<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report: July 16, 1998
FIRST SIERRA FINANCIAL, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-22525 76-0438432
- --------------------------------------------------------------------------------
(State of other (Commission File (IRS Employer
jurisdiction of Number) Identification
incorporation) Number
Chase Tower, Suite 7050, 600 Travis Street, Houston, Texas 77002
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (713) 221-8822
--------------
<PAGE> 2
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 F-3
Consolidated Statements of Operations for the Years Ended December 31, F-4
1995, 1996 and 1997
Consolidated Statements of Stockholders' Equity for the Years Ended F-5
December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31, F-6
1995, 1996 and 1997
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE> 3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To First Sierra Financial, Inc.:
We have audited the accompanying consolidated balance sheets of First
Sierra Financial, Inc., and subsidiaries as of December 31, 1996 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of First Sierra
Financial, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
July 10, 1998
F-2
<PAGE> 4
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
----------------
1996 1997
----------------
<S> <C> <C>
Lease financing receivables, net ................................... $61,405 $24,769
Cash and cash equivalents .......................................... 2,876 13,265
Investment in trust certificates ................................... 9,534 12,512
Marketable security ................................................ -- 4,020
Furniture and equipment, net ....................................... 1,313 3,535
Goodwill and other intangible assets, net .......................... 3,615 20,162
Other assets ....................................................... 1,913 7,570
------- -------
Total assets ............................................. $80,656 $85,833
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Warehouse credit facilities ...................................... $52,820 $13,070
Subordinated notes payable ....................................... 9,000 6,000
Other liabilities:
Holdback reserve payable ......................................... 6,523 11,334
Accounts payable and accrued liabilities ......................... 4,497 11,272
Income taxes payable ............................................. -- 1,176
Deferred income taxes ............................................ 1,366 3,494
------- -------
Total liabilities ........................................ 74,206 46,346
Commitments and contingencies
Redeemable preferred stock ......................................... 3,890 2,640
Stockholders' equity:
Common stock, $.01 par value,
25,000,000 shares authorized,
6,282,759 shares and 9,891,881
shares issued and outstanding,
respectively .................................................. 63 99
Additional paid-in capital ....................................... 802 27,543
Retained earnings ................................................ 1,695 9,205
------- -------
Total stockholders' equity ............................... 2,560 36,847
------- -------
Total liabilities and stockholders' equity ............... $80,656 $85,833
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 5
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Gain of sale of lease financing receivables ........... $ 4,176 $ 5,881 $22,476
Interest income ....................................... 3,053 6,323 9,018
Servicing income ...................................... 323 1,050 3,092
Other income .......................................... 1,566 2,956 6,537
------- ------- -------
Total revenues .............................. 9,118 16,210 41,123
------- ------- -------
Salaries and benefits ................................. 1,881 3,548 10,010
Interest expense ...................................... 2,632 5,022 5,101
Provision for credit losses ........................... 392 537 1,891
Depreciation and amortization ......................... 142 368 1,360
Other general and administrative expenses ............. 2,375 3,959 9,056
------- ------- -------
Total expenses .............................. 7,422 13,434 27,418
------- ------- -------
Income before provision for income taxes .............. 1,696 2,776 13,705
Provision for income taxes ............................ 570 932 5,131
------- ------- -------
Net income ............................................ $ 1,126 $ 1,844 $ 8,574
======= ======= =======
Earnings per common share, basic ...................... $ 0.19 $ 0.29 $ 1.02
======= ======= =======
Earnings per common share, diluted .................... $ 0.16 $ 0.27 $ 0.95
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 6
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ ADDITIONAL RETAINED TOTAL
NUMBER PAID-IN (DEFICIT) STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ............................ 6,056,449 $ 61 $ 1,017 $ (684) $ 394
Net income .......................................... -- -- -- 1,126 1,126
Distribution to stockholders (Note 3) ............... -- -- -- (35) (35)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1995 ............................ 6,056,449 61 1,017 407 1,485
Net income .......................................... -- -- -- 1,844 1,844
Issuance of common stock ............................ 854,736 8 139 -- 147
Repurchase and retirement of common
stock ............................................ (628,426) (6) (354) -- (360)
Distribution to stockholders (Note 3) ............... -- -- -- (496) (496)
Preferred stock dividends ........................... -- -- -- (60) (60)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1996 ............................ 6,282,759 63 802 1,695 2,560
Net income .......................................... -- -- -- 8,574 8,574
Initial public offering of common stock ............. 2,300,000 23 16,183 -- 16,206
Issuance of common stock in connection with
purchase business combinations ................... 871,781 9 8,373 -- 8,382
Issuance of common stock in exchange for warrants ... 198,352 2 -- -- 2
Issuance of common stock in exchange for
preferred stock ................................ 238,989 2 2,185 -- 2,187
Distribution to stockholders (Note 3)................ (944) (944)
Preferred stock dividends ........................... -- -- -- (120) (120)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 ............................ 9,891,881 $ 99 $ 27,543 $ 9,205 $ 36,847
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 7
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operations:
Net income ........................................................... $ 1,126 $ 1,843 $ 8,574
Reconciliation of net income to cash provided
by (used in) operations --
Depreciation and amortization ...................................... 142 368 1,360
Provision for credit losses ........................................ 392 537 1,891
Gain on sale of lease financing receivables ........................ (3,259) (3,456) (19,017)
Funding of lease financing receivables ............................. (66,408) (172,752) (360,808)
Principal payments received on lease financing receivables ......... 3,167 13,977 13,366
Proceeds from sales of lease financing receivables, net of
trust certificates and marketable security retained................ 28,623 159,354 432,240
Proceeds from (repayments of) warehouse credit facilities,
net of repayments (borrowings) .................................... 32,461 (3,134) (85,103)
Deferred income tax provision ...................................... 144 792 3,923
Changes in assets and liabilities, net of effects from acquisitions:
Decrease (increase) in other assets .............................. 22 (612) 249
Increase in accounts payable and accrued liabilities ............. 736 2,227 1,715
Increase in holdback reserve payable ............................. 1,850 4,554 6,283
Increase in income taxes payable ................................. -- -- 1,176
--------- --------- ---------
Net cash provided by (used in) operations ...................... (1,004) 3,698 5,849
--------- --------- ---------
Cash flows from investing activities:
Additions to furniture and equipment ................................. (332) (990) (2,250)
Cash used in acquisitions, net of cash acquired ...................... -- (69) (4,535)
--------- --------- ---------
Net cash used in investing activities .......................... (332) (1,059) (6,785)
--------- --------- ---------
Cash flows from financing activities:
Repayment of subordinated note payable ............................... -- -- (9,000)
Advances under subordinated revolving credit facility ................ -- -- 5,000
Proceeds from issuance of common stock and exercise of
convertible warrants ............................................... -- 147 16,208
Repurchase of common stock ........................................... -- (360) --
Distributions to stockholders ........................................ (35) (496) (883)
--------- --------- ---------
Net cash provided by (used in) financing activities ............ (35) (709) 11,325
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ................... (1,371) 1,930 10,389
Cash and cash equivalents at beginning of period ....................... 2,317 946 2,876
--------- --------- ---------
Cash and cash equivalents at end of period ............................. $ 946 $ 2,876 $ 13,265
========= ========= =========
Supplemental disclosure of cash flow information:
Income taxes paid ................................................. $ 360 $ 27 $ 25
========= ========= ---------
Interest paid ..................................................... $ 2,749 $ 4,818 $ 4,897
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 8
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. THE COMPANY
Organization
First Sierra Financial, Inc. ("First Sierra" or the "Company") is a
specialized finance company that was formed in June 1994 to acquire and
originate, sell and service equipment leases. The underlying leases financed by
the Company relate to a wide range of equipment, including computers and
peripherals, computer software, medical, dental and diagnostic,
telecommunications, office, automotive servicing, hotel security, food services,
tree service and industrial, as well as specialty vehicles. The equipment
generally has a purchase price of less than $250,000 (with an average of
approximately $19,000 from inception through December 31, 1997). The Company
initially funds the acquisition or origination of its leases through its
warehouse credit facilities and, upon achieving a sufficient portfolio size,
sells such receivables in the public and private markets, principally through
its securitization program.
The Company acquires and originates leases primarily through its
Private Label, Broker and Vendor programs. Under the Private Label program, the
Company is provided protection from credit losses on defaulted leases through a
first lien security interest in the underlying equipment, recourse to the source
of the lease (the "Source"), holdback reserves withheld from amounts paid to the
Source upon purchase of the lease, or a combination of the above. Leases
acquired through the Broker and Vendor programs are originated through
relationships with vendors, manufacturers, brokers and dealers of equipment. In
addition, the Company has in the past generated, and may in the future generate,
gain on sale income through the acquisition of lease portfolios and the
subsequent sale of such portfolios at a premium.
Since inception, the Company's underwriting, customer service and
collection staff have been located in its Jupiter, Florida office. In order to
consolidate its operations and maximize administrative efficiencies, the Company
relocated its operations center from Jupiter, Florida to its headquarters in
Houston, Texas in late 1997 and early 1998. The Company incurred approximately
$97,000 of expenses in 1997 related to the relocation.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of First
Sierra and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles and conform to practices within the equipment leasing
industry. As discussed further in Note 13, the Company consummated mergers with
Independent Capital Corporation ("ICC") and Integrated Lease Management, Inc.
("ILM") in the first quarter of 1998 which were accounted for as poolings of
interests. Accordingly, the accompanying financial statements have been restated
to include the financial position and results of operations of the merged
companies for all periods presented. The separate results of First Sierra and
each of the merged companies is set forth in the following table (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues
First Sierra 6,651 11,364 34,457
ICC 917 2,431 3,484
ILM 1,550 2,415 3,182
-------- -------- --------
Restated revenues 9,118 16,210 41,123
Net income (loss)
First Sierra 825 1,217 7,655
ICC 142 436 931
ILM 159 191 (12)
-------- -------- --------
Restated net income 1,126 1,844 8,574
</TABLE>
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
<PAGE> 9
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Lease Financing Receivables
The Company records the sum of the future minimum lease payments,
unguaranteed residual value and initial direct costs as the gross investment in
the lease. The difference between gross investment in the lease and the cost of
the lease is defined as "unearned income." Unearned income and initial direct
costs incurred in connection with the acquisition or origination of the lease
are amortized over the related lease term using the interest method.
Amortization of unearned income and initial direct costs is suspended if, in the
opinion of management, full payment of the contractual amount due under the
lease agreement is doubtful, typically upon a payment becoming 90 days past due,
unless such payment is guaranteed pursuant to recourse or holdback provisions of
the lease acquisition agreements.
In conjunction with the acquisition and origination of leases, the
Company may retain a residual interest in the underlying equipment upon
termination of the lease. The value of such interests is estimated at inception
of the lease and evaluated periodically for impairment.
Gain on Sale of Lease Financing Receivables
In June 1996, the Financial Accounting Standards Board adopted
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
Under SFAS No. 125, an entity will recognize the financial and servicing assets
it controls and the liabilities it has incurred, derecognize financial assets
when control has been surrendered and derecognize liabilities when extinguished.
