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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-22525
FIRST SIERRA FINANCIAL, INC.
<TABLE>
<S> <C>
DELAWARE 76-0438432
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
600 TRAVIS STREET, SUITE 7050 77002
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (713) 221-8822
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
RIGHTS TO PURCHASE SHARES OF JUNIOR PREFERRED STOCK,
SERIES C, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [ ]
The registrant estimates that the aggregate market value of the
registrant's Common Stock held by non-affiliates on March 11, 1999 was
approximately $86.5 million. Determination of stock ownership by non-affiliates
was made solely for the purpose of responding to this requirement and the
registrant is not bound by this determination for any other purpose.
As of March 11, 1999, 14,223,915 shares of the registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's Proxy Statement for its Annual Meeting
of Stockholders to be held on May 3, 1999 are incorporated by reference into
Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
First Sierra Financial, Inc. customizes lease financing products and offers
servicing, consulting and technology solutions for commercial customers. We
acquire, originate, sell and service equipment leases relating to a wide range
of equipment, including computers and peripherals, software, medical, dental,
diagnostic, telecommunications, office, automotive servicing, hotel security,
food services, tree service and industrial. The equipment we finance generally
has a purchase price of less than $250,000, with an average of approximately
$20,000 for leases originated in 1997 and $31,000 for leases originated in 1998.
Because of their relatively small size, the leases we finance are commonly
referred to in the finance industry as "small ticket leases."
We have established strategic alliances with a network of independent
leasing companies, lease brokers and equipment vendors, each of which acts as a
source from which we obtain access to equipment leases. We customize lease
financing products to meet the specific financing needs of our lease sources,
including automation and integration. Through our B2B Solutions Group, we
provide equipment vendors with e-commerce technology solutions and lease
financing products for their commercial customers.
Since 1996, we have provided online financing products to our Private Label
customers. Through our acquisition of Nexsoft, Inc. in April 1998, we greatly
expanded our ability to offer electronic solutions to a customer's lease
financing needs. In February 1999, we announced the formation of a new strategic
services group, B2B Solutions, which is dedicated to providing equipment vendors
with e-commerce technology solutions and online financing products for their
commercial customers. From inception of our online financing program in 1996
through December 31, 1998, we generated over $500 million in online
transactions. During 1998, our online financing products generated approximately
28% of our total lease originations. B2B Solutions represents the culmination of
our recognition of, and desire to accommodate, the online market and the need
for internet-driven leasing solutions.
Through B2B Solutions, we offer vendors a complete one-stop solution for
their lease financing needs. Our e-commerce technology enables us to make direct
originations or acquisitions of leases over the internet, through an online
application process that provides vendors with immediate access to our credit
department and documents. Our lease processing systems are linked directly to
the vendor's systems, allowing us to interface with the vendor's web site, sales
force and customers. We are also able to develop functional web sites for our
vendors to facilitate business-to-business e-commerce and offer maintenance and
training support.
A fundamental part of our business strategy is to target captive
transaction flows and detailed customer data through electronic links. We
receive transaction flows in exchange for providing businesses with e-commerce
technology solutions for automated commercial transaction. Our goal is to create
vendor internet portals which will support cross-selling of additional
e-commerce products and outsourcing services through joint ventures and
strategic alliances. Electronic and internet relationships with end-users
facilitate data warehousing and mining which captures key information enhancing
our ability, as well as our vendors' ability, to generate additional transaction
flows.
We initially fund the acquisition or origination of our leases from working
capital or through our securitized funding facilities. From time to time,
depending on market conditions, we securitize the leases in our portfolio that
meet pre-established eligibility criteria by packaging them into a pool and
selling beneficial interests in the leases through public offerings and private
placement transactions. From time to time we also generate income by acquiring
lease portfolios and then reselling these portfolios at a premium. Our goal is
to maximize the spread between the yield received on our leases and our cost of
funds by obtaining favorable terms on our securitized funding facilities, our
securitizations and our portfolio sales.
Prior to July 1, 1998, we structured our securitization transactions to
meet the criteria for sales of lease financing receivables under generally
accepted accounting principles. Thus, for all securitizations completed prior to
this date, we recorded a gain on sale of lease financing receivables when we
included the receivables in
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a securitization. Effective as of July 1, 1998, we made a strategic decision to
alter the structure of our future securitization transactions so as to retain
the leases we acquire and originate on our balance sheet and earn an interest
margin on those assets over the life of the leases.
We provide lease financing to different participants in the small ticket
equipment leasing industry through four general lease funding programs, referred
to as our Private Label, Wholesale, Retail and Captive Finance programs. While
the terms of the underlying leases are similar in all these lease funding
programs, the financing arrangement we offer varies depending on the size and
servicing capabilities of the lease source.
Our Private Label program is designed to provide financing to established
leasing companies that have demonstrated the ability to originate a large volume
of leases, follow prudent underwriting guidelines that we have established and
undertake some of the more labor-intensive aspects of lease servicing on an
ongoing basis. Participants in our Private Label program also provide us with
protection from credit losses on the leases we acquire from them. Through our
Wholesale program, we finance equipment leases from small ticket lease brokers
who are unwilling or unable to provide the credit protection and perform the
servicing functions necessary to participate in our Private Label program. Our
Retail program focuses on providing lease financing services directly to
equipment lessees and on establishing formal and informal relationships with
manufacturers, dealers and other equipment vendors who are in a position to
recommend us to their customers as a preferred provider of lease financing.
Through our Captive Finance program, we focus on cultivating partnerships with
large equipment vendors to help them develop, implement and administer a
customized, sales-oriented lease finance program. In addition to offering lease
financing, we provide the training, sales tools, management and, in some cases,
personnel, necessary to support a dedicated lease finance program. See "Lease
Funding Programs."
RECENT ACQUISITIONS
In 1998, we acquired eleven equipment leasing businesses. Through these
acquisitions, we substantially increased our ability to generate lease
origination volume, introduce new programs and enter new markets. As of December
31, 1998, we had 28 offices in 14 states and three locations in the United
Kingdom.
The following table contains information regarding the acquisitions we
completed during 1998:
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DATE NAME PRINCIPAL LOCATION PRIMARY LEASE SOURCE
- ---- ---- ------------------ --------------------
<S> <C> <C> <C>
March 1998 Independent Capital New Jersey Retail
Corporation
March 1998 Independent Lease California Captive Finance
Management, Inc.
April 1998 OMNI Leasing, Inc. Pennsylvania Retail
April 1998 Vendor Leasing, Inc. Georgia Retail
April 1998 Nexsoft, Inc. Colorado *
June 1998 TFS, Inc. d/b/a The Money Washington Retail
Source
June 1998 21st Century Credit Leasing Florida Retail
Services, Inc.
July 1998 The Republic Group, Inc. California Retail
July 1998 Suffolk Street Group, PLC England Wholesale/Retail
August 1998 Booker Montague Leasing England Retail
Limited
October 1998 Titan Finance, Limited England Retail
</TABLE>
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* Nexsoft, Inc. is a software development firm specializing in software for the
equipment leasing industry.
Our mergers with Independent Capital Corporation, Integrated Lease
Management, Inc., Vendor Leasing, Inc., TFS, Inc., 21st Century Credit Leasing
Services, Inc., and the Republic Group, Inc. were accounted for as poolings of
interests. The accompanying financial statements and the related discussion of
results of operations for the years ended December 31, 1996 and 1997 have been
restated to include the financial position and results of operations of all
material acquired companies.
While we do not expect that additional acquisitions of equipment leasing
companies will significantly contribute to our growth in 1999, under appropriate
circumstances and market conditions, we may continue to pursue acquisition
opportunities.
LEASE FUNDING PROGRAMS
We provide lease financing through our Private Label, Wholesale, Retail and
Captive Finance programs. The Private Label program was our first lease funding
program, which we began at our inception in June 1994. Through our Private Label
program, we purchased $4.5 million of leases with a weighted average yield of
9.92% in 1994, $65.2 million of leases with a weighted average yield of 9.78% in
1995, $161.1 million of leases with a weighted average yield of 9.45% in 1996,
$210.1 million of leases with a weighted average yield of 9.14% in 1997, and
$249.3 million of leases with a weighted average yield of 7.53% in 1998. We
established our Wholesale and Retail programs, formerly referred to as our
Broker and Vendor programs, in 1996 through strategic acquisitions, and
substantially increased our lease volume in these two programs in 1997 and 1998
through additional acquisitions. Through our Wholesale program, we originated
$10.5 million of leases with a weighted average yield, net of brokers' fees, of
14.07% in 1996, $74.8 million of leases with a weighted average yield, net of
brokers' fees, of 13.32% in 1997, and $106.2 million of leases with a weighted
average yield, net of brokers' fees, of 12.47% in 1998. Through our Retail
program we originated $7.5 million of leases with a weighted average yield of
16.09% in 1996, $98.2 million of leases with a weighted average yield of 15.79%
in 1997, and $377.3 million of leases with a weighted average yield of 16.60% in
1998. We began our Captive Finance program in March 1998 through our acquisition
of Integrated Lease Management, Inc. During 1998, we originated $164.3 million
of leases through our Captive Finance program, all of which we subsequently sold
to third parties.
PRIVATE LABEL PROGRAM
Our Private Label program is designed to provide financing to established
leasing companies that have demonstrated the ability to originate a large volume
of leases, follow prudent underwriting guidelines established pursuant to our
credit policy, provide us with credit protection, and provide lease servicing on
an ongoing basis. The Private Label program was designed to provide us with
access to high volumes of leases eligible for the securitization market, while
minimizing our risk of loss.
In the past, participants in our Private Label program have typically
relied on commercial loans from local banks to fund their leases. These loans
are generally secured by a specific pledge of the lease receivable and the
underlying equipment as well as recourse back to the leasing company. Because
financing available to these companies under typical commercial lending
arrangements is generally limited, the Private Label program offers an
attractive alternative to meet their financing needs. This program also offers
an alternative source of financing to companies whose volume of leases may be
too small to economically securitize. Our Private Label program is designed to
provide the economic advantages of securitized financings (such as enhanced
liquidity at relatively low rates) without the administrative and financial
burdens common to issuers of asset-backed securities.
Participants in our Private Label program identify, document and evaluate
potential leases in accordance with our underwriting guidelines. Once an
application has been submitted, we also review the potential leases before we
determine whether to accept the application. Because participants in the Private
Label program follow our underwriting guidelines in deciding whether to submit
an application, we ultimately accept more than 90% of the leases submitted to us
under this program.
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In a typical Private Label transaction, we purchase the lease from the
Private Label lease source and receive a security interest in the underlying
equipment. The lease source retains ownership of the equipment and is
responsible for paying any applicable property taxes. The lease generally
carries a $1.00 buyout provision upon maturity. We receive payments on the
leases directly through a lockbox account. While the lease source is responsible
for monitoring the payment activity of the lessee, and for performing all
customer contact functions, we provide the lease source with access to our
online servicing system to facilitate collection.
The terms of our Private Label lease purchase agreements provide us with
protection from losses on defaulted leases through a first lien security
interest in the underlying equipment, and recourse to the lease source. The
recourse provisions generally require the lease source to repurchase the lease
from us if the lease becomes 90 days past due. This recourse is typically
limited to 10% to 20% of the aggregate amount of leases purchased from each
lease source and is supported by holdbacks from amounts paid to the lease source
upon purchase of the lease. The amount of the holdback typically ranges from 1%
to 10% of the purchase price of the lease.
From our inception in June 1994 through December 31, 1998, we incurred
losses of $752,000 from $690.3 million of lease receivables funded under our
Private Label program. It is possible that our Private Label sources will not be
able to continue to meet their repurchase obligations in the future or that the
amounts we have held back from the purchase price of our Private Label leases,
together with any amounts realized upon disposal of the underlying equipment,
will not be sufficient to fully offset any losses we might incur upon defaults
by lessees. This could have a material adverse effect on our business, financial
condition and results of operations.
WHOLESALE PROGRAM
Under our Wholesale program, formerly known as our Broker program, we
finance equipment leases from small ticket lease brokers that are unwilling or
unable to provide the credit protection and perform the servicing functions
necessary to participate in our Private Label program. In a typical Wholesale
transaction, we originate leases referred to us by a lease broker and pay the
broker a referral fee. We structure our wholesale leases on a non-recourse
basis, which means that we assume the risk of loss in the event of a default by
the lessee. We own the underlying equipment covered by a wholesale lease and, in
some cases, retain a residual interest in the underlying equipment. We also
perform all servicing functions on our wholesale leases.
We provide a variety of value-added services to participants in our
Wholesale program, including consulting on the structuring of financing
transactions with equipment purchasers, timely and efficient credit approvals
and preparation and completion of standardized lease documents. Although we
enter into a brokerage agreement with each of the participants in our Wholesale
program, these agreements are not exclusive and may be terminated by either
party.
The yield on leases we originate under our Wholesale program are generally
higher than the yields on leases we acquire under our Private Label program
because we assume the risk of loss and servicing responsibilities on leases
originated through our Wholesale program.
RETAIL PROGRAM
Our Retail program, formerly known as our Vendor program, focuses on
providing lease financing services directly to equipment users and on developing
formal and informal relationships with manufacturers, dealers and other
equipment vendors who are in a position to recommend us to their customers as a
preferred provider of lease financing.
In a typical direct lease arrangement, our sales force interacts directly
with purchasers of equipment who are in need of lease financing to initiate the
application process and complete the equipment financing transaction. In a
typical vendor arrangement, we originate a lease referred to us by an equipment
vendor. By assisting vendors in providing timely, convenient and competitive
financing for their equipment sales, and
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offering vendors a variety of value-added services, we simultaneously promote
the vendor's equipment sales and our lease financing services.
We structure our Retail leases on a non-recourse basis, which means that we
assume the risk of loss in the event of a default by the lessee. We own the
underlying equipment covered by a Retail lease and, in some cases, retain a
residual interest in the equipment. We also perform all servicing functions on
our Retail leases.
Through our Retail program, we are able to provide customized lease finance
arrangements to respond to the needs of a particular vendor or equipment
purchaser. The value-added services we offer to participants in our Retail
program include consulting with vendors on structuring financing transactions
with equipment purchasers, training the vendor's sales and management staffs to
understand and market our various financing alternatives, customizing financial
products to encourage product sales and preparing and completing standardized
lease documents. In most cases, our sales representatives also work directly
with a vendor's equipment purchasers, providing them with the guidance necessary
to complete the equipment financing transaction. We also may participate
actively in our vendor's sales and marketing efforts, including advertising,
promotions, trade show activities and sales meetings.
The yields on leases we originate under our Retail program are generally
higher than the yields on leases we originate under our Wholesale program
because of the additional services we provide under the Retail program.
CAPTIVE FINANCE PROGRAM
Under our Captive Finance program, which we developed in March 1998 through
our acquisition of Independent Lease Management, Inc., we focus on cultivating
partnerships with large equipment vendors to help them develop, implement and
administer a customized, sales-oriented lease finance program. In addition to
offering lease financing, we provide the training, sales tools, management, and
often, personnel, necessary to support a lease finance program. To make customer
finance an effective part of the vendors' sales efforts, our Captive Finance
program helps vendors build systems that are tailored to their specific business
and their customers. Our sales consultants with backgrounds in software and
communications technology help the vendors' sales representatives achieve their
companies' financial objectives. This process creates customized financial
solutions that drive revenue and incremental sales. During 1998, we sold
virtually all of the leases originated under our Captive Finance program to
third parties. As a result, substantially all of the revenue we generated under
this program was from servicing income and fee income rather than yield income.
In the future, we intend to retain a portion of leases funded under our Captive
Finance program in our lease portfolio until they can be financed, securitized
or otherwise sold.
PORTFOLIO ACQUISITIONS AND SALES AND LEASE SALES TO THIRD PARTIES
In addition to our four lease funding programs, we have in the past
generated, and may from time to time in the future generate, gains from direct
sale of financing receivables by acquiring lease portfolios and subsequently
selling the portfolios at a premium. In general, we seek to acquire portfolios
of equipment leases from finance companies exiting the business, independent
companies seeking a financial partner or companies with businesses that are
complementary to ours. Before we acquire a portfolio of leases under our
portfolio acquisition program, we perform due diligence procedures, including
review of a sample of the lease files included in the portfolio, loss and
delinquency experience of the portfolio and other factors we consider
appropriate.
From time to time, we also generate gain from direct sales of lease
financing receivables by selling and brokering leases to third party financing
sources for cash.
CREDIT POLICIES AND PROCEDURES
We have developed underwriting policies and procedures that we believe
enable us to select creditworthy equipment lessees and to minimize the risks of
delinquencies and credit losses. The nature of our business
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requires two levels of review, the first focused on the qualification of the
lease source and the second focused on the lessee or ultimate end-user of the
equipment.
SOURCE QUALIFICATION
We perform a background investigation on all potential lease sources. This
investigation may include verification of bank and trade references and a review
of financial statements, past credit history and the business and industry in
which the lease source operates. Because participants in our Private Label
program are required to provide us with credit protection, we perform additional
procedures to evaluate the creditworthiness of our Private Label sources. These
additional procedures may include an examination of the lease source's financial
statements and liquidity, management team, staffing and servicing infrastructure
and a review of ongoing support capabilities in credit, documentation, customer
service and collections.
LEASE UNDERWRITING
In each of our lease funding programs, we review individual leases for
compliance with underwriting guidelines pursuant to our credit policy. These
underwriting guidelines generally require a credit investigation of an equipment
lessee, including an analysis of the personal credit of the owner who typically
guarantees the lease, verification of time in business and corporate name, Dun &
Bradstreet reports if available and comparable bank and trade references on
larger exposures. Typically these functions are electronically automated through
our processing and servicing technology. Under the Private Label program, the
lease source performs some of these functions. We typically perform all of these
functions with respect to leases financed under our other lease funding
programs.
The lease approval process begins with the submission by computer facsimile
or electronic transmission of a credit application by the lease originator, at
which time we conduct an independent credit investigation through recognized
commercial credit reporting agencies such as Dun & Bradstreet, Equifax, Inc. and
TRW, Inc. The credit application is automatically forwarded for review and
approval by a credit officer. The time required for an underwriting decision
varies according to the nature, size and complexity of each transaction, but
approval is generally accomplished within one day or less.
Once we make a determination to finance a lease, we require signed lease
documentation on our standard lease agreements, or other pre-approved lease
forms. Once the equipment is shipped and installed, the vendor invoices us and
we verify that the lessee has received and accepted the equipment. When the
lessee authorizes payment to the vendor, we forward the lease to our funding and
documentation department for funding, transaction accounting and billing
procedures.
In connection with our securitization program, financial guaranty insurers
and rating agencies perform extensive reviews of our underwriting standards and
procedures.
SERVICING AND ADMINISTRATION
Our lease servicing responsibilities vary depending on the lease funding
program under which we acquired or originated the lease. Servicing
responsibilities generally include billing, processing payments, remitting
payments to key sources and investors, preparing investor reports, paying taxes
and insurance and performing collection and liquidation functions. For equipment
leases funded under our Private Label program, the lease source performs the
collection and customer service functions, while we perform other servicing
functions, including billing and cash receipt. This arrangement allows the lease
source to maintain close relationships with lessees and reduces our servicing
costs. Under our Wholesale and Retail programs, we are normally responsible for
all servicing functions. We also perform all servicing functions with respect to
leases funded under our Captive Finance program that we retain in our portfolio.
We retain the right to service leases included in our securitization
transactions. In return, we generally receive a servicing fee of 0.50% per year
on the outstanding principal balance of all securitized leases plus late fees,
which we collect out of monthly lease payments. We believe that, by performing
servicing functions on
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our securitized leases, we enhance operating efficiencies and provide an
additional revenue stream. As of December 31, 1998, we serviced leases for
others with an aggregate principal amount of $893.0 million.
The small ticket leasing industry is operationally intensive due, in part,
to the small average lease size. Accordingly, state-of-the-art technology is
critical in keeping servicing costs to a minimum and providing quality customer
service. Recognizing the importance of servicing, we utilize a lease
administration system that is tailored to support our operational needs. Our
system handles application tracking, invoicing, payment processing, automated
collection queuing, portfolio evaluation, cash forecasting and report
preparation. The system is linked with a lockbox bank account for payment
processing and provides for direct withdrawal of lease payments. Our technology
also allows us to offer all of our customers direct access to our credit
department and application documents over the internet, through an on-line
application process which provides for immediate credit approvals. The system's
paperless environment substantially enhances the efficiency with which we can
offer lease financing to our customers.
Under our Private Label program, the lease source performs all customer
contact functions, other than receipt of cash. Many of our Private Label sources
have direct access to our lease administration system to assist them in
servicing and collecting the leases they have sold to us. We closely monitor
delinquency information with respect to leases from each Private Label source.
If a lessee defaults, which typically means when the account is 90 days past
due, we send a notice to the lease source stating that the source must
repurchase the lease within 60 days. For leases we acquire or originate under
our Wholesale and Retail programs, and those Captive Finance leases that we
retain in our portfolio, our collections policy is designed to identify payment
problems sufficiently early to permit us to quickly address delinquencies and,
when necessary, to act to preserve equity in the leased equipment. Collection
procedures begin when payments are thirteen days past due.
TERMS OF EQUIPMENT LEASES
Substantially all of the equipment leases we acquire or originate are
non-cancelable. During the term of the lease, we generally receive scheduled
payments sufficient, in the aggregate, to cover our borrowing costs and the
costs of the underlying equipment, and to provide us with an appropriate profit
margin. The initial non-cancelable term of the lease is equal to or less than
the equipment's estimated economic life and a small portion of our leases
provide us with additional revenues based on the residual value of the equipment
financed at the end of the initial term of the lease. Initial terms of the
leases we acquire or originate generally range from 12 to 84 months, with a
weighted average initial term of 59 months for all leases originated in 1998.
The terms and conditions of all our leases are substantially similar. In
most cases, the lessees contractually are required to:
- maintain, service and operate the equipment in accordance with procedures
required by the manufacturer and the government,
- insure the equipment against property and casualty loss,
- pay all taxes associated with the equipment, and
- make all scheduled contract payments regardless of the performance of the
equipment.
Our standard lease agreements provide that, if the lessee defaults, we can
require payment of liquidated damages and can seize and remove the equipment for
subsequent sale, refinancing or other disposal at our discretion. Any additions,
modifications or upgrades to the equipment, regardless of the source of payment,
are automatically incorporated into and deemed a part of the equipment financed.
RESIDUAL INTERESTS IN UNDERLYING EQUIPMENT
With respect to leases we acquire or originate under our Wholesale and
Retail programs, and those Captive Finance leases that we retain in our
portfolio, we may own a residual interest in the equipment covered by the lease.
We record the residual value of a lease on our books when there is no obligation
on the
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part of the lessee to purchase the equipment at the expiration of the lease
term. Of the leases we acquired or originated under our Wholesale and Retail
programs through December 31, 1998, approximately 80.65%, as measured by net
investment, had no residual value on our books. This is generally because the
lessee was granted an option to purchase the equipment at the end of the term
for a nominal price or the lessee was required to purchase the equipment at the
end of the term at a fixed price. Our aggregate investment in residual values
with respect to equipment underlying leases acquired and originated under our
Wholesale and Retail programs through December 31, 1998 was approximately $5.5
million, representing less than 1.6% of the total outstanding balance of such
leases as of December 31, 1998. In the future, we may consider acquiring or
originating leases that are classified as operating leases for financial
accounting purposes, which would require us to record substantially higher
residual values than we record on direct financing leases.
With respect to equipment in which we own a residual interest, we generally
seek to determine the best remarketing plan for the equipment prior to the
expiration of the lease covering the equipment. In many cases, our remarketing
plan provides for the continuation of the lease on a month-to-month or other
basis or the negotiated sale of the equipment to the lessee through equipment
brokers and remarketers, rather than our employees, in order to maximize the net
proceeds from the sale.
SALES AND MARKETING
Our marketing strategy is to increase our volume of lease funding by:
- targeting the online financing market by offering e-commerce technology
solutions and online financing products,
- maintaining, selectively expanding and supporting our network of lease
sources,
- developing programs for specific vendor or customer groups, and
- developing and introducing complementary lease finance products that we
can market and sell through our existing network of lease sources.
As of December 31, 1998, we employed a sales force of approximately 218
employees. These employees are responsible for implementing marketing plans and
coordinating marketing activities with our lease sources, as well as providing
customer service and attending industry conventions and trade shows.
Our recently formed strategic services group, B2B Solutions, represents the
culmination of our recognition of, and desire to accommodate, the online market
and the need for internet-driven leasing solutions. Through B2B Solutions, our
strategy is to offer vendors a complete one-stop solution for their lease
financing needs, including functional web-site development, on-line applications
and credit approval, and electronic interfaces between our systems and the
vendor's web site, sales force and customers.
We have established a substantial network of independent leasing companies,
brokers and vendors, each of which acts as a source from which we obtain access
to equipment leases. Our sales force works directly with these external lease
sources to generate lease volume for our lease funding programs.
We have developed several convenience-oriented specialty lease finance
programs that are designed to enhance our lease volume in specific industries.
For example, we provide equipment lessees with a pre-approved credit line,
referred to as a "Smart Card," which can be used with various vendors of
equipment, enabling the lessee to obtain quick and efficient financing. We
intend to continue to grow our business by offering specialized finance products
to both existing and new lease sources in the future.
Through our Captive Finance program, our goal is to cultivate partnerships
with large equipment vendors to help them develop, implement and administer a
customized, sales-oriented lease finance program. In addition to offering lease
financing, we provide the training, sales tools, management, and in some cases,
personnel, necessary to support a dedicated lease finance program. This process
creates customized financial solutions that drive the vendors' revenue and
incremental sales, while garnering profitable new asset flows for First Sierra.
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We are represented at major equipment leasing conventions and trade shows
held each year, and several of our officers are active in the Equipment Leasing
Association, the United Association of Equipment Lessors, the National
Association of Equipment Lease Brokers and the Eastern Association of Equipment
Lessors, all well-recognized equipment leasing associations. We are also
represented at several major industry-specific vendor trade shows each year.
COMPETITION
We compete in the equipment financing market with a number of national,
regional and local finance companies and consulting electronic commerce
technology providers. Our competitors also include those equipment manufacturers
that finance the sale or lease of their products themselves and other
traditional types of financial services companies, such as commercial banks and
savings and loan associations, all of which provide financing for the purchase
of equipment. Our competitors include many larger, more established companies
that may have access to capital markets and to other funding sources that may
not be available to us. Many of our competitors have substantially greater
financial, marketing and operational resources and longer operating histories
than we do.
We believe that our experienced management team and sales force, our
advanced technology and servicing capacity and our significant wholesale and
retail customer base allow us to aggressively compete with larger, more
established companies.
EMPLOYEES
As of December 31, 1998, we had 498 full time employees, of which 51 were
engaged in credit and collection activities, 229 were engaged in servicing and
general administration activities and 218 were engaged in marketing activities.
We believe that our relationship with our employees is good. None of our
employees are members of a collective bargaining unit.
In late 1997 and early 1998, in order to maximize administrative
efficiencies, we consolidated our underwriting, customer service and collection
operations at our headquarters in Houston, Texas. The technological enhancements
we gained from our acquisition of Nexsoft in April 1998 also allowed us to
increase the efficiency of our branch network. The administrative efficiencies
resulting from these events have allowed us to reduce our workforce by
approximately 17% since September 30, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 15, 1999, our executive officers were as follows:
THOMAS J. DEPPING, age 40, has served as Chairman of the Board, President
and Chief Executive Officer of First Sierra since its inception in June 1994.
Mr. Depping has over 15 years of experience in the equipment leasing industry,
including 11 years with SunAmerica Financial Resources and its predecessor
company (which was acquired by SunAmerica, Inc. in 1991). From 1991 to May 1994,
Mr. Depping served as President of SunAmerica Financial Resources, the equipment
leasing and financial division of SunAmerica, Inc.
SANDY B. HO, age 39, has served as Executive Vice President, Chief
Financial Officer and Secretary of First Sierra since January 1995. Ms. Ho has
over 15 years of experience in the equipment leasing and financial services
industries, including 10 years with SunAmerica Financial Resources and its
predecessor company (which was acquired by SunAmerica, Inc. in 1991). From 1991
through 1994, Ms. Ho served as Vice President of SunAmerica Financial Resources
and Managing Director of SunAmerica Corporate Finance.
DAVID L. PEDERSON age 39, has served as Executive Vice President and Chief
Information Officer of First Sierra since April 1998. Prior to joining First
Sierra, Mr. Pederson was President of Nexsoft, Inc., which he founded in 1993.
