is voted at the Special Meeting by (a) executing and
returning a proxy bearing a later date, (b) filing a written notice of such
revocation with the Secretary of First Sierra stating that the proxy is revoked
or (c) attending the meeting and voting in person.
Delaware law does not require that holders of First Sierra Common Stock who
object to the issuance of shares of First Sierra Common Stock in connection with
the Merger and who vote against or abstain from voting in favor of such issuance
be afforded any appraisal rights or the right to receive cash for their shares.
First Sierra does not intend to make any such rights available to its
stockholders.
13
<PAGE> 24
VOTE REQUIRED FOR APPROVAL
The presence at the Special Meeting, in person or by proxy, of holders of a
majority of the outstanding shares of First Sierra Common Stock entitled to vote
at the meeting will constitute a quorum for the transaction of business. Under
Nasdaq rules, approval of the issuance of shares of First Sierra Common Stock in
connection with the Merger requires the affirmative vote of a majority of the
shares of First Sierra Common Stock voted, in person or by proxy, at the Special
Meeting. Approval and adoption of the Option Plan Proposal also requires the
affirmative vote of a majority of the total votes cast, in person or by proxy,
at the Special Meeting. Approval and adoption of the Option Plan Proposal is not
a condition to the Merger.
Approval and adoption of the Charter Proposal requires the affirmative vote
of the holders of a majority of the outstanding shares of First Sierra Common
Stock. Approval and adoption of the Charter Proposal is not a condition to the
Merger. On the Record Date, the directors and officers of First Sierra and their
affiliates held approximately million shares of First Sierra Common
Stock, representing approximately % of the outstanding shares. Such persons
have indicated to First Sierra that they intend to vote their shares in favor of
the Merger Proposal, the Charter Proposal and the Option Plan Proposal.
SOLICITATION OF PROXIES
In addition to solicitation by mail, the directors, officers, and employees
of First Sierra may solicit proxies from its stockholders by personal interview,
telephone, telegram, facsimile, or otherwise. First Sierra has engaged
, a proxy solicitation firm, to assist in the solicitation of
proxies from First Sierra stockholders. First Sierra will pay the fees in
connection with the solicitation by such firm which are anticipated to be
$ , plus such firm's out-of-pocket expenses. Arrangements will be made
with brokerage firms and other custodians, nominees, and fiduciaries who hold
First Sierra Common Stock of record for the forwarding of solicitation materials
to the beneficial owners thereof. First Sierra will reimburse brokers,
custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses
incurred by them in connection therewith.
OTHER MATTERS
At the date of this Proxy Statement, the Board of Directors of First Sierra
does not know of any business to be presented at the Special Meeting other than
as set forth in the notice accompanying this Proxy Statement.
14
<PAGE> 25
THE MERGER AND RELATED TRANSACTIONS
The detailed terms and conditions of the Merger, including conditions to
consummation of the Merger, are contained in the Merger Agreement, which is
attached hereto as Appendix A and incorporated herein by reference. The
following discussion sets forth a description of certain material terms and
conditions of the Merger Agreement. The description in this Proxy Statement of
the terms and conditions of the Merger is qualified in its entirety by reference
to the Merger Agreement.
GENERAL DESCRIPTION OF THE MERGER
The Merger Agreement provides that, at the Effective Time, Subsidiary will
merge with and into OAC, whereupon OAC will become a wholly-owned subsidiary of
First Sierra and each outstanding share of OAC Common Stock will be converted
into the right to receive, without interest, a number of shares of First Sierra
Common Stock determined by dividing (i) $79,000,000 minus any transaction fees
in excess of $5,100,000 by (ii) $25 and then dividing the quotient thereof by
the aggregate number of shares of OAC Common Stock issued and outstanding at the
Effective Time. In addition, each OAC Option that is outstanding at the
Effective Time shall be converted into an option to purchase the number of
shares of First Sierra Common Stock equal to the number of shares of OAC Common
Stock subject to the OAC Option multiplied by the Exchange Ratio at an exercise
price equal to the Adjusted Exchange Ratio. At the Effective Time, each issued
and outstanding share of Subsidiary Common Stock will be converted into one
share of common stock, par value $.01 per share, of the Surviving Corporation.
Based upon the number of shares of First Sierra Common Stock outstanding as
of July 9, 1998, approximately 15.8 million shares of First Sierra Common Stock
will be outstanding immediately following the Effective Time, of which
approximately 3,160,000 shares, representing approximately 20.0% of the total,
will be held by former holders of OAC Common Stock.
BACKGROUND OF THE MERGER
On December 4, 1997, OAC engaged NationsBanc Montgomery Securities LLP to
act as its financial advisor in pursuing strategic alternatives, including a
possible sale of OAC. Between December 4, 1997 and early March 1998,
representatives of OAC had discussions with representatives of a number of
participants in the equipment leasing industry, including First Sierra,
concerning the potential for some type of business combination. On February 24,
1998, First Sierra engaged FBR to act as its financial advisor in connection
with a possible business combination with OAC.
On March 18, 1998, Mr. Depping (Chairman of the Board and Chief Executive
Officer of First Sierra) and Mr. Allen (Chairman of the Board and President of
OAC) met to discuss the potential synergies, cost-savings and other benefits
that would result from a business combination between First Sierra and OAC. On
March 18th and 19th, 1998, the management teams of First Sierra and OAC met to
commence their respective due diligence investigations and review the operations
of the two companies. During the period following such meeting, First Sierra and
OAC each continued their respective due diligence investigations.
On April 23, 1998, First Sierra presented OAC with a draft Merger Agreement
which did not include the final Exchange Ratio or other economic terms.
On April 30, 1998, at a meeting of the Board of Directors of First Sierra,
Mr. Depping briefed the Board on his discussions with Mr. Allen and FBR made a
presentation to the Board of Directors of First Sierra regarding various
valuation and transaction structure issues related to a business combination
with OAC. At the conclusion of the meeting, the Board authorized Mr. Depping to
proceed with discussions regarding a possible business combination with OAC.
Over the next several weeks, the parties exchanged drafts of the Merger
Agreement and on May 13, 1998, the parties met in San Francisco to negotiate
certain significant terms of the Merger Agreement, including the final Exchange
Ratio, and related documents. Between May 14, 1998 and June 9, 1998, the parties
continued to exchange drafts of the Merger Agreement and related documents.
15
<PAGE> 26
On June 9, 1998, (i) FBR rendered its oral opinion that, as of such date,
the Exchange Ratio was fair to the stockholders of First Sierra from a financial
point of view and (ii) Mr. Depping had telephone conversations with each of the
members of First Sierra's Board of Directors in which they discussed the final
terms of the proposed Merger Agreement (which were substantially similar to the
terms discussed at the April 30, 1998 Board of Directors meeting) and the
probable effects of the Merger on First Sierra and the combined company.
By unanimous written consent dated June 9, 1998, the First Sierra Board
approved the Merger Agreement and recommended that the stockholders of First
Sierra vote in favor of the issuance of shares of First Sierra Common Stock
pursuant to the Merger Agreement.
The Merger Agreement was executed early in the morning of June 10, 1998. A
joint public announcement was made by the parties on the morning of June 10,
1998.
FIRST SIERRA'S REASONS FOR THE MERGER
In evaluating the Merger, management and the Board of Directors of First
Sierra considered a variety of factors in the context of First Sierra's
strategic objectives. A key element of First Sierra's strategy is the
acquisition of equipment leasing companies. First Sierra's Board concluded that
OAC would provide a platform for integrating all of First Sierra's information
technology finance activities and that by combining operations of First Sierra
and OAC, First Sierra could further its strategic objective of strengthening its
presence in the rapidly growing information technology leasing market. In
evaluating the Merger, the First Sierra Board also took into account OAC's
profitability and strong history of growth and earnings and concluded that a
combination with OAC would strengthen First Sierra's financial position in a
number of key areas. In addition, First Sierra's Board of Directors and
management concluded that (i) certain of the members of OAC's management would
complement First Sierra's existing management team in pursuing acquisitions and
managing the growth of First Sierra and (ii) assuming the achievement of certain
operating synergies, the Merger would result in accretion to First Sierra's
earnings.
On June 9, 1998, the First Sierra Board of Directors received an opinion
from FBR that the Exchange Ratio was fair as of such date, from a financial
point of view, to the stockholders of First Sierra. See "-- Opinion of Financial
Advisor to First Sierra."
The foregoing discussion of the information and factors considered by the
First Sierra Board is not intended to be exhaustive. In view of the variety of
factors considered in connection with its evaluation of the Merger, the First
Sierra Board did not find it practicable to and did not quantify or otherwise
assign relative weights to the specific factors considered in reaching its
determination. In addition, individual members of the First Sierra Board may
have given different weights to the different factors.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF FIRST SIERRA
For the reasons set forth under "-- First Sierra's Reasons for the Merger,"
the Board of Directors of First Sierra believes that the terms of the Merger
Agreement and the Merger are fair to, and in the best interests of, First Sierra
and the holders of First Sierra Common Stock. All members of the Board of
Directors approved the Merger Agreement. THE FIRST SIERRA BOARD UNANIMOUSLY
RECOMMENDS THAT THE HOLDERS OF FIRST SIERRA COMMON STOCK VOTE "FOR" THE ISSUANCE
OF SHARES OF FIRST SIERRA COMMON STOCK PURSUANT TO THE MERGER AGREEMENT.
OAC'S REASONS FOR THE MERGER
The growth of OAC's lease origination volume over the past few years has
required the Company to seek access to ever-increasing sources of financing. To
date, the Company has been able to fund its growth through a combination of
increased non-recourse loans, increased lines of credit and greater internally
generated funds. In order to sustain its growth and to capitalize on other
growth opportunities, management of OAC recognized the need for greater
long-term capitalization of the business. OAC management also believed there to
be an opportunity to increase originations by affiliating with a company that
had an established base of leasing
16
<PAGE> 27
customers to whom OAC could market its information technology finance products
and services. In addition, OAC management was interested in exploring
opportunities to grow through acquisition of complementary leasing companies and
was aware of certain acquisition opportunities but did not have the capital or a
publicly-traded security to use for acquisitions.
In evaluating the Merger and First Sierra as a merger candidate OAC
considered a number of factors including (i) First Sierra's historic and
anticipated financial performance, (ii) the strength of First Sierra's current
financial condition, (iii) First Sierra's ability to access capital markets cost
effectively, (iv) the depth and breadth of First Sierra's customer base and the
ability of OAC to cross-market to these customers, (v) First Sierra's success to
date in attracting quality merger candidates and its ability in the future to
attract other information technology leasing companies that would be
complementary to OAC, (vi) the strength of First Sierra's management team, (vii)
the attractiveness of First Sierra Common Stock as an acquisition currency and
(viii) the ability of OAC shareholders to seek liquidity if they chose to do so.
OPINION OF FINANCIAL ADVISOR TO FIRST SIERRA
FBR has acted as financial advisor to First Sierra in connection with the
Merger. FBR was selected by First Sierra based on FBR's experience, expertise
and familiarity with First Sierra and its business. FBR is a nationally
recognized investment banking company and is regularly engaged in the valuation
of businesses and their securities in connection with mergers and acquisitions,
leveraged buyouts, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes.
In connection with FBR's engagement, First Sierra requested that FBR
evaluate the fairness, from a financial point of view, to the stockholders of
First Sierra of the consideration to be paid by First Sierra in connection with
the proposed Merger. On June 9, 1998, FBR rendered an oral opinion to the effect
that, as of such date and based upon and subject to certain matters, the
Exchange Ratio was fair to the stockholders of First Sierra from a financial
point of view. On June 9, 1998, the First Sierra Board unanimously approved and
authorized the execution and delivery of the Merger Agreement. FBR is updating
and confirming its oral opinion by delivery of its written opinion to be
included in and dated the date of this Proxy Statement. In connection with its
oral opinion of June 9, 1998, and written opinion dated the date of this Proxy
Statement, FBR updated certain of its analyses, as necessary, and reviewed the
assumptions on which such analyses were based and the factors considered in
connection therewith.
In arriving at its opinion dated the date of this Proxy Statement, FBR:
1. reviewed OAC's Audited Financial Statements for the fiscal years
ended June 30, 1997, 1996 and 1995;
2. reviewed OAC's Unaudited Quarterly Financial Statements for the
nine months ending March 31, 1998;
3. reviewed OAC's Federal and State (California only) Tax Returns for
the three years ended December 31, 1996, 1995 and 1994;
4. reviewed OAC's Descriptive Memorandum and Management Presentation
which were prepared by OAC's management and NationsBanc Montgomery
Securities;
5. reviewed OAC's financial projections for the five years ended June
30, 1998 through 2002;
6. reviewed First Sierra's Annual Reports on Form 10-K filed with the
Commission for the fiscal years ended December 31, 1997 and 1996, and First
Sierra's Quarterly Reports on Form 10-Q filed with the Commission for the
fiscal quarters ended March 31, 1998, and September 30, June 30, and March
31, 1997;
7. reviewed the reported market prices and trading activity for First
Sierra Common Stock for the period May 15, 1997 through June 8, 1998;
17
<PAGE> 28
8. reviewed certain information, including financial forecasts,
relating to the businesses, earnings, assets, liabilities and prospects of
First Sierra and OAC furnished to FBR by management of First Sierra and
OAC, as well as the amount and timing of the cost savings and related
expenses and revenue enhancements expected to result from the Merger
furnished to FBR by management of First Sierra and OAC (the "Synergies");
9. conducted discussions with members of management of First Sierra
and OAC concerning the respective businesses, prospects, regulatory
conditions and contingencies of First Sierra and OAC before and after
giving effect to the Merger and the Synergies;
10. compared the results of operations and financial condition of
First Sierra and OAC with those of certain publicly-traded financial
services companies that FBR deemed to be reasonably comparable to First
Sierra or OAC, as the case may be;
11. reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions that FBR deemed to be reasonably
comparable to the Merger;
12. reviewed the potential pro forma impact of the Merger;
13. reviewed a copy of the Merger Agreement; and
14. reviewed such other financial studies and analyses and took into
account such other matters as FBR deemed necessary, including an assessment
of general economic, market and monetary conditions.
In connection with its review, FBR did not assume any responsibility for
independent verification of any of the information provided to or otherwise
reviewed by FBR and relied upon its being complete and accurate in all material
respects. With respect to the financial forecasts reviewed, FBR assumed that
such forecasts were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the management teams of First Sierra and
OAC as to the future financial performance of First Sierra and OAC and the
Synergies (including the amount, timing and achievability thereof) anticipated
to result from the Merger. FBR did not review individual credit files or make an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of First Sierra or OAC, including loan or lease portfolios or the
allowances for losses with respect thereto, and assumed that such allowances for
First Sierra and OAC are in the aggregate adequate to cover such losses. FBR
also assumed, with the consent of the First Sierra Board, that in the course of
obtaining the necessary regulatory and third party consents for the Merger, no
restriction will be imposed that will have a material adverse effect on the
contemplated benefits of the Merger or the transactions contemplated thereby.
FBR's opinion was necessarily based on information available to it and
financial, stock market and other conditions as they existed and could be
evaluated on the date of its opinion. FBR expressed no opinion as to what the
value of the First Sierra Common Stock actually would be when issued to OAC's
stockholders pursuant to the Merger or the prices at which such First Sierra
Common Stock would trade subsequent to the Merger. No other limitations were
imposed by First Sierra on FBR with respect to the investigations made or
procedures followed by FBR in rendering its opinion.
THE FULL TEXT OF FBR'S WRITTEN OPINION TO THE FIRST SIERRA BOARD DATED THE
DATE OF THIS PROXY STATEMENT, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS
CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS APPENDIX B
TO THIS PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. HOLDERS OF
FIRST SIERRA COMMON STOCK ARE URGED TO READ THIS OPINION CAREFULLY IN ITS
ENTIRETY. FBR'S OPINIONS ARE DIRECTED ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO
FROM A FINANCIAL POINT OF VIEW TO THE STOCKHOLDERS OF FIRST SIERRA, DO NOT
ADDRESS ANY OTHER ASPECT OF THE PROPOSED MERGER OR ANY RELATED TRANSACTION AND
DO NOT CONSTITUTE A RECOMMENDATION TO ANY
18
<PAGE> 29
STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE SPECIAL MEETING. THE
SUMMARY OF THE OPINION OF FBR SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In preparing its opinion for the First Sierra Board, FBR performed a
variety of financial and comparative analyses, including those described below.
The summary of FBR's analyses set forth below does not purport to be a complete
description of the analyses underlying FBR's opinion. The preparation of a
fairness opinion is a complex analytic process involving various determinations
as to the most appropriate and relevant methods of financial analyses and the
application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to summary description. In arriving
at its opinion, FBR made qualitative judgments as to the significance and
relevance of each analysis and factors considered by it. Accordingly, FBR
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and factors, without considering all analyses and
factors, could create a misleading or incomplete view of the processes
underlying such analyses and its opinion. In its analyses, FBR made numerous
assumptions with respect to First Sierra, OAC, industry performance, regulatory,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of First Sierra and OAC. No company,
transaction or business used in such analyses as a comparison is identical to
First Sierra, OAC or the Merger, nor is an evaluation of the results of such
analyses entirely mathematical; rather, it involves complex considerations and
judgments concerning financial and operating characteristics and other factors
that could affect the acquisition, public trading or other values of the
companies, business segments or transactions being analyzed. The estimates
contained in such analyses and the valuations resulting from any particular
analysis are not necessarily indicative of actual values or predictive of future
results or values, which may be significantly more or less favorable than those
suggested by such analyses. In addition, analyses relating to the value of
businesses or securities do not purport to be appraisals or to reflect the
prices at which businesses or securities actually may be sold. Accordingly,
because such estimates are inherently subject to substantial uncertainty, none
of First Sierra, OAC, FBR or any other person assumes responsibility for their
accuracy. As described above, FBR's opinion and financial analyses were only one
of many factors considered by the First Sierra Board in its evaluation of the
Merger and should not be viewed as determinative of the views of First Sierra's
Board or management with respect to the Exchange Ratio or the proposed Merger.
The following is a summary of the material analyses performed by FBR in
connection with its oral opinion delivered on June 9, 1998:
Introduction. FBR calculated the price to OAC's December 31, 1997 book
value and tangible book value, price to OAC's December 31, 1997 last twelve
months ("LTM") earnings, and price to estimated fiscal (June 30, 1998) 1998
earnings and estimated December 31, 1998 earnings for OAC implied by the
merger consideration. Using a closing stock price of $24.00 for First
Sierra Common Stock and the issuance of 3.8 million shares of First Sierra
Common Stock to OAC shareholders, the implied merger consideration of $91.2
million represents a price to December 31, 1997 book value and tangible
book value of 4.80x and 4.80x, respectively, a price to estimated December
31, 1997 LTM earnings of 26.83x, and a price to fiscal (June 30, 1998) 1998
earnings of 23.76x and estimated December 31, 1998 LTM earnings of 17.83x.
EPS estimates for OAC were based on First Sierra's and OAC's management
expectations of OAC's performance for the subject periods.
Comparable Transaction Analysis. FBR analyzed certain information
relating to transactions in the leasing industry, including average, median
and minimum/maximum range information for 101 leasing acquisition
transactions announced between January 1, 1996 and May 31, 1998. This
analysis was based on publicly available information obtained from public
company disclosures, as well as information supplied by SNL Securities LC.
Based on its analysis of the comparable transactions, FBR derived the
average, median and ranges of various takeout ratios for the comparable
transaction group and compared such ratios to OAC's comparable ratios in
the Merger. The comparable transaction group's average and median price to
assets ratio of 74.77% and 50.47%, and range from 8.40% to 462.96%,
compared with OAC's ratio of 21.53%; the average and median price to
receivables ratio of 145.13% and 73.77%, and range from 13.43% to 921.48%,
compared with OAC's ratio of 52.42%; the average and median price to book
value ratio of 262.18% and 199.19%, and range from 58.32% to 789.47%,
compared with OAC's
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<PAGE> 30
ratio of 479.52%; the average and median price to LTM earnings ratio of
20.96x and 18.33x, and range from 2.63x to 58.12x, compared with OAC's
ratio of 26.83x; the average and median price to LTM revenues ratio of
1.48x and 1.17x, and range from 0.20x to 5.31x, compared with OAC's ratio
of 2.42x. FBR calculated the OAC ratios with respect to the Merger based on
a price of $24.00 per share for First Sierra Common Stock and the issuance
of 3.8 million shares of First Sierra Common Stock to OAC shareholders,
equating to an aggregate merger consideration of $91.2 million.
Contribution Analysis. FBR analyzed the contribution of each of First
Sierra and OAC to, among other things, origination volume, total assets,
common equity and tangible equity at December 31, 1997, and estimated net
income for the years ended December 31, 1997 and 1998. First Sierra's
contribution in terms of origination volume, total assets, common equity
and tangible equity at December 31, 1997 equaled approximately 79.3%,
32.0%, 67.3% and 50.0%, respectively. First Sierra's contribution in terms
of estimated net income for the year ended December 31, 1997 and 1998
equaled approximately 69.3%, and 77.1%, respectively. Based upon the
issuance of 3.8 million shares of First Sierra Common Stock to OAC
shareholders, holders of First Sierra Common Stock prior to the Merger
would own approximately 78.3% of the combined company upon consummation of
the Merger.
Pro Forma Merger Analysis. FBR noted that, based upon estimates of
First Sierra's and OAC's management and after giving effect to First Sierra
management's estimates resulting from the Synergies created from the
Merger, internal asset and origination growth estimates and certain
assumptions as to, among other things, the number of shares outstanding in
each respective period, the proposed Merger would, based on the Exchange
Ratio, be accretive to First Sierra's reported EPS on a fully diluted basis
in calendar years 1998 and 1999. In this analysis, FBR assumed that both
First Sierra and OAC would perform substantially in accordance with
earnings forecasts provided to FBR by First Sierra's and OAC's management.
The actual results achieved by the combined company may vary from projected
results and the variations may be material. This analysis is based on the
assumption that the Merger would be accounted for as a pooling of
interests.
Certain Other Factors and Comparative Analyses. In rendering its
opinion, FBR considered certain other factors and conducted certain other
comparative analyses, including, among other things, a review of the
historical financial results of First Sierra and OAC; historical stock
price performance and share trading volume of First Sierra; analysis of
stock price, share trading volume history and historical financial
performance of comparable publicly-traded leasing companies in the U.S.;
and the market capitalization of selected financial services companies
involved in transactions similar to the proposed Merger both before and
after such transactions.
Pursuant to the terms of FBR's engagement letter dated as of April 20,
1998, First Sierra has agreed to pay FBR for its services in connection with the
Merger an aggregate financial advisory and transaction success fee of 1% of the
aggregate merger consideration of $91.2 million, or $912,000, payable as
follows: (i) 25% or $228,000 payable upon the execution of the Merger Agreement;
and (ii) the balance upon the closing of the Merger. First Sierra also has
agreed to reimburse FBR for its reasonable out-of-pocket expenses and to
indemnify FBR and certain related entities against certain liabilities,
including liabilities under the federal securities laws.
In the ordinary course of business, FBR and its affiliates may actively
trade the equity securities of First Sierra for their own account and for
accounts of customers, and, accordingly, may at any time hold a long or short
position in such securities. FBR may provide additional financial advisory and
investment banking services to First Sierra in the future.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes certain material federal income tax
consequences of the Merger to holders of OAC Common Stock under the Code, but
does not deal with all tax consequences of the Merger that may be relevant to
OAC stockholders in light of their particular circumstances, such as the tax
consequences to OAC stockholders who do not hold their OAC Common Stock as a
capital asset, foreign persons, insurance companies, tax-exempt organizations,
financial institutions, securities dealers, broker-
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<PAGE> 31
dealers or persons who acquired their shares in compensatory transactions.
Furthermore, no foreign, state or local tax considerations are addressed herein.
It is a condition precedent to OAC's obligation to consummate the Merger
that OAC shall have received from its counsel, Shartsis, Friese & Ginsburg LLP,
an opinion substantially to the effect that (i) the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code, (ii) no gain or
loss will be recognized by First Sierra, OAC, or Subsidiary as a result of the
Merger and (iii) no gain or loss will be recognized by the holders of OAC Common
Stock upon the exchange of their OAC Common Stock solely for shares of First
Sierra Common Stock. The opinion of Shartsis, Friese & Ginsburg LLP is
hereinafter referred to as the "Opinion." The Opinion will be subject to certain
assumptions as noted therein and will be based on certain representations of
First Sierra, Subsidiary, OAC and affiliates of OAC. The Opinion will be based
upon the Code, applicable Treasury regulations, judicial authority and
administrative rulings and practice, all as of the date of the Opinion. There
can be no assurance that future legislative, judicial or administrative changes
or interpretations will not adversely affect the accuracy of the statements and
conclusions set forth therein. Any such changes or interpretations could be
applied retroactively and could affect the tax consequences of the Merger. The
Opinion will not be binding upon the Internal Revenue Service (the "Service"),
and the Service will not be precluded from adopting a contrary position.
Assuming the Merger qualifies as a reorganization under Section 368(a) of
the Code, the following federal income tax consequences will occur:
(a) no gain or loss will be recognized by First Sierra, Subsidiary or
OAC as a result of the Merger;
(b) no gain or loss will be recognized by holders of OAC Common Stock
upon the exchange of their OAC Common Stock solely for shares of First
Sierra Common Stock;
(c) the tax basis of the shares of First Sierra Common Stock received
by an OAC stockholder in the Merger will be the same as the tax basis of
OAC Common Stock surrendered in exchange therefor; and
(d) the holding period of the shares of First Sierra Common Stock
received by an OAC stockholder in the Merger will include the holding
period of the shares of OAC Common Stock surrendered in exchange therefor,
provided that such shares of OAC Common Stock are held as capital assets at
the Effective Time.
The federal income tax consequences summarized above are for general
information only. Each OAC Stockholder should consult a tax advisor as to the
particular consequences of the Merger that may apply to such stockholder,
including the application of state, local, foreign and other federal tax laws.
For more information on the tax opinion to be delivered by counsel to OAC
as a condition to the obligations of the parties to consummate the Merger, see
"The Plan of Merger and Terms of the Merger -- Conditions to the Merger."
ACCOUNTING TREATMENT
It is anticipated that the Merger will be accounted for using the "pooling
of interests" method of accounting pursuant to APB No. 16. The pooling of
interests method of accounting assumes that the combining companies have been
merged from inception, and the historical financial statements for periods prior
to consummation of the Merger are restated as though the companies had been
combined from inception.
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<PAGE> 32
Two of the conditions to the closing of the Merger are as follows: (i)
Arthur Andersen LLP, certified public accountants for First Sierra, shall have
delivered to First Sierra a letter, dated the Closing Date, addressed to First
Sierra, in form and substance reasonably satisfactory to First Sierra, to the
effect that the Merger will qualify for "pooling of interests" accounting
treatment if consummated in accordance with the Merger Agreement, and (ii) Ernst
& Young LLP, certified public accountants for OAC, shall have delivered a letter
to OAC and First Sierra, dated the Closing Date, addressed to OAC, regarding
such firm's concurrence with the conclusions of OAC's management that no
conditions exist related to OAC that would preclude First Sierra's accounting
for the Merger with OAC as a "pooling of interests" under APB No. 16 if closed
and consummated in accordance with the Merger Agreement.
GOVERNMENT AND REGULATORY APPROVALS
Transactions such as the Merger are reviewed by the Antitrust Division of
the Department of Justice (the "Antitrust Division") and the Federal Trade
Commission (the "FTC") to determine whether they comply with applicable
antitrust laws. Under the provisions of the HSR Act, the Merger may not be
consummated until such time as the specified waiting period requirements of the
HSR Act have been satisfied. First Sierra and OAC filed notification reports
with the Department of Justice and FTC under the HSR Act on , 1998,
and the waiting period will expire at 11:59 p.m. on , 1998 unless
First Sierra or OAC receives a request for additional information or documentary
material, or the Antitrust Division and the FTC terminate the waiting period
prior thereto. If, prior to , 1998, either the Antitrust Division or
the FTC requests additional information or documentary material from First
Sierra or OAC, the waiting period will be extended and would expire at 11:59
p.m., Eastern time, on the twentieth calendar day after the date of substantial
compliance by the parties with such request. Only one extension of the waiting
period pursuant to a request for additional information is authorized by the HSR
Act. Thereafter, such waiting period may be extended only by court order or with
the consent of the parties.
The FTC and the Antitrust Division frequently scrutinize the legality under
the antitrust laws of transactions such as the Merger. At any time before or
after the Merger, the Antitrust Division or the FTC could take such action under
the antitrust laws as it deems necessary or desirable in the public interest,
including seeking to enjoin the Merger or seeking divestiture of substantial
assets of First Sierra or OAC or their subsidiaries. Private parties and state
attorneys general may also bring an action under the antitrust laws under
certain circumstances. There can be no assurance that a challenge to the Merger
on antitrust grounds will not be made or, if such a challenge is made, of the
result.
Consummation of the Merger is conditioned upon all governmental waivers,
consents, orders and approvals legally required for the consummation of the
Merger and the transactions contemplated thereby, and all consents from lenders
required to consummate the Merger, having been obtained and being in effect at
the Effective Time.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Under the Articles of Incorporation and Bylaws of OAC, the directors,
officers, employees and agents of OAC have certain rights of indemnification,
including with respect to the approval of the Merger Agreement and the Merger.
First Sierra has agreed that OAC's indemnification obligations under its
Articles of Incorporation at the date of the Merger Agreement will survive the
Merger and will not be amended, repealed or otherwise modified for six years
after the Effective Time in any manner that would adversely affect the
indemnification rights of the directors, officers, employees and agents of OAC.
The Merger Agreement further provides that the officers, directors and agents of
OAC will be indemnified by First Sierra against certain liabilities and costs,
including those arising out of, relating to or in connection with any action or
omission occurring prior to the Effective Time or arising out of or pertaining
to the transactions contemplated by the Merger Agreement.
In connection with the Merger, John F. Allen and John M. Howe, currently
executive officers of OAC, will enter into employment agreements with First
Sierra pursuant to which they will be entitled to specified salaries, benefits
and other compensation. See "Other Agreements -- Employment Agreements." In
addition,
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<PAGE> 33
pursuant to the Merger Agreement, the Board of Directors of First Sierra has
agreed to take such action as may be necessary to cause John F. Allen or an
individual designated by him and acceptable to First Sierra to be elected to
First Sierra's Board of Directors as a Class II Director as of a mutually
agreeable time after the Closing Date.
As of the Record Date, John M. Howe held an option to acquire 150 shares of
OAC Common Stock at an exercise price of $25,000 per share. Pursuant to the
Merger Agreement, at the Effective Time, such OAC Option will be converted into
and become an option to purchase 790,000 shares of First Sierra Common Stock at
an exercise price of $4.75 per share (assuming that OAC's Transaction Fees do
not exceed $5.1 million). See "The Plan of Merger and Term of the
Merger -- Manner and Basis of Converting Shares and Options." Pursuant to the
Merger Agreement, First Sierra agreed to file a Registration Statement on Form
S-8 with respect to the shares of First Sierra Common Stock issuable upon
exercise of such OAC Option within one business day after the consummation of
the Merger. First Sierra also agreed to use its reasonable efforts to maintain
the effectiveness of the Registration Statement for as long as such OAC Option
remains outstanding.
RESTRICTIONS ON RESALES BY AFFILIATES
The Merger Agreement provides that OAC and First Sierra will use their
reasonable efforts to cause each of their officers, directors and each other
person who is an "affiliate" of OAC or First Sierra, as the case may be, to
deliver to First Sierra and/or OAC on or prior to the Effective Time a written
agreement to the effect that such persons will not offer to sell, sell or
otherwise dispose of any shares of First Sierra Common Stock or OAC Common Stock
until after the results covering 30 days of post-Merger combined operations of
First Sierra and OAC have been filed with the Commission, sent to stockholders
of First Sierra or otherwise publicly issued. Under Commission guidelines
interpreting generally accepted accounting principles, with certain limited
exceptions, the sale of First Sierra Common Stock or OAC Common Stock by an
affiliate of either First Sierra or OAC generally within 30 days prior to the
Effective Time or thereafter prior to the publication of results that include a
minimum of at least 30 days of combined operations of First Sierra and OAC after
the Effective Time could preclude "pooling of interests" accounting treatment
for the Merger.
FEDERAL SECURITIES LAW CONSEQUENCES; RESALE REGISTRATION STATEMENT
The shares of First Sierra Common Stock to be issued in connection with the
Merger have not been registered under the Securities Act and therefore will be
"restricted securities" which cannot be resold in the Untied States unless they
are registered under the Securities Act or unless an exemption from registration
is available. The certificates that will represent the shares of First Sierra
Common Stock to be issued in connection with the Merger will bear legends
stating that the shares have not been registered under the Securities Act and
referring to the restrictions on the transfer and sale of the shares.
In general, restricted securities may be sold in the public market only if
registered under the Securities Act or sold in compliance with Rule 144. Under
Rule 144 as currently in effect, any person (or persons whose shares are
aggregated, who has beneficially owned restricted securities for at least one
year is entitled to sell, within any three-month period, a number of those
securities that does not exceed the greater of 1% of the then-outstanding shares
of the issuer in the same class or the average weekly trading volume in the
public market during the four calendar weeks preceding the filing of the
seller's Form 144, provided that certain requirements concerning the
availability of public information concerning the issuer, the manner of sale and
the filing of the seller's Form 144 are satisfied. A person who is not an
affiliate, has not been an affiliate within three months prior to the sale and
has beneficially owned restricted securities for at least two years is entitled
to sell those securities under Rule 144(k) without regard to any of the other
limitations described above. Rule 144 also provides that affiliates who are
selling shares that are not restricted securities must nonetheless comply with
the same restrictions applicable to restricted securities with the exception of
the holding period requirement.
Pursuant to the Merger Agreement, First Sierra agreed to prepare and file
as soon as reasonably practicable after the date of the Merger Agreement, a
Registration Statement on Form S-3 or other appropriate form pursuant to Rule
415 under the Securities Act, or other similar rule of the Commission,
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<PAGE> 34
covering the resale by the OAC Stockholders of the First Sierra Common Stock
issued to them in connection with the Merger (the "Resale Registration
Agreement"). First Sierra further agreed to use all commercially reasonable
efforts to cause the Resale Registration Statement to be declared effective and
to keep the Resale Registration Statement continuously effective for a period of
two years following the Closing Date, or, if sooner, until the date on which the
OAC Stockholders have disposed of all shares of First Sierra Common Stock issued
to them in connection with the Merger. First Sierra has further agreed, if
necessary during the time that the Resale Registration Statement is required to
be maintained effective, to amend or supplement the Resale Registration
Statement when required by the registration form or the instructions applicable
to such form, or by the Securities Act or the rules and regulations thereunder,
and the OAC Stockholders have agreed, subject to certain limitations, to
discontinue disposition of the First Sierra Common Stock covered by the Resale
Registration Statement until appropriate amendments or supplements have been
received by them.
AMENDMENT TO FIRST SIERRA RESTATED CERTIFICATE OF INCORPORATION
The authorized capital stock of First Sierra currently consists of
25,000,000 shares of Common Stock, par value $.01 per share, and 1,000,000
shares of Preferred Stock, par value $.01 per share. On the Record Date,
approximately shares of First Sierra Common Stock were issued and
outstanding, and approximately shares were reserved for issuance upon
exercise of outstanding options, warrants and convertible securities.
The Board of Directors of First Sierra believes that it is in the best
interests of First Sierra to have additional shares of First Sierra Common Stock
available for issuance at the Board of Directors' discretion for future
acquisitions, stock splits, stock dividends, equity financings, employee benefit
plans and other corporate purposes. Accordingly, the First Sierra Board of
Directors has proposed an amendment to the Restated Certificate of Incorporation
of First Sierra to increase the number of shares of First Sierra Common Stock
authorized for issuance from 25,000,000 shares to 100,000,000 shares.
If the proposal is approved by the stockholders of First Sierra as
described below, the additional shares of First Sierra Common Stock may be
issued from time to time upon authorization of the Board of Directors, without
further approval by the stockholders unless required by applicable law or Nasdaq
rules, which generally require the approval of holders of a majority of the
outstanding First Sierra Common Stock when First Sierra Common Stock is to be
issued if such First Sierra Common Stock has voting power equal to or in excess
of 20% of the voting power outstanding, and for such consideration as the First
Sierra Board of Directors may determine and as may be permitted by applicable
law. The availability of additional shares of First Sierra Common Stock for
issuance will afford First Sierra greater flexibility in acting upon proposed
transactions.
The increase in authorized shares is not being proposed as a means of
preventing or dissuading a change in control or takeover of First Sierra.
However, use of these shares for such a purpose is possible. Shares of
authorized but unissued or unreserved First Sierra Common Stock and Preferred
Stock, for example, could be issued in an effort to dilute the stock ownership
and voting power of persons seeking to obtain control of First Sierra or could
be issued to purchasers who would support the Board of Directors in opposing a
takeover proposal. In addition, the increase in authorized shares, if approved,
may have the effect of discouraging a challenge for control or make it less
likely that such a challenge, if attempted, would be successful.
The proposed amendment does not change the terms of the First Sierra Common
Stock, which does not have preemptive rights. The additional shares of First
Sierra Common Stock for which authorization is sought will have the same voting
rights, the same rights to dividends and distributions and will be identical in
all other respects to the shares of First Sierra Common Stock now authorized.
Recommendation of the Board of Directors. The Board of Directors of First
Sierra recommends that the stockholders of First Sierra vote FOR the amendment
to increase the number of authorized shares of First Sierra Common Stock from
25,000,000 to 100,000,000. This amendment is being proposed by the Board of
Directors in order to ensure that, after the Merger, First Sierra will have
shares available for issuance at the
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<PAGE> 35
Board of Directors' discretion for future acquisitions, stock splits, stock
dividends, equity financings, employee benefit plans and other corporate
purposes.
Vote Required for Approval. Approval of the Charter Proposal requires the
affirmative vote of the holders of a majority of the outstanding shares of First
Sierra Common Stock. If approved by the stockholders of First Sierra, it is
anticipated that this amendment to the Restated Certificate of Incorporation
will become effective as soon as practicable after stockholder approval is
received.
APPROVAL OF AMENDMENT TO THE COMPANY'S
1997 STOCK OPTION PLAN
GENERAL
The First Sierra stockholders are also being asked to approve an amendment
to First Sierra's 1997 Stock Option Plan which increases the number of shares of
Common Stock authorized for issuance pursuant to the plan. The 1997 Stock Option
Plan currently provides that the number of shares of Common Stock that may be
issued under the plan may not exceed 2,500,000 shares. The Board of Directors
has amended the 1997 Stock Option Plan to provide for the grant of options to
acquire up to 20% of the shares of First Sierra Common Stock outstanding at any
given time and directed that such amendment be submitted to the stockholders of
First Sierra for their approval. Since inception of the 1997 Stock Option Plan
in May 1997 and through June 30, 1998, options to purchase 2,279,676 shares of
Common Stock have been granted (net of cancellations), 8,850 shares have been
issued upon exercise of options and 2,270,826 shares are reserved for issuance
upon exercise of currently outstanding options.
The Board of Directors believes that First Sierra's continued success
depends upon its ability to attract and retain highly competent persons as
directors, consultants, advisors and employees. The Board of Directors believes
that one of the best ways to attain these objectives is to give directors,
consultants, advisors and employees an opportunity to acquire a proprietary
interest in First Sierra by purchasing shares of First Sierra Common Stock
through the exercise of options granted under the 1997 Stock Option Plan.
Approval of the amendment, which will be submitted at the Special Meeting
in the form of the following resolution, will require the affirmative vote of a
majority of the shares of First Sierra Common Stock outstanding and entitled to
vote and represented in person or by proxy at the Special Meeting.
"RESOLVED, that the second sentence of Section 5(a) of the 1997 Stock
Option Plan is amended and restated in its entirety to provide as follows:
Subject to adjustment in the same manner as provided in Paragraph VIII with
respect to shares of Common Stock subject to Options then outstanding, the
aggregate number of shares of Common Stock that may be issued under the
Plan shall not exceed 20% of the outstanding shares of Common Stock on the
date of any grant of Options hereunder."