Additionally, SFAS No. 125 requires that servicing assets and other retained
interests in the transferred assets be measured by allocating the previous
carrying amount between the assets sold, if any, and retained interests, if any,
based on relative fair values at the date of transfer. SFAS No. 125 is effective
for transactions occurring after December 31, 1996, and earlier or retroactive
application is not permitted. If SFAS No. 125 were effective for fiscal 1996
transactions, the effect would have been to record a servicing asset in
conjunction with transactions conducted through the Company's securitization
program and to decrease the allocated cost attributable to the residual interest
in securitized assets retained by the Company.
Gain on sale of leases sold through securitization transactions is
recorded as the difference between the proceeds received from the sale of senior
and subordinated securities, net of related issuance expenses, and the cost
basis of the leases allocated to the securities sold. The cost basis of the
leases is allocated to the senior and subordinated securities, the Trust
Certificate (as defined herein) and the servicing asset on a relative fair value
basis on the date of sale. The fair value of the senior and subordinated
securities which have been sold is based on the price at which such securities
are sold through public issuances and private placement transactions, while the
fair value of the Trust Certificate, the subordinated securities which have been
retained and the servicing asset is based on the Company's estimate of its fair
value using a discounted cash flow approach.
Gain on portfolio sales of leases is calculated as the difference
between the proceeds received, net of related selling expenses, and the carrying
amount of the related leases adjusted for ongoing recourse obligations of the
Company, if any. At December 31, 1997, the Company believes that it does not
have any material recourse obligations related to receivables sold through
portfolio sales.
Marketable Security
The Company considers rated subordinated securities retained in
securitization transactions as trading securities under the provisions of SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and
unrealized holding gains and losses are reflected currently in earnings. During
the year
F-8
<PAGE> 10
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ended December 31, 1997, the Company recognized gains of $183,000 representing
estimated appreciation in a subordinated security held.
Exposure to Credit Losses
Management evaluates the collectibility of leases acquired or
originated based on the level of recourse provided, if any, delinquency
statistics, historical loss experience, current economic conditions and other
relevant factors. The Company provides an allowance for credit losses for
leases which are considered impaired during the period from the funding of the
leases through the date such leases are sold through the Company's
securitization program. Estimated losses on leases that are considered impaired
and have been sold through the Company's securitization program are taken into
consideration in the valuation of the Company's investment in the Trust
Certificates retained in the securitization transactions.
The following table sets forth certain information as of December 31,
1996 and 1997, with respect to leases, which were held by the Company in its
portfolio or serviced by the Company pursuant to its securitization program
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1997 (1)
---------------------------------------- -----------------------------------------
PRIVATE BROKER/ PRIVATE BROKER/
LABEL VENDOR TOTAL LABEL VENDOR TOTAL
----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gross leases outstanding ..... $ 244,049 $ 13,185 $ 257,234 $ 422,290 $ 189,068 $ 611,358
31 - 60 days past due ........ 2.46% 1.25% 2.40% 1.86% 1.90% 1.87%
61 - 90 days past due ........ 0.81% 0.21% 0.78% 0.60% 0.50% 0.57%
Over 90 days past due ........ 0.35% 0.00% 0.33% 0.38% 0.36% 0.37%
----------- ---------- ----------- ----------- ----------- -----------
Total past due .......... 3.62% 1.46% 3.51% 2.84% 2.76% 2.81%
</TABLE>
- ----------------
(1) The Broker/Vendor amounts as of December 31, 1997 include, and the Private
Label amounts as of December 31, 1997 exclude, approximately $14.9 million
of leases that were purchased by the Company pursuant to its Private Label
program from Lease Pro and Heritage. Such companies were formerly Private
Label Sources until their acquisition by the Company in February 1997 and
May 1997, respectively.
In assessing the Company's exposure to credit losses, management
generally segregates the leases acquired under its Private Label program from
those acquired or originated under its Broker and Vendor programs due to the
differing levels of credit protection available to the Company under the various
lease funding programs. The following table sets forth the Company's allowance
for credit losses for its Private Label program and its Broker and Vendor
programs for the years ended December 31, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
PRIVATE BROKER/
LABEL VENDOR (1) TOTAL
------- ---------- -------
<S> <C> <C> <C>
Balance at December 31, 1995 .................... $ 420 $ -- $ 420
Provision for credit losses ..................... 326 211 537
Charge-offs, net of recoveries .................. (25) -- (25)
Reduction of allowance for leases sold (2) ...... (407) -- (407)
------- ------- -------
Balance at December 31, 1996 .................... 314 211 525
Provision for credit losses ..................... 236 1,655 1,891
Reduction of allowance for leases sold (2) ...... (415) (1,968) (2,383)
Charge-offs, net of recoveries on leases acquired
or originated by the Company ................. (99) (73) (172)
Additional allowance related to leases acquired
through business combinations ................ -- 841 841
Charge-offs, net of recoveries on leases acquired
through business combinations ................ -- (293) (293)
------- ------- -------
Balance at December 31, 1997 .................... $ 36 $ 373 $ 409
======= ======= =======
</TABLE>
F-9
<PAGE> 11
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ----------------
(1) The Company established its Broker and Vendor programs in July 1996.
(2) In conjunction with the sales of leases, the Company reduces the allowance
for credit losses for any provision previously recorded for such leases.
Any losses expected to be incurred on leases sold, as previously evidenced
by the allowance for credit losses, are taken into consideration in
determining the fair value of any Trust Certificates retained and recourse
obligations accrued, if any.
Under the Private Label program, the Company seeks to minimize its
losses through a first lien security interest in the equipment funded, recourse
to the Private Label source, holdback reserves withheld from the Private Label
Source upon purchase of the lease, or a combination of the above. The recourse
provisions generally require the Private Label Source to repurchase a receivable
when it becomes 90 days past due. The recourse commitment generally ranges from
10% to 20% of the aggregate purchase price of all leases acquired from the
Private Label Source. Holdback reserves withheld from the purchase price
generally range from 1% to 10% of the aggregate purchase price of the leases
acquired from the Private Label Source. In determining whether a lease acquired
pursuant to the Private Label program which is considered impaired will result
in a loss to the Company, management takes into consideration the ability of the
Private Label Source to honor its recourse commitments and the holdback reserves
withheld from the Private Label Source upon purchase of the lease, as well as
the credit quality of the underlying lessee and the related equipment value. At
December 31, 1996 and 1997, the Company had holdback reserves of $6.5 million
and $11.3 million, respectively, relating to leases, acquired pursuant to the
Private Label program. Such amounts have been classified as liabilities in the
accompanying financial statements.
The following table sets forth certain aggregate information regarding
the level of credit protection afforded the Company pursuant to the recourse and
holdback provisions of the Private Label program as of December 31, 1996 and
1997 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Leases outstanding under the Private Label program (1) ..... $202,523 $331,219
======== ========
Recourse to Sources available .............................. $ 19,480 $ 33,351
Holdback reserves outstanding .............................. 6,523 11,334
-------- --------
Total recourse and holdback reserves available ............. $ 26,003 $ 44,685
======== ========
Ratio of recourse and holdback reserves outstanding to total
Leases outstanding under the Private Label program(2) .... 12.84% 13.49%
======== ========
</TABLE>
- ----------------
(1) Represents net principal balance of leases held by the Company in its
portfolio as well as leases serviced by the Company pursuant to its
securitization program.
(2) The specific level of credit protection varies for each Private Label
Source. Specific levels of credit protection by Source are considered by
management in determining the allowance for credit losses.
The following table sets forth the experience of the Company with
respect to leases acquired pursuant to the Private Label program for the year's
ended December 31, 1995, 1996 and 1997 (dollars in thousands):
F-10
<PAGE> 12
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Average balance of leases acquired pursuant to the Private
Label program outstanding during the period(1) ............... $ 30,561 $124,592 $260,011
======== ======== ========
Total amount of leases triggering action under recourse
and holdback provisions during the period .................... $ 266 $ 1,855 $ 5,021
-------- -------- --------
Amounts recovered under recourse provisions .................... 238 1,694 4,535
Amounts recovered pursuant to holdback reserves ................ 28 136 264
-------- -------- --------
Total amounts recovered ........................................ 266 1,830 4,799
-------- -------- --------
Net loss experienced on leases acquired pursuant to the
Private Label program ........................................ $ -- $ 25 $ 222
======== ======== ========
Net default ratio .............................................. 0.00% 0.02% 0.09%
======== ======== ========
</TABLE>
- ----------------
(1) Represents net principal balance of leases held by the Company in its
portfolio as well as leases serviced by the Company pursuant to its
securitization program.
Management analyzes the collectibility of leases acquired or originated
pursuant to its Broker and Vendor programs based on its underwriting criteria,
delinquency statistics, historical loss experience, current economic conditions
and other relevant factors. While the Company owns the underlying equipment, it
does not have any recourse or holdback reserves with respect to any leases
acquired or originated pursuant to its Broker and Vendor programs. The Company
did not incur any losses with respect to leases acquired or originated pursuant
to the Broker and Vendor programs from the time such programs were established
in July 1996 through December 31, 1996. The following table sets forth the
Company's experience with respect to leases acquired or originated pursuant to
the Broker and Vendor programs for the year ended December 31, 1997 (dollars in
thousands):
<TABLE>
<S> <C>
Average balance of leases acquired pursuant to the Broker and
Vendor programs outstanding during the period (1) (2) ........... $61,954
=======
Net losses experienced on leases acquired pursuant to the Broker
and Vendor programs (1) ........................................ $ 362
=======
0.58%
Net default ratio .................................................. =======
</TABLE>
- ----------------
(1) Excludes lease receivables and losses on lease receivables acquired through
business combinations.
(2) Represents net principal balance of leases held by the Company in its
portfolio as well as leases serviced by the Company pursuant to its
securitization program.
The Company may also acquire leases in conjunction with the acquisition of
other leasing companies. For acquisitions accounted for as purchases, management
initially records lease receivables at their estimated fair value at date of
acquisition. In determining such amount, management performs certain due
diligence procedures on the underwriting, collections and servicing functions of
the acquired company as well as evaluates the estimated realizability of the
portfolio of leases itself. During the year ended December 31, 1997, the Company
acquired approximately $44.6 million of leases through purchase business
combinations. Such leases may be retained by the Company, sold through its
securitization program or sold through portfolio sales. In conjunction with such
sales, management takes into consideration estimated losses to be incurred on
these leases in determining the estimated fair value of Trust Certificates
retained in the securitization transactions or recourse obligations assumed in
portfolio sales, if any. As of December 31, 1997, approximately $11.6 million of
leases acquired through business combinations remained on the Company's balance
sheet. An allowance of $310,000 was outstanding at December 31, 1997 related to
such leases which management believes to be adequate to cover losses expected to
be incurred on leases which were impaired as of such date.