Nexsoft designed and developed First Sierra's systems and communications
network. Mr. Pederson has over 15 years of experience in directing technology
initiatives in the equipment leasing industry.
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<PAGE> 11
MICHAEL A. SABEL, age 32, has served as Executive Vice President-Business
Development of First Sierra since January 1999. From May 1998 through December
1998, Mr. Sabel served as Executive Vice President -- Global Mergers and
Acquisitions of First Sierra. Since joining First Sierra in May 1998, Mr. Sabel
has also served as President of First Sierra International. From September 1994
until May 1998, Mr. Sabel was a member of the Investment Banking Group at
Friedman, Billings Ramsey & Co., Inc., most recently serving as a Managing
Director. From August 1991 until August 1994, Mr. Sabel served as a Vice-
President of Sandler, O'Neil and Partners' Corporate Strategies Group.
OTHER SENIOR OFFICERS OF THE REGISTRANT
Other senior officers of First Sierra as of March 15, 1999 included:
GREG E. McINTOSH, age 36, has served as Executive Vice President of the
Retail Division of First Sierra since September 1998. Mr. McIntosh was Senior
Vice President of First Sierra's Retail Western Region from May 1997 to
September 1998. From 1990 to May 1997, Mr. McIntosh held various positions,
including Chief Operating Officer of Heritage Credit Services, Inc., which was
acquired by First Sierra in May of 1997.
FREDERICK M. VAN ETTEN, age 45, has served as Executive Vice President of
Marketing and Sales of First Sierra since September 1998. From January 1995
through August 1998, Mr. Van Etten served as Senior Vice President of Marketing
for First Sierra. Mr. Van Etten has been involved in all aspects of the
commercial finance and equipment leasing business for over 20 years. Prior to
joining First Sierra, Mr. Van Etten was Managing Director of SunAmerica
Corporate Finance, a division of SunAmerica, Inc.
MICHAEL D. WING, age 46, has served as Executive Vice President of
Operations and Administration of First Sierra since September 1998. From May
1998 through August 1998, Mr. Wing served as a Senior Vice President of First
Sierra. From March 1993 until April 1998, Mr. Wing was the Founder and President
of Oakmont Financial Services. Mr. Wing has over 26 years of experience in the
financial services industry and 10 years experience in the equipment leasing
industry.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
We make forward-looking statements from time to time and desire to take
advantage of the "safe harbor" which is afforded such statements under the
Private Securities Litigation Reform Act of 1995 when they are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those in the forward-looking
statements.
The statements contained in "Item 1 -- Business" and "Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations," statements contained in future filings with the Securities and
Exchange Commission and publicly disseminated press releases, and statements
that our management may make from time to time in the future in presentations to
shareholders, prospective investors, and others interested in our business and
financial affairs, which are not historical facts, are forward-looking
statements that involve risks and uncertainties that could cause actual results
to differ materially from those set forth in the forward-looking statements. You
should not construe any projections of financial or operating performance or
statements concerning expectations as to future developments in any manner as a
guarantee that such results or developments will, in fact, occur. Our
projections of future financial or operating performance and expectations as to
future developments referenced in any forward-looking statement may not be
realized and our actual results may be significantly different from those set
forth in the forward-looking statements. In addition to the risks and
uncertainties of ordinary business operations, the forward-looking statements
referred to above are also subject to the following risks and uncertainties:
WE DEPEND ON THE SECURITIZATION MARKET TO FINANCE OUR LEASES
From time to time, depending on market conditions, we securitize the leases
in our portfolio that meet pre-established eligibility criteria by packaging
them into a pool and selling beneficial interests in the leases through public
offerings and private placement transactions. In a securitization transaction,
we transfer a pool
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<PAGE> 12
of leases to a wholly owned, special purpose subsidiary of First Sierra. The
special purpose subsidiary simultaneously transfers an interest in the leases to
a trust, which issues beneficial interests in the leases in the form of senior
and subordinated securities and sells such securities through public offerings
and private placement transactions. We generally retain the right to receive any
excess cash flows of the trust, which right is represented by a trust
certificate.
Gain on sale of securitized leases represented approximately 15% of our
revenues in 1996, approximately 35% of our revenues in 1997, and approximately
48% of our revenues during the period from January 1, 1998 through June 30,
1998. As a result of our decision to emphasize portfolio lending, effective July
1, 1998, we altered the structure of our securitizations so that we no longer
record an immediate gain on sale when we securitize lease financing receivables.
Rather, we recognize net interest margin over the life of each of our leases.
Thus, we expect that our earnings per share will be negatively affected until
the interest income and other revenue generated from leases held on our balance
sheet exceed our operating expenses.
We depend on securitizations for refinancing of amounts outstanding under
our securitized funding facilities, which we utilize to acquire and originate
additional leases. Several factors affect our ability to complete
securitizations, including conditions in the securities markets generally,
conditions in the asset-backed securities markets, the credit quality of our
lease portfolio, compliance of our leases with the eligibility requirements
established in connection with the securitizations, our ability to obtain
third-party credit enhancement, our ability to adequately service our lease
portfolio, and the absence of any material downgrading or withdrawal of ratings
given to securities previously issued in our securitizations. Any substantial
reduction in the availability of the securitization market for our leases or any
adverse change in the terms of our securitizations could have a material adverse
effect on our business, financial condition and results of operations.
IF THE CASH FLOWS FROM OUR SECURITIZATION TRANSACTIONS ARE LESS THAN WE
EXPECT, IT WOULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS
The cash flows available to the trust certificates which we retain in our
securitization transactions are calculated as the difference between cash flows
received from the leases and the sum of interest and principal payable to the
holders of the senior and subordinated securities, trustee fees, third party
credit enhancement fees, service fees, and backup service fees. Our right to
receive this excess cash flow is subject to certain conditions specified in the
related trust documents designed to provide additional credit enhancement to
holders of the senior and subordinated securities issued in the securitization.
We estimate the expected levels of cash flows available to the trust
certificate taking into consideration anticipated defaults, recoveries and other
factors which may affect the cash flows available to the holder of the trust
certificate. The cash flows ultimately available to the trust certificate
largely depend upon the actual default rates and recovery levels experienced on
the leases sold to the trust. Losses incurred on leases held by the trust are
borne solely by the holder of the trust certificate to the extent of the
holder's investment in the trust certificate.
Because we are typically entitled to receive, as holder of the trust
certificates issued in our securitization transactions, from 2.0% to 6.5% of the
cash flows of the trust yet we bear the risk of loss based upon the performance
of the entire portfolio of leases held by the trust, relatively small
fluctuations in default rates, recovery levels and other factors impacting cash
flows of the leases could have a material adverse effect on our ability to
realize our recorded basis in the trust certificates. If any of these
fluctuations were to occur, we would be required to reduce the carrying amount
of our trust certificates and record a charge to earnings in the period in which
the event occurred or became known to management.
OUR ACQUISITION STRATEGY MAY NOT BE SUCCESSFUL
A key component of our growth strategy has been to acquire other equipment
leasing companies in strategic markets and locations. In the past, we have
financed these acquisitions by using a combination of common stock, cash and
debt. During 1998, we experienced a significant decline in the market price of
our common stock. As a result, our ability to complete acquisitions using our
Common Stock as currency, in a
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<PAGE> 13
manner that was not dilutive to current stockholders, was adversely affected. If
our common stock does not maintain a sufficient market value in the future, or
if the owners of businesses we wish to acquire are unwilling to accept common
stock as part of the purchase price, we may be required to use more of our cash
resources, or seek additional capital, in order to complete acquisitions. It is
possible that we will not be able to successfully consummate acquisitions in the
future. If we are unable to pursue an acquisition strategy in the future, we
will be required to rely on internal growth to expand our business.
Any acquisition we make may result in potentially dilutive issuances of
equity securities, the incurrence of additional debt and the amortization of
expenses related to goodwill and other intangible assets, any of which could
have a material adverse effect on our business, financial condition and results
of operations. We also may experience difficulties in the assimilation of the
operations, services, products and personnel of acquired companies, an inability
to sustain or improve the historical revenue levels of acquired companies, the
diversion of management's attention from ongoing operations and the potential
loss of key employees of such acquired companies.
WE DEPEND ON EXTERNAL FINANCING TO FUND OUR LEASES
We fund a large percentage of the equipment leases we acquire or originate
through our securitized funding facilities. The securitized funding facilities
are available to fund leases which satisfy eligibility criteria for inclusion in
our public securitizations. We repay borrowings under our securitized funding
facilities with the proceeds we receive from our public securitization
transactions. Any adverse impact on our ability to complete public
securitization transactions could have a material adverse effect on our ability
to obtain or maintain securitized funding facilities or the amount available
under such facilities. Any failure to renew our existing securitized funding
facilities or obtain additional facilities or other financings with pricing,
advance rates and other terms consistent with our existing facilities could have
a material adverse effect on our business, financial condition and results of
operations.
WE MAY NEED ADDITIONAL CAPITAL TO FINANCE OUR OPERATIONS
Our lease financing business is capital intensive and requires access to
substantial short-term and long-term credit to fund new equipment leases. We
expect to continue to require access to a large amount of capital to maintain
and expand our volume of leases funded. If future market conditions adversely
affect our ability to finance leases, we may require additional capital to fund
our operations.
INCREASES IN INTEREST RATES COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS
The leases we finance are non-cancelable and require payments to be made by
the lessee at fixed rates for specified terms. The rates we charge are based on
interest rates prevailing in the market at the time of lease approval. Until we
securitize or otherwise sell our leases, we generally fund the leases under our
securitized funding facilities or from working capital. If we were to become
unable to securitize or otherwise sell leases with fixed rates within a
reasonable period of time after funding, our operating margins could be
adversely affected by increases in interest rates. Moreover, increases in
interest rates which cause us to raise the implicit rate we charge to our
customers could cause a reduction in demand for our lease financing. We
generally undertake to hedge against the risk of interest rate increases when
our equipment lease portfolio exceeds $10.0 million. These hedging activities
limit our ability to participate in the benefits of lower interest rates with
respect to our hedged portfolio of leases. In addition, our hedging activities
may not adequately insulate us from interest rate risks.
INCREASES IN LESSEE DEFAULTS COULD ADVERSELY AFFECT OUR BUSINESS AND
FINANCIAL CONDITION
We specialize in acquiring and originating equipment leases with a purchase
price of less than $250,000, generally involving small and mid-size commercial
businesses located throughout the United States. Small business leases generally
entail a greater risk of non-performance and higher delinquencies and losses
than leases entered into with larger, more creditworthy lessees. Because of our
short operating history, we have
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<PAGE> 14
limited performance data with respect to leases we finance. Thus, our historical
delinquency and loss statistics do not necessarily predict our future
performance.
We funded the vast majority of the leases we acquired or originated through
December 31, 1996 through a combination of the recourse and purchase price
holdback features of our Private Label program. During the year ended December
31, 1998, we funded approximately 54% of the leases that we acquired or
originated through our Wholesale and Retail programs, which do not have these
credit protections. We believe that we will generate increasingly larger
percentages of our lease originations in the future through lease funding
programs that do not provide us with credit protection.
The failure of our lessees to comply with the terms of their leases will
result in the inability of these leases to qualify to serve as collateral under
our securitized funding facilities and securitization program and may have a
material adverse effect on our liquidity. Also, delinquencies and defaults in
excess of levels estimated by our management in determining our allowance for
credit losses and in valuing our right to receive excess cash flows under our
securitization program could have a material adverse effect on our ability to
obtain financing and effect public securitization transactions. Our inability to
effect public securitization transactions could, in turn, have a material
adverse effect on our business, financial condition and results of operations.
OUR QUARTERLY RESULTS MAY FLUCTUATE
We may experience significant fluctuations in quarterly operating results
due to a number of factors, including, among others, the interest rate on the
securities issued in connection with our securitization transactions, variations
in the volume of leases we finance, differences between our cost of funds and
the average implicit yield we receive on our leases prior to their being
securitized or otherwise sold, the effectiveness of our hedging strategy, the
degree to which we encounter competition in our markets and general economic
conditions. As a result of these fluctuations, you should not rely on our
results for any one quarter as predicting or guaranteeing our performance in
future quarters.
WE MAY BE UNABLE TO CONTINUE OUR GROWTH IN VOLUME OF LEASE FINANCING
RECEIVABLES
Our ability to sustain continued growth depends upon our capacity to
attract, evaluate, finance and service increasing volumes of leases of suitable
yield and credit quality. Our ability to accomplish this on a cost-effective
basis is largely a function of our ability to market our products effectively,
to manage our credit evaluation process to assure adequate portfolio quality, to
provide competent, attentive and efficient servicing and to maintain access to
institutional financing sources to achieve an acceptable cost of funds for our
financing programs. Any failure to market our products effectively, to maintain
our portfolio quality, to effectively service our leases or to obtain
institutional financing at reasonable rates would have a material adverse effect
on our business, financial condition and results of operations.
WE RELY ON KEY EMPLOYEES WHOSE ABSENCE COULD ADVERSELY AFFECT OUR BUSINESS
We depend to a large extent upon the experience, abilities and continued
efforts of our senior management, including the management of companies we have
acquired. We have entered into employment agreements with our principal
executive officers. The loss of the services of one or more of the key members
of our senior management could have a material adverse effect on our business,
financial condition and results of operations. Our future success also will
depend upon our ability to attract and retain additional skilled management
personnel necessary to support anticipated future growth.
COMPETITION COULD ADVERSELY AFFECT OUR BUSINESS
The financing of small ticket equipment is highly competitive. We compete
for customers with a number of national, regional and local finance companies.
Our competitors also include those equipment manufacturers that finance the sale
or lease of their products themselves and other traditional types of financial
services companies, such as commercial banks and savings and loan associations,
all of which provide financing for the purchase of equipment. Many of our
competitors and potential competitors possess substantially greater financial,
marketing and operational resources than we do. Our competitors and potential
competitors include
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<PAGE> 15
many larger, more established companies that may have a lower cost of funds than
we do and access to capital markets and to other funding sources that may be
unavailable to us.
OUR LEASES ARE CONCENTRATED IN A SMALL NUMBER OF STATES AND INDUSTRIES;
ADVERSE ECONOMIC OR REGULATORY CONDITIONS IN THOSE STATES OR INDUSTRIES COULD
ADVERSELY AFFECT OUR BUSINESS
Although our portfolio of leases includes lessees located throughout the
United States, we acquire or originate a majority of our leases from sources
operating in five states: Texas, Florida, New York, New Jersey and California.
The ability of our lessees to honor their contracts may substantially depend on
economic conditions in these states. All of our leases are collateralized by the
related equipment. The recourse and holdback provisions of our Private Label
program mitigate, but do not eliminate, a significant portion of any economic
risk not recoverable through the sale of the related equipment.
Also, a substantial portion of our leases are concentrated in certain
industries, including the medical industry, the dental industry and the
veterinary industry. If the economic or regulatory conditions prevalent in such
industries were to change, our lessees may not be able to honor their lease
obligations.
If our major lease sources were to substantially reduce the number of
leases sold to us, and we were not able to replace the lost lease volume, this
reduction could have a material adverse effect on our business, financial
condition and results of operations.
WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR GROWTH
We have grown dramatically since our inception in June 1994. The volume of
leases we acquired or originated was $4.5 million for the period from inception
to December 31, 1994, $65.2 million for the year ended December 31, 1995, $179.2
million for the year ended December 31, 1996, $383.1 million for the year ended
December 31, 1997, and $897.1 million for the year ended December 31, 1998. This
growth has placed, and if sustained will continue to place, a burden on our
administrative and financial resources. If our management is unable to
effectively manage our future growth, this could have a material adverse effect
on our business, financial condition and results of operations.
IF WE ARE UNABLE TO REALIZE THE RECORDED RESIDUAL VALUES ON OUR EQUIPMENT,
THIS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We retain a residual interest in the equipment covered by some of our
leases. We reflect the estimated fair market value of the equipment at the end
of the contract term of the lease as an asset on our balance sheet. Our results
of operations depend, to some degree, upon our ability to realize these residual
values. Realization of residual values depends on many factors, several of which
are outside our control, including general market conditions at the time of
expiration of the lease, whether there has been unusual wear and tear on, or use
of, the equipment, the cost of comparable new equipment, the extent, if any, to
which the equipment has become technologically or economically obsolete during
the contract term and the effects of any additional or amended government
regulations. If, upon the expiration of a lease, we sell or refinance the
underlying equipment and the amount realized is less than the recorded value of
the residual interest in the equipment, we realize a loss reflecting the
difference. If we were to fail to realize aggregate recorded residual values,
this could have a material adverse effect on our business, financial condition
and results of operations.
ITEM 2. PROPERTIES
From inception through 1997, our underwriting, customer service and
collection staff were located in our Jupiter, Florida office. In order to
consolidate our operations and maximize administrative efficiencies, we
relocated our operations center from Jupiter, Florida to our headquarters in
Houston, Texas. This relocation began in late 1997 and was completed in the
first half of 1998. In connection with this relocation, we incurred
non-recurring costs of $1.6 million during 1998 (or $0.08 per share), primarily
attributable to personnel-related expenses.
Our corporate headquarters are located in 9,114 square feet of leased space
at 600 Travis Street, Suite 7050, Houston, Texas 77002. In connection with the
relocation of our operations center to Houston, we
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<PAGE> 16
leased approximately 27,742 quare feet of additional space in the building where
our corporate headquarters are located. In addition, we lease office space for
our regional offices in numerous locations in the United States and the United
Kingdom. As of December 31, 1998, the aggregate monthly rent under all of our
office leases was approximately $208,000. We believe that our current facilities
are adequate for our existing needs and that suitable space will be available to
satisfy future growth as required.
ITEM 3. LEGAL PROCEEDINGS
From time to time, First Sierra and its subsidiaries are parties to various
claims, lawsuits and administrative proceedings arising in the ordinary course
of business. Although we cannot predict the outcome of these lawsuits with
certainty, we do not expect these matters to have a material adverse effect on
our business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
On May 15, 1997, our common stock began trading on the Nasdaq National
Market under the symbol "FSFH." The following table sets forth the high and low
sale prices of our common stock, as reported by Nasdaq, for the periods
indicated, since May 15, 1997.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997
Second Quarter (beginning May 15)........................... $11 1/4 $ 8 3/8
Third Quarter............................................... 20 1/4 10 1/2
Fourth Quarter.............................................. 20 1/4 17 3/4
1998
First Quarter............................................... 27 16
Second Quarter.............................................. 31 23 3/4
Third Quarter............................................... 32 5/8 6 3/8
Fourth Quarter.............................................. 13 1/8 5 3/4
</TABLE>
On March 11, 1999, there were approximately 57 holders of record of our
common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain earnings to finance the growth and development of our
business and do not anticipate paying any cash dividends on our common stock in
the foreseeable future. In addition, the terms of our credit facilities and our
Series A Preferred Stock restrict the payment of dividends on our common stock.
Holders of shares of Series A Preferred Stock are entitled to receive annual
cash dividends of $1.86 per share, payable annually as declared by our Board of
Directors. Any future change in our dividend policy will be made at the
discretion of our Board of Directors in light of our financial condition,
capital requirements, earnings and prospects and any restrictions under our
credit facilities or rights of the holders of the Series A Preferred Stock, as
well as other factors the Board of Directors may deem relevant.
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SALES OF UNREGISTERED SECURITIES
On October 1, 1998, we acquired all of the outstanding shares of capital
stock of Titan Finance, Limited, a company incorporated in England and Wales, in
exchange for $2,250,000 in cash and $2,250,000 in convertible subordinated
promissory notes. The offering and issuance of the promissory notes was effected
pursuant to Regulation S, promulgated under the Securities Act of 1933, as
amended.
STOCKHOLDER RIGHTS PLAN
On December 15, 1998, our Board of Directors declared a dividend
distribution of one preferred stock purchase right for each share of our common
stock. The dividend was payable on December 30, 1998 to stockholders of record
at the close of business on December 28, 1998. Each right generally entitles the
registered holder to purchase from First Sierra, upon the occurrence of certain
triggering events, one one-hundredth of a share of our Junior Preferred Stock,
Series C, par value $0.01 per share, at a purchase price of $65.25 per one
one-hundredth of a share. The description and terms of the rights are set forth
in the Rights Agreement, dated as of December 30, 1998, between First Sierra and
Harris Trust and Savings Bank as Rights Agent.
On December 31, 1998, we filed a Form 8-A with the Securities and Exchange
Commission to register the rights pursuant to applicable law. Further
information regarding the rights, including the Rights Agreement, may be found
in the Form 8-A.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth our selected financial and operating data as
of the dates and for the periods indicated (as restated). The selected
consolidated financial data, as of December 31, 1994 and for the period from our
inception (June 3, 1994) through December 31, 1994 and as of and for the years
ended December 31, 1995, 1996, 1997 and 1998, have been derived from financial
statements audited by Arthur Andersen LLP, independent public accountants. The
selected financial and operating data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our Consolidated Financial Statements and related
notes, included elsewhere in this report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1994 1995 1996 1997 1998
------ ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Gain on sale of lease financing receivables
through securitized transactions......... $ -- $ 3,259 $ 3,456 $18,164 $16,291
Gains from direct sales of lease financing
receivables.............................. 1,565 4,926 9,755 17,095 18,434
Interest income............................. 183 3,069 6,387 9,193 17,315
Servicing income............................ 6 323 1,053 3,095 5,112
Other income................................ 955 958 2,720 4,052 3,991
------ ------- ------- ------- -------
Total revenues...................... 2,709 12,535 23,371 51,599 61,143
</TABLE>
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1994 1995 1996 1997 1998
------ ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Expenses:
Salaries and benefits....................... $1,999 $ 2,235 $ 6,799 $15,554 $29,509
Interest expense............................ 163 2,632 5,049 5,180 6,027
Provision for credit losses on lease
financing receivables and investment in
trust certificates....................... 28 392 605 2,101 10,364
Depreciation and amortization............... 46 179 469 1,525 3,752
Other general and administrative............ 1,320 4,998 6,254 11,595 14,173
Research and development costs of acquired
companies................................ -- -- -- -- 2,550
Merger and acquisition expenses............. -- -- -- -- 1,742
Relocation of operations center............. -- -- -- -- 1,593
------ ------- ------- ------- -------
Total expenses...................... 3,556 10,436 19,176 35,955 69,710
Net income (loss) before provision (benefit)
for income taxes............................ (847) 2,099 4,195 15,644 (8,567)
Provision (benefit) for income taxes.......... (317) 720 932 5,107 (2,665)
------ ------- ------- ------- -------
Net income (loss)............................. $ (530) $ 1,379 $ 3,263 $10,537 $(5,902)
====== ======= ======= ======= =======
Earnings (loss) per share, diluted(1)......... (0.07) .17 .41 1.03 (.43)
====== ======= ======= ======= =======
Shares used in computing earnings (loss) per
share....................................... 7,235 8,074 7,923 10,185 13,725
====== ======= ======= ======= =======
</TABLE>
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<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Assets:
Lease financing receivables, net.......... $29,961 $67,945 $62,769 $27,675 $337,162
Cash and cash equivalents................. 2,502 1,265 3,793 14,569 7,928
Other receivables......................... -- -- -- 4,087 11,596
Investment in trust certificates.......... -- -- 9,534 12,512 7,288
Marketable securities..................... -- -- -- 4,223 5,042
Goodwill and other intangible assets,
net.................................... -- 732 2,003 20,162 39,202
Furniture and equipment, net.............. 393 -- 3,615 5,801 9,909
Other assets.............................. 1,324 1,367 2,040 3,929 6,923
Current tax receivables................... -- -- -- -- 3,243
------- ------- ------- ------- --------
Total assets...................... $34,180 $71,309 $83,754 $92,958 $428,293
======= ======= ======= ======= ========
Liabilities and Stockholders' Equity:
Nonrecourse Debt.......................... $ -- $ -- $ -- $ -- $276,511
Debt...................................... 23,539 56,166 53,153 14,937 23,026
Subordinated Notes Payable................ 9,000 9,000 9,000 6,000 3,250
Other liabilities......................... 1,223 4,300 13,374 28,794 40,989
------- ------- ------- ------- --------
Total liabilities................. $33,762 $69,466 $75,527 $49,731 $343,776
======= ======= ======= ======= ========
Redeemable preferred stock................ -- -- 3,890 2,640 469
Stockholders' equity...................... 418 1,843 4,337 40,587 84,048
------- ------- ------- ------- --------
Total liabilities and
stockholders' equity............ $34,180 $71,309 $83,754 $92,958 $428,293
======= ======= ======= ======= ========
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Lease financing receivables acquired and
originated(2):
Private Label
Average interest rate.............. 9.92% 9.78% 9.45% 9.14% 7.53%
Principal amount................... $ 4,492 $ 65,244 $161,137 $210,113 $ 249,327
Wholesale(3)
Average interest rate.............. -- -- 14.07% 13.32% 12.47%
Principal amount................... $ -- $ -- $ 10,543 $ 74,781 $ 106,215
Retail(3)
Average interest rate.............. 16.09% 15.79% 16.60%
Principal amount................... $ -- $ -- $ 7,526 $ 98,229 $ 377,299
Captive Finance(4)
Principal amount................... $ -- $ -- $ -- $ -- $ 164,290
------- -------- -------- -------- ----------
Total
Average interest rate.............. 9.92% 9.78% 10.00% 11.66% 12.94%
Principal amount................... $ 4,492 $ 65,244 $179,206 $383,123 $ 897,131
Total principal amount adjusted for
poolings of interests................. $74,824 $168,035 $352,203 $640,359 $ 897,131
Total leases serviced(5)
Principal amount................... $40,543 $ 77,204 $217,283 $504,387 $ 892,929
Credit quality statistics:
Delinquencies (at period end)
Gross lease receivables serviced
and owned(5)..................... $ 5,784 $ 83,687 $257,234 $611,358 $1,070,574
31-60 days......................... 0.00% 2.53% 2.40% 1.87% 1.33%
61-90 days......................... 0.00% 0.45% 0.78% 0.57% 0.65%
91+ days........................... 0.00% 0.08% 0.33% 0.37% 0.58%
------- -------- -------- -------- ----------
Total delinquencies........... 0.00% 3.06% 3.51% 2.81% 2.56%
Net charge-offs
Private Label(5)
Principal amount................. $ -- $ -- $ 25 $ 222 $ 505
Wholesale and Retail(5)
Principal amount................. $ -- $ -- -- $ 362 $ 3,776
Net charge-offs as % of average
receivables outstanding.......... -- -- -- 0.18% 0.65%
</TABLE>
- ---------------
(1) See Note 2 to Financial Statements for a description of the computation of
earnings (loss) per share.
(2) Lease financing receivables acquired or originated during the year ended
December 31, 1997 do not include approximately $44.6 million of leases
acquired in connection with our acquisition of Heritage Credit Services,
Inc., and lease financing receivables acquired or originated during the year
ended December 31, 1998 do not include approximately $17.9 million of leases
acquired in connection with our acquisitions of three leasing companies
located in the United Kingdom.
(3) We established our Wholesale and Retail programs in July 1996.
(4) We established our Captive Finance program in March 1998. During 1998, we
did not retain on our balance sheet any of the leases we originated under
our Captive Finance program.
(5) Excludes lease receivables and losses on lease receivables acquired through
business combinations.
20
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
First Sierra Financial, Inc. customizes lease financing products and offers
servicing, consulting and technology solutions for commercial customers. We
acquire, originate, sell and service equipment leases relating to a wide range
of equipment, including computers and peripherals, software, medical, dental,
diagnostic, telecommunications, office, automotive servicing, hotel security,
food services, tree service and industrial. The equipment we finance generally
has a purchase price of less than $250,000, with an average of approximately
$20,000 for leases originated in 1997 and $31,000 for leases originated in 1998.
Because of their relatively small size, the leases we finance are commonly
referred to in the finance industry as "small ticket leases."
During 1998, we consummated mergers with Independent Capital Corporation,
Integrated Lease Management, Inc., Vendor Leasing, Inc., TFS, Inc., 21st Century
Credit Leasing Services, Inc., and the Republic Group, Inc. which were accounted
for as poolings of interests. The accompanying financial statements and the
related discussion of results of operations for the years ended December 31,
1996 and 1997 have been restated to include the financial position and results
of operations of all material acquired companies.
Prior to July 1, 1998, we structured our securitization transactions to
meet the criteria for sales of lease financing receivables under generally
accepted accounting principles. Thus, for all securitizations completed prior to
this date, we recorded a gain on sale of lease financing receivables when we
included the receivables in a securitization. Effective as of July 1, 1998, we
made a strategic decision to alter the structure of our future securitization
transactions so as to retain the leases we acquire and originate on our balance
sheet and earn an interest margin on those assets over the life of the leases.