SUMMARY OF 1997 STOCK OPTION PLAN
The 1997 Stock Option Plan is intended to provide incentives which will
attract and retain able persons to serve as directors, consultants, advisors or
employees of First Sierra and to provide a means whereby those individuals upon
whom the responsibilities of the successful administration and management of
First Sierra rest, and whose present and potential contributions to the welfare
of First Sierra are of importance, can acquire and maintain stock ownership,
thereby strengthening their concern for the welfare of First Sierra. A further
purpose of the Plan is to provide such individuals with additional incentive and
reward opportunities designed to enhance the profitable growth of First Sierra.
The 1997 Stock Option Plan provides for administration by a committee of
the Board of Directors comprised solely of two or more outside directors. The
1997 Stock Option Committee (the "Committee") currently consists of Mr. Campo
and Mr. Metcalfe. Among the Committee's powers are the authority to construe the
1997 Stock Option Plan, prescribe rules and regulations relating to the plan,
determine which
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<PAGE> 36
employees, consultants, advisors or directors of First Sierra shall receive
grants of options and determine the amount and other terms and conditions of
such grants.
Employees, consultants, advisors and directors of First Sierra or any of
its subsidiaries are eligible to participate in the 1997 Stock Option Plan. As
of June 30, 1998, there were approximately 360 employees and six directors who
were eligible to participate in the 1997 Stock Option Plan.
Under the 1997 Stock Option Plan, First Sierra may grant both incentive
stock options intended to qualify under Section 422 of the Internal Revenue Code
("Incentive Stock Options") and options that are not qualified as incentive
stock options ("Non-Qualified Stock Options"). Incentive Stock Options may be
granted only to individuals who are employees of First Sierra or a subsidiary on
the date of grant. Non-Qualified Stock Options may be granted to directors,
consultants, advisors and employees of First Sierra and its subsidiaries. The
exercise price of a stock option is determined by the Stock Option Committee
and, with respect to any given option, will not be less than the fair market
value of the First Sierra Common Stock on the date the option is granted.
Subject to the terms of the 1997 Stock Option Plan, the Stock Option Committee
is authorized to select the recipients of options from among those eligible and
to establish the exercise price, vesting schedule, term of each option and the
number of shares that may be issued under each option. Under the terms of the
1997 Stock Option Plan, the exercise price of an option may be paid in cash, in
shares of First Sierra 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 Stock Option Committee.
The maximum number of shares that may be subject to options granted to any
one individual during any calendar year may not exceed 500,000 shares of First
Sierra Common Stock, subject to adjustment in the event of certain changes in
First Sierra's capital structure. To the extent that an option lapses or the
rights of an optionee terminate, any shares of First Sierra Common Stock subject
to such option may again be used for new awards under the 1997 Stock Option
Plan.
The 1997 Stock Option Plan provides that the total number of shares covered
by such plan, 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, stock dividend, or similar capital adjustment effected without
receipt of consideration by First Sierra.
Pursuant to the 1997 Stock Option Plan, Non-Qualified Stock Options are not
transferable otherwise than by will or the laws of descent and distribution,
pursuant to a qualified domestic relations order or with the unanimous consent
of the Board of Directors. Incentive Stock Options are not transferable
otherwise than by will or the laws of descent and distribution.
The Board of Directors reserves the right to alter, amend or terminate the
1997 Stock Option Plan at any time, provided that no change in any option
theretofore granted may be made which would impair the rights of the optionee
without the consent of the optionee and provided further that the Board may not,
without the approval of First Sierra's stockholders, (i) increase the maximum
aggregate number of shares that may be issued under the 1997 Stock Option Plan,
or (ii) change the class of individuals eligible to receive options under the
plan.
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OPTIONS GRANTED IN 1997 UNDER THE 1997 STOCK OPTION PLAN
The following table sets forth options granted in 1997 to (i) the Named
Executive Officers (as defined herein), (ii) all executive officers as a group,
(iii) all non-employee directors and (iv) all employees, including all current
officers who were not executive officers, as a group, under the 1997 Stock
Option Plan.
<TABLE>
<CAPTION>
NUMBER OF
SHARES UNDERLYING
OPTIONS
NAME AND POSITION GRANTED(1)
----------------- -----------------
<S> <C>
Thomas J. Depping,.......................................... 367,536
President and Chief Executive Officer
Oren M. Hall,............................................... --
Executive Vice President and Chief Operating Officer
Sandy B. Ho,................................................ 128,941
Executive Vice President and Chief Financial Officer
Robert H. Quinn, Jr.,....................................... 128,941
Executive Vice President and Chief Credit Officer
Craig M. Spencer,........................................... 31,250
Senior Vice President and Chief Accounting Officer
All executive officers as a group (5 persons)............... 656,668
All directors who were not executive officers as a group (4
persons).................................................. 275,652
All employees who were not executive officers as a group.... 100,000
</TABLE>
- ---------------
(1) All options to purchase First Sierra Common Stock were issued at 100% of
their fair market value on the date of grant and expire ten years from the
date of grant. See "Executive Compensation".
On , 1998, the last reported sale price of the
Common Stock on Nasdaq was $ per share.
FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN
A. Incentive Stock Options. The following general rules are applicable to
holders of Incentive Stock Options and to First Sierra for Federal income tax
purposes under existing law:
1. Generally, no taxable income results to the optionee upon the grant
or exercise of an Incentive Stock Option and no tax deduction is allowed to
First Sierra.
2. If shares acquired upon exercise of an Incentive Stock Option are
held for: (i) two years following the date the Incentive Stock Option was
granted; and (ii) one year following the date the shares are transferred to
the optionee pursuant to the exercise of the Incentive Stock Option, the
difference between the amount realized on any subsequent disposition of the
shares and the exercise price will generally be treated as capital gain or
loss to the optionee.
3. If shares acquired upon exercise of an Incentive Stock Option are
disposed of before the expiration of one or both of the requisite holding
periods (a "disqualifying disposition"), then in most cases the lesser of:
(i) any excess of the fair market value of the shares at the time of
exercise of the Incentive Stock Option over the exercise price; or (ii) the
actual gain on disposition, will be taxed as ordinary income in the year of
such disposition and First Sierra will generally be entitled to a
corresponding deduction for income tax purposes.
4. Any excess of the amount realized by the optionee as the result of
a disqualifying disposition over the sum of: (i) the exercise price; and
(ii) the amount of ordinary income recognized under the above rules, will
be treated as capital gain.
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<PAGE> 38
5. The amount by which the fair market value of the Common Stock
acquired upon exercise of the Incentive Stock Option exceeds the exercise
price, may be taxable to the optionee under the "alternative minimum tax"
provisions of the Code.
B. Non-Qualified Options. The following general rules are applicable to
holders of Non-Qualified Stock Options and to First Sierra for Federal income
tax purposes under existing law:
1. The optionee does not realize any taxable income upon the grant of
a Non-Qualified Stock Option, and First Sierra is not allowed a tax
deduction by reason of such grant.
2. The optionee will recognize ordinary income at the time of exercise
of a Non-Qualified Stock Option in an amount equal to the excess, if any,
of the fair market value of the shares on the date of exercise over the
exercise price and First Sierra will be entitled to a corresponding
deduction.
BOARD RECOMMENDATION
THE FIRST SIERRA BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE
AMENDMENT TO FIRST SIERRA'S 1997 STOCK OPTION PLAN.
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<PAGE> 39
EXECUTIVE COMPENSATION
The following table presents summary information concerning compensation
awarded or paid to, or earned by, the Chief Executive Officer and each of the
other four most highly compensated executive officers at December 31, 1997
(together, the "Named Executive Officers") during the periods indicated for
services rendered to First Sierra and its subsidiaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
--------------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Thomas J. Depping.................. 1997 $239,250 -- 587,536(1) $12,750(2)
President and Chief Executive 1996 200,000 (3) -- 2,000
Officer
Oren M. Hall(4).................... 1997 173,250 $150,000(5) -- 30,563(6)
Executive Vice President and
Chief Operating Officer
Sandy B. Ho........................ 1997 160,000 -- 178,941(7) 4,750(8)
Executive Vice President and 1996 131,250 100,000(9) -- 1,500
Chief Financial Officer
Robert H. Quinn, Jr................ 1997 160,000 -- 168,941(10) 4,750(8)
Executive Vice President and 1996 145,417 100,000(11) -- 1,000
Chief Credit Officer
Craig M. Spencer(12)............... 1997 125,000 -- 31,250 4,750(8)
Senior Vice President and Chief
Accounting Officer
</TABLE>
- ---------------
(1) Includes 220,000 options that were granted in 1998 based upon Mr. Depping's
performance during 1997 and in lieu of a cash bonus pursuant to First
Sierra's Executive Incentive Compensation Plan.
(2) Consists of amounts contributed by First Sierra on behalf of Mr. Depping to
First Sierra's 401(k) plan and an automobile allowance.
(3) Mr. Depping was paid a bonus of $100,000 in 1996 based upon his performance
during 1995. Mr. Depping did not receive a bonus for his performance in
1996.
(4) Mr. Hall's employment with First Sierra began on May 20, 1997.
(5) This amount was paid in 1998 based upon Mr. Hall's performance during 1997.
(6) Consists of a transitional moving allowance and amounts contributed on
behalf of Mr. Hall to First Sierra's 401(k) plan.
(7) Includes 50,000 options that were granted in 1998 based upon Ms. Ho's
performance during 1997 and in lieu of a cash bonus pursuant to First
Sierra's Executive Incentive Compensation Plan.
(8) Consists of amounts contributed by First Sierra on behalf of the Named
Executive Officer to First Sierra's 401(k) plan.
(9) This amount was paid in 1997 based upon Ms. Ho's performance during 1996. A
bonus of $110,000 was paid in 1996 based upon Ms. Ho's performance during
1995.
(10) Includes 40,000 options that were granted in 1998 based upon Mr. Quinn's
performance during 1997 and in lieu of a cash bonus pursuant to First
Sierra's Executive Incentive Compensation Plan.
(11) This amount was paid in 1997 based upon Mr. Quinn's performance during
1996. A bonus of $120,000 was paid in 1996 based upon Mr. Quinn's
performance during 1995.
(12) Mr. Spencer's employment with First Sierra began on November 16, 1996.
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<PAGE> 40
The following table sets forth information concerning the grant of stock
options during 1997 to the Named Executive Officers:
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE
AT ASSUMED
PERCENTAGE ANNUAL RATE OF STOCK
NUMBER OF OF TOTAL PRICE
SHARES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -------------------------
NAME GRANTED(1) FISCAL 1997 (PER SHARE) DATE 5% 10%
---- ---------- ------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. Depping...... 367,536 35.6% $8.00 5/15/2007 $1,848,706 $4,686,084
Oren M. Hall........... -- -- -- -- -- --
Sandy B. Ho............ 128,941 12.5 8.00 5/15/2007 648,573 1,643,998
Robert H. Quinn........ 128,941 12.5 8.00 5/15/2007 648,573 1,643,998
Craig M. Spencer....... 31,250 3.0 8.00 5/15/2007 157,187 398,437
</TABLE>
- ---------------
(1) All of such options were granted pursuant to First Sierra's 1997 Stock
Option Plan and vest in increments of 20% per year over a period of five
years beginning on the first anniversary of the date of grant. In addition,
each of such options will vest immediately in the event that the Named
Executive Officers' employment with First Sierra terminates by reason of
death or upon the occurrence of a "Corporate Change" (as defined in the 1997
Stock Option Plan) while the Named Executive Officer is employed by First
Sierra.
(2) Represents the potential realizable value of each grant of options assuming
that the market price of the underlying security appreciates in value from
the date of grant to the end of the option term at the rates of 5% and 10%
compounded annually.
The following table sets forth information concerning fiscal year-end
option values. No options were exercised by the Named Executive Officers during
1997.
FISCAL YEAR-END OPTION VALUE TABLE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF IN-THE-MONEY
UNDERLYING OPTIONS AT OPTIONS AT DECEMBER 31,
DECEMBER 31, 1997 1997(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Thomas J. Depping............................. -- 367,536 -- $3,583,476
Oren M. Hall.................................. -- -- -- --
Sandy B. Ho................................... -- 128,941 -- 1,257,175
Robert H. Quinn............................... -- 128,941 -- 1,257,175
Craig M. Spencer.............................. -- 31,250 -- 304,687
</TABLE>
- ---------------
(1) Calculated as the difference between the aggregate fair market value of such
options based on the last reported sale price of the First Sierra Common
Stock on December 31, 1997 ($17.75 per share) and the aggregate exercise
price.
EMPLOYMENT AGREEMENTS
First Sierra has an employment agreement with Thomas J. Depping effective
May 20, 1997. 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 First Sierra or the employee gives 90 days' notice of termination.
Pursuant to his employment agreement, Mr. Depping is entitled to receive an
annual salary of not less than $250,000. If the agreement is terminated without
cause by First Sierra, or with cause (including certain changes in control of
First Sierra) by Mr. Depping, First Sierra 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
30
<PAGE> 41
compensation. In addition, the agreement contains a covenant prohibiting Mr.
Depping from competing with First Sierra for a period of one year following
termination of his employment with First Sierra. The agreement also provides for
customary benefits and perquisites.
First Sierra also has an employment agreement with Sandy B. Ho effective
April 1, 1998. Ms. Ho's employment agreement has an initial term of three years
with an evergreen three year extension continuing after the initial term unless
either First Sierra or the employee gives 90 days' notice of termination.
Pursuant to such agreement, Ms. Ho is entitled to receive an annual salary of
not less than 185,000 and an annual bonus at the discretion of First Sierra's
Board of Directors. If the agreement is terminated without cause by First
Sierra, First Sierra is obligated to pay Ms. Ho (i) for a period of three years
from the Termination Date, her base salary plus the bonus paid to Ms. Ho for the
year prior to termination and (ii) a lump sum bonus at the end of the term of
the agreement equal to the bonus paid to Ms. Ho for the year prior to
termination pro rated for the number of days she was employed during the year of
termination. If the agreement is terminated by Ms. Ho after a change in control
of First Sierra, First Sierra is obligated to pay Ms. Ho a lump sum equal to her
annual base salary plus the prior year's bonus. Ms. Ho's employment agreement
prohibits her from competing with First Sierra for a period of one year after
termination of employment and provides for customary benefits and perquisites.
First Sierra also has a separate employment agreement with Robert H. Quinn
effective May 20, 1997. Mr. Quinn's employment agreement has an initial term of
three years. Pursuant to this agreement, Mr. Quinn is entitled to receive an
annual salary of not less that $160,000. In addition, Mr. Quinn's agreement
contains a covenant prohibiting him from competing with First Sierra for a
period of one year following termination of his employment with First Sierra.
The agreement with Mr. Quinn also provides for customary benefits and
perquisites.
In addition, First Sierra has an employment agreement with Oren M. Hall
effective May 20, 1997. Mr. Hall's employment agreement has a term of three
years and provides for an annual salary of not less than $195,000. The agreement
contains a provision which requires First Sierra to pay Mr. Hall at least 12
months of base salary if the agreement is terminated without cause by First
Sierra or with cause by Mr. Hall. In addition, the agreement contains a covenant
prohibiting Mr. Hall from competing with First Sierra for a period of one year
following termination of his employment with First Sierra. The Agreement also
provides for customary benefits and perquisites.
COMPENSATION AND STOCK OPTION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Depping and Solomon are members of the Compensation Committee of
the Board of Directors. Messrs. Campo and Metcalfe are members of the Stock
Option Committee of the Board of Directors. Mr. Depping is President and Chief
Executive Officer of First Sierra and receives compensation from First Sierra
for his service as such. None of Mr. Solomon, Mr. Campo or Mr. Metcalfe is an
officer of First Sierra. No member of First Sierra's Compensation or Stock
Option Committees served as a director or member of the Compensation or Stock
Option Committees of another entity, one of whose executive officers served as a
director or member of the Compensation or Stock Option Committee of First
Sierra.
31
<PAGE> 42
THE PLAN OF MERGER AND TERMS OF THE MERGER
The following summary of the terms of the Merger Agreement is qualified in
its entirety by reference to the Merger Agreement, a copy of which is attached
hereto as Appendix A. Certain capitalized terms used herein without definition
have the respective meanings set forth in the Merger Agreement.
EFFECTIVE TIME OF THE MERGER
The Merger will become effective at such time as shall be stated in the
Certificates of Merger, which shall be in a form mutually acceptable to First
Sierra and OAC, and shall be filed with the Secretary of State of the State of
California in accordance with the GCL and the Secretary of State of the State of
Delaware in accordance with the DGCL (the "Merger Filings"). The Merger Filings
will be made simultaneously with, or as soon as practicable after, the closing
of the transactions contemplated by the Merger Agreement in accordance with the
Merger Agreement. See "-- Conditions to the Merger."
MANNER AND BASIS FOR CONVERTING SHARES AND OPTIONS
At the Effective Time, each outstanding share of OAC Common Stock will be
converted into the right to receive, without interest, a number of shares of
First Sierra Common Stock determined by dividing (i) $79,000,000 minus any
transaction fees in excess of $5,100,000 by (ii) $25 and then dividing the
quotient thereof by the aggregate number of shares of OAC Common Stock issued
and outstanding at the Effective Time. In addition, each OAC Option that is
outstanding at the Effective Time will be converted into an option to purchase
the number of shares of First Sierra Common Stock equal to the number of shares
of OAC Common Stock subject to the OAC Option multiplied by the Exchange Ratio
at an exercise price equal to the Adjusted Exchange Ratio, and First Sierra will
assume each OAC Option in accordance with the stock option agreement by which it
is evidenced. As of July 9, 1998, John M. Howe, an executive officer of OAC,
held all outstanding OAC Options, consisting of an option to acquire 150 shares
of OAC Common Stock at an exercise price of $25,000 per share. At the Effective
Time, each issued and outstanding share of Subsidiary Common Stock will be
converted into one share of common stock, par value $.01 per share, of the
Surviving Corporation.
No certificates or scrip for fractional shares of First Sierra Common Stock
will be issued in the Merger and no First Sierra Common Stock dividend, stock
split or interest will relate to any fractional security. Fractional interests
will not entitle the owner thereof to vote or to any other rights of a security
holder.
Pursuant to the Merger Agreement, the OAC Stockholders have agreed to
indemnify First Sierra and its officers, directors, employees, consultants,
stockholders and affiliates (collectively, the "Parent Indemnified Parties")
from and against certain damages, losses, claims, liabilities, demands, charges,
suits, penalties, costs and expenses which such parties may sustain related to
or arising out of any breach or default by OAC or the OAC Stockholders of any of
their representations, warranties, covenants or agreements in the Merger
Agreement. On or prior to Closing, the OAC Stockholders, First Sierra and an
escrow agent mutually agreed upon by First Sierra and the OAC Stockholders (the
"Escrow Agent") will enter into an Indemnification Escrow Agreement (the "Escrow
Agreement") pursuant to which ten percent (10%) of the shares of First Sierra
Common Stock which would otherwise be delivered to the OAC Stockholders as
consideration for the Merger at Closing (the "Escrowed Shares"), together with
stock powers executed in the blank, will be deposited into and held in escrow
pursuant to the terms of the Escrow Agreement in order to secure the indemnity
obligations of the OAC Stockholders to the Parent Indemnified Parties under the
Merger Agreement.
CONDITIONS TO THE MERGER
The respective obligations of First Sierra and OAC to effect the Merger are
subject to the fulfillment at or prior to the Closing Date of the following
conditions: (a) the issuance of shares of First Sierra Common Stock pursuant to
the Merger Agreement and the transactions contemplated thereby shall have been
approved and adopted by the requisite vote of the stockholders of First Sierra
under applicable law and applicable Nasdaq requirements; (b) an additional
listing application shall have been filed with Nasdaq with respect to
32
<PAGE> 43
the shares of First Sierra Common Stock issuable in connection with the Merger
and those to be reserved for issuance upon exercise of OAC Options that are
converted into options to purchase First Sierra Common Stock; (c) the waiting
period applicable to the consummation of the Merger under the HSR Act shall have
expired or been terminated; (d) this Proxy Statement shall have been cleared by
the Commission; (e) no preliminary or permanent injunction or other order or
decree by any federal or state court which prevents the consummation of the
Merger shall have been issued and remain in effect (each party agreeing to use
its reasonable efforts to have any such injunction, order or decree lifted); (f)
no statute, rule or regulation shall have been enacted by any state or federal
government or governmental agency in the United States which would prevent the
consummation of the Merger or make the Merger illegal; (g) all governmental
waivers, consents, orders and approvals legally required for the consummation of
the Merger and the transactions contemplated hereby, and all consents from
lenders required to consummate the Merger shall have been obtained and be in
effect at the Effective Time; (h) Arthur Andersen LLP, certified public
accountants for First Sierra, shall have delivered a letter, dated the Closing
Date, addressed to First Sierra, in form and substance reasonably satisfactory
to First Sierra, to the effect that the Merger will qualify for a pooling of
interests accounting treatment if closed and consummated in accordance with the
Merger Agreement; and (i) each of the parties to the Agreement shall have
received a letter dated the Closing Date, addressed to OAC, from Ernst & Young
LLP, certified public accountants for OAC, regarding such firm's concurrence
with OAC's management's conclusions that no conditions exist related to OAC that
would preclude First Sierra's accounting for the Merger with OAC as a pooling of
interests under APB No. 16 if closed and consummated in accordance with the
Merger Agreement.
The obligation of OAC to effect the Merger is further subject to the
fulfillment at or prior to the Closing Date of the following additional
conditions, unless waived by OAC: (a) First Sierra and Subsidiary shall have
performed in all material respects their agreements contained in the Merger
Agreement required to be performed on or prior to the Closing Date and the
representations and warranties of First Sierra and Subsidiary contained in the
Merger Agreement shall be true and correct on and as of the date made and
(except to the extent that such representations and warranties speak as of an
earlier date) on and as of the Closing Date as if made at and as of such date,
and OAC shall have received a certificate of the Chairman of the Board and Chief
Executive Officer, the President or a Vice President of First Sierra and of the
President and Chief Executive Officer or a Vice President of Subsidiary to that
effect; (b) OAC shall have received an opinion of Shartsis, Friese & Ginsburg
LLP, in form and substance reasonably satisfactory to OAC, dated the Closing
Date, substantially to the effect that, on the basis of facts, representations
and assumptions set forth in such opinion, which are consistent with the state
of facts existing at the Effective Time, the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code and neither
First Sierra, Subsidiary, OAC, or the holders of OAC's Common Stock will
recognize gain or loss for federal income tax purposes; (c) OAC shall have
received from McDermott, Will & Emery a written opinion dated the Closing Date;
(d) on the Closing Date, First Sierra shall have delivered to each OAC
Stockholder a certificate representing the number of shares of First Sierra
Common Stock which such holder has the right to receive; and (e) the Resale
Registration Statement shall have been declared effective by the Commission on
or before the Closing Date and shall be effective on the Closing Date.
The obligation of First Sierra and Subsidiary to effect the Merger is
further subject to the fulfillment at or prior to the Closing Date of the
following additional conditions, unless waived by First Sierra and Subsidiary:
(a) OAC shall have performed its agreements contained in the Merger Agreement
required to be performed on or prior to the Closing Date and the representations
and warranties of OAC and the OAC Stockholders contained in the Merger Agreement
shall be true and correct on and as of the date made and (except to the extent
that such representations and warranties speak as of an earlier date) on and as
of the Closing Date as if made at and as of such date, and First Sierra shall
have received a certificate of the President and Chief Executive Officer of OAC
and of each OAC Stockholder to that effect; (b) First Sierra shall have received
(i) from Shartsis, Friese & Ginsburg LLP a written opinion dated the Closing
Date, and (ii) from attorneys representing each OAC Stockholder written opinions
dated the Closing Date; (c) each holder of OAC Common Stock shall have delivered
to First Sierra the certificates representing such OAC Common Stock, which
certificates shall be properly endorsed for transfer or accompanied by duly
executed stock powers in either case executed in blank or in favor of First
Sierra or its designee; (d) First Sierra, the Escrow Agent and
33
<PAGE> 44
each OAC Stockholder shall have executed and delivered the Escrow Agreement; (e)
prior to the Effective Time, John M. Howe shall have terminated his employment
with OAC pursuant to the Employment Termination Agreement between him and OAC,
and the Surviving Corporation or Parent and each of John F. Allen and John M.
Howe shall have executed and delivered employment agreements by and between the
Surviving Corporation or First Sierra, as the case may be, and each such person;
(f) each director and officer of OAC shall have resigned from his or her
position as a director or officer of the OAC, as the case may be, effective as
of the Effective Time; (g) either (i) OAC shall have obtained all necessary
consents or waivers under its Loan Agreement to enable the Merger and the other
transactions contemplated by the Merger Agreement to be consummated without
causing an event of default or any acceleration of indebtedness under the Loan
Agreement or all amounts outstanding under the Loan Agreement shall have been
repaid and the Loan Agreement shall have been terminated prior to the Effective
Time; and (h) OAC shall have delivered certain financial statements of OAC to
First Sierra.
COOPERATION
Pursuant to the Merger Agreement, each of the parties has agreed to take,
or to cause to be taken, all action and to do or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by the Merger
Agreement.
REPRESENTATIONS AND WARRANTIES OF FIRST SIERRA AND OAC
In the Merger Agreement, First Sierra and OAC have made various
representations and warranties relating to, among other things, their respective
businesses and financial condition, the accuracy of First Sierra's filings with
the Commission, the satisfaction of certain legal requirements for the Merger
and the absence of undisclosed liabilities or material litigation matters. The
representations and warranties of each of the parties to the Merger Agreement
will expire on the date of issuance of the first report of First Sierra's
independent auditors on the combined operations of First Sierra and OAC
following the Merger.
CONDUCT OF THE BUSINESS OF FIRST SIERRA AND OAC PRIOR TO THE MERGER
Pursuant to the Merger Agreement, OAC has agreed that, after the date of
the Merger Agreement and prior to the Closing Date or earlier termination of the
Merger Agreement, and except as otherwise agreed to in writing by First Sierra,
it shall, and shall cause each of its subsidiaries to: (a) conduct their
respective businesses in the ordinary and usual course of business and
consistent with past practice; (b) not (i) amend or propose to amend their
respective charters or by-laws, (ii) split, combine or reclassify their
outstanding capital stock or (iii) declare, set aside or pay any dividend or
distribution payable in cash, stock, property or otherwise, except for the
payment of dividends or distributions to OAC by a wholly-owned subsidiary of
OAC; (c) not issue, sell, pledge or dispose of, or agree to issue, sell, pledge
or dispose of, any additional shares of, or any options, warrants or rights of
any kind to acquire any shares of their capital stock of any class or any debt
or equity securities convertible into or exchangeable for such capital stock,
except that OAC may issue shares upon exercise of outstanding stock options; (d)
not (i) incur or become contingently liable with respect to any indebtedness for
borrowed money other than borrowings in the ordinary course of business (other
than pursuant to credit facilities) or borrowings under the existing credit
facilities of OAC or any of its subsidiaries (the "Existing Credit Facilities")
up to the existing borrowing limit on the date hereof or borrowings to refinance
existing indebtedness on terms which are reasonably acceptable to First Sierra,
(ii) redeem, purchase, acquire or offer to purchase or acquire any shares of its
capital stock or any options, warrants or rights to acquire any of its capital
stock or any security convertible into or exchangeable for its capital stock,
(iii) take any action that would jeopardize the treatment of the Merger as a
pooling of interests under APB No. 16 (iv) take or fail to take any action which
action or failure to take action is reasonably likely to cause OAC or the OAC
Stockholders (except to the extent of stockholders in special circumstances) to
recognize gain or loss for federal income tax purposes as a result of the
consummation of the Merger or otherwise is reasonably likely to cause the Merger
not to qualify as a reorganization under Section 368(a) of the Code, (v) make
any acquisition of any assets or businesses other than expenditures for current
assets in the ordinary course of business and expenditures for fixed or capital
assets in the ordinary course of business, (vi) sell,
34
<PAGE> 45
pledge, dispose of or encumber any material assets or businesses other than (a)
sales of businesses or assets in the ordinary course of business, (b) sales of
businesses or assets disclosed in OAC's disclosure schedule to the Merger
Agreement, and (c) pledges or encumbrances pursuant to Existing Credit
Facilities or other permitted borrowings, or (vii) enter into any binding
contract, agreement, commitment or arrangement with respect to any of the
foregoing; (e) use all reasonable efforts to preserve intact their respective
business organizations and goodwill, keep available the services of their
respective present officers and key employees, and preserve the goodwill and
business relationships with customers and others having business relationships
with them and not engage in any action, directly or indirectly, with the intent
to adversely impact the transactions contemplated by the Merger Agreement or the
documents contemplated thereby; (f) subject to restrictions imposed by
applicable law, confer with one or more representatives of First Sierra to
report operational matters of materiality and the general status of ongoing
operations; (g) not enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other similar
arrangements or agreements with any directors, officers or key employees, except
in the ordinary course and consistent with past practice; provided, however,
that OAC and its subsidiaries shall in no event enter into or amend any written
employment agreement providing for an annual base salary in excess of $50,000
per annum; (h) not adopt, enter into or amend any pension or retirement plan,
trust or fund, except as required to comply with changes in applicable law and
not adopt, enter into or amend in any material respect any bonus, profit
sharing, compensation, stock option, deferred compensation, health care,
employment or other employee benefit plan, agreement, trust, fund or arrangement
for the benefit or welfare of any employees or retirees generally, other than in
the ordinary course of business, except (i) as required to comply with changes
in applicable law, or (ii) as required pursuant to an existing contractual
arrangement or agreement; (i) use commercially reasonable efforts to maintain
with financially responsible insurance companies insurance on its tangible
assets and its businesses in such amounts and against such risks and losses as
are consistent with past practice; (j) not make, change or revoke any material
tax election or make any material agreement or settlement regarding taxes with
any taxing authority; and (k) not take or fail to take any action which action
or failure to take action would materially delay consummation of the Merger.
Pursuant to the Merger Agreement, First Sierra has agreed that, after the
date of the Merger Agreement and prior to the Closing Date or earlier
termination of the Merger Agreement, and except as otherwise agreed to in
writing by OAC, it shall, and shall cause each of its subsidiaries to: (a)
conduct their respective businesses in the ordinary and usual course of business
and consistent with past practice; (b) not (i) amend or propose to amend their
respective charters (except for any amendments by First Sierra of its Restated
Certificate of Incorporation to increase the number of authorized shares of
First Sierra Common Stock) or by-laws, (ii) split, combine or reclassify
(whether by stock dividend or otherwise) their outstanding capital stock, or
(iii) declare, set aside or pay any dividend or distribution payable in cash,
stock, property or otherwise, except for the payment of dividends or
distributions to First Sierra by a wholly-owned subsidiary of First Sierra; (c)
not (i) take any action that would jeopardize the treatment of the Merger as a
pooling of interests under APB No. 16 (ii) take or fail to take any action which
action or failure to take action is reasonably likely to cause OAC or the OAC
Stockholders to recognize gain or loss for federal income tax purposes as a
result of the consummation of the Merger or otherwise is reasonably likely to
cause the Merger not to qualify as a reorganization under Section 368(a) of the
Code, or (iii) take or fail to take any action which action or failure to take
action would materially delay consummation of the Merger; and (d) use all
reasonable efforts to preserve intact their respective business organizations
and goodwill, keep available the services of their respective present officers
and key employees, and preserve the goodwill and business relationships with
customers and others having business relationships with them and not engage in
any action, directly or indirectly, with the intent to adversely impact the
transactions contemplated by the Merger Agreement.
NO SOLICITATION OF ACQUISITION TRANSACTIONS
The Merger Agreement provides that after the date of the Merger Agreement
and prior to the Effective Time or earlier termination of the Merger Agreement,
OAC shall not, and shall not permit any of its subsidiaries to, initiate,
solicit, negotiate, encourage or provide information to facilitate, and OAC
shall, and shall use its reasonable efforts to cause any officer, director or
employee of OAC, or any attorney, accountant,
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<PAGE> 46
investment banker, financial advisor or any other agent retained by it or any of
its subsidiaries not to, initiate, solicit, negotiate, encourage or provide
information to facilitate, any Acquisition Transaction. The Merger Agreement
requires that OAC immediately notify First Sierra after receipt of any proposal
for an Acquisition Transaction, indication of interest or request for
information relating to OAC or its subsidiaries in connection with an
Acquisition Transaction or for access to the properties, books or records of OAC
or any subsidiary by any person or entity that informs the Board of Directors of
OAC or such subsidiary that it is considering making, or has made, a proposal
for an Acquisition Transaction. Such notice to First Sierra must be made orally
and in writing.
CONDUCT OF THE BUSINESS OF THE COMBINED COMPANIES FOLLOWING THE MERGER
Following the Merger, OAC will be a wholly-owned subsidiary of First
Sierra. Pursuant to the Merger Agreement, the Articles of Incorporation and the
Bylaws of Subsidiary, as in effect immediately prior to the Effective Time, will
be the Articles of Incorporation and Bylaws of the Surviving Corporation after
the Effective Time as amended pursuant to the Merger Filings, and (subject to
certain provisions of the Merger Agreement) thereafter may be amended in
accordance with their terms as provided in the DGCL.
TERMINATION OR AMENDMENT
The Merger Agreement may be terminated at any time prior to the Closing
Date, whether before or after approval by the stockholders of First Sierra, by
the mutual written consent of OAC and First Sierra or as follows: (a) by either
First Sierra or OAC (i) upon a breach of a representation or warranty of the
Non-Terminating Party contained in the Merger Agreement which has not been cured
in all material respects and which has caused certain conditions to the
obligation of the Terminating Party to effect the Merger to be incapable of
being satisfied by the Termination Date, (ii) if the Merger is not completed by
December 31, 1998 (unless due to a delay or default on the part of the
Terminating Party), (iii) if the Merger is enjoined by a final, unappealable
court order not entered at the request or with the support of the Terminating
Party and if the Terminating Party shall have used reasonable efforts to prevent
the entry of such order or (iv) if the Average Closing Price is less than
$21.00. Additionally, OAC may terminate the Merger Agreement (i) if First Sierra
(a) fails to perform in any respect any of its material covenants in the Merger
Agreement and (b) does not cure such default in all material respects within 30
days after written notice of such default specifying such default in reasonable
detail is given to First Sierra by OAC; or (ii) if the stockholders of First
Sierra fail to approve the issuance of First Sierra Common Stock pursuant to the
Merger Agreement at a duly held meeting of stockholders called for such purpose
or any adjournments thereof.
The Merger Agreement may be amended or supplemented by an instrument in
writing signed on behalf of each party and in compliance with applicable law.
Such amendment may take place at any time prior to the Closing Date, and,
subject to applicable law, whether before or after approval by the stockholders
of First Sierra.
TRANSACTION FEES
First Sierra and OAC have agreed that the Merger consideration of
$79,000,000 shall be reduced by the amount of any Transaction Fees in excess of
$5.1 million. For purposes of the Merger Agreement "Transaction Fees" means the
sum of (i) all legal, accounting, tax, consulting and financial advisory and
other fees and expenses incurred by OAC and its stockholders in connection with
the transactions contemplated by the Merger Agreement that are not paid by OAC
or its stockholders on or prior to the Closing Date (the "Professional Advisory
Expenses") and (ii) all amounts that, solely as a result of the Merger, OAC or
First Sierra will be obligated to pay (including loans that OAC or First Sierra
will be required to forgive) after the Effective Time to persons who were
employees of OAC prior to the Effective Time pursuant to provisions in their
employment, executive compensation, or other similar agreements relating to
incentive bonuses or loan forgiveness payable in connection with the employee's
continuation of employment after a change in control (the "Compensation
Expenses").
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Pursuant to the Merger Agreement, at least two days prior to the Closing
Date, OAC will calculate the amount of Compensation Expenses to be paid by First
Sierra or OAC after Closing and OAC, the OAC Stockholders and First Sierra will
estimate, by mutual agreement, the amount of Professional Advisory Expenses as
of the Closing Date for purposes of determining the number of shares of First
Sierra Common Stock to be delivered at the Closing (the sum of such Compensation
Expenses and estimated Professional Advisory Expenses being referred to herein
as the "Preliminary Value"). Within 60 days after the Closing Date, First Sierra
will prepare and deliver to the OAC Stockholders a determination (the
"Determination") of the actual amount of the Professional Advisory Expenses as
of the Closing Date (which amount, when added to the amount of Compensation
Expenses shall be referred to herein as the "Actual Value"), together with
documentation supporting any adjustments in the Professional Advisory Expenses
from the Preliminary Value, which will be prepared on a basis consistent with
the determination of the Preliminary Value. The Merger Agreement provides a
mechanism for resolution of any dispute between First Sierra and the OAC
Stockholders relating to the Determination. If the Actual Value and the
Preliminary Value both exceed $5.1 million and the Actual Value is greater than
the Preliminary Value, First Sierra will be entitled to set off against the
Escrowed Shares the difference between the Actual Value and the Preliminary
Value (assuming a value per share of First Sierra Common Stock for purposes of
such calculation equal to $25 per share). If the Actual Value exceeds $5.1
million and the Preliminary Value is less than $5.1 million, First Sierra will
be entitled to set off against the Escrowed Shares the difference between the
Actual Value and $5.1 million (assuming a value per share of First Sierra Common
Stock for purposes of such calculation equal to $25 per share). The Minimum Loss
(as hereinafter defined) will not be applicable to any such set off and such set
off will not count against such Minimum Loss. If the Actual Value and the
Preliminary Value both exceed $5.1 million and the Actual Value is less than the
Preliminary Value, then the Purchase Price will be increased by a number of
additional shares of First Sierra Common Stock equal to the amount determined by
dividing such difference by $25, and such shares will be issued and delivered to
the OAC Stockholders. If the Preliminary Value exceeds $5.1 million and the
Actual Value is less than $5.1 million, then the Purchase Price will be
increased by a number of additional shares of First Sierra Common Stock
determined by dividing the difference between the Preliminary Value and $5.1
million by $25, and such shares will be issued and delivered to the OAC
Stockholders. In the event that the Actual Value is less than $5.1 million, the
difference between $5.1 million and the Actual Value will be paid to employees
of OAC designated by mutual agreement of Thomas J. Depping and John F. Allen
provided that such employees were not stockholders of OAC prior to the Effective
Time.
INDEMNIFICATION
The Merger Agreement provides that, subject to certain limitations
described below, after the Effective Time, each OAC Stockholder will indemnify
and hold harmless the Parent Indemnified Parties from and against any and all
damages, losses, claims, liabilities, demands, charges, suits, penalties, costs
and expenses (including court costs and attorney's fees) ("Indemnified Costs")
to which any of the Parent Indemnified Parties may be subjected related or
arising out of any breach or default by OAC or the OAC Stockholders of any
representations or warranties or covenants or agreements under the Merger
Agreement. The Merger Agreement also contains a similar obligation of First
Sierra to indemnify OAC, the OAC Stockholders and certain affiliates of OAC.