F-11
<PAGE> 13
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's allowance for credit losses and its valuation of the
Trust Certificates retained in its securitization transactions are based on
estimates and qualitative evaluations, and ultimate losses will vary from
current estimates. These estimates are reviewed periodically and as adjustments,
either positive or negative, become necessary, they are reported in earnings in
the period in which they become known.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates applied to taxable income in
the years in which those temporary differences are expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the period in which the change is
enacted.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost over the fair value of
identifiable net assets of businesses acquired and is amortized on a straight
line basis over 20 years. The Company periodically assesses the recoverability
of goodwill by evaluating whether the future cash flows expected to be generated
from the businesses acquired are greater than the carrying amount of the related
goodwill. If such future cash flows are not expected to exceed the carrying
amount of the related goodwill, an impairment is deemed to have occurred and a
write down would be recorded currently in earnings. At December 31, 1997, no
impairment was deemed to have occurred. Other intangible assets consist of
amounts paid for noncompete agreements, which are amortized on a straight line
basis over the term of the agreement. At December 31, 1997, accumulated
amortization related to amounts recorded for goodwill and amounts paid pursuant
to noncompete agreements was approximately $825,000.
Furniture and Equipment
Furniture and equipment are carried at cost, less accumulated
depreciation. Such assets are depreciated using accelerated and straight line
methods over the estimated useful lives of the respective assets.
Cash and Cash Equivalents
The Company considers all significant investments, which mature within
three months of the date of purchase to be cash equivalents.
Interest Rate Management Activities
Leases acquired and originated by the Company require payments to be
made by the lessee at fixed rates for specified terms. The rates charged by the
Company are based on interest rates prevailing in the market at the time of
lease approval. The Company generally obtains funding for lease acquisitions and
originations through borrowings from its warehouse credit facilities or sales to
its securitized warehouse facilities. Because the warehouse credit facilities
bear interest at floating rates, the Company is exposed to risk of loss from
adverse interest rate movements during the period from the date of borrowing
through the date the underlying leases are securitized or otherwise sold. The
Company seeks to minimize its exposure to adverse interest rate movements during
this period through entering into amortizing interest rates swap transactions
under which the notional amount of the contract changes monthly to match the
F-12
<PAGE> 14
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
anticipated amortization of the underlying leases. Settlements with
counterparties are accrued at period-end and either increase or decrease
interest expense reported in the statement of operations.
Additionally, because the senior certificates issued by the securitized
warehouse facilities bear interest at floating rates, the Company is exposed to
risk of loss on its investment in the residual interests retained in such
facilities. The terms of the securitized warehouse facilities require the trust
to enter into amortizing swap transactions with notional principal amounts of at
least 90% of the aggregate principal amount of the senior certificates issued by
the trust. Settlements with counter-parties are the responsibility of the trust
however, such payments directly affect the estimated valuation of the residual
interest retained by the Company in the trust. Accordingly, management takes
into consideration the nature and amount of any amortizing interest rate swap
agreements entered into by the trust in determining the estimated fair value of
residual interests retained in the trust upon the initial sale of leases to the
securitized warehouse facilities and in evaluating the realizability of the
retained residual interests on an ongoing basis.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share". SFAS No. 128 requires a dual presentation of
basic and diluted earnings per share. Basic earnings per share excludes dilution
and is computed by dividing net income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The Company adopted SFAS No. 128 in the fourth quarter of
fiscal 1997 and prior periods have been restated to reflect the provisions of
the new standard.
Following is a reconciliation of the numerators and denominators used
in calculating basic and diluted earnings per share for the years ended December
31, 1995, 1996 and 1997 (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Earnings per common share, basic
Net income ...................................... $ 1,126 $ 1,844 $ 8,574
Preferred stock dividends ....................... -- 60 120
---------- ---------- ----------
Net income available to common stockholders ..... $ 1,126 $ 1,784 $ 8,454
========== ========== ==========
Weighted average shares outstanding ............. 6,056,449 6,136,516 8,248,002
========== ========== ==========
Earnings per common share, basic ................ $ 0.19 $ 0.29 $ 1.02
========== ========== ==========
Earnings per common share, diluted
Net income ...................................... $ 1,126 $ 1,844 $ 8,574
========== ========== ==========
Weighted average shares outstanding ............. 6,056,449 6,136,516 8,248,002
Dilutive securities -
Options ........................................ 760,520 243,558 249,943
Warrants ....................................... 77,902 198,307 78,452
Redeemable preferred stock ..................... -- 165,333 429,418
---------- ---------- ----------
Weighted average shares outstanding, diluted .... 6,894,871 6,743,714 9,005,815
========== ========== ==========
Earnings per common share, diluted .............. $ 0.16 $ 0.27 $ 0.95
========== ========== ==========
</TABLE>
Stock Compensation Plan
The Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock Based Compensation," in October 1995. SFAS No. 123
encourages companies to adopt a fair value approach to valuing stock options
that would require compensation cost to be recognized based on the fair value of
F-13
<PAGE> 15
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock options granted. The Company has elected, as permitted under SFAS No. 123,
to continue to follow the intrinsic value based method of accounting for stock
options consistent with Accounting Principles Board Opinion No. 25 (APB 25) and
to provide the pro forma net income and pro forma earnings per share disclosures
as if the fair value based method defined in SFAS No. 123 had been applied (see
Note 10). Under the intrinsic method, compensation expense is recorded on the
date of grant only if the market price of the underlying stock at such date
exceeded the exercise price.
Recent Accounting Pronouncement
In June 1997, Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information" which is
effective for fiscal years beginning after December 15, 1997. SFAS No. 131
establishes standards for reporting information about operating segments in
annual financial statements and in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Management is evaluating the effect of the
adoption of this standard on the disclosures presented in the consolidated
financial statements. The adoption of this standard will not however, have any
impact on the Company's financial position or results of operations.
Reclassifications
Certain reclassifications have been made to conform with the current
period presentation.
3. ACQUISITIONS
During the years ended December 31, 1996 and 1997, the Company
completed a total of ten acquisitions. Each of these have been accounted for
using the purchase method of accounting. Under the purchase method of
accounting, the results of acquired businesses are included in the Company's
results from their respective acquisition dates. The allocations of the purchase
price to the fair market value of the net assets acquired is based on
preliminary estimates of fair market value and may be revised when additional
information concerning asset and liability valuations is obtained. The aggregate
consideration for the two acquisitions completed in 1996 consisted of the
payment of approximately $500,000 in cash and the issuance of 100,409 shares of
preferred stock of the Company, initially valued at approximately $3.9 million.
The aggregate consideration for the eight acquisitions completed in 1997
consisted of the payment of approximately $4.5 million in cash, net of cash
acquired, the issuance of a subordinated note payable in the amount of $1.0
million and the issuance of 871,781 shares of common stock of the Company valued
at approximately $8.4 million. Following is a brief description of each
acquisition consummated in 1996 and 1997:
On July 11, 1996, the Company acquired certain assets and liabilities
of General Interlease Corporation ("GIC"), including its key personnel. GIC is
located in Ft. Lauderdale, Florida and primarily focuses on the small ticket
broker and vendor markets in the southeastern region of the United States. By
virtue of the GIC acquisition, the Company was able to enter the lease broker
market and gained a geographic presence in the Florida vendor market, the fourth
largest vendor market in the United States based on a study by the Foundation
for Leasing Education. In addition, the Company gained a presence in several
national vendor markets, including hotel security, food services, industrial and
automotive servicing equipment.
On October 31, 1996, the Company acquired the outstanding capital stock
of Corporate Capital Leasing Group, Inc. ("CCL"). CCL is located in West
Chester, Pennsylvania and focuses primarily on the broker market in the
Mid-Atlantic region of the United States. By virtue of the CCL acquisition, the
F-14
<PAGE> 16
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company gained a geographic presence in the mid-Atlantic broker market, as well
as a presence in the national market for vendors of arbor (tree service)
equipment.
On February 4, 1997, the Company acquired certain assets and
liabilities of Lease Pro, Inc. ("Lease Pro"). Lease Pro is located in Atlanta,
Georgia and has a significant presence in the national market for veterinary
equipment financing. Since October 1986, Lease Pro has generated over 5,000
veterinarian leases.
On May 20, 1997, the Company acquired the outstanding capital stock of
Heritage Credit Services, Inc. ("Heritage"). Heritage is located near
Sacramento, California and maintains sales offices in Bellevue, Washington;
Miami, Florida; Los Angeles, California; and Prescott, Arizona. Heritage is
primarily involved in the broker market on the U. S. west coast and has a
significant vendor base in California (see Note 6).
On May 30, 1997, the Company acquired certain assets and liabilities
of Universal Fleet Leasing, Inc. ("UFL"). UFL is located in Houston, Texas and
focuses primarily on the small ticket vendor market in the southwestern region
of the United States.
On June 30, 1997, the Company acquired certain assets and liabilities
of Public Funding Corporation ("Public Funding"). Public Funding is located in
Chicago, Illinois. Public Funding specializes in leasing equipment to municipal
and other governmental entities.
Effective as of September 2, 1997, the Company acquired the outstanding
capital stock of Northcoast Capital Leasing Company ("Northcoast"). Northcoast
is located in Cleveland, Ohio and focuses primarily on the tree service and
construction equipment markets in the midwest region of the United States.
On September 12, 1997, the Company acquired the outstanding capital
stock of Financial Management Services, Inc., which does business under the name
Cascade. Cascade is located near Seattle, Washington and focuses primarily on
the agricultural equipment market in the northwest region of the United States.
On November 6, 1997, the Company acquired the outstanding capital stock
of Heritage Credit Services of Oregon, Inc. ("Heritage Credit"). Heritage Credit
is located in Portland, Oregon and focuses primarily on the small ticket vendor
market in the northwestern region of the United States.
On November 26, 1997, the Company acquired the outstanding capital
stock of All American Financial Services, Inc. ("All American"). All American is
located in Conyers, Georgia and focuses primarily on leasing to the retail
petroleum and convenience store industries.
The following table reflects, on an unaudited pro forma basis, the
combined operations of the Company and the significant businesses acquired
during the years ended December 31, 1996 and 1997 as if the acquisitions had
taken place at the beginning of 1996 and 1997. Appropriate pro forma adjustments
have been made to reflect the cost basis used in recording these acquisitions.
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of the results of operations that would have
resulted had the combinations been in effect on the dates referred to above,
that have resulted since the dates of the acquisitions or that may result in the
future (in thousands, except per share amounts):
F-15
<PAGE> 17
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Revenues ............................... $29,667 $45,022
Net income before income taxes ......... 3,394 11,552
Net income ............................. 2,212 7,286
Earnings per common share, basic ....... 0.32 0.85
Earnings per common share, diluted ..... 0.29 0.79
</TABLE>
4. LEASE FINANCING RECEIVABLES
The Company's lease financing receivable balance at December 31, 1996
and 1997, consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Minimum lease payments .................. $ 75,945 $ 28,748
Estimated unguaranteed residual value ... 1,179 2,242
Initial direct costs .................... 895 131
Unearned income ......................... (16,089) (5,943)
Allowance for credit losses ............. (525) (409)
-------- --------
Lease financing receivables, net ...... $ 61,405 $ 24,769
======== ========
</TABLE>
Future scheduled minimum payments on the Company's lease portfolio as
of December 31, 1997, are as follows (in thousands):
<TABLE>
<S> <C>
1998.................................................... $ 9,715
1999.................................................... 7,940
2000.................................................... 5,358
2001.................................................... 3,359
2002.................................................... 1,654
Thereafter.............................................. 722
--------
Total minimum payments........................ $ 28,748
========
</TABLE>
At December 31, 1997, the weighted average remaining life of leases in
the Company's lease portfolio is 35 months and the weighted average implicit
rate of interest is 14.35%. While contractual payments on the leases extend
through 2005, management believes that substantially all currently outstanding
leases will be sold within the next year through the Company's securitization
program.