Prior to making this strategic decision, our senior management and Board of
Directors analyzed the impact of recognizing interest income over the life of
the assets held on our balance sheet, our funding strategies, the credit quality
of our lease receivables, the overall strength of our balance sheet and our
positive cash flow characteristics. We determined that cash flows from our
securitized assets would not be significantly different whether securitizations
were structured as financings or as sales. Accordingly, we do not expect this
change to have a significant impact on our cash flow.
We do expect that, initially, our earnings per share will be negatively
affected by the change. However, we believe that the change will build long-term
value for First Sierra and its stockholders by establishing consistent portfolio
earnings, removing uncertainty in recognition of income, limiting earnings
volatility and enhancing franchise value.
We began operations in June 1994 and initially developed a program to
purchase leases from leasing companies that had the ability to originate
significant lease volume and were willing and able to provide us with credit
protection and perform some of the more labor-intensive servicing functions on
an ongoing basis with respect to the leases sold to us. This program, referred
to as our "Private Label" program, was designed to provide us with access to
high volumes of leases eligible for the securitization market, while minimizing
our risk of loss. Each Private Label lease source provides us with credit
protection through a combination of recourse and purchase price holdback
features and performs servicing functions such as credit collection, equipment
repossession and liquidation with respect to the leases they sell to us.
Generally, we receive and process all lease payments on leases that we purchase
under our Private Label program.
We have experienced significant growth in our Private Label program since
its inception. Under this program, we purchased $4.5 million of leases in 1994,
$65.2 million of leases in 1995, $161.1 million of leases in 1996, $210.1
million of leases in 1997 and $249.3 million of leases in 1998. Our weighted
average yield on Private Label leases from inception through December 31, 1998
was 8.70%.
In 1996, as part of our growth strategy, we began targeting additional
sources of lease volume from small ticket lease brokers who were unable or
unwilling to provide the credit protection or perform the servicing
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<PAGE> 22
functions required under our Private Label program and through relationships
with manufacturers, dealers and other vendors of equipment. We established our
Wholesale and Retail programs in 1996 through two strategic acquisitions and
have expanded these programs through additional acquisitions in 1997 and 1998.
In a typical Wholesale or Retail arrangement, we originate leases without
recourse to the lease source. We also perform all servicing functions on leases
acquired or originated under our Wholesale and Retail programs. As a result, our
yields are higher than those on our Private Label leases. Our weighted average
yields on our Wholesale leases were 14.07% in 1996, 13.32% in 1997, and 12.47%
in 1998. Our weighted average yields on our Retail leases were 16.09% in 1996,
15.79% in 1997 and 16.60% in 1998. Under our Wholesale program, we funded $10.5
million of leases in 1996, $74.8 million of leases in 1997 and $106.2 million of
leases in 1998. Under our Retail program, we funded $7.5 million of leases in
1996, $98.2 million of leases in 1997, and $377.3 million of leases in 1998. We
established our Captive Finance program with our acquisition of Independent
Lease Management, Inc. in March 1998. During 1998, we funded $164.3 million of
leases under our Captive Finance program, all of which we subsequently sold to
third parties. As a result, substantially all of the revenue we generated under
this program during 1998 was from servicing income rather than yield income. In
the future, we intend to retain a portion of leases funded under our Captive
Finance program in our lease portfolio until they can be financed, securitized
or otherwise sold.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
Gain on sale of lease receivables decreased $1.9 million, or 10%, from
$18.2 million for the year ended December 31, 1997 to $16.3 million for the year
ended December 31, 1998. This decrease in leases sold was largely the result of
our strategic decision, effective July 1, 1998, to alter the structure of our
securitization transactions so as to retain our lease financing receivables on
our balance sheet after securitization and recognize interest income over the
life of the leases, rather than recognizing gain on sale at the time of
securitization. Because of this decision, the volume of lease receivables
securitized that met the criteria for sales of lease financing receivables under
generally accepted accounting principles decreased from $395.7 million in 1997
to $265.0 million in 1998.
Gains from direct sales of lease financing receivables increased $1.3
million, or 8%, from $17.1 million for the year ended December 31, 1997 to $18.4
million for the year ended December 31, 1998. This increase directly resulted
from an increase in volumes of leases brokered or discounted to third parties.
Interest income increased $8.1 million, or 88%, from $9.2 million for the
year ended December 31, 1997 to $17.3 million for the year ended December 31,
1998. This increase primarily related to a 78% increase in our average balance
of lease receivables outstanding during 1998 as a result of our decision to
retain lease receivables on our balance sheet after securitization. An increase
in our weighted average yield of lease receivables, resulting from the fact that
leases acquired under our Retail program, which are higher yielding, represented
a larger percentage of our total originations in 1998 than in 1997, also
contributed to the overall increase in interest income.
Servicing income increased $2.0 million, or 65%, from $3.1 million for the
year ended December 31, 1997, to $5.1 million for the year ended December 31,
1998. This increase primarily resulted from a 100% increase in the weighted
average balance of lease receivables serviced under our securitization program,
which was partially offset by a decrease in the ratio of late fees collected to
total assets owned and serviced. The ratio of late fees collected to total
assets owned and serviced decreased because of lower delinquencies in our
portfolio of owned and serviced leases. The change in the structure of our
securitization transactions also served to offset the increase in servicing
income. Effective July 1, 1998, when we began retaining lease receivables on our
balance sheet after securitization, servicing fees related to lease receivables
securitized after such date were recorded as reduction of interest expense
rather than as servicing income.
Other income decreased $0.1 million, or 2%, from $4.1 million for the year
ended December 31, 1997, to $4.0 million for the year ended December 31, 1998.
Other income consists of miscellaneous income items and documentation and other
fees we collect in connection with our origination and administration of leases.
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<PAGE> 23
Although documentation and administration fees increased by $300,000 in 1998 due
to the overall expansion of our business, other miscellaneous income items
decreased by $400,000 in 1998.
Salaries and benefits increased $13.9 million, or 89%, from $15.6 million
for the year ended December 31, 1997 to $29.5 million for the year ended
December 31, 1998. This increase was primarily related to a 154% increase in the
number of people we employed from December 31, 1997 to December 31, 1998. The
number of employees increased because of our acquisitions as well as the general
expansion of our business. During the fourth quarter 1998 as a part of our
ongoing effort to increase the efficiency of our operations, we eliminated
certain administrative positions and underperforming sales people thereby
reducing our work force by 103 people, or 17%, from 597 people on September 30,
1998.
Interest expense increased $0.8 million, or 16%, from $5.2 million for the
year ended December 31, 1997 to $6.0 million for the year ended December 31,
1998. The increase primarily related to a 20% increase in outstanding borrowings
as a result of our decision, effective July 1, 1998, to retain lease receivables
and the related borrowings on our balance sheet after securitization. The
increase was partially offset by the servicing fees and cash flows allocable to
trust certificates that we received from lease receivables securitized after
July 1, 1998. As we retain lease receivables on our balance sheet, the related
servicing fees and cash flows allocable to the trust certificates are recorded
as a reduction of interest expense.
Provision for credit losses increased $8.3 million, or 393%, from $2.1
million for the year ended December 31, 1997 to $10.4 million for the year ended
December 31, 1998. This increase was primarily due to a $6.0 million charge to
write down the carrying value of our investment in trust certificates as a
result of the widening of the spread over Treasuries paid to investors in
securitization transactions from the time we initially securitized our leases in
our securitized funding facilities to the time we permanently securitized our
leases in December 1998. The widening of spreads was due to economic turmoil in
Russia and Asia and other economic factors. In December 1998, we were successful
in completing a public securitization in a difficult market. This write-down
affects only the lease receivables we securitized prior to July 1, 1998. As for
leases securitized after July 1, 1998, we no longer record an investment in
trust certificate and gain on sale related to such securitizations. The increase
in provision for credit losses was also the result of an increase in lease
receivables retained on our balance sheet during 1998, which also resulted from
our decision to retain leases on balance sheet effective July 1, 1998.
Depreciation and amortization increased $2.3 million, or 146%, from $1.5
million for the year ended December 31, 1997, to $3.8 million for the year ended
December 31, 1998. This increase was primarily attributable to an 88% increase
in goodwill and other intangible assets during 1998, due to our acquisition of
five businesses from April 1998 through October 1998 which were accounted for
using the purchase method of accounting. A 71% increase in our fixed assets from
December 1997 to December 1998 also contributed to the increase in deprecation
and amortization.
Other general and administrative expenses increased $2.6 million, or 22%,
from $11.6 million for the year ended December 31, 1997 to $14.2 million for the
year ended December 31, 1998. This increase resulted from the general expansion
of our business and the acquisitions referred to above.
In April 1998, we acquired Nexsoft, Inc. of Denver, Colorado. Nexsoft is a
software development firm specializing in software for the equipment leasing
industry. We accounted for this transaction using the purchase method of
accounting. We allocated the purchase price to the net assets acquired and to
purchased in-process research and development. Purchased in-process research and
development includes the value of products in the development stage which were
not considered to have reached technological feasibility. As a result, we
expensed $2.6 million of acquisition costs during the year ended December 31,
1998.
During the year ended December 31, 1998, we incurred approximately $1.7
million of expenses in connection with the acquisition or proposed acquisition
of companies accounted for as poolings of interests. Approximately $559,000 of
this amount related to our proposed merger with the Oliver-Allen Corporation,
which we mutually agreed to terminate in August 1998. We did not incur any of
these acquisition costs during the year ended December 31, 1997.
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<PAGE> 24
During the year ended December 31, 1998, we incurred approximately $1.6
million of costs in connection with the relocation of our operations center from
Jupiter, Florida to Houston, Texas. We did not incur any of these relocation
costs during the year ended December 31, 1997.
1997 COMPARED TO 1996
During the years ended December 31, 1996 and 1997, we sold leases with an
aggregate principal balance of $152.0 million and $395.7 million, respectively,
net of unearned income, through our securitization program. We recognized gains
of $3.5 million and $18.2 million, respectively, as a result of these sales and
retained trust certificates in the related trusts. The gains we 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. This increase
was directly attributable to an increase in the weighted average interest rate
of leases we sold as a result of the inclusion of higher yielding leases
acquired under our Wholesale and Retail programs and a decrease in the level of
trust certificates we were required to retain in the securitization trusts.
Additionally, we recognized gains of $17.1 million on leases we sold or
discounted to third parties during the year ended December 31, 1997, an increase
of $7.3 million from the previous year. We also 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.
Interest income increased $2.8 million, or 44%, from $6.4 million for the
year ended December 31, 1996 to $9.2 million for the year ended December 31,
1997. This increase primarily related to an increase of $1.0 million during 1997
of interest income recognized on trust certificates we retained in our
securitization transactions. The remaining difference resulted from a 17%
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 our
Wholesale and Retail programs in July 1996.
Servicing income increased $2.0 million, or 194%, from $1.1 million for the
year ended December 31, 1996 to $3.1 million for the year ended December 31,
1997. This increase was primarily attributable to a 207% increase in leases
serviced for others from December 31, 1996 to December 31, 1997.
Other income increased $1.3 million, or 49%, from $2.7 million for the year
ended December 31, 1996 to $4.1 million for the year ended December 31, 1997.
This increase primarily related to an increase in documentation and other fees
we collected in connection with our origination and administration of leases due
to the expansion of our Retail and Wholesale originations.
Salaries and benefits increased $8.8 million, or 129%, from $6.8 million
for the year ended December 31, 1996 to $15.6 million for the year ended
December 31, 1997. This increase was primarily attributable to an increase in
the number of people we employed. The number of employees increased because we
acquired ten companies from July 1996 through November 1997. In addition,
salaries and benefits increased due to the higher level of servicing required as
a result of the formation of our Wholesale and Retail programs in July 1996.
Interest expense increased $131,000, or 3%, from $5.0 million for the year
ended December 31, 1996 to $5.2 million for the year ended December 31, 1997.
This increase related to additional indebtedness we assumed in connection with
acquisitions at higher interest rates than those under our existing warehouse
facilities, which were substantially offset by shorter periods that we held
leases prior to securitization due to the formation of our securitized funding
facilities, and reduced amounts of subordinated notes payable outstanding due to
our repayment of one note with proceeds from our initial public offering in May
1997.
Provision for credit losses increased $1.5 million, or 247%, from $605,000
for the year ended December 31, 1996 to $2.1 million for the year ended December
31, 1997. This increase was primarily due to the origination of $173.0 million
of leases under our Wholesale and Retail programs during the year ended December
31, 1997, which have a greater exposure to credit losses than leases originated
under our Private Label program.
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<PAGE> 25
Depreciation and amortization increased $1.1 million, or 225%, from
$469,000 for the year ended December 31, 1996 to $1.5 million for the year ended
December 31, 1997. This 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.
Other general and administrative expenses increased $5.3 million, or 85%,
from $6.3 million for the year ended December 31, 1996 to $11.6 million for the
year ended December 31, 1997. This increase was primarily attributable to the
general expansion of our business and our acquisition of eight businesses in
1997.
LIQUIDITY AND CAPITAL RESOURCES
Our lease finance business is capital intensive and requires access to
substantial short-term and long-term credit to fund new equipment leases. Since
inception, we have funded our operations primarily through borrowings under our
funding facilities, sales of our common stock and by including our leases in
public and private securitization transactions. During the first quarter of
1998, we sold 2,567,084 shares of common stock in a secondary public offering,
raising net proceeds of approximately $39.7 million after deducting underwriting
discounts and commissions and offering expenses. We expect to continue to
require access to large amounts of capital to maintain and expand our volume of
leases funded and, depending upon market conditions, to complete acquisitions of
additional lease finance companies.
Our uses of cash include the acquisition and origination of equipment
leases, payment of interest expenses, repayment of borrowings under our
securitized funding facilities, and the payment of operating and administrative
expenses, income taxes and capital expenditures. The structure of our lease
funding programs, including the holdback and recourse features of our Private
Label program, along with the structure of our securitized funding facilities
and public securitization transactions, enabled us to generate positive cash
flow from operations in 1996, 1997 and 1998. We do not expect the strategic
decision we made in the third quarter of 1998 to retain our lease receivables on
our balance sheet as long-term investments to affect our cash flows from
operations.
We use our securitized funding facilities to fund the acquisition and
origination of leases that satisfy the eligibility requirements established
under each facility. These funding facilities provide us with advance rates that
generally do not require us to utilize our capital during the period that we are
financing lease receivables under the facilities. The liquidity provided under
some of our facilities is generally interim in nature and we seek to refinance
or resell the lease receivables that we fund under these interim facilities
through our public securitization program within six to twelve months after we
acquire or originate the leases.
We believe that our existing cash and investment balances, cash flow from
operations, net proceeds from future securitization transactions and amounts
available under our securitized funding facilities will be sufficient to fund
our operations for the foreseeable future.
SECURITIZED FUNDING FACILITIES
As of December 31, 1998, our five securitized funding facilities had an
aggregate funding capacity of $586.6 million. As of December 31, 1998, $221.2
million was available under these facilities.
Through June 30, 1998, our securitized funding facilities were structured
so that transfers to those facilities were considered sales under generally
accepted accounting principles. Effective July 1, 1998, concurrent with our
strategic decision to retain our lease receivables on our balance sheet as
long-term investments, we modified the structure of our securitized funding
facilities so that advances under the facilities would be considered debt under
generally accepted accounting principles. The cash flows available to us, which
are generally based on the advance rates and discount rates set forth in the
facility agreements, were generally unaffected by the modifications to the
agreements.
PUBLIC SECURITIZATION TRANSACTIONS
To date, the proceeds that we have received in our public securitization
transactions have generally been sufficient to repay amounts we have borrowed
under our securitized funding facilities, as well as issuance
25
<PAGE> 26
expenses related to each securitization. We generally structure our
securitization transactions to qualify as financings for income tax purposes.
Therefore, no income tax is payable in the current period on the gain
recognized. We anticipate that our future financings of equipment leases will be
principally through securitization transactions and, to a lesser extent, through
portfolio sales and sales to third-party financing sources.
As of December 31, 1998, we had completed four public securitization
transactions involving the issuance of $627.0 million of senior and subordinated
securities. We completed the Series 1996-1 and 1996-2 transactions in 1996, the
Series 1997-1 transaction in September 1997, and the Series 1998-1 transaction
in December 1998.
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. We retained a Class B-3 Note,
which was rated B by Duff & Phelps Credit Rating Co., for future sale in the
private market.
Due to our ability to structure and sell Class B-1 and Class B-2 rated
components of our securitizations, the remaining interest that we were required
to retain was reduced, which allowed us to maximize the cash proceeds generated
from each transaction.
In connection with the Series 1998-1 transaction, four tranches of Class A
Notes, rated AAA by Standard and Poor's, Aaa by Moody's Investor Services, Inc.,
AAA by Duff & Phelps Credit Rating Co. and AAA by Fitch IBCA, Inc. were sold in
the public market. The Class B-1 and Class B-2 notes were rated BBB and BB by
Duff & Phelps Credit Rating Co. and Fitch IBCA, Inc., and were sold and financed
on a non-recourse basis in the private market. A Class B Note was rated B by
Duff & Phelps Credit Rating Co., and Fitch IBCA, Inc. and was retained by the
Company for future sale in the private market.
We were able to realize approximately 94.0% of the present value of the
remaining scheduled payments of the equipment leases included in our Series
1996-1 and 1996-2 securitizations, approximately 96.0% of the present value of
the remaining scheduled payments of the equipment leases included in our Series
1997-1 securitization, and approximately 95% of the present value of the
remaining scheduled payments of the equipment leases included in our Series
1998-1 securitization.
SUBORDINATED NOTES
In May 1997, we entered into a $5.0 million subordinated revolving credit
facility with an affiliate. The commitment level on this facility is scheduled
to decrease by $1.0 million per year. Advances under this facility bear interest
at 11.00% per annum. As of December 31, 1998, we had not borrowed any money
under this facility.
In connection with the acquisition of Heritage in May 1997, we issued a
$1.0 million subordinated note payable to the former owner of Heritage. Such
note bears interest at 9.00% per annum, with principal payable semi-annually
over 5 years.
On October 1, 1998, we acquired all of the outstanding shares of capital
stock of Titan Finance, Limited, a company incorporated in England and Wales, in
exchange for $2,250,000 in cash and $2,250,000 in convertible subordinated
promissory notes. The promissory notes bear interest at a rate of 6% per annum,
payable semi-annually, with the outstanding principal amount due October 1,
2003. The notes will automatically convert into shares of the Company's common
stock when the average trading price of the
26
<PAGE> 27
common stock for the twenty days preceding conversion equals or exceeds $20.00.
Upon conversion, the Company will issue one share of common stock for each
$20.00 of outstanding principal amount of the notes.
INTEREST RATE MANAGEMENT ACTIVITIES
Our implicit yield on all of our leases is based on a fixed interest rate
because the leases have scheduled payments that are fixed at the time of
origination of the leases. When we acquire or originate leases, we base our
pricing on the "spread" we expect to achieve between the implicit yield to us on
each lease and the effective interest we will have to pay when we include the
lease in a public securitization transaction or otherwise sell the lease.
Increases in interest rates between the time we acquire or originate the lease
and the time we include the lease in a public securitization transaction or
otherwise sell the lease could narrow or eliminate the spread, or result in a
negative spread.
Our policy is to generally mitigate the risk on changes in interest rates.
We mitigate the volatility of interest rate movement between the time we acquire
or originate a lease and the time we include the lease in a public
securitization transaction by hedging movements in interest rates using interest
rate swap derivatives which match the underlying cash flow associated with the
leases we originate. Under these swap agreements, we receive interest on the
notional amount at either the 30-day LIBOR or the 30-day AA Corporate Commercial
Paper Index, and we pay 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.
We generally implement these hedging arrangements when our 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.
We 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 we generally limit this activity to levels where we are
confident of origination in the near term.
YEAR 2000 READINESS
The "Year 2000 problem" exists because many computer programs, embedded
systems and components were designed to refer to a year by the last two digits
of the year, such as "99" for "1999." As a result, some of these systems may not
properly recognize that the year that follows "1999" is "2000" and not "1900."
If those problems are not corrected, the systems could fail or produce erroneous
results. No one knows the extent of the potential impact of the Year 2000
problem generally.
OUR STATE OF READINESS
During 1998, we began our Year 2000 program by making initial inquiries of
the software vendors for our major applications as to the Year 2000 readiness of
such applications. We received assurances from these vendors that these
applications are Year 2000 ready. We also began making inquiries of significant
customers and other counterparties as to their Year 2000 readiness. For purposes
of our Year 2000 program, we have divided all of our applications, systems,
relationships and services into three groups:
- Mission critical items are those that we require to operate our business
without disruption,
- Important items are those that we do not require to operate our business
without disruption but that are important to our day-to-day operations,
and
- Ordinary items are those that do not depend on date specific data or are
not important to our day-to-day operations.
27
<PAGE> 28
Our Year 2000 program for all of our hardware, software, operating systems,
relationships and services consists of the following six phases:
Inventory
During this first phase of our Year 2000 program, we compiled information
relating to all hardware, software, operating systems, relationships and
services that may be affected by the Year 2000 problem. As of the date of this
report, we have substantially completed this phase.
Impact Analysis
This phase will encompass the initial analysis of all of our hardware and
software, including embedded technologies and other "non-information technology"
applications, and our operating systems, relationships and services, to
determine whether there is a possibility that they are not Year 2000 ready, and
how this may affect us. We will also investigate and categorize the hardware,
software, systems, relationships and services as mission critical, important, or
ordinary. We expect this phase to be completed during the second quarter of
1999.
Solution Planning
Based on the results of our impact analysis, we will identify the necessary
steps to ensure Year 2000 readiness. This analysis will determine whether the
hardware, software, systems, relationship or services will be scanned using Year
2000 scanning software, manually checked, or will be checked for readiness
through website or personal letter confirmation. We expect this phase to be
completed by the end of the second quarter of 1999.
Corrective Procedures
In this phase, we will detail and perform the steps outlined from the
results of the Solution Planning phase to identify those fields or processes
that contain a Year 2000 problem, and to develop appropriate corrective
procedures. These corrective procedures may include remediation, replacement, or
retirement. We expect this phase to be completed by the end of the third quarter
of 1999 for mission critical applications and the end of the fourth quarter of
1999 for important applications.
Quality Assurance
During this phase, we will ensure that the necessary steps that are taken
to test any date related issues can be properly executed to create Year 2000
readiness for the specific process or system. In addition, this phase will
ensure that all related processes and systems are not affected by the corrective
action. We expect this phase to be completed by the end of the third quarter of
1999 for mission critical applications and the end of the fourth quarter of 1999
for important applications.
Contingency Planning
In the event that we are unable to correct a Year 2000 problem in a mission
critical process or system prior to September 30, 1999, a contingency plan will
be completed to ensure continued operation after December 31, 1999. In
completing this contingency plan, we will identify alternatives, including
manual processes, the expected correction date, and any conversion issues from
the manual process to the corrected system.
COSTS TO ADDRESS OUR YEAR 2000 ISSUES
We did not incur any material cost to address Year 2000 issues during the
year ended December 31, 1998. We estimate that we will incur costs approximating
$250,000 during 1999 to complete our resolution of Year 2000 issues.
28
<PAGE> 29
RISKS OF OUR YEAR 2000 ISSUES.
We have not identified any specific known events, trends or uncertainties
which are reasonably likely to have a material effect on our business, results
of operations, or financial condition. We will continue to review these issues
as we evaluate the progress of our Year 2000 program.
The foregoing constitutes a Year 2000 statement and readiness disclosure
subject to the protections afforded it by the federal Year 2000 Information and
Readiness Disclosure Act of 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The nature of our business exposes us to market risk arising from changes
in interest rates, credit spreads, and exchange rates. We have instituted risk
management policies to monitor and limit these exposures as follows:
INTEREST RATE RISK
To manage our interest rate risk, we have implemented policies that are
designed to minimize changes in our cost of funds associated with changes in
benchmark interest rates after lease receivables have been funded. The
measurement of market risk associated with financial instruments is meaningful
when all related and offsetting transactions are aggregated, and the resulting
net positions are identified.
Our implicit yield on all of our leases is based on a fixed interest rate.
We generally obtain initial funding for lease acquisitions and originations
through borrowings under our securitized funding facilities and, from time to
time, depending on market conditions, we include the lease receivables in a
securitization transaction or portfolio sale. Because the securitized funding
facilities bear interest at floating rates, whereas the permanent
securitizations or portfolio sales bear interest at a spread over the benchmark
Treasury rate which is fixed at the time the transaction is completed, we are
exposed to the risk of an increase in the cost of funds from adverse interest
rate movements during the period from the date of borrowing through the date
that the underlying leases are included in a securitization transaction or
otherwise sold. We seek to minimize our exposure by entering into amortizing
interest swap transactions under which the notional amount of the contract
changes monthly to match the anticipated amortization of the underlying leases.
As of December 31, 1998, we were engaged in various interest rate swap
transactions. The total notional amount involved in these transactions closely
matched our outstanding balance of lease receivables.
The following earnings sensitivity analysis assumes an immediate closing of
a permanent securitization transaction on lease receivables outstanding as of
December 31, 1998 and an increase of 50 basis points in the benchmark Treasury.
As indicated in the analysis, an immediate change in the interest rate would
have a minimal impact on our earnings because the increase in our cost of funds
from an increase in the benchmark Treasury would be substantially offset by a
reduction in our cost of funds from the amortization of swap settlement proceeds
received when our swap positions are unwound.
1999 pre-tax earnings change from increase in benchmark Treasury by 50 basis
points:
<TABLE>
<S> <C>
Decrease in pre-tax earnings from increase in interest
expense................................................... $(901,134)
Increase in pre-tax earnings from decrease in interest
expense due to the amortization of swap proceeds.......... 708,290
---------
Net decrease in pre-tax earnings............................ $(192,844)
=========
</TABLE>
CREDIT SPREAD RISK
We are also exposed to the risk of an increase in credit spreads between
the time we borrow money under our securitized funding facilities and the time
we securitize or otherwise sell the leases. We can partially offset this type of
increase in our cost of funds by engaging in interest rate swap transactions and
benefiting from an increase in interest rate swap spreads. However, it is not
possible for us to completely offset our credit spread risk through hedging
transactions. Based on our lease receivables outstanding as of December 31,
1998, an
29
<PAGE> 30
increase of 50 basis points in the credit spread would result in a $901,000
decrease in our pre-tax earnings in 1999, provided that there is no
corresponding increase in the swap spread which would partially offset the
decrease in pre-tax earnings.
FOREIGN EXCHANGE RISK
We entered the small ticket leasing market in the United Kingdom in the
third quarter of 1998 through our acquisition of Suffolk Street Group. As of
December 31, 1998, our pound sterling denominated lease receivables totaled
approximately $23.5 million. As of the same date, our pound sterling denominated
borrowings had an aggregate outstanding balance of approximately $16.6 million.
We are exposed to changes in exchange rates when translating these pound
sterling denominated revenues and expenses to United States dollars. Based on
lease receivables and borrowings outstanding as of December 31, 1998, a 5%
decrease in the relative value of the British pound compared to the United
States dollar would result in a $68,000 decrease in our pretax earnings in 1999.
While the earnings sensitivity analyses presented above represent our best
estimate of the impact on our earnings and balance sheet of various market rate
movements, the actual behavior will likely differ from what we project. From
time to time, we recalibrate our assumptions and adjust our modeling techniques
as needed to improve the accuracy of the risk measurement results. You should
also be aware that actual movements of market interest rates can include changes
in the shape of the yield curve and changes in the basis relationship between
various market rates, among other changes, which are not captured in the
sensitivity analyses presented here.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements included in this Report beginning at
page F-1 are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to the identity and
business experience of our directors is set forth in our Proxy Statement for the
Annual Meeting of Stockholders to be held on May 3, 1999 under the caption
"Election of Directors" and is hereby incorporated herein by reference.
The information required by this Item with respect to the identity and
business experience of our executive officers is set forth in Item 1 of this
Report under the caption "Executive Officers of the Registrant."
The information required by this Item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934, as amended, is set forth
in our Proxy Statement for the Annual Meeting of Stockholders to be held on May
3, 1999 under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" and is hereby incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth in our Proxy Statement
for the Annual Meeting of Stockholders to be held on May 3, 1999 under the
captions "Executive Compensation," "Compensation Committee Interlocks and
Insider Participation," and "Organization and Remuneration of Board of
Directors" and is hereby incorporated herein by reference.