The following limitations apply to claims for indemnification made pursuant
to the Merger Agreement; except that (i) these limitations do not apply to
claims related to the Resale Registration Statement and (ii) the limitations
relating to Minimum Loss do not apply to any claims related to or arising out of
a breach of the representations and warranties of OAC and the OAC Stockholders
relating to Compensation Expenses.
a) Minimum Loss. No indemnifying party will be required to indemnify
an indemnified party except to the extent that the aggregate amount of
Indemnified Costs for which the indemnified party is otherwise entitled to
indemnification exceeds $500,000 (the "Minimum Loss"), whereupon the
indemnified party will be entitled to be paid the entire amount of such
Indemnified Costs, subject to the limitations on recovery and recourse set
forth below. For purposes of determining the aggregate amount of Minimum
Loss suffered by an indemnified party, each representation and warranty
contained in the
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Merger Agreement for which indemnification can be or is sought will be read
(including, without limitation, for purposes of determining whether a
breach of such representation or warranty has occurred) without regard to
materiality qualifications that may be contained therein.
b) Limitation as to Time. No indemnifying party will be liable for any
Indemnified Costs relating to or arising out of any breach of a
representation or warranty contained in the Merger Agreement unless a
written claim for indemnification is given by the indemnified party to the
indemnifying party with respect thereto by 5:00 p.m., Eastern time, on the
date of issuance of the first report of First Sierra's independent auditors
on the combined operations of First Sierra and OAC following the Merger;
except that (i) there will be no time limitation with respect to claims
relating to or arising out of a breach of a covenant or agreement contained
in the Merger Agreement; and (ii) the representations and warranties of OAC
relating to Compensation Expenses will survive for a period of four years
after the Closing Date.
c) Liability Cap. The indemnification obligations of OAC and the OAC
Stockholders on the one hand and First Sierra on the other hand are limited
to $7.9 million in Indemnified Costs.
d) NOL Offset. Any indemnification obligations of the OAC Stockholders
with respect to a breach of any representations or warranties of OAC or the
OAC Stockholders relating to taxes will first be satisfied by setting off
an equivalent amount of the accrued Net Operating Loss of OAC (up to the
aggregate amount of the actual accrued Net Operating Loss of OAC as of the
Effective Date); provided that the OAC Stockholders will only be entitled
to apply the accrued Net Operating Loss of OAC as a setoff with respect to
that portion of the indemnification obligation that represents amounts owed
to any taxing authority for which the Net Operating Loss of OAC could
otherwise be applied (e.g., to the extent that such indemnification
obligations include any amounts due as a result of penalties assessed by a
taxing authority for which OAC's accrued Net Operating Loss could not be
applied, such amount may not be set off by the OAC Stockholders). Any
amount of the accrued Net Operating Loss of OAC which is used by the OAC
Stockholders to set off against any indemnification obligation with respect
to the representations and warranties of OAC and the OAC Stockholders
relating to taxes will not be counted towards the Minimum Loss or the
liability cap provisions set forth above.
e) Limitations on Indemnification. The indemnification obligations set
forth in the Merger Agreement do not apply to any claims arising under or
related to the Employment Agreements, the Escrow Agreement or the Affiliate
Letters.
Any claim by a Parent Indemnified Party against any OAC Stockholder for
Indemnified Costs (other than a claim related to or arising out of a breach of
the representation and warranty of OAC and the OAC Stockholders relating to
Compensation Expenses) will be payable only out of the Escrowed Shares for all
amounts due to the Parent Indemnified Party from such OAC Stockholder with
respect to such claim and will be payable in an amount not to exceed the Maximum
Escrow Amount (as defined below) of such OAC Stockholder. In no event will a
Parent Indemnified Party be entitled to be paid out of the Escrowed Shares in
respect of claims against an OAC Stockholder an amount in excess of such OAC
Stockholder's Maximum Escrow Amount. In the event of any claim for Indemnified
Costs by a Parent Indemnified Party against one or more OAC Stockholders, each
such OAC Stockholder's Maximum Escrow Amount will be reduced (but not below
zero) by such OAC Stockholder's pro rata portion of the amount paid out of the
Escrowed Shares in respect of such claim, and, to the extent that the portion of
such claim for which such OAC Stockholder is liable exceeds such OAC
Stockholder's Maximum Escrow Amount as of the time of payment of such claim out
of the Escrowed Shares, the Parent Indemnified Party will then be entitled to
seek the remaining amount of such claim from such other OAC Stockholders whose
respective Maximum Escrow Amounts exceed zero, pro rata based upon the Maximum
Escrow Amounts of such OAC Stockholders as of the time of payment of such claim,
until such claim has been paid in full or each Stockholder's Maximum Escrow
Amount has been reduced to zero. An OAC Stockholder's "Maximum Escrow Amount"
will mean, at any time, such OAC Stockholder's pro rata share of the Escrowed
Shares, less any amounts previously deducted from such OAC Stockholder's Maximum
Escrow Amount.
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OTHER AGREEMENTS
Employment Agreements
The Merger Agreement provides that, at the Closing, First Sierra will offer
to enter into Employment Agreements with each of John F. Allen and John M. Howe,
such agreements to be effective at the Effective Time, and it is expected that
such individuals will enter into such Employment Agreements. Pursuant to the
Employment Agreements, First Sierra will agree to pay annual compensation of
$250,000 to each of Messrs. Allen and Howe in consideration of certain
non-competition agreements of each employee and each employee's performance of
certain duties on First Sierra's behalf.
The Employment Agreements will contain non-competition provisions pursuant
to which each employee will agree not to, during the period which is the longer
of (i) the period that begins on the Closing Date and ends one year after the
Employment Agreement expires or is terminated or (ii) the period that begins on
the Closing Date and ends three years thereafter (the "Noncompete Period"),
engage in any business engaged in by First Sierra as of the date of the
Employment Agreement, any business engaged in by OAC as of the date of
termination, or any other business that such employee has been involved in on
behalf of First Sierra at any time prior to the date of termination in direct
competition with First Sierra or any of its subsidiaries. Notwithstanding the
above, each employee may continue to engage in charitable, social or community
activities and in personal and family investing; provided, however, that unless
prior approval is given by First Sierra's Chief Executive Officer, such
investments may not include (i) investments in equipment leases, (ii) interests
in non-publicly traded entities engaged in equipment leasing or the sale of new
and used computer and technology equipment or (iii) investments in excess of 1%
of the outstanding capital stock of publicly traded entities engaged in
equipment leasing or the sale of new and used computer and technology equipment.
The term of each Employment Agreement will be two years and each Employment
Agreement will be terminable by First Sierra for good cause. Each Employment
Agreement also will be terminable by First Sierra without cause provided that
the employee is paid for the remainder of the employment term.
Escrow Agreement
Pursuant to the Merger Agreement, the OAC Stockholders have agreed to
indemnify the Parent Indemnified Parties from and against certain damages,
losses, claims, liabilities, demands, charges, suits, penalties, costs and
expenses which such parties may sustain related to or arising out of any breach
or default by OAC or the OAC Stockholders of any of their representations,
warranties, covenants or agreements in the Merger Agreement. On or prior to
Closing, the OAC Stockholders, First Sierra and the Escrow Agent will enter into
an Escrow Agreement pursuant to which ten percent (10%) of the shares of First
Sierra Common Stock which would otherwise be delivered to the OAC Stockholders
as consideration for the Merger at Closing, together with stock powers executed
in the blank, will be deposited into and held in escrow pursuant to the terms of
the Escrow Agreement in order to secure the indemnity obligations of the OAC
Stockholders to the Parent Indemnified Parties under the Merger Agreement.
Affiliate Agreements
The affiliates of First Sierra and OAC have agreed in writing that, until
First Sierra announces financial results covering at least 30 days of
post-Merger combined operations of First Sierra and OAC, they will not sell,
exchange, transfer, pledge, distribute or otherwise dispose of, or in any other
way reduce their risk relative to, any shares of First Sierra Common Stock or
OAC Common Stock owned by them.
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BUSINESS OF OAC
OAC is an information technology ("IT") leasing company that provides
technology and financing solutions to middle-market companies throughout the
United States. OAC specializes in configuring and leasing mid-range systems,
such as IBM AS/400s, networking systems, including client server systems,
desktop and laptop computers and peripherals, and telecommunications equipment.
OAC also derives a small portion of its revenue from computer sales activities.
OAC was founded in 1973 as predominantly a computer sales and service business.
OAC offered leasing options to its customers as a convenience and as a way to
help facilitate a sale. In the early 1990's a combination of factors, including
lower computer equipment prices, shrinking margins on computer equipment sales,
a shift from mainframe systems to networked systems and a positive experience
with its leasing business, caused OAC to revise its business plan to
de-emphasize computer sales and focus its efforts in the higher margin and more
promising IT leasing arena. OAC is headquartered in Larkspur, California,
approximately 15 miles north of San Francisco, and has offices in Southern
California and the Minneapolis, Minnesota area.
OAC's lease transactions are net lease transactions with a specified
non-cancelable lease term. These non-cancelable leases require the lessee to
make all lease payments under all circumstances and require the lessee to pay
any other expenses associated with the use of the equipment such as maintenance,
casualty and liability insurance, sales or use taxes, and personal property
taxes. OAC's typical lease ranges in size from $75,000 to $1 million with an
average of approximately $221,000 at March 31, 1998. The initial term of the
leases typically ranges from 24 to 60 months.
OAC funds the majority of its leases on a non-recourse basis. On
substantially all transactions greater than $100,000, OAC secures a funding
commitment from one of over 25 funding sources with which it has a relationship
before committing the lease to the lessee. Smaller transactions are funded
internally via OAC's line of credit until pooled for non-recourse or limited
recourse financing.
OAC markets its lease products to middle market companies throughout the
United States. A salesforce of 24 persons identifies target customers from
database sources and uses telemarketing as a means of contacting a prospect
initially. In addition, OAC receives leads from existing customers and from
vendors. Preliminary contacts are targeted towards the prospect's IT/MIS manager
or chief financial officer.
OAC seeks to differentiate itself from its competitors by providing a
flexible, fair and customer friendly lease delivered with a high level of
service and IT equipment expertise. OAC offers principally fair market value
leases which provide it with the opportunity to utilize its IT expertise and
strong customer relationships to enhance its return through the residuals
realized at the end of the initial lease term. The lease agreement includes the
option to renew the lease at the fair market value at the end of the lease term,
but may also include fair market value purchase options, mid-term technology
exchange options, and other customized terms and conditions.
OAC tailors lease transactions to suit the needs of individual customers as
well as sourcing and designing IT systems for these customers. The high level of
service provided by OAC enables the customer to have a leasing professional
explain the leasing process, develop customized procurement procedures and
create an optimal asset tracking mechanism for its IT system.
OAC's relationships with vendors and distributors, combined with its
technology expertise, allow it to offer customers a wide range of technical
products and services. In addition, OAC has on staff personnel with expertise in
mid-range, network and open systems thus allowing it to offer customers
assistance in systems configuration, sizing, installation, training,
maintenance, and other support services. OAC receives fees for many of these
services.
OAC's management team has extensive experience in computer leasing, sales
and remarketing. John Allen, a founder of OAC, and John Howe, Executive Vice
President of OAC, together have almost 50 years of experience in the computer
leasing and sales industry. Mr. Howe was a sales representative with Honeywell
Information Systems prior to joining OAC in 1981. Kobert Smith, Vice President
of Lease Financing of OAC, has over 15 years of experience in the financial
services industry, including 13 years of affiliation with the
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leasing industry. Prior to joining OAC in 1997, Mr. Smith served in management
roles at several companies, including Deutsche Credit Corporation, Manufacturers
Hanover Leasing Company and Bank of America.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF OAC
NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO NINE MONTHS ENDED MARCH 31, 1997
NET INCOME
Net income increased 54% to $2.0 million for the nine month period ended
March 31, 1998, compared with $1.3 million for the corresponding prior year
period. This increase was primarily due to the 55% increase in total revenues to
$39.5 million for the nine month period ended March 31, 1998 compared with $25.5
million for the same nine month period of the prior year.
REVENUES
Total leasing revenues accounted for 87% of total revenues for the nine
month period ended March 31, 1998, compared with 63% for the corresponding prior
year period. Leasing revenues increased 115% to $34.4 million for the nine month
period ended March 31, 1998, compared with $16.0 million for the same period a
year ago. This increase was primarily due to (i) an increase of 26%, or $18.1
million, to $87.7 million in new lease originations in the nine month period
ended March 31, 1998, compared with $69.6 million in new lease originations in
the same period a year ago; and (ii) a 433% increase in the sale of residuals to
$6.4 million for the nine month period ended March 31, 1998, compared with $1.2
million for the corresponding prior year period.
Total equipment sales and other fee income accounted for $5 million or
12.8% of total revenues for the nine month period ended March 31, 1998 compared
with $9.4 million or 37% of total revenues for the corresponding prior year
period. This decrease is consistent with OAC's strategy to de-emphasize this
lower margin business and focus on growing the leasing business.
GROSS PROFIT
Total gross margin increased 15.4% to $9.0 million for the nine month
period ended March 31, 1998, compared with $7.8 million for the corresponding
period a year ago. This net increase of $1.2 million in gross margin was due to
an increase of $3.3 million, or 70%, in leasing revenues for the nine month
period ended March 31, 1998, offset by a decrease of $2.1 million, or 69%, in
gross margin from the equipment sales during the nine month period ended March
31, 1998, compared with the corresponding prior year period.
Before allocation of interest expense to the various components of leasing
revenues, finance lease income for the nine month period ended March 31, 1998
increased $3.6 million; gross margin from sale of residuals increased $0.8
million; and gross margin from sales-type leases and operating leases each
increased $0.7 million, offset by an increase in interest expense of $2.5
million compared with the corresponding nine month period a year ago.
EXPENSES
Selling, general and administrative expense was approximately $5.6 million
for both comparable periods. As a percentage of total revenues, these expenses
were 14.3% and 22.1% for the nine months ended March 31, 1998 and 1997,
respectively. This decrease reflected the processing of a significantly higher
volume of transactions with a higher average original equipment cost while
maintaining the same level of staff and general office expenses. The average
original equipment cost of a lease transaction increased 33% in the nine month
period ended March 31, 1998 to $221,000, compared with $166,000 for the same
prior year period.
TAXES
OAC's tax provision was 40% for the nine months ended March 31, 1998 and
1997, representing its estimated annual tax rate for the years ending June 30,
1998 and 1997.
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LIQUIDITY AND CAPITAL RESOURCES
OAC funds its operating activities through non-recourse and limited
recourse debt, revolving line of credit, and internally generated funds. At
March 31, 1998, OAC had aggregate outstanding balances of $134 million and $19
million on non-recourse debt and lines of credit, respectively. OAC's revolving
credit line was increased from $18 million to $24 million in February of 1998.
OAC will continue to require access to capital as it expands its volume of
lease originations. OAC believes that cash flows generated from operations, the
availability of funds under non-recourse and limited recourse arrangements with
existing lenders, and available borrowings under the revolving credit facility
are sufficient to fund its ongoing operations for the foreseeable future.
FISCAL 1997 COMPARED TO FISCAL 1996
OVERVIEW
In 1996, OAC changed its year-end from May 31 to June 30 to align its
reporting periods with calendar quarters. As a result, fiscal year 1996 was a
thirteen month period. Comparisons of fiscal 1996 with fiscal 1997 may be skewed
by the difference in the length of the fiscal years.
OAC's investment in leased assets increased from $103.4 million at June 30,
1996 to $159.4 million at June 30, 1997, a 54% increase. Lease originations in
fiscal year 1997 increased 25% to $92.2 million, compared to $73.8 million for
the prior year. Total cumulative original equipment cost increased 61% to $226.9
million as of June 30, 1997, compared with $140.7 million at the end of the
prior fiscal year. Net income for the year ended June 30, 1997 and the thirteen
months ended June 30, 1996 was $1.6 million and $1.2 million, respectively.
REVENUES
Revenues are derived from three main sources: equipment leasing; sales of
computer equipment that are separate from OAC's leasing operations; and fee and
other income, including brokerage fees from business partners and third parties,
charges for the installation of computer equipment and late fees. Fiscal 1997
revenue attributable to each of these areas was as follows: leasing
operations -- 72%; sale of equipment -- 25%; and fee and other income -- 3%.
Revenues decreased slightly to $41.9 million for the twelve months ended
June 30, 1997, compared with $42.0 million for the thirteen months ended June
30, 1996. Leasing revenues increased 59% to $30.1 million in fiscal 1997,
compared with $18.9 million in fiscal 1996. This increase was a result of the
significant increase in lease originations. Offsetting the increase in leasing
revenue was a decrease in sales of computer equipment from $21.9 million in
fiscal year 1996 to $10.4 million in fiscal year 1997, a decline of 53%. This
decline was a result of (i) the sale in fiscal 1997 of a majority-owned
subsidiary engaged in the computer equipment sales business and (ii)
management's conscious effort to exit the lower-margin equipment sales business
and focus on the more profitable IT leasing business. Fee and other income
accounted for $1.4 million of total revenues in fiscal 1997, or an increase of
17% from $1.2 million in fiscal 1996.
EXPENSES
Total direct expenses as a percentage of total revenues were 73% and 72%
for the fiscal periods ended June 30, 1997 and 1996, respectively. Leasing
expenses as a percentage of leasing revenue increased from 70% in fiscal 1996 to
76% in fiscal 1997. This increase was attributable to (i) the increased cost of
sales from sales-type leases (the cost of sales from sales-type leases as a
percentage of sales from sales-type leases was 76% and 68% in fiscal years 1997
and 1996, respectively); and (ii) an increase of 56% in interest expense as a
result of funding of increased new lease originations. OAC's non-recourse notes
payable balance at June 30, 1997 was $111.4 million, a 51% increase over the
prior year end balance. Cost of equipment sales as a percentage of equipment
sales declined from 77% in fiscal 1996 to 73% in fiscal 1997. This decrease was
primarily a result of eroding profit margin in the equipment sales business, and
management's efforts to focus on the higher margin IT leasing business.
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Selling, general and administrative expense decreased 14% from $10.1
million in fiscal 1996 to $8.7 million in fiscal 1997. This decrease was
primarily attributable to an increase in the deferral of initial direct costs
and a decline in payroll and related expenses that resulted from OAC's reduction
of employees from 77 at the end of fiscal 1996 to 67 at the end of fiscal 1997,
offset by a one-time charge of $880,000 for a legal settlement with the U.S.
Attorney's office in fiscal 1997, more fully described in the footnotes to the
financial statements. FASB 13 allows a lessor to defer specific costs, such as
initial direct costs related to the origination of a lease, for the purpose of
matching revenues and expenses over the term of the lease. Management of OAC
expects that initial direct costs will continue to increase with higher lease
origination volumes.
OAC accounts for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes. This statement requires the use of a liability method of
accounting for income taxes. A deferred tax liability or asset is recognized for
the estimated future tax effects attributable to temporary differences between
the financial and tax reporting of assets and liabilities. These differences are
measured using the rates and rules of the current tax law. OAC currently is an
alternative minimum taxpayer. In fiscal year 1997, OAC's income tax rate was
42.0%. As of June 30, 1997, OAC had carryforwards of federal net operating loss
("NOL"), alternative minimum tax ("AMT"), NOL and AMT credit against regular
income tax of $2.6 million, $1.1 million, and $2.6 million, respectively. OAC's
California NOL and AMT NOL carryforwards were $0.2 million each, and AMT credit
against regular income tax was $0.4 million.
NET INCOME
As mentioned above, net income for the fiscal periods ended June 30, 1997
and 1996 was $1.6 million and $1.2 million, respectively, an increase of 33%.
Excluding the non-recurring items mentioned above (namely (i) the thirteenth
month of net income in fiscal 1996, (ii) the operations of the majority owned
subsidiary sold in fiscal 1997 for both years, and (iii) the non-recurring
payment to the government in fiscal 1997) net income would have been $2.1
million and $1.2 million in fiscal 1997 and fiscal 1996, respectively.
FISCAL 1996 COMPARED TO FISCAL 1995
OVERVIEW
Net income for the thirteen months ended June 30, 1996 and the year ended
May 31, 1995 were both $1.2 million.
During fiscal year 1996, the Company's investment in leased assets
increased from $56.5 million to $103.4 million, an 83% increase. Lease
originations in fiscal year 1996 increased 120% to $73.8 million compared to
$33.5 million for the prior year.
REVENUES
Leasing revenues increased 9% to $18.9 million in fiscal 1996, compared
with $17.3 million in fiscal 1995. This increase was primarily a result of the
120% year-to-year increase in lease originations. Since the accretion of income
on a capital lease is recognized over the term of the lease, not all revenues
from increased lease originations will be realized upon commencement of the
lease.
Total revenues decreased 14% to $42.0 million for the thirteen months ended
June 30, 1996, compared with $48.7 million for year ended May 31, 1995. The
decrease was primarily due to a 29% decrease in sales of computer equipment from
OAC's brokered dealer operations. This resulted from the closure of two
equipment sales divisions, Horizon Systems and the Atlanta sales office, with
combined revenues of $10.9 million in fiscal year 1995. Horizon Systems was an
IBM Industry Remarketer, whose services were subsequently replaced by OAC's new
partnership arrangement with Target Solutions. The Atlanta office was closed as
part of OAC's strategy to de-emphasize the sale of used computer equipment in
favor of growing the IT leasing business.
44
<PAGE> 55
GROSS PROFIT
Total gross margin as a percentage of total revenues increased to 29% for
the period ended June 30, 1996, compared with 24% for the year ended May 31,
1995. The increase was due primarily to an increase in gross margin associated
with equipment sales, which increased from 16% to 23%, and an increase of 177%
in fee income.
Leasing gross margin decreased to 30% in 1996, compared with 36% in 1995.
This was due primarily to the timing and increased volume of lease originations.
More than 60% of lease originations commenced at the end of the year. This
provided for lower earnings accretion during the fiscal year. In addition,
interest expense increased by 96% in 1996 due to a two-fold increase in
non-recourse and limited recourse debt outstanding, which was necessary to fund
the 120% growth of lease originations. Outstanding balances on the revolving
line of credit facility ranged from $4.2 million to $14.7 million in 1996
compared with $0.0 to $6.7 million in 1995.
Selling, general and administrative expenses as a percentage of total
revenues showed a moderate increase to 24% for the thirteen months ended June
30, 1996, compared with 20% for year ended May 31, 1995. The increase as a
percentage of total revenues was due to decreased revenues from $48.7 million in
1995 to $42.0 million in 1996 as indicated above, while expenses remained flat
at about $10 million in both years.
LIQUIDITY AND CAPITAL RESOURCES
Funding for both equipment leases and day-to-day operations comes from
three sources:
- Net cash provided by (used in) operating activities. Net cash provided by
(used in) operating activities was $1.7 million, ($0.9) million, and
($1.4) million during the periods ended June 30, 1997 and 1996 and May
31, 1995, respectively. This increase was primarily caused by an increase
in net income, an increase in non-cash depreciation and amortization
expense, and an increase in accounts payable and other liabilities.
- Proceeds from long-term non-recourse borrowings. OAC has relationships
with a network of lenders where lease rental payments are discounted on a
non-recourse basis. Advances totaled $75.0 million, $58.1 million, and
$27.4 during the periods ended June 30, 1997 and 1996 and May 31, 1995,
respectively. Total outstanding non-recourse notes payable were $111.4,
$73.6 million, and $38.6 million at June 30, 1997 and 1996, and May 31,
1995, respectively. The weighted average interest rate on this debt at
June 30, 1997 was 8.7%. The increase in the balance of notes payable was
due to the increase in lease originations. OAC typically seeks credit
pre-approval from its lenders for prospective lessees before a lease is
underwritten. Upon commencement of a lease, OAC discounts the remaining
lease payment stream to the lender. Proceeds received from the lender are
generally used to pay down the revolving line of credit facility.
- Revolving line of credit. This facility provides funding up to $18
million with Fleet Bank, N.A. as agent and Sumitomo Bank of California as
33% participant. The facility provides for a two-year revolving line
converting to a two-year term facility amortizing to a 33% balloon
payment. The facility was increased to $24 million in February 1998 and
is renewed annually. The revolver is available through January 31, 1999.
The credit facility is secured by the OAC's unassigned assets. Amounts
outstanding under the line were $15.1 million, $14.7 million, and $6.6
million at June 30, 1997 and 1996, and May 31, 1995, respectively. Total
interest expense incurred on this facility amounted to $1.1 million, $0.8
million, and $0.4 million for the fiscal periods ended June 30, 1997,
June 30, 1996, and May 31, 1995, respectively. OAC uses this facility (i)
as a bridge-financing vehicle to purchase equipment for lease until the
lease has commenced and can be discounted to a non-recourse lender
(approximately 55%, or $8.3 million, of the total outstanding balance was
used in this way during fiscal year 1997); (ii) to finance unfunded
leases that have not been discounted to lenders until such leases can be
pooled and funded on a non-recourse or limited recourse basis (this
category accounted for approximately 27%, or $4.1 million, of the total
outstanding balance during fiscal 1997); and (iii) to finance equipment
sales and general working capital needs (this category accounted for the
remaining 18%, or $2.7 million, of the total outstanding balance during
fiscal 1997).
45
<PAGE> 56
OAC believes that cash flows from operations, the excellent relationships
maintained with its non-recourse lenders and the revolving facility are
sufficient to fund its ongoing operations for the foreseeable future.
INFLATION
OAC does not believe that inflation has had a significant impact on its
results of operations.
46
<PAGE> 57
SECURITIES BENEFICIALLY OWNED BY
PRINCIPAL STOCKHOLDERS AND MANAGEMENT OF FIRST SIERRA
The following table sets forth the beneficial ownership of First Sierra's
Common Stock as of the Record Date by (i) each stockholder known by First Sierra
to be the beneficial owner of more than 5% of the outstanding shares of First
Sierra Common Stock, (ii) each director, (iii) each executive officer named in
the Summary Compensation Table, and (iv) all directors and executive officers as
a group. Unless otherwise indicated, each such person (alone or with family
members) has sole voting and dispositive power with respect to the shares listed
opposite such person's name. The address of Redstone Group, Ltd. ("Redstone")
and Messrs. Shindeldecker and Solomon is 5847 San Felipe Road, Suite 320,
Houston, Texas 77057. The address of all other named individuals is c/o First
Sierra Financial, Inc., 600 Travis Street, Suite 7050, Houston, Texas 77002.
<TABLE>
<CAPTION>
NUMBER OF
BENEFICIALLY PERCENT
NAME OWNED SHARES OF CLASS(1)
- ---- ------------ -----------
<S> <C> <C>
Thomas J. Depping........................................... 1,605,800 %
Redstone Group, Ltd.(2)..................................... 1,408,151 %
David C. Shindeldecker(3)................................... 1,513,018 %
David L. Solomon(3)......................................... 2,118,000 %
Oren M. Hall................................................ 450,000 %
Sandy B. Ho................................................. 220,790 %
Robert H. Quinn, Jr......................................... 236,578 %
Richard J. Campo............................................ 20,000
Norman J. Metcalfe.......................................... 20,000
Craig M. Spencer............................................ 6,250
All directors and executive officers as a group (10
persons).................................................. 4,769,747 %
</TABLE>
- ---------------
* Less than one percent
(1) The applicable percentage of ownership is based upon shares of
First Sierra Common Stock outstanding as of the Record Date.
(2) Redstone is a Texas limited partnership, of which Redstone, Inc. is the
general partner.
(3) Includes 1,408,151 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.
INDEPENDENT ACCOUNTANTS
Representatives of Arthur Andersen LLP, First Sierra's certified public
accountants, are expected to be present at the Special Meeting and will have the
opportunity to make a statement if they so desire. Such representatives are also
expected to be available to respond to appropriate questions.
47
<PAGE> 58
PROPOSALS OF STOCKHOLDERS FOR ANNUAL MEETING
The Board of Directors of First Sierra will consider proposals of
stockholders intended to be presented for action at First Sierra's 1999 annual
meeting of stockholders. A stockholder proposal must be submitted in writing and
be received at First Sierra's principal executive offices, 600 Travis Street,
Suite 7050, Houston, Texas 77002, no later than December 2, 1998, to be
considered for inclusion in First Sierra's proxy statement and form of proxy
relating to the 1999 annual meeting of stockholders. Submission of a stockholder
proposal does not assure inclusion in the proxy statement or form of proxy
because proposals must meet certain Commission rules and First Sierra By-law
requirements.
OTHER MATTERS
The Board of Directors of First Sierra does not know of any other matters
to be presented for action at the Special Meeting other than those listed in its
Notice of Meeting and referred to herein. If any other matter should properly
come before the Special Meeting or any adjournment thereof, it is intended that
the proxies solicited hereby be voted with respect to such matters in accordance
with the judgment of the persons voting such proxies.
48
<PAGE> 59
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
FIRST SIERRA FINANCIAL, INC. -- UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
Introduction to Unaudited Pro-Forma Consolidated Financial
Statements............................................. F-2
Unaudited Pro Forma Consolidated Balance Sheet as of March
31, 1998............................................... F-3
Unaudited Pro Forma Consolidated Statement of Operations
for the Three Months Ended March 31, 1998.............. F-4
Unaudited Pro Forma Consolidated Statement of Operations
for the Year Ended December 31, 1997................... F-5
Notes to Unaudited Pro Forma Consolidated Financial
Statements............................................. F-6
OLIVER-ALLEN CORPORATION, INC. -- CONSOLIDATED FINANCIAL
STATEMENTS
Balance Sheets as of March 31, 1998 and December 31, 1997
(unaudited)............................................ F-7
Statements of Income for the Nine Month Periods Ended
March 31, 1998 and 1997 (unaudited).................... F-8
Statements of Cash Flows for the Nine Month Periods Ended
March 31, 1998 and 1997 (unaudited).................... F-9
Notes to Unaudited Financial Statements................... F-10
OLIVER-ALLEN CORPORATION, INC. -- FINANCIAL STATEMENTS
Report of Independent Auditors............................ F-12
Balance Sheets as of June 30, 1997 and 1996............... F-13
Statements of Income for the Years Ended June 30, 1997 and
May 31, 1995 and for the 13-Month Period Ended June 30,
1996................................................... F-14
Statements of Stockholder's Equity for the Years Ended
June 30, 1997, May 31, 1995 and for the 13-Month Period
Ended June 30, 1996.................................... F-15
Statements of Cash Flows for the Years Ended June 30, 1997
and May 31, 1995 and for the 13-Month Period Ended June
30, 1996............................................... F-16
Notes to Financial Statements............................. F-17
</TABLE>
F-1
<PAGE> 60
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth the unaudited pro forma consolidated balance
sheet of First Sierra Financial, Inc. (the "Company") as of March 31, 1998, and
the unaudited pro forma consolidated statements of operations of the Company for
the year ended December 31, 1997 and for the three months ended March 31, 1998
after giving effect to the proposed merger transaction (the "Merger") with
Oliver-Allen Corporation, Inc. ("Oliver-Allen"), which is expected to be
completed in the third quarter of 1998. Pursuant to the definitive agreement
between the Company and Oliver-Allen dated June 10, 1998, the Company intends to
issue 3,160,000 shares of its common stock in exchange for all of the
outstanding shares of Oliver-Allen Common Stock. The Company will also convert
an outstanding option to purchase 150 shares of Oliver-Allen Common Stock into
an option to purchase 790,000 shares of the Company's common stock. The
unaudited pro forma consolidated financial statements have been prepared
assuming the Merger is accounted for as a pooling-of-interests. The unaudited
pro forma consolidated balance sheet as of March 31, 1998 includes the issuance
of the Company's common stock to effect the Merger and assumes that the Merger
occurred on March 31, 1998. The unaudited pro forma consolidated statements of
operations for the year ended December 31, 1997 and for the three months ended
March 31, 1998 assume that Company and Oliver-Allen have been combined since
inception. The pro forma earnings per common share reflected in the unaudited
pro forma consolidated statements of operations assume that the common stock
used as consideration to effect the Merger was outstanding as of the beginning
of the applicable period.
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 Oliver-Allen and
the related notes thereto included elsewhere herein or incorporated by
reference. Such pro forma information is based on historical data with respect
to the Company and Oliver-Allen. The pro forma information is not necessarily
indicative of the results that might have occurred had this transaction actually
taken place as of the aforementioned dates 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 unaudited pro forma consolidated statements of operations do 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 Oliver-Allen, nor does it assume increases in corporate
general and administrative expenses, which may have resulted from the Company
managing Oliver-Allen for the year ended December 31, 1997 and the three months
ended March 31, 1998. 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 Oliver-Allen will be
operated under the control of the Company.
F-2
<PAGE> 61
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------------
FIRST SIERRA
FIRST OLIVER- PRO FORMA AND OLIVER-ALLEN
SIERRA ALLEN ADJUSTMENT PRO FORMA
-------- -------- ---------- ----------------
<S> <C> <C> <C> <C>
Investment in financing transactions........... $ 20,743 $147,069 $ -- $167,812
Cash and cash equivalents...................... 47,089 -- -- 47,089
Inventory of computer equipment held for
existing lease commitments................... -- 16,894 -- 16,894
Equipment under operating lease................ -- 14,908 -- 14,908
Investment in trust certificates............... 10,301 -- -- 10,301
Furniture and equipment, net................... 3,684 719 -- 4,403
Marketable security............................ 3,771 -- -- 3,771
Accounts receivable, net....................... -- 2,488 -- 2,488
Goodwill and other intangible assets, net...... 20,035 -- -- 20,035
Other assets................................... 6,193 2,279 -- 8,472
-------- -------- ---- --------
Total assets......................... $111,816 $184,357 $ -- $296,173
======== ======== ==== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Nonrecourse notes............................ $ -- $134,161 $ -- $134,161
Lines of credit.............................. 2,866 18,950 -- 21,816
Subordinated note payable.................... 1,000 -- -- 1,000
Other liabilities:
Holdback reserve payable..................... 12,442 -- -- 12,442
Accounts payable and accrued liabilities..... 9,338 11,631 -- 20,969
Income taxes payable......................... 4,723 2,167 -- 6,890
-------- -------- ---- --------
Total liabilities.................... 30,369 166,909 -- 197,278
Commitments and contingencies
Redeemable preferred stock..................... 1,789 -- -- 1,789
Stockholders' equity:
Common stock................................. 126 8 24(A) 158
Additional paid-in capital................... 68,037 -- (24)(A) 68,013
Retained earnings............................ 11,495 17,440 -- 28,935
-------- -------- ---- --------
Total stockholders' equity........... 79,658 17,448 -- 97,106
-------- -------- ---- --------
Total liabilities and stockholders'
equity............................. $111,816 $184,357 $ -- $296,173
======== ======== ==== ========
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Consolidated Financial Statements.
F-3
<PAGE> 62
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FIRST SIERRA AND
OLIVER-ALLEN
FIRST SIERRA OLIVER-ALLEN PRO FORMA
------------ ------------ ----------------
<S> <C> <C> <C>
Gain on sale of lease financing receivables.............. $ 6,550 $ -- $ 6,550
Interest income.......................................... 1,395 3,959 5,354
Sales from sales-type leases............................. -- 3,705 3,705
Rent from operating leases............................... -- 2,365 2,365
Residual and remarketing income.......................... -- 2,129 2,129
Servicing income......................................... 1,207 -- 1,207
Sales of computer equipment.............................. -- 739 739
Other income............................................. 2,640 215 2,855
------- ------- -------
Total revenues................................. 11,792 13,112 24,904
Salaries and benefits.................................... 3,661 1,227 4,888
Interest expense......................................... 349 3,086 3,435
Cost of sales from sales-type leases..................... -- 2,912 2,912
Depreciation and amortization............................ 612 1,766 2,378
Cost of sales from residual and remarketing.............. -- 1,614 1,614
Relocation of operations center.......................... 885 -- 885
Cost of computer equipment sold.......................... -- 863 863
Provision for credit losses.............................. 693 (175) 518
Other general and administrative......................... 1,567 753 2,320
------- ------- -------
Total expenses................................. 7,767 12,046 19,813
------- ------- -------
Income before provision for income taxes................. 4,025 1,066 5,091
Provision for income taxes............................... 1,608 426 2,034
------- ------- -------
Net income............................................. 2,417 640 3,057
Preferred stock dividends.............................. 22 -- 22
------- ------- -------
Net Income Allocable to Common Shareholders.... $ 2,395 $ 640 $ 3,035
======= ======= =======
Earnings per Common Share
-- Basic............................................... $ 0.21(AA)
=======
-- Diluted............................................. $ 0.20(AA)
=======
Weighted Average Shares Outstanding
-- Basic............................................... 14,410(AA)
=======
-- Diluted............................................. 15,531(AA)
=======
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Consolidated Financial Statements.
F-4
<PAGE> 63
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FIRST SIERRA AND
OLIVER-ALLEN
FIRST SIERRA OLIVER-ALLEN PRO FORMA
------------ ------------ ----------------
<S> <C> <C> <C>
Interest income........................................ $ 9,018 $13,551 $22,569
Gain on sale of lease financing receivables............ 22,476 -- 22,476
Sales from sales-type leases........................... -- 16,373 16,373
Sales of computer equipment............................ -- 7,944 7,944
Residual and remarketing income........................ -- 5,864 5,864
Rent from operating leases............................. -- 5,307 5,307
Servicing income....................................... 3,092 -- 3,092
Other income........................................... 6,537 778 7,315
------- ------- -------
Total revenues............................... 41,123 49,817 90,940
Salaries and benefits.................................. 10,010 3,949 13,959
Interest expense....................................... 5,101 10,554 15,655
Cost of sales from sales-type leases................... -- 13,248 13,248
Cost of computer equipment sold........................ -- 6,286 6,286
Depreciation and amortization.......................... 1,360 3,572 4,932
Cost of sales from residual and remarketing............ -- 4,586 4,586
Provision for credit losses............................ 1,891 670 2,561
Other general and administrative....................... 9,056 3,618 12,674
------- ------- -------
Total expenses............................... 27,418 46,483 73,901
------- ------- -------
Income before provision for income taxes............... 13,705 3,334 17,039
Provision for income taxes............................. 5,131 1,390 6,521
------- ------- -------
Net income........................................... 8,574 1,944 10,518
Preferred stock dividends............................ 120 -- 120
------- ------- -------
Net income allocable to common
shareholders............................... $ 8,454 $ 1,944 $10,398
======= ======= =======
Earnings per Common Share
-- Basic............................................. $ 0.91(AA)
=======
-- Diluted........................................... $ 0.84(AA)
=======
Weighted Average Shares Outstanding....................
-- Basic............................................. 11,408(AA)
=======
-- Diluted........................................... 12,463(AA)
=======
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Consolidated Financial Statements.
F-5
<PAGE> 64
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENT
The accompanying unaudited pro forma consolidated balance sheet as of March
31, 1998 assumes that the Merger occurred on March 31, 1998. The Merger is
expected to be accounted for as a pooling-of-interests and accordingly, an
adjustment has been made to give effect to the issuance of Common Stock to be
issued as consideration for the shares of Oliver-Allen.
(A) Reflects the issuance of approximately 3,200,000 shares of Company's
Common Stock, par value $0.01 per share, in exchange for all of the outstanding
shares of Oliver-Allen.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS ADJUSTMENT
The accompanying unaudited pro forma consolidated statements of operations
for the year ended December 31, 1997 and the three months ended March 31, 1998,
assume that the Company and Oliver-Allen had been combined since inception.