In December 1997, the Company sold a group of lease receivables with an
aggregate principal balance of $7.6 million, net of unearned income, initial
direct costs and allowance for credit losses, to a third party.
The Company recognized a gain of $0.9 million upon such sale.
In December 1994, the Company purchased a portfolio of leases for $25.4
million. In February 1995, after receiving $2.4 million of collections, the
Company sold the majority of the leases in such portfolio for total
consideration of $27.7 million. The Company recorded a pretax gain on sale of
portfolio leases of $3.3 million in connection with such sale, net of related
closing expenses.
5. SECURITIZATION PROGRAM
The Company generally sells the leases it acquires or originates
through securitization transactions and other structured finance techniques. In
a securitization transaction, the Company sells and transfers a pool of leases
to a wholly-owned, bankruptcy remote, special purpose subsidiary. This
subsidiary in turn
F-16
<PAGE> 18
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
simultaneously sells and transfers its interest in the leases to a trust which
issues beneficial interests in the leases in the form of senior and subordinated
securities. The Company generally retains the right to receive any excess cash
flows of the trust (the "Trust Certificate"). The Company also retains the right
to service leases sold through its securitization program and receives a fee for
doing so. In conjunction with the sale of leases through securitization
transactions, the Company records a servicing asset representing the excess of
the estimated revenues to be received over the estimated costs to be incurred.
During the year ended December 31, 1997, the Company recorded servicing assets
of $840,000 in conjunction with the sale of leases through securitization
transactions. Of such amount, the Company amortized $50,000 during 1997.
Trust Certificates are initially recorded based upon the relative fair
value approach discussed in Note 2. The Company's investment in Trust
Certificates is amortized over the estimated lives of the underlying leases
using the interest method. During the years ended December 31, 1996 and 1997,
the Company recognized $.4 million and $1.4 million of interest income related
to its investment in Trust Certificates. The cash flows allocable to the Trust
Certificate are calculated as the difference between (a) cash flows received
from the leases and (b) the sum, as applicable, of (i) interest and principal
payable to the holders of the senior and subordinated securities, (ii) trustee
fees, (iii) third-party credit enhancement fees, (iv) service fees, and (v)
backup service fees. The Company's right to receive this excess cash flow is
subject to certain conditions specified in the related trust documents designed
to provide additional credit enhancement to holders of the senior and
subordinated securities. The Company estimates the expected levels of cash flows
to the Trust Certificate taking into consideration estimated defaults,
recoveries and other factors which may affect the cash flows to the holder of
the Trust Certificate. For purposes of calculating the estimated fair value of
the Trust Certificates as of the date of sale of the leases to the Trusts, and
on an ongoing basis, management has used a discount rate of 11%. Management has
also used a range of expected losses arising from defaults, net of recoveries,
of 0.00% to 2.00% per annum depending on the level of recourse available, if
any, from the Sources, and the program under which the lease was acquired or
originated. Other factors, such as prepayments, do not have a significant impact
on the gain on sale calculation due to the non-cancellable and full-payout
nature of the underlying leases. The cash flows ultimately available to the
Trust Certificate are largely dependent upon the actual default rates and
recoveries experienced on the leases held by the Trust. Increases in default
rates above, or reduction in recoveries below, the Company's estimates could
reduce the cash flows available to the Trust Certificate. To the extent events
occur which cause actual Trust Certificate cash flows to be materially below
those originally estimated, the Company would be required to reduce the carrying
amount of its Trust Certificates and record a charge to earnings. Such charge
would be recorded in the period in which the event occurred or became known to
management.
Securitized Warehouse Facilities
The Company has entered into three securitized warehouse facilities.
In March 1997, the Company entered into a facility with Prudential Securities
Credit Corporation ("Prudential") (the "Prudential Securitized Warehouse
Facility") and in June 1997, the Company entered into two separate securitized
warehouse facilities with First Union National Bank of North Carolina ("First
Union") (the "First Union Securitized Warehouse Facilities" and together with
the Prudential Securitized Warehouse Facility, the "Securitized Warehouse
Facilities".) The structure of each facility is essentially the same. The
facilities allow the Company on an ongoing basis to transfer and sell lease
receivables to a wholly-owned, bankruptcy remote special purpose subsidiary,
which will sell such receivables to one or more trusts. Each trust is structured
such that it will issue two classes of certificates of beneficial ownership, a
senior certificate, and a Trust Certificate which will be owned by the Company's
subsidiary. The combined limit of all senior certificates issued by the trusts
pursuant to the First Union Securitized Warehouse Facilities was $105 million as
of December 31, 1997, however the Company revised the agreements with First
Union subsequent to December 31, 1997, to increase the total amount available
under such facilities to $200 million. The limit related to the Prudential
Securitized Warehouse facility was $150 million as of
F-17
<PAGE> 19
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997. Transfers and sales of lease receivables pursuant to the
facilities are accounted for as sales under generally accepted accounting
principles and the related gains on sales are recognized on the date of such
transfers. The senior certificates issued pursuant to the First Union
Securitized Warehouse Facilities earn a stated return of either 30-day LIBOR
plus 0.74% or the Commercial Paper index rate plus 0.74% while the senior
certificates issued by the Prudential Securitized Warehouse Facility earn a
stated rate of return of the 30-day LIBOR plus 0.75%. As of December 31, 1997,
the senior certificate-holders' investments in the senior certificates issued by
the Securitized Warehouse Facilities was $151 million. Unless extended, the
First Union Securitized Warehouse Facilities provide for sales to the facilities
through June 25, 1998, while the Prudential Securitized Warehouse Facility
provides for sales to such facility through October 30, 1998. Management
believes that it will be able to either extend these facilities or enter into
alternate facilities with terms at least as favorable as those under its
existing agreements.
During the year ended December 31, 1997, the Company transferred and
sold leases with an aggregate principal balance of $321.1 million, net of
unearned income, initial direct costs and allowance for credit losses, to the
Securitized Warehouse Facilities. Senior certificates with an aggregate
principal balance of $313.2 million were issued by the trusts, while Trust
Certificates were retained by the Company. The Company recognized a gain of
$14.5 million upon transfer and sale of the leases to the trusts.
Public Securitization Transactions
In September 1997, substantially all lease receivables held in the
Securitized Warehouse Facilities at such time were transferred to the First
Sierra Equipment Contract Trust 1997-1 in conjunction with a public
securitization transaction. In connection with this transaction, the senior
certificate-holders were repaid amounts then outstanding under the senior
certificates and the Company exchanged its Trust Certificates in the Securitized
Warehouse Facilities and sold additional lease receivables with an aggregate
principal balance of $54.4 million, net of unearned income to the trust. Gains
of $2.5 million were recognized by the Company in connection with the sale of
the leases and the exchange of the Trust Certificates.
During the year ended December 31, 1996, leases with an aggregate
principal balance of $152.0 million, net of unearned income, were sold through
two public securitization transactions. Senior and subordinated certificates
with an aggregate principal balance of $148.0 million were sold in such
transactions, while the Trust Certificates were retained by the Company. Gains
of $2.8 million were recognized upon sale of the senior and subordinated
securities.
The terms of the securitization transactions closed in 1996 provided
for a revolving period during which additional leases are sold to the
securitization trusts in amounts sufficient to maintain the collateral value, as
calculated pursuant to the trust agreements, at levels consistent with such
balance as of closing. Such additional leases are sold at prices equivalent to
the present value of the scheduled monthly payments of the additional leases
contributed, discounted at specified rates set forth in the Pooling and
Servicing Agreement for the related transaction. During the years ended December
31, 1996 and 1997, the Company sold leases with an aggregate principal balance
of $14.7 million and $20.2 million, respectively, net of unearned income,
capitalized initial direct costs and allowance for credit losses, pursuant to
the revolving period provisions. The Company recognized gains of $.6 million and
$1.2 million in conjunction with such sales, respectively.
F-18
<PAGE> 20
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. DEBT
Debt consisted of the following as of December 31, 1996 and 1997 (in
thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Warehouse credit facilities
Feather River State Bank ....................... $ -- $12,468
Prudential Securities Credit Corporation ....... 40,142 --
First Union National Bank of North Carolina .... 12,238 --
Other .......................................... 440 602
------- -------
Total warehouse credit facilities ................ 52,820 13,070
Subordinated notes payable ....................... 9,000 6,000
------- -------
$61,820 $19,070
======= =======
</TABLE>
Warehouse Credit Facilities
In addition to its Securitized Warehouse Facilities (as described
above), the Company also uses warehouse credit facilities to fund the
acquisition and origination of leases. Funds borrowed through warehouse credit
facilities are repaid when the Company sells the lease receivables pledged
thereunder to either its Securitized Warehouse Facilities or through public
securitization transactions.
On September 30, 1997, the Company entered into a warehouse credit
facility with Prudential (the "Prudential Warehouse Facility") which provides
for advances of $50 million. The Prudential Warehouse Facility bears interest at
a floating rate equal to the 30-day LIBOR plus .75% and matures on October 30,
1998. The Company is required to maintain certain minimum financial ratios
pursuant to the terms of the Prudential Warehouse Facility. As of December 31,
1997, the Company was in compliance with these requirements. There were no
amounts outstanding under the Prudential Warehouse Facility as of December 31,
1997.
On June 1, 1997, the Company entered into a warehouse credit facility
with Dresdner Bank AG, New York Branch and ContiFinancial Corporation (the
"Dresdner Warehouse Facility") that provided the Company with up to $50.0
million of warehouse funding. The Company borrowed $48.2 million under the
Dresdner Warehouse Facility. All amounts outstanding under the Dresdner
Warehouse Facility were repaid with funds received from the public
securitization transaction completed by the Company on September 10, 1997 and
the facility terminated on that date.
In conjunction with the acquisition of Heritage, the Company assumed
approximately $32 million of debt outstanding under notes payable and warehouse
credit facilities which had been used by Heritage to finance its purchase of
leases. At December 31, 1997, approximately $12.6 million remained outstanding
under such notes and warehouse credit facilities with interest rates ranging
from 8.25% to 12.50%. The Company repaid $10.3 million of such notes and
warehouse credit facilities in January 1998 with proceeds from sales of lease
receivables.