30
<PAGE> 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in our Proxy Statement
for the Annual Meeting of Stockholders to be held on May 3, 1999 under the
caption "Securities Beneficially Owned by Principal Stockholders and Management"
and is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is set forth in our Proxy Statement
for the Annual Meeting of Stockholders to be held on May 3, 1999 under the
caption "Certain Relationships and Related Transactions" and is hereby
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) See Index to Financial Statements on Page F-1 of this Report.
(a)(2) Financial Statement Schedules
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The following Financial Statement Schedule and the Report of
Independent Accountants on Financial Statement Schedule are
included in this report on the pages indicated:
Report of Independent Public Accountants on Financial F-34
Statement Schedule..........................................
Financial Statement Schedule II -- Valuation and Qualifying F-35
Accounts....................................................
All other schedules are omitted as the required information
is inapplicable or the information is presented in the
consolidated financial statements or related notes.
</TABLE>
(a)(3) List of Exhibits
EXHIBITS
<TABLE>
<C> <S>
3.1. Restated Certificate of Incorporation of First Sierra, as
amended.
3.2. Amended and Restated Bylaws of First Sierra (incorporated by
reference to Exhibit 3.2 to Registrant's Form S-1
Registration Statement (Registration No. 333-22629)).
4.1. Rights Agreement, dated December 30, 1998, between First
Sierra and Harris Trust and Savings Bank, as Rights Agent,
together with the Form of Certificate of Designations of
Preferred Stock attached thereto as Exhibit A, the Form of
Rights Certificate attached thereto as Exhibit B and the
Summary of Rights to Purchase Preferred Stock attached
thereto as Exhibit C (incorporated by reference to Exhibit
4.1 to Registrant's Form 8-A filed December 31, 1998).
10.1. 1997 Stock Option Plan (incorporated by reference to Exhibit
10.1 to Amendment No. 2 to Registrant's Form S-1
Registration Statement (Registration No. 333-22629)).*
10.2. Amendment to 1997 Stock Option Plan.*
10.3. Reserved
10.4. Form of Registration Rights Agreement (incorporated by
reference to Exhibit 10.3 to Amendment No. 2 to Registrant's
Form S-1 Registration Statement (Registration No.
333-22629)).
10.5. Asset Purchase Agreement dated June 28, 1996 between First
Sierra Financial, Inc., First Sierra Acquisition, Inc. and
General Interlease Corporation and Eric Barash and Daniel
Dengate (incorporated by reference to Exhibit 10.4 to
Registrant's Form S-1 Registration Statement (Registration
No. 333-22629)).
</TABLE>
31
<PAGE> 32
<TABLE>
<C> <S>
10.6. Agreement and Plan of Reorganization dated October 15, 1996
among Valerie A. Hayes, Corporate Capital Leasing Group,
Inc., the Company and First Sierra Pennsylvania, Inc.
(incorporated by reference to Exhibit 10.5 to Registrant's
Form S-1 Registration Statement (Registration No.
333-22629)).
10.7. Asset Purchase Agreement, dated February 4, 1997, between
Lease Pro, Inc., Charles E. Lester and First Sierra
(incorporated by reference to Exhibit 10.6 to Registrant's
Form S-1 Registration Statement (Registration No.
333-22629)).
10.8. First Amendment to Agreement and Plan of Reorganization
dated February 27, 1997 among Valerie A. Hayes, Corporate
Capital Leasing Group, Inc., the Company and First Sierra
Pennsylvania, Inc. (incorporated by reference to Exhibit
10.7 to Registrant's Form S-1 Registration Statement
(Registration No. 333-22629)).
10.9. Agreement and Plan of Merger between Oren M. Hall, Charles
E. Brazier, Greg E. McIntosh, Brent M. Hall, Heritage Credit
Services, Inc., the Company and First Sierra California,
Inc. dated as of February 1, 1997 (incorporated by reference
to Exhibit 10.8 to Registrant's Form S-1 Registration
Statement (Registration No. 333-22629)).
10.10. Form of Registration Rights Agreement between First Sierra
and Oren M. Hall (incorporated by reference to Exhibit 10.9
to Registrant's Form S-1 Registration Statement
(Registration No. 333-22629)).
10.11. Employment Agreement between Thomas J. Depping and First
Sierra (incorporated by reference to Exhibit 10.10 to
Amendment No. 2 to Registrant's Form S-1 Registration
Statement (Registration No. 333-22629)).*
10.12. Employment Agreement between Sandy B. Ho and First Sierra.*
10.13. Employment Agreement between Robert H. Quinn, Jr. and First
Sierra (incorporated by reference to Exhibit 10.12 to
Amendment No. 2 to Registrant's Form S-1 Registration
Statement (Registration No. 333-22629)).*
10.14. Employment Agreement between Oren M. Hall and First Sierra
(incorporated by reference to Exhibit 10.13 to Amendment No.
1 to Registrant's Form S-1 Registration Statement
(Registration No. 333-41833)).*
10.15. Employment Agreement between Michael A. Sabel and First
Sierra (incorporated by reference to Exhibit 10.1 to
Registrant's Form 10-Q for the quarter ended September 30,
1998).
10.16. Agreement and Plan of Merger dated as of June 24, 1998 by
and among First Sierra Financial, Inc., Sierra Acquisition
Corporation II, The Republic Group, Inc., James T. Raeder
and Mark G. McQuitty (incorporated by reference to Exhibit
2.1 to Registrant's Form 8-K filed as of July 24, 1998).
10.17 Employment Agreement between David L. Pederson and First
Sierra.*
21.1. Subsidiaries of First Sierra.
23.1. Consent of Arthur Andersen LLP.
27.1. Financial data schedules.
27.2 Restated Financial Data Schedule for 1997.
27.3 Restated Financial Data Schedule for 1996.
</TABLE>
- ---------------
* Indicates management contract or compensatory plan or arrangement.
(b) First Sierra filed the following two reports on Form 8-K during the
fourth quarter of 1998:
On October 1, 1998, we filed a Form 8-K reporting, under Item 9, the
issuance of common stock in connection with our acquisition of all of the
outstanding shares of capital stock of Titan Finance Limited, a company
incorporated in England and Wales.
32
<PAGE> 33
On December 15, 1998, we filed a Form 8-K reporting, under Item 5, our
dividend distribution of certain stock purchase rights to our stockholders.
(c) The exhibits filed as part of this Report are as specified in Item
14(a)(3) herein.
33
<PAGE> 34
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998.......................... F-4
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 1996, 1997 and 1998.............. F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1997 and 1998.............. F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 35
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, 1997 and 1998, and
the related consolidated statements of operations, comprehensive income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
February 17, 1999
F-2
<PAGE> 36
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- --------
RESTATED
<S> <C> <C>
Lease financing receivables, net............................ $27,675 $337,162
Cash and cash equivalents................................... 14,569 7,928
Other receivables........................................... 4,087 11,596
Investment in trust certificates............................ 12,512 7,288
Marketable securities....................................... 4,223 5,042
Goodwill and other intangible assets, net................... 20,162 39,202
Furniture and equipment, net................................ 5,801 9,909
Other assets................................................ 3,929 6,923
Current tax receivables..................................... -- 3,243
------- --------
Total assets...................................... $92,958 $428,293
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Nonrecourse debt.......................................... $ -- $276,511
Other debt................................................ 14,937 23,026
Subordinated notes payable................................ 6,000 3,250
Other liabilities:
Accounts payable and accrued liabilities.................. 12,670 23,283
Holdback reserve payable.................................. 11,334 16,682
Income taxes payable...................................... 1,176 523
Deferred income taxes..................................... 3,614 501
------- --------
Total liabilities................................. 49,731 343,776
------- --------
Redeemable preferred stock.................................. 2,640 469
Stockholders' equity:
Common stock, $.01 par value, 25,000,000 and 100,000,000
shares authorized, respectively, 11,070,921 shares and
14,223,915 shares issued and outstanding,
respectively........................................... 110 142
Additional paid-in capital................................ 27,543 76,855
Retained earnings......................................... 12,934 6,859
Accumulated other comprehensive income.................... -- 192
------- --------
Total stockholders' equity........................ 40,587 84,048
------- --------
Total liabilities and stockholders' equity........ $92,958 $428,293
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 37
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
-------- -------- -------
RESTATED RESTATED
<S> <C> <C> <C>
Gain on sale of lease financing receivables through
securitization transactions............................... $ 3,456 $18,164 $16,291
Gains from direct sales of lease financing receivables...... 9,755 17,095 18,434
Interest income............................................. 6,387 9,193 17,315
Servicing income............................................ 1,053 3,095 5,112
Other income................................................ 2,720 4,052 3,991
------- ------- -------
Total revenues.................................... 23,371 51,599 61,143
------- ------- -------
Salaries and benefits....................................... 6,799 15,554 29,509
Interest expense............................................ 5,049 5,180 6,027
Provision for credit losses on lease financing receivables
and investment in trust certificates...................... 605 2,101 10,364
Depreciation and amortization............................... 469 1,525 3,752
Other general and administrative............................ 6,254 11,595 14,173
Research and development costs of acquired companies........ -- -- 2,550
Merger and acquisition expenses............................. -- -- 1,742
Relocation of operations center............................. -- -- 1,593
------- ------- -------
Total expenses.................................... 19,176 35,955 69,710
------- ------- -------
Income (loss) before provision (benefit) for income taxes... 4,195 15,644 (8,567)
Provision (benefit) for income taxes........................ 932 5,107 (2,665)
------- ------- -------
Net income (loss)........................................... $ 3,263 $10,537 $(5,902)
======= ======= =======
Earnings (loss) per common share, basic..................... $ 0.44 $ 1.11 $ (0.43)
======= ======= =======
Earnings (loss) per common share, diluted................... $ 0.41 $ 1.03 $ (0.43)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 38
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
-------- -------- -------
RESTATED RESTATED
<S> <C> <C> <C>
Net income (loss)........................................... $3,263 $10,537 $(5,902)
Other comprehensive income
Foreign currency translation adjustment, net of tax....... -- -- 192
------ ------- -------
Comprehensive income (loss)................................. $3,263 $10,537 $(5,710)
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 39
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
ACCUMU-
LATED
COMMON STOCK OTHER
------------------- ADDITIONAL RETAINED COMPRE- TOTAL
NUMBER PAID-IN (DEFICIT) HENSIVE STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY
---------- ------ ---------- --------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995
(restated)................... 7,235,489 $ 72 $ 1,017 $ 754 $ -- $ 1,843
Net income................... -- -- -- 3,263 -- 3,263
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
(restated)................... 7,461,799 74 802 3,461 -- 4,337
Net income................... -- -- -- 10,537 -- 10,537
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
(restated)................... 11,070,921 110 27,543 12,934 -- 40,587
Net loss..................... -- -- -- (5,902) -- (5,902)
Public offering of common
stock..................... 2,567,084 26 39,644 -- -- 39,670
Issuance of common stock in
exchange for preferred
stock..................... 255,123 3 2,168 -- -- 2,171
Issuance of common stock for
business combinations..... 293,949 3 7,205 148 -- 7,356
Exercise of options to
purchase common stock..... 36,838 -- 295 -- -- 295
Distribution to stockholders
(Note 3).................. -- -- -- (255) -- (255)
Preferred stock dividends.... -- -- -- (66) -- (66)
Foreign currency translation
adjustment................ -- -- -- -- 192 192
---------- ---- ------- ------- ---- -------
Balance, December 31, 1998..... 14,223,915 $142 $76,855 $ 6,859 $192 $84,048
========== ==== ======= ======= ==== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 40
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
---------- ---------- ---------
RESTATED RESTATED
<S> <C> <C> <C>
Cash flows from operations:
Net income (loss)....................................... $ 3,263 $ 10,537 $ (5,902)
Reconciliation of net income (loss) to cash provided by
operations --
Depreciation and amortization........................ 469 1,525 3,752
Provision for credit losses on lease financing
receivables and investment in trust certificates... 605 2,101 10,364
Gain on sale of lease financing receivables.......... (13,211) (35,259) (34,725)
Funding of lease financing receivables............... (198,887) (398,833) (422,495)
Research and development costs of acquired
companies.......................................... -- -- 2,550
Merger and acquisition expenses...................... -- -- 1,742
Principal payments received on lease financing
receivables........................................ 41,467 55,944 7,624
Proceeds from sales of lease financing receivables,
net of trust certificates and marketable securities
retained........................................... 167,234 442,707 446,496
Proceeds from (repayments of) warehouse credit
facilities, net of repayments (borrowings)......... (3,097) (83,775) (6,118)
Deferred income tax provision (benefit).............. 792 3,923 (2,194)
Accumulated translation adjustment................... -- -- 192
Changes in assets and liabilities, net of effects
from acquisitions:
Increase in other receivables...................... -- -- (7,509)
Increase in other assets........................... (1,096) (519) (1,006)
Increase in accounts payable and accrued
liabilities..................................... 2,547 2,188 8,809
Increase in holdback reserve payable............... 4,554 6,283 5,348
Increase (decrease) in income taxes payable........ -- 1,176 (5,616)
--------- --------- ---------
Net cash provided by operations................. 4,640 7,998 1,312
--------- --------- ---------
Cash flows from investing activities:
Funding of lease financing receivables, net of
repayments........................................... -- -- (295,206)
Additions to furniture and equipment.................... (1,334) (3,712) (5,292)
Cash used in acquisitions, net of cash acquired......... (69) (4,535) (20,926)
Available-for-sale securities, net...................... -- (239) --
--------- --------- ---------
Net cash used in investing activities........... (1,403) (8,486) (321,424)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from (repayments of) warehouse credit
facilities, net of repayments (borrowings).... -- -- 276,511
Repayment of subordinated notes payable, net of
issuances..................................... -- (9,000) (2,750)
Advances under subordinated revolving credit
facility...................................... -- 5,000 --
Proceeds from issuance of common stock and
exercise of convertible warrants.............. 147 16,208 39,965
Repurchase of common stock...................... (360) -- --
Distributions to stockholders................... (496) (944) (255)
--------- --------- ---------
Net cash provided by (used in) financing
activities.................................... (709) 11,264 313,471
Net increase (decrease) in cash and cash equivalents...... 2,528 10,776 (6,641)
Cash and cash equivalents at beginning of period.......... 1,265 3,793 14,569
--------- --------- ---------
Cash and cash equivalents at end of period................ $ 3,793 $ 14,569 $ 7,928
========= ========= =========
Supplemental disclosure of cash flow information:
Income taxes paid....................................... $ 27 $ 25 $ 2,727
========= ========= =========
Interest paid........................................... $ 4,818 $ 4,916 $ 6,027
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 41
FIRST SIERRA FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Organization
First Sierra Financial, Inc. ("First Sierra" or the "Company") customizes
lease financing products and offers servicing, consulting and technology
solutions for commercial customers. The Company was formed in June 1994 to
acquire, originate, sell and service equipment leases. The underlying leases
financed by the Company relate to a wide range of equipment, including computers
and peripherals, software, medical, dental, diagnostic, telecommunications,
office, automotive servicing, hotel security, food services, tree service and
industrial. The equipment generally has a purchase price of less than $250,000
(with an average of approximately $20,000 for leases originated in 1997 and
$31,000 for leases originated in 1998). The Company initially funds the
acquisition or origination of its leases through its securitized funding
facilities and, from time to time depending on market conditions, securitizes
the leases in its portfolio that meet pre-established eligibility criteria by
packaging them into a pool and selling beneficial interests in the leases
through public offerings and private placement transactions.
Prior to July 1, 1998 the Company structured its securitization
transactions to meet the criteria for sales of lease financing receivables under
generally accepted accounting principles. Thus, for all securitizations
completed prior to such date, the Company recorded a gain on sale of lease
financing receivables when it included the receivables in a securitization.
Effective as of July 1, 1998, the Company made a strategic decision to alter the
structure of its future securitization transactions so as to retain leases
acquired and originated as long-term investments on its balance sheet rather
than selling such leases through securitization transactions. As discussed
further in Note 5, the Company also modified the structure of its securitized
funding facilities such that they would be considered debt under generally
accepted accounting principles. The cash flows available to the Company, which
are generally based on the advance rates and discount rates set forth in the
agreements, were unaffected by these modifications. The primary effect from this
move to emphasize portfolio lending is a shift from the recognition of an
immediate gain upon sale of the lease receivables to the recognition of net
interest margin over the lives of the receivables.
The Company acquires and originates leases primarily through its Private
Label, Wholesale (formerly known as the Broker program), Retail (formerly known
as the Vendor program) and Captive Finance 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"), which is generally supported
by holdback reserves withheld from amounts paid to the Source upon purchase of
the lease, or a combination of the above. Leases acquired through the Wholesale,
Retail and Captive Finance programs are originated through relationships with
lease brokers, equipment vendors and individual lessees. In addition, the
Company has in the past generated, and may in the future generate, 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 had 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. The relocation was commenced in late 1997 and completed in the
first half of 1998. The Company incurred approximately $1.6 million, or $.12 per
diluted share, of expenses in the year ended December 31, 1998, 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.
F-8
<PAGE> 42
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and conform to practices within the
equipment leasing industry.
During 1998, the Company consummated mergers with Independent Capital
Corporation, Integrated Lease Management, Inc., Vendor Leasing, Inc., TFS, Inc.,
21st Century Credit Leasing Services, Inc., and the Republic Group, Inc. which
were accounted for as poolings of interests (See Note 3). The accompanying
financial statements and the related footnotes for the years ended December 31,
1996 and 1997 have been restated to include the financial position and results
of operations of all material acquired companies.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Lease Financing Receivables
The Company records the sum of the future minimum lease payments,
unguaranteed residual value and initial direct costs as the gross investment in
the lease. The difference between gross investment in the lease 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
On January 1, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." Under SFAS
No. 125, the Company recognizes the financial and servicing assets it controls
and the liabilities it has incurred, derecognizes financial assets when control
has been surrendered and derecognizes liabilities when extinguished.
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. 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.
F-9
<PAGE> 43
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, 1998, the Company believes that it does not have any
material recourse obligations related to receivables sold through portfolio
sales.
Marketable Securities
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 years ended December 31, 1997 and 1998, the Company recognized gains of
$183,000 and $0, respectively, representing estimated appreciation in
subordinated securities 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. Prior to July 1, 1998, the Company structured its securitization
transactions to meet the criteria for sales of lease financing receivables under
generally accepted accounting principles. The Company provided an allowance for
credit losses for leases which were considered impaired during the period from
the funding of the leases through the date such leases were sold through the
Company's securitization program. When the securitizations took place, the
Company reduced the allowance for credit losses for any provision previously
recorded for such leases. Any losses expected to be incurred on leases sold were
taken into consideration in determining the fair value of any Trust Certificates
retained and recourse obligations accrued, if any. Effective as of July 1, 1998,
the Company made a strategic decision to retain its leases as long-term
investments on its balance sheet. As a result, the Company now provides an
allowance for credit losses for leases which the Company considers impaired
based on management's assessment of the risks inherent in the lease receivables.
Management monitors the allowance on an ongoing basis based on its current
assessment of the risks and losses identified in the portfolio.
The Company's allowance for credit losses on lease receivables and its
valuation of the Trust Certificates retained in its securitization transactions
are based on management's current assessment of the risks inherent in the
Company's lease receivables from national and regional economic conditions,
industry conditions, concentrations, financial conditions of the obligors,
historical experience of certain origination channels, and other factors. These
estimates are reviewed periodically and as write-downs become necessary, they
are reported as reduction of earnings in the period in which they become known.
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 Wholesale and Retail 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
F-10
<PAGE> 44
Label program and its Wholesale and Retail programs for the years ended December
31, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
PRIVATE WHOLESALE/
LABEL RETAIL(1) TOTAL(2)
------- ---------- --------
<S> <C> <C> <C>
Balance at December 31, 1996............................. $314 $ 783 $1,097
Provision for credit losses............................ 236 1,865 2,101
Charge-offs, net of recoveries on leases acquired or
originated by the Company........................... (99) (73) (172)
Reduction of allowance for leases sold(1).............. (415) (2,178) (2,593)
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 $ 945 $ 981
==== ======= ======
Provision for credit losses............................ 117 4,247 4,364
Charge-offs, net of recoveries on leases acquired or
originated by the Company........................... (29) (452) (481)
Reduction of allowance for leases sold(1).............. (41) (1,590) (1,631)
Additional allowance related to leases acquired through
business combinations............................... -- 1,130 1,130
Recoveries, net of charge-offs, on leases acquired
through business combinations....................... -- 400 400
---- ------- ------
Balance at December 31, 1998............................. $ 83 $ 4,680 $4,763
==== ======= ======
</TABLE>
- ---------------
(1) In connection 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.
(2) The Company began its Captive Finance program in March 1998 through the
acquisition of Independent Lease Management, Inc. During 1998, the Company
originated $164.3 million of leases through its Captive Finance program, all
of which were sold to third parties at the time of originations, therefore
no allowance for credit losses were provided for leases originated under the
Captive Finance program
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 which is generally collateralized by 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, 1997 and 1998, the
Company had holdback reserves of $11.3 million and $16.7 million, respectively,
relating to leases acquired pursuant to the Private Label program. Such amounts
have been classified as liabilities in the accompanying financial statements.
F-11
<PAGE> 45
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, 1997 and
1998 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Leases outstanding under the Private Label program(1)....... $331,219 $477,138
======== ========
Recourse to Sources available............................... $ 33,351 $ 52,518
Ratio of recourse to total leases outstanding under the
Private Label program(2).................................. 10.07% 11.01%
======== ========
Holdback reserves outstanding............................... $ 11,334 $ 16,682
======== ========
Ratio of holdback reserves outstanding to total Leases
outstanding under the Private Label program(2)............ 3.42% 3.50%
======== ========
</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.
Management analyzes the collectibility of leases acquired or originated
pursuant to its Wholesale and Retail 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 Wholesale and Retail programs.
The Company began its Captive Finance program in March 1998 through the
acquisition of Independent Lease Management, Inc. During 1998, the Company
originated $164.3 million of leases through its Captive Finance program, all of
which were subsequently sold to third parties. In the future, the Company
intends to retain the majority of leases funded under its Captive Finance
program in its lease portfolio until they can be financed, securitized or
otherwise sold.
The following tables set forth certain information as of December 31, 1997
and 1998, 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>
1997(1)(2) 1998
-------------------------------- ----------------------------------
PRIVATE WHOLESALE/ PRIVATE WHOLESALE/
LABEL RETAIL TOTAL LABEL RETAIL TOTAL
-------- ---------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gross leases
outstanding........ $422,290 $189,068 $611,358 $592,435 $478,139 $1,070,574
31 - 60 days past
due................ 1.86% 1.90% 1.87% 1.36% 1.30% 1.33%
61 - 90 days past
due................ 0.60% 0.50% 0.57% 0.63% 0.69% 0.65%
Over 90 days past
due................ 0.38% 0.36% 0.37% 0.40% 0.81% 0.58%
-------- -------- -------- -------- -------- ----------
Total past
due...... 2.84% 2.76% 2.81% 2.39% 2.80% 2.56%
</TABLE>
- ---------------
(1) The Wholesale/Retail 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.
(2) The information with respect to leases held by the Company in its portfolio
or serviced by the Company as of December 31, 1997 excludes leases acquired
in connection with business combinations accounted for as poolings of
interests.
F-12
<PAGE> 46
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Average balance of lease acquired outstanding during the
period(1)(2).............................................. $321,965 $653,852
======== ========
Net losses experienced on leases acquired
Private Label program..................................... 222 505
Wholesale and Retail program.............................. 362 3,776
-------- --------
Total............................................. $ 584 $ 4,281
======== ========
Net Loss Ratio as a percentage of average balance of leases
acquired outstanding...................................... 0.18% 0.65%
======== ========
</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 years ended December 31, 1997 and 1998,
the Company acquired approximately $44.6 million and $17.9 million,
respectively, 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.
Income Taxes
The Company files a consolidated U.S. federal income tax return. The
Company recognizes deferred tax assets and liabilities 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.
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, 1998, 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 and 1998, accumulated
amortization related to amounts recorded for goodwill and amounts paid pursuant
to noncompete agreements was approximately $825,000 and $2.5 million,
respectively.
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.
F-13
<PAGE> 47
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 funding facilities. Because the securitized funding 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
anticipated amortization of the underlying leases. Settlements with
counterparties are accrued at period-end and either an increase or a decrease in
interest expense is reported in the statement of operations. The terms of the
securitized funding 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.
Earnings Per Share
Earnings per share are presented for all periods in accordance with 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 reflect the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common
stock.
In periods where there exist a net loss rather than income available to
common shareholders, potentially dilutive securities or contracts are
antidilutive and, therefore, should not be considered. Accordingly, the Company
has not presented diluted loss per share for the year ended December 31, 1998.
Following is a reconciliation of the numerators and denominators used in
calculating basic and diluted earnings (loss) per
F-14
<PAGE> 48
share for the years ended December 31, 1996, 1997 and 1998 (dollars in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Earnings (loss) per common share, basic
Net income (loss)............................ $ 3,263 $ 10,537 $ (5,902)
Preferred stock dividends.................... 60 120 66
---------- ----------- -----------
Net income (loss) available to common
stockholders.............................. $ 3,203 $ 10,417 $ (5,968)
========== =========== ===========
Weighted average shares outstanding.......... 7,315,556 9,427,042 13,724,695
========== =========== ===========
Earnings (loss) per common share, basic...... $ .44 $ 1.11 $ (0.43)
========== =========== ===========
Earnings (loss) per common share, diluted
Net income (loss)............................ $ 3,263 $ 10,537 $ (5,968)
========== =========== ===========
Weighted average shares outstanding.......... 7,315,556 9,427,042 13,724,695
Dilutive securities --
Options................................... 243,558 249,943 --
Warrants.................................. 198,307 78,452 --
Redeemable preferred stock................ 165,333 429,418 --
---------- ----------- -----------
Weighted average shares outstanding, diluted... 7,922,754 10,184,855 13,724,695
========== =========== ===========
Earnings (loss) per common share, diluted...... $ .41 $ 1.03 $ (0.43)
========== =========== ===========
</TABLE>
Comprehensive Income
In January, 1998, the Company adopted the provision of SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards of
reporting and display of comprehensive income and its components of net income
and "other comprehensive income" in a full set of general-purpose financial
statements. "Other comprehensive income" refers to revenues, expenses, gains and
losses that are not included in net income but rather are recorded directly in
stockholders' equity. The only component of comprehensive income other than net
income was foreign currency translation adjustments that commenced with the
acquisition of the Company's first foreign subsidiary in July 1998 (see Note 3).
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries were
prepared in their local currency and translated into U.S. dollars based on the
current exchange rate at the end of the period for the balance sheet and a
weighted-average rate for the period on the statement of operations. Balance
sheet translation adjustments, net of related deferred taxes, are reflected as
other comprehensive income in the stockholders' equity section of the Company's
balance sheet and accordingly, have no impact on net income or loss.
Stock Compensation Plan
SFAS No. 123, "Accounting for Stock Based Compensation", 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 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.
F-15
<PAGE> 49
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
certain derivative instruments imbedded in other contracts, and hedging
activities. In particular, SFAS No. 133 requires a company to record every
derivative instrument on the company's balance sheet as either an asset or
liability measured at fair value. In addition, SFAS No. 133 requires that
changes in the fair value of a derivative be recognized currently in earnings
unless specific hedge accounting criteria are satisfied. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. Management has not quantified the effect that
SFAS No. 133 will have on the Company's financial statements, however, the
Statement could increase volatility in earnings and other comprehensive income.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999, but
companies may adopt it on a going-forward basis as of the start of any fiscal
quarter beginning on or after June 16, 1998. SFAS No. 133 cannot be applied
retroactively. It must be applied to (a) derivative financial instruments and
(b) certain derivative instruments embedded in hybrid contracts that were
issued, acquired, or substantively modified after December 31, 1997 (and at the
Company's election, before January 1, 1998). The Company expects to adopt SFAS
No. 133 on January 1, 2000 and is currently evaluating the impact of such
adoption on the consolidated financial statements.
Reclassifications
Certain reclassifications have been made to conform with the current period
presentation.
3. ACQUISITIONS
During the year ended December 31, 1997, the Company completed eight
acquisitions. Each of these has 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 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 1997:
In February 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.
In May 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 .
In May 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.
In June 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.
F-16
<PAGE> 50
In September 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.
In September 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.
In November 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.
In November 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.