(AA) Pro forma earnings per share is computed assuming the Merger is
accounted for as a pooling-of-interests. Following is a reconciliation of the
numerators and denominators used in calculating unaudited pro forma basic and
diluted earnings per share for the year ended December 31, 1997 and the three
months ended March 1998 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED, THREE MONTHS ENDED,
DECEMBER 31, 1997 MARCH 31, 1998
--------------------------------------- ---------------------------------------
FIRST SIERRA OLIVER-ALLEN PRO FORMA FIRST SIERRA OLIVER-ALLEN PRO FORMA
------------ ------------ --------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Earnings per common share, basic --
Net Income............................... $8,574 $1,944 $10,518 $ 2,417 $ 640 $ 3,057
Preferred stock dividends................ 120 -- 120 22 -- 22
------ ------ ------- ------- ------ -------
Net income available to common
stockholders........................... $8,454 $1,944 $10,398 $ 2,395 $ 640 $ 3,035
====== ====== ======= ======= ====== =======
Weighted average shares outstanding...... 8,248 3,160 11,408 11,250 3,160 14,410
====== ====== ======= ======= ====== =======
Earnings per common share, basic......... $ 1.02 $ 0.61 $ 0.91 $ 0.21 $ 0.20 $ 0.21
====== ====== ======= ======= ====== =======
Earnings per common share, diluted --
Net income............................... $8,574 $1,944 $10,518 $ 2,417 $ 640 $ 3,057
====== ====== ======= ======= ====== =======
Weighted average shares outstanding...... 8,248 3,160 11,408 11,250 3,160 14,410
Dilutive securities --
Options................................ 250 297 547 494 372 866
Warrants............................... 79 -- 79 -- -- --
Redeemable preferred stock............. 429 -- 429 255 -- 255
------ ------ ------- ------- ------ -------
Weighted average shares outstanding,
diluted................................ 9,006 3,457 12,463 11,999 3,532 15,531
====== ====== ======= ======= ====== =======
Earnings per common share, diluted....... $ 0.95 $ 0.56 $ 0.84 $ 0.20 $ 0.18 $ 0.20
====== ====== ======= ======= ====== =======
</TABLE>
F-6
<PAGE> 65
OLIVER-ALLEN CORPORATION, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash........................................................ $ -- $ 513,033
Accounts receivable, net of allowance for doubtful accounts
of $364,192 and $367,179 on March 31, 1998 and June 30,
1997...................................................... 2,487,718 2,786,875
Inventory of computer equipment held for existing lease
commitments............................................... 16,894,635 28,755,493
Inventory of computer equipment held for sale............... 994,222 1,774,634
Equipment under operating leases at cost, net of accumulated
depreciation of $6,078,520 and $3,790,860 on March 31,
1998 and June 30, 1997.................................... 14,907,893 8,305,020
Investment in financing transactions........................ 147,068,963 122,292,372
Property and equipment at cost, net of accumulated
depreciation of $1,654,262 and $1,486,894 on March 31,
1998 and June 30, 1997.................................... 719,125 692,146
Notes receivable and other assets........................... 1,285,052 516,765
------------ ------------
Total assets...................................... $184,357,608 $165,636,338
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Nonrecourse notes payable................................. $134,161,137 $111,358,175
Line of credit............................................ 18,950,000 15,050,000
Accounts payable -- inventory............................. 1,359,288 12,826,168
Trade accounts payable.................................... 1,275,532 301,247
Customer security deposits................................ 6,329,229 4,825,733
Other liabilities......................................... 2,534,826 2,748,835
Deferred and accrued executive comp payable............... 132,125 --
Income taxes payable...................................... 1,244,169 1,237,175
Deferred income taxes..................................... 923,445 1,841,200
------------ ------------
Total liabilities................................. 166,909,751 150,188,533
Stockholder's equity:
Common stock:
Authorized shares -- 7,500
Issued and outstanding shares -- 600................... 7,700 7,700
Retained earnings......................................... 17,440,157 15,440,105
------------ ------------
Total stockholder's equity........................ 17,447,857 15,447,805
------------ ------------
Total liabilities and stockholder's equity........ $184,357,608 $165,636,338
============ ============
</TABLE>
See accompanying notes.
F-7
<PAGE> 66
OLIVER-ALLEN CORPORATION, INC.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Revenues:
Sales from sales-type leases............................. $11,215,689 $ 4,477,860
Finance lease income..................................... 11,302,390 7,657,232
Rent from operating leases............................... 5,482,256 2,699,424
Residual and remarketing income.......................... 6,422,833 1,207,473
Sales of computer equipment.............................. 4,648,847 8,161,391
Fee and other income..................................... 386,055 1,285,951
----------- -----------
Total revenues................................... 39,458,070 25,489,331
Expenses:
Cost of sales from sales-type leases..................... 8,746,259 2,725,390
Interest................................................. 8,829,631 6,290,904
Depreciation and amortization............................ 3,819,187 1,706,663
Cost of sales from residual and remarketing.............. 5,020,090 615,373
Cost of computer equipment sold.......................... 4,070,734 6,383,652
Selling, general and administrative...................... 5,638,416 5,634,255
----------- -----------
Total expenses................................... 36,124,317 23,356,237
----------- -----------
Income before income taxes................................. 3,333,753 2,133,094
Provision for income taxes................................. 1,333,702 853,238
----------- -----------
Net income....................................... $ 2,000,051 $ 1,279,856
=========== ===========
</TABLE>
See accompanying notes.
F-8
<PAGE> 67
OLIVER-ALLEN CORPORATION, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................. $ 2,000,051 $ 1,279,855
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 4,724,770 2,978,415
Provision for doubtful accounts, net of write-offs....... (2,977) (7,563)
Provision for deferred income taxes...................... (917,755) (272,111)
Gain on sale of leased assets............................ (1,382,623) (586,565)
Changes in operating assets and liabilities:
Accounts receivable................................... 302,134 1,669,670
Inventory............................................. 12,641,271 (2,878,197)
Trade accounts/income taxes payable................... (10,485,600) 1,737,481
Customer security deposits............................ 1,460,763 1,230,648
Deferred and accrued executive compensation........... 61,200 (70,872)
Other liabilities..................................... (100,352) 300,034
------------ ------------
Net cash provided by operating activities........ 8,300,882 5,380,795
INVESTING ACTIVITIES
Lease payments received, net of earned income.............. 40,060,510 28,642,809
Investment in leased equipment............................. (81,015,238) (64,965,431)
Proceeds from sale of leased assets........................ 6,402,713 1,201,937
Acquisition of property and equipment...................... (196,575) (85,583)
Investment in subsidiary................................... 0 781,620
Increase (decrease) in other assets........................ (768,287) 123,518
------------ ------------
Net cash used in investing activities............ (35,516,877) (34,301,130)
FINANCING ACTIVITIES
Advances on line of credit................................. 40,300,000 39,560,000
Repayments on line of credit............................... (36,400,000) (42,795,000)
Proceeds from nonrecourse notes............................ 65,861,531 55,002,701
Payments on nonrecourse notes.............................. (43,058,569) (25,832,694)
------------ ------------
Net cash provided by financing activities........ 26,702,962 25,935,007
Net decrease in cash....................................... (513,033) (2,985,328)
Cash at beginning of year.................................. 513,033 2,985,328
------------ ------------
Cash at March 31, 1998 and 1997............................ $ -- $ --
============ ============
</TABLE>
See accompanying notes.
F-9
<PAGE> 68
OLIVER-ALLEN CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
1. ACCOUNTING POLICIES
Description of Business
Oliver-Allen Corporation, Inc. was incorporated in the state of California
on December 28, 1973, and engages primarily in the sale and lease of new and
used computer and technology equipment to customers located throughout the
United States. The Company is headquartered in Larkspur, California and has
offices in southern California and Minnesota. The Company works with diverse
information technology assets, including mid-range, network and open systems as
well as check processing equipment.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and the
rules and regulations of the Securities and Exchange Commission for interim
financial statements. Accordingly, the interim statements do not include all of
the information and disclosures required for annual financial statements. In the
opinion of the Company's management, all adjustments (consisting solely of
adjustments of a normal recurring nature) necessary for a fair presentation of
these interim results have been included. Intercompany accounts and transactions
have been eliminated. These financial statements and related notes should be
read in conjunction with the audited financial statements and notes thereto
included herein. The results for the interim periods are not necessarily
indicative of the results to be expected for the entire year.
2. INVESTMENT IN FINANCING TRANSACTIONS
The Company's investment in financing transactions is summarized below:
<TABLE>
<CAPTION>
DIRECT
FINANCING SALES-TYPE TOTAL
------------ ----------- ------------
<S> <C> <C> <C>
MARCH 31, 1998
Lease and other contracts receivable........ $130,931,389 $19,460,643 $150,392,032
Estimated residual value of leased
equipment................................. 15,410,686 2,384,640 17,795,326
Initial direct costs, net of amortization... 2,875,405 0 2,875,405
Less unearned income........................ (21,103,552) (2,890,248) (23,993,800)
------------ ----------- ------------
Net investment in financing transactions.... $128,113,928 $18,955,035 $147,068,963
============ =========== ============
JUNE 30, 1997
Lease and other contracts receivable........ $112,011,840 $15,460,828 $127,472,668
Estimated residual value of leased
equipment................................. 11,301,833 1,609,702 12,911,535
Initial direct costs, net of amortization... 2,812,230 -- 2,812,230
Less unearned income........................ (18,908,603) (1,995,458) (20,904,061)
------------ ----------- ------------
Net investment in financing transactions.... $107,217,300 $15,075,072 $122,292,372
============ =========== ============
</TABLE>
3. NOTES PAYABLE AND LINE OF CREDIT
Various nonrecourse notes payable total $134,161,137 and $111,358,175 at
March 31, 1998 and June 30, 1997, respectively. These notes are secured by
assignment of rentals and security interests in specific equipment subject to
operating and financing leases (direct financing and sales type) due through May
2001. Interest rates are fixed at time of funding, at rates that range from 6.3%
to 15.0%.
In addition, OAC has a working-capital line of credit facility with a bank
for $24,000,000 available through January 31, 1999, at which time all
outstanding principal is due. The line is secured by all OAC assets
F-10
<PAGE> 69
OLIVER-ALLEN CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
not otherwise assigned. Interest is payable monthly at a rate based either on
the prime rate of interest or LIBOR, as specified by OAC at the time of drawing.
Amounts outstanding under the line were $18,950,000 and $15,050,000 at March 31,
1998 and June 30, 1997, respectively.
14. SUBSEQUENT EVENT
On June 10, 1998, OAC announced the signing of a definitive agreement with
First Sierra Financial, Inc. ("First Sierra") whereby First Sierra will issue
its common stock in exchange for each share of OAC's common stock. First Sierra,
headquartered in Houston, Texas, is a specialty finance company that acquires,
originates, sells and services equipment leases on a wide range of information
technology and other specialized equipment. It is expected that the transaction
will be accounted for as a pooling of interests. Consummation of the merger is
expected to be completed in the third quarter of 1998 and is subject to, among
other things, approval by the shareholders of First Sierra.
F-11
<PAGE> 70
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Oliver-Allen Corporation, Inc.
We have audited the accompanying balance sheets (as restated) of
Oliver-Allen Corporation, Inc. as of June 30, 1997 and 1996, and the related
statements (as restated) of income, stockholder's equity, and cash flows for the
year ended June 30, 1997, the 13 month period ended June 30, 1996, and the year
ended May 31, 1995. 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 Oliver-Allen Corporation,
Inc. at June 30, 1997 and 1996, and the results of its operations and its cash
flows for the year ended June 30, 1997, the 13 month period ended June 30, 1996,
and the year ended May 31, 1995, in conformity with generally accepted
accounting principles.
June 12, 1998
F-12
<PAGE> 71
OLIVER-ALLEN CORPORATION, INC.
BALANCE SHEETS
(AS RESTATED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash........................................................ $ 513,033 $ 2,970,599
Accounts receivable, net of allowance for doubtful accounts
of $367,179 and $268,345 on June 30, 1997 and 1996........ 2,786,875 4,115,714
Inventory of computer equipment held for existing lease
commitments............................................... 28,755,493 14,262,828
Inventory of computer equipment held for sale............... 1,774,634 2,072,970
Equipment under operating leases at cost, net of accumulated
depreciation of $3,790,860 and $2,356,168 on June 30, 1997
and 1996.................................................. 8,305,020 6,256,121
Investment in financing transactions........................ 122,292,372 82,881,493
Property and equipment at cost, net of accumulated
depreciation of $1,486,894 and $1,318,482 on June 30, 1997
and 1996.................................................. 692,146 1,018,976
Notes receivable and other assets........................... 516,765 913,238
Income taxes receivable..................................... -- 17,535
------------ ------------
Total assets...................................... $165,636,338 $114,509,474
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Nonrecourse notes payable................................. $111,358,175 $ 73,583,447
Line of credit............................................ 15,050,000 14,710,000
Accounts payable -- inventory............................. 12,826,168 3,833,322
Other accounts payable.................................... 301,247 1,172,904
Customer security deposits................................ 4,825,733 3,174,667
Other liabilities......................................... 2,748,835 1,666,370
Income taxes payable...................................... 1,237,175 --
Deferred income taxes..................................... 1,841,200 2,531,065
------------ ------------
Total liabilities................................. 150,188,533 100,671,775
Stockholder's equity:
Common stock:
Authorized shares -- 7,500.............................
Issued and outstanding shares -- 600................... 7,700 7,700
Retained earnings......................................... 15,440,105 13,829,999
------------ ------------
Total stockholder's equity........................ 15,447,805 13,837,699
------------ ------------
Total liabilities and stockholder's equity........ $165,636,338 $114,509,474
============ ============
</TABLE>
See accompanying notes.
F-13
<PAGE> 72
OLIVER-ALLEN CORPORATION, INC.
STATEMENTS OF INCOME
(AS RESTATED)
<TABLE>
<CAPTION>
YEAR ENDED 13 MONTHS YEAR ENDED
JUNE 30, ENDED JUNE 30, MAY 31,
1997 1996 1995
----------- -------------- -----------
<S> <C> <C> <C>
Revenues:
Sales from sales-type leases....................... $12,443,745 $ 7,064,235 $ 7,721,456
Sales of computer equipment........................ 10,370,700 21,854,253 30,973,888
Rent from operating leases......................... 3,960,013 3,199,315 3,331,188
Finance lease income............................... 11,120,501 7,166,540 4,016,391
Residual and remarketing income.................... 2,577,941 1,502,943 2,263,721
Commission income.................................. 722,967 631,969 274,526
Other.............................................. 657,502 588,029 165,459
----------- ----------- -----------
Total revenue.............................. 41,853,369 42,007,284 48,746,629
Expenses:
Cost of computer equipment sold.................... 7,561,915 16,784,990 25,921,427
Cost of sales from sales-type leases............... 9,488,358 4,773,466 5,658,862
Cost of sales from residual disposals.............. 1,734,953 647,524 866,437
Selling, general and administrative................ 8,657,388 10,095,146 9,684,471
Depreciation expense............................... 2,688,077 2,109,747 1,658,478
Amortization expense............................... 150,007 117,749 81,727
Interest........................................... 8,795,161 5,621,561 2,874,567
----------- ----------- -----------
Total expenses............................. 39,075,859 40,150,183 46,745,969
----------- ----------- -----------
Income before income taxes........................... 2,777,510 1,857,101 2,000,660
Provision for income taxes........................... 1,167,404 675,910 783,797
----------- ----------- -----------
Net income................................. $ 1,610,106 $ 1,181,191 $ 1,216,863
=========== =========== ===========
</TABLE>
See accompanying notes.
F-14
<PAGE> 73
OLIVER-ALLEN CORPORATION, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(AS RESTATED)
<TABLE>
<CAPTION>
COMMON STOCK
------------------
NUMBER OF DOLLAR RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- ------ ----------- -----------
<S> <C> <C> <C> <C>
Balance, May 31, 1994 as previously reported... 600 $7,700 $11,617,945 $11,625,645
Cumulative adjustment for accounting for
interim rent.............................. -- -- (186,000) (186,000)
--- ------ ----------- -----------
Balance, May 31, 1994 as Restated.............. 600 7,700 11,431,945 11,439,645
Net income................................... -- -- 1,216,863 1,216,863
--- ------ ----------- -----------
Balance, May 31, 1995.......................... 600 7,700 12,648,808 12,656,508
Net income................................... -- -- 1,181,191 1,181,191
--- ------ ----------- -----------
Balance, June 30, 1996......................... 600 7,700 13,829,999 13,837,699
Net income................................... -- -- 1,610,106 1,610,106
--- ------ ----------- -----------
Balance, June 30, 1997......................... 600 $7,700 $15,440,105 $15,447,805
=== ====== =========== ===========
</TABLE>
See accompanying notes.
F-15
<PAGE> 74
OLIVER-ALLEN CORPORATION, INC.
STATEMENTS OF CASH FLOWS
(AS RESTATED)
<TABLE>
<CAPTION>
YEAR ENDED 13 MONTHS ENDED YEAR ENDED
JUNE 30, JUNE 30, MAY 31,
1997 1996 1995
------------ --------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income....................................... $ 1,610,106 $ 1,181,191 $ 1,216,863
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 2,838,084 2,227,496 1,740,205
Provision for doubtful accounts, net of
write-offs.................................. 98,824 7,852 43,424
Provision for deferred income taxes............ (689,865) 235,039 219,437
Gain on sale of leased assets.................. (828,149) (852,614) (1,408,744)
Other gains.................................... (190,804) --
Changes in operating assets and liabilities:
Accounts receivable......................... 319,634 1,479,056 (2,440,649)
Inventory................................... (14,578,190) (6,310,046) (2,707,523)
Trade accounts/income taxes payable......... 10,347,860 (571,017) 1,227,326
Customer security deposits.................. 1,651,066 1,595,830 945,270
Deferred and accrued executive
compensation.............................. (42,409) (7,646) 763
Other liabilities........................... 1,195,244 152,307 (194,053)
------------ ------------ ------------
Net cash provided by (used in)
operating activities................. 1,731,401 (862,552) (1,357,681)
INVESTING ACTIVITIES
Lease payments received, net of earned income.... 40,705,868 26,716,312 16,237,063
Investment in leased equipment................... (86,634,345) (68,118,325) (36,858,542)
Proceeds from disposition of residual value
interests...................................... -- 184,143 251,764
Proceeds from sale of leased assets.............. 2,563,102 476,065 2,432,730
Acquisition of property and equipment............ (16,457) (580,430) (382,497)
Increase (decrease) in other assets.............. 423,137 485,410 1,261,949
Other............................................ 715,000 454,897 409,364
------------ ------------ ------------
Net cash (used in) investing
activities........................... (42,243,695) (40,381,928) (16,648,169)
FINANCING ACTIVITIES
Advances on line of credit....................... 52,860,000 48,220,000 22,230,000
Repayments on line of credit..................... (52,520,000) (40,060,000) (18,530,000)
Proceeds from nonrecourse notes.................. 74,970,745 58,108,033 27,364,125
Payments on nonrecourse notes.................... (37,196,017) (23,106,225) (12,452,626)
Payments on recourse notes....................... (60,000) (339,805) --
------------ ------------ ------------
Net cash provided by financing
activities........................... 38,054,728 42,822,003 18,611,499
Net (decrease) increase in cash.................. (2,457,566) 1,577,523 605,949
Cash at beginning of year........................ 2,970,599 1,393,076 787,127
------------ ------------ ------------
Cash at end of year.............................. $ 513,033 $ 2,970,599 $ 1,393,076
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid................................ $ 649,577 $ 277,617 $ 846,738
Interest paid.................................... $ 8,845,977 $ 5,562,661 $ 3,010,063
</TABLE>
See accompanying notes.
F-16
<PAGE> 75
OLIVER-ALLEN CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS
(AS RESTATED)
JUNE 30, 1997
1. ACCOUNTING POLICIES
Description of Business
Oliver-Allen Corporation, Inc. was incorporated in the state of California
on December 28, 1973, and engages primarily in the sale and lease of new and
used computer and technology equipment to customers located throughout the
United States. The Company is headquartered in Larkspur, California and has
offices in southern California and Minnesota. The Company works with diverse
information technology assets, including mid-range, network and open systems as
well as check processing equipment.
Change in Year End
The Company elected to change its year end from May 31 to June 30,
effective June 30, 1996. The change was made to align the Company's reporting
periods with calendar quarters. In connection with the year-end change, the
13-month period from June 1, 1995 through June 30, 1996 is being reported in the
accompanying statements of income and retained earnings and of cash flows.
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 dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Sales of computer equipment are recognized upon shipment or transfer of
title, whichever occurs later. Cost of computer equipment sold includes the cost
of equipment purchased for resale, as well as the depreciated book value of
leased equipment sold.
Financing transactions consist primarily of sales-type and direct financing
leases as defined by Statement of Financial Accounting Standards (SFAS) No. 13.
Gross margin from sales-type leases is recognized as revenue upon commencement
of the lease and is measured using the fair market value of the consideration
received (i.e., minimum lease payments and residual value) discounted at a 10%
implicit rate. Unearned lease income associated with financing transactions is
amortized over the life of the related transaction using the interest method.
Description of Lease Arrangements
The Company's leasing activity consists principally of leasing various
types of data processing and office equipment. With the exception of leases for
selected types of data processing peripherals, the majority of the Company's
leases are classified as direct financing or sales-type leases. Data processing
peripheral equipment leases are generally classified as operating leases and
have terms of less than four years. The direct financing and sales-type leases
expire over the next five years. Generally, lessees are responsible for
maintenance, repairs, insurance and excise taxes.
Initial Direct Costs
The Company capitalizes initial direct costs on direct finance and
operating leases and amortizes them over the terms of the related leases in
proportion to revenues.
F-17
<PAGE> 76
OLIVER-ALLEN CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Residual Values
The residual value of equipment under direct financing and sales-type
leases is the estimated amount to be received by the Company from the
disposition of equipment upon expiration of the lease. The Company reviews
residual value estimates at least annually. If the review results in a lower
estimate than had been previously established and the decline is judged to be
other than temporary, the accounting for the transaction is revised using the
new estimate, and the resulting reduction in the net investment is recognized as
an expense in the period in which the change is made. The Company had no such
revisions for the periods ending June 30, 1997 and 1996 and May 31, 1995.
Inventory of Computer Equipment Held for Sale
The Company purchases equipment for resale and also sells off-lease
equipment from its lease equipment portfolio. Inventory of computer equipment
held for sale is recorded at the lower of fair market value or average cost,
less accumulated depreciation, if applicable.
Depreciation
The Company depreciates equipment subject to operating leases using the
straight-line method over the initial lease term to its stated residual value,
and for renewals, to the end of its estimated useful life to its estimated
salvage value. If the net book value of the leased equipment at the end of the
existing lease term is expected to be greater than the estimated fair value of
the equipment at that date, the Company increases depreciation over the
remaining lease term by an amount sufficient to reduce the net book value of
such equipment to its fair market value at lease termination. Whenever the
amount of depreciation required to reduce the net book value of such equipment
to its fair market value exceeds the remaining minimum lease payments due under
the lease, the Company records an additional charge to depreciation in the
current period to the extent of such excess.
Property and equipment are stated at cost. Depreciation is provided on the
straight-line method over estimated useful lives of assets ranging from three to
ten years. Leasehold improvements are amortized over the lesser of the lease
term or the anticipated life of the asset.
Income Taxes
The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes," which requires the use of the
liability method of accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on temporary differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
Statement of Cash Flows
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents for the purposes of
presentation in the statement of cash flows.
Fair Value of Financial Instruments
The carrying values of the Company's cash, notes receivable, notes payable,
and variable rate line of credit approximate fair value. The aggregate fair
value of the Company's fixed rate notes payable was estimated using discounted
cash flow analyses, based on the Company's current incremental borrowing rates
for similar types of borrowing arrangements.
F-18
<PAGE> 77
OLIVER-ALLEN CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Restatement of Financial Statements
The accompanying financial statements have been restated to defer rents
received during the first several months of many leases (interim rent) as
unearned income and amortize such rents to income over the lease term so as to
produce a constant periodic rate of return on the net investment in the leases.
Previously, the Company had recognized all interim rent as income when due. In
addition, certain prior year amounts have been reclassified to conform with the
current year presentation.
Accordingly, the previously reported financial results as of and for these
periods have been restated, resulting in the following changes:
<TABLE>
<CAPTION>
AS REPORTED RESTATED
------------ ------------
<S> <C> <C>
YEAR ENDED JUNE 30, 1997
Equipment under operating lease.......................... $ 8,120,020 $ 8,305,020
Investment in financing transactions..................... 125,080,372 122,292,372
Income taxes payable..................................... 541,441 1,237,175
Deferred income taxes.................................... 3,578,934 1,841,200
Retained earnings........................................ 17,001,105 15,440,105
Rent from operating leases............................... 6,670,013 3,960,013
Finance lease income..................................... 9,341,501 11,120,501
Cost of sales from residual disposals.................... -- 1,734,953
Selling, general and administrative...................... 8,936,664 8,657,388
Depreciation and amortization............................ 4,478,761 2,838,084
Provision for income taxes............................... 1,465,404 1,167,404
Net income............................................... 2,058,106 1,610,106
THIRTEEN MONTHS ENDED JUNE 30, 1996
Investment in financing transactions..................... 84,738,493 82,881,493
Income taxes payable..................................... 132,349 (17,535)
Deferred income taxes.................................... 3,125,181 2,531,065
Retained earnings........................................ 14,942,999 13,829,999
Rent from operating leases............................... 5,240,315 3,199,315
Finance lease income..................................... 6,182,540 7,166,540
Cost of sales from residual disposals.................... -- 647,524
Selling, general and administrative...................... 11,007,790 10,095,146
Depreciation and amortization............................ 1,962,376 2,227,496
Provision for income taxes............................... 1,098,910 675,910
Net income............................................... 1,815,191 1,181,191
YEAR ENDED MAY 31, 1995
Rent from operating leases............................... $ 4,213,188 $ 3,331,188
Finance lease income..................................... 3,623,391 4,016,391
Cost of sales from residual disposals.................... -- 866,437
Selling, general and administrative...................... 10,749,899 9,684,471
Depreciation and amortization............................ 1,541,214 1,740,205
Provision for income taxes............................... 979,797 783,797
Net income............................................... 1,509,863 1,216,863
</TABLE>
F-19
<PAGE> 78
OLIVER-ALLEN CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. INVESTMENT IN FINANCING TRANSACTIONS
The Company's investment in financing transactions is summarized below:
<TABLE>
<CAPTION>
DIRECT
FINANCING SALES-TYPE TOTAL
------------ ----------- ------------
<S> <C> <C> <C>
JUNE 30, 1997
Lease and other contracts receivable........ $112,011,840 $15,460,828 $127,472,668
Estimated residual value of leased
equipment................................. 11,301,833 1,609,702 12,911,535
Initial direct costs, net of amortization... 2,812,230 -- 2,812,230
Less unearned income........................ (18,908,603) (1,995,458) (20,904,061)
------------ ----------- ------------
Net investment in financing transactions.... $107,217,300 $15,075,072 $122,292,372
============ =========== ============
JUNE 30, 1996
Lease and other contracts receivable........ $ 76,674,237 $12,139,761 $ 88,813,998
Estimated residual value of leased
equipment................................. 4,971,196 1,021,908 5,993,104
Initial direct costs, net of amortization... 2,048,107 -- 2,048,107
Less unearned income........................ (12,524,685) (1,449,031) (13,973,716)
------------ ----------- ------------
Net investment in financing transactions.... $ 71,168,855 $11,712,638 $ 82,881,493
============ =========== ============
</TABLE>
Lease and other contracts receivable as of June 30, 1997 are due in
installments as follows:
<TABLE>
<S> <C>
1998.................................................. $ 54,922,618
1999.................................................. 43,861,893
2000.................................................. 21,171,792
2001.................................................. 6,236,914
2002.................................................. 1,279,451
------------
$127,472,668
============
</TABLE>
3. OPERATING LEASES
Future minimum rents receivable under noncancelable operating leases as of
June 30, 1997, are due as follows:
<TABLE>
<S> <C>
1998................................................... $ 6,066,562
1999................................................... 3,477,948
2000................................................... 1,002,898
2001................................................... 456,169
2002................................................... 48,328
-----------
Total........................................ $11,051,905
===========
</TABLE>
Unamortized initial direct costs of $260,237 and $211,618 are included in
equipment under operating lease at June 30, 1997 and 1996, respectively.
F-20
<PAGE> 79
OLIVER-ALLEN CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Furniture, fixtures and equipment.......................... $ 1,728,364 $ 1,934,201
Leasehold improvements..................................... 450,676 403,257
----------- -----------
2,179,040 2,337,458
Accumulated depreciation and amortization.................. (1,486,894) (1,318,482)
----------- -----------
Net property and equipment................................. $ 692,146 $ 1,018,976
=========== ===========
</TABLE>
5. NOTES PAYABLE AND LINE OF CREDIT
Various nonrecourse notes payable total $111,358,175 and $73,583,447 at
June 30, 1997 and 1996, respectively. These notes are secured by assignment of
rentals and security interests in specific equipment subject to operating and
financing leases (direct financing and sales type) due through May 2001.
Interest rates are fixed at time of funding, at rates that range from 6.3% to
15.0%.
In addition, the Company has a working-capital line of credit facility with
a bank for $18,000,000 available through January 31, 1999, at which time all
outstanding principal is due. The line is secured by all the Company's assets
not otherwise assigned. Interest is payable monthly at a rate based either on
the prime rate of interest or LIBOR, as specified by the Company at the time of
drawing. Amounts outstanding under the line were $15,050,000 and $14,710,000 at
June 30, 1997 and 1996, respectively.
As of June 30, 1997, the Company was in compliance with all financial
covenants as provided for in the working capital line of credit facility, except
as waived by the financial institution. The Company obtained waivers in 1996
from the two banks allowing the change in year end and capital expenditures in
excess of a stipulated threshold.
Principal payments on nonrecourse notes payable required in future years
are as follows:
<TABLE>
<S> <C>
Year ending June 30:
1998................................................... $ 50,889,526
1999................................................... 37,446,633
2000................................................... 16,765,452
2001................................................... 5,403,632
2002................................................... 852,932
------------
$111,358,175
============
</TABLE>
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-21
<PAGE> 80
OLIVER-ALLEN CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
JUNE 30
------------------------- MAY 31
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Alternative minimum tax credit.............. $ 2,623,821 $ 1,347,039 $ 237,376
Losses not currently deductible............. 890,892 522,495 --
Reserves not currently deductible........... 456,976 107,708 104,557
Capitalized expenses........................ 101,487 38,646 92,253
Other....................................... 388,352 212,911 126,800
----------- ----------- -----------
Total deferred tax assets........... 4,461,528 2,228,799 560,986
Deferred tax liabilities:
Book/tax basis differences due to
depreciation............................. (5,922,998) (4,526,048) (2,592,467)
Other....................................... (379,730) (233,816) (264,545)
----------- ----------- -----------
Total deferred tax liabilities...... (6,302,728) (4,759,864) (2,857,012)
----------- ----------- -----------
Net deferred tax (liability)........ $(1,841,200) $(2,531,065) $(2,296,026)
=========== =========== ===========
</TABLE>
Included in net deferred tax liability is a deferred state tax benefit of
approximately $700,000.
A reconciliation between the federal statutory tax rate and the Company's
effective tax rate is shown below:
<TABLE>
<CAPTION>
JUNE 30
----------- MAY 31
1997 1996 1995
---- ---- ------
<S> <C> <C> <C>
Federal statutory income tax rate........................... 34.0% 34.0% 34.0%
State tax provision, net of federal tax benefit............. 6.2 6.5 6.2
Other....................................................... 1.8 (1.8) (0.7)
---- ---- ----
Effective tax rate.......................................... 42.0% 38.7% 39.5%
==== ==== ====
</TABLE>
F-22
<PAGE> 81
OLIVER-ALLEN CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company's provision for income taxes consists of the following:
<TABLE>
<CAPTION>
JUNE 30
--------------------- MAY 31
1997 1996 1995
---------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................... $1,273,658 $256,089 $405,459
State............................................. 583,611 184,782 158,901
---------- -------- --------
1,857,269 440,871 564,360
---------- -------- --------
Deferred:
Federal........................................... (193,436) 329,436 206,297
State............................................. (496,429) (94,397) 13,140
---------- -------- --------
(689,865) 235,039 219,437
---------- -------- --------
$1,167,404 $675,910 $783,797
========== ======== ========
</TABLE>
7. LEASE COMMITMENTS
The Company leases its headquarters office facility and sales offices under
noncancelable leases with terms expiring through 2004. Under the terms of these
leases, the Company pays certain related operating expenses. The Company has
options to renew the leases for additional years at the then agreed upon rates,
based on fair market values. Future minimum rental payments required under the
office leases having remaining terms in excess of one year, as of June 30, 1997,
are as follows:
<TABLE>
<S> <C>
1998..................................................... $ 416,064
1999..................................................... 323,190
2000..................................................... 237,861
2001..................................................... 238,110
2002..................................................... 242,340
Thereafter............................................... 666,435
----------
$2,124,000
==========
</TABLE>
Rent expense for the periods ended June 30, 1997 and 1996 and May 31, 1995
was $429,204, $625,154, and $628,306, respectively.
8. EMPLOYEE RETIREMENT BENEFIT PLANS
The Company has a 401(k) Plan covering eligible employees who meet certain
requirements. Under the terms of the 401(k) Plan, each eligible employee is
allowed to contribute up to 15% of his or her annual salary to the Plan.
Contributions by eligible employees, of up to 6%, are matched by the Company, in
an amount equal to 50% of the contribution. Company contributions become 100%
vested upon the date of funding. Company contributions are made annually on
December 31. The Company contributed $26,937, $14,345, and $30,000 under its
matching agreement for the periods ending June 30, 1997 and 1996 and May 31,
1995, respectively.
9. COMPENSATION PROGRAMS AND TRANSACTIONS WITH RELATED PARTIES
The Company has, from time to time, made short-term advances against future
compensation to officers and other employees. Such advances outstanding at June
30, 1997 and 1996 were $182,496 and $119,310, respectively.
F-23
<PAGE> 82
OLIVER-ALLEN CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has provided certain executive officers with compensation
agreements which provide for incentive bonuses based on a formula derived from
net income, as defined. Certain bonuses are payable in future years if certain
financial targets are achieved; these bonuses are accrued when their payment
becomes probable.
During 1993, the Company made several loans to employees. During fiscal
year 1997, additional loans were made to those employees. These loans bear
interest at 7.5% and are due in June 2001. The outstanding balance at June 30,
1997 and 1996 are $200,000 and $133,798, respectively, and are included in other
assets.
In 1993, the Company granted an option to an executive officer to purchase
150 shares of stock at a purchase price of $25,000 per share which options are
fully vested as of June 30, 1997. As part of the merger agreement discussed in
Note 13, First Sierra has agreed to assume these options. The executive expects
to exercise certain provisions of the agreement resulting in the option exercise
period expiring one year from the merger closing date.
10. OUT OF PERIOD ADJUSTMENT
Included in selling, general and administrative expenses in the
accompanying 1997 statement of income is an expense accrual of $880,000 related
to final settlement with respect to a federal government investigation conducted
in the eastern district of New York. The Company has agreed to forfeit revenues
of $780,000 received in 1992 from transactions consummated by employees in the
Company's Atlanta office who were not acting in a manner consistent with Company
policies and procedures. The Atlanta office has since been closed. In addition,
the Company has agreed to a fine of $100,000 which will be paid in fiscal year
end 2001.
11. CONCENTRATION OF CREDIT RISK
The Company is a distributor/dealer of computer equipment to companies in
diversified industries. Sales are throughout the United States. The Company has
a well-defined credit policy for its different types of customers. Terms are
generally net 30 days or less for end-users and payment in full before shipment
for wholesalers/brokers.
The Company is also active in placing equipment on leases for its own
portfolio. The lease portfolio is diversified with no concentrations of lessees
in excess of 15% of the portfolio. All lease transactions are subject to credit
review. The Company manages its overall credit exposure by the assignment of
lease receivables on a nonrecourse basis to third-party lending institutions.
12. IMPACT OF THE YEAR 2000 (UNAUDITED)
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in similar
normal business activities.
Management of the Company believes that it will not be required to modify
or replace significant portions of its software and that the year 2000 issue
will not pose significant operational problems for its computer systems.
Ultimately, the potential impact of the year 2000 issue will depend not only on
the corrective measures the Company undertakes, but also on the way in which the
year 2000 issue is addressed by businesses and other entities whose financial
condition or operational capability is important to the Company as lenders,
customers, or vendors. Therefore, the Company is communicating to these parties
to ensure they are aware of the year 2000 issue, to learn how they are
addressing it, and to evaluate any likely impact on the Company.
F-24
<PAGE> 83
OLIVER-ALLEN CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13. SUBSEQUENT EVENT
On June 10, 1998, the Company announced the signing of a definitive
agreement with First Sierra Financial, Inc. ("First Sierra") whereby First
Sierra will issue its common stock in exchange for each share of the Company's
common stock. First Sierra, headquartered in Houston, Texas, is a specialty
finance company that acquires, originates, sells and services equipment leases
on a wide range of information technology and other specialized equipment. It is
expected that the transaction will be accounted for as a pooling of interests.
Consummation of the merger is expected to be completed in the third quarter of
1998 and is subject to, among other things, approval by the shareholders of
First Sierra.
F-25
<PAGE> 84
APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 10, 1998
BY AND AMONG
FIRST SIERRA FINANCIAL, INC.
SIERRA ACQUISITION CORPORATION I
AND
OLIVER-ALLEN CORPORATION, INC.
<PAGE> 85
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
ARTICLE I
THE MERGER
SECTION 1.1 The Merger..................................................
SECTION 1.2 Effective Time of the Merger................................
ARTICLE II
THE SURVIVING AND PARENT CORPORATIONS
SECTION 2.1 Certificate of Incorporation................................
SECTION 2.2 By-Laws.....................................................
SECTION 2.3 Directors...................................................
SECTION 2.4 Officers....................................................
ARTICLE III
CONVERSION OF SECURITIES
SECTION 3.1 Conversion of Company Securities in the Merger..............
SECTION 3.2 Anti-Dilution Provisions....................................
SECTION 3.3 Effect of Merger on Capital Stock...........................
SECTION 3.4 No Fractional Securities....................................
SECTION 3.5 Conversion of Howe Option...................................
SECTION 3.6 Closing.....................................................
SECTION 3.7 Closing of the Company's Transfer Books.....................
SECTION 3.8 Escrow Agreement............................................
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUBSIDIARY
SECTION 4.1 Organization and Qualification..............................
SECTION 4.2 Capitalization..............................................
SECTION 4.3 Subsidiaries................................................
SECTION 4.4 Authority; Non-Contravention; Approvals.....................
SECTION 4.5 Reports and Financial Statements............................
SECTION 4.6 Absence of Undisclosed Liabilities..........................
SECTION 4.7 Absence of Certain Changes or Events........................
SECTION 4.8 Litigation..................................................
SECTION 4.9 No Violation of Law.........................................
SECTION 4.10 Compliance with Agreements..................................
SECTION 4.11 Taxes.......................................................
SECTION 4.12 Environmental Matters.......................................
SECTION 4.13 Non-competition Agreements..................................
SECTION 4.14 Title to Assets.............................................
SECTION 4.15 Reorganization and Pooling of Interests.....................
SECTION 4.16 Parent Stockholders' Approval...............................
SECTION 4.17 Brokers and Finders.........................................
SECTION 4.18 Ownership of Company Common Stock...........................
SECTION 4.19 Proxy Statement.............................................
SECTION 4.20 Certain Business Practices..................................
SECTION 4.21 Fairness Opinion and Pooling Letter.........................
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS
SECTION 5.1 Organization and Qualification..............................
SECTION 5.2 Capitalization..............................................
SECTION 5.3 Subsidiaries................................................
</TABLE>
A-2
<PAGE> 86
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
SECTION 5.4 Authority; Non-Contravention; Approvals.....................
SECTION 5.5 Financial Statements........................................
SECTION 5.6 Absence of Undisclosed Liabilities..........................
SECTION 5.7 Absence of Certain Changes or Events........................
SECTION 5.8 Litigation..................................................
SECTION 5.9 Proxy Statement.............................................
SECTION 5.10 Permits; Compliance With Law................................
SECTION 5.11 Contracts and Agreements....................................
SECTION 5.12 Taxes.......................................................
SECTION 5.13 Employee Benefit Plans; ERISA...............................
SECTION 5.14 Labor Controversies.........................................
SECTION 5.15 Environmental Matters.......................................
SECTION 5.16 Non-competition Agreements..................................
SECTION 5.17 Title to Assets.............................................
SECTION 5.18 Reorganization and Pooling of Interests.....................
SECTION 5.19 Certain Business Practices..................................
SECTION 5.20 Intellectual Property Rights................................
SECTION 5.21 Insider Interests...........................................
SECTION 5.22 Brokers and Finders.........................................
SECTION 5.23 Business Relations..........................................
SECTION 5.24 Compensation Arrangements...................................
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
SECTION 6.1 Owners of Company Common Stock..............................
SECTION 6.2 Authority...................................................
SECTION 6.3 No Conflicts................................................
SECTION 6.4 Investor Status.............................................
SECTION 6.6 Reorganization and Pooling of Interests.....................
ARTICLE VII
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 7.1 Conduct of Business by the Company Pending the Merger.......
SECTION 7.2 Conduct of Business by Parent and Subsidiary Pending the
Merger......................................................
SECTION 7.3 Control of the Company's Operations.........................
SECTION 7.4 Control of Parent's Operations..............................