Subordinated Notes Payable
In May 1997, the Company used a portion of the proceeds of the Offering
(see Note 10) to repay a $9 million subordinated note with a stockholder. On May
20, 1997, the Company entered into a new $5 million subordinated revolving
credit facility with such stockholder, with the commitment level decreasing $1
million per year. Advances under this facility bear interest at 11.00% per
annum. At December 31, 1997, advances of $5 million were outstanding under this
facility.
F-19
<PAGE> 21
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In conjunction with the acquisition of Heritage, the Company issued a
$1 million subordinated note payable to the former owner of Heritage who is
currently an officer of the Company. Such note bears interest at 9.00% per
annum, with interest payable semi-annually and principal due in May 2002. At
December 31, 1997, $1 million was outstanding under this note.
Interest Rate Swap Agreements
The Company was required pursuant to the terms of a warehouse facility with
First Union to enter into interest rate swap agreements in amounts equal to at
least 60% of the amount of borrowings outstanding under such facility. At
December 31, 1996, the Company had entered into amortizing swap agreements with
notional amounts of $33.9 million. These agreements effectively modified amounts
outstanding under the LIBOR based revolving lines to fixed rate debt at rates
ranging from 5.83% to 6.29% at December 31, 1996. The counterparties to the
Company's swap agreements at December 31, 1996 were Prudential Global Funding,
Inc., an affiliate of Prudential Securities Credit Corporation, and First Union
National Bank of North Carolina.
At December 31, 1997, the Company had entered into interest rate swap
agreements with aggregate notional amounts of $9.8 million. These agreements
effectively modified a comparable amount outstanding under floating rate debt
facilities to fixed rate debt at a rate of 6.135%. The counterparty to these
agreements was Prudential Global Funding, Inc. The Company was not required to
enter into any interest rate swap agreements pursuant to the terms of its
warehouse credit facilities at December 31, 1997.
7. FURNITURE AND EQUIPMENT
The following is a summary of furniture and equipment as of December
31, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
1996 1997 LIFE
------- ------- ----------
<S> <C> <C> <C>
Furniture and fixtures ............. $ 590 $ 1,306 7 years
Computer and office equipment ...... 1,131 3,167 3-5 Years
Leasehold improvements and other ... 57 88 3 years
------- -------
1,778 4,561
Accumulated depreciation ........... (465) (1,026)
------- -------
$ 1,313 $ 3,535
======= =======
</TABLE>
8. INCOME TAXES
The temporary differences, which give rise to net deferred tax assets
and liabilities are as follows at December 31, 1996 and 1997, respectively (in
thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Accruals and reserves not yet deductible ................... $ 111 $ 2,646
Depreciation and amortization .............................. (6) (414)
Cash to accrual adjustment ................................. (604) 220
Net operating loss carryforward ............................ 59 --
Securitization transactions ................................ (1,074) (5,812)
Other ...................................................... 148 (134)
------- -------
Total deferred income tax assets (liabilities) ........ $(1,366) $(3,494)
======= =======
</TABLE>
F-20
<PAGE> 22
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes for the years ended December 31, 1995,
1996 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Current --
Federal ................... $ 376 $ 107 $1,074
State ..................... 50 33 134
------ ------ ------
$ 426 $ 140 $1,208
====== ====== ======
Deferred --
Federal ................... $ 111 $ 722 $3,581
State ..................... 33 70 342
------ ------ ------
$ 144 $ 792 $3,923
====== ====== ======
Total provision ... $ 570 $ 932 $5,131
====== ====== ======
</TABLE>
Deferred income tax expense results principally from the use of
different capital recovery and revenue and expense recognition methods for tax
and financial accounting purposes. The sources of these temporary differences
and related tax effects were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Securitization transactions ..................... $ -- $ 993 $ 3,830
Accruals not deductible until paid .............. (12) 111 (615)
Depreciation and amortization ................... -- -- 437
Cash to accrual adjustment ...................... 12 (56) 110
Net operating loss carryforward ................. 144 (59) 131
Other ........................................... -- (197) 30
------- ------- -------
Total deferred provision (benefits) ....... $ 144 $ 792 $ 3,923
======= ======= =======
</TABLE>
The following is a reconciliation between the effective income tax rate
and the applicable statutory federal income tax rate for the years ended
December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate ......................................... 34.0% 34.0% 34.0%
State income taxes, net of federal benefit ..................... 3.2 3.2 3.2
Earnings of subsidiary not subject to federal income tax (1) ... (2.8) (5.5) (2.4)
Change in valuation allowance .................................. (3.2%) -- --
Non-deductible expenses and other .............................. 2.4 1.9 2.6
---- ---- ----
Effective income tax rate .................................... 33.6% 33.6% 37.4%
==== ==== ====
</TABLE>
- -------------------
(1) The Company acquired one company in March 1998 which has been accounted
for as a pooling of interest which is not subject to federal income taxes.
As discussed in Note 2, these financial statements have been restated to
reflect the results of operations of the merged companies.
The Company acquired one company in March 1998 which has been accounted
for as a pooling of interest which is not subject to federal income taxes. As
discussed in Note 2, these financial statements have been restated to reflect
the results of operations of the merged companies.
F-21
<PAGE> 23
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. REDEEMABLE PREFERRED STOCK
As of December 31, 1997, the Company was authorized to issue 1,000,000
shares of preferred stock. The number of shares to be issued, classes
designated, voting rights, dividend rates, liquidation and other rights,
preferences and limitations may be set by the Company's Board of Directors
without stockholder approval.
At December 31, 1997, 56,718 shares of Series A Preferred Stock (the
"Series A Preferred Stock") were issued and outstanding. Each share of the
Series A Preferred Stock is convertible at the holder's option at any time into
5.47 shares of the Company's common stock. Holders of the Series A Preferred
Stock are entitled to an annual, non-cumulative dividend of $1.86 per share.
Each outstanding share of Series A Preferred Stock entitles the holder thereof
to 5.47 votes on any matter submitted to a vote of the stockholders. If not
previously converted, the Company is required to redeem all outstanding Series A
Preferred Stock on December 31, 2001, at a redemption price of $46.54607 per
share.
During 1996, 43,691 shares of Series B Convertible Preferred Stock (the
"Series B Preferred Stock") were issued. The Series B Preferred Stock was
subject to an escrow agreement which provided that 21,845 shares would be
released if the CCL division of the Company met or exceeded certain targeted
income amounts set forth in the escrow agreement. In connection with a
restructuring of the Company's operational divisions during 1997, the shares
previously held under escrow were released and the Company recorded an
adjustment to the purchase price of CCL of $937,000 in 1997. In December 1997,
all outstanding shares of the Series B Preferred Stock were converted into
238,989 shares of Common Stock and a cumulative dividend of $29,000 was paid to
the holder of such stock.
Concurrent with the issuance of the Series A Preferred Stock and the
Series B Preferred Stock, irrevocable standby letters of credit, issued by a
financial institution and guaranteed by an affiliate of the Company, were given
to the holders of the preferred stock and could be drawn upon if certain events
occur, including the failure of the Company to pay dividends when due, the
failure of the Company to redeem the shares on the designated mandatory
redemption date or the occurrence of a liquidation, dissolution or winding up of
the Company. As of December 31, 1997, all letters of credit have been returned
to the financial institution and cancelled.
The Company may issue one or more series of preferred stock in the
future in conjunction with its acquisition strategy or otherwise. Any such
issuances may adversely affect, among other things, the voting power of holders
of the Company's common stock and the then outstanding preferred stock. The
Series A Preferred Stock has been reflected as Redeemable Preferred Stock in the
accompanying financial statements.
10. STOCKHOLDERS' EQUITY
Common Stock
In February 1997, the Company increased the authorized shares of common
stock of the Company to 25 million shares. On February 27, 1997, the Board of
Directors of the Company approved a stock split whereby 5.47 shares of common
stock were issued for each outstanding share of common stock. All share and per
share amounts included in the accompanying financial statements and footnotes
have been restated to reflect the stock split.
On May 20, 1997, the Company consummated its initial public offering of
Common Stock through the sale of 2,000,000 shares of Common Stock ("the
Offering"). In June 1997, the underwriters of the Company's offering exercised
their over-allotment option and purchased an additional 300,000 shares
F-22
<PAGE> 24
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of Common Stock of the Company. The Company received net proceeds of
approximately $16.2 million from the Offering and the exercise of the
underwriters' option related thereto. The proceeds therefrom were used to
partially fund an acquisition which closed concurrently with the Offering, to
repay in full a subordinated note payable outstanding at such time and for
general corporate purposes.
In May 1995, the Company issued warrants to purchase a total of 198,397
shares of the Company's common stock to First Union in connection with a
warehouse credit facility entered into with First Union at such time. The
exercise price of the warrants was $.0018 per share which approximated the
estimated fair value of the underlying common stock at the date of issuance of
the warrants. All warrants were exercised in May 1997.
From June 1994 through January 1995, options to purchase common stock
of the Company at the estimated fair value on the date of the grant were offered
to certain key officers and a director of the Company in conjunction with the
formation of the Company and pursuant to the employees' respective employment
agreements. During the year ended December 31, 1996, such employees and the
director exercised these options and acquired 854,736 shares of common stock of
the Company for $146,941.
In May 1996, the Company acquired 628,426 shares of its common stock
from a stockholder for $360,000. Additionally, the Company entered into a
two-year consulting agreement for $75,000 per year with such shareholder in
conjunction with the formation of the Company. Such consulting agreement
terminated in June 1996.
Stock Option Plan
The Company has adopted a stock option plan (the "1997 Stock Option
Plan") to align the interests of the directors, executives, consultants and
employees of the Company with those of its stockholders. A total of 1,800,000
shares of Common Stock have been reserved for issuance pursuant to the 1997
Stock Option Plan.
During the year ended December 31, 1997, options to purchase 1,032,320
shares of Common Stock of the Company were issued with a weighted average
exercise price of $8.00 per share. The options vest pro ratably over five years
and have a term of 10 years from the date of grant. No options were forfeited
during the year. The per share weighted average fair value of stock options
granted during 1997 was $2.87 on the date of grant using the Black Sholes option
pricing model with the following weighted average assumptions: expected
volatility - 22%; risk free interest rate - 5.62%; and an expected life of 6
years.
Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No.123, the Company's net
earnings would have been as follows for the year ended December 31, 1997 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
AS PRO
REPORTED FORMA
-------- -----
<S> <C> <C>
Net income............................... $8,574 $8,240
Earnings per common share:
Basic.................................. $1.02 $0.98
Diluted................................ $0.95 $0.92
</TABLE>
F-23
<PAGE> 25
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has entered into various operating lease agreements, primarily
for office space. Rent expense under all operating leases for the years ended
December 31, 1995, 1996 and 1997 was $162,000, $397,000 and $851,000,
respectively. For the subsequent five years, minimum annual rental payments
under noncancelable operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................... $1,183
1999............................................... 1,154
2000............................................... 874
2001............................................... 727
2002............................................... 684
------
Total minimum payments...................... $4,622
======
</TABLE>
Concentration of Credit Risks
At December 31, 1997, leases aggregating approximately 37% of the net
principal balance of leases owned and serviced by the Company pursuant to its
securitization program were located in two states, California and Florida. No
other state accounted for more than 10% of the net principal balance of leases
owned and serviced by the Company as of such date. Although the Company's
portfolio of leases includes lessees located throughout the United States, such
lessees' ability to honor their contracts may be substantially dependent on
economic conditions in these states. All such contracts are collateralized by
the related equipment. The recourse and holdback provisions of the Private Label
program mitigate, but do not eliminate, a significant portion of any economic
risk not recoverable through the sale of the related equipment.