During the year ended December 31, 1998, the Company completed eleven
acquisitions. Five of these acquisitions were accounted for using the purchase
method of accounting. The aggregate consideration in 1998 for acquisitions
accounted for as purchases consisted of approximately $15.8 million in cash, a
$2.3 million subordinated note payable and 293,949 shares of common stock of the
Company valued at approximately $6.5 million. Following is a brief description
of each purchase method acquisition completed in 1998:
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.
The Company also acquired Nexsoft, Inc. ("Nexsoft") of Denver, Colorado in
April 1998. Nexsoft is a software development firm specializing in software of
the equipment leasing industry. In connection with the acquisition of Nexsoft,
the purchase price was allocated to the net assets acquired and to purchased
in-process research and development (R&D). Purchased in-process R&D includes the
value of products in the development stage and not considered to have reached
technological feasibility. Accordingly, $2.6 million of the acquisition cost was
expensed during the quarter ended June 30, 1998.
In July 1998, the Company acquired Suffolk Street Group, PLC ("Suffolk") of
Devon, England. The acquisition of Suffolk provided the Company with its entry
into the European leasing market.
In August 1998, the Company acquired Booker Montague Leasing Limited
("Booker Montague") in Manchester, England. Booker Montague specializes in the
leasing of computers, telecommunications systems and other office equipment.
In October 1998, the Company acquired Titan Finance Limited ("Titan") of
Kent, England. Titan specializes in leasing computer hardware and software and
other information technology equipment.
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, 1997 and 1998 and accounted for the purchase method as
if the acquisitions had taken place at the beginning of 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
F-17
<PAGE> 51
have resulted since the dates of the acquisitions or that may result in the
future (in thousands, except per share amounts):
<TABLE>
<CAPTION>
UNAUDITED
-----------------
1997 1998
------- -------
<S> <C> <C>
Revenues.................................................... $69,132 $68,448
Net income (loss) before income taxes....................... 14,789 (8,707)
Net income (loss)........................................... 10,412 (6,204)
Earnings (loss) per common share, basic..................... 1.04 (0.45)
Earnings (loss) per common share, diluted................... 1.00 (0.45)
</TABLE>
The six remaining acquisitions have been accounted for as poolings of
interests. The consolidated financial statements for the periods presented have
been restated to include the affects of all material acquisitions accounted for
as poolings of interests. The merger and acquisition expenses reflected on the
Consolidated Statement of Operations represent costs incurred in connection with
the acquisitions of the companies which were accounted for as poolings of
interests. Additionally, merger and acquisition expenses include approximately
$559,000 incurred in connection with the terminated merger with Oliver-Allen
Corporation. Distributions to stockholders reflected on the Consolidated
Statement of Stockholders' Equity represent distributions to stockholders of the
pooled companies for taxes due.
Acquisitions that have been accounted for as poolings of interests include
Independent Capital Corporation ("ICC"), Integrated Lease Management, Inc.
("ILM"), The Republic Group, Inc. ("Republic"), Vendor Leasing, Inc. ("Vendor
Leasing"), TFS, Inc. dba The Money Source and 21st Century Credit Leasing
Services, Inc. ("21st Century"). Following is a brief description of each
acquisition accounted for as a pooling of interest:
In March 1998, the Company completed its merger with ICC. ICC focuses on
the small ticket broker market in the northeastern region of the United States
and has offices in Bridgewater and Rutherford, New Jersey. Consideration
consisted of 272,727 shares of the Company's common stock.
In March 1998, the Company completed its merger with ILM. ILM is based in
San Jose, California and specializes in independent lease origination and
consulting services in the technology marketplace. Consideration consisted of
313,722 shares of the Company's common stock.
In April 1998, the Company completed its merger with Vendor Leasing. Vendor
Leasing is located in Roswell, Georgia and provides the Company with greater
penetration in the eastern United States. Consideration consisted of 18,954
shares of the Company's common stock.
In June 1998, the Company completed its merger with TFS, Inc. dba The Money
Source, a Redmond, Washington-based small ticket equipment leasing company.
Consideration consisted of 53,707 shares of the Company's common stock.
Also in June 1998, the Company completed its merger with 21st Century. 21st
Century is located in Naples, Florida and will be operated as a satellite office
of the Company's Ft. Lauderdale office. Consideration consisted of 6,060 shares
of the Company's common stock.
In July 1998, the Company completed its merger with Republic, an Anaheim,
California-based private company that originates leases of equipment for small
businesses in a broad range of industries. Republic has a specialization in
small business-direct telemarketing and a well-developed sales recruiting and
training program. Consideration for the transaction consisted of the issuance of
approximately 1.1 million shares of the Company's common stock. For additional
information regarding the Company's merger with Republic, reference is made to
the Company's Form 8-K as filed with the Securities and Exchange Commission on
August 10, 1998.
F-18
<PAGE> 52
The separate results of First Sierra and each of the merged companies
through the date that the combinations were consummated is set forth in the
following table (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Revenues
First Sierra.......................................... $11,364 $34,457 $53,216
ICC................................................... 2,431 3,484 664
ILM................................................... 2,415 3,182 899
TFS................................................... 767 829 --
Republic.............................................. 6,394 9,647 6,364
------- ------- -------
Restated revenues.................................. $23,371 $51,599 $61,143
Net income (loss)
First Sierra.......................................... $ 1,217 $ 7,655 $(6,195)
ICC................................................... 436 931 176
ILM................................................... 191 (12) 106
TFS................................................... 56 1 --
Republic.............................................. 1,363 1,962 11
------- ------- -------
Restated net income (loss)......................... $ 3,263 $10,537 $(5,902)
</TABLE>
4. LEASE FINANCING RECEIVABLES
The Company's lease financing receivable balance at December 31, 1997 and
1998, consists of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Minimum lease payments...................................... $30,515 $417,116
Estimated unguaranteed residual value....................... 6,270 4,120
Initial direct costs........................................ 131 6,729
Unearned income............................................. (8,260) (86,040)
Allowance for credit losses................................. (981) (4,763)
------- --------
Lease financing receivables, net....................... $27,675 $337,162
======= ========
</TABLE>
Future scheduled minimum payments on the Company's lease portfolio as of
December 31, 1998, are as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $115,134
2000........................................................ 82,782
2001........................................................ 75,201
2002........................................................ 57,512
2003........................................................ 43,689
Thereafter.................................................. 42,798
--------
Total minimum payments............................ $417,116
========
</TABLE>
At December 31, 1998, the weighted average remaining life of leases in the
Company's lease portfolio is 29 months and the weighted average implicit rate of
interest is 11.05%.
5. SECURITIZATION PROGRAM
The Company initially funds the acquisition or origination of its leases
from working capital or through its securitized funding facilities. From time to
time, depending on market conditions, the Company securitized the leases in its
portfolio that meet pre-established eligibility criteria by packaging them into
a pool and selling beneficial interests in the leases through public offerings
and private placement transactions.
F-19
<PAGE> 53
In these securitization transactions, the Company transfers a pool of
leases to a wholly-owned, bankruptcy remote, special purpose subsidiary. This
subsidiary in turn simultaneously transfers its interest in the leases to a
trust, or trusts, which issues beneficial interests in the leases in the form of
senior and subordinated securities which may include certificates of beneficial
interest or notes. These securitization transactions typically employ a
multi-tranched structure of either beneficial interests or notes. 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.
Prior to July 1, 1998, the Company structured its securitization
transactions to meet the criteria for sales of lease financing receivables under
generally accepted accounting principles. Gain on sale of lease receivables was
recorded based upon the excess of the sales proceeds received on the
certificates or notes over the book balance calculated based on the relative
fair value discussed in Note 2. The Company recorded a servicing asset
representing the excess of the estimated servicing revenues to be received over
the Company's costs to be incurred. As of December 31, 1997 and 1998, the
balances of servicing assets outstanding were $0.8 million and $1.3 million,
respectively. The amount of the Trust Certificates was amortized over the
estimated lives of the underlying leases using the interest method. The cash
flows allocable to the Trust Certificate were 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, as the case may be. 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 or transfer 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 9.00% per annum depending on the level of recourse available, if any,
from the lease 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-cancelable 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 reductions 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.
Effective as of July 1, 1998, the Company made a strategic decision to
alter the structure of its future securitization transactions so as to retain
the leases on its balance sheet. With respect to all securitization transactions
completed subsequent to such change, the Company finances leases through
beneficial interests or notes issued by the trust, retains the right to receive
any excess cash flows allocable to the Trust Certificates, and continues to
retain the right to service leases financed through its securitization program
and receive a servicing fee for doing so. As these securitization transactions
meet the criteria for financing of lease receivables under generally accepted
accounting principles, the Company records as financings the amount of proceeds
received related to the issuance of beneficial interests or notes by the trust.
Interest expense is recorded based on interest accrued on each class of
certificates or notes financed by the Company. Any cash flow allocable to the
Trust Certificates and servicing fees received are recorded as reduction of
interest expense.
These securitization transactions are structured such that once the leases
are transferred from the Company to the special purpose subsidiary and
ultimately to the trust, the amount of the certificates of beneficial interest
or notes purchased or financed by investors in such securities is nonrecourse to
the Company. Investors purchasing the certificates of beneficial interests or
notes look solely to the defined cash
F-20
<PAGE> 54
flow from leases included in the special purpose entity for repayment of
principal and interest associated with their particular investment.
Securitized Funding Facilities
As of December 31, 1998, the Company maintained five securitized funding
facilities (the "Securitized Funding Facilities"). In March 1997, the Company
entered into a facility with Prudential (the "Prudential Facility"), in June
1997 the Company entered into two separate facilities with First Union (the
"First Union Facilities"), in March 1998 the Company entered into a facility
with PNC Bank (the "PNC Facility"), and in December 1998 the Company entered
into a facility with Bank of Montreal (the "Bank of Montreal Facility"). As of
December 31, 1998, the total amount available under the Prudential Facility was
$36.6 million which was the amount outstanding, the total amount available under
the First Union Facilities was $200 million, the total amount available under
the PNC Facility was $200 million, and the total amount available under the Bank
of Montreal Facility was $150 million. The structure of all of the facilities is
essentially the same. The facilities allow the Company to transfer and sell
equipment lease receivables first to a bankruptcy remote special purpose entity
and then to a trust. The trust issues either certificates or notes to the senior
investor, and a Certificate of Seller's Interest, which represents a subordinate
beneficial interest in the Trust, to the bankruptcy remote special purpose
entity. The senior certificate or note is owned by either Prudential, First
Union, PNC, or Bank of Montreal, or its assignees, as the case may be, and the
residual certificate, or Certificate of Seller's Interest, is owned by the
Company's special purpose subsidiary. Prior to July 1, 1998, the Company
structured securitization transactions under its securitized funding facilities
as sales of lease financing receivables. Effective July 1,1998, the Company made
a strategic decision to alter the structure of its securitized funding
facilities so as to retain its lease receivables on balance sheet and record the
amount of certificates or notes issued to senior investors as financings.
The amount outstanding at any time on any of the certificates or notes
issued to senior investors in the securitized funding facilities is nonrecourse
to Company. Principal and interest which is due any investor under the
certificates or notes is paid to them based on the available cashflow from only
the leases included in the particular facility. The Company has no obligation to
ensure that the investor who holds the certificate or note receives the full
amount of principal and interest due.
As of December 31, 1998, the amount of Prudential's investment in the
senior certificate was $36.6 million, of which $4.6 million was financed after
July 1, 1998 under the revised structure and thus was recorded as non-recourse
debt; the amount of First Union's investment in the senior certificate was
$128.8 million, of which $86.5 million was financed after July 1, 1998 and thus
was recorded as non-recourse debt. The amount of PNC's investment was $200
million, of which $82.7 million was financed after July 1, 1998 and thus was
recorded as non-recourse debt; the amount of Bank of Montreal's investment was
$0.
The Securitized Funding Facilities provide several significant advantages
to the Company, including favorable interest rates and providing greater
flexibility with respect to the timing and size of permanent securitizations,
thereby reducing related transaction costs.
The equipment lease receivables included in the Securitized Funding
Facilities may be transferred by the trust to other trusts in which the Company
has a minority interest.
Securitization Transactions
As of December 31, 1998 the Company had completed four permanent
securitization transactions involving the issuance of $627 million of senior and
subordinate securities. The Series 1996-1 and 1996-2 transactions were completed
in 1996, the Series 1997-1 transaction was completed in September 1997 and the
Series 1998-1 transaction was completed in December 1998. 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
F-21
<PAGE> 55
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 &
Phelps Credit Rating Co., and was retained by the Company for future sale in the
private market.
In connection with the Series 1998-1 transaction, four tranches of Class A
notes, rated AAA by Standard and Poor's, Aaa by Moody's Investor Services, Inc.,
AAA by Duff & Phelps Credit Rating Co. and AAA by Fitch IBCA, Inc. were sold in
the public market. The Class B-1 and Class B-2 notes were rated BBB and BB by
Duff & Phelps Credit Rating Co. and Fitch IBCA, Inc., and were sold and financed
on a non-recourse basis in the private market. A Class B note was rated B by
Duff & Phelps Credit Rating Co. and Fitch IBCA, Inc. and was retained by the
Company for future sale in the private market.
The Company was able to realize approximately 94.0% of the present value of
the remaining scheduled payments of the equipment leases included in its Series
1996-1 and 1996-2 securitizations, approximately 96.0% of the present value of
the remaining scheduled payments of the equipment leases included in its Series
1997-1 securitization, and 95.0% of the present value of the remaining scheduled
payments in its Series 1998-1 securitization.
Prior to July 1, 1998, the Company structured its securitization
transactions as sales of lease financing receivables. Consistent with the
Company's decision, effective July 1, 1998 to retain securitized leases on its
balance sheet, the Series 1998-1 securitization was structured so that all lease
receivables sold or financed in this series which were originated after July 1,
1998 were retained on the Company's balance sheet and the related senior and
subordinated notes financed were recorded as nonrecourse debt. As of December
31, 1998, the amount of nonrecourse debt outstanding under the Series 1998-1
securitization was $101.2 million.
Hedging Strategy
The implicit yield to the Company on all of its leases is on a fixed
interest rate basis due to the leases having scheduled payments that are fixed
at the time of origination of the lease. When the Company acquires or originates
leases, it bases its pricing in part on the "spread" it expects to achieve
between the implicit yield rate to the Company on each lease and the effective
interest cost it will pay when it sells such leases through securitization or
otherwise. Increases in interest rates between the time the leases are acquired
or originated by the Company and the time they are securitized or otherwise sold
could narrow or eliminate the spread, or result in a negative spread. The
Company has adopted a policy that is designed to provide a level of protection
against the volatility of interest rate movement between the time the Company
acquires or originates a lease and the time such lease is sold or financed
through a securitization or otherwise sold. Such hedging arrangements generally
are implemented when the Company's portfolio of unhedged leases reaches $10.0
million. Such hedges typically match the amount of debt the Company anticipates
it will fund with respect to such leases. At certain times, changes in the
interest rate market present favorable conditions to hedge against future
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.
F-22
<PAGE> 56
6. DEBT
Total Debt consisted of the following as of December 31, 1997 and 1998 (in
thousands):
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Nonrecourse Debt:
Securitized Warehouse Facilities:
First Union National Bank.............................. -- $ 86,467
PNC Bank............................................... -- 82,720
Prudential Securities Credit Corporation............... -- 4,580
------- --------
Total Securitized Warehouse Facilities.................... -- 173,767
Securitized Transactions:
Series 1998-1 securitization........................... -- 101,247
Other nonrecourse Debt.................................... -- 1,497
------- --------
Total Nonrecourse Debt...................................... -- 276,511
Other Debt:................................................. 14,937 23,026
------- --------
Total Debt.................................................. 14,937 299,537
Subordinated Notes Payable.................................. 6,000 3,250
------- --------
Total Debt.................................................. $20,937 $302,787
======= ========
</TABLE>
The Company classifies its indebtedness as either nonrecourse debt or debt
based on the structure of the debt instrument that defines the Company's
obligations. Nonrecourse debt includes amounts outstanding related to leases
included in Securitized Funding Facilities, securitized transactions, or
individual or groups of leases funded under nonrecourse funding arrangements
with specific financing sources. Amounts outstanding in these instances are
classified as nonrecourse debt because the Company has no obligation to ensure
that investors or funding sources receive the full amount of principal and
interest which may be due to them under their funding arrangement. In these
instances, the investors or financing sources may only look to specific leases
and the associated cashflows for the ultimate repayment of amounts due to them.
In the event the cashflow associated with specific leases funded under
circumstances are insufficient to fully repay amounts due, the investor or
financing source withstands the full risk of loss. Debt includes amounts due to
financing sources for which the Company is responsible for full repayment of
principal and interest.
Securitized Funding Facilities
As of December 31, 1998, the Company maintained five securitized warehouse
facilities. In March 1997 the Company entered into the Prudential Facility, in
June 1997 the Company entered into two First Union Facilities, in March 1998 the
Company entered into the PNC Facility, and in December 1998 the Company entered
into the Bank of Montreal Facility. As of December 31, 1998, the total amount
available under the Prudential Facility was equal to the amount outstanding, the
total amount available under the First Union Facilities was $200 million, the
total amount available under the PNC Facility was $200 million, and the total
amount available under the Bank of Montreal Facility was $150 million.
As of December 31, 1998, the amount of nonrecourse debt outstanding under
the First Union, PNC, Prudential and Bank of Montreal facilities was $86.5
million, $82.7 million, $4.6 million and $0 respectively.
Securitization Transactions
Effective July 1, 1998, consistent with the Company's strategy to retain
its leases on balance sheet, senior and subordinated notes financed related to
lease receivables originated after July 1, 1998 under the Company's Series
1998-1 securitization were recorded as nonrecourse debts. As of December 31,
1998, the amount of nonrecourse debt outstanding under the Series 1998-1
securitization was $101.2 million.
F-23
<PAGE> 57
Subordinated Notes
In May 1997, the Company entered into a $5.0 million subordinated revolving
credit facility. Advances under the facility bear interest at 11.00% per annum.
As of December 31, 1998, no advances were outstanding under such facility.
In connection with the acquisition of Heritage in May 1997, the Company
issued a $1.0 million subordinated note payable to the former owner of Heritage.
Such note bears interest at 9.00% per annum, with principal payable
semi-annually over 5 years.
In connection with the acquisition of Titan in October 1998, the Company
issued $2.3 million in subordinated notes payable as consideration for the
transaction. The notes bear interest at 6.0% payable semi-annually and mature
October 1, 2003. The notes will automatically convert into shares of the
Company's common stock when the average trading price of the common stock for
the twenty days preceding conversion equals or exceeds $20.00. Upon conversion,
the Company will issue one share of common stock for each $20.00 of outstanding
principal amount of the notes.
Interest Rate Swap Agreements
Pursuant to the terms and conditions of the Company's Securitized Funding
Facilities, the Company is required to maintain a specified level of interest
rate swaps relative to the amount outstanding under the facility. The hedged
amount, or notional amount of the hedge, is required to be no less than 90% but
no greater than 100% of the amount outstanding. As of December 31, 1998, the
Company was in compliance with such hedging requirement.
At December 31, 1997 and 1998, the Company had entered into interest rate
swap agreements with aggregate notional amounts of $9.8 million and $166.2
million, respectively. These interest rate swap agreements effectively modify
the interest rate specific to each facility from a floating rate of LIBOR or
Commercial Paper rates, as the case may be, to a fixed rate and the notional
amount amortizes in proportion to the leases included in each facility. The
fixed rates associated with these interest rate swap agreements as of December
31, 1997 and 1998 range from 5.83% to 6.29% and 4.79% to 6.135%, respectively.
The counterparties to the Company's swap agreements were First Union National
Bank of North Carolina, Prudential Global Funding, Inc., and Merrill Lynch.
7. FURNITURE AND EQUIPMENT
The following is a summary of furniture and equipment as of December 31,
1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
1997 1998 LIFE
------- ------ ---------
<S> <C> <C> <C>
Buildings............................................... $ 1,102 $1,929 26 years
Furniture and fixtures.................................. 1,992 3,115 7 years
Computer and office equipment........................... 3,380 6,126 3-5 years
Leasehold improvements and other........................ 700 1,910 3 years
------- ------
7,174 13,080
Accumulated depreciation................................ (1,373) (3,171)
------- ------
$ 5,801 $9,909
======= ======
</TABLE>
F-24
<PAGE> 58
8. INCOME TAXES
The temporary differences, which give rise to net deferred tax assets and
liabilities are as follows at December 31, 1997 and 1998, respectively (in
thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Accruals and reserves not yet deductible.................... $ 2,702 $ 202
Depreciation and amortization............................... (414) (6,892)
Cash to accrual adjustment.................................. 220 120
Net operating loss carryforward............................. 605 1,030
Securitization transactions................................. (6,593) 6,290
Other....................................................... (134) (1,251)
------- -------
Total deferred income tax assets (liabilities).... $(3,614) $ (501)
======= =======
</TABLE>
The provision (benefit) for income taxes for the years ended December 31,
1996, 1997 and 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
---- ------ -------
<S> <C> <C> <C>
Current --
Federal................................................... $107 $1,080 $ (751)
State..................................................... 33 134 (77)
Foreign................................................... -- -- 357
---- ------ -------
$140 $1,214 $ (471)
==== ====== =======
Deferred --
Federal................................................... $722 $3,581 $(1,950)
State..................................................... 70 312 (201)
Foreign................................................... -- -- (43)
---- ------ -------
$792 $3,893 $(2,194)
==== ====== =======
Total provision (benefit)......................... $932 $5,107 $(2,665)
==== ====== =======
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $0.7 million at December 31, 1998. Those earnings are considered
to be indefinitely reinvested and, accordingly, no provision for U.S. federal
and state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the foreign country.
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>
1996 1997 1998
---- ------ -------
<S> <C> <C> <C>
Securitization transactions................................. $993 $3,830 $(7,246)
Accruals not deductible until paid.......................... 111 (615) 618
Depreciation and amortization............................... -- 437 5,161
Cash to accrual adjustment.................................. (56) 110 106
Net operating loss carryforward............................. (59) 131 (1,030)
Other....................................................... (197) -- 197
---- ------ -------
Total deferred provision (benefit)................ $792 $3,893 $(2,194)
==== ====== =======
</TABLE>
F-25
<PAGE> 59
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, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
----- ---- -----
<S> <C> <C> <C>
Federal statutory rate...................................... 34.0% 34.0% (34.0%)
State income taxes, net of federal benefit.................. 3.2 3.2 (3.5%)
Earnings of subsidiary not subject to federal income
tax(1).................................................... (16.9) (7.2) --
Foreign taxes............................................... -- -- 1.0%
Non-deductible expenses and other........................... 1.9 2.6 5.4%
----- ---- -----
Effective income tax (benefit) rate....................... 22.2% 32.6% (31.1%)
===== ==== =====
</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.
9. REDEEMABLE PREFERRED STOCK
As of December 31, 1998, 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 1998, 46,640 shares of Series A Preferred Stock were converted into
255,123 shares of Common Stock. Consequently, at December 31, 1998, 10,078
shares of Series A Preferred Stock were outstanding.
At December 31, 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 had 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.
F-26
<PAGE> 60
STOCKHOLDER RIGHTS PLAN
On December 15, 1998, the Company's Board of Directors declared a dividend
distribution of one preferred stock purchase right (a "Right") for each share of
the Company's Common Stock. The dividend was payable on December 30, 1998 to
stockholders of record at the close of business on December 28, 1998 (the
"Record Date"). Each Right generally entitles the registered holder to purchase
from the Company one one-hundredth of a share of the Company's Junior Preferred
Stock, Series C, par value $0.01 per share (the "Preferred Stock"), at a
purchase price of $65.25 per one one-hundredth of a share (the "Purchase
Price"). The description and terms of the Rights are set forth in the Rights
Agreement, dated as of December 30, 1998 (the "Rights Agreement"), between the
Company and Harris Trust and Savings Bank as Rights Agent.
The Rights will be evidenced by Common Stock certificates and not separate
certificates until the earliest of (i) ten days following the date of public
disclosure that a person or group (the "Acquiring Person") has acquired or
obtained the right to acquire beneficial ownership of 15% or more of the
outstanding shares of the Common Stock, or (ii) ten business days following the
commencement or disclosure of an intention to commence a tender offer or
exchange offer by a person or group other than the Company and certain related
entities if, upon consummation of such offer, such person or group would
beneficially own 15% or more of the outstanding shares of Common Stock (the
earlier of such dates being the "Distribution Date"). Until the Distribution
Date (or earlier redemption or expiration of the Rights), the transfer of Common
Stock will also constitute transfer of the associated Rights. The Rights will
expire at the close of business on December 30, 2008, unless earlier redeemed by
the Company.
If a person acquires beneficial ownership of 20% or more of the Common
Stock, or if the Company is the surviving corporation in a merger with an
Acquiring Person and the Common Stock remains outstanding and unchanged, the
Rights will "flip in" and entitle each holder of a Right, with certain
exceptions, to purchase (upon exercise at the then-current market price) that
number of shares of Common Stock having a market value of two times the Purchase
Price.
In the event that, following the Distribution Date, the Company is acquired
in a merger or other business combination in which the Common Stock does not
remain outstanding or is changed or 50% or more of the Company's consolidated
assets or earning power is sold, leased, exchanged, or otherwise transferred or
disposed of (whether in one transaction or a series of related transactions),
the Rights will "flip over" and entitle each holder of a Right to purchase, upon
the exercise of the Right at the then-current Purchase Price, that number of
shares of common stock of the acquiring company (or, in certain circumstances,
one of its affiliates) which at the time of the transaction would have a market
value of two times the Purchase Price.
Preferred Stock purchasable upon exercise of the Rights will not be
redeemable. Each share of Preferred Stock will be entitled to a minimum
preferential quarterly dividend payment of $1.00 per share, but will be entitled
to an aggregate dividend of 100 times the dividend declared per share of Common
Stock, if greater. In the event of liquidation, the holders of the Preferred
Stock will be entitled to a minimum preferential liquidation payment of $100 per
share, but will be entitled to an aggregate payment of 100 times the payment
made per share of Common Stock, if greater. In the event of any merger or other
business combination in which Common Stock is exchanged, each share of Preferred
Stock will be entitled to receive 100 times the amount received per share of
Common Stock. Customary anti-dilution provisions protect these rights.
10. STOCKHOLDERS' EQUITY
Common Stock
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 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
F-27
<PAGE> 61
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.
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.
In February 1997, the Company increased the authorized shares of common
stock of the Company to 25,000,000 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 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 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 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 have been or
will be used for other general corporate purposes, including acquisitions and
the repayment of other borrowings of the Company.
In August 1998, the Company increased the authorized shares of Common Stock
of the Company to 100,000,000 shares.
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 and
2,844,783 shares, respectively of Common Stock have been reserved for issuance
pursuant to the 1997 Stock Option Plan as of December 31, 1997 and 1998,
respectively.
As permitted by SFAS No. 123, the Company accounts for the 1997 Stock
Option Plan under APB Opinion No. 25, under which no compensation cost has been
recognized. The Company has elected to provide the pro forma disclosures, as
permitted under the provisions of SFAS No. 123. Had the Company determined
compensation costs based on the fair value at the grant dates for its stock
options under SFAS No. 123, the
F-28
<PAGE> 62
Company's net income (loss) would have been reduced to the following pro forma
amounts (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
1997 1998
------- -------
<S> <C> <C>
Net income (loss)
As reported............................................... $10,537 $(5,902)
Pro forma................................................. 10,204 (8,489)
Net income (loss) per common share:
As reported -- basic...................................... $ 1.11 $ (0.43)
As reported -- diluted.................................... $ 1.03 $ (0.43)
Pro forma -- basic........................................ $ 1.07 $ (0.62)
Pro forma -- diluted...................................... $ 1.00 $ (0.62)
</TABLE>
The fair value of each option granted included in the above calculations is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for the years ended December 31,
1997 and 1998:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1998
--------- ---------
<S> <C> <C>
Risk-free interest rate..................................... 5.62% 4.79%
Expected life............................................... 6.0 years 6.0 years
Expected volatility......................................... 22% 70%
Dividend yield.............................................. 0% 0%
</TABLE>
Additional information relating to the Stock Option Plan are as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
NUMBER OF OPTIONS PER SHARE
----------------- ----------------
<S> <C> <C>
Outstanding at:
December 31, 1997.................................. 1,032,320 $ 8.00
Options granted.................................... 1,032,320 8.00
Outstanding at:
December 31, 1998.................................. 2,356,644 $10.61
Options granted.................................... 2,245,753 16.12
Options exercised.................................. 36,838 8.00
Options forfeited.................................. 887,591 20.95
Exercisable at:
December 31,
1997............................................ 0 $ 8.00
1998............................................ 249,114 11.92
</TABLE>
Options granted for 1998 include 682,597 options which were cancelled and
repriced on November 30, 1998. Options forfeited in 1998 include 835,541 options
that were cancelled related to repricing of which 682,597 options were repriced.