SECTION 7.5 Acquisition Transactions....................................
ARTICLE VIII
ADDITIONAL AGREEMENTS
SECTION 8.1 Access to Information.......................................
SECTION 8.2 Proxy Statement.............................................
SECTION 8.3 Stockholders' Approvals.....................................
SECTION 8.4 Compliance with the Securities Act..........................
SECTION 8.5 Nasdaq Listing..............................................
SECTION 8.6 Expenses and Fees...........................................
SECTION 8.7 Agreement to Cooperate......................................
SECTION 8.8 Public Statements...........................................
SECTION 8.9 Notification of Certain Matters.............................
SECTION 8.10 Corrections to Proxy Statement..............................
SECTION 8.11 Employment Agreements.......................................
SECTION 8.12 Benefits and Contracts......................................
SECTION 8.13 Cooperation With Respect to Tax Returns.....................
</TABLE>
A-3
<PAGE> 87
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
SECTION 8.14 Indemnification of Directors and Officers...................
SECTION 8.15 Miscellaneous Matters.......................................
SECTION 8.16 Announcement of Post-Merger Results.........................
SECTION 8.17 Resale Registration Statement...............................
SECTION 8.18 Document Review.............................................
ARTICLE IX
CONDITIONS
SECTION 9.1 Conditions to Each Party's Obligation to Effect the
Merger......................................................
SECTION 9.2 Conditions to Obligation of the Company to Effect the
Merger......................................................
SECTION 9.3 Conditions to Obligations of Parent and Subsidiary to Effect
the Merger..................................................
ARTICLE X
INDEMNIFICATION
SECTION 10.1 Indemnification of Parent Indemnified Parties...............
SECTION 10.2 Indemnification of the Company Indemnified Parties..........
SECTION 10.3 Defense of Third-Party Claims...............................
SECTION 10.4 Direct Claims...............................................
SECTION 10.5 Limitations.................................................
SECTION 10.6 Recourse Against Escrowed Shares............................
ARTICLE XI
TERMINATION, AMENDMENT AND WAIVER
SECTION 11.1 Termination.................................................
SECTION 11.2 Effect of Termination.......................................
SECTION 11.3 Amendment...................................................
SECTION 11.4 Waiver......................................................
ARTICLE XII
GENERAL PROVISIONS
SECTION 12.1 Survival of Representations and Warranties..................
SECTION 12.2 Notices.....................................................
SECTION 12.3 Interpretation..............................................
SECTION 12.4 Miscellaneous...............................................
SECTION 12.5 Counterparts................................................
SECTION 12.6 Parties in Interest.........................................
SECTION 12.7 Captions....................................................
SECTION 12.8 No Waiver Relating to Claims for Fraud......................
SECTION 12.9 Severability................................................
Exhibit A -- Indemnification Escrow Agreement
Exhibit B -- Warrior Stockholders
Exhibit C -- Affiliate Letter
Exhibit D -- Opinion of McDermott, Will & Emery
Exhibit E -- Opinion of Shartsis, Friese & Ginsburg LLP
Exhibit F -- Employment Termination Agreement
</TABLE>
A-4
<PAGE> 88
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of June 10, 1998 (this
"Agreement"), is made and entered into by and among First Sierra Financial,
Inc., a Delaware corporation ("Parent"), Sierra Acquisition Corporation I, a
Delaware corporation and a wholly-owned subsidiary of Parent ("Subsidiary"),
Oliver-Allen Corporation, Inc., a California corporation (the "Company"), and
the stockholders of the Company identified on the signature pages hereto (each a
"Stockholder" and collectively the "Stockholders");
WITNESSETH:
WHEREAS, the Boards of Directors of each of Parent, Subsidiary and the
Company (i) are of the opinion that the transactions described herein are in the
best interests of Parent, Subsidiary and the Company, as the case may be, and
their respective stockholders and (ii) have approved the merger of Subsidiary
with and into the Company on the terms set forth in this Agreement (the
"Merger");
WHEREAS, Parent, Subsidiary and the Company intend the Merger to qualify as
a (i) tax-free reorganization under the provisions of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
thereunder and (ii) pooling of interests for accounting purposes; and
WHEREAS, the stockholders of the Company have approved and adopted this
Agreement and the transactions contemplated hereby.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein, the parties hereto,
intending to be legally bound, agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 The Merger. Upon the terms and subject to the conditions of
this Agreement, at the Effective Time (as defined in Section 1.2) in accordance
with the California General Corporation Law (the "GCL"), Subsidiary shall be
merged with and into the Company and the separate existence of Subsidiary shall
thereupon cease. The Company shall be the surviving corporation in the Merger
and is hereinafter sometimes referred to as the "Surviving Corporation."
SECTION 1.2 Effective Time of the Merger. The Merger shall become
effective at such time (the "Effective Time") as shall be stated in a
certificate of merger, in a form mutually acceptable to Parent and the Company,
to be filed with the Secretary of State of the State of California in accordance
with the GCL (the "Merger Filing"). The Merger Filing shall be made
simultaneously with or as soon as practicable after the closing of the
transactions contemplated by this Agreement in accordance with Section 3.6. The
parties acknowledge that it is their mutual desire and intent to consummate the
Merger as soon as practicable after the date hereof. Accordingly, the parties
shall, subject to the provisions hereof and to the fiduciary duties of their
respective boards of directors, use all reasonable efforts to consummate, as
soon as practicable, the transactions contemplated by this Agreement in
accordance with Section 3.6.
ARTICLE II
THE SURVIVING AND PARENT CORPORATIONS
SECTION 2.1 Certificate of Incorporation. The Certificate of Incorporation
of Subsidiary in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation after the Effective
Time, as amended pursuant to the Merger Filing.
SECTION 2.2 By-Laws. The By-laws of Subsidiary as in effect immediately
prior to the Effective Time shall be the By-laws of the Surviving Corporation
after the Effective Time.
A-5
<PAGE> 89
SECTION 2.3 Directors. The Board of Directors of Parent shall take such
action as may be necessary to cause one of John F. Allen or another individual
designated by John F. Allen and acceptable to Parent (the "OAC Board Member") to
be elected to Parent's Board of Directors effective as of a mutually agreeable
time after Closing (as defined herein). The OAC Board Member shall be a Class II
Director of Parent with a term of office expiring at Parent's annual meeting of
stockholders in 1999. The directors of Subsidiary in office immediately prior to
the Effective Time shall be the directors of the Surviving Corporation after the
Effective Time, and such directors shall serve in accordance with the By-laws of
the Surviving Corporation until their respective successors are duly elected or
appointed and qualified.
SECTION 2.4 Officers. The officers of Subsidiary in office immediately
prior to the Effective Time shall be the officers of the Surviving Corporation
after the Effective Time, and such officers shall serve in accordance with the
By-laws of the Surviving Corporation until their respective successors are duly
elected or appointed and qualified.
ARTICLE III
CONVERSION OF SECURITIES
SECTION 3.1 Conversion of Company Securities in the Merger. At the
Effective Time, by virtue of the Merger and without any action on the part of
any holder of any capital stock of Parent, Subsidiary or the Company:
(a) Each share of the common stock, par value $10 per share, of the
Company (the "Company Common Stock") shall, as of the Effective Time and
subject the provisions of this Article III, be converted into the right to
receive, without interest, a number of shares of the common stock, par
value $.01 per share, of Parent ("Parent Common Stock") determined by
dividing (i) $79,000,000 (the "Purchase Price") minus any Transaction Fees
(as defined below) in excess of $5.1 million by (ii) $25 and then dividing
the quotient thereof by the aggregate number of shares of Company Common
Stock issued and outstanding at the Effective Time (the "Exchange Ratio"),
payable upon surrender of the certificate formerly representing such share
of Company Common Stock (the "Common Stock Consideration");
(b) Each share of capital stock of the Company, if any, owned by
Parent or any subsidiary of Parent or held in treasury by the Company or
any subsidiary of the Company immediately prior to the Effective Time shall
be canceled and no consideration shall be paid in exchange therefor and
each such share shall cease to exist from and after the Effective Time; and
(c) Each issued and outstanding share of common stock, par value $.01
per share, of Subsidiary ("Subsidiary Common Stock") shall be converted
into one share of common stock, par value $.01 per share, of the Surviving
Corporation.
(d) The parties hereto agree that the Purchase Price shall be reduced
by the amount of any Transaction Fees in excess of $5.1 million. For
purposes of this Agreement, "Transaction Fees" shall mean the sum of (i)
all legal, accounting, tax, consulting and financial advisory and other
fees and expenses incurred by the Company and the Stockholders in
connection with the transactions contemplated hereby that are not paid by
the Company or the Stockholders on or prior to Closing (the "Professional
Advisory Expenses") and (ii) all amounts that, solely as a result of the
Merger, the Company or Parent will be obligated to pay (including loans
that the Company or Parent will be required to forgive) after the Effective
Time to persons who were employees of the Company prior to the Effective
Time pursuant to provisions in their employment, executive compensation, or
other similar agreements relating to incentive bonuses or loan forgiveness
payable in connection with the employee's continuation of employment after
a change in control (the "Compensation Expenses"); provided, however, that
the term Compensation Expenses shall not include any asset protection
payments, severance payments or distributions of long-term deferred
compensation.
A-6
<PAGE> 90
(e) At least two days prior to the Closing Date (as defined herein),
the Company shall calculate the amount of Compensation Expenses to be paid
by Parent or the Company after Closing and the Company, the Stockholders
and Parent shall estimate, by mutual agreement, the amount of Professional
Advisory Expenses as of the Closing Date for purposes of determining the
number of shares of Parent Common Stock to be delivered at the Closing (the
sum of such Compensation Expenses and estimated Professional Advisory
Expenses being referred to herein as the "Preliminary Value"). Within 60
days after the Closing Date, Parent shall prepare and deliver to the
Stockholders (in accordance with the notice provisions of Section 12.2) a
determination (the "Determination") of the actual amount of the
Professional Advisory Expenses as of the Closing Date (which amount, when
added to the amount of Compensation Expenses shall be referred to herein as
the "Actual Value"), together with documentation supporting any adjustments
in the Professional Advisory Expenses from the Preliminary Value, which
shall be prepared on a basis consistent with the determination of the
Preliminary Value. If, within 30 days after the date on which a
Determination is delivered to the Stockholders, the Stockholders shall not
have given written notice to Parent setting forth in detail any objection
to such Determination, then such Determination shall be final and binding
on the parties hereto. In the event the Stockholders give written notice of
any objection to such Determination within the 30-day period, Parent and
the Stockholders shall use all reasonable efforts to resolve the dispute
within the 30-day period following delivery of the written notice. If the
parties are unable to reach an agreement within such 30-day period, the
matter shall be submitted to a firm of independent certified public
accountants acceptable to the parties (the "Independent Accountants"), for
determination of the Actual Value which shall be final and binding upon
Parent and the Stockholders. Parent and the Stockholders shall contribute
equally to all costs (including fees and expenses charged by the
Independent Accountants) in connection with the resolution of any such
dispute. If the Actual Value and the Preliminary Value both exceed $5.1
million and the Actual Value is greater than the Preliminary Value, Parent
shall be entitled to set off against the Escrowed Shares (as defined in
Section 3.9) the difference between the Actual Value and the Preliminary
Value (assuming a value per share for purposes of such calculation equal to
$25 per share), which set off shall be deemed to be Parent Indemnified
Costs (as defined in Section 10.1). If the Actual Value exceeds $5.1
million and the Preliminary Value is less than $5.1 million, Parent shall
be entitled to set off against the Escrowed Shares the difference between
the Actual Value and $5.1 million (assuming a value per share for purposes
of such calculation equal to $25 per share), which set off shall be deemed
to be Parent Indemnified Costs. Notwithstanding anything herein to the
contrary, the Minimum Loss (as defined in Section 10.5) shall not be
applicable to any such set off and such set off shall not count against
such Minimum Loss. If the Actual Value and the Preliminary Value both
exceed $5.1 million and the Actual Value is less than the Preliminary
Value, then the Purchase Price shall be increased by a number of additional
shares of Parent Common Stock equal to the amount determined by dividing
such difference by $25, and such shares shall be issued and delivered to
the Stockholders. If the Preliminary Value exceeds $5.1 million and the
Actual Value is less than $5.1 million, then the Purchase Price shall be
increased by a number of additional shares of Parent Common Stock
determined by dividing the difference between the Preliminary Value and
$5.1 million by $25, and such shares shall be issued and delivered to the
Stockholders. Notwithstanding anything herein to the contrary, in the event
that the Actual Value is less than $5.1 million, the difference between
$5.1 million and the Actual Value shall be paid to employees of the Company
designated by mutual agreement of Thomas J. Depping and John F. Allen
provided that such employees were not stockholders of the Company prior to
the Effective Time.
SECTION 3.2 Anti-Dilution Provisions. In the event Parent changes the
number of shares of Parent Common Stock issued and outstanding prior to the
Effective Time as a result of a stock split, stock dividend, recapitalization,
or similar transaction with respect to such stock and the record date therefor
(in the case of a stock dividend) or the effective date thereof (in the case of
a stock split or similar recapitalization for which a record date is not
established) shall be prior to the Effective Time, the Exchange Ratio shall be
proportionately adjusted.
SECTION 3.3 Effect of Merger on Capital Stock. As of the Effective Time,
all shares of Company Common Stock shall cease to be outstanding and shall
automatically be canceled and retired and shall cease
A-7
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to exist. Each holder of a certificate representing any such shares of Company
Common Stock shall cease to have any rights with respect thereto, except the
right to receive the Common Stock Consideration. If any holder of Company Common
Stock is unable to surrender such holder's certificate(s) theretofore
representing Company Common Stock because such certificate has been lost or
destroyed, such holder may deliver in lieu thereof an affidavit and indemnity
agreement in form and substance reasonably satisfactory to Parent at the
Closing. No interest shall be paid on any Common Stock Consideration payable to
former holders of Company Common Stock. If any certificate for shares of Parent
Common Stock is to be issued in a name other than that in which the certificate
for shares of Company Common Stock surrendered in exchange therefor is
registered, it shall be a condition of such exchange that the person requesting
such exchange shall pay any applicable transfer or other taxes required by
reason of such issuance.
SECTION 3.4 No Fractional Securities. Notwithstanding any other provision
of this Agreement, no certificates or scrip for fractional shares of Parent
Common Stock shall be issued in the Merger and no Parent Common Stock dividend,
stock split or interest shall relate to any fractional security, and such
fractional interests shall not entitle the owner thereof to vote or to any other
rights of a security holder.
SECTION 3.5 Conversion of Howe Option.
(a) At the Effective Time, each option to purchase or acquire shares
of Company Common Stock disclosed in Section 5.2(b) of the Company
Disclosure Schedule (as defined herein) (each a "Company Option"), which is
outstanding at the Effective Time, whether or not exercisable, shall be
converted into and become an option to purchase or acquire Parent Common
Stock, and Parent shall assume each Company Option in accordance with the
stock option agreement by which it is evidenced, except that from and after
the Effective Time, (i) Parent and its stock option committee shall
administer such Company Option, (ii) each Company Option assumed by Parent
may be exercised solely for shares of Parent Common Stock, (iii) the number
of shares of Parent Common Stock subject to such Company Option shall be
equal to the number of shares of Company Common Stock subject to such
Company Option immediately prior to the Effective Time multiplied by the
Exchange Ratio, and (iv) the per share exercise price (or similar threshold
price, in the case of stock awards) under each such Company Option shall be
adjusted by dividing the per share exercise (or threshold) price under each
such Company Option by the Exchange Ratio and rounding up to the nearest
cent.
(b) After the Effective Time, each Company Option shall continue in
effect on the same terms and conditions (subject to the adjustments
required by Section 3.5(a) after giving effect to the Merger) as existed
prior to the Effective Time. At or prior to the Effective Time, Parent
shall take all corporate action necessary to authorize and reserve for
issuance sufficient shares of Parent Common Stock for delivery upon
exercise of Company Options assumed by Parent in accordance with this
Section 3.5, which shares of Parent Common Stock will, upon payment of the
exercise price and issuance of such Parent Common Stock pursuant to the
terms of the Company Options, be validly issued and non-assessable. As soon
as reasonably practicable after the Effective Time, and, in any event
within one business day after the date of the Effective Time, Parent shall
file (at the expense of Parent) a registration statement on Form S-8 (or
any successor or other similar form) with respect to the shares of Parent
Common Stock to be issued upon exercise of such Company Options. After
filing of such registration statement, Parent shall use its reasonable
efforts to maintain the effectiveness of such registration statement (and
maintain the current status of the prospectus or prospectuses contained
therein) for so long as such Company Options remain outstanding. As soon as
reasonably practicable after the Effective Time, Parent shall deliver to
each holder of a Company Option a notice to the effect that the Company
Option has been duly assumed by Parent in accordance with this Section 3.5.
SECTION 3.6 Closing. The closing (the "Closing") of the transactions
contemplated by this Agreement shall take place at a location mutually agreeable
to Parent and the Company as promptly as practicable (but in any event within
five business days) following the date on which the last of the conditions set
forth in Article VIII is fulfilled or waived, or at such other time and place as
Parent and the Company shall agree. The date on which the Closing occurs is
referred to in this Agreement as the "Closing Date."
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SECTION 3.7 Closing of the Company's Transfer Books. At and after the
Effective Time, holders of Company Common Stock shall cease to have any rights
as stockholders of the Company, except for the right to receive shares of Parent
Common Stock pursuant to Section 3.1. At the Effective Time, the stock transfer
books of the Company shall be closed and no transfer of shares of Company Common
Stock which were outstanding immediately prior to the Effective Time shall
thereafter be made.
SECTION 3.8 Escrow Agreement. Pursuant to Article X hereof, the
Stockholders have agreed to indemnify the Parent Indemnified Parties (as
hereinafter defined) from and against certain Parent Indemnified Costs (as
hereinafter defined). On or prior to Closing, the Stockholders, Parent and an
escrow agent mutually agreed upon by Parent and the Stockholders (the "Escrow
Agent") shall enter into an Indemnification Escrow Agreement in the form of
Exhibit A attached hereto, subject to any changes requested by the Escrow Agent
(the "Escrow Agreement"). Notwithstanding any other provision in this Agreement
to the contrary, in order to secure the indemnity obligations of the
Stockholders to the Parent Indemnified Parties under this Agreement, ten percent
(10%) of the shares of Parent Common Stock which would otherwise be delivered to
the Stockholders as Common Stock Consideration at Closing pursuant to Section
3.1(a) (the "Escrowed Shares"), together with stock powers executed in blank,
shall be deposited into and held in escrow pursuant to the terms of the Escrow
Agreement. Parent is hereby directed by each Stockholder to deposit the number
of Escrowed Shares required to be delivered to the Escrow Agent pursuant to this
Section 3.8 with the Escrow Agent at the Closing and Parent shall make such
deposit as directed.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUBSIDIARY
Parent and Subsidiary, jointly and severally, each represent and warrant to
the Company and the Stockholders that, as of the date hereof and as of the
Closing Date:
SECTION 4.1 Organization and Qualification. Each of Parent and Subsidiary
is a corporation duly organized, validly existing and in good standing under the
laws of the state of its incorporation and has the requisite power and authority
to own, lease and operate its assets and properties and to carry on its business
as it is now being conducted. Each of Parent and Subsidiary is qualified to do
business and is in good standing in each jurisdiction in which the properties
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification necessary, except where the failure to be so qualified
and in good standing will not, when taken together with all other such failures,
have a material adverse effect on the business, operations, properties, assets,
condition (financial or other) or results of operations of Parent and its
subsidiaries, taken as a whole ("Parent Material Adverse Effect"). For purposes
of this Agreement, Parent Material Adverse Effect shall not be deemed to include
the impact of (a) actions and omissions by Parent (or any of its subsidiaries)
taken at the request of the Company in contemplation of the transactions
contemplated hereby, and (b) the Merger and compliance with the provisions of
this Agreement on the financial condition or results of operations of Parent.
True, accurate and complete copies of each of Parent's and Subsidiary's charters
and By-laws, in each case as in effect on the date hereof, including all
amendments thereto, have heretofore been delivered to the Company.
SECTION 4.2 Capitalization.
(a) As of May 12, 1998, the authorized capital stock of Parent
consisted of 25,000,000 shares of Parent Common Stock and 1,000,000 shares
of preferred stock, par value $.01 per share ("Parent Preferred Stock"). As
of May 12, 1998, (i) 12,602,015 shares of Parent Common Stock were issued
and outstanding, all of which were validly issued and are fully paid,
nonassessable and free of preemptive rights, (ii) 38,437 shares of Parent
Preferred Stock were issued and outstanding, (iii) no shares of Parent
Common Stock or Parent Preferred Stock were held in the treasury of Parent,
(iv) 1,713,320 shares of Parent Common Stock were reserved for issuance
pursuant to the exercise of outstanding options and warrants to purchase
Parent Common Stock and (v) 210,247 shares of Parent Common Stock were
reserved for issuance upon conversion of outstanding Parent Preferred
Stock. Assuming the conversion of
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all outstanding Parent Preferred Stock and the exercise of all outstanding
options and warrants to purchase Parent Common Stock, as of May 12, 1998,
there would be 14,525,582 shares of Parent Common Stock issued and
outstanding. In addition, as of May 12, 1998, no shares of Parent Common
Stock were reserved and unissued pending conversion of shares of acquired
companies.
(b) The authorized capital stock of Subsidiary consists of 1,000
shares of Subsidiary Common Stock, of which 100 shares are issued and
outstanding, which shares are owned beneficially and of record by Parent.
(c) Except as disclosed in the Parent SEC Reports (as defined in
Section 4.5) or in Section 4.2(a) or as otherwise contemplated by this
Agreement, as of the date hereof, there are no outstanding subscriptions,
options, calls, contracts, commitments, understandings, restrictions,
arrangements, rights or warrants, including any right of conversion or
exchange under any outstanding security, instrument or other agreement and
also including any rights plan or other anti-takeover agreement, obligating
Parent or any subsidiary of Parent to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of the capital stock of
Parent or obligating Parent or any subsidiary of Parent to grant, extend or
enter into any such agreement or commitment. Except as otherwise disclosed
in the Parent SEC Reports, there are no voting trusts, proxies or other
agreements or understandings to which Parent or any subsidiary of Parent is
a party or is bound with respect to the voting of any shares of capital
stock of Parent, other than voting agreements executed in connection with
this Agreement. The shares of Parent Common Stock issued to stockholders of
the Company in the Merger will be at the Effective Time duly authorized,
validly issued, fully paid and nonassessable and free of preemptive rights.
SECTION 4.3 Subsidiaries. Except as disclosed in Section 4.3 of the
disclosure schedule of Parent, dated as of the date hereof and signed by an
authorized officer of Parent ("Parent Disclosure Schedule"), each direct and
indirect subsidiary of Parent is duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has the
requisite power and authority to own, lease and operate its assets and
properties and to carry on its business as it is now being conducted and each
subsidiary of Parent is qualified to do business, and is in good standing, in
each jurisdiction in which the properties owned, leased or operated by it or the
nature of the business conducted by it makes such qualification necessary;
except in all cases where the failure to be so qualified and in good standing
will not have a Parent Material Adverse Effect. All of the outstanding shares of
capital stock of each corporate subsidiary of Parent are validly issued, fully
paid, nonassessable and free of preemptive rights and are owned directly or
indirectly by Parent free and clear of any liens, claims, encumbrances, security
interests, equities, charges and options of any nature whatsoever. There are no
subscriptions, options, warrants, rights, calls, contracts, voting trusts,
proxies or other commitments, understandings, restrictions or arrangements
relating to the issuance, sale, voting, transfer, ownership or other rights with
respect to any shares of capital stock of any corporate subsidiary of Parent,
including any right of conversion or exchange under any outstanding security,
instrument or agreement. The Subsidiary was formed for the sole purpose of
engaging in a transaction similar to those contemplated by this Agreement, has
conducted no other business activities and has conducted its operations only as
contemplated by this Agreement.
SECTION 4.4 Authority; Non-Contravention; Approvals.
(a) Parent and Subsidiary each have full corporate power and authority
to enter into this Agreement and, subject to the Parent Stockholders'
Approval (as defined in Section 8.3) and the Parent Required Statutory
Approvals (as defined in Section 4.4(c)), to consummate the transactions
contemplated hereby. This Agreement has been approved by the Boards of
Directors of Parent and Subsidiary and Parent in its capacity as sole
stockholder of Subsidiary, and no other corporate proceedings on the part
of Parent or Subsidiary are necessary to authorize the execution and
delivery of this Agreement or, except for the Parent Stockholders'
Approval, the consummation by Parent and Subsidiary of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
each of Parent and Subsidiary, and, assuming the due authorization,
execution and delivery hereof by the Company, constitutes a valid and
legally binding agreement of each of Parent and Subsidiary enforceable
against each of them in accordance with its terms, except that such
enforcement may be subject to
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(i) bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting or relating to enforcement of creditors' rights generally
and (ii) general equitable principles.
(b) The execution and delivery of this Agreement by each of Parent and
Subsidiary do not violate, conflict with or result in a breach of any
provision of, or constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under, or result in the
termination of, or accelerate the performance required by, or result in a
right of termination or acceleration under, or result in the creation of
any lien, security interest, charge or encumbrance upon any of the
properties or assets of Parent or any of its subsidiaries under any of the
terms, conditions or provisions of (i) the respective charters or by-laws
of Parent or any of its subsidiaries, (ii) any statute, law, ordinance,
rule, regulation, judgment, decree, order, injunction, writ, permit or
license of any court or governmental authority applicable to Parent or any
of its subsidiaries or any of their respective properties or assets or
(iii) any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, concession, contract, lease or other instrument,
obligation or agreement of any kind to which Parent or any of its
subsidiaries is now a party or by which Parent or any of its subsidiaries
or any of their respective properties or assets may be bound or affected.
The consummation by Parent and Subsidiary of the transactions contemplated
hereby will not result in any violation, conflict, breach, termination,
acceleration or creation of liens under any of the terms, conditions or
provisions described in clauses (i) through (iii) of the preceding
sentence, subject (x) in the case of the terms, conditions or provisions
described in clause (ii) above, to obtaining (prior to the Effective Time)
the Parent Required Statutory Approvals and the Parent Stockholders'
Approval and (y) in the case of the terms, conditions or provisions
described in clause (iii) above, to obtaining (prior to the Effective Time)
consents required from commercial lenders, lessors or other third parties.
Excluded from the foregoing sentences of this paragraph (b), insofar as
they apply to the terms, conditions or provisions described in clauses (ii)
and (iii) of the first sentence of this paragraph (b) (and whether
resulting from such execution and delivery or consummation), are such
violations, conflicts, breaches, defaults, terminations, accelerations or
creations of liens, security interests, charges or encumbrances that would
not have a Parent Material Adverse Effect.
(c) Except for (i) any filings by Parent required by the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), (ii) the filing of a proxy statement relating to the Parent
Stockholders' Approval (the "Proxy Statement") with the Securities and
Exchange Commission (the "SEC") pursuant to the Securities Exchange Act of
1934, as amended (the "Exchange Act") and any necessary filings with
various state securities commissions, (iii) the making of the Merger Filing
with the Secretary of State of the State of California in connection with
the Merger, (iv) any required filings with or approvals from The Nasdaq
Stock Market, Inc. ("Nasdaq"), and (v) any required filings with applicable
state regulatory authorities (the filings and approvals referred to in
clauses (i) through (v) are collectively referred to as the "Parent
Required Statutory Approvals"), no declaration, filing or registration
with, or notice to, or authorization, consent or approval of, any
governmental or regulatory body or authority is necessary for the execution
and delivery of this Agreement by Parent or Subsidiary or the consummation
by Parent or Subsidiary of the transactions contemplated hereby, other than
such declarations, filings, registrations, notices, authorizations,
consents or approvals which, if not made or obtained, as the case may be,
would not have a Parent Material Adverse Effect.
SECTION 4.5 Reports and Financial Statements. Since May 15, 1997, Parent
has filed with the SEC all forms, statements, reports and documents (including
all exhibits, post-effective amendments and supplements thereto) required to be
filed by it under each of the Securities Act, the Exchange Act and the
respective rules and regulations thereunder, all of which, as amended if
applicable, complied when filed in all material respects with all applicable
requirements of the appropriate act and the rules and regulations thereunder.
Parent has previously delivered or made available to the Company copies
(including all exhibits, post-effective amendments and supplements thereto) of
its (a) Annual Report on Form 10-K for the fiscal year ended December 31, 1997,
as filed with the SEC, (b) its proxy statement relating to its 1998 annual
meeting of stockholders, and (c) all other reports, including quarterly reports,
and registration statements filed by Parent with the SEC since May 15, 1997
(other than registration statements filed on Form S-8) (the documents referred
to in clauses (a), (b) and (c) filed prior to the date hereof are collectively
referred to as
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the "Parent SEC Reports"). As of their respective dates, the Parent SEC Reports
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The representation in the preceding sentence shall not apply to any
misstatement or omission in any Parent SEC Report filed prior to the date of
this Agreement which was superseded by a subsequent Parent SEC Report filed
prior to the date of this Agreement. The audited consolidated financial
statements of Parent included in the Parent's Annual Report on Form 10-K for the
year ended December 31, 1997 (collectively, the "Parent Financial Statements")
have been prepared in accordance with generally accepted accounting principles
("GAAP") applied on a consistent basis (except as may be indicated therein or in
the notes thereto) and fairly present the financial position of Parent and its
subsidiaries as of the dates thereof and the results of their operations and
changes in financial position for the periods then ended.
SECTION 4.6 Absence of Undisclosed Liabilities. Except as disclosed in the
Parent SEC Reports or as disclosed in Section 4.6 of the Parent Disclosure
Schedule, neither Parent nor any of its subsidiaries had at December 31, 1997,
or has incurred since that date and as of the date hereof, any liabilities or
obligations (whether absolute, accrued, contingent or otherwise) of any nature,
except: (a) liabilities, obligations or contingencies (i) which are accrued or
reserved against in the Parent Financial Statements or reflected in the notes
thereto or (ii) which were incurred after December 31, 1997, and were incurred
in the ordinary course of business and consistent with past practices; (b)
liabilities, obligations or contingencies which (i) would not have a Parent
Material Adverse Effect, or (ii) have been discharged or paid in full prior to
the date hereof; and (c) liabilities and obligations which are of a nature not
required to be reflected in the consolidated financial statements of Parent and
its subsidiaries prepared in accordance with GAAP consistently applied and which
were incurred in the ordinary course of business.
SECTION 4.7 Absence of Certain Changes or Events. Since the date of the
most recent Parent SEC Report that contains consolidated financial statements of
Parent, (i) there have been no events, changes, or occurrences which have had,
or are reasonably likely to have, a Parent Material Adverse Effect and (ii)
Parent and its subsidiaries have conducted their respective businesses in the
ordinary and usual course (excluding the incurrence of expenses in connection
with this Agreement and the transactions contemplated hereby).
SECTION 4.8 Litigation. Except as referred to in the Parent SEC Reports or
as disclosed in Section 4.8 of the Parent Disclosure Schedule, there are no
claims, suits, actions or proceedings pending or, to the knowledge of Parent,
threatened against, relating to or affecting Parent or any of its subsidiaries,
before any court, governmental department, commission, agency, instrumentality
or authority, or any arbitrator that seek to restrain the consummation of the
Merger or which would reasonably be expected, either alone or in the aggregate
with all such claims, actions or proceedings, to have a Parent Material Adverse
Effect. Except as referred to in the Parent SEC Reports, neither Parent nor any
of its subsidiaries is subject to any judgment, decree, injunction, rule or
order of any court, governmental department, commission, agency, instrumentality
or authority, or any arbitrator which prohibits or restricts the consummation of
the transactions contemplated hereby or would have a Parent Material Adverse
Effect.
SECTION 4.9 No Violation of Law. Except as disclosed in the Parent SEC
Reports, neither Parent nor any of its subsidiaries is in violation of, or has
been given notice or been charged with any violation of, any law, statute,
order, rule, regulation, ordinance, or judgment (including, without limitation,
any applicable environmental law, ordinance or regulation) of any governmental
or regulatory body or authority, except for violations which could not
reasonably be expected to have a Parent Material Adverse Effect. Except as
disclosed in the Parent SEC Reports, as of the date of this Agreement, to the
knowledge of Parent, no investigation or review by any governmental or
regulatory body or authority is pending or threatened involving Parent or its
subsidiaries, nor has any governmental or regulatory body or authority indicated
an intention to conduct the same. Parent has all permits, licenses, franchises,
grants, variances, exemptions, easements, orders, authorizations, consents,
certificates, identifications, registration numbers and approvals necessary to
own, lease and operate its properties and to conduct its business as presently
conducted (collectively, the "Parent Permits"), except for permits, licenses,
franchises, grants, variances, exemptions, easements, orders,
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authorizations, consents, certificates, identifications, registration numbers
and approvals the absence of which would not have a Parent Material Adverse
Effect.
SECTION 4.10 Compliance with Agreements. Except as disclosed in the Parent
SEC Reports, Parent and each of its subsidiaries are not in breach or violation
of or in default in the performance or observance of any term or provision of,
and no event has occurred which, with lapse of time or action by a third party,
could result in a default under (a) the respective charter, by-laws or other
similar organizational instruments of Parent or any of its subsidiaries or (b)
any contract, commitment, agreement, indenture, mortgage, loan agreement, note,
lease, bond, license, approval or other instrument to which Parent or any of its
subsidiaries is a party or by which any of them is bound or to which any of
their property is subject, other than, in the case of clause (b) of this Section
4.10, breaches, violations and defaults which would not have a Parent Material
Adverse Effect.
SECTION 4.11 Taxes.
(a) Parent and its subsidiaries have (i) duly filed with the
appropriate governmental authorities all Tax Returns (as defined in Section
4.11(c)) required to be filed by them for all periods ending on or prior to
December 31, 1997, other than those Tax Returns the failure of which to
file would not have a Parent Material Adverse Effect, and such Tax Returns
are true, correct and complete in all material respects and (ii) duly paid
in full or made adequate provision in accordance with generally accepted
accounting principles for the payment of all Taxes (as defined in Section
4.11(b)) for all past and current periods. All Tax Returns for periods
ending on or before the date of the most recent fiscal year end immediately
preceding the Effective Time or requests for extensions relating thereto
will be timely filed. The liabilities and reserves for Taxes reflected in
the Parent balance sheet included in the latest Parent SEC Report to cover
all Taxes for all periods ending at or prior to the date of such balance
sheet have been determined in accordance with generally accepted accounting
principles and there is no material liability for Taxes for any period
beginning after such date other than Taxes arising in the ordinary course
of business. There are no material liens for Taxes upon any property or
assets of Parent or any subsidiary thereof, except for liens for Taxes not
yet due or Taxes contested in good faith and adequately reserved against in
accordance with generally accepted accounting principles. There are no
unresolved issues of law or fact arising out of a notice of deficiency,
proposed deficiency or assessment from the Internal Revenue Service (the
"IRS") or any other governmental taxing authority with respect to Taxes of
the Parent or any of its subsidiaries which would reasonably be expected to
have a Parent Material Adverse Effect. Neither Parent nor its subsidiaries
has waived any statute of limitations in respect of a material amount of
Taxes or agreed to any extension of time with respect to a material Tax
assessment or deficiency other than waivers and extensions which are no
longer in effect. Neither Parent nor any of its subsidiaries is a party to
any agreement providing for the allocation or sharing of Taxes with any
entity that is not, directly or indirectly, a wholly-owned corporate
subsidiary of Parent other than agreements the consequences of which are
fully and adequately reserved for in the Parent Financial Statements.
Neither Parent nor any of its corporate subsidiaries has, with regard to
any assets or property held, acquired or to be acquired by any of them,
filed a consent to the application of Section 341(f) of the Code.
(b) For purposes of this Agreement, the term "Taxes" shall mean all
taxes, including, without limitation, income, gross receipts, excise,
property, sales, withholding, social security, occupation, use, service,
license, payroll, franchise, transfer and recording taxes, fees and
charges, windfall profits, severance, customs, import, export, employment
or similar taxes, charges, fees, levies or other assessments imposed by the
United States, or any state, local or foreign government or subdivision or
agency thereof, whether computed on a separate, consolidated, unitary,
combined or any other basis, and such term shall include any interest,
fines, penalties or additional amounts and any interest in respect of any
additions, fines or penalties attributable or imposed or with respect to
any such taxes, charges, fees, levies or other assessments.
(c) For purposes of this Agreement, the term "Tax Return" shall mean
any return, report or other document required to be supplied to a taxing
authority in connection with Taxes.
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SECTION 4.12 Environmental Matters.
(a) Except as disclosed in the Parent SEC Reports, (i) Parent and its
subsidiaries have conducted their respective businesses in compliance with
all applicable Environmental Laws (defined in Section 4.12(b)), including,
without limitation, having all permits, licenses and other approvals and
authorizations necessary for the operation of their respective businesses
as presently conducted, (ii) there are no civil, criminal or administrative
actions, suits, demands, claims, hearings, investigations or proceedings
pending or threatened, against Parent or any of its subsidiaries relating
to any violation, or alleged violation, of any Environmental Law, (iii)
neither Parent, its subsidiaries nor any of their respective properties are
subject to any liabilities or expenditures (fixed or contingent) relating
to any suit, settlement, court order, administrative order, regulatory
requirement, judgment or claim asserted or arising under any Environmental
Law, except for violations of the foregoing clauses (i) through (iii) that,
singly or in the aggregate, would not reasonably be expected to have a
Parent Material Adverse Effect.
(b) As used herein, "Environmental Law" means any federal, state,
local or foreign law, statute, ordinance, rule, regulation, code, license,
permit, authorization, approval, consent, legal doctrine, order, judgment,
decree, injunction, requirement or agreement with any governmental entity
relating to (x) the protection, preservation or restoration of the
environment (including, without limitation, air, water vapor, surface
water, groundwater, drinking water supply, surface land, subsurface land,
plant and animal life or any other natural resource) or to human health or
safety or (y) the exposure to, or the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling, production,
release or disposal of Hazardous Substances, in each case as amended and as
in effect on the Closing Date. The term "Environmental Law" includes,
without limitation, (i) the Federal Comprehensive Environmental Response
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act of 1972, the
Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource
Conservation and Recovery Act of 1976 (including the Hazardous and Solid
Waste Amendments thereto), the Federal Solid Waste Disposal Act and the
Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide
and Rodenticide Act, and the Federal Occupational Safety and Health Act of
1970, each as amended and as in effect during the term of this Agreement,
and (ii) any common law or equitable doctrine (including, without
limitation, injunctive relief and tort doctrines such as negligence,
nuisance, trespass and strict liability) that may impose liability or
obligations for injuries or damages due to, or threatened as a result of,
the presence of, effects of or exposure to any Hazardous Substance.
(c) As used herein, "Hazardous Substance" means any substance
presently or hereafter listed, defined, designated or classified as
hazardous, toxic, radioactive, or dangerous, or otherwise regulated, under
any Environmental Law. Hazardous Substance includes any substance to which
exposure is regulated by any government authority or any Environmental Law
including, without limitation, any toxic waste, pollutant, contaminant,
hazardous substance, toxic substance, hazardous waste, special waste,
industrial substance or petroleum or any derivative or by-product thereof,
radon, radioactive material, asbestos, or asbestos containing material,
urea formaldehyde foam insulation, lead or polychlorinated biphenyls.
SECTION 4.13 Non-competition Agreements. Neither Parent nor any subsidiary
of Parent is a party to any agreement which (i) purports to restrict or prohibit
in any material respect any of them from, directly or indirectly, engaging in
any business involving the acquisition, origination, sale or servicing of
equipment leases or the sale of new and used computer and technology equipment
or any other business currently engaged in by Parent or the Company or any
corporations affiliated with either of them, and (ii) would restrict or prohibit
the Company or any subsidiary of the Company (other than the Company and its
subsidiaries that are currently so restricted or prohibited) from engaging in
any such business. None of Parent's officers, directors or key employees is a
party to any agreement which, by virtue of such person's relationship with
Parent, restricts in any material respect Parent or any subsidiary of Parent
from, directly or indirectly, engaging in any of the businesses described above.