Additionally, a substantial portion of the Company's leases are
concentrated in certain industries, including, the medical industry, the dental
industry and the veterinary industry. To the extent that the economic or
regulatory conditions prevalent in such industries change, the lessees' ability
to honor their lease obligations may be adversely impacted.
Executive Incentive Compensation Plan
The Board of Directors has adopted an Executive Incentive Compensation
Plan (the "Incentive Plan"). The Incentive Plan provides for the payment of
incentive awards for a fiscal year only if the Company's after-tax earnings for
such fiscal year (determined without regard to payments under the Incentive
Plan) exceeds 20 % of the Company's Average Common Equity (as defined below) for
such fiscal year. In the event that such threshold is satisfied for a fiscal
year, then the aggregate incentive compensation that will be paid under the
Incentive Plan for a fiscal year (the "Incentive Pool") will be equal to 12% of
the excess, if any, of the Company's pre-tax earnings for such fiscal year
(determined without regard to payments under the Incentive Plan) over 20% of the
Company's Average Common Equity for such fiscal year. The Average Common Equity
for a fiscal year is the average of the balance of equity attributable to the
outstanding Common Stock of the Company (including par value, additional paid in
capital and retained earnings), as reflected in the financial statements of the
Company at the end of each month during the fiscal year.
F-24
<PAGE> 26
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employee Benefit Plans
The Company established a 401(k) defined contribution plan in October
1996, which is generally available to all employees. Employees may generally
contribute up to 15 percent of their salary each year; and the Company, at its
discretion, may match up to 50% of the first 8% contributed by the employee.
During the years ended December 31, 1996 and 1997, the Company recognized $5,000
and $157,000, respectively, of expense related to the 401(k) plan. Additionally,
the financial statements include $111,914 and $234,710, related to employee
benefit plans established by companies acquired by First Sierra and accounted
for as poolings of interests (See Note 13) for the years ended December 31, 1996
and 1997, respectively. The Company does not offer any other post-employment or
post-retirement benefits.
Employment Agreements
The Company has entered into employment agreements with certain key
members of management. The terms of such agreements provide for salaries and
bonuses as set forth in the agreements and upon achieving certain performance
objectives.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
Much of the information used to determine fair value is highly subjective and
judgmental in nature and, therefore, may not be precise. Because the fair value
is estimated as of the balance sheet date, the amounts which will actually be
realized or paid upon settlement or maturity of the various instruments could be
significantly different. The following table summarizes the carrying amounts and
estimated fair values of the Company's financial instruments at December 31,
1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
Financial assets --
<S> <C> <C> <C> <C>
Lease financing receivables, net ... $ 61,405 $ 64,417 $ 24,769 $ 26,222
Investment in Trust Certificates ... 9,534 9,778 12,512 16,541
Marketable security ................ -- -- 4,020 4,020
Cash and cash equivalents .......... 2,876 2,876 13,265 13,265
Financial liabilities --
Warehouse credit facilities ........ 52,820 52,820 13,070 13,070
Subordinated notes payable ......... 9,000 9,000 6,000 6,000
Off balance sheet instruments --
Interest rate swap agreements ...... -- 96 -- (60)
</TABLE>
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate such value.
Lease Financing Receivables - The fair value was estimated by
discounting expected future cash flows at a risk adjusted rate of return deemed
to be appropriate for investors in such instruments. Expected cash flows take
into consideration management's estimates of prepayments, defaults and
recoveries.
F-25
<PAGE> 27
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investment in Trust Certificates -- The fair value was estimated by
discounting expected future cash flows allocable to the holder of the Trust
Certificate at a risk adjusted rate of return deemed to be appropriate for
investors in such investment. Expected cash flows take into consideration
management's estimates of defaults, recoveries and other factors.
Marketable Security -- The fair value was estimated by discounting
expected future cash flows allocable to the holder of the Marketable Security at
a risk adjusted rate of return deemed to be appropriate for investors in such
investment.
Cash and Cash Equivalents -- The carrying amounts approximate fair
value because of the short maturity and market interest rates of those
instruments.
Warehouse Credit Facilities -- The carrying amounts approximate fair
value due to the short-term nature of the credit facilities.
Subordinated Note Payable -- The carrying amount of the subordinated
note payable approximates its fair value based on estimated yields, which would
be required for similar types of debt instruments.
Interest Rate Swap Agreements -- The fair value represents the payment
the Company would have made to or received from the swap counterparties to
terminate the swap agreements on the indicated dates.
13. SUBSEQUENT EVENTS
Secondary Offering of Common Stock
In February and March 1998, the Company sold an aggregate amount of
2,567,084 shares of its Common Stock, including the exercise of the
underwriters' over-allotment option, in a secondary public offering raising net
proceeds to the Company of approximately $39.7 million, after deducting
underwriting discounts and commissions and estimated offering expenses.
Approximately $5.0 million of the net proceeds were used to repay the
outstanding balance under the Subordinated Revolving Credit Facility, while the
remaining funds were used to repay other borrowings of the Company and for other
general corporate purposes.
Recent Acquisitions
On March 12, 1998, the Company completed its acquisition of Independent
Capital Corporation ("ICC"). ICC has offices in Bridgewater and Rutherford, New
Jersey, and focuses primarily on the small ticket broker market in the
Northeastern region of the United States.
On March 24, 1998, the Company completed its acquisition of Integrated
Lease Management, Inc. (ILM). ILM is based in San Jose, Ca. and specializes in
independent lease origination and consulting services in the technology
marketplace.
The above transactions which closed in the first quarter of 1998 have
been accounted for as poolings of interests and, accordingly, the consolidated
financial statements for the periods presented have been restated to include the
accounts of ICC and ILM. Distributions to stockholders reflected on the
Consolidated Statement of Stockholders' Equity represent distributions of the
acquired companies for taxes due.
In April 1998, the Company acquired OMNI Leasing, Inc. ("OMNI"). OMNI
is located in Hatfield, Pennsylvania and is active in the arbor, landscaping,
trucking, sanitation and automotive industries in the greater Pennsylvania area.
Also in April 1998, the Company acquired Vendor Leasing, Inc ("Vendor
Leasing"). Vendor Leasing is located in Roswell, Georgia and provides the
Company with greater penetration in the eastern United States.
The Company also acquired Nexsoft, Inc. ("Nexsoft") of Denver, Colorado
in April 1998. Nexsoft is a software development firm specializing in software
for the equipment leasing industry.
On June 18, 1998, the Company announced that it had acquired TFS, Inc.
dba The Money Source, a Redmond, Washington-based small ticket equipment leasing
company. The acquisition will be accounted for as a pooling of interests.
F-26
<PAGE> 28
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On June 10, 1998, the Company announced the proposed merger with
Oliver-Allen Corporation, Inc. ("Oliver-Allen"), a private leasing company that
specializes in leasing and remarketing Information Technology equipment.
Oliver-Allen, established in 1973, is headquartered in Larkspur, California and
has offices in Laguna Beach, California and Minnetonka, Minnesota. The total
transaction is valued at $95,000,000 million with consideration solely
consisting of First Sierra common stock and the conversion of an Oliver Allen
stock option into an option to acquire the Company's stock under equivalent
terms. At December 31, 1997, Oliver-Allen had total assets of approximately $176
million. The Company will issue the equivalent of approximately 3.2 million
shares in stock and options to acquire 790,000 shares of the Company's stock. It
is expected that the transaction will be accounted for as a pooling of
interests. The transaction is expected to be completed in the third quarter of
1998, subject to approval by the Company's shareholders as well as other
customary closing conditions.
On June 24, 1998, the Company announced the proposed merger with The
Republic Group, Inc., an Anaheim, California based private company that
originates leases of equipment for small businesses in a broad range of
industries. The Republic Group, Inc. has a specialization in small
business-direct telemarketing and a well-developed sales recruiting and training
program. The transaction is valued at approximately $27.5 million based upon the
issuance of approximately 1.1 million shares of the Company's common stock. It
is expected that the transaction will be accounted for as a pooling of interests
and that the acquisition will be completed in July 1998.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1997
Revenues $ 6,877 $ 9,623 $ 12,160 $ 12,463
Income before provision for income taxes 2,462 3,141 4,165 3,937
Net income 1,579 1,950 2,601 2,444
Earnings per common share, basic 0.25 0.25 0.27 0.25
Earnings per common share, diluted 0.23 0.24 0.25 0.23
1996
Revenues $ 3,079 $ 4,374 $ 3,852 $ 4,905
Income (loss) before provision (benefit) for income taxes 163 1,600 140 873
Net income (loss) 140 1,010 124 570
Earnings (loss) per common share, basic 0.02 0.16 0.02 0.09
Earnings (loss) per common share, diluted 0.02 0.15 0.02 0.08
</TABLE>
F-27
<PAGE> 29
RESTATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following restated management's discussion and analysis of
financial condition and results of operations filed herewith have been prepared
to give retroactive effect to two mergers consummated by the Company in the
first quarter of 1998 which were accounted for as poolings of interests (see
footnote 2 to the financial statements filed under Item 7). Interim unaudited
consolidated management's discussion and analysis of financial condition and
results of operations as of March 31, 1998 and for the three month periods
ended March 31, 1998 and 1997 were previously filed as a part of the Company's
Form 10-Q for the quarterly period ended March 31, 1998.
OVERVIEW
First Sierra Financial, Inc. (First Sierra) is a specialized finance
company that acquires and originates, sells and services equipment leases. The
Company initially funds the acquisition or origination of its leases through its
warehouse 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. Management believes that its
significant experience in asset-backed securitization transactions and extensive
relationships with financing sources has allowed the Company to achieve a lower
cost of funds and ultimately a wider spread upon securitization of its equipment
leases than many of its competitors. The structure of the Company's lease
funding programs, along with the structure of the Company's warehouse facilities
and securitization program, enabled the Company to generate positive cash flow
from operations in 1996 and 1997.
The Company commenced operations in June 1994 and initially developed a
program to purchase leases from leasing companies which had the ability to
originate significant lease volume and were willing and able to provide credit
protection to the Company and perform certain servicing functions on an ongoing
basis with respect to such leases. This program, referred to by the Company as
its "Private Label" program, was designed to provide the Company with access to
high volumes of leases eligible for the securitization market, while minimizing
the risk of loss to the Company. Each Private Label Source provides credit
protection to the Company through a combination of recourse and purchase price
holdback features and performs certain labor-intensive servicing functions with
respect to the leases sold to the Company, such as credit collection, equipment
repossession and liquidation functions. Generally, the Company receives and
processes all lease payments on leases purchased by it under the Private Label
program.