The options which were repriced were originally granted between March 2, 1998
and May 27, 1998 with original exercise prices between $18.375 and $23.9375.
These options were cancelled on November 30, 1998 and reissued at an exercise
price of $11.25 per share, which represented 125% of the fair market value of
Common Stock on that day, with a new five year vesting period.
The weighted average fair value of options granted during 1997 and 1998 was
$2.47 and $13.19 per option, respectively.
F-29
<PAGE> 63
As of December 31, 1998, the options outstanding under the 1997 Stock
Option Plan had exercise prices between $8.00 and $23.9375 and a weighted
average remaining contractual life of 9.43 years.
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, 1996, 1997 and 1998 was $535,000, $1,083,000, and $1,971,000,
respectively. For the subsequent five years, minimum annual rental payments
under non-cancelable operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $1,630
2000........................................................ 1,272
2001........................................................ 1,029
2002........................................................ 870
2003........................................................ 594
------
Total minimum payments............................ $5,395
======
</TABLE>
Concentration of Credit Risks
At December 31, 1998, leases aggregating approximately 24% of the net
principal balance of leases owned and serviced by the Company pursuant to its
securitization program were located in California. 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.
Employee Benefit Plan
The Company established a 401(k) defined contribution plan in October 1996,
which is generally available to all employees. In 1998, employees could
generally contribute up to 15% of their salary each year, and the Company, at
its discretion, may match up to 50% of the first 8% of salary contributed by the
employee. During the years ended December 31, 1997 and 1998, the Company
recognized $157,000 and $551,000, respectively, of expenses related to the
401(k) plan.
On January 1, 1999, the Company changed the matching contribution
calculations of the plan to take advantage of IRS safe-harbor matching
provision. As of that date, the Company, at its discretion, may match up to 100%
of the first 3% of salary and 50% of the next 2% of salary contributed by the
employee. 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.
F-30
<PAGE> 64
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,
1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
------------------ -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Financial assets --
Lease financing receivables, net........... $27,675 $29,289 $337,162 $346,355
Investment in trust certificates........... 12,512 16,541 7,288 7,288
Marketable securities...................... 4,223 4,223 5,042 5,042
Cash and cash equivalents.................. 14,569 14,569 7,928 7,928
Financial liabilities --
Nonrecourse debt........................... -- -- 276,511 276,511
Other debt................................. 14,937 14,937 23,026 23,026
Subordinated notes payable.............. 6,000 6,000 3,250 3,250
Off balance sheet instruments --
Interest rate swap agreements.............. -- (60) -- (4,467)
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
such value.
Lease Financing Receivables -- The fair value was estimated by discounting
expected future cash flows at a risk adjusted rate of return deemed to be
appropriate for investors in such instruments. Expected cash flows take into
consideration management's estimates of prepayments, defaults and recoveries.
Investment in Trust Certificates -- The fair value was estimated by
discounting expected future cash flows allocable to the holder of the Trust
Certificate at a risk adjusted rate of return deemed to be appropriate for
investors in such investment. Expected cash flows take into consideration
management's estimates of defaults, recoveries and other factors.
Marketable Securities -- The fair value was estimated by discounting
expected future cash flows allocable to the holder of the Marketable Securities
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.
Nonrecourse Debt -- The carrying amounts approximate fair value due to the
short-term nature of the credit facilities.
Other Debt -- The carrying amounts approximate fair value due to the
short-term nature of the credit facilities.
Subordinated Notes 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.
F-31
<PAGE> 65
13. SEGMENT INFORMATION
The Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" on January 1, 1998. 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.
The Company acquires and originates leases primarily through its Private
Label, Wholesale/Retail, and Captive Finance programs. Additionally, First
Sierra conducts business in the continental United States (U.S.) and the United
Kingdom (U.K.). Segment data for the years ended December 31, 1996, 1997 and
1998 for these three lease programs are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Revenue by business segment:
Private Label........................................ $10,477 $13,460 $ 11,917
Wholesale/Retail..................................... 10,478 34,957 46,014
Captive Finance...................................... 2,416 3,182 3,212
Corporate............................................ 0 0 0
------- ------- --------
Total........................................ $23,371 $51,599 $ 61,143
Revenue by geographic area:
Revenue generated from business within US............ $23,371 $51,599 $ 56,429
Revenue generated from UK operation.................. 0 0 4,714
------- ------- --------
Total........................................ $23,371 $51,599 $ 61,143
Depreciation and amortization:
Private Label........................................ $ 5 $ 9 $ 18
Wholesale/Retail..................................... 305 1,202 2,979
Captive Finance...................................... 45 83 121
Corporate............................................ 114 231 634
------- ------- --------
Total........................................ $ 469 $ 1,525 $ 3,752
Pre-tax operating profit (loss):
Private Label........................................ $ 5,437 $10,120 $ 9,158
Wholesale/Retail..................................... 1,283 11,741 7,275
Captive Finance...................................... 318 (7) 95
Corporate............................................ (2,843) (6,210) (25,095)
------- ------- --------
Total........................................ $ 4,195 $15,644 $ (8,567)
Interest expenses:
Private Label........................................ $ 3,664 $ 1,993 $ 1,929
Wholesale/Retail..................................... 162 2,495 3,915
Captive Finance...................................... 0 0 0
Corporate............................................ 1,223 692 183
------- ------- --------
Total........................................ $ 5,049 $ 5,180 $ 6,027
Total assets:
Private Label........................................ $61,435 $17,116 $158,446
Wholesale/Retail..................................... 17,917 60,606 255,146
Captive Finance...................................... 1,231 1,005 120
Corporate............................................ 3,171 14,231 14,581
------- ------- --------
Total........................................ $83,754 $92,958 $428,293
Total assets:
Total U.S. assets.................................... $83,754 $92,958 $388,149
Total U.K. assets.................................... 0 0 40,144
------- ------- --------
Total........................................ $83,754 $92,958 $428,293
</TABLE>
F-32
<PAGE> 66
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The quarterly financial data presented below has been restated to include
the results of operations of acquired companies accounted for as poolings of
interests.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1998
Revenues........................... $14,729 $19,057 $12,000 $15,357
Income (loss) before provision
(benefit) for income taxes...... 4,368 2,933 (8,150) (7,718)
Net income (loss).................. 2,760 1,674 (4,949) (5,387)
Earnings (loss) per common share,
basic........................... .22 .12 (.35) (.38)
Earnings (loss) per common share,
diluted......................... .21 .11 (.35) (.38)
1997
Revenues........................... $ 8,872 $11,781 $14,572 $16,374
Income before provision for income
taxes........................... 2,823 3,475 4,326 5,020
Net income......................... 1,940 2,284 2,762 3,551
Earnings per common share, basic... .26 .26 .26 .33
Earnings per common share,
diluted......................... .24 .24 .24 .30
</TABLE>
F-33
<PAGE> 67
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To First Sierra Financial, Inc.
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of First Sierra Financial, Inc. and
subsidiaries included in this Form 10-K, and have issued our report thereon
dated February 17, 1999. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule listed
in Part IV, Item 14 (a)(2) for First Sierra Financial, Inc. and subsidiaries is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Houston, Texas
February 17, 1999
F-34
<PAGE> 68
FIRST SIERRA FINANCIAL, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BEGINNING ENDING
BALANCE CHARGES TO BALANCE
12/31/97 RESERVE EXPENSE 12/1/98
--------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Relocation of operations center to Houston,
Texas from Jupiter, Florida.................. $-- $1,592,684 $(1,190,855) $401,829
=== ========== =========== ========
</TABLE>
F-35
<PAGE> 69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST SIERRA FINANCIAL, INC.
By /s/ THOMAS J. DEPPING
-----------------------------------
Thomas J. Depping
President, Chairman of the Board
and
Chief Executive Officer
Date: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ THOMAS J. DEPPING President, Chairman of the March 29, 1999
- ----------------------------------------------------- Board and Chief Executive
Thomas J. Depping Officer (principal executive
officer)
/s/ SANDY B. HO Executive Vice President and March 29, 1999
- ----------------------------------------------------- Chief Financial Officer
Sandy B. Ho (principal financial and
accounting officer)
/s/ RICHARD J. CAMPO Director March 29, 1999
- -----------------------------------------------------
Richard J. Campo
/s/ ROBERT TED ENLOE, III Director March 29, 1999
- -----------------------------------------------------
Robert Ted Enloe, III
/s/ BRIAN E. MCMANUS Director March 29, 1999
- -----------------------------------------------------
Brian E. McManus
/s/ NORMAN J. METCALFE Director March 29, 1999
- -----------------------------------------------------
Norman J. Metcalfe
/s/ DAVID C. SHINDELDECKER Director March 29, 1999
- -----------------------------------------------------
David C. Shindeldecker
/s/ DAVID L. SOLOMON Director March 29, 1999
- -----------------------------------------------------
David L. Solomon
</TABLE>
<PAGE> 70
EXHIBIT INDEX
<TABLE>
<C> <S>
3.1. Restated Certificate of Incorporation of First Sierra, as
amended.
3.2. Amended and Restated Bylaws of First Sierra (incorporated by
reference to Exhibit 3.2 to Registrant's Form S-1
Registration Statement (Registration No. 333-22629)).
4.1. Rights Agreement, dated December 30, 1998, between First
Sierra and Harris Trust and Savings Bank, as Rights Agent,
together with the Form of Certificate of Designations of
Preferred Stock attached thereto as Exhibit A, the Form of
Rights Certificate attached thereto as Exhibit B and the
Summary of Rights to Purchase Preferred Stock attached
thereto as Exhibit C (incorporated by reference to Exhibit
4.1 to Registrant's Form 8-A filed December 31, 1998).
10.1. 1997 Stock Option Plan (incorporated by reference to Exhibit
10.1 to Amendment No. 2 to Registrant's Form S-1
Registration Statement (Registration No. 333-22629)).*
10.2 Amendment to 1997 Stock Option Plan. *
10.3. Reserved.
10.4. Form of Registration Rights Agreement (incorporated by
reference to Exhibit 10.3 to Amendment No. 2 to Registrant's
Form S-1 Registration Statement (Registration No.
333-22629)).
10.5. Asset Purchase Agreement dated June 28, 1996 between First
Sierra Financial, Inc., First Sierra Acquisition, Inc. and
General Interlease Corporation and Eric Barash and Daniel
Dengate (incorporated by reference to Exhibit 10.4 to
Registrant's Form S-1 Registration Statement (Registration
No. 333-22629)).
10.6. Agreement and Plan of Reorganization dated October 15, 1996
among Valerie A. Hayes, Corporate Capital Leasing Group,
Inc., the Company and First Sierra Pennsylvania, Inc.
(incorporated by reference to Exhibit 10.5 to Registrant's
Form S-1 Registration Statement (Registration No.
333-22629)).
10.7. Asset Purchase Agreement, dated February 4, 1997, between
Lease Pro, Inc., Charles E. Lester and First Sierra
(incorporated by reference to Exhibit 10.6 to Registrant's
Form S-1 Registration Statement (Registration No.
333-22629)).
10.8. First Amendment to Agreement and Plan of Reorganization
dated February 27, 1997 among Valerie A. Hayes, Corporate
Capital Leasing Group, Inc., the Company and First Sierra
Pennsylvania, Inc. (incorporated by reference to Exhibit
10.7 to Registrant's Form S-1 Registration Statement
(Registration No. 333-22629)).
10.9. Agreement and Plan of Merger between Oren M. Hall, Charles
E. Brazier, Greg E. McIntosh, Brent M. Hall, Heritage Credit
Services, Inc., the Company and First Sierra California,
Inc. dated as of February 1, 1997 (incorporated by reference
to Exhibit 10.8 to Registrant's Form S-1 Registration
Statement (Registration No. 333-22629)).
10.10. Form of Registration Rights Agreement between First Sierra
and Oren M. Hall (incorporated by reference to Exhibit 10.9
to Registrant's Form S-1 Registration Statement
(Registration No. 333-22629)).
10.11. Employment Agreement between Thomas J. Depping and First
Sierra (incorporated by reference to Exhibit 10.10 to
Amendment No. 2 to Registrant's Form S-1 Registration
Statement (Registration No. 333-22629)).*
10.12. Employment Agreement between Sandy B. Ho and First Sierra.
10.13. Employment Agreement between Robert H. Quinn, Jr. and First
Sierra (incorporated by reference to Exhibit 10.12 to
Amendment No. 2 to Registrant's Form S-1 Registration
Statement (Registration No. 333-22629)).*
10.14. Employment Agreement between Oren M. Hall and First Sierra
(incorporated by reference to Exhibit 10.13 to Amendment No.
1 to Registrant's Form S-1 Registration Statement
(Registration No. 333-41833)).*
10.15. Employment Agreement between Michael A. Sabel and First
Sierra (incorporated by reference to Exhibit 10.1 to
Registrant's Form 10-Q for the quarter ended September 30,
1998).
</TABLE>
<PAGE> 71
<TABLE>
<C> <S>
10.16. Agreement and Plan of Merger dated as of June 24, 1998 by
and among First Sierra Financial, Inc., Sierra Acquisition
Corporation II, The Republic Group, Inc., James T. Raeder
and Mark G. McQuitty (incorporated by reference to Exhibit
2.1 to Registrant's Form 8-K filed as of July 24, 1998).
10.17 Employment Agreement between David L. Pederson and First
Sierra. *
21.1. Subsidiaries of First Sierra.
23.1. Consent of Arthur Andersen LLP.
27.1. Financial data schedule for 1998.
27.2 Restated financial data schedule for 1997.
27.3 Restated financial data schedule for 1996.
</TABLE>
- ---------------
* Indicates management contract or compensatory plan or arrangement.
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
FIRST SIERRA FINANCIAL, INC.
First Sierra Financial, Inc., a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:
A. The name of the Corporation is First Sierra Financial, Inc. The
Certificate of Incorporation of the Corporation was originally filed with the
Secretary of State of the State of Delaware on June 3, 1994, and amended on May
8, 1995, May 21, 1996 and July 9, 1996.
B. This Restated Certificate of Incorporation has been duly adopted
in accordance with Sections 242 and 245 of the General Corporation Law of the
State of Delaware (the "DGCL") and, pursuant to such provisions, this Restated
Certificate of Incorporation restates and integrates and further amends the
provisions of the Certificate of Incorporation of the Corporation.
C. The text of the Certificate of Incorporation of the Corporation
is hereby restated and further amended to read in its entirety as set forth on
Exhibit A hereto and in Exhibits B and C hereto containing the Certificates of
Designation, Preferences, Rights and Limitations of the Corporation's Series A
Preferred Stock and Series B Convertible Preferred Stock, respectively.
<PAGE> 2
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
signed by the undersigned authorized officers of the Corporation this 27th day
of February, 1997.
FIRST SIERRA FINANCIAL, INC.
By: /s/ THOMAS J. DEPPING
--------------------------------
Name: Thomas J. Depping
--------------------------------
Title: President
--------------------------------
ATTEST:
/s/ SANDY B. HO
- ---------------------------
<PAGE> 3
EXHIBIT A
RESTATED CERTIFICATE OF INCORPORATION
OF
FIRST SIERRA FINANCIAL, INC.
ARTICLE I.
The name of the Corporation is First Sierra Financial, Inc.
ARTICLE II.
The registered office of the Corporation in the State of Delaware is
located at Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of the registered agent of the
Corporation at such address is The Corporation Trust Company.
ARTICLE III.
The purpose for which the Corporation is organized is to engage in any
and all lawful acts and activity for which corporations may be organized under
the General Corporation Law of Delaware. The Corporation will have perpetual
existence.
ARTICLE IV.
The total number of shares of stock that the Corporation shall have
authority to issue is, 26,000,000 shares of capital stock, consisting of (i)
25,000,000 shares of common stock, par value $.01 per share ("Common Stock")
and (ii) 1,000,000 shares of preferred stock, par value $.01 per share
("Preferred Stock").
The designations and the powers, preferences, rights, qualifications,
limitations, and restrictions of the Common Stock and the Preferred Stock are
as follows:
1. Provisions Relating to the Common Stock.
(a) Dividends. Subject to the prior rights and preferences, if any,
applicable to shares of the Preferred Stock or any class or series thereof,
each share of Common Stock shall entitle the holder of record thereof to
receive dividends (payable in cash, stock, or otherwise) out of funds legally
available therefor, when, as and if declared by the board of directors of the
Corporation with respect to any of such class of stock.
<PAGE> 4
(b) Liquidation Rights. The holders of Common Stock shall be
entitled to participate in the net assets of the Corporation remaining after
any dissolution, liquidation or winding up of the affairs of the Corporation,
whether voluntary or involuntary, and after payment or provision for the
payment of the debts and liabilities of the Corporation and payment of the
liquidation preference of any shares of capital stock of the Corporation having
such a preference, ratably in proportion to the number of shares of Common
Stock held by them. A dissolution, liquidation or winding-up of the
Corporation, as such terms are used in this paragraph (b), shall not be deemed
to be occasioned by or to include any consolidation or merger of the
Corporation with or into any other corporation or corporations or other entity
or a sale, lease, exchange, or conveyance of all or a part of the assets of the
Corporation.
2. Provisions Relating to the Preferred Stock.
(a) The Preferred Stock may be issued from time to time in one or
more classes or series, the shares of each class or series to have any
designations and powers, preferences, and rights, and qualifications,
limitations, and restrictions thereof as are stated and expressed in this
Article IV and in the resolution or resolutions providing for the issue of such
class or series adopted by the board of directors of the Corporation as
hereafter prescribed.
(b) Authority is hereby expressly granted to and vested in the board
of directors of the Corporation to authorize the issuance of the Preferred
Stock from time to time in one or more classes or series, and with respect to
each class or series of the Preferred Stock, to state by the resolution or
resolutions from time to time adopted providing for the issuance thereof the
following:
(i) whether or not the class or series is to have voting
rights, special, or limited, or is to be without voting rights, and whether or
not such class or series is to be entitled to vote as a separate class either
alone or together with the holders of one or more other classes or series of
stock;
(ii) the number of shares to constitute the class or series and
the designations thereof;
(iii) the preferences and relative, participating, optional, or
other special rights, if any, and the qualifications, limitations, or
restrictions thereof, if any, with respect to any class or series;
(iv) whether or not the shares of any class or series shall be
redeemable at the option of the Corporation or the holders thereof or upon the
happening of any specified event, and, if redeemable, the redemption price or
prices (which may be payable in the form of cash, notes, securities, or other
property), and the time or times at which, and the terms and conditions upon
which, such shares shall be redeemable and the manner of redemption;
<PAGE> 5
(v) whether or not the shares of a class or series shall be
subject to the operation of retirement or sinking funds to be applied to the
purchase or redemption of such shares for retirement, and, if such retirement
or sinking fund or funds are to be established, the periodic amount thereof,
and the terms and provisions relative to the operation thereof;
(vi) the dividend rate, whether dividends are payable in cash,
stock of the Corporation, or other property, the conditions upon which and the
times when such dividends are payable, the preference to or the relation to the
payment of dividends payable on any other class or classes or series of stock,
whether or not such dividends shall be cumulative or noncumulative, and if
cumulative, the date or dates from which such dividends shall accumulate;
(vii) the preferences, if any, and the amounts thereof which the
holders of any class or series thereof shall be entitled to receive upon the
voluntary or involuntary dissolution of, or upon any distribution of the assets
of, the Corporation;
(viii) whether or not the shares of any class or series, at the
option of the Corporation or the holder thereof or upon the happening of any
specified event, shall be convertible into or exchangeable for the shares of
any other class or classes or of any other series of the same or any other
class or classes of stock, securities, or other property of the Corporation and
the conversion price or prices or ratio or ratios or the rate or rates at which
such conversion or exchange may be made, with such adjustments, if any, as
shall be stated and expressed or provided for in such resolution or
resolutions; and
(ix) any other special rights and protective provisions with
respect to any class or series as may be deemed advisable by the board of
directors of the Corporation.
(c) The shares of each class or series of the Preferred Stock may
vary from the shares of any other class or series thereof in any or all of the
foregoing respects and in any other manner. The board of directors of the
Corporation may increase the number of shares of the Preferred Stock designated
for any existing class or series by a resolution adding to such class or series
authorized and unissued shares of the Preferred Stock not designated for any
other class or series. The board of directors of the Corporation may decrease
the number of shares of the Preferred Stock designated for any existing class
or series by a resolution subtracting from such class or series authorized and
unissued shares of the Preferred Stock designated for such existing class or
series, and the shares so subtracted shall become authorized, unissued, and
undesignated shares of the Preferred Stock.
3. General.
(a) Subject to the foregoing provisions of this Restated Certificate
of Incorporation, the Corporation may issue shares of its Preferred Stock and
Common Stock from time to time for such consideration (not less than the par
value thereof) as may be fixed by the board of directors of the Corporation,
which is expressly authorized to fix the same in its absolute discretion
subject to the foregoing conditions. Shares so issued for which the
consideration shall have been paid or delivered to the Corporation shall be
deemed fully paid stock and shall not be liable to any further
<PAGE> 6
call or assessment thereon, and the holders of such shares shall not be liable
for any further payments in respect of such shares.
(b) The Corporation shall have authority to create and issue rights
and options entitling their holders to purchase shares of the Corporation's
capital stock of any class or series or other securities of the Corporation,
and such rights and options shall be evidenced by instrument(s) approved by the
board of directors of the Corporation. The board of directors of the
Corporation shall be empowered to set the exercise price, duration, times for
exercise, and other terms of such rights or options; provided, however, that
the consideration to be received for any shares of capital stock subject
thereto shall not be less than the par value thereof.
ARTICLE V.
The number, classification, and terms of the board of directors of the
Corporation and the procedures to elect directors, to remove directors, and to
fill vacancies in the board of directors shall be as follows:
(a) The number of directors that shall constitute the whole board of
directors shall from time to time be fixed exclusively by the board of
directors by a resolution adopted by a majority of the whole board of directors
serving at the time of that vote. In no event shall the number of directors
that constitute the whole board of directors be fewer than three. No decrease
in the number of directors shall have the effect of shortening the term of any
incumbent director. Directors of the Corporation need not be elected by
written ballot unless the bylaws of the Corporation otherwise provide.
(b) The board of directors of the Corporation shall be divided into
three classes designated Class I, Class II, and Class III, respectively, all as
nearly equal in number as possible, with each director then in office receiving
the classification that at least a majority of the board of directors
designates. The initial term of office of directors of Class I shall expire at
the annual meeting of stockholders of the Corporation in 1998, of Class II
shall expire at the annual meeting of stockholders of the Corporation in 1999,
and of Class III shall expire at the annual meeting of stockholders of the
Corporation in 2000, and in all cases as to each director until his successor
is elected and qualified or until his earlier death, resignation or removal.
At each annual meeting of stockholders beginning with the annual meeting of
stockholders in 1998, each director elected to succeed a director whose term is
then expiring shall hold his office until the third annual meeting of
stockholders after his election and until his successor is elected and
qualified or until his earlier death, resignation or removal. If the number of
directors that constitutes the whole board of directors is changed as permitted
by this Article V, the majority of the whole board of directors that adopts the
change shall also fix and determine the number of directors comprising each
class; provided, however, that any increase or decrease in the number of
directors shall be apportioned among the classes as equally as possible.
(c) Vacancies in the board of directors resulting from death,
resignation, retirement, disqualification, removal from office, or other cause
and newly-created directorships resulting from any increase in the authorized
number of directors may be filled by no less than a majority vote of the
remaining directors then in office, though less than a quorum, who are
designated to
<PAGE> 7
represent the same class or classes of stockholders that the vacant position,
when filled, is to represent or by the sole remaining director (but not by the
stockholders except as required by law), and each director so chosen shall
receive the classification of the vacant directorship to which he has been
appointed or, if it is a newly-created directorship, shall receive the
classification that at least a majority of the board of directors designates
and shall hold office until the first meeting of stockholders held after his
election for the purpose of electing directors of that classification and until
his successor is elected and qualified or until his earlier death, resignation,
or removal from office.
(d) A director of any class of directors of the Corporation may be
removed before the expiration date of that director's term of office, only for
cause, by an affirmative vote of the holders of not less than eighty percent
(80%) of the votes of the outstanding shares of the class or classes or series
of stock then entitled to be voted at an election of directors of that class or
series, voting together as a single class, cast at the annual meeting of
stockholders or at any special meeting of stockholders called by a majority of
the whole board of directors for this purpose.
(e) Notwithstanding any other provisions of this Restated Certificate
of Incorporation or any provision of law that might otherwise permit a lesser
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the capital stock of the Corporation required by
law or by this Restated Certificate of Incorporation, the affirmative vote of
the holders of not less than eighty percent (80%) of the votes of the
outstanding shares of the Corporation then entitled to be voted in an election
of directors, voting together as a single class, shall be required to amend or
repeal, or to adopt any provision inconsistent with, this Article V.
ARTICLE VI.
All of the power of the Corporation, insofar as it may be lawfully
vested by this Restated Certificate of Incorporation in the board of directors,
is hereby conferred upon the board of directors of the Corporation. In
furtherance of and not in limitation of that power or the powers conferred by
law, (1) a majority of directors then in office (or such higher percentage as
may be specified in the bylaws with respect to any provision thereof) shall
have the power to adopt, amend, and repeal the bylaws of the Corporation; (2)
the stockholders of the Corporation shall have no power to appoint or remove
directors as members of committees of the board of directors, nor to abrogate
the power of the board of directors to establish any such committees or the
power of any such committee to exercise the powers and authority of the board
of directors; (3) the stockholders of the Corporation shall have no power to
elect or remove officers of the Corporation nor to abrogate the power of the
board of directors to elect and remove officers of the Corporation; and (4)
notwithstanding any other provision of this Restated Certificate of
Incorporation or any provision of law that might otherwise permit a lesser or
no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the capital stock of the Corporation required by
law or by this Restated Certificate of Incorporation, the bylaws of the
Corporation shall not be adopted, altered, amended or repealed by the
stockholders of the Corporation except in accordance with the provisions of the
bylaws and by the vote of the holders of not less than two-thirds of the
outstanding shares of stock then entitled to vote upon the election of
directors, voting together as a single class, or such higher vote as is set
forth in the bylaws. In the event of a direct conflict between the bylaws of
the Corporation and this Restated Certificate
<PAGE> 8
of Incorporation, the provisions of this Restated Certificate of Incorporation
shall be controlling. Notwithstanding any other provisions of this Restated
Certificate of Incorporation or any provision of law that might otherwise
permit a lesser or no vote, but in addition to any affirmative vote of the
holders of any particular class or series of the capital stock of the
Corporation required by law or by this Restated Certificate of Incorporation,
the affirmative vote of the holders of not less than eighty percent (80%) of
the votes of the shares of the Corporation then entitled to be voted in an
election of directors, voting together as a single class, shall be required to
amend or repeal, or to adopt any provision inconsistent with, this Article VI.
ARTICLE VII.
Any action required or permitted to be taken by the stockholders of the
Corporation may be taken without a meeting if a consent in writing, setting
forth the action so taken, is signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted.
ARTICLE VIII.
Special meetings of the stockholders of the Corporation, and any
proposals to be considered at such meetings, may be called and proposed
exclusively by the board of directors, pursuant to a resolution approved by a
majority of the members of the board of directors at the time in office, and no
stockholder of the Corporation shall require the board of directors to call a
special meeting of common stockholders or to propose business at a special
meeting of stockholders. Except as otherwise required by law or regulation, no
business proposed by a stockholder to be considered at an annual meeting of the
stockholders (including the nomination of any person to be elected as a
director of the Corporation) shall be considered by the stockholders at that
meeting unless, no later than sixty (60) days before the annual meeting of
stockholders or (if later) ten days after the first public notice of that
meeting is sent to stockholders, the Corporation receives from the stockholder
proposing that business a written notice that sets forth (1) the nature of the
proposed business with reasonable particularity, including the exact text of
any proposal to be presented for adoption, and the reasons for conducting that
business at the annual meeting; (2) with respect to each such stockholder, that
stockholder's name and address (as they appear on the records of the
Corporation), business address and telephone number, residence address and
telephone number, and the number of shares of each class of stock of the
Corporation beneficially owned by that stockholder; (3) any interest of the
stockholder in the proposed business; (4) the name or names of each person
nominated by the stockholder to be elected or re-elected as a director, if any;
and (5) with respect to each nominee, that nominee's name, business address and
telephone number, and residence address and telephone number, the number of
shares, if any, of each class of stock of the Corporation owned directly and
beneficially by that nominee, and all information relating to that nominee that
is required to be disclosed in solicitations of proxies for elections of
directors, or is otherwise required, pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (or any
provision of law subsequently replacing Regulation 14A), together with a duly
acknowledged letter signed by the nominee stating his or her acceptance of the
nomination by that stockholder, stating his or her intention to serve as a
director if elected, and consenting to
<PAGE> 9
being named as a nominee for director in any proxy statement relating to such
election. The person presiding at the annual meeting shall determine whether
business (including the nomination of any person as a director) has been
properly brought before the meeting and, if the facts so warrant, shall not
permit any business (or voting with respect to any particular nominee) to be
transacted that has not been properly brought before the meeting.