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SECTION 4.14 Title to Assets. Parent and each of its subsidiaries has good
and marketable title in fee simple to all its real property and good title to
all its leasehold interests and other properties as reflected in the most recent
balance sheet included in the Parent Financial Statements, except for such
properties and assets that have been disposed of in the ordinary course of
business since the date of such balance sheet, free and clear of all mortgages,
liens, pledges, charges or encumbrances of any nature whatsoever, except (i) the
lien for current taxes, payments of which are not yet delinquent, (ii) such
imperfections in title and easements and encumbrances, if any, as are not
substantial in character, amount or extent and do not materially detract from
the value or interfere with the present use of the property subject thereto or
affected thereby, or otherwise materially impair the Parent's business
operations (in the manner presently carried on by the Parent), or (iii) as
disclosed in the Parent SEC Reports, and except for such matters which could not
reasonably be expected to have a Parent Material Adverse Effect. All leases
under which Parent leases any real or personal property are in good standing,
valid and effective in accordance with their respective terms, and there is not,
under any of such leases, any existing default or event which with notice or
lapse of time or both would become a default other than failures to be in good
standing, valid and effective and defaults under such leases which in the
aggregate will not have a Parent Material Adverse Effect.
SECTION 4.15 Reorganization and Pooling of Interests. None of the Parent,
Subsidiary or, to their knowledge, any of their affiliates has taken or agreed
or intends to take any action or has any knowledge of any fact or circumstance
that (a) is reasonably likely to prevent the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code or (b) would
prevent the Merger from being treated for financial accounting purposes as a
"pooling of interests" in accordance with generally accepted accounting
principles and the rules, regulations and interpretations of the SEC (a "Pooling
Transaction"). As of the date hereof, other than directors and officers of
Parent, the Redstone Group, Ltd. and persons who control or are under common
control with the Redstone Group, Ltd. ("Redstone"), to the knowledge of Parent,
there are no "affiliates" of Parent, as that term is used in paragraphs (c) and
(d) of Rule 145 under the Securities Act of 1933, as amended (the "Securities
Act").
SECTION 4.16 Parent Stockholders' Approval. The only vote of
securityholders of Parent required for approval and adoption of this Agreement
and the Merger is an affirmative vote of a majority of the shares of Parent
Common Stock present in person or by proxy at a meeting of such stockholders and
entitled to vote thereat.
SECTION 4.17 Brokers and Finders. Except for the fees and expenses payable
to Friedman, Billings, Ramsey & Co., Inc., which fees are reflected in its
agreement with Parent, Parent has not entered into any contract, arrangement or
understanding with any person or firm which may result in the obligation of
Parent to pay any finder's fees, brokerage or agent commissions or other like
payments in connection with the transactions contemplated hereby. Except for the
fees and expenses paid or payable to Friedman, Billings, Ramsey & Co., Inc.,
there is no claim for payment by Parent of any investment banking fees, finder's
fees, brokerage or agent commissions or other like payments in connection with
the negotiations leading to this Agreement or the consummation of the
transactions contemplated hereby.
SECTION 4.18 Ownership of Company Common Stock. Neither Parent nor any of
its subsidiaries beneficially owns any shares of Company Common Stock as of the
date hereof.
SECTION 4.19 Proxy Statement. None of the information to be supplied by
Parent for inclusion in the Proxy Statement will, at the time of the mailing of
the Proxy Statement and any amendments or supplements thereto, and at the time
of the meeting of stockholders of Parent to be held in connection with the
transactions contemplated by this Agreement, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading.
SECTION 4.20 Certain Business Practices. Except as described in Section
4.20 of the Parent Disclosure Schedule none of Parent, or, to the knowledge of
Parent, any directors, officers, agents or employees of Parent (in their
capacities as such) have (a) used any funds for unlawful contributions, gifts,
entertainment or other unlawful purposes relating to political activity, (b)
made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns
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or violated any provision of the Foreign Corrupt Practices Act of 1977, as
amended, or (c) made any other unlawful payment.
SECTION 4.21 Fairness Opinion and Pooling Letter. The financial advisor of
Parent, Friedman, Billings, Ramsey & Co., Inc. has rendered an opinion to the
Board of Directors of Parent to the effect that the Exchange Ratio is fair from
a financial point of view to Parent; it being understood and acknowledged by the
Company that such opinion has been rendered for the benefit of the Board of
Directors of Parent and is not intended to, and may not, be relied upon by the
Company, its affiliates or their respective subsidiaries.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS
The Company and each of the stockholders, jointly and severally, represent
and warrant to Parent and Subsidiary that, as of the date hereof and as of the
Closing Date:
SECTION 5.1 Organization and Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of California and has the requisite corporate power and authority to own,
lease and operate its assets and properties and to carry on its business as it
is now being conducted. The Company is duly qualified to do business and is in
good standing in each jurisdiction listed on Section 5.1 of the Disclosure
Schedule of the Company dated as of the date hereof and signed by an authorized
officer of the Company (the "Company Disclosure Schedule"), which jurisdictions
represent every jurisdiction in which the properties owned, leased or operated
by it or the nature of the business conducted by it makes such qualification
necessary, except where the failure to be so qualified and in good standing
would not, when taken together with all other such failures, have a material
adverse effect on the business, operations, properties, assets, condition
(financial or other) or results of operations of the Company and its
subsidiaries, taken as a whole ("Company Material Adverse Effect"). For purposes
of this Agreement, Company Material Adverse Effect shall not be deemed to
include the impact of (a) actions and omissions by the Company (or any of its
subsidiaries) taken at the request of Parent or Subsidiary in contemplation of
the transactions contemplated hereby, and (b) the Merger and compliance with the
provisions of this Agreement on the financial condition or results of operations
of the Company. True, accurate and complete copies of the Company's Articles of
Incorporation and By-laws, in each case as in effect on the date hereof,
including all amendments thereto, have heretofore been delivered to Parent.
SECTION 5.2 Capitalization.
(a) The authorized capital stock of the Company consists of 7,500
shares of Company Common Stock. As of May 15, 1998, (i) 600 shares of
Company Common Stock were issued and outstanding, all of which were duly
authorized and validly issued and are fully paid, nonassessable and free of
preemptive rights, (ii) 350 shares of Company Common Stock were held in the
treasury of the Company, and (iii) 150 shares of Company Common Stock were
reserved for issuance upon exercise of options issued and outstanding
pursuant to the Company's existing stock option plans, all of which stock
option plans are listed in Section 5.2(a) of the Company Disclosure
Schedule. The Company has no outstanding bonds, debentures, notes or other
obligations the holders of which have the right to vote (or which are
convertible into or exercisable for securities having the right to vote)
with the stockholders of the Company on any matter. Assuming the exercise
of all outstanding options, warrants or rights to purchase Company Common
Stock, as of May 15, 1998, there would be 750 shares of Company Common
Stock issued and outstanding.
(b) Except as disclosed in Section 5.2(b) of the Company Disclosure
Schedule or in Section 5.2(a), as of the date hereof there are no
outstanding subscriptions, options, calls, contracts, commitments,
understandings, restrictions, arrangements, rights or warrants, including
any right of conversion or exchange under any outstanding security,
instrument or other agreement, obligating the Company or any subsidiary of
the Company to issue, transfer, deliver or sell, or cause to be issued,
transferred, delivered or sold, any shares of the capital stock of the
Company or obligating the Company or any subsidiary of the Company to
grant, extend or enter into any such agreement or commitment.
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Section 5.2(b) of the Company Disclosure Schedule sets forth the exercise
price, vesting schedule and expiration date of each such option, call,
contract, commitment, understanding, arrangement, right or warrant. There
are no voting trusts, proxies or other agreements or understandings to
which the Company or any subsidiary of the Company is a party or is bound
with respect to the voting of any shares of capital stock of the Company.
(c) There are no agreements which require the Company to register any
shares of Company Common Stock under the Securities Act or which would
require the Parent to register any shares of Parent Common Stock under the
Securities Act upon or after the Closing.
SECTION 5.3 Subsidiaries. Each direct and indirect subsidiary of the
Company is duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation and has the requisite power and authority
to own, lease and operate its assets and properties and to carry on its business
as it is now being conducted and each subsidiary of the Company is qualified to
do business, and is in good standing, in each jurisdiction in which the
properties owned, leased or operated by it or the nature of the business
conducted by it makes such qualification necessary; except in all cases where
the failure to be so qualified and in good standing will not have a Company
Material Adverse Effect. All of the outstanding shares of capital stock of each
corporate subsidiary of the Company are validly issued, fully paid,
nonassessable and free of preemptive rights and are owned directly or indirectly
by the Company free and clear of any liens, claims, encumbrances, security
interests, equities, charges and options of any nature whatsoever. There are no
subscriptions, options, warrants, rights, calls, contracts, voting trusts,
proxies or other commitments, understandings, restrictions or arrangements
relating to the issuance, sale, voting, transfer, ownership or other rights with
respect to any shares of capital stock of any corporate subsidiary of the
Company, including any right of conversion or exchange under any outstanding
security, instrument or agreement.
SECTION 5.4 Authority; Non-Contravention; Approvals.
(a) The Company has all requisite corporate power and authority to
enter into this Agreement and any Transaction Documents (hereinafter
defined) to which it is a party and to consummate the transactions
contemplated hereby and thereby. This Agreement has been approved by the
Board of Directors and each of the holders of outstanding capital stock of
the Company, and no other corporate proceedings on the part of the Company
are necessary to authorize the execution and delivery of this Agreement or
the consummation by the Company of the transactions contemplated hereby.
This Agreement has been executed by each holder of outstanding capital
stock of the Company and each such holder has waived its right to dissent
from the Merger and receive payment of the appraised value of such shares
of capital stock in accordance with the provisions of Section 1300 of the
GCL. This Agreement and the Transaction Documents to which the Company is a
party have been, or upon execution and delivery will be, duly executed and
delivered by the Company, and, constitute, or upon execution and delivery
will constitute, valid and legally binding obligations of the Company,
enforceable against the Company in accordance with their respective terms,
except that such enforcement may be subject to (a) bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting or relating to
enforcement of creditors' rights generally and (b) general equitable
principles. As used in this Agreement with respect to any party hereto,
"Transaction Documents" means any of the following documents to which such
person or entity is a party: (a) the Escrow Agreement; (b) the Employment
Termination Agreement (as defined in Section 9.3(e) hereof); (c) the
employment agreements referred to in Section 9.3(e); and (d) all other
documents to be executed by any of the Company, any of the Stockholders,
Parent or Subsidiary in connection with the consummation of the
transactions contemplated by this Agreement.
(b) The execution and delivery by the Company of this Agreement and
the Transaction Documents to which the Company is a party do not violate,
conflict with or result in a breach of any provision of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under or result in the termination of, or accelerate
the performance required by or result in a right of termination of
acceleration under (whether as a result of a change of control of the
Company or otherwise as a result of this Agreement), or result in the
creation of any lien, security interest, charge or
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encumbrance upon any of the properties or assets of the Company or any of
its subsidiaries, or result in the loss of any benefit or give any person
the right to require any security to be repurchased under, any of the
terms, conditions or provisions of (i) the respective charters or by-laws
of the Company or any of its subsidiaries, (ii) any statute, law,
ordinance, rule, regulation, judgment, decree, order, injunction, writ,
permit or license of any court or governmental authority applicable to the
Company or any of its subsidiaries or any of their respective properties or
assets, or (iii) any note, bond, mortgage, indenture, deed of trust,
license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which the Company or any
of its subsidiaries is now a party or by which the Company or any of its
subsidiaries or any of their respective properties or assets may be bound
or affected. The consummation by the Company of the transactions
contemplated by this Agreement and the Transaction Documents to which the
Company is a party will not result in any violation, conflict, breach,
termination, acceleration or creation of liens under any of the terms,
conditions or provisions described in clauses (i) through (iii) of the
preceding sentence, subject (x) in the case of the terms, conditions or
provisions described in clause (ii) above, to obtaining (prior to the
Effective Time) the Company Required Statutory Approvals and (y) in the
case of the terms, conditions or provisions described in clause (iii)
above, to obtaining (prior to the Effective Time) consents required from
commercial lenders, lessors or other third parties as specified in Section
5.4(b) of the Company Disclosure Schedule. Excluded from the foregoing
sentences of this paragraph (b), insofar as they apply to the terms,
conditions or provisions described in clauses (ii) and (iii) of the first
sentence of this paragraph (b) (and whether resulting from such execution
and delivery or consummation), are such violations, conflicts, breaches,
defaults, terminations, accelerations or creations of liens, security
interests, charges or encumbrances that would not, in the aggregate, have a
Company Material Adverse Effect.
(c) Except for (i) any filings by the Company required by the HSR Act,
(ii) the making of the Merger Filing with the Secretary of State of the
State of California in connection with the Merger and (iii) the required
filings with or approvals from state regulatory authorities listed in
Section 5.4(c) of the Company Disclosure Schedule (the filings and
approvals referred to in clauses (i) through (iii) are collectively
referred to as the "Company Required Statutory Approvals"), no declaration,
filing or registration with, or notice to, or authorization, consent or
approval or permit of, any governmental or regulatory body or authority
("Governmental Entity") is necessary for the execution and delivery of this
Agreement or any Transaction Document by the Company or the consummation by
the Company of the transactions contemplated hereby or thereby, other than
such declarations, filings, registrations, notices, authorizations,
consents or approvals which, if not made or obtained, as the case may be,
would not, in the aggregate, prevent or delay consummation of any of the
transactions contemplated hereby or otherwise prevent the Company from
performing its obligations under this Agreement or have a Company Material
Adverse Effect.
SECTION 5.5 Financial Statements. The Company has delivered to Parent
copies of the audited consolidated balance sheets of the Company and its
subsidiaries as of May 31, 1995, June 30, 1996 and June 30, 1997, together with
the audited consolidated statements of income and cash flows of the Company and
its subsidiaries for the years then ended, and the notes thereto, accompanied by
the reports thereon of Ernst & Young LLP, independent public accountants and
unaudited consolidated balance sheets of the Company and its subsidiaries as of
March 31, 1998, together with unaudited consolidated statements of income and
cash flows of the Company and its subsidiaries for the period then ended, and
the notes thereto (such audited and unaudited consolidated financial statements
collectively being referred to as the "Company Financial Statements"). Except as
disclosed in Section 5.5 of the Company Disclosure Schedule, the Company
Financial Statements, including the notes thereto, were prepared in accordance
with GAAP applied on a consistent basis throughout the periods covered thereby
(except to the extent disclosed therein or required by changes in GAAP) and
fairly present the financial position of the Company and its subsidiaries at the
dates thereof and the results of operations and changes in financial position of
the Company and its subsidiaries for the respective periods indicated.
SECTION 5.6 Absence of Undisclosed Liabilities. Except as disclosed in
Section 5.6 of the Company Disclosure Schedule, neither the Company nor any of
its subsidiaries had at December 31, 1997, or has
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incurred since that date and as of the date hereof, any liabilities or
obligations (whether absolute, accrued, fixed, contingent or otherwise) of any
nature, except (a) liabilities, obligations or contingencies (i) which are
accrued or reserved against in the Company Financial Statements or reflected in
the notes thereto or (ii) which were incurred after December 31, 1997, and were
incurred in the ordinary course of business and consistent with past practices,
and (b) liabilities and obligations which are of a nature not required to be
reflected in the consolidated financial statements of the Company and its
subsidiaries prepared in accordance with GAAP consistently applied and which
were incurred in the ordinary course of business.
SECTION 5.7 Absence of Certain Changes or Events. Since December 31, 1997,
the Company and its subsidiaries have conducted their respective businesses in
the ordinary and usual course (excluding the incurrence of expenses in
connection with this Agreement and the transactions contemplated hereby). Except
as disclosed in Section 5.7 of the Company Disclosure Schedule, since December
31, 1997, there has not been (i) any event, change, circumstance, fact or
occurrence (whether or not covered by insurance) which has had, or is reasonably
likely to have, a Company Material Adverse Effect, (ii) any material change by
the Company in its accounting methods, principles or practices, (iii) any entry
by the Company into any agreement, commitment or transaction material to the
Company, except in the ordinary course of business and consistent with past
practice or except in connection with the negotiation and execution and delivery
of this Agreement and the Transaction Documents, (iv) any declaration, setting
aside or payment of any dividend or distribution in respect of any capital stock
of the Company or any redemption, purchase or other acquisition of any of the
Company's securities, (v) other than pursuant to the Company Plans (as
hereinafter defined) or as required by law, any increase in, amendment to, or
establishment of any bonus, insurance, severance, deferred compensation,
pension, retirement, profit sharing, stock option, stock purchase or other
employee benefit plan, (vi) granted any general increase in compensation, bonus
or other benefits payable to the employees of the Company, except for increases
occurring in the ordinary course of business in accordance with its customary
practice, (vii) paid any bonus to the employees of the Company except in the
ordinary course and consistent with past practice, (viii) any incurrence of
indebtedness for borrowed money or assumption or guarantee of indebtedness for
borrowed money by the Company, or the grant of any lien on the material assets
of the Company to secure indebtedness for borrowed money, (ix) any sale or
transfer of any material assets of the Company other than in the ordinary course
of business and consistent with past practice, or (x) any loan, advance or
capital contribution to or investment in any person by the Company.
SECTION 5.8 Litigation. Except as disclosed in Section 5.8 of the Company
Disclosure Schedule, there are no claims, suits, inquiries, actions, judicial or
administrative proceedings, grievances or arbitrations pending or, to the
knowledge of the Company or the Stockholders, threatened against, relating to or
affecting the Company or any of its subsidiaries or relating to the transactions
contemplated by this Agreement and the Transaction Documents, before any court,
governmental department, commission, agency, instrumentality or authority, or
any arbitrator. Except as disclosed in Section 5.8 of the Company Disclosure
Schedule, neither the Company nor any of its subsidiaries nor any of their
respective properties or assets is subject to any judgment, decree, injunction,
rule or order of any court, governmental department, commission, agency,
instrumentality or authority or arbitrator.
SECTION 5.9 Proxy Statement. None of the information to be supplied by the
Company or its subsidiaries for inclusion in the Proxy Statement will, at the
time of the mailing of the Proxy Statement and any amendments or supplements
thereto, and at the time of the meeting of stockholders of Parent to be held in
connection with the transactions contemplated by this Agreement, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they are made, not misleading.
SECTION 5.10 Permits; Compliance With Law. The Company and its
subsidiaries have all permits, licenses, franchises, grants, variances,
exemptions, easements, orders, authorizations, consents, certificates,
identifications, registration numbers and approvals necessary to own, lease and
operate their respective properties and to conduct their businesses as presently
conducted (collectively, the "Company Permits"), except for permits, licenses,
franchises, grants, variances, exemptions, easements, orders, authorizations,
consents, certificates, identifications, registration numbers and approvals the
absence of which would not have a Company Material Adverse Effect. Section 5.10
of the Company Disclosure Schedule sets forth a list of all
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Company Permits and the jurisdiction issuing the same, all of which Company
Permits are in good standing and not subject to meritorious challenge. The
Company and its subsidiaries are not in violation of the terms of any Company
Permit, except for delays in filing reports or violations which would not have a
Company Material Adverse Effect. Section 5.10 of the Company Disclosure Schedule
also sets forth, as of the date of this Agreement, all actions, proceedings or
investigations, pending or, to the knowledge of the Company and the
Stockholders, threatened against the Company that could reasonably be expected
to result in the loss, revocation, suspension or cancellation of a Company
Permit, except for any suspension, loss or revocation that could not reasonably
be expected to have a Company Material Adverse Effect. Except as disclosed in
Section 5.10 of the Company Disclosure Schedule, neither the Company nor any of
its subsidiaries is in violation of, or has been given notice or been charged
with any violation of, any Company Permit or any law or statute, or any order,
rule, regulation, ordinance, decree or judgment of any governmental or
regulatory body or authority, except for violations which, in the aggregate,
could not reasonably be expected to have a Company Material Adverse Effect.
Except as disclosed in Section 5.10 of the Company Disclosure Schedule, as of
the date of this Agreement, no investigation or review by any governmental or
regulatory body or authority is pending or, to the knowledge of the Company or
the Stockholders, threatened involving the Company or its subsidiaries, nor has
any governmental or regulatory body or authority indicated an intention to
conduct the same.
SECTION 5.11 Contracts and Agreements. The contracts and agreements listed
in Section 5.11 of the Company Disclosure Schedule constitute all of the written
and oral contracts, commitments, leases and other agreements (including, without
limitation, promissory notes, loan agreements and other evidences of
indebtedness) to which the Company is a party or by which any of its properties
are bound with respect to which the obligations of or the benefits to be
received by the Company could reasonably be expected to have a value in excess
of $100,000 in any consecutive 12-month period and all real property leases or
sub-leases to which the Company is a party (each a "Company Material Contract").
Except as disclosed in Section 5.11 of the Company Disclosure Schedule, the
Company and each of its subsidiaries are not in breach or violation of or in
default in the performance or observance of any term or provision of, and no
event has occurred which, with lapse of time or action by a third party, could
result in a default under, (a) the respective charter, by-laws or similar
organizational instruments of the Company or any of its subsidiaries, (b) any
Company Material Contract or (c) any contract, commitment, agreement, indenture,
mortgage, loan agreement, note, lease, bond, license, approval or other
instrument to which the Company or any of its subsidiaries is a party or by
which any of them is bound or to which any of their property is subject, the
breach, violation or default of or under which would have a Company Material
Adverse Effect, and the Company has not waived any right under or received any
notice of default or termination under or assigned or otherwise transferred any
rights under any such contract, commitment, agreement, indenture, mortgage, loan
agreement, note, lease, bond, license, approval or other instrument.
SECTION 5.12 Taxes.
(a) The Company and its subsidiaries have (i) duly filed with the
appropriate governmental authorities all Tax Returns required to be filed
by them, and all such Tax Returns are true, correct and complete in all
material respects, and (ii) duly and timely paid in full or made adequate
provision in accordance with generally accepted accounting principles for
the payment of all Taxes for all past and current periods. All Tax Returns
for periods ending on or before the date of the most recent fiscal year end
immediately preceding the Effective Time or requests for extensions
relating thereto will be timely filed by the Company. With respect to any
period for which Taxes are not yet due with respect to the Company and its
subsidiaries, the Company has made due and sufficient current accruals for
such Taxes in accordance with GAAP in the Company Financial Statements and
there is no material liability for Taxes for any period beginning after
December 31, 1997 other than Taxes arising in the ordinary course of
business. The Company has withheld and paid all material Taxes required by
all applicable laws to be withheld or paid in connection with any amounts
paid or owing to any employee, creditor, independent contractor,
stockholder or other third party.
(b) There are no material liens for Taxes upon any property or asset
of the Company or any subsidiary thereof, except for liens for Taxes not
yet due or Taxes contested in good faith and adequately
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reserved against in accordance with GAAP. There are no unresolved issues of
law or fact arising out of a notice of deficiency, proposed deficiency or
assessment from the IRS or any other governmental taxing authority with
respect to Taxes of the Company or any of its subsidiaries and all material
deficiencies of Taxes have been paid, fully settled or adequately provided
for in the Company Financial Statements.
(c) There are no outstanding agreements, waivers or arrangements
extending the statutory period of limitation applicable to any claim for,
or the period for the collection or assessment of, Taxes due from or with
respect to the Company or any of its subsidiaries, for any taxable period.
Except as disclosed in Section 5.5 of the Company Disclosure Schedule, no
audit or other proceeding by any court, governmental or regulatory
authority, or similar person is pending in regard to any Taxes due from or
with respect to the Company or any of its subsidiaries, other than normal
and routine audits by nonfederal governmental authorities. The Company has
not received written notice that any assessment of material Taxes is
proposed against the Company or any of its subsidiaries or any of its
assets.
(d) No consent to the application of Section 341(f)(2) of the Code (or
any predecessor provision) has been made or filed by or with respect to the
Company or any of its assets. Except as disclosed in Section 5.5 of the
Company Disclosure Schedule, the Company has not agreed to make any
material adjustment pursuant to Section 481(a) of the Code (or any
predecessor provision) by reason of any change in any accounting method,
and there is no application pending with any taxing authority requesting
permission for any changes in any accounting method of the Company which,
in each respective case, will or would reasonably cause the Company to
include any material adjustment in taxable income for any taxable period
(or portion thereof) ending after the Closing Date. The Company is not, nor
has it been during the five years preceding the date hereof, a "US real
property holding corporation" within the meaning of Section 897(c)(2) of
the Code.
(e) The Company is not a party to, is not bound by and has no
obligation under, any Tax sharing agreement, Tax allocation agreement or
similar contract, agreement or arrangement.
(f) The Company has not executed or entered into with the IRS or any
taxing authority, a closing agreement pursuant to Section 7121 of the Code
or any similar provision of state, local, foreign or other income tax law,
which will require any increase in taxable income or alternative minimum
taxable income, or any reduction in tax credits for, the Company for any
taxable period ending after the Closing Date.
(g) There are no requests from any taxing authority for information
relating to Taxes of the Company and no material reassessments (for
property or ad valorem tax purposes) of any assets or any property owned or
leased by the Company have been proposed in written form.
(h) Neither the Company nor any Stockholder has taken any action or
has any knowledge of any fact or circumstance that is reasonably likely to
prevent the Merger from qualifying as a reorganization within the meaning
of Section 368(a) of the Code.
SECTION 5.13 Employee Benefit Plans; ERISA.
(a) Section 5.13 of the Company Disclosure Schedule contains a list of
the names and annual rates of compensation of the employees of the Company
whose annual rates of compensation during the fiscal year ending December
31, 1997 (including base salary, bonuses, commissions and incentive pay)
exceeded $50,000 and provides a description of each of the following which
is sponsored, maintained or contributed to by the Company for the benefit
of the employees of the Company, former employees of the Company, directors
of the Company, former directors of the Company, or any agents, consultants
or similar representatives providing services to or for the Company, or has
been so sponsored, maintained or contributed to within six years prior to
the Closing Date for the benefit of such individuals:
(i) each "employee benefit plan," as such term is defined in
Section 3(3) of the Employment Income and Retirement Security Act of
1974, as amended ("ERISA") (including, but not limited to, employee
benefit plans, such as foreign plans, which are not subject to the
provisions of ERISA (each, a "Company Plan");
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(ii) each personnel policy, stock option plan, stock purchase plan,
stock appreciation right, phantom stock plan, collective bargaining
agreement, bonus plan or arrangement, incentive award plan or
arrangement, vacation policy, severance pay plan, policy or agreement,
deferred compensation agreement or arrangement, executive compensation
or supplemental income arrangement, consulting agreement, employment
agreement and each other employee benefit plan, agreement, arrangement,
program, practice or understanding which is not described in Section
5.13(a)(i) (individually, a "Benefit Program or Agreement" and,
collectively, the "Benefit Programs and Agreements").
(b) True, correct and complete copies of each of the Company Plans,
related trusts, insurance or group annuity contracts and each other funding
or financing arrangement relating to any Company Plan, including all
amendments thereto, have been furnished to Parent. There has also been
furnished to Parent, with respect to each Company Plan required to file
such report and description, the most recent report on Form 5500 and the
summary plan description. True, correct and complete copies or descriptions
of each Benefit Program or Agreement have also been furnished to Parent. A
schedule of employer expenses with respect to each Company Plan and Benefit
Program or Agreement for the current plan year and past plan year has been
furnished to Parent along with any administration agreement associated with
any Company Plan. Parent has also been furnished the recent actuarial
report or valuation for each Company Plan subject to Title IV of ERISA.
Additionally, the most recent determination letter from the IRS for each of
the Company Plans intended to be qualified under Section 401 of the Code,
and any outstanding determination letter application for such plans have
been furnished.
(c) (i) The Company has substantially performed all obligations, whether
arising by operation of law or by contract, required to be performed by
it in connection with the Company Plans and the Benefit Programs or
Agreements, and to the knowledge of the Company and the Stockholders
there have been no material defaults or violations by any other party to
the Company Plans or Benefit Programs and Agreements;
(ii) All reports and disclosures relating to the Company Plans
required to be filed by the Company with or furnished to governmental
agencies, Company Plan participants or Company Plan beneficiaries have
been filed or furnished in accordance with applicable law in a timely
manner, and each Company Plan and each Benefit Program or Agreement has
been administered in substantial compliance with its governing
documents;
(iii) Each of the Company Plans intended to be qualified under
Section 401 of the Code satisfies the requirements of such section and
has received a favorable determination letter from the IRS regarding
such qualified status and has not, since receipt of the most recent
favorable determination letter, been amended or operated in a way which
would adversely affect such qualified status;
(iv) Each Company Plan and Benefit Program or Agreement has been
administered in substantial compliance with its terms, the applicable
provisions of ERISA, the Code and all other applicable laws and the
terms of all applicable collective bargaining agreements;
(v) There are no actions, suits or claims pending (other than
routine claims for benefits) or, to the knowledge of the Company or the
Stockholders, threatened against, or with respect to, any of the Company
Plans or Benefit Programs and Agreements or their assets;
(vi) All contributions required to be made to the Company Plans
pursuant to their terms and provisions have been made timely;
(vii) As to any Company Plan subject to Title IV of ERISA, there
has been no event or condition which presents the risk of plan
termination, no accumulated funding deficiency, whether or not waived,
within the meaning of Section 302 of ERISA or Section 412 of the Code
has been incurred, no reportable event within the meaning of Section
4043 of ERISA (for which the disclosure requirements of Regulation
Section 4043.1 et seq., promulgated by the Pension Benefit
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Guaranty Corporation ("PBGC") have not been waived) has occurred, no
notice of intent to terminate the Company Plan has been given under
Section 4041 of ERISA, no proceeding has been instituted under Section
4042 of ERISA to terminate the Company Plan, no liability to the PBGC
has been incurred, and the assets of the Company Plan equal or exceed
the actuarial present value of the benefit liabilities, within the
meaning of Section 4041 of ERISA, under the Company Plan, based upon
reasonable actuarial assumptions and the asset valuation principles
established by the PBGC;
(viii) As to any Company Plan intended to be qualified under
Section 401 of the Code, there has been no termination or partial
termination of the Company Plan within the meaning of Section 411(d)(3)
of the Code;
(ix) No act, omission or transaction has occurred which would
result in imposition on the Company of (1) breach of fiduciary duty
liability damages under Section 409 of ERISA, (2) a civil penalty
assessed pursuant to subsections (c), (i) or (l) of Section 502 of ERISA
or (3) a Tax imposed pursuant to Chapter 43 of Subtitle D of the Code;
(x) There is no matter pending (other than routine qualification
determination filings) with respect to any of the Company Plans before
the IRS, the Department of Labor or the PBGC;
(xi) Each trust funding a Company Plan, which trust is intended to
be exempt from federal income taxation pursuant to Section 501(c)(9) of
the Code, satisfies the requirements of such section and has received a
favorable determination letter from the IRS regarding such exempt status
and has not, since receipt of the most recent favorable determination
letter, been amended or operated in a way that would adversely affect
such exempt status;
(xii) With respect to any employee benefit plan, within the meaning
of Section 3(3) of ERISA, which is not listed in Section 5.13 of the
Company Disclosure Schedule but which is sponsored, maintained or
contributed to, or has been sponsored, maintained or contributed to
within six years prior to the Effective Time, by any corporation, trade,
business or entity under common control with the Company, within the
meaning of Section 414(b), (c) or (m) of the Code or Section 4001 of
ERISA ("Commonly Controlled Entity"), (1) no withdrawal liability,
within the meaning of Section 4201 of ERISA, has been incurred, which
withdrawal liability has not been satisfied, (2) no liability to the
PBGC has been incurred by any Commonly Controlled Entity, which
liability has not been satisfied, (3) no accumulated funding deficiency,
whether or not waived, within the meaning of Section 302 of ERISA or
Section 412 of the Code has been incurred, and (4) all contributions
(including installments) to such plan required by Section 302 of ERISA
and Section 412 of the Code have been timely made; and
(xiii) Except as otherwise set forth in Section 5.13 of the Company
Disclosure Schedule, the execution and delivery of this Agreement and
the Transactions Documents and the consummation of the transactions
contemplated hereby and thereby will not (1) require the Company to make
a larger contribution to, or pay greater benefits under, any Company
Plan or Benefit Program or Agreement than it otherwise would or (2)
create or give rise to any additional vested rights or service credits
under any Company Plan or Benefit Program or Agreement.
(d) Except as otherwise set forth in Section 5.13 of the Company
Disclosure Schedule, the Company is not a party to any agreement, nor has
it established any policy or practice, requiring it to make a payment or
provide any other form of compensation or benefit to any person performing
services for the Company upon termination of such services which would not
be payable or provided in the absence of the consummation of the
transactions contemplated by this Agreement.
(e) The Company is not a party to any agreement, contract, arrangement
or plan which has, will or may provide payments to any officer, employee,
stockholder, or highly compensated individual which will be "parachute
payments" under Section 280G of the Code.
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(f) Except as otherwise set forth in Section 5.13 of the Company
Disclosure Schedule, the Company is not a party to or bound by any
employment contract or other employee benefit arrangements with "change of
control," severance or similar provisions.
(g) Each Company Plan which is an "employee welfare benefit plan," as
such term is defined in section 3(1) of ERISA, may be unilaterally amended
or terminated in its entirety without liability except as to benefits
accrued thereunder prior to such amendment or termination.
(h) No Company Plan or Benefit Program or Agreement provides retiree
medical or retiree life insurance benefits to any person and the Company is
not contractually or otherwise obligated (whether or not in writing) to
provide any person with life insurance or medical benefits upon retirement
or termination of employment, other than as required by the provisions of
Sections 601 through 608 of ERISA and Section 4980B of the Code.
(i) As to each Company Plan described in Section 5.13 of the Company
Disclosure Schedule, which is a multiemployer plan within the meaning of
Section 3(37) of ERISA, Section 5.13 of the Company Disclosure Schedule
accurately describes the dollar amount of withdrawal liability which would
be owed by the Company to such Company Plan if the Company ceased
contributing to such Company Plan immediately after consummation of the
transactions contemplated by this Agreement.
(j) Except as set forth in Section 5.13 of the Company Disclosure
Schedule, no Company Plan or Benefit Program or Agreement provides that
payments pursuant to such Company Plan or Benefit Program or Agreement may
be made in securities of the Company or a Commonly Controlled Entity, nor
does any trust maintained pursuant to any Company Plan or Benefit Program
or Agreement hold any securities of the Company or a Commonly Controlled
Entity.
SECTION 5.14 Labor Controversies. The Company is not a party to any
collective bargaining agreement. The Company has not agreed to recognize any
union or other collective bargaining representative, nor has any union or other
collective bargaining representative been certified as the exclusive bargaining
representative of any of its employees. There is no question concerning
representation as to any collective bargaining representative concerning
employees of the Company, and to the Company's knowledge, no labor union or
representative thereof claims to or is seeking to represent employees of the
Company. No union organizational campaign or representation petition is
currently pending with respect to any of the employees of the Company. There is
no labor strike or labor dispute, slowdown, work stoppage or lockout pending or,
to the knowledge of the Company and the Stockholders, threatened against or
affecting the Company, and the Company has not experienced any labor strike,
slowdown, work stoppage or lockout since January 1, 1995. The Company (i) is,
and has always been since January 1, 1995, in substantial compliance with all
applicable laws regarding labor and employment practices, including, without
limitation, applicable laws relating to terms and conditions of employment,
equal employment opportunity, employee compensation, employee benefits,
affirmative action, wages and hours, plant closing and mass layoff, occupational
safety and health, immigration, workers' compensation, disability, unemployment
compensation, whistle blower laws or other employment or labor relations laws,
except where the failure to be in substantial compliance would not have a
Company Material Adverse Effect, (ii) is not engaged, nor has it since January
1, 1995 engaged, in any unfair labor practices, and has no, and has not had
since January 1, 1995 any, unfair labor practice charges or complaints before
the National Labor Relations Board pending or, to the knowledge of the Company
and the Stockholders, threatened against it, (iii) has no, and has not had since
January 1, 1995 any, grievances, arbitrations, or other proceedings arising or
asserted to arise under any collective bargaining agreement pending or, to the
knowledge of the Company and the Stockholders threatened, against it and (iv)
has no, and has not had since January 1, 1995 any, charges, complaints, or
proceedings before the Equal Employment Opportunity Commission, Department of
Labor or any other Governmental Entity responsible for regulating labor or
employment practices, pending, or, to the knowledge of the Company and the
Stockholders, threatened against it.
SECTION 5.15 Environmental Matters. The Company does not hold, and neither
the Company nor any of its subsidiaries has ever held, any ownership interest in
any real property. The Company and its subsidiaries have conducted their
respective businesses and operations in compliance with all applicable
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Environmental Laws, including, without limitation, having all permits, licenses
and other approvals and authorizations necessary for the operation of their
respective businesses as presently conducted. None of the properties leased or
operated by the Company or any of its subsidiaries contain any Hazardous
Substance as a result of any activity of the Company or any of its subsidiaries
in amounts exceeding the levels permitted by applicable Environmental Laws.
Since January 1, 1995, neither the Company nor any of its subsidiaries has
received any notices, demand letters or requests for information from any
federal, state, local or foreign governmental entity indicating that the Company
or any of its subsidiaries may be in violation of, or liable under, any
Environmental Law in connection with the ownership or operation of their
businesses. There are no civil, criminal or administrative actions, suits,
demands, claims, hearings, investigations or proceedings pending or threatened,
against the Company or any of its subsidiaries relating to any violation, or
alleged violation, of any Environmental Law. No Hazardous Substance has been
disposed of, released or transported in violation of any applicable
Environmental Law from any properties leased or operated by the Company or any
of its subsidiaries as a result of any activity of the Company or any of its
subsidiaries during the time such properties were leased or operated by the
Company or any of its subsidiaries. Neither the Company, its subsidiaries nor
any of their respective properties are subject to any material liabilities or
expenditures (fixed or contingent) relating to any suit, settlement, court
order, administrative order, regulatory requirement, judgment or claim asserted
or arising under any Environmental Law.
SECTION 5.16 Non-competition Agreements. Neither the Company nor any
subsidiary of the Company is a party to any agreement which (i) purports to
restrict or prohibit in any material respect any of them or any corporation
affiliated with any of them from, directly or indirectly, engaging in any
business involving the acquisition, origination, sale or servicing of equipment
leases or the sale of new and used computer and technology equipment, or any
other material business currently engaged in by Parent or the Company or any
corporations affiliated with either of them and (ii) would restrict or prohibit
Parent or any subsidiary of the Parent (other than the Company and its
subsidiaries that are currently so restricted or prohibited) from engaging in
such business. None of the Company's officers, directors or key employees is a
party to any agreement which, by virtue of such person's relationship with the
Company, restricts in any material respect the Company or any subsidiary or
affiliate of the Company from, directly or indirectly, engaging in any of the
businesses described above.
SECTION 5.17 Title to Assets. Except as disclosed in Section 5.17 of the
Company Disclosure Schedule, the Company and each of its subsidiaries has good
and marketable title in fee simple to all its real property and good title to
all its leasehold interests and other properties and assets, whether tangible or
intangible, real, personal or mixed, as reflected in the most recent balance
sheet included in the Company Financial Statements, except for properties and
assets that have been disposed of in the ordinary course of business since the
date of such balance sheet, free and clear of all mortgages, liens, pledges,
charges or encumbrances of any nature whatsoever, except (i) the lien for
current taxes, payments of which are not yet delinquent, (ii) such imperfections
in title and easements and encumbrances, if any, as are not substantial in
character, amount or extent and do not materially detract from the value, or
interfere with the present use of the property subject thereto or affected
thereby, or otherwise materially impair the Company's business operations (in
the manner presently carried on by the Company) or (iii) liens disclosed in the
notes to Company Financial Statements. All leases under which the Company leases
any real or personal property are in good standing, valid and effective in
accordance with their respective terms, and there is not, under any of such
leases, any existing default or event which with notice or lapse of time or both
would become a default other than failures to be in good standing, valid and
effective and defaults under such leases which will not have a Company Material
Adverse Effect.