The yields generated under the Company's Private Label program are
generally lower than those generated under the Company's Broker and Vendor
programs because of the credit protection afforded the Company and the reduced
level of servicing required of the Company. The weighted average yield to the
Company on leases funded through the Private Label program from inception
through December 31, 1997 was 9.36%. The Company has experienced significant
growth in its Private Label program. The volume of leases purchased by the
Company pursuant to its Private Label program was $4.5 million in 1994, $65.2
million in 1995, $161.1 million in 1996 and $210.1 million in 1997.
In 1996, as part of its growth strategy, the Company began targeting
additional sources of lease volume from small ticket lease brokers which were
unable or unwilling to provide the credit protection or perform the servicing
functions required under the Private Label program and through relationships
with vendors of equipment. The Company established its "Broker" and "Vendor"
programs in 1996 through two strategic acquisitions and has expanded these
programs through eight additional acquisitions in 1997. In a typical Broker or
Vendor arrangement, leases are originated by the Company without recourse to the
Source. The Company also performs all servicing functions on leases acquired or
originated under its Broker and Vendor programs. As a result, the Company's
yields are higher than those on its Private Label leases. The weighted average
yields to the Company on leases funded pursuant to its Broker and Vendor
programs were 14.07% and 16.09%, respectively, in 1996 and 13.32% and 15.79%,
respectively, in 1997. The volume of leases funded by the Company pursuant to
its Broker and Vendor programs was $10.5 million and $7.5 million, respectively,
in 1996 and $74.8 million and $98.2 million, respectively, in 1997. Management
intends to continue to pursue opportunities to acquire additional small ticket
leasing companies with broker and vendor operations and believes that a larger
percentage of the Company's revenues in the future will be derived from such
broker and vendor Sources.
As a fundamental part of its business and financing strategy, the
Company sells the leases it acquires or originates primarily through
securitization transactions and other structured finance transactions. In a
securitization transaction, the Company sells and transfers a pool of leases to
a wholly-owned, special purpose subsidiary of the Company. The special purpose
subsidiary simultaneously sells and transfers an interest in the leases to a
trust, which issues beneficial interests in the leases in the form of senior
securities and subordinated securities and sells such senior and subordinated
securities in the public and private markets. The Company generally retains the
right to receive any excess cash flows of the trust, which right is represented
by the Trust Certificate.
<PAGE> 30
Year 2000
The "Year 2000" issue involves computer programs and applications that
were written using two digits (instead of four) to describe the applicable year.
Failure to successfully modify such programs and applications to be Year 2000
compliant may have a material adverse impact on the Company. Exposure arises not
only from potential consequences (e. g., business interruption) of certain of
the Company's own applications not being Year 2000 compliant, but also from
non-compliance by significant counterparties the Company does business with.
Management has made inquiries of its major software vendors and has received
assertions that the software programs from such vendors are Year 2000 compliant.
The Company expects to complete testing of the software vendors' assertions by
the first quarter of 1999.
RESULTS OF OPERATIONS
1997 Compared to 1996
During the years ended December 31, 1996 and 1997, the Company sold
leases with an aggregate principal balance of $152.0 million and $395.7 million,
respectively, net of unearned income, through the Company's securitization
program. The Company recognized gains of $3.5 million and $18.2 million,
respectively, upon such sales and retained Trust Certificates in the related
trusts. Gains recognized upon sales of leases through securitization
transactions increased as a percentage of leases sold through securitization
transactions from 2.3% for the year ended December 31, 1996, to 4.6% for the
year ended December 31, 1997. The increase was directly attributable to an
increase in the weighted average interest rate of leases sold as a result of the
inclusion of higher yielding leases acquired pursuant to the Company's Broker
and Vendor programs and a decrease in the level of Trust Certificates the
Company was required to retain in the securitization trusts. Additionally, the
Company recognized gains of $3.5 million on leases sold or discounted to third
parties during the year ended December 31, 1997, an increase of $1.1 million
from the previous year. Furthermore, the Company recognized a gain of $853,000
upon the sale of a portfolio of lease receivables with an aggregate principal
balance of $7.6 million to a third party during 1997. The Company did not sell
any portfolios of leases during 1996, other than through its securitization
program.
Interest income increased $2.7 million, or 43%, from $6.3 million for
the year ended December 31, 1996 to $9.0 million for the year ended December 31,
1997. The increase was primarily related to an increase of $1.0 million during
1997 of interest income recognized on Trust Certificates retained by the Company
in securitization transactions. The remaining difference was the result of a 22%
increase in the average rate earned on the leases. The increase in the average
rate earned on the leases was directly attributable to the formation of the
Company's Broker and Vendor programs in July 1996.
Servicing income increased $2.0 million, or 182%, from $1.1 million for
the year ended December 31, 1996 to $3.1 million for the year ended December 31,
1997. Such increase was primarily attributable to a 207% increase in leases
serviced for others from December 31, 1996 to December 31, 1997.
Interest expense increased $79,000, or 2%, from $5.0 million for the
year ended December 31, 1996 to $5.1 million for the year ended December 31,
1997. The increase was related to additional indebtedness assumed in connection
with acquisitions at higher interest rates than those under the Company's
existing warehouse facilities, substantially offset by (a) reduced periods that
leases were held by the Company prior to securitization due to the formation of
the Company's Securitized Warehouse Facilities, and (b) reduced amounts of
subordinated notes payable outstanding due to the repayment of one such note
with proceeds from the Company's initial public offering of Common Stock in May
1997.
Salaries and benefits increased $6.5 million, or 182%, from $3.5
million for the year ended December 31, 1996 to $10.0 million for the year ended
December 31, 1997. Such increase was primarily attributable to an increase in
the number of employees resulting from the acquisitions of ten companies from
July 1996 through November 1997. In addition, salaries and benefits have
increased due to the higher level of servicing required as a result of the
formation of the Company's Broker and Vendor programs in July 1996.
Provision for credit losses increased $1.4 million, or 252%, from
$537,000 for the year ended December 31, 1996 to $1.9 million for the year ended
December 31, 1997. The increase was primarily due to the origination of $173.0
million of leases under the Company's Broker and Vendor programs during the year
ended December 31, 1997, which have a greater exposure to credit losses than
leases originated under the Company's Private Label program, which provide for
recourse to the Private Label Source.
Depreciation and amortization increased $992,000, from $368,000 for the
year ended December 31, 1996 to $1.4 million for the year ended December 31,
1997. The increase was attributable to a 696% increase in amortization of
goodwill and other intangible assets resulting from the acquisitions referred to
above as well as a 168% increase in depreciation of fixed assets owned at
December 31, 1997.
<PAGE> 31
Other general and administrative expenses increased $5.1 million, or
129%, from $4.0 million for the year ended December 31, 1996 to $9.1 million for
the year ended December 31, 1997. Such increase was primarily attributable to
the general expansion of the Company's business and the acquisitions of eight
businesses in 1997.
1996 Compared to 1995
Interest income increased $3.3 million, or 107%, from $3.1 million for
the year ended December 31, 1995 to $6.3 million for the year ended December 31,
1996. The increase was primarily attributable to a 90% increase in average lease
receivable balance outstanding ($659,000 of interest income was recognized on
higher yielding leases originated under the Company's Broker and Vendor programs
which began in July 1996) and $573,000 recognized on subordinated securities
retained by the Company in its securitization transactions.
Gain on sale of lease financing receivables increased $1.7 million, or
41%, from $4.2 million for the year ended December 31, 1995 to $5.9 million for
the year ended December 31, 1996. The increase is primarily attributable to an
increase of leases sold or discounted to third parties from $900,000 during the
year ended December 31, 1995 to $2.4 million during the year ended December 31,
1996. The remaining difference relates to a $3.5 million gain recognized upon
sale of leases through the Company's securitization program in 1996, partially
offset by a gain of $3.3 million recognized in 1995 upon the sale of a lease
portfolio acquired at a discount from a third party in 1994.
Servicing income increased $727,000, or 225%, from $323,000 for the
year ended December 31, 1995 to $1.1 million for the year ended December 31,
1996. Such increase was primarily attributable to servicing fees received from
the Company's securitization transactions. At December 31, 1995, the Company
serviced 159 leases for others with an aggregate principal amount of $9.7
million. At December 31, 1996, the Company serviced 8,476 leases with an
aggregate principal amount of $157.1 million.
Other income increased $1.4 million from $1.6 million for the year
ended December 31, 1995 to $3.0 million for the year ended December 31, 1996.
Such increase was primarily attributable to brokerage fees received on
transactions brokered or discounted to third parties.
Interest expense increased $2.4 million, or 92%, from $2.6 million for
the year ended December 31, 1995 to $5.0 million for the year ended December 31,
1996. Such increase was due to an increase in the average balance outstanding
under the Company's warehouse facilities, which borrowings were used to finance
the significant increase in leases acquired or originated by the Company in
1996. In 1996, the Company acquired or originated $179.2 million of leases, as
compared to $65.2 million in 1995.
Salaries and benefits increased $1.7 million, or 89%, from $1.9 million
for the year ended December 31, 1995 to $3.5 million for the year ended December
31, 1996. Such increase was primarily attributable to a general expansion of the
Company's business and an increase in the number of employees resulting from the
acquisitions of two businesses in 1996. In addition, due to the higher level of
servicing responsibility assumed by the Company in connection with its Broker
and Vendor programs, salaries and benefits are higher as a percentage of lease
volumes than under the Company's Private Label program.
Provision for credit losses increased $145,000, or 37%, from $392,000
for the year ended December 31, 1995 to $537,000 for the year ended December 31,
1996. Such increase was primarily attributable to the increase in the amount of
leases acquired or originated by the Company in 1996.
Depreciation and amortization increased $226,000, or 159%, from
$142,000 for the year ended December 31, 1995 to $368,000 for the year ended
December 31, 1996. Such increase was primarily attributable to a 300% increase
in fixed assets owned during 1996, as well as amortization of goodwill and other
intangible assets resulting from the acquisitions of GIC and CCL.
Other general and administrative expenses increased $1.6 million, or
67%, from $2.4 million for the year ended December 31, 1995 to $4.0 million for
the year ended December 31, 1996. Such increase was primarily attributable to
the general expansion of the Company's business and the acquisitions of GIC and
CCL.
LIQUIDITY AND CAPITAL RESOURCES
The Company's lease finance business is capital intensive and requires
access to substantial short-term and long-term credit to fund new equipment
leases. Since inception, the Company has funded its operations primarily through
sales of leases, borrowings under its warehouse facilities, sales of common
stock and through its securitization program. The Company expects to continue to
require access to significant additional capital to maintain and expand its
volume of leases funded. The Company also expects to require additional capital
to continue its acquisitions of equipment leasing companies.