Notwithstanding any other provisions of this Restated Certificate of
Incorporation or any provision of law that might otherwise permit a lesser or
no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the capital stock of the Corporation required by
law or by this Restated Certificate of Incorporation, the affirmative vote of
the holders of not less than eighty percent (80%) of the shares of the
Corporation then entitled to be voted in an election of directors, voting
together as a single class, shall be required to amend or repeal, or to adopt
any provision inconsistent with, this Article VIII.
ARTICLE IX.
Notwithstanding any other provisions of this Restated Certificate of
Incorporation or any provision of law that might otherwise permit a lesser or
no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the capital stock of the Corporation required by
law or by this Restated Certificate of Incorporation, the affirmative vote of
the holders of not less than two-thirds (66 2/3%) of the shares of the
Corporation then entitled to be voted in an election of directors, voting
together as a single class, shall be required to approve any of the following
proposed transactions:
(a) a merger or consolidation in which the Corporation shall not be
the surviving entity or shall survive only as a subsidiary of an entity;
(b) a sale, lease or exchange or an agreement to sell, lease or
exchange all or substantially all of the assets of the Corporation to any other
person or entity; or
(c) the dissolution or liquidation of the Corporation.
Notwithstanding any other provisions of this Restated Certificate of
Incorporation or any provision of law that might otherwise permit a lesser or
no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the capital stock of the Corporation required by
law or by this Restated Certificate of Incorporation, the affirmative vote of
the holders of not less than eighty percent (80%) of the shares of the
Corporation then entitled to be voted in an election of directors, voting
together as a single class, shall be required to amend or repeal, or to adopt
any provision inconsistent with, this Article IX.
ARTICLE X.
No contract or transaction between the Corporation and one or more of
its directors, officers, or stockholders or between the Corporation and any
person (as used herein "person" means any corporation, partnership,
association, firm, trust, joint venture, political subdivision, or
instrumentality) or other organization in which one or more of its directors,
officers, or stockholders are directors, officers, or stockholders, or have a
financial interest, shall be void or
<PAGE> 10
voidable solely for this reason, or solely because the director or officer is
present at or participates in the meeting of the board or any committee thereof
which authorizes the contract or transaction, or solely because his, her, or
their votes are counted for such purpose, if: (i) the material facts as to his
or her relationship or interest and as to the contract or transaction are
disclosed or are known to the board of directors or the committee, and the
board of directors or the committee in good faith authorizes the contract or
transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or
(ii) the material facts as to his or her relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders entitled
to vote thereon, and the contract or transaction is specifically approved in
good faith by majority vote of the stockholders; or (iii) the contract or
transaction is fair as to the Corporation as of the time it is authorized,
approved, or ratified by the board of directors, a committee thereof, or the
stockholders. Interested directors may be counted in determining the presence
of a quorum at a meeting of the board of directors or of a committee which
authorizes the contract or transaction.
ARTICLE XI.
The Corporation shall indemnify and hold harmless any person who was,
is, or is threatened to be made a party to a proceeding (as hereinafter
defined) by reason of the fact that he or she (i) is or was a director or
officer of the Corporation or (ii) while a director or officer of the
Corporation, is or was serving at the request of the Corporation as a director,
officer, partner, venturer, proprietor, trustee, employee, agent, or similar
functionary of another foreign or domestic corporation, partnership, joint
venture, sole proprietorship, trust, employee benefit plan, or other
enterprise, to the fullest extent permitted under the Delaware General
Corporation Law, as the same exists or may hereafter be amended. Such right
shall be a contract right and as such shall run to the benefit of any director
or officer who is elected and accepts the position of director or officer of
the Corporation or elects to continue to serve as a director or officer of the
Corporation while this Article XI is in effect. Any repeal or amendment of
this Article XI shall be prospective only and shall not limit the rights of any
such director or officer or the obligations of the Corporation with respect to
any claim arising from or related to the services of such director or officer
in any of the foregoing capacities prior to any such repeal or amendment to
this Article XI. Such right shall include the right to be paid by the
Corporation expenses incurred in defending any such proceeding in advance of
its final disposition to the maximum extent permitted under the Delaware
General Corporation Law, as the same exists or may hereafter be amended. If a
claim for indemnification or advancement of expenses hereunder is not paid in
full by the Corporation within sixty (60) days after a written claim has been
received by the Corporation, the claimant may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim, and if
successful in whole or in part, the claimant shall also be entitled to be paid
the expenses of prosecuting such claim. It shall be a defense to any such
action that such indemnification or advancement of costs of defense are not
permitted under the Delaware General Corporation Law, but the burden of proving
such defense shall be on the Corporation. Neither the failure of the
Corporation (including its board of directors, independent legal counsel, or
stockholders) to have made its determination prior to the commencement of such
action that indemnification of, or advancement of costs of defense to, the
claimant is permissible in the circumstances nor an actual determination by the
Corporation (including its board of directors, independent legal counsel, or
stockholders) that such indemnification or advancement is not
<PAGE> 11
permissible shall be a defense to the action or create a presumption that such
indemnification or advancement is not permissible. In the event of the death
of any person having a right of indemnification under the foregoing provisions,
such right shall inure to the benefit of his or her heirs, executors,
administrators, and personal representatives. The rights conferred above shall
not be exclusive of any other right which any person may have or hereafter
acquire under any statute, bylaw, resolution of stockholders or directors,
agreement, or otherwise.
The Corporation may additionally indemnify any employee or agent of the
Corporation to the fullest extent permitted by law.
As used herein, the term "proceeding" means any threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal, administrative,
arbitrative, or investigative, any appeal in such an action, suit, or
proceeding, and any inquiry or investigation that could lead to such an action,
suit, or proceeding.
ARTICLE XII.
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. Any repeal or amendment of this Article XII by the
stockholders of the Corporation shall be prospective only, and shall not
adversely affect any limitation on the personal liability of a director of the
Corporation arising from an act or omission occurring prior to the time of such
repeal or amendment. In addition to the circumstances in which a director of
the Corporation is not personally liable as set forth in the foregoing
provisions of this Article XII, a director shall not be liable to the
Corporation or its stockholders to such further extent as permitted by any law
hereafter enacted, including, without limitation, any subsequent amendment to
the Delaware General Corporation Law.
<PAGE> 12
EXHIBIT B
CERTIFICATE OF DESIGNATION, PREFERENCES,
RIGHTS AND LIMITATIONS
OF
SERIES A PREFERRED STOCK
OF
FIRST SIERRA FINANCIAL, INC.
PURSUANT to Section 151(g) of the General Corporation Law of Delaware,
FIRST SIERRA FINANCIAL, INC., a corporation organized and existing under the
General Corporation Law of Delaware (herein referred to as the "Corporation"),
DOES HEREBY CERTIFY:
That, pursuant to authority conferred upon the Board of Directors of
the Corporation by its Certificate of Incorporation, and pursuant to the
provisions of Section 151(g) of the General Corporation Law of Delaware, such
Board of Directors by written unanimous consent dated June 27, 1996, and as
amended by such Board of Directors by written unanimous consent dated October
11, 1996, duly adopted a resolution providing for the issuance of a series of
Fifty Eight Thousand Seven Hundred Sixteen (58,716) shares of the Corporation's
Preferred Stock, $.01 par value per share, to be designated "Series A Preferred
Stock", and fixing the voting powers, preferences and relative, participating,
optional or other rights, and the qualifications, limitations or restrictions
thereof, which resolution is as follows:
RESOLVED, that pursuant to the authority expressly granted
and vested in the Board of Directors of the Corporation in accordance
with the provisions of its Certificate of Incorporation, there shall be
established and authorized for issuance a series of the Corporation's
Preferred Stock, $.01 par value per share, designated "Series A
Preferred Stock" (herein referred to as "Series A Preferred Stock"),
consisting of Fifty Eight Thousand Seven Hundred Sixteen (58,716)
shares, each of the par value of $.01 per share, and having the voting
powers, preferences and relative, participating, optional and other
rights, and the qualifications, limitations or restrictions set forth
below:
1. Definitions. For purposes hereof, the following terms shall have the
following definitions or shall be subject to the following rules of
construction:
<PAGE> 13
(a) "Affiliate" of any person shall mean (a) any member of
the immediate family of such person, including parents, siblings,
spouse and lineal descendants (including those by adoption); the
parents, siblings, spouse, or lineal descendants (including those by
adoption) of such immediate family member; and in any such case any
trust whose primary beneficiary is such person or one or more members
of such immediate family and/or such person's lineal descendants; (b)
the legal representative or guardian of such person or of any such
immediate family members in the event such person or any such immediate
family members becomes mentally incompetent; and (c) any person,
corporation or other entity controlling, controlled by or under common
control with such person. As used in this definition, the term
"control", including the correlative terms "controlling", "controlled
by" and "under common control with" shall mean possession, directly or
indirectly, of the power to direct or cause the direction of management
or policies (whether through ownership of securities or any partnership
or other ownership interest, by contract or otherwise) of a person,
corporation or other entity.
(b) "Board of Directors" means the Board of Directors of
the Corporation.
(c) "Common Stock" means shares of the Corporation's
Common Stock, $.01 par value per share.
(d) "Conversion Rate" means the rate at which the Series A
Preferred Stock is convertible on a per share basis into Common Stock,
as shall be determined from time to time by the Board of Directors at
the time of issuance of any shares of Series A Preferred Stock. The
Conversion Rate applicable to any shares of Series A Preferred Stock
shall be recorded in the minutes of the Board of Directors at which
such shares are authorized to be issued, and shall be conclusively
evidenced (absent manifest error) by a notation to such effect on the
face of each certificate representing such shares.
(e) "Dividend Rate" shall mean an annual rate (expressed
in dollars or portions thereof) as shall be determined from time to
time by the Board of Directors at the time of issuance of any shares of
Series A Preferred Stock. The Dividend Rate applicable to any shares
of Series A Preferred Stock shall be recorded in the minutes of the
Board of Directors at which such shares are authorized to be issued,
and shall be conclusively evidenced (absent manifest error) by a
notation to such effect on the face of each certificate representing
such shares.
(f) "Preferred Stock" means shares of any series of the
Corporation's Preferred Stock, $.01 par value per share.
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<PAGE> 14
(g) "Securities Act" means the Securities Act of 1933, as
amended.
(h) "Redemption Price" means the rate at which the Series
A Preferred Stock shall be redeemed as shall be determined from time to
time by the Board of Directors at the time of issuance of any shares of
Series A Preferred Stock. The Redemption Price applicable to any
series of Series A Preferred Stock shall be recorded in the minutes of
the Board of Directors at which such shares are authorized to be
issued, and shall be conclusively evidenced (absent manifest error) by
a notation to such effect on the face of each certificate representing
such shares.
(i) "Underlying Stock" means all shares of Common Stock
into which the Series A Preferred Stock is convertible, and all other
shares of capital stock received on account of such shares of Series A
Preferred Stock or Common Stock in respect of any stock split, stock
dividend, recapitalization, reorganization or other similar corporate
events.
(j) All accounting terms used herein and not expressly
defined herein shall have the meanings given to them in accordance with
generally accepted accounting principles consistently applied and in
effect as of the date of the relevant calculation.
2. Dividends.
(a) Series A Preferred Stock. The holders of Series A
Preferred Stock, in preference to the holders of Common Stock, shall be
entitled to receive, but only out of any funds legally available for
the declaration of dividends, non-cumulative, preferential dividends in
cash at an annual rate equal to the Dividend Rate, payable at such
times as shall be determined by the Board of Directors at the time of
issuance of the Series A Preferred Stock. So long as any shares of
Series A Preferred Stock remain outstanding, no dividends or
distributions (other than dividends or distributions on Common Stock
payable in Common Stock) shall be paid upon, or declared or set apart
for, the Common Stock.
(b) Other Stock. Subject to paragraph (a) above, (i)
dividends may be declared and paid on the Common Stock and any other
class or series of the Corporation's capital stock, and (ii) Common
Stock or such other capital stock may be purchased, retired or
otherwise acquired, when and as determined by the Board of Directors,
out of any funds legally available for such purposes.
3. Redemption.
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<PAGE> 15
(a) Mandatory Redemption. On December 31, 2001, the
Corporation shall redeem all of the shares of Series A Preferred Stock
then outstanding (subject, however, to the right of the holders of the
Series A Preferred Stock to convert their shares pursuant to Section 5
by providing the written conversion notice referred to in Section 5(c)
below on or before November 30, 2001), at the Redemption Price.
(b) General. From and after the effective date of
redemption and the setting aside of the funds necessary for redemption,
notwithstanding that any certificate for shares of Series A Preferred
Stock so called for redemption shall not have been surrendered for
cancellation, the shares to be redeemed shall no longer be deemed
outstanding, and the holders of certificates representing such shares
shall have with respect to such shares no rights in or with respect to
the Corporation except the right to receive, upon the surrender of such
certificates, the Redemption Price therefor. Shares of Series A
Preferred Stock redeemed by the Corporation pursuant to this Section 3,
or shares of Series A Preferred Stock otherwise purchased by the
Corporation, shall not be reissued and shall be cancelled and retired
in the manner provided by the laws of the State of Delaware, and no
other shares of Series A Preferred Stock shall be issued in lieu
thereof.
4. Preference on Liquidation, Dissolution or Winding Up.
(a) Definition. A consolidation or merger of the
Corporation, a sale or transfer of substantially all of its assets as
an entirety, or any purchase or redemption of capital stock of the
Corporation of any class, shall not be regarded as "liquidation,
dissolution or winding up of the affairs of the Corporation" within the
meaning of this Section 4.
(b) Series A Preferred Stock. During any proceedings for
the voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Corporation, the holders of the Series A Preferred
Stock shall be entitled to receive, before any distribution of the
assets of the Corporation shall be made in respect of the outstanding
Common Stock, an amount in cash for each share of Series A Preferred
Stock equal to the Redemption Price or funds necessary for such payment
shall have been set aside in trust for the account of the holders of
the outstanding Series A Preferred Stock so as to be and continue
available therefor. If upon such liquidation, dissolution or winding
up, the assets distributable to the holders of the Series A Preferred
Stock as aforesaid shall be insufficient to permit the payment to them
the Redemption Price, the assets of the Corporation shall be
distributed to the holders of the Series A Preferred Stock until they
shall have received the full amount to which they would otherwise be
entitled. If the assets of the Corporation are sufficient to permit
the payment of such amounts to the holders of the Series A Preferred
Stock, the remainder of the assets of the Corporation, if any, after
the distributions as aforesaid shall be distributed and
4
<PAGE> 16
divided ratably among the holders of the Common Stock then outstanding
according to their respective shares. In calculating any amount
distributable to the holders of the Series A Preferred Stock as
aforesaid, there shall be credited against such amount any sums
distributed or payable to such holders other than pursuant to the terms
hereof, whether under any letter of credit, security or other similar
right or interest.
5. Conversion. The Series A Preferred Stock shall be convertible into
Common Stock in accordance with the following provisions of this
Section 5.
(a) Optional Conversion. Subject to and upon compliance
with the provisions of this Section 5, each holder of shares of Series
A Preferred Stock shall have the right at such holder's option, at any
time or from time to time, from and after the date of original issuance
to convert all (but not less than all) of his shares of Series A
Preferred Stock into fully paid and nonassessable shares of Common
Stock, at the Conversion Rate in effect on the Conversion Date, upon
the terms hereinafter set forth.
(b) Conversion Rate. Each share of Series A Preferred
Stock shall be convertible at the Conversion Rate.
(c) Mechanics of Conversion. The holder of any shares of
Series A Preferred Stock may exercise the optional conversion right
specified in paragraph (a) above by surrendering to the Corporation or
any transfer agent of the Corporation the certificate or certificates
for the shares to be converted, accompanied by written notice stating
that the holder elects to convert all of the shares represented
thereby. Optional conversion under paragraph (a) shall be deemed to
have been effected on the date when notice of an election to convert
and certificates for the shares to be converted has been delivered; any
such date is referred to herein as the "Conversion Date". As promptly
as practicable thereafter the Corporation shall issue and deliver to or
upon the written order of such holders a certificate or certificates
for the number of full shares of Common Stock to which such holders are
entitled rounded down to the next whole share as provided in paragraph
(d) below. The person in whose name the certificate or certificates of
Common Stock are to be issued shall be deemed to have become a holder
of record of such Common Stock on the Conversion Date.
(d) Fractional Shares. No fractional shares of Common
Stock or scrip shall be issued upon conversion of shares of Series A
Preferred Stock. Instead of any fractional shares of Common Stock
which would otherwise be issuable upon conversion of any shares of
Series A Preferred Stock, the number of full shares of Common Stock
issuable upon conversion thereof shall be reduced to the next lowest
number of whole shares, and the Corporation will pay a cash adjustment
in
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<PAGE> 17
respect of any surrendered shares of Series A Preferred Stock not
converted into Common Stock in an amount equal to the Redemption Price
divided by the number of shares of Series A Preferred Stock so held by
such holder.
(e) Conversion Amount Adjustments. The Conversion Rate
shall be subject to adjustment from time to time as follows:
(i) Stock Dividends. If the number of shares of
Common Stock outstanding at any time after the issuance of any
Series A Preferred Stock is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or
split-up of shares of Common Stock, then immediately after the
record date fixed for the determination of holders of Common
Stock entitled to receive such stock dividend or the effective
date of such subdivision or split-up, as the case may be, the
Conversion Rate shall be appropriately increased so that the
holders of any shares of Series A Preferred Stock shall be
entitled to receive the number of shares of Common Stock of
the Corporation which they would have owned immediately
following such action had such shares of Series A Preferred
Stock been converted immediately prior thereto.
(ii) Reorganizations. In case of any capital
reorganization of the Corporation, or of any reclassification
of the Common Stock, or in case of the consolidation of the
Corporation with or the merger of the Corporation with or into
any other corporation, partnership or other business entity in
which the Corporation is not the survivor, or of the sale,
lease or other transfer of all or substantially all of the
assets of the Corporation to any other corporation,
partnership or other business entity, each share of Series A
Preferred Stock shall, effective simultaneously with such
capital reorganization, reclassification, consolidation,
merger, sale or lease, be convertible into the number of
shares of stock or other securities or property to which the
Common Stock issuable (at the time of such capital
reorganization, reclassification, consolidation, merger, sale
or lease) upon conversion of such share of Series A Preferred
Stock would have been entitled immediately following such
capital reorganization, reclassification, consolidation,
merger, sale or lease in place of (or in addition to, in the
case of any such event after which Common Stock remains
outstanding) the shares of Common Stock into which such share
of Series A Preferred Stock would otherwise have been
convertible; and in any such case, if necessary, the
provisions set forth herein with respect to the rights and
interests thereafter of the holders of the shares of Series A
Preferred Stock shall be appropriately adjusted so as to be
applicable, as nearly as may reasonably be, to any share of
stock or other securities or property thereafter deliverable
on the conversion of the shares of Series A Preferred Stock.
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<PAGE> 18
(f) Notice to Holders. In the event the Corporation
proposes to take any action of the type described in paragraph (e)
above, the Corporation shall give notice to each holder of the Series A
Preferred Stock and to the Corporation's transfer agent by mail, first
class postage prepaid, at his or its address appearing on the
Corporation's records. Such notice shall specify the record date, if
any, with respect to any such action and the approximate date on which
such action is to take place. Such notice shall also set forth such
facts with respect thereto as shall be reasonably necessary to indicate
the effect of such action (to the extent such effect may be known at
the date of such notice) on the Conversion Rate and the number, kind or
class of shares or other securities or property which shall be
deliverable or purchasable upon the occurrence of such action or
deliverable upon conversion of the Series A Preferred Stock. In the
case of any action which would require the fixing of a record date,
such notice shall be given at least 10 days prior to the date so fixed,
and in case of all other action, such notice shall be given at least 15
days prior to the taking of such proposed action. The Corporation
shall also provide to each such holder notice of the consummation of
such action.
(g) Costs. The Corporation shall pay all documentary,
stamp, transfer or other transactional taxes attributable to the
issuance or delivery of shares of Common Stock of the Corporation or
other securities or property upon conversion of the shares of Series A
Preferred Stock; provided, however, that the Corporation shall not be
required to pay any taxes which may be payable in respect of any
transfer involved in the issuance or delivery of any certificate for
such shares or securities in the name other than that of the holder of
the shares of Series A Preferred Stock in respect of which such shares
are being issued.
(h) Reservation of Shares. The Corporation shall reserve
at all times so long as any shares of Series A Preferred Stock remain
outstanding, free from preemptive rights, out of its treasury stock or
its authorized but unissued shares of Common Stock, or both, solely for
the purpose of effecting the conversion of shares of Series A Preferred
Stock, sufficient shares of Common Stock to provide for the conversion
of all outstanding shares of Series A Preferred Stock and set aside and
keep available any other property deliverable upon conversion of all
outstanding shares of Series A Preferred Stock.
(i) Valid Issuance. All shares of Common Stock or other
securities which may be issued upon conversion of the shares of Series
A Preferred Stock will upon issuance by the Corporation be duly and
validly issued, fully paid and nonassessable and free from all taxes,
liens and charges with respect to the issuance thereof and the
Corporation shall take no action which will cause a contrary result.
6. Voting Rights. At any annual or special meeting of shareholders or
otherwise in respect of any matter submitted for the vote of
shareholders generally, each share
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<PAGE> 19
of Series A Preferred Stock shall entitle the holder to such number of
votes per share as shall equal the number of shares of Common Stock
(rounded to the nearest whole share) into which such shares of Series A
Preferred Stock is then convertible. The provisions of this Section 6
shall apply to any shares of Series A Preferred Stock so long as such
shares are outstanding, and shall terminate with respect to such shares
when such shares are no longer outstanding, whether by repurchase,
conversion into Common Stock, or otherwise.
7. Certain Transferability Rights and Restrictions.
(a) Application. The following provisions of this Section
7 apply to all shares of Series A Preferred Stock as well as all shares
of Underlying Stock relating thereto (collectively, "Stock"). Such
provisions shall continue to bind all shares of Stock, and each
original holder of such shares and each transferee thereof agrees by
acceptance of any certificate representing such shares to be so bound
by such provisions, notwithstanding the conversion of the Series A
Preferred Stock into Common Stock or that no shares of Series A
Preferred Stock may be outstanding at any given time, from the date of
issuance until the earlier to occur of (i) the dissolution or
termination of existence of the Corporation, or (ii) the written
consent of the Board of Directors and the holders of 66-2/3% of the
outstanding Stock. Every certificate representing shares of Stock
shall be inscribed with a legend referring to the restrictions set
forth in this Section 7.
(b) General. Without the prior approval of the Board of
Directors in each instance, no shares of Stock subject may be sold,
assigned, pledged, encumbered, transferred or otherwise hypothecated in
any manner (by gift, pursuant to any marital dissolution, in any
bankruptcy or insolvency proceeding, or otherwise), except as provided
in this Section 7.
(c) Right of First Refusal. If any holder of Stock
desires to sell, assign, transfer or otherwise dispose of any shares of
Stock, then such holder (for purposes of this paragraph (c), the
"Selling Shareholder"), prior to making any such sale, shall first
offer such shares of Stock (for purposes of this paragraph (c), the
"Option Shares") for sale to the Corporation, in accordance with the
following provisions of this paragraph (c).
(i) Option Price; Terms; Offering Notices. The
price per Option Share at which the Selling Shareholder shall
be required to offer the Option Shares (for purposes of this
paragraph (c), the "Option Price") and the terms of such
offer, shall be the price at which and the terms upon which
any proposed third party purchaser shall have offered to
purchase the Option Shares from the Selling Shareholder and
which the Selling Shareholder is prepared to accept. Each
offer required to be made by the
8
<PAGE> 20
Selling Shareholder pursuant to this paragraph (c) shall be
made by a written notice (for purposes of this paragraph (C),
the "Offering Notice") which shall state that the offer is
being made pursuant to this paragraph (c) and which shall set
forth the number of Option Shares, the name or names of the
proposed purchaser or purchasers of the Option Shares, the
price per share offered by such proposed purchaser or
purchasers for the Option Shares, the method of payment of the
purchase price and the scheduled date of consummation of such
proposed sale. A copy of the written offer from any proposed
third-party purchaser shall be attached to each Offering
Notice.
(ii) Offer to the Corporation. The Selling
Shareholder shall offer the Option Shares to the Corporation
by delivering an Offering Notice to the Corporation. Within
30 days following the Corporation's receipt of such Offering
Notice, the Corporation shall deliver to the Selling
Shareholder a written reply notice accepting the offer of the
Selling Shareholder with respect to all (but not less than
all) of the Option Shares or rejecting such offer. If by such
written reply notice the Corporation accepts the offer made by
the Selling Shareholder, the reply notice shall constitute an
agreement binding on the Selling Shareholder and the
Corporation to sell and purchase the Option Shares at a price
per share equal to the Option Price. If within such 30-day
period, the Corporation shall have failed to deliver a reply
notice accepting the offer of the Selling Shareholder as to
all of the Option Shares, the Corporation shall be deemed to
have rejected such offer.
(iii) Lapse of Option. If the foregoing offer to
sell Option Shares has been made by the Selling Shareholder
and has not been accepted by the Corporation, then the Selling
Shareholder may sell not less than all of the Option Shares at
any time within, but not subsequent to, 60 days after the
lapse of the option granted pursuant to this paragraph (c);
provided, however, that no sale of the Option Shares shall be
made at any price lower than the Option Price or on terms
materially different from those specified in the Offering
Notice or to any person or persons other than the persons
specified in the Offering Notice or to any person or persons
other than the persons specified in the Offering Notice. If
after the lapse of such 60-day period the Option Shares shall
not have been sold, all of the provisions of this paragraph
(c) shall apply to any future sale or other disposition of
shares of Stock owned by the Selling Shareholder.
(iv) Consummation of Purchases. Each transaction
of purchase and sale of Option Shares pursuant to this
paragraph (c) shall be completed by delivery of the stock
certificates representing the Option Shares endorsed
9
<PAGE> 21
in blank, or accompanied by duly executed stock powers, and by
actual registration of the transfer of the Option Shares on
the books of the Corporation upon payment of the purchase
price to the Selling Shareholder (the Corporation agreeing to
effect such registration upon the tender of such certificates,
endorsed or accompanied by such executed stock powers). Any
such transaction shall be closed at such time and place as
shall be agreed upon by the parties thereto, or, if no such
agreement is reached, at the principal office of the
Corporation on the 30th day following the date of delivery of
the last reply notice given in connection with such
transaction or, if such day shall not be a business day, on
the first business day thereafter during normal business
hours.
(v) Certain Permitted Dispositions. Subject to
the restrictions set forth in paragraph (b) above, transfers
by holders of Stock to Affiliates, upon the death of any such
holder to such holder's estate or other legal representative,
or the pledge of Stock by such holder (but not any disposition
in foreclosure or other remedy) shall not be subject to the
right of first refusal under this paragraph (c), provided,
however, that the provisions of this Section 7 shall continue
to bind the shares of Stock held by any such transferee. The
foregoing provisions of this paragraph (c) shall also not
apply to any disposition pursuant to an effective registration
statement under the Securities Act or under Rule 144.
8. Registration Rights. Subject to paragraph (h) below and the other
provisions of this Section 8, the holders of the Series A Preferred
Stock shall be entitled to have their respective shares of Common Stock
issuable upon conversion of their Series A Preferred Stock included in
any registration of Common stock under the Securities Act proposed by
the Corporation.