SECTION 5.18 Reorganization and Pooling of Interests. Neither the Company
nor any of its affiliates has taken or agreed or intends to take any action or
has any knowledge of any fact or circumstance that (a) is reasonably likely to
prevent the Merger from qualifying as a reorganization within the meaning of
Section 368(a) of the Code or (b) would prevent the Merger from being treated
for financial accounting purposes as a Pooling Transaction. Section 5.18 of the
Company Disclosure Schedule identifies all persons who, to the knowledge of the
Company and the Stockholders, may be deemed to be "affiliates" of the
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Company, as that term is used in Accounting Series Releases No. 130 and No. 135
of the Securities and Exchange Commission ("SEC").
SECTION 5.19 Certain Business Practices. None of the Company, or, to the
knowledge of the Company and the Stockholders, any directors, officers, agents
or employees of the Company (in their capacities as such) have (a) used any
funds for unlawful contributions, gifts, entertainment or other unlawful
purposes relating to political activity, (b) made any unlawful payment to
foreign or domestic government officials or employees or to foreign or domestic
political parties or campaigns or violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended, or (c) made any other unlawful payment.
SECTION 5.20 Intellectual Property Rights. Section 5.20 of the Company
Disclosure Schedule sets forth a true and complete list and description of all
registered patents, trademarks, servicemarks, tradenames, copyrights and
applications therefor owned by or registered in the name of the Company, or in
which the Company has any right, license or interest (the "Company Intellectual
Property Rights"). Except as set forth in Section 5.20 of the Company Disclosure
Schedule, the Company is not a party to any license agreement, whether written
or oral, either as licensor or licensee, with respect to any Company
Intellectual Property Rights. The Company has good and marketable title to or
the right to use all Company Intellectual Property Rights and all inventions,
processes, designs, formulae, trade secrets and know-how necessary for the
operation of the business of the Company without the payment of any royalty or
similar payment. To the Company's knowledge, the Company is not infringing any
patent, trademark, servicemark, tradename or copyright of others, and neither
the Company nor any Stockholder is aware of any infringement by others of any
such rights owned by the Company.
SECTION 5.21 Insider Interests. No officer or director of the Company or
holder of more than five percent of Company Common Stock outstanding on a
fully-diluted basis has any interest in any material property, real or personal,
tangible or intangible, including without limitation, any computer software or
Company Intellectual Property Rights, used in or pertaining to the business of
the Company, except for the ordinary rights of a stockholder or employee stock
optionholder.
SECTION 5.22 Brokers and Finders. Except for the fees and expenses payable
to NationsBanc Montgomery Securities LLC, which fees are reflected in its
agreement with the Company, the Company has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of the Company to pay any finder's fees, brokerage or agent
commissions or other like payments in connection with the transactions
contemplated hereby. Except for the fees and expenses paid or payable to
NationsBanc Montgomery Securities LLC, there is no claim for payment by the
Company of any investment banking fees, finder's fees, brokerage or agent
commissions or other like payments in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby.
SECTION 5.23 Business Relations. Except as disclosed in Section 5.23 of
the Company Disclosure Schedule, neither the Company nor any Stockholder knows
or has any reason to believe that any customer or supplier of the Company will
cease or otherwise refuse to do business with the Company after the Effective
Time in the same manner as such business was previously conducted with the
Company except for such refusals to do business with the Company that could not
be expected, either alone or in the aggregate with all such refusals, to have a
Company Material Adverse Effect. The Company has not received any notice of any
material disruption in the availability of the materials, services or products
used by the Company in the conduct of its business, nor is the Company aware of
any facts which could lead it to believe that the operations of the Company will
be subject to any such material disruption.
SECTION 5.24 Compensation Arrangements. Section 5.24(a) of the Company
Disclosure Schedule lists all amounts that, solely as a result of the Merger,
the Company or Parent will be obligated to pay after the Effective Time to
persons who were employees of the Company prior to the Effective Time pursuant
to provisions in their employment, executive compensation or other similar
agreements relating to incentive bonuses or loan forgiveness payable in
connection with the employee's continuation of employment after a change in
control (not including any asset protection payments, severance payments or
distributions of long-term deferred compensation). Section 5.24(b) lists all
amounts that as of the date hereof, solely as a result of the Merger, the
Company or Parent would be obligated to pay after the Effective Time to persons
who were
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employees of the Company prior to the Effective Time pursuant to provisions in
their employment, executive compensation or similar agreements other than (i)
Compensation Expenses or (ii) payments that are payable upon a termination of
the employee's employment by Parent or the Company.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
Each Stockholder hereby represents and warrants to Parent, as of the date
hereof and as of the Closing Date, as follows:
SECTION 6.1 Owners of Company Common Stock. As of the date hereof, each
such Stockholder is the holder of record and beneficially owns the number of
shares of Company Common Stock set forth opposite its name on Exhibit B.
SECTION 6.2 Authority.
(a) If such Stockholder is an entity (i.e., not a natural person),
such Stockholder has been duly created and is validly existing under the
laws of the jurisdiction of its creation; such Stockholder has all
requisite power and authority to execute and deliver this Agreement and the
Transaction Documents to which it is a party and to perform its obligations
hereunder and thereunder; and the execution, delivery and performance by
such Stockholder of this Agreement and Transaction Documents to which it is
a party and the consummation by such Stockholder of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
action on the part of such Stockholder.
(b) Such Stockholder has full legal capacity to execute and deliver
this Agreement and the Transaction Documents to which it is a party and to
perform the obligations of such Stockholder hereunder and thereunder. This
Agreement has been duly and validly executed and delivered by such
Stockholder and constitutes a valid and binding obligation of such
Stockholder, enforceable against it in accordance with its terms, subject
as to enforceability to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally and to general principles of
equity (regardless of whether enforcement is sought in a proceeding at law
or in equity and with respect to Section 8.17 hereof, subject to
limitations as to enforceability of the indemnification and contribution
provisions contained therein). The Transaction Documents to which such
Stockholder is a party have been duly and validly executed and delivered by
such Stockholder and constitute valid and binding obligations of such
Stockholder, enforceable against it in accordance with its terms, subject
as to enforceability, to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally and to general principles of
equity (regardless of whether enforcement is sought in a proceeding at law
or in equity). Each consent, authorization, order or approval of, or filing
or registration with, any Governmental Entity required by applicable law on
or before the Closing Date for or in connection with the execution and
delivery by such Stockholder of this Agreement or any Transaction
Documents, or the performance by such Stockholder of its obligations
hereunder or under any Transaction Documents, will have been obtained or
made on or before the Closing Date, except where the failure to obtain any
such consent, authorization, order, approval, filing or registration would
not affect such Stockholder's ability to perform its obligations under this
Agreement or under any Transaction Documents in any material respect.
SECTION 6.3 No Conflicts. The execution, delivery and performance by such
Stockholder of this Agreement and the Transaction Documents to which it is a
party does not (a) violate or breach any provision of any law or statute
applicable to such Stockholder (and, if such Stockholder is a legal entity, any
provision of its organizational or constituent documents), or (b) violate,
breach, cause a default under or result in the creation of a lien pursuant to,
any agreement or instrument to which such Stockholder is a party or to which it
or any of its properties may be subject.
SECTION 6.4 Investor Status. Each Stockholder is an "accredited investor"
as such term is defined in Section 501(a) of Regulation D under the Securities
Act. Each Stockholder alone, or with its purchaser
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representative, has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of accepting
Parent Common Stock under the terms and conditions of this Agreement. Each
Stockholder has received a copy of (a) the Parent 1997 Annual Report to
Stockholders and (b) the Parent Annual Report on Form 10-K for the year ended
December 31, 1997 and (c) all other reports filed by Parent with the SEC under
the Exchange Act since December 31, 1997 (collectively, the "Merger Disclosure
Documents"). Each Stockholder has had an opportunity to ask questions of and
receive answers from Parent and the Company concerning the terms and conditions
of the Agreement and to obtain any additional information to the extent that
Parent or the Company possesses such information or can acquire it without
unreasonable effort or expense, necessary to verify the accuracy of the
information contained in the Merger Disclosure Documents. Each Stockholder is
acquiring the Parent Common Stock to be received by such Stockholder pursuant to
this Agreement for (i) such Stockholder and not for any other person and (ii)
investment purposes only and not with a view to, or in connection with the
distribution of such stock in violation of federal securities laws.
SECTION 6.5 Restrictions on Transfer. Each Stockholder acknowledges that
if it should decide to dispose of any of the Parent Common Stock to be received
by it in the Merger, it may do so only pursuant to an effective registration
statement under the Securities Act or pursuant to an exemption from registration
under the Securities Act. In connection with any offer, resale, pledge or other
transfer (individually and collectively, a "Transfer") of any Parent Common
Stock other than pursuant to an effective registration statement, Parent may
require that the transferor of the Parent Common Stock provide to Parent an
opinion of counsel which opinion shall be reasonably satisfactory in form and
substance to Parent, to the effect that such Transfer is being made pursuant to
an exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act and any state or foreign securities laws.
Each Stockholder agrees to the imprinting, so long as appropriate, of
substantially the following legends on certificates representing the Parent
Common Stock received hereunder:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT") AND ACCORDINGLY
MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR IN
ACCORDANCE WITH AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT.
SECTION 6.6 Reorganization and Pooling of Interests. No Stockholder has
taken or agreed or intends to take any action or has any knowledge of any fact
or circumstance that (a) is reasonably likely to prevent the Merger from
qualifying as a reorganization within the meaning of Section 368(a) of the Code
or (b) would prevent the Merger from being treated for financial accounting
purposes as a Pooling Transaction.
ARTICLE VII
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 7.1 Conduct of Business by the Company Pending the Merger. Except
as otherwise contemplated by this Agreement, after the date hereof and prior to
the Closing Date or earlier termination of this Agreement, unless Parent shall
otherwise agree in writing, the Company shall, and shall cause its subsidiaries
to:
(a) conduct their respective businesses in the ordinary and usual
course of business and consistent with past practice;
(b) not (i) amend or propose to amend their respective charter or
by-laws, (ii) split, combine or reclassify their outstanding capital stock
or (iii) declare, set aside or pay any dividend or distribution payable in
cash, stock, property or otherwise, except for the payment of dividends or
distributions to the Company by a wholly-owned subsidiary of the Company;
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(c) not issue, sell, pledge or dispose of, or agree to issue, sell,
pledge or dispose of, any additional shares of, or any options, warrants or
rights of any kind to acquire any shares of their capital stock of any
class or any debt or equity securities convertible into or exchangeable for
such capital stock, except that the Company may issue shares upon exercise
of outstanding stock options;
(d) not (i) incur or become contingently liable with respect to any
indebtedness for borrowed money other than borrowings in the ordinary
course of business (other than pursuant to credit facilities) or borrowings
under the existing credit facilities of the Company or any of its
subsidiaries (the "Existing Credit Facilities") up to the existing
borrowing limit on the date hereof or borrowings to refinance existing
indebtedness on terms which are reasonably acceptable to Parent, (ii)
redeem, purchase, acquire or offer to purchase or acquire any shares of its
capital stock or any options, warrants or rights to acquire any of its
capital stock or any security convertible into or exchangeable for its
capital stock, (iii) take any action that would jeopardize the treatment of
the Merger as a pooling of interests under Opinion No. 16 of the Accounting
Principles Board ("APB No. 16"), (iv) take or fail to take any action which
action or failure to take action is reasonably likely to cause the Company
or its Stockholders (except to the extent of stockholders in special
circumstances) to recognize gain or loss for federal income tax purposes as
a result of the consummation of the Merger or otherwise is reasonably
likely to cause the Merger not to qualify as a reorganization under Section
368(a) of the Code, (v) make any acquisition of any assets or businesses
other than expenditures for current assets in the ordinary course of
business and expenditures for fixed or capital assets in the ordinary
course of business, (vi) sell, pledge, dispose of or encumber any material
assets or businesses other than (a) sales of businesses or assets in the
ordinary course of business, (b) sales of businesses or assets disclosed in
Section 7.1 of the Company Disclosure Schedule, and (c) pledges or
encumbrances pursuant to Existing Credit Facilities or other permitted
borrowings, or (vii) enter into any binding contract, agreement, commitment
or arrangement with respect to any of the foregoing;
(e) use all reasonable efforts to preserve intact their respective
business organizations and goodwill, keep available the services of their
respective present officers and key employees, and preserve the goodwill
and business relationships with customers and others having business
relationships with them and not engage in any action, directly or
indirectly, with the intent to adversely impact the transactions
contemplated by this Agreement or the Transaction Documents;
(f) subject to restrictions imposed by applicable law, confer with one
or more representatives of Parent to report operational matters of
materiality and the general status of ongoing operations;
(g) not enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other similar
arrangements or agreements with any directors, officers or key employees,
except in the ordinary course and consistent with past practice; provided,
however, that the Company and its subsidiaries shall in no event enter into
or amend any written employment agreement providing for annual base salary
in excess of $50,000 per annum;
(h) not adopt, enter into or amend any pension or retirement plan,
trust or fund, except as required to comply with changes in applicable law
and not adopt, enter into or amend in any material respect any bonus,
profit sharing, compensation, stock option, deferred compensation, health
care, employment or other employee benefit plan, agreement, trust, fund or
arrangement for the benefit or welfare of any employees or retirees
generally, other than in the ordinary course of business, except (i) as
required to comply with changes in applicable law, or (ii) as required
pursuant to an existing contractual arrangement or agreement;
(i) use commercially reasonable efforts to maintain with financially
responsible insurance companies insurance on its tangible assets and its
businesses in such amounts and against such risks and losses as are
consistent with past practice;
(j) not make, change or revoke any material Tax election or make any
material agreement or settlement regarding Taxes with any taxing authority;
and
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(k) not take or fail to take any action which action or failure to
take action would materially delay consummation of the Merger.
SECTION 7.2 Conduct of Business by Parent and Subsidiary Pending the
Merger. Except as otherwise contemplated by this Agreement, after the date
hereof and prior to the Closing Date or earlier termination of this Agreement,
unless the Company shall otherwise agree in writing, Parent shall, and shall
cause its subsidiaries to:
(a) conduct their respective businesses in the ordinary and usual
course of business and consistent with past practice;
(b) not (i) amend or propose to amend their respective charters
(except for any amendments by Parent of its Certificate of Incorporation to
increase the number of authorized shares of Parent Common Stock) or
by-laws, (ii) split, combine or reclassify (whether by stock dividend or
otherwise) their outstanding capital stock, or (iii) declare, set aside or
pay any dividend or distribution payable in cash, stock, property or
otherwise, except for the payment of dividends or distributions to Parent
by a wholly-owned subsidiary of Parent;
(c) not (i) take any action that would jeopardize the treatment of the
Merger as a pooling of interests under APB No. 16, (ii) take or fail to
take any action which action or failure to take action is reasonably likely
to cause the Company or its stockholders to recognize gain or loss for
federal income tax purposes as a result of the consummation of the Merger
or otherwise is reasonably likely to cause the Merger not to qualify as a
reorganization under Section 368(a) of the Code, or (iii) take or fail to
take any action which action or failure to take action would materially
delay consummation of the Merger; and
(d) use all reasonable efforts to preserve intact their respective
business organizations and goodwill, keep available the services of their
respective present officers and key employees, and preserve the goodwill
and business relationships with customers and others having business
relationships with them and not engage in any action, directly or
indirectly, with the intent to adversely impact the transactions
contemplated by this Agreement.
SECTION 7.3 Control of the Company's Operations. Nothing contained in this
Agreement shall give to Parent, directly or indirectly, rights to control or
direct the Company's operations prior to the Effective Time. Prior to the
Effective Time, the Company shall exercise, consistent with the terms and
conditions of this Agreement, complete control and supervision of its
operations.
SECTION 7.4 Control of Parent's Operations. Nothing contained in this
Agreement shall give to the Company, directly or indirectly, rights to control
or direct Parent's operations prior to the Effective Time. Prior to the
Effective Time, Parent shall exercise, consistent with the terms and conditions
of this Agreement, complete control and supervision of its operations.
SECTION 7.5 Acquisition Transactions. After the date hereof and prior to
the Effective Time or earlier termination of this Agreement, the Company shall
not, and shall not permit any of its subsidiaries to, initiate, solicit,
negotiate, encourage or provide information to facilitate, and the Company
shall, and shall use its reasonable efforts to cause any officer, director or
employee of the Company, or any attorney, accountant, investment banker,
financial advisor or other agent retained by it or any of its subsidiaries, not
to initiate, solicit, negotiate, encourage or provide information to facilitate,
any proposal or offer to acquire all or any substantial part of the business or
properties of the Company or any capital stock of the Company, whether by
merger, purchase of assets or otherwise, whether for cash, securities or any
other consideration or combination thereof (any such transactions being referred
to herein as an "Acquisition Transaction"). The Company shall immediately notify
Parent after receipt of any proposal for an Acquisition Transaction, indication
of interest or request for information relating to the Company or its
subsidiaries in connection with an Acquisition Transaction or for access to the
properties, books or records of the Company or any subsidiary by any person or
entity that informs the Board of Directors of the Company or such subsidiary
that it is considering making, or has made, a proposal for an Acquisition
Transaction. Such notice to Parent shall be made orally and in writing.
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ARTICLE VIII
ADDITIONAL AGREEMENTS
SECTION 8.1 Access to Information.
(a) Subject to applicable law, the Company and its subsidiaries shall
afford to Parent and Subsidiary and their respective accountants, counsel,
financial advisors and other representatives (the "Parent Representatives")
and Parent and its subsidiaries shall afford to the Company and its
accountants, counsel, financial advisors and other representatives (the
"Company Representatives") full access during normal business hours with
reasonable notice throughout the period prior to the Effective Time to all
of their respective properties, books, contracts, commitments and records
(including, but not limited to, Tax Returns) and, during such period, shall
furnish promptly to one another such information concerning their
respective businesses, properties and personnel as Parent or Subsidiary or
the Company, as the case may be, shall reasonably request; provided,
however, that no investigation pursuant to this Section 8.1 shall amend or
modify any representations or warranties made herein or the conditions to
the obligations of the respective parties to consummate the Merger. Parent
and its subsidiaries shall hold and shall use their reasonable best efforts
to cause the Parent Representatives to hold, and the Company and its
subsidiaries shall hold and shall use their reasonable best efforts to
cause the Company Representatives to hold, in strict confidence all
nonpublic documents and information furnished to Parent and Subsidiary or
to the Company, as the case may be, in connection with the transactions
contemplated by this Agreement, except that (i) Parent, Subsidiary and the
Company may disclose such information as may be necessary in connection
with seeking the Parent Required Statutory Approvals and Parent
Stockholders' Approval and the Company Required Statutory Approvals and
(ii) each of Parent, Subsidiary and the Company may disclose any
information that it is required by law or judicial or administrative order
to disclose.
(b) In the event that this Agreement is terminated in accordance with
its terms, each party shall promptly redeliver to the other all nonpublic
written material provided pursuant to this Section 8.1 and shall not retain
any copies, extracts or other reproductions in whole or in part of such
written material. In such event, all documents, memoranda, notes and other
writings prepared by Parent or the Company based on the information in such
material shall be destroyed (and Parent and the Company shall use their
respective reasonable best efforts to cause their advisors and
representatives to similarly destroy their documents, memoranda and notes),
and such destruction (and reasonable best efforts) shall be certified in
writing by an authorized officer supervising such destruction.
SECTION 8.2 Proxy Statement. The Company shall promptly furnish to Parent
all information, and take such other actions, as may reasonably be requested by
Parent in connection with the filing by Parent of the Proxy Statement with the
SEC, the clearance of such Proxy Statement by the SEC and the compliance by
Parent with its reporting obligations under the federal securities laws of the
United States in connection with the Merger, including without limitation,
unaudited consolidated balance sheets of the Company and its subsidiaries as of
December 31, 1997 and unaudited consolidated statements of income and cash flows
of the Company and its subsidiaries for the calendar year ended December 31,
1997. The information provided and to be provided by the Company to Parent for
use in the Proxy Statement shall not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading.
SECTION 8.3 Stockholders' Approvals. Parent shall call a stockholders'
meeting, to be held as soon as reasonably practicable after the Proxy Statement
is cleared by the SEC, for the purpose of voting upon the issuance of shares of
Parent Common Stock pursuant to the Merger and such other related matters as it
deems appropriate ("Parent Stockholders' Approval").
SECTION 8.4 Compliance with the Securities Act. Parent and the Company
shall each use its commercially reasonable efforts to cause each officer, each
director and each other person who is an "affiliate," as that term is used in
paragraphs (c) and (d) of Rule 145 under the Securities Act or Accounting Series
Releases No. 130 and No. 135 of the SEC, of Parent or the Company, as the case
may be, to deliver to
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Parent and the Company on or prior to the Effective Time a written agreement (an
"Affiliate Letter"), in substantially the form of Exhibit C,to the effect that
such person will not offer to sell, sell or otherwise dispose of any shares of
Parent Common Stock issued in the Merger, except, in each case, pursuant to an
effective registration statement or in compliance with Rule 145, as amended from
time to time, or in a transaction which, in the opinion of legal counsel
reasonably satisfactory to Parent, is exempt from the registration requirements
of the Securities Act and, in any case, until after the results covering 30 days
of post-Merger combined operations of Parent and the Company have been filed
with the SEC, sent to stockholders of Parent or otherwise publicly issued.
SECTION 8.5 Nasdaq Listing. Parent shall file, at or before the Effective
Time, an additional listing application with Nasdaq with respect to the shares
of Parent Common Stock to be issued pursuant to the Merger and the shares of
Parent Common Stock to be reserved for issuance upon the exercise of any
outstanding Company Options as provided in Section 3.5 hereof.
SECTION 8.6 Expenses and Fees. Except as otherwise provided in Section 3.1
hereof, all costs and expenses incurred in connection with this Agreement, the
Transaction Documents and the transactions contemplated hereby and thereby shall
be paid by the party incurring such expenses.
SECTION 8.7 Agreement to Cooperate.
(a) Subject to the terms and conditions herein provided and subject to
the fiduciary duties of the respective boards of directors of the Company
and Parent, each of the parties hereto shall use all reasonable efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations
to consummate and make effective the transactions contemplated by this
Agreement, including using its reasonable efforts to obtain all necessary
or appropriate waivers, consents or approvals of third parties required in
order to preserve material contractual relationships of Parent and the
Company and their respective subsidiaries, all necessary or appropriate
waivers, consents and approvals and SEC "no-action" letters to effect all
necessary registrations, filings and submissions and to lift any injunction
or other legal bar to the Merger (and, in such case, to proceed with the
Merger as expeditiously as possible).
(b) Without limitation of the foregoing, if required by applicable
law, each of Parent and the Company undertakes and agrees to file as soon
as practicable, and in any event prior to 15 days after the date hereof, a
Notification and Report Form under the HSR Act with the Federal Trade
Commission ("FTC") and the Antitrust Division of the Department of Justice
(the "Antitrust Division"). Each of Parent and the Company shall (i)
respond as promptly as practicable to any inquiries received from the FTC
or the Antitrust Division for additional information or documentation and
to all inquiries and requests received from any State Attorney General or
other governmental authority in connection with antitrust matters and (ii)
not extend any waiting period under the HSR Act or enter into any agreement
with the FTC or the Antitrust Division not to consummate the transactions
contemplated by this Agreement, except with the prior written consent of
the other parties hereto. Each party shall promptly notify the other party
of any communication to that party from the FTC, the Antitrust Division,
any State Attorney General or any other governmental entity and permit the
other party to review in advance any proposed communication to any of the
foregoing.
(c) In the event any litigation is commenced by any person or entity
relating to the transactions contemplated by this Agreement, including any
Acquisition Transaction, Parent shall have the right, at its own expense,
to participate therein, and the Company will not settle any such litigation
without the consent of Parent, which consent will not be unreasonably
withheld.
SECTION 8.8 Public Statements. The parties shall consult with each other
prior to issuing any press release or any written public statement with respect
to this Agreement or the transactions contemplated hereby and shall not issue
any such press release or written public statement prior to such consultation.
SECTION 8.9 Notification of Certain Matters. Each of the Company, Parent
and Subsidiary agrees to give prompt notice to each other of, and to use
commercially reasonable efforts to remedy, (i) the occurrence
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or failure to occur of any event which occurrence or failure to occur would be
likely to cause any of its representations or warranties in this Agreement to be
untrue or inaccurate in any material respect at the Effective Time and (ii) any
material failure on its part to comply with or satisfy any covenant, condition
or agreement to be complied with or satisfied by it hereunder; provided,
however, that the delivery of any notice pursuant to this Section 8.9 shall not
limit or otherwise affect the remedies available hereunder to the party
receiving such notice.
SECTION 8.10 Corrections to Proxy Statement. Prior to the date of approval
of the issuance of shares of Parent Common Stock pursuant to the Merger by
Parent's stockholders, each of the Company, Parent and Subsidiary shall correct
promptly any information provided by it to be used specifically in the Proxy
Statement that shall have become false or misleading in any material respect and
Parent shall take all steps necessary to file with the SEC and have cleared by
the SEC any amendment or supplement to the Proxy Statement so as to correct the
same and to cause the Proxy Statement as so corrected to be disseminated to the
stockholders of the Parent, in each case to the extent required by applicable
law.
SECTION 8.11 Employment Agreements. At the Closing, Parent or the
Surviving Corporation shall offer to enter into employment agreements with John
F. Allen and John M. Howe in the form set forth in Section 8.11 of the Parent
Disclosure Schedule.
SECTION 8.12 Benefits and Contracts. During the twelve-month period
immediately following the Effective Time, Parent shall provide generally to
employees of the Company, employee benefits either (a) under employee benefit
plans on terms and conditions which when taken as a whole are substantially
similar to those currently provided by Parent to its similarly situated
employees or (b) under the Company Plans. For purposes of participation and
vesting under such employee benefit plans described in (a) above, (i) service
under any qualified plans of the Company shall be treated as service under
Parent's qualified plans, (ii) service under any other employee benefit plans of
the Company shall be treated as service under any similar employee benefit plans
maintained by Parent. Parent shall cause the welfare benefit plans that cover
the employees of the Company after the Effective Time to (i) waive any waiting
period and restrictions and limitations for preexisting conditions or
insurability and (ii) cause any deductible, co-insurance, or maximum
out-of-pocket payments made by employees of the Company under the Company's
welfare benefit plans to be credited to such employees under such welfare
benefit plans, so as to reduce the amount of any deductible, co-insurance, or
maximum out-of-pocket payments payable by such employees under the welfare
benefit plans after the Effective Time. Parent also shall cause the Company and
its subsidiaries to honor all employment, severance, consulting, and other
compensation contracts disclosed in Section 8.12 of the Company Disclosure
Schedule between the Company and any current or former director, officer, or
employee thereof.
SECTION 8.13 Cooperation With Respect to Tax Returns. Parent shall
reasonably cooperate with the Stockholders with respect to any matters involving
the Stockholders arising out of the Stockholders' ownership of the Company prior
to the Effective Time or the transactions contemplated by this Agreement,
including matters relating to tax returns and any tax audits, appeals, claims or
litigation with respect to such tax returns or the preparation of such tax
returns. In connection therewith, Parent shall make available to the
Stockholders such files, documents, books and records of the Company and the
Subsidiary for inspection and copying as may be reasonably requested by the
Stockholders and shall cooperate with the Stockholders with respect to retaining
information and documents which relate to such matters.
SECTION 8.14 Indemnification of Directors and Officers.
(a) Parent and Subsidiary agree that the indemnification obligations
set forth in the Company's Articles of Incorporation as of the date of this
Agreement shall survive the Merger (and, prior to the Effective Time,
Parent shall cause the By-laws of Subsidiary to reflect such provisions)
and shall not be amended, repealed or otherwise modified for a period of
six years after the Effective Time in any manner that would adversely
affect the rights thereunder of the individuals who on or prior to the
Effective Time were directors, officers, employees or agents of the
Company.
(b) After the Effective Time, Parent and the Subsidiary shall, to the
fullest extent permitted under the applicable law, indemnify and hold
harmless each present and former director or officer of the
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Company and each such person who served at the request of the Company as a
director, officer, partner, fiduciary, employee or agent of the Company
(collectively, the "Pre-Merger Indemnified Parties") against all costs and
expenses (including reasonable attorneys fees), judgments, fines, losses,
claims, damages, liabilities and settlement amounts paid in connection with
any claim, action, suit, proceeding or investigation (whether arising
before or after the Effective Time), whether civil, administrative or
investigative, arising out of or relating to any action or omission in
their capacity as an officer, director, employee, agent or other person to
whom this provision applies, in each case occurring before the Effective
Time (including the transactions contemplated by this Agreement). Without
limiting the generality of the foregoing, in the event of any such claim,
action, suit, proceeding or investigation, Parent or Subsidiary shall pay
the fees and expenses of counsel selected by any Pre-Merger Indemnified
Party, which counsel shall be reasonably satisfactory to Parent and
Subsidiary, as the case may be, promptly after statements therefor are
received.
SECTION 8.15 Miscellaneous Matters. John F. Allen may retain and remove
from the Company's offices at any time after the Closing Date personal
memorabilia relating to the period during which the Company was owned by John F.
Allen or his Affiliates and family, including without limitation framed and
unframed photographs, news clippings, public service awards and citations,
official proclamations, personal effects, certificates and copies of historical
records.
SECTION 8.16 Announcement of Post-Merger Results. As soon as the first
full calendar month of combined results of operations of the Parent and the
Company are available following the Merger, Parent will make public such results
of operations in a manner that satisfies the requirements under the applicable
pooling rules (including ASR No. 135 and Staff Accounting Bulletin ("SAB") No.
65) to allow affiliates of Parent or the Company to reduce their risk relative
to their stockholdings (e.g., publication of at least 30 days of combined
operating sales and net income). Parent shall provide the Stockholders with a
copy of such public statement promptly following its release.
SECTION 8.17 Resale Registration Statement.
(a) As soon as reasonably practicable after the date hereof, Parent
shall prepare and file with the SEC a Registration Statement on Form S-3 or
other appropriate form pursuant to Rule 415 under the Securities Act, or
other similar rule of the SEC covering the resale by the Stockholders of
the shares of Parent Common Stock issued to them in connection with the
Merger (the "Resale Registration Agreement"). The Company shall, promptly
after any request by Parent, furnish to Parent all financial statements and
other information as may be requested by Parent in connection with
preparation and filing of the Resale Registration Statement. Parent shall
use all commercially reasonable efforts to cause the Resale Registration
Statement to be declared effective and to keep the Resale Registration
Statement continuously effective for a period of two years following the
Closing Date, or, if sooner, until the date on which the Stockholders have
disposed of all shares of Parent Common Stock issued to them in connection
with the Merger. Parent further agrees, if necessary during the time that
the Resale Registration Statement is required to be maintained effective,
to amend or supplement the Resale Registration Statement when required by
the registration form, by the instructions applicable to such form, or by
the Securities Act or the rules and regulations thereunder.
(b) Parent agrees to furnish promptly to each Stockholder such number
of copies of the Resale Registration Statement, any amendments thereto, any
documents incorporated by reference therein, the prospectus included in the
Resale Registration Statement, including any preliminary prospectus, and
such other documents as such Stockholder may reasonably request in writing
in order to facilitate the disposition of the shares of Parent Common Stock
covered by the Resale Registration Statement ("Registered Stock").
(c) Parent agrees to promptly notify each holder of Registered Stock,
at any time when a prospectus relating thereto is required to be delivered
under the Securities Act, of the occurrence of an event requiring the
preparation of a supplement to such prospectus or an amendment of the
Resale Registration Statement necessary in order to maintain the
effectiveness of the Resale Registration
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Statement and to ensure that such prospectus will not contain an untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading, and to promptly file with the SEC and make available to such
holder any such supplemented prospectus or amended Resale Registration
Statement.
(d) Each Stockholder agrees that, upon receipt of written notice from
Parent of the happening of any event of the kind described in Section
8.17(c) hereof, such Stockholder will treat such information as
confidential, will immediately discontinue the disposition of Registered
Stock pursuant to the Resale Registration Statement until such
Stockholder's receipt of the copies of the revised prospectus contemplated
by Section 8.17(c) hereof (a "Suspension Period") and, if so directed by
Parent, such Stockholder will deliver to Parent all copies, other than
permanent file copies then in such Stockholder's possession, of the most
recent prospectus covering such Registered Stock at the time of receipt of
such notice. Parent agrees and acknowledges that for the period beginning
on the date on which Parent announces its results of operations for the
first full calendar month of combined operations of Parent and the Company
and ending six months thereafter (i) it shall not impose any single
Suspension Period in excess of 30 consecutive days, (ii) a period of at
least 10 trading days must occur between Suspension Periods and (iii) that
the total number of days constituting Suspension Periods shall not exceed
100 days in the aggregate, provided that such limitations shall not apply
to events of the type described in Section 8.17(c) hereof which are beyond
Parent's control.
(e) Parent shall use all commercially reasonable efforts to register
or qualify the Registered Stock under such other securities or blue sky
laws of such jurisdictions as each holder of Registered Stock shall
reasonably request, and do any and all other acts and things which may be
necessary under such securities or blue sky laws to enable each such holder
of Registered Stock to consummate the public sale or other disposition in
such jurisdictions of the Registered Stock owned by such holder, except
that Parent shall not for any such purpose be required to qualify to do
business as a foreign corporation in any jurisdiction wherein it is not so
qualified.
(f) Parent shall use all commercially reasonable efforts to prevent
the issuance of any order suspending the effectiveness of the Resale
Registration Statement, and if one is issued, use its best efforts to
obtain the withdrawal of any order suspending the effectiveness of the
Resale Registration Statement at the earliest possible moment.
(g) Parent shall promptly file appropriate additional listing
applications, and shall use all commercially reasonable efforts to cause
the Registered Stock to be listed on the securities exchange or quoted on
the automated quotation system on which the Parent Common Stock is then
listed or quoted.
(h) Parent shall otherwise use all commercially reasonable efforts to
comply with all applicable rules and regulations of the SEC in connection
with the Resale Registration Statement and make generally available to
Parent's security holders, in each case as soon as practicable, but not
later than 45 days after the close of the period covered thereby (90 days
in case the period covered corresponds to a fiscal year of Parent), an
earnings statement of Parent which will satisfy the provisions of Section
11(a) of the Securities Act and Rule 158 thereunder (or any comparable
successor provisions).
(i) In connection with the Resale Registration Statement, Parent shall
pay the following registration expenses: (i) all registration and filing
fees; (ii) the fees and expenses of compliance with securities or blue sky
laws (including reasonable fees and disbursements of Parent's counsel in
connection with blue sky qualifications of the Registered Stock); (iii)
printing expenses; (iv) the reasonable fees and disbursements of counsel
for Parent and the customary fees and expenses for independent certified
public accountants retained by Parent; and (v) the reasonable fees and
expenses of any experts retained by Parent in connection with such
registration. Parent shall not have any obligation to pay any legal fees of
the holders of Registered Stock, any fees or expenses of independent
certified public accountants retained by the Company, any underwriting
fees, discounts, or commissions attributable to the sale of Registered
Stock, or any out-of-pocket expenses of the holders of Registered Stock (or
the agents of such holders who manage the holders' accounts).
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(j) Each Stockholder shall comply with Regulation M under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") which,
among other things, requires a seller of Registered Stock and all
affiliates of that seller to suspend all bids for or purchases of shares of
Parent Common Stock at least one business day before and during any offers
and sales of Registered Stock by that seller and until that seller's offers
and sales terminate and prohibits any person from stabilizing the prices of
a security to facilitate an offering of that security.
(k) Each of Parent, the Company and the Stockholders shall execute and
deliver such additional instruments and other documents and shall take such
further actions as may be necessary or appropriate to effectuate, carry out
and comply with all of such party's obligations under this Section 8.17,
including without limitation any actions reasonably requested by Parent in
connection with obtaining any required consents or approvals to the actions
contemplated hereby under the Securities Act.
(l) Parent agrees to indemnify and hold harmless each holder of
Registered Stock (a "Holder"), its directors and officers, and each person,
if any, who controls each Holder within the meaning of either Section 15 of
the Securities Act or Section 20 of the Exchange Act from and against any
and all losses, claims, damages, liabilities, and expenses (including
reasonable attorneys fees and costs of investigation) arising out of or
based upon any untrue statement or alleged untrue statement of a material
fact contained in the Resale Registration Statement or the prospectus
contained therein or in any amendment or supplement thereto or in any
preliminary prospectus, or arising out of or based upon any omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages, liabilities, or expenses arise out
of, or are based upon, any such untrue statement or omission or allegation
thereof based upon information furnished in writing to Parent by such
Holder or on such Holder's behalf expressly for use therein; and, provided
further, that, with respect to any untrue statement or omission or alleged
untrue statement or omission made in any preliminary prospectus, the
indemnity agreement contained in this subsection shall not apply to the
extent that it has been established that any such loss, claim, damage,
liability, or expense results from the fact that a current copy of the
prospectus was not sent or given to the person asserting any such loss,
claim, damage, liability, or expense at or prior to the written
confirmation of the sale of the Registered Stock to such person and such
current copy of the prospectus was previously provided to the Holder and
such current copy of the prospectus would have cured the defect giving rise
to such loss, claim, damage, liability, or expense. Any indemnification
obligation of Parent pursuant to this Section 8.17(l) shall be in addition
to and not exclusive of any other liability or indemnification obligation
that Parent may have at law or in equity or pursuant to Article X of this
Agreement.
(m) Each Holder, severally but not jointly, agrees to indemnify and
hold harmless Parent, its directors and officers, and each person, if any,
who controls Parent within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act to the same extent as the
foregoing indemnity from Parent to such Holder, but only with respect to
information furnished in writing by such Holder or on such Holder's behalf
expressly for use in the Resale Registration Statement or prospectus
relating to the Registered Stock, any amendment or supplement thereto, or
any preliminary prospectus; provided, however, that such Holder shall not
be obligated to provide such indemnity to the extent that such losses,
claims, damages, liabilities or expenses result from the failure of Parent
to promptly amend or take action to correct or supplement any such Resale
Registration Statement or Prospectus on the basis of corrected or
supplemental information provided in writing by such Holder to Parent
expressly for such purpose. In case any action or proceeding shall be
brought against Parent or its directors or officers, or any such
controlling person, in respect of which indemnity may be sought against
such Holder, such Holder and its directors, officers and controlling
persons shall have the rights and duties given to Parent, and Parent or its
directors or officers or such controlling person shall have the rights and
duties given to such Holder, by the preceding section hereof. In no event
shall the liability of any Holder of Registered Stock hereunder be greater
in amount than the amount of the proceeds received by such Holder upon the
sale of the Registered Stock giving rise to such indemnification
obligation. Any indemnification obligation of a Holder pursuant to this
Section 8.17(m) shall be in addition to, and not exclusive of, any other
liability or
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indemnification obligation that such Holder may have at law or in equity or
pursuant to Article X of this Agreement.