The Company's uses of cash include the acquisition and origination of
equipment leases, payment of interest expenses, repayment of borrowings under
its warehouse facilities, operating and administrative expenses, income taxes
and capital expenditures. The structure of the Company's lease funding programs
(including the holdback and recourse features of the Private
<PAGE> 32
Label program), along with the structure of the Company's warehouse facilities
and securitization program, enabled the Company to generate positive cash flow
from operations in 1996 and 1997.
The Company utilizes both warehouse credit facilities and securitized
warehouse facilities to fund the acquisition and origination of leases that
satisfy the eligibility requirements established pursuant to each facility. The
Company's warehouse facilities provide the Company with advance rates that
generally do not require the Company to utilize its capital during the period
that lease receivables are financed under such facilities. The liquidity
provided under each warehouse facility is interim in nature and lease
receivables funded thereunder are generally refinanced or resold through the
Company's public securitization program within six to twelve months.
WAREHOUSE CREDIT FACILITY
At December 31, 1997, the Company had a warehouse credit facility, which is
treated as debt for financial reporting purposes, with available borrowing
capacity of $50 million. No borrowings were outstanding under this facility at
December 31, 1997.
SECURITIZED WAREHOUSE FACILITIES
The Company also maintained three securitized warehouse facilities (the
"Securitized Warehouse Facilities") as of December 31, 1997. These facilities
allow the Company to transfer and sell equipment lease receivables to a trust.
The trust issues two certificates of beneficial interest: a senior certificate,
which is owned by an unrelated third party, and a Trust Certificate, which is
owned by a special purpose subsidiary of the Company. The Securitized Warehouse
Facilities provide for an aggregate issuance of $200 million of senior
certificates through June 25, 1998 in the case of two facilities and the
issuance of $150 million of senior certificates through October 30, 1998, in the
case of the remaining facility. As of December 31, 1997, the trust had issued
senior certificates aggregating $151 million pursuant to the three facilities.
Management believes that it will be able to either extend these facilities or
enter into alternate facilities with terms at least as favorable as those under
its existing agreements.
The Securitized Warehouse Facilities provide several significant
advantages to the Company, including (i) favorable interest rates and (ii)
allowing the Company to transfer lease receivables to a trust on an on-going
basis, including the transfer of the risks and rewards of ownership as well as
the control of the underlying trust, thus enabling the Company to record the
transactions as a sale at the time such receivables are transferred to the
trust, rather than at the time of a public securitization transaction. This
reduces the degree to which the Company's quarterly results might fluctuate due
to the timing of public securitizations and provides greater flexibility with
respect to the timing and size of public securitizations, thereby reducing
related transaction costs. The equipment lease receivables included in the
Securitized Warehouse Facilities may be transferred by the trust to other trusts
in which the Company has a minority interest.
PUBLIC SECURITIZATION TRANSACTIONS
To date, proceeds received by the Company in its public securitization
transactions have generally been sufficient to repay amounts financed under the
warehouse facilities, as well as issuance expenses. In addition to the proceeds
received upon closing of the sale of the securitized leases, securitization
transactions generate cash flow from ongoing servicing and other fees, including
late charges on securitized equipment leases, and excess cash flow distributions
from the Trust Certificates retained by the Company and other assets of the
trust once the securities are retired. The Company structures its securitization
transactions to qualify as financings for income tax purposes. Therefore, no
income tax is payable in the current period on the gain recognized. The Company
anticipates that future sales of its equipment leases will be principally
through securitization transactions or other structured finance techniques and,
to a lesser extent, through portfolio sales and sales to third party financing
sources.
As of December 31, 1997, the Company had completed three public
securitization transactions involving the issuance of $369.3 million of senior
and subordinated securities. The Series 1996-1 and 1996-2 transactions were
completed in 1996 and the Series 1997-1 transaction was completed in September
1997. In connection with the Series 1996-1 and 1996-2 transactions, Class A
certificates, rated AAA by Standard and Poor's, Aaa by Moody's Investor Services
and AAA by Duff & Phelps Credit Rating Co., were sold in the public market. The
Class B-1 and Class B-2 Certificates were rated BBB and BB, respectively, by
Duff & Phelps Credit Rating Co., and were sold on a non-recourse basis in the
private market. In connection with the Series 1997-1 transaction, four tranches
of Class A Notes, rated AAA by Standard and Poor's, Aaa by Moody's Investor
Services, Inc. and AAA by Duff & Phelps Credit Rating Co., were sold in the
public market. The Class B-1 and Class B-2 Notes were rated BBB and AA,
respectively, by Duff & Phelps Credit Rating Co., and were sold on a
non-recourse basis in the private market. The Class B-2 Note was enhanced
through a letter of credit with Dresdner Bank AG, which resulted in the higher
ratings. A Class B-3 Note was rated B by Duff and Phelps Credit Rating Co., and
was retained by the Company for future sale in the private market. Due to the
Company's ability to structure and sell Class B-1 and Class B-2 rated components
of its securitizations, the remaining interest retained by the Company was
reduced, thereby allowing the Company to maximize the cash proceeds generated
from each transaction. The Company was able to realize approximately 94.0% of
the present value of the remaining scheduled payments of the equipment leases
included in
<PAGE> 33
its Series 1996-1 and 1996-2 securitizations, and approximately 96.0% of the
present value of the remaining scheduled payments of the equipment leases
included in its Series 1997-1 securitization.
The Company continually seeks to improve the efficiency and execution
of its securitization transactions. In the Company's Series 1997-1
securitization transaction, which was completed in September 1997, the Company
was able to reduce the level of subordination required for the Class A Notes
from 12.0% to 8.0%, thereby increasing the size of the Class A Notes, which
carry the lowest coupon rate, from 88.0% to 92.0% of the present value of the
remaining scheduled lease payments under securitization. Furthermore, the spread
over comparable Treasury securities on the Class A Notes was reduced from .51%
to .43%, and the spread on the Class B-1 Notes was reduced to 1.10%. The Class
B-2 Notes carried a spread of .55%. The effect of these reduced subordination
levels and the lower spreads has been to decrease the effective cost of the
transaction to the Company and thus increase the gains realized in the
securitization transaction.
Subordinated Revolving Credit Facility
On May 20, 1997, the Company entered into a $5.0 million subordinated
revolving credit facility with an affiliate, with the commitment level
thereunder decreasing by $1.0 million per year. Advances under the facility bear
interest at 11.00% per annum. As of December 31, 1997, $5.0 million was
outstanding under this facility.
Interest Rate Management Activities
The implicit yield to the Company on all its leases is on a fixed
interest rate basis due to the leases having scheduled payments that are fixed
at the time of origination of the leases. When the Company acquires or
originates leases, it bases its pricing on the "spread" it expects to achieve
between the implicit yield to the Company on each lease and the effective
interest cost it will pay when it sells such lease through a public
securitization transaction. Increases in interest rates between the time the
leases are acquired or originated by the Company and the time they are sold
through a public securitization transaction could narrow or eliminate the
spread, or result in a negative spread. It is the Company's policy to generally
mitigate the risk on changes in interest rates. The Company mitigates the
volatility of interest rate movement between the time the Company acquires or
originates a lease and the time such lease is sold through a public
securitization transaction by hedging movements in interest rates using interest
rate swap derivatives which match the underlying cashflow associated with the
leases originated. Under these swap agreements, the Company receives interest on
the notional amount at either the 30-day LIBOR or the 30-day AA Corporate
Commercial Paper Index, in the case of leases funded through the First Union
Commercial Paper program, and the Company pays a fixed rate which is equal to a
spread over the yield to maturity of U.S. Treasury securities similar to the
maturities of the specific leases being held for securitization. Such hedging
arrangements are generally implemented when the Company's portfolio of unhedged
leases reaches $10.0 million. At certain times, changes in the interest rate
market present favorable conditions to hedge against future rate movement. The
Company may, from time to time, enter into hedges against interest rate movement
in anticipation of future origination volume in order to take advantage of
unique market conditions, but this activity is generally limited to levels where
the Company is confident of origination in the near term.
<PAGE> 34
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FIRST SIERRA FINANCIAL, INC.
------------------------------------
(Registrant)
By: /s/ Sandy B. Ho
--------------------------------
Sandy B. Ho
Executive Vice President
and Chief Financial Officer
Dated: July 15, 1998
<PAGE> 35
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27.1 -- Restated Financial Data Schedule for the year ended
December 31, 1997
27.2 -- Restated Financial Data Schedule for the year ended
December 31, 1996
27.3 -- Restated Financial Data Schedule for the year ended
December 31, 1995
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,265
<SECURITIES> 44,264
<RECEIVABLES> 25,178
<ALLOWANCES> 409
<INVENTORY> 0
<CURRENT-ASSETS> 82,298
<PP&E> 4,561
<DEPRECIATION> 1,026
<TOTAL-ASSETS> 85,833
<CURRENT-LIABILITIES> 27,276
<BONDS> 19,070
2,640
0
<COMMON> 99
<OTHER-SE> 36,748
<TOTAL-LIABILITY-AND-EQUITY> 85,833
<SALES> 41,123
<TOTAL-REVENUES> 41,123
<CGS> 20,426
<TOTAL-COSTS> 20,426
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,891
<INTEREST-EXPENSE> 5,101
<INCOME-PRETAX> 13,705
<INCOME-TAX> 5,131
<INCOME-CONTINUING> 8,574
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,574
<EPS-PRIMARY> 1.02
<EPS-DILUTED> .95
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,876
<SECURITIES> 15,062
<RECEIVABLES> 61,930
<ALLOWANCES> 525
<INVENTORY> 0
<CURRENT-ASSETS> 79,343
<PP&E> 1,778
<DEPRECIATION> 465
<TOTAL-ASSETS> 80,656
<CURRENT-LIABILITIES> 12,386
<BONDS> 61,820
3,890
0
<COMMON> 63
<OTHER-SE> 2,497
<TOTAL-LIABILITY-AND-EQUITY> 80,656
<SALES> 16,210
<TOTAL-REVENUES> 16,210
<CGS> 7,875
<TOTAL-COSTS> 7,875
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 537
<INTEREST-EXPENSE> 5,022
<INCOME-PRETAX> 2,776
<INCOME-TAX> 932
<INCOME-CONTINUING> 1,844
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,844
<EPS-PRIMARY> .29
<EPS-DILUTED> .27
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 876
<SECURITIES> 884
<RECEIVABLES> 67,742
<ALLOWANCES> 420
<INVENTORY> 0
<CURRENT-ASSETS> 69,082
<PP&E> 367
<DEPRECIATION> 105
<TOTAL-ASSETS> 69,344
<CURRENT-LIABILITIES> 3,207
<BONDS> 64,827
0
0
<COMMON> 55
<OTHER-SE> 1,255
<TOTAL-LIABILITY-AND-EQUITY> 69,344
<SALES> 9,118
<TOTAL-REVENUES> 9,118
<CGS> 4,398
<TOTAL-COSTS> 4,398
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 392
<INTEREST-EXPENSE> 2,632
<INCOME-PRETAX> 1,696
<INCOME-TAX> 570
<INCOME-CONTINUING> 1,126
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,126
<EPS-PRIMARY> .19
<EPS-DILUTED> .16
</TABLE>