(a) Piggyback Rights. If at any time or from time to time
the Corporation proposes to file with the Securities and Exchange
Commission (the "Commission") a registration statement (whether on Form
S-1, S-2 or S-3, SB-1, SB-2, or any equivalent form then in effect) for
the registration under the Securities Act of any shares of Common Stock
for sale to the public by the Corporation or on behalf of a shareholder
of the corporation for cash (excluding any shares of Common Stock
issuable by the Corporation upon the exercise of employee or director
stock options or in connection with the merger or consolidation of the
Corporation or one of its subsidiaries with one or more other
corporations if the Corporation is the surviving corporation), the
Corporation shall give each holder of the Series A Preferred Stock at
least 30 days' prior written notice of the filing of the proposed
registration statement. The notice shall include a list of the states
and foreign jurisdictions, if any, in which the Corporation intends to
qualify such shares, and shall also include the Corporation's estimate
of the range of the
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<PAGE> 22
offering price per share of Common Stock. On the written request of
any holder of the Series A Preferred Stock received by the Corporation
within 15 days after the date of the Corporation's notice, the
Corporation shall, subject to the conditions and in accordance with the
procedures set forth in paragraphs (b) and (c) below, and at its own
expense as provided in paragraph (e) below, include in the coverage of
such registration statement and qualify for sale under the blue sky or
securities laws of the various states, the number of shares (but not
less than 5,000 shares, subject to adjustment to give effect to any
stock dividends, splits or combinations, recapitalizations or other
similar corporate events) of Common Stock (herein called the "Specified
Shares") held and so requested to be registered by each such holder;
provided that if the managing underwriter for the Corporation indicates
its belief in writing that the effect of including in the coverage of
such registration statement all or part of the Specified Shares and the
shares of Common Stock requested to be so included by other
stockholders having contractual registration rights ("Other Requesting
Stockholders") will materially and adversely affect the sale of the
shares of Common Stock proposed to be sold by the Corporation (which
statement of the managing underwriter shall also state the maximum
number of shares (herein called the "Maximum Shares"), if any, which
can be sold by such all such holders without materially and adversely
affecting the sale of the shares proposed to be sold by the
Corporation), then the number of Specified Shares which the holders of
the Series A Preferred Stock and the Other Requesting Stockholders
shall collectively have the right to include in such registration
statement shall be reduced to the number of Maximum Shares set forth in
such statement of the managing underwriter, such reduction to be
effected on a pro rata basis in accordance with the number of all such
shares requested to be so registered by the holders of the Series A
Preferred Stock and the Other Requesting Stockholders.
Except as provided in paragraph (c) below, in no event shall
the Corporation be required to amend any registration statement filed
pursuant to this Section 8 after it has become effective or to amend or
supplement any prospectus to permit the continued disposition of shares
of Common Stock registered under any registration statement.
The Corporation shall have the right to select any
underwriters, including the managing underwriter, of any public
offering of shares of Common Stock subject to the provisions of this
paragraph (a). Nothing in this paragraph (a) shall create any
liability on the part of the Corporation to the holders of the Series A
Preferred Stock if the Corporation for any reason should decide not to
file such a registration statement.
The Corporation may withdraw any registration statement and
abandon any proposed offering initiated by the Corporation without the
consent of any holder of the Series A Preferred Stock, notwithstanding
the request of any such holder to
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<PAGE> 23
participate therein in accordance with this paragraph (a), if the
Corporation determines that such action is in the best interests of the
Corporation.
(b) Certain Registration Conditions. Any holder of Series
A Preferred Stock requesting registration of Common Stock into which
such holder's Series A Preferred Stock is convertible pursuant to
paragraph (a) of this Section 8 is hereafter referred to as a "Selling
Stockholder." Anything in this Agreement to the contrary
notwithstanding, the Corporation shall not be required to effect a
registration of any Common Stock of any Selling Stockholder pursuant to
paragraph (a) of this Section 8, or file any post-effective amendment
thereto:
(i) unless such Selling Stockholder agrees (x) to
sell and distribute a portion or all of his Common Stock in
accordance with the customary plan or plans of distribution
adopted by and through underwriters, if any, acting for the
Corporation, and (y) to bear a pro rata share of underwriter's
discounts and commissions;
(ii) unless the Corporation and the underwriters
for the Corporation shall have received from such Selling
Stockholder all such information as the Corporation and such
underwriters may reasonably request from him concerning such
Selling Stockholder to enable the Corporation to include in
the registration statement all material facts required to be
disclosed therein. Notwithstanding the foregoing, a Selling
Stockholder shall not be required to furnish to the
Corporation any personal financial information of such Selling
Stockholder unrelated to his holdings of Common Stock, Series
A Preferred Stock or other securities of the Corporation held
by him, provided that each Selling Stockholder shall
nonetheless be required to furnish all information reasonably
requested by any such underwriter;
(iii) unless such Selling Stockholder is then
entitled to convert his shares of Series A Preferred Stock
into Common Stock and such Selling Stockholder in fact
delivers to the Corporation, contemporaneously with the notice
given by such Selling Stockholder under paragraph (a) hereof
of his intention to convert the Series A Preferred Stock into
Common Stock subject to and upon the effectiveness of the
registration statement; and
(iv) unless such Selling Stockholder, at the
request of the Corporation or its managing underwriter, agrees
or acknowledges that such Selling Stockholder (x) has a
present intention to sell such shares; (y) agrees to execute
all consents, powers of attorney, registration statements and
other documents required in order to cause such registration
statement to become effective; and (z) agrees, if the offering
is at the market, to give the
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<PAGE> 24
Corporation written notice of the first bona fide offering of
such shares and to use the prospectus forming a part of such
registration statement for only a period of 90 days (or such
longer period provided for in paragraph (c) below) unless such
registration statement is on a form that complies with Rule
415.
(c) Covenants and Procedures. If the Corporation becomes
obligated under the provisions of paragraph (a) of this Section 8 to
effect registration of shares of Common Stock on behalf of any Selling
Stockholder, the following shall apply:
(i) The Corporation, at its own expense as
provided in paragraph (e), shall prepare and file with the
Commission a registration statement covering such shares of
Common Stock and use its best efforts to cause such
registration statement to become effective; and the
Corporation will file such post-effective amendments to such
registration statement (and use its best efforts to cause them
to be effective) and such supplements as are necessary so that
current prospectuses are at all times available for a period
of at least 90 days after the effective date of such
registration statement or for such longer period, not to
exceed 180 days, as may be required by the Corporation or the
managing underwriter under the plan or plans of distribution
set forth in such registration statement. Each Selling
Stockholder shall promptly provide the Corporation with such
information with respect to such Selling Stockholder's shares
of Common Stock to be so registered and, if applicable, the
proposed terms of the offering thereof as is required for such
registration. Further, if the shares of Common Stock to be
covered by the registration statement are not to be sold to or
through underwriters acting for the Corporation, the
Corporation shall (x) deliver to each Selling Stockholder as
promptly as practicable as many copies of preliminary
prospectuses as such Selling Stockholder may reasonably
request, and such Selling Stockholder shall keep a written
record of the distribution of such preliminary prospectuses
and shall refrain from delivery of such preliminary
prospectuses in any manner or under any circumstances which
would violate the Securities Act or the securities laws of any
other jurisdiction, including the various states of the United
States, (y) deliver to each Selling Stockholder, as soon as
practicable after the effective date of the registration
statement, and from time to time thereafter during such 90-
day period, or such longer period as is herein provided, as
many copies of the prospectuses required to be delivered in
connection with the sale of shares of Common Stock registered
under the registration statement as such Selling Stockholder
may reasonably request, and (z) in case of the happening,
after the effective date of such registration statement and
during such 90- day period (or such longer period specified
above), of
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<PAGE> 25
any event or occurrence which would be set forth in an
amendment of or supplement to such prospectus to make any
statements therein not misleading or to correct any misleading
omissions, give each Selling Stockholder written notice
thereof and prepare and furnish to such Selling Stockholder,
in such quantities as he may reasonably request, copies of
such amended prospectus or of such supplement to be attached
to the prospectus in order that the prospectus, as so amended
or supplemented, will not contain any untrue statement of a
material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made,
not misleading.
(ii) On or prior to the date on which the
registration statement is declared effective, the Corporation
shall use its best efforts to register or qualify, and
cooperate with each Selling Stockholder, the underwriter or
underwriters, if any, and their counsel, in connection with
the registration or qualification of the Common Stock covered
by the registration statement for offer and sale under the
securities or blue sky laws of each state and other
jurisdiction of the United States as such Selling Stockholder
or underwriter reasonably requests, to use its best efforts to
keep each such registration or qualification effective,
including through new filings, or amendments or renewals,
during the period such registration statement is required to
be kept effective and to do any and all other acts or things
necessary or advisable to enable the disposition in all such
jurisdictions of the Common Stock covered by the applicable
registration statement, provided that the Corporation will not
be required to qualify generally to do business in any
jurisdiction where it is not then so qualified.
(iii) The Corporation shall use its best efforts to
cause all of each Selling Stockholder's Common Stock included
in such registration statement to be listed, by the date of
the first sale of such Common Stock pursuant to such
registration statement, on each securities exchange on which
the Common Stock of the Corporation is then listed or proposed
to be listed, if any.
(iv) The Corporation shall make generally
available to each Selling Stockholder and any underwriter
participating in the offering conducted pursuant to the
registration statement an earnings statement satisfying the
provisions of Section 11(a) of the Securities Act no later
than 45 days after the end of the 12-month period beginning
with the first day of the Corporation's first fiscal quarter
commencing after the effective date of the registration
statement, which earnings statement shall cover said 12-month
period, which requirement will be deemed to be satisfied if
the
14
<PAGE> 26
Corporation timely files complete and accurate information on
Forms 10-Q, 10-K, and 8-K under the Securities Exchange Act of
1934, as amended, and otherwise complies with Rule 158 under
the Securities Act as soon as feasible.
(v) The Corporation shall cooperate with each
Selling Stockholder and the managing underwriter or
underwriters, if any, to facilitate the timely preparation and
delivery of certificates (not bearing any restrictive legends)
representing Common Stock to be sold under the registration
statement, and enable such securities to be in such
denominations and registered in such names as the managing
underwriter or underwriters, if any, or such Selling
Stockholder may request, subject to the underwriters'
obligation to return any certificates representing securities
not sold.
(vi) The Corporation shall use its best efforts to
cause each Selling Stockholder's Common Stock covered by the
registration statement to be registered with or approved by
such other governmental agencies or authorities within the
United States as may be necessary to enable such Selling
Stockholder or the underwriter or underwriters, if any, to
consummate the disposition of such Common Stock.
(vii) The Corporation shall make available for
inspection by each Selling Stockholder, any underwriter
participating in any disposition pursuant to such registration
statement, and any attorney, accountant or other agent
retained by such Selling Stockholder or any such underwriter
(collectively, the "Inspectors"), all financial and other
records, pertinent corporate documents and properties of the
Corporation, as shall be reasonably necessary to enable them
to exercise their due diligence, responsibility, and cause the
Corporation's officers, directors and employees to supply all
nonconfidential information reasonably requested by any such
Inspector in connection with such registration statement. As
a condition to providing such access, the Corporation may
require that any and all Inspectors execute and deliver
confidentiality agreement, in form and substance acceptable to
the Corporation, and that confidentiality procedures be
observed, all with respect to such information.
(viii) The Corporation shall use its best efforts to
obtain a "cold comfort" letter from the Corporation's
independent public accountants, and an opinion of counsel for
the Corporation, each in customary form and covering such
matters of the type customarily covered by cold comfort
letters and opinions of counsel in connection with public
offerings of securities, as each Selling Stockholder
reasonably requests.
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<PAGE> 27
(d) Indemnification.
(i) Indemnification by the Corporation. In the
event of any registration under the Securities Act pursuant to
this Section 8 of shares of Common Stock held by any Selling
Stockholder, the Corporation will hold harmless each Selling
Stockholder and each underwriter of such securities and each
other person, if any, who controls each Selling Stockholder or
such underwriter within the meaning of the Securities Act,
against any losses, claims, damages or liabilities (including
legal fees and costs of court), joint or several, to which
such Selling Stockholder or such underwriter or controlling
person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue
statement of any material fact contained, on the effective
date thereof, in any registration statement under which such
securities were registered under the Securities Act, any
preliminary prospectus or final prospectus contained therein,
or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statements therein not misleading; and will reimburse
each Selling Stockholder and each such underwriter and each
such controlling person for any legal or any other expenses
reasonably incurred by them in connection with investigating
or defending any such loss, claim, damage or liability;
provided, however, that the Corporation shall not be liable to
any Selling Stockholder or his underwriters or controlling
persons in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or
alleged omission made in such registration statement,
preliminary prospectus or final prospectus or such amendment
or supplement in reliance upon and in conformity with
information furnished to the Corporation through a written
instrument duly executed by such Selling Stockholder or such
underwriter specifically for use in the preparation thereof.
(ii) Indemnification by Selling Stockholders. It
shall be a condition precedent to the obligation of the
Corporation to include in any registration statement any
shares of Common Stock then held by a Selling Stockholder that
the Corporation shall have received an undertaking reasonably
satisfactory to it and its counsel from such selling
Stockholder to severally indemnify and hold harmless (in the
same manner and to the same extent as set forth in
subparagraph (i) above) the Corporation, each director of the
Corporation, each officer of the Corporation who shall sign
such registration statement, each underwriter of such
securities and any
16
<PAGE> 28
person who controls the Corporation or such underwriter within
the meaning of the Securities Act, with respect to any
statement or omission from such registration statement, any
preliminary prospectus or final prospectus contained therein,
or any amendment or supplement thereto, if such statement or
omission was made in reliance upon and in conformity with
information furnished to the Corporation through a written
instrument duly executed by such Selling Stockholder
specifically for use in the preparation of such registration
statement, preliminary prospectus or final prospectus or such
amendment or supplement thereto.
(iii) Indemnification Procedures. Promptly after
receipt by an indemnified party of notice of the commencement
of any action involving a claim referred to in the preceding
subparagraphs (i) and (ii), such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying
party, give written notice to the indemnifying party of the
commencement of such action. In case any such action is
brought against an indemnified party, the indemnifying party
will be entitled to participate in and to assume the defense
thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume
the defense thereof, and provided that the indemnifying party
in fact assumes such defense, the indemnifying party will not
be liable to such indemnified party for any legal or other
expenses incurred after the date of such notice by the latter
in connection with the defense thereof. Whether or not such
defense is assumed by the indemnifying party, the indemnifying
party will not be subject to any liability for any settlement
made without its consent. No indemnifying party will consent
to entry of any judgment or enter into any settlement which
does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such indemnified party of a
release from all liability in respect of such claim or
litigation. The indemnified party shall be entitled to
participate with his own counsel (at his own expense) if
reasonably necessary to avoid a conflict of interest.
(iv) Contribution. If the indemnification
provided for in this paragraph (d) from the indemnifying party
is unavailable to an indemnified party hereunder in respect of
any losses, claims, damages, liabilities or expenses referred
to therein, then the indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses in
such proportion as is appropriate to reflect the relative
fault of the indemnifying party and indemnified parties in
connection with the actions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other
relevant equitable
17
<PAGE> 29
considerations. The relative fault of such indemnifying party
and indemnified parties shall be determined by reference to,
among other things, whether any action in question, including
any untrue or alleged untrue statement of a material fact or a
material omission, has been made by, or relates to information
supplied by, such indemnifying party or indemnified parties,
and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action.
The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include any legal or other fees or
expenses reasonably incurred by such party in connection with
any investigation or proceeding. For purposes of the
foregoing, it would not be just and equitable if contribution
pursuant to this paragraph (d) were determined by pro rata
allocation or by any other method of allocation which does not
take account of the equitable considerations referred to in
the immediately preceding paragraph. Notwithstanding the
provisions of this subparagraph (iv), no Selling Stockholder
shall be required to contribute any amount in excess of the
amount by which the total price at which the Common Stock of
such Selling Stockholder was offered to the public exceeds the
amount of any damages which such Selling Stockholder has
otherwise been required to pay by reason of such untrue
statement or omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent
misrepresentation.
(e) Expenses. All expenses incurred by the Corporation in
connection with any registration statement covering shares of Common
Stock offered by the Selling Stockholders, including, without
limitation, all registration and filing fees (including all expenses
incident to filing with the National Association of Securities Dealers,
Inc.), printing expenses, fees and disbursements of counsel for the
Corporation and of its independent certified public accountants, the
reasonable fees and disbursements of one counsel for collectively all
Selling Stockholders and Other Requesting Stockholders whose stock is
included in such registration, and the expense of qualifying such
shares under state blue sky laws, shall be borne by the Corporation;
provided, however, that all underwriter's discounts and commissions
relating to the shares of Common Stock to be sold by the Selling
Stockholders shall be borne by the Selling Stockholders.
(f) Dispositions During Registration. Upon written
request by the Corporation, the Selling Stockholders will agree, upon
the registration of any of each such Selling Stockholder's shares of
Common Stock or the Common Stock issued by the Corporation, not to sell
or otherwise dispose of any shares of Stock (other than Common Stock
covered by such registration, which may be sold in
18
<PAGE> 30
accordance with the plan or plans of distribution described in the
registration statement) owned by each such Selling Stockholder for a
period of 90 days following the effective date of such registration
statement or for such longer period (not to exceed 180 days) as may be
required under the plan or plans of distribution set forth in such
registration statement. Each holder of the Series A Preferred Stock
shall comply with the foregoing requirements even if his Common Stock
issuable upon the conversion thereof is not being included in such
registration, if (i) at such time such holder (together with his
Affiliates) owns five percent (5%) or more of the Common Stock not
being registered by such registration and (ii) other holders of five
percent or more of the Common Stock not being registered by such
registration are similarly bound.
(g) Term of Registration Rights. The registration rights
granted pursuant to this Section 8 shall be effective for a period
commencing upon the date of original issuance thereof and ending on (i)
as to any holder of Series A Preferred Stock, upon either (A) such
holder's written consent, (B) the date such holder holds, together with
such holder's Affiliates, less than 5,000 shares (subject to adjustment
as described in paragraph (g) above) of Common Stock determined on a
fully diluted basis, or (c) the date such holder is able to dispose of
his shares of Common Stock that such holder may acquire upon conversion
of the Series A Preferred Stock under Rule 144 promulgated under the
Securities Act; and (ii) upon redemption on December 31, 2001.
9. Exclusion of Other Rights. Unless otherwise required by law, the
shares of Series A Preferred Stock shall not have any voting powers,
preferences or relative, participating, optional or other special
rights other than those specifically set forth herein.
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<PAGE> 31
EXHIBIT C
AMENDED AND RESTATED
CERTIFICATE OF DESIGNATION, PREFERENCES,
RIGHTS AND LIMITATIONS
OF
SERIES B CONVERTIBLE PREFERRED STOCK
OF
FIRST SIERRA FINANCIAL, INC.
PURSUANT to Section 151(g) of the General Corporation Law of the State
of Delaware, FIRST SIERRA FINANCIAL, INC., a corporation organized and existing
under the General Corporation Law of the State of Delaware (herein referred to
as the "Corporation"), DOES HEREBY CERTIFY:
That, pursuant to authority conferred upon the Board of Directors of
the Corporation by its Certificate of Incorporation, and pursuant to the
provisions of Section 151(g) of the General Corporation Law of the State of
Delaware, such Board of Directors by written unanimous consent dated as of
October 31, 1996, duly adopted a resolution providing for the creation and
issuance of a series of 43,691 shares of the Corporation's Preferred Stock,
$.01 par value per share, to be designated the "Series B Convertible Preferred
Stock", and fixing the voting powers, preferences and relative, participating,
optional or other rights, and the qualifications, limitations or restrictions
thereof, which resolution is as follows:
RESOLVED, that pursuant to the authority expressly granted and
vested in the Board of Directors of the Corporation in accordance with
the provisions of its Certificate of Incorporation, a series of
Preferred Stock of the Corporation be, and it hereby is, created out
of the authorized but unissued shares of the Preferred Stock of the
Corporation, such series to be designated "Series B Convertible
Preferred Stock" (the "Series B Preferred Stock"), to consist of
43,691 shares, par value $0.01 per share, and having the voting
powers, preferences and relative, participating, optional and other
rights, and the qualifications, limitations and restrictions (in
addition to those set forth in the Certificate of Incorporation) set
forth below:
1. Definitions. For purposes hereof, each of the following terms shall
have the meaning ascribed to it below:
(a) "Affiliate" of any person shall mean (a) any member
of the immediate family of such person, including parents, siblings,
spouse and lineal descendants (including those by adoption); the
parents, siblings, spouse or lineal descendants (including those by
adoption) of such immediate family member; and in any such case any
trust whose primary beneficiary is such person or one or more members
of such immediate family and/or such
<PAGE> 32
person's lineal descendants; (b) the legal representative or guardian
of such person or of any such immediate family members in the event
such person or any such immediate family members becomes mentally
incompetent; and (c) any person, corporation or other entity
controlling, controlled by or under common control with such person.
As used in this definition, the term "control", including the
correlative terms "controlling", "controlled by" and "under common
control with", shall mean possession, directly or indirectly, of the
power to direct or cause the direction of management or policies
(whether through ownership of securities or any partnership or other
ownership interest, by contract or otherwise) of a person, corporation
or other entity.
(b) "Board of Directors" means the Board of Directors of
the Corporation.
(c) "Common Stock" means shares of the Corporation's
Common Stock, $.01 par value per share.
(d) "Conversion Rate" has the meaning ascribed to it in
Section 5(c) below.
(e) "Dividend Rate" has the meaning ascribed to it in
Section 2(b).
(f) "Escrow Agreement" means that certain Escrow
Agreement to be entered into among the Corporation, Valerie A. Hayes
and an escrow agent mutually acceptable to the Corporation and Valerie
A. Hayes.
(g) "Preferred Stock" means shares of any series of the
Corporation's Preferred Stock, $.01 par value per share.
(h) "Securities Act" means the Securities Act of 1933, as
amended.
(i) "Redemption Acceleration Event" means the occurrence
of any one of the following:
(i) The filing by the Corporation of a petition
for liquidation, reorganization, arrangement or adjudication as a
bankrupt or similar relief under bankruptcy, insolvency or similar
laws of the United States or any state or territory thereof;
(ii) The filing against the Corporation of a
petition for liquidation, reorganization, arrangement or adjudication
as a bankrupt or similar relief under bankruptcy, insolvency or
similar laws of the United States or any state thereof and the failure
of the Corporation to secure dismissal of any such petition filed
against it within 90 days of such filing;
(iii) The institution by the Corporation of any
type of insolvency proceeding (under the Bankruptcy Code or otherwise)
for the dissolution or liquidation of, settlement of claims against,
or winding up of the affairs of the Corporation;
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<PAGE> 33
(iv) The failure of the Corporation to provide a
renewal or extension of the Letter of Credit described in Section
2(c)(vi) of the Agreement and Plan of Reorganization dated as of
October 15, 1996 between Valerie A. Hayes, Corporate Capital Leasing
Group, Inc., First Sierra Financial, Inc. and First Sierra
Pennsylvania, Inc. (the "Reorganization Agreement"), in accordance
with the terms of such Section 2(c)(vi) of the Reorganization
Agreement; or
(v) Failure of the Corporation to pay any
dividends on the Series B Preferred Stock when required pursuant to
the terms of Section 2(c)(ii) of the Reorganization Agreement and such
failure continues beyond the cure period referenced in such Section
2(c)(ii) of the Reorganization Agreement.
(i) "Redemption Price" has the meaning ascribed to it in
Section 3(a) below.
(j) "Required Conversion Shares" means, as of each day on
which the Trading Level Event occurs, those outstanding shares of the
Series B Preferred Stock (a) that are not held in the Escrow and (b)
as to which there is a currently effective registration statement
under the Securities Act of 1933 and applicable state law and a
prospectus covering the immediate resale of the shares of Common Stock
(and, if applicable, the Underlying Stock relating to such shares)
into which such shares of Series B Preferred Stock are convertible.
(k) "Released Preferred B Shares" means those shares of
the Series B Preferred Stock that at any time prior to any date of
determination were deposited and held in escrow pursuant to the Escrow
Agreement and that as of such date of determination have been released
from such escrow pursuant to the terms of the Escrow Agreement.
(l) "Trading Level Event" means, as of any particular day
of determination, that the Common Stock of the Corporation is listed
on the New York Stock Exchange, the American Stock Exchange or The
Nasdaq National Market or The Nasdaq Small Cap Market and such Common
Stock has traded at or above 120% of the Target Per Share Price for
the 20 consecutive trading days preceding such day.
(m) "Underlying Stock" means all shares of Common Stock
into which the Series B Preferred Stock is convertible, and all other
shares of capital stock received on account of such shares of Series B
Preferred Stock or Common Stock in respect of any stock split, stock
dividend, recapitalization, reorganization or other similar corporate
event.
All accounting terms used herein and not expressly defined herein shall have
the meanings given to them in accordance with generally accepted accounting
principles consistently applied and in effect as of the date of the relevant
calculation.
2. Dividends.
(a) Series B Preferred Stock. Holders of Series B Preferred Stock
shall be entitled to receive, but only out of any funds legally available for
the declaration of dividends, cumulative
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<PAGE> 34
dividends, on each share of the Series B Preferred Stock at an annual rate
equal to the Dividend Rate payable at such times as shall be determined by the
Board of Directors. Dividends shall accrue at the Dividend Rate whether or not
there are profits, surplus or other funds of the Corporation legally available
for the payment of dividends.
(b) Dividend Rate. The term "Dividend Rate" means, subject to
adjustment pursuant to the following provisions of this paragraph (b), $1.14
per share of Series B Preferred Stock during any period prior to the aggregate
Released Preferred B Shares exceeding 21,846; $1.53 per share of Series B
Preferred Stock during any period prior to the aggregate Released Preferred B
Shares exceeding 29,127; $1.91 per share of Series B Preferred Stock during any
period prior to the aggregate Released Preferred B Shares exceeding 36,409; and
$2.29 per share of Series B Preferred Stock during any period following the
aggregate Released Preferred B Shares exceeding 36,409.
(c) Restriction on Dividends. During such time as (i) dividends
on the Series B Preferred Stock shall be in arrears or (ii) the Corporation
shall be obligated to and shall have failed to redeem any shares of Series B
Preferred Stock pursuant to Section 3(a), the Corporation may not declare or
pay any dividend on shares of Common Stock or any other stock ranking junior to
the Series B Preferred Stock (other than a distribution payable exclusively in
shares of such stock). Should dividends not be paid in full on the Series B
Preferred Stock and any other preferred stock ranking on a parity as to
dividends with the Series B Preferred Stock, all dividends declared on the
Series B Preferred Stock and any other preferred stock ranking on a parity as
to dividends with the Series B Preferred Stock will be declared pro rata, so
that the amount of dividends declared per share on the Series B Preferred Stock
and such other preferred stock will bear to each other the same ratio that
accumulated dividends per share on the shares of the Series B Preferred Stock
and such other preferred stock bear to each other. For purposes of this
Section 2(c), the Series B Preferred Stock shall rank on a parity as to
dividends with the Corporation's Series A Convertible Preferred Stock and any
subsequently issued series of the Corporation's Preferred Stock so designated
as being on parity with the Series B Preferred Stock. In connection with each
dividend that the Corporation intends to declare on the Corporation's Common
Stock while any shares of the Series B Preferred Stock are outstanding, the
Corporation shall give notice thereof to the record holder(s) of the Series B
Preferred Stock (at the address(s) of such holder(s) as reflected in the
records of the Corporation) no less than ten days prior to the effective date
of such dividend.
(d) Other Stock. Subject to paragraph (c) above, (i) dividends
may be declared and paid on the Common Stock and any other class or series of
the Corporation's capital stock, and (ii) Common Stock or such other capital
stock may be purchased, retired or otherwise acquired, when and as determined
by the Board of Directors, out of any funds legally available for such
purposes.
3. Redemption.
(a) Mandatory Redemption. (i) On December 31, 2001, the
Corporation shall redeem all of the shares of Series B Preferred Stock then
outstanding (subject, however, to the right of the holders of the Series B
Preferred Stock to convert all, but not less than all, of their shares pursuant
to Section 5 by providing the written conversion notice referred to in Section
5(c) on or before November 30, 2001), at a per share price equal to the
Redemption Price. Subject to adjustment
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<PAGE> 35
pursuant to Section 3(c), the "Redemption Price" shall be $28.61 per share of
Series B Preferred Stock during any period prior to the aggregate Released
Preferred B Shares exceeding 21,846 plus any accrued but unpaid dividends on
such share; $38.15 per share of Series B Preferred Stock during any period
prior to the aggregate Released Preferred B Shares exceeding 29,127 plus any
accrued but unpaid dividends on such share; $48.00 per share of Series B
Preferred Stock during any period prior to the aggregate Released Preferred