(n) If any action or proceeding (including any governmental
investigation) shall be brought or asserted against any person entitled to
indemnification under Section 8.17(l) or 8.17(m) above (a "Securities
Indemnified Party") in respect of which indemnity may be sought from any
party who has agreed to provide such indemnification (a "Securities
Indemnifying Party"), the Securities Indemnifying Party shall assume the
defense thereof, including the employment of counsel reasonably
satisfactory to such Securities Indemnified Party, and shall assume the
payment of all expenses. Such Securities Indemnified Party shall have the
right to employ separate counsel in any such action and to participate in
the defense thereof, but the fees and expenses of such counsel shall be at
the expense of such Securities Indemnified Party unless (i) the Securities
Indemnifying Party has agreed to pay such fees and expenses, (ii) the
Securities Indemnifying Party has failed to assume the defense of such
action within a reasonable time following written notice thereof from the
Securities Indemnified Party or fails to employ counsel reasonably
satisfactory to such Securities Indemnified Party, or (iii) the named
parties to any such action or proceeding (including any impleaded parties)
include both such Securities Indemnified Party and the Securities
Indemnifying Party, and such Securities Indemnified Party shall have been
advised by counsel that there is a conflict of interest on the part of
counsel employed by the Securities Indemnifying Party to represent such
Securities Indemnified Party (in which case, if such Securities Indemnified
Party notifies the Securities Indemnifying Party in writing that it elects
to employ separate counsel at the expense of the Securities Indemnifying
Party, the Securities Indemnifying Party shall not have the right to assume
the defense of such action or proceeding on behalf of such Securities
Indemnified Party; it being understood, however, that the Securities
Indemnifying Party shall not, in connection with any one such action or
proceeding or separate but substantially similar or related actions or
proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the fees and expenses of more
than one separate firm of attorneys (together with appropriate local
counsel) at any time for all such Securities Indemnified Parties, which
firm shall be designated in writing by such Securities Indemnified
Parties). The Securities Indemnifying Party shall not be liable for any
settlement of any such action or proceeding effected without its written
consent, but if settled with its written consent, or if there be a final
judgment for the plaintiff in any such action or proceeding, the Securities
Indemnifying Party shall indemnify and hold harmless such Securities
Indemnified Parties from and against any loss or liability (to the extent
stated above) by reason of such settlement or judgment.
(o) If the indemnification provided for in this Section 8.17 is
unavailable to the Securities Indemnified Parties in respect of any losses,
claims, damages, liabilities, or judgments referred to herein, then each
Securities Indemnifying Party, in lieu of indemnifying such Securities
Indemnified Party, shall contribute to the amount paid or payable by such
Securities Indemnified Party as a result of such losses, claims, damages,
liabilities and judgments in the following manner: as between Parent on the
one hand and a Holder on the other, in such proportion as is appropriate to
reflect the relative fault of Parent on the one hand and such Holder on the
other hand in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or judgments, as well as any
other relevant equitable considerations. The relative fault of Parent on
the one hand and of a Holder on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by such party, and the
party's relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. No person guilty of
fraudulent misrepresentation (within the meaning of subsection 11(f) of the
Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
Notwithstanding the provisions of this Section 8.17(o), no Holder
shall be required to contribute any amount in excess of the amount by which
the total price at which shares of the Registered Stock of such Holder were
offered to the public exceeds the amount of any damages which such Holder
has otherwise been required to pay by reason of such untrue statement or
omission. Each Holder's obligation to contribute pursuant to this Section
8.17(o) is several in the proportion that the proceeds of the offering
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received by such Holder bears to the total proceeds of the offering
received by all the Holders and not joint.
(p) The indemnity and contribution agreements contained in this
Section 8.17 shall remain operative and in full force and effect regardless
of (i) any termination of this Agreement, (ii) any investigation made by or
on behalf of any Securities Indemnified Party or by or on behalf of Parent,
and (iii) the consummation of the sale or successive resale of the
Registered Stock.
SECTION 8.18 Document Review. At least three business days prior to the
filing of the Resale Registration Statement or the Proxy Statement with the SEC,
Parent will provide the Company and the Stockholders with copies of such
documents and will make all changes to such documents reasonably requested by
the Company or the Stockholders to information contained therein relating to the
Company or the Stockholders.
ARTICLE IX
CONDITIONS
SECTION 9.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) the issuance of shares of Parent Common Stock pursuant to this
Agreement and the transactions contemplated hereby shall have been approved
and adopted by the requisite vote of the stockholders of Parent under
applicable law and applicable Nasdaq requirements;
(b) an additional listing application shall have been filed with
Nasdaq with respect to the shares of Parent Common Stock issuable in the
Merger and those to be reserved for issuance upon exercise of Company
Options as provided in Section 3.5 hereof;
(c) the waiting period applicable to the consummation of the Merger
under the HSR Act, if any, shall have expired or been terminated;
(d) the Proxy Statement shall have been cleared by the SEC;
(e) no preliminary or permanent injunction or other order or decree by
any federal or state court which prevents the consummation of the Merger
shall have been issued and remain in effect (each party agreeing to use its
reasonable efforts to have any such injunction, order or decree lifted);
(f) no statute, rule or regulation shall have been enacted by any
state or federal government or governmental agency in the United States
which would prevent the consummation of the Merger or make the Merger
illegal;
(g) all governmental waivers, consents, orders and approvals legally
required for the consummation of the Merger and the transactions
contemplated hereby, and all consents from lenders required to consummate
the Merger, including, without limitation, all required consents or
approvals of each person that is a party to a contract or agreement
identified in Section 5.11 of the Company Disclosure Schedule shall have
been obtained and be in effect at the Effective Time;
(h) Arthur Andersen LLP, certified public accountants for Parent,
shall have delivered a letter, dated the Closing Date, addressed to Parent,
in form and substance reasonably satisfactory to Parent, to the effect that
the Merger will qualify for a pooling of interests accounting treatment if
consummated in accordance with this Agreement; and
(i) each of the parties to the Agreement shall have received a letter
dated the Closing Date, addressed to the Company, from Ernst & Young LLP,
certified public accountants for the Company, regarding such firm's
concurrence with the Company's management's conclusions that no conditions
exist
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related to the Company that would preclude the Parent's accounting for the
Merger with the Company as a pooling of interests under APB No. 16 if
closed and consummated in accordance with this Agreement.
SECTION 9.2 Conditions to Obligation of the Company to Effect the
Merger. Unless waived by the Company, the obligation of the Company to effect
the Merger shall be subject to the fulfillment at or prior to the Closing Date
of the following additional conditions:
(a) Parent and Subsidiary shall have performed in all material
respects their agreements contained in this Agreement required to be
performed on or prior to the Closing Date and the representations and
warranties of Parent and Subsidiary contained in this Agreement shall be
true and correct on and as of the date made and (except to the extent that
such representations and warranties speak as of an earlier date) on and as
of the Closing Date as if made at and as of such date, and the Company
shall have received a certificate of the Chairman of the Board and Chief
Executive Officer, the President or a Vice President of Parent and of the
President and Chief Executive Officer or a Vice President of Subsidiary to
that effect;
(b) the Company shall have received an opinion of Shartsis, Friese &
Ginsburg LLP, in form and substance reasonably satisfactory to the Company,
dated the Closing Date, substantially to the effect that, on the basis of
facts, representations and assumptions set forth in such opinion, which are
consistent with the state of facts existing at the Effective Time: (i) the
Merger will constitute a reorganization within the meaning of Section
368(a) of the Code, (ii) no gain or loss will be recognized by Parent, the
Company or Subsidiary as a result of the Merger, and (iii) no gain or loss
will be recognized by the holders of Company Common Stock upon the exchange
of their Company Common Stock solely for shares of Parent Common Stock. In
rendering such opinion, such counsel may rely upon representations
contained in certificates of officers and certain stockholders of Parent,
the Company and Subsidiary;
(c) the Company shall have received from McDermott, Will & Emery a
written opinion dated the Closing Date, in substantially the form attached
hereto as Exhibit D.
(d) on the Closing Date, Parent shall have delivered to each
Stockholder a certificate representing the number of shares of Parent
Common Stock which such holder has the right to receive pursuant to Article
III hereof; and
(e) the Resale Registration Statement shall have been declared
effective by the SEC on or before the Closing Date and shall be effective
on the Closing Date.
SECTION 9.3 Conditions to Obligations of Parent and Subsidiary to Effect
the Merger. Unless waived by Parent and Subsidiary, the obligations of Parent
and Subsidiary to effect the Merger shall be subject to the fulfillment at or
prior to the Effective Time of the additional following conditions:
(a) the Company shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior
to the Closing Date and the representations and warranties of the Company
and the Stockholders contained in this Agreement shall be true and correct
on and as of the date made and (except to the extent that such
representations and warranties speak as of an earlier date) on and as of
the Closing Date as if made at and as of such date, and Parent shall have
received a Certificate of the President and Chief Executive Officer of the
Company and of each Stockholder to that effect;
(b) Parent shall have received (i) from Shartsis, Friese & Ginsburg
LLP a written opinion dated the Closing Date, in substantially the form
attached hereto as Exhibit E; and (ii) from attorneys representing each
Stockholder written opinions dated the Closing Date in form and substance
reasonably satisfactory to Parent;
(c) each holder of Company Common Stock shall have delivered to Parent
the certificates representing such Company Common Stock, which certificates
shall be properly endorsed for transfer or accompanied by duly executed
stock powers in either case executed in blank or in favor of Parent or its
designee;
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(d) Parent, the Escrow Agent and each Stockholder shall have executed
and delivered the Escrow Agreement;
(e) prior to the Effective Time, John M. Howe shall have terminated
his employment with the Company pursuant to that certain Employment
Termination Agreement (the "Employment Termination Agreement") dated the
date hereof and attached hereto as Exhibit F. The Surviving Corporation or
Parent and each of John F. Allen and John M. Howe shall have executed and
delivered employment agreements in substantially the form set forth in
Section 8.11 of the Parent Disclosure Schedule (the "Employment
Agreements"), each of even date herewith by and between the Surviving
Corporation or Parent, as the case may be, and each such person;
(f) each director and officer of the Company shall have resigned from
his or her position as a director or officer of the Company, as the case
may be, effective as of the Effective Time;
(g) either (i) the Company shall have obtained and delivered to Parent
all necessary consents or waivers under that certain Amended and Restated
Loan Agreement among the Company, Fleet Bank, N.A. and other banks dated
June 19, 1995 (the "Loan Agreement") to enable the Merger and the other
transactions contemplated by this Agreement to be consummated without
causing an event of default or any acceleration of indebtedness under the
Loan Agreement, or (ii) all outstanding indebtedness under the Loan
Agreement shall have been repaid and the Loan Agreement shall have been
terminated prior to the Effective Time; and
(h) The Company shall have delivered to Parent Company Financial
Statements prepared in accordance with GAAP applied on a consistent basis
throughout the periods covered thereby and which fairly present the
financial position of the Company and its subsidiaries at the dates thereof
and the results of operations and changes in financial position of the
Company and its subsidiaries for the respective periods indicated, which
Company Financial Statements will reflect a 100% deferral of interim rents
and will not reflect any other changes from the Company Financial
Statements delivered pursuant to Section 5.5 hereto unless approved in
writing by Parent.
ARTICLE X
INDEMNIFICATION
SECTION 10.1 Indemnification of Parent Indemnified Parties. Subject to the
overall limitations and time limitations set forth in Section 10.5 below and the
limitations on recourse set forth in Section 10.6 below, each Stockholder,
jointly and severally, agrees to indemnify and hold harmless Parent and each
officer, director, employee, consultant, stockholder and affiliate of Parent
(which after the Closing shall include the Company) (collectively, the "Parent
Indemnified Parties") from and against any and all damages, losses, claims,
liabilities, demands, charges, suits, penalties, costs and expenses (including
court costs and attorneys' fees and expenses incurred in investigating and
preparing for any litigation or proceeding) (collectively, "Damages") which any
of the Parent Indemnified Parties may sustain, or to which any of Parent
Indemnified Parties may be subjected, relating to or arising directly or
indirectly out of any breach or default by the Company or the Stockholders of
any of their representations or warranties contained in Article V or VI hereof
(determined without regard to any qualifications as to materiality in such
representations or warranties) or any covenants or agreements under this
Agreement. Any Damages which any Parent Indemnified Party sustains, or to which
any of the Parent Indemnified Parties may be subjected, are referred to herein
as "Parent Indemnified Costs".
SECTION 10.2 Indemnification of the Company Indemnified Parties. Subject
to the overall limitations and time limitations set forth in Section 10.5 below
and the limitations on recourse set forth in Section 10.6 below, Parent agrees
to indemnify and hold harmless the Company, each Stockholder and each officer,
director, authorized representative, employee, consultant, stockholder, limited
partner, general partner or affiliate of the Company or any Stockholder which is
not a natural person (collectively, the "Company Indemnified Parties" and
together with Parent Indemnified Parties, the "Indemnified Parties") from and
against any and all Damages which any of the Company Indemnified Parties may
sustain, or to which any of
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the Company Indemnified Parties may be subjected, related to or arising directly
or indirectly out of any breach or default by Parent or Subsidiary of any of
their representations or warranties contained in Article IV hereof (determined
without regard to any qualifications as to materiality in such representations
or warranties), or any covenants or agreements under this Agreement. Any Damages
which any Company Indemnified Party sustains, or to which any of the Company
Indemnified Parties may be subjected, are referred to herein as the "the Company
Indemnified Costs" and together with Parent Indemnified Costs, the "Indemnified
Costs". Any Indemnified Costs arising out of or relating to any breach or
default by any party who is obligated to provide indemnification hereunder (an
"Indemnifying Party") of any of his, her or its representations, warranties,
covenants or agreements under this Agreement are referred to herein as
Indemnified Representation Costs.
SECTION 10.3 Defense of Third-Party Claims. An Indemnified Party shall
give prompt written notice to any Indemnifying Party of the commencement or
assertion of any action, proceeding, demand or claim by a third party
(collectively, a "third-party action") in respect of which such Indemnified
Party shall seek indemnification hereunder. Any failure so to notify an
Indemnifying Party shall not relieve such Indemnifying Party from any liability
that it, he or she may have to such Indemnified Party under this Article X
except to the extent the failure to give such notice materially and adversely
prejudices such Indemnifying Party. The Indemnifying Party shall have the right
to assume control of the defense of, settle or otherwise dispose of such
third-party action on such terms as he, she or it deems appropriate; provided,
however, that:
(a) The Indemnified Party shall be entitled, at his, her or its own
expense, to participate in the defense of such third-party action
(provided, however, that the Indemnifying Parties shall pay the attorneys'
fees of the Indemnified Party) if (i) the employment of separate counsel
shall have been authorized in writing by any such Indemnifying Party in
connection with the defense of such third-party action, (ii) the
Indemnifying Parties shall not have employed counsel reasonably
satisfactory to the Indemnified Party to take charge of such third-party
action, or (iii) the Indemnified Party's counsel shall have advised the
Indemnified Party in writing, with a copy to the Indemnifying Party, that
there is a conflict of interest that could make it inappropriate under
applicable standards of professional conduct to have common counsel or that
there are defenses available to the Indemnified Party that are not
available to the Indemnifying Party);
(b) The Indemnifying Party shall obtain the prior written approval of
the Indemnified Party before entering into or making any settlement,
compromise, admission or acknowledgment of the validity of such third-party
action or any liability in respect thereof if, pursuant to or as a result
of such settlement, compromise, admission or acknowledgment, injunctive or
other equitable relief would be imposed against the Indemnified Party;
(c) To the extent that the Indemnified Party participates in the
defense of any third-party action as contemplated by Section 10.3(a), the
Indemnified Party shall obtain the prior written approval of the
Indemnifying Party before entering into or making any settlement,
compromise, admission or acknowledgment of the validity of such third party
action or any liability in respect thereof.
(d) No Indemnifying Party shall consent to the entry of any judgment
or enter into any settlement that does not include as an unconditional term
thereof the giving by each claimant or plaintiff to each Indemnified Party
of a release from all liability in respect of such third-party action; and
(e) The Indemnifying Party shall not be entitled to control (but shall
be entitled to participate at his, her or its own expense in the defense
of), and the Indemnified Party shall be entitled to have sole control over,
the defense or settlement, compromise, admission or acknowledgment of any
third-party action (i) as to which the Indemnifying Party fails to assume
the defense within a reasonable length of time or (ii) to the extent the
third-party action seeks an order, injunction or other equitable relief
against the Indemnified Party which, if successful, would materially
adversely affect the business, operations, assets or financial condition of
the Indemnified Party; provided, however, that the Indemnified Party shall
make no settlement, compromise, admission or acknowledgment that would give
rise to liability on the part of any Indemnifying Party without the prior
written consent of such Indemnifying Party.
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The parties hereto shall extend reasonable cooperation in connection with
the defense of any third-party action pursuant to this Article X and, in
connection therewith, shall furnish such records, information, and testimony and
attend such conferences, discovery proceedings, hearings, trials and appeals as
may be reasonably requested.
SECTION 10.4 Direct Claims. In any case in which an Indemnified Party
seeks indemnification hereunder which is not subject to Section 10.3 because no
third-party action is involved, the Indemnified Party shall notify the
Indemnifying Party in writing of any Indemnified Costs which such Indemnified
Party claims are subject to indemnification under the terms hereof. The failure
of the Indemnified Party to exercise promptness in such notification shall not
amount to a waiver of such claim except to the extent the resulting delay
materially prejudices the position of the Indemnifying Party with respect to
such claim.
SECTION 10.5 Limitations. Subject to Section 10.6 and Section 12.8 hereof,
the following limitations shall apply to claims for Indemnified Costs made
pursuant to this Article X; provided, however, that, notwithstanding anything
herein to the contrary, (i) the following limitations shall not apply to any
claims contemplated by Sections 8.17(l) or 8.17(m) hereof and (ii) the
limitations in Section 10.5(a) (relating to Minimum Loss) shall not apply to any
claims for Parent Indemnified Costs related to or arising out of a breach of the
representations and warranties of the Company and the Stockholders contained in
Section 5.24 hereof.
(a) Minimum Loss. No Indemnifying Party shall be required to indemnify
an Indemnified Party under this Article X for any Indemnified
Representation Costs except to the extent that the aggregate amount of
Indemnified Costs for which the Indemnified Party is otherwise entitled to
indemnification pursuant to this Article X exceeds $500,000 (the "Minimum
Loss"), whereupon the Indemnified Party shall be entitled to be paid the
entire amount of such Indemnified Representation Costs, subject to the
limitations on recovery and recourse set forth in this Section 10.5 and in
Section 10.6 below. For purposes of determining the aggregate amount of
Minimum Loss suffered by an Indemnified Party, each representation and
warranty contained in this Agreement for which indemnification can be or is
sought hereunder shall be read (including, without limitation, for purposes
of determining whether a breach of such representation or warranty has
occurred) without regard to materiality qualifications that may be
contained therein (including a Company Material Adverse Effect or a Parent
Material Adverse Effect). As used in the foregoing provisions of this
Section 10.5(a), an "Indemnified Party" refers to all of the Parent
Indemnified Parties on the one hand and all of the Company Indemnified
Parties on the other hand, and an "Indemnifying Party" refers to Parent on
the one hand and the Company and each Stockholder, together, on the other
hand.
(b) Limitation as to Time. Except as hereinafter provided, no
Indemnifying Party shall be liable for any Indemnified Costs pursuant to
this Article X relating to or arising out of any breach of a representation
or warranty contained in this Agreement unless a written claim for
indemnification in accordance with Section 10.3 or 10.4 is given by the
Indemnified Party to the Indemnifying Party with respect thereto by 5:00
p.m., Eastern time, on the date of issuance of the first report of Parent's
independent auditors on the combined operations of Parent and the Company
following the Merger. Notwithstanding anything in this Agreement to the
contrary, (i) there shall be no time limitation with respect to claims
relating to or arising out of a breach of a covenant or agreement contained
in this Agreement; and (ii) the representations and warranties set forth in
Section 5.24 hereof shall survive for a period of four years after the
Closing Date.
(c) Liability Cap. Without limiting any of the foregoing provisions of
this Section 10.5, the parties hereto agree that the indemnification
obligations of the Company and Stockholders under this Article X shall be
limited to $7.9 million and the indemnification obligations of Parent under
this Article X shall be limited to an amount equal to $7.9 million in
Indemnified Costs.
(d) NOL Offset. Parent agrees that any indemnification obligations of
the Stockholders under this Article X with respect to a breach of any
representations or warranties of the Company or the Stockholders in Section
5.12 hereof shall first be satisfied by setting off an equivalent amount of
the accrued Net Operating Loss of the Company (up to the aggregate amount
of the actual accrued Net
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Operating Loss of the Company as of the Effective Date); provided that the
Stockholders shall only be entitled to apply the accrued Net Operating Loss
of the Company as a setoff with respect to that portion of the
indemnification obligation that represents amounts owed to any taxing
authority for which the Net Operating Loss of the Company could otherwise
be applied (e.g., to the extent that such indemnification obligations
include any amounts due as a result of penalties assessed by a taxing
authority for which the Company's accrued Net Operating Loss could not be
applied, such amount may not be set off by the Stockholders). Any amount of
the accrued Net Operating Loss of the Company which is used by the
Stockholders to set off against any indemnification obligation with respect
to Section 5.12 shall not be counted towards the Minimum Loss provisions of
Section 10.5(a) or the liability cap provisions of Section 10.5(c).
(e) Limitations on Indemnification. Article X shall not apply to any
claims arising under or related to the Employment Agreements, the Escrow
Agreement or the Affiliate Letters.
SECTION 10.6 Recourse Against Escrowed Shares. Subject to Section 12.8
hereof, any claim by a Parent Indemnified Party against any Stockholder for
Parent Indemnified Costs payable under this Article X (other than a claim
related to or arising out of a breach of the representation and warranty set
forth in Section 5.24 hereof) shall be payable only out of the Escrowed Shares
for all amounts due to the Parent Indemnified Party from such Stockholder with
respect to such claim and shall be payable in an amount not to exceed the
Maximum Escrow Amount (as defined below) of such Stockholder. In no event shall
the Parent Indemnified Party be entitled to be paid out of the Escrowed Shares
in respect of claims against a Stockholder an amount in excess of such
Stockholder's Maximum Escrow Amount. In the event of any claim pursuant to
Section 10.1 hereof by a Parent Indemnified Party against one or more
Stockholders, each such Stockholder's Maximum Escrow Amount shall be reduced
(but not below zero) by such Stockholder's pro rata portion, determined in
accordance with the percentage set forth opposite such Stockholder's name on
Exhibit B, of the amount paid out of the Escrowed Shares in respect of such
claim, and, to the extent that the portion of such claim for which such
Stockholder is liable exceeds such Stockholder's Maximum Escrow Amount as of the
time of payment of such claim out of the Escrowed Shares, the Parent Indemnified
Party shall then be entitled to seek the remaining amount of such claim from
such other Stockholders whose respective Maximum Escrow Amounts exceed zero, pro
rata based upon the Maximum Escrow Amounts of such Stockholders as of the time
of payment of such claim, until such claim has been paid in full or each
Stockholder's Maximum Escrow Amount has been reduced to zero. For purposes of
this Section 10.6, a Stockholder's "Maximum Escrow Amount" shall mean, at any
time, such Stockholder's pro rata share of the Escrowed Shares, less any amounts
previously deducted from such Stockholder's Maximum Escrow Amount in accordance
with this Section 10.6. For purposes of satisfying a claim for Parent
Indemnified Costs under this Section 10.6, the Escrowed Shares shall be valued
$25 per share. Subject to the provisions of Section 12.8, the parties hereto
intend and agree that, notwithstanding anything to the contrary stated in any
other paragraph of this Agreement, the Parent Indemnified Parties' sole recourse
against the Stockholders for any claim with respect to a breach of this
Agreement (other than a claim contemplated by Sections 8.17(l) or 8.17(m) hereof
or a claim related to or arising out of the representation and warranty set
forth in Section 5.24 hereof) shall be governed by, and subject to the terms and
provisions of, the Escrow Agreement, and that the maximum aggregate liability of
the Stockholders under this Article X shall in no event exceed $7.9 million.
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ARTICLE XI
TERMINATION, AMENDMENT AND WAIVER
SECTION 11.1 Termination. This Agreement may be terminated at any time
prior to the Closing Date, whether before or after the Parent Stockholders'
Approval, by the mutual written consent of the Company and Parent or as follows:
(a) The Company shall have the right to terminate this Agreement:
(i) upon a breach of a representation or warranty of Parent
contained in this Agreement which has not been cured in all material
respects and which has had or is likely to have a Parent Material
Adverse Effect and caused any of the conditions set forth in Section
8.2(a) to be incapable of being satisfied by the Termination Date;
(ii) if the Merger is not completed by December 31, 1998 (the
"Termination Date") (unless due to a delay or default on the part of the
Company);
(iii) if the Merger is enjoined by a final, unappealable court
order not entered at the request or with the support of the Company and
if the Company shall have used reasonable efforts to prevent the entry
of such order;
(iv) if Parent (A) fails to perform in any material respect any of
its covenants in this Agreement and (B) does not cure such default in
all material respects within 30 days after written notice of such
default specifying such default in reasonable detail is given to Parent
by the Company;
(v) if the stockholders of Parent fail to approve the issuance of
the shares of Parent Common Stock pursuant to the Merger at a duly held
meeting of stockholders called for such purpose or any adjournment or
postponement thereof; or
(vi) if the Average Closing Price is less than $21.00. For purposes
of this Agreement, "Average Closing Price" shall mean the average of the
daily closing prices per share of Parent Common Stock (as reported by
The Wall Street Journal or, if not reported thereby, another
authoritative source chosen by Parent) during the 20 consecutive trading
days in which such shares are traded on Nasdaq, ending at the close of
trading on the fifth trading day preceding any then scheduled Closing
Date (such amount to be appropriately adjusted for any stock split or
stock dividend or distribution, combination or other change in Parent
Common Stock).
(b) Parent shall have the right to terminate this Agreement:
(i) upon a breach of a representation or warranty of the Company or
the Stockholders contained in this Agreement which has not been cured in
all material respects and which has had or is likely to have a Company
Material Adverse Effect and has caused any of the conditions set forth
in Section 9.3(a) to be incapable of being satisfied by the Termination
Date;
(ii) if the Merger is not completed by December 31, 1998 (unless
due to a delay or default on the part of Parent);
(iii) if the Merger is enjoined by a final, unappealable court
order not entered at the request or with the support of Parent and if
Parent shall have used reasonable efforts to prevent the entry of such
order; or
(iv) if the Average Closing Price is less than $21.00.
SECTION 11.2 Effect of Termination. In the event of termination of this
Agreement by either Parent or the Company pursuant to the provisions of Section
11.1, this Agreement shall forthwith become void and there shall be no liability
or further obligation on the part of the Company, Parent, Subsidiary or their
respective officers or directors (except with respect to this Section 11.2, the
second sentence of Section 8.1(a) and Sections 8.1(b), 8.6 and 12.4, all of
which shall survive the termination). Nothing in this Section 11.2
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shall relieve any party from liability for any willful and intentional breach of
any covenant or agreement of such party contained in this Agreement.
SECTION 11.3 Amendment. This Agreement may not be amended except by action
taken by the parties' respective Boards of Directors or duly authorized
committees thereof and then only by an instrument in writing signed on behalf of
each of the parties hereto and in compliance with applicable law. Such amendment
may take place at any time prior to the Closing Date, and, subject to applicable
law, whether before or after approval by the stockholders of the Company, Parent
or Subsidiary.
SECTION 11.4 Waiver. At any time prior to the Effective Time, the parties
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant thereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE XII
GENERAL PROVISIONS
SECTION 12.1 Survival of Representations and Warranties.
(a) Except as set forth in Section 12.1(b) of this Agreement, the
representations, warranties, covenants and agreements of each party hereto
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any other party hereto, any person
controlling any such party or any of their officers, directors,
representatives or agents whether prior to or after the execution of this
Agreement; provided, however, that nothing in this Section 12.1(a) shall in
any way limit the effect of disclosures made by a party in the Disclosure
Schedules attached hereto with respect to the representations and
warranties of such party.
(b) Each representation, warranty, covenant and agreement set forth in
this Agreement shall survive the Effective Time. The representations and
warranties of the Company and the Stockholders set forth in Section 5.24
hereof shall survive the Effective Time for a period of four years from the
Effective Time. All other representations and warranties made by any of the
parties to this Agreement shall expire on the last day, if any, that any
claims for breaches of such representations and warranties may be made
pursuant to Section 10.5 hereof, except that any such representation or
warranty that has been made the subject of a third-party or direct claim
prior to such expiration date shall survive with respect to such claim
until the final resolution of such claim pursuant to Article X. Except as
otherwise specifically stated in this Agreement, all covenants and
agreements in this Agreement shall survive the Closing indefinitely.
SECTION 12.2 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, mailed by
registered or certified mail (return receipt requested) or sent via facsimile to
the parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) If to Parent or Subsidiary to:
First Sierra Financial, Inc.
600 Travis Street
Suite 7050
Houston, Texas 77002
Attention: Chief Executive Officer
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with a copy to:
Karen A. Dewis
McDermott, Will & Emery
600 13th Street, N.W.
Washington, DC 20005-3096
(b) If to the Company, to:
Oliver-Allen Corporation, Inc.
801 Larkspur Landing
Larkspur, California 94939
Attention: John F. Allen
with a copy to:
Jeffrey A. O'Connell
Shartsis, Friese & Ginsburg LLP
One Maritime Plaza
Eighteenth Floor
San Francisco, California 94111
(c) If to the Stockholders, to:
SECTION 12.3 Interpretation. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. In this Agreement, unless a contrary intention
appears, (i) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision and (ii) reference to any Article or
Section means such Article or Section hereof. No provision of this Agreement
shall be interpreted or construed against any party hereto solely because such
party or its legal representative drafted such provision. Neither this Agreement
nor any uncertainty or ambiguity herein shall be construed or resolved against
any party, whether under any rule of construction or otherwise. No party to this
Agreement shall be considered the draftsman. The parties acknowledge and agree
that this Agreement has been reviewed, negotiated, and accepted by all parties
and their attorneys and shall be construed and interpreted according to the
ordinary meaning of the words used so as fairly to accomplish the purposes and
intentions of the parties.
SECTION 12.4 Miscellaneous. This Agreement (including the documents and
instruments referred to herein) (a) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
among the parties, or any of them, with respect to the subject matter hereof,
(b) shall not be assigned by operation of law or otherwise, except that
Subsidiary may assign this Agreement to any other wholly-owned subsidiary of
Parent. THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS, INCLUDING VALIDITY,
INTERPRETATION AND EFFECT, BY THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO
CONTRACTS EXECUTED AND TO BE PERFORMED WHOLLY WITHIN SUCH STATE.
SECTION 12.5 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
SECTION 12.6 Parties in Interest. Other than as provided in Section 3.5
hereof, this Agreement shall be binding upon and inure solely to the benefit of
each party hereto, and nothing in this Agreement, express or implied, is
intended to confer upon any other person any rights or remedies of any nature
whatsoever under or by reason of this Agreement.
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SECTION 12.7 Captions. The captions contained in this Agreement are for
reference purposes only and are not part of this Agreement.
SECTION 12.8 No Waiver Relating to Claims for Fraud. Notwithstanding
anything herein to the contrary, the liability of any party under Article X
shall be in addition to, and not exclusive of any other liability that such
party may have at law or equity based on such party's intentional
misrepresentations or fraudulent acts or omissions. Notwithstanding anything
herein to the contrary, none of the provisions set forth in this Agreement,
including, but not limited, to the provisions set forth in Sections 10.5(a)
(relating to Minimum Loss), 10.5(b) (relating to limitations on the period of
time during which a claim for indemnification may be brought), or 10.5(c)
(relating to liability caps) or 10.6 (relating to recourse against Escrowed
Shares), shall be deemed a waiver by any party to this Agreement of any right or
remedy which such party may have at law or equity based on any other party's
intentional misrepresentations or fraudulent acts or omissions, nor shall any
such provisions limit, or be deemed to limit, (a) the amounts of recovery sought
or awarded in any such claim for fraud, (b) the time period during which such a
claim for fraud may be brought, or (c) the recourse which any such party may
seek against another party with respect to such a claim for fraud; provided,
that with respect to such rights and remedies at law or equity, the parties
further acknowledge and agree that none of the provisions of this Section 12.8,
nor any references to this Section 12.8 throughout this Agreement, shall be
deemed a waiver of any defenses which may be available in respect of actions or
claims for fraud or violation of state or federal securities laws, including but
not limited to, defenses of statutes of limitations or limitations of damages.
SECTION 12.9 Severability. Any term or provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
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IN WITNESS WHEREOF, Parent, Subsidiary and the Company have caused this
Agreement to be signed by their respective officers and attested to as of the
date first written above.
<TABLE>
<S> <C>
FIRST SIERRA FINANCIAL, INC.
Attest:
/s/ MICHAEL A. SABEL By: /s/ THOMAS J. DEPPING
- ----------------------------------------------------- -------------------------------------------------
Name: Thomas J. Depping
Title: President
SIERRA ACQUISITION CORPORATION I
Attest:
/s/ MICHAEL A. SABEL By: /s/ THOMAS J. DEPPING
- ----------------------------------------------------- -------------------------------------------------
Name: Thomas J. Depping
Title: President
OLIVER-ALLEN CORPORATION, INC.
Attest:
/s/ QUINTON YEUNG By: /s/ JOHN F. ALLEN
- ----------------------------------------------------- -------------------------------------------------
Name: John F. Allen
Title: President
</TABLE>
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<PAGE> 132
<TABLE>
<S> <C>
STOCKHOLDERS:
John F. Allen and Elizabeth H. Allen,
Trustees, John F. Allen and Elizabeth H. Allen
Family Trust, U/T/D July 10, 1992
By: /s/ JOHN F. ALLEN
-------------------------------------------------
John F. Allen,
Trustee
John R. Domingos, Trustee, Elizabeth W. F. Allen
Trust, U/T/D December 26, 1992
By: /s/ JOHN R. DOMINGOS
-------------------------------------------------
John R. Domingos,
Trustee
John R. Domingos, Trustee, Nicholas M. Allen Trust,
U/T/D December 26, 1992
By: /s/ JOHN R. DOMINGOS
-------------------------------------------------
John R. Domingos,
Trustee
The Marin Community Foundation
By: /s/ THOMAS PETERS, PH.D
-------------------------------------------------
Thomas Peters, PH.D,
President
</TABLE>
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<PAGE> 133
APPENDIX B
July , 1998
Board of Directors
First Sierra Financial, Inc.
600 Travis Street, #7050
Houston, TX 77002
Gentlemen:
You have requested that Friedman, Billings, Ramsey & Co., Inc. ("FBR")
provide you with its opinion as to the fairness, from a financial point of view,
to holders of common stock ("Stockholders") of First Sierra Financial, Inc.
("FSFH") of the Exchange Ratio (as hereinafter defined) to be provided by FSFH
pursuant to the Agreement and Plan of Merger by and between FSFH and
Oliver-Allen Corporation ("OAC"), dated June 10, 1998 (the "Merger Agreement"),
pursuant to which OAC will be merged with and into FSFH (the "Merger"). The
Merger Agreement provides, among other things and subject to certain terms and
conditions, that each issued and outstanding share of OAC common stock shall be
converted into a number of shares of FSFH Common Stock determined by dividing
(i) $79 million minus any transaction fees incurred by OAC in excess of $5.1
million by (ii) $25 and then dividing the quotient thereof by the aggregate
number of shares of OAC common stock issued and outstanding at the closing of
the Merger (the "Exchange Ratio"). In addition, each option to purchase OAC
common stock that is outstanding at the closing of the Merger (an "OAC Option")
shall be converted into an option to purchase the number of shares of FSFH
Common Stock equal to the number of shares of OAC common stock subject to the
OAC Option multiplied by the Exchange Ratio at an exercise price equal to the
exercise price under the OAC Option divided by the Exchange Ratio. The Merger
Agreement will be considered at a special meeting of the Stockholders of FSFH.
The terms of the Merger are more fully set forth in the Merger Agreement.
In delivering this opinion, FBR has completed the following tasks:
1. reviewed OAC's Audited Financial Statements for the fiscal years
ended June 30, 1997, 1996 and 1995;
2. reviewed OAC's Unaudited Quarterly Financial Statements for the
nine months ending March 31, 1998;
3. reviewed OAC's Federal and State (California only) Tax Returns for
the three years ended December 31, 1996, 1995 and 1994;
4. reviewed OAC's Descriptive Memorandum and Management Presentation
which were prepared by OAC's management and NationsBanc Montgomery
Securities;
5. reviewed OAC's financial projections for the five years ended June
30, 1998 through 2002;
6. reviewed First Sierra's Annual Report on Form 10-K filed with the
Securities and Exchange Commission (the "SEC") for the fiscal year ended
December 31, 1997, and First Sierra's Quarterly Reports on Form 10-Q filed
with the SEC for the fiscal quarters ended March 31, 1998, and September 30
and June 30, 1997;
7. reviewed the reported market prices and trading activity for First
Sierra Common Stock for the period May 15, 1997 through June 8, 1998;
8. reviewed certain information, including financial forecasts,
relating to the businesses, earnings, assets, liabilities and prospects of
First Sierra and OAC furnished to FBR by senior management of First Sierra
and OAC, as well as the amount and timing of the cost savings and related
expenses and revenue
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enhancements expected to result from the Merger furnished to FBR by senior
management of First Sierra and OAC (the "Synergies");
9. conducted discussions with members of senior management of First
Sierra and OAC concerning the respective businesses, prospects, regulatory
conditions and contingencies of First Sierra and OAC before and after
giving effect to the Merger and the Synergies;
10. compared the results of operations and financial condition of
First Sierra and OAC with those of certain publicly-traded financial
services companies that FBR deemed to be reasonably comparable to First
Sierra or OAC, as the case may be;
11. reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions that FBR deemed to be reasonably
comparable to the Merger;
12. reviewed the potential pro forma impact of the Merger to the
Stockholders;
13. reviewed a copy of the Merger Agreement; and
14. reviewed such other financial studies and analyses and took into
account such other matters as FBR deemed necessary, including an assessment
of general economic, market and monetary conditions.
In rendering this opinion, FBR did not assume responsibility for
independently verifying, and did not independently verify, any financial or
other information concerning FSFH and OAC furnished to it by FSFH or OAC, or the
publicly-available financial and other information regarding FSFH and certain
other financial services companies. FBR has assumed, for the purposes of this
opinion, that all such information is accurate and complete. FBR has further
relied on the assurances of management of FSFH and OAC that they are not aware
of any facts that would make such financial or other information relating to
such entities inaccurate or misleading. With respect to financial forecasts for
OAC and FSFH provided to FBR by their respective management, FBR has assumed,
for the purposes of this opinion, that the forecasts have been reasonably
prepared on bases reflecting the best available estimates and judgments of such
management at the time of preparation as to the future financial performance of
OAC and FSFH, as the case may be. FBR has assumed that there has been no
material change in OAC's assets, financial condition, result of operations,
business or prospects since March 31, 1998. FBR did not undertake an independent
appraisal of the assets or liabilities (contingent or otherwise) of OAC nor was
FBR furnished with any such appraisals. FBR is not an expert in the evaluation
of allowances for loan or lease losses, was not requested to and did not review
the adequacy of such allowances, and was not requested to and did not review any
individual credit files of OAC. FBR's conclusions and opinion are necessarily
based upon economic, market and other conditions and the information made
available to FBR as of the date of this opinion. FBR expresses no opinion on
matters of a legal, regulatory, tax or accounting nature related to the Merger.
FBR, as part of its institutional brokerage, research and investment
banking practice, is regularly engaged in the valuation of securities and the
evaluation of transactions in connection with mergers and acquisitions of
commercial banks, savings institutions, financial institution holding companies,
leasing companies and other specialty finance companies, initial and secondary
offerings, mutual-to-stock conversions of savings institutions, as well as
business valuations for other corporate purposes for financial services
companies and real estate related companies. FBR has experience in, and
knowledge of, the valuation of specialty finance company securities in Texas,
California and the rest of the United States.
FBR has acted as a financial advisor to FSFH in connection with the Merger
and will receive a fee for services rendered which is contingent upon the
consummation of the Merger. In the ordinary course of FBR's business, it may
effect transactions in the securities of FSFH for its own account and/or for the
accounts of its customers and, accordingly, may at any time hold long or short
positions in such securities. From time to time, principals and/or employees of
FBR may also have positions in such securities.
Based upon and subject to the foregoing, as well as any such other matters
as we consider relevant, it is FBR's opinion, as of the date hereof, that the
Exchange Ratio is fair, from a financial point of view, to the Stockholders of
FSFH.
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This letter is solely for the information of the Board of Directors and
Stockholders of FSFH and may not be relied upon by any other person or used for
any other purpose, reproduced, disseminated, quoted from or referred to without
FBR's prior written consent; provided, however, this letter may be referred to
and reproduced in its entirety in proxy materials sent to the Stockholders in
connection with the solicitation of approval for the Merger.
Very truly yours,
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
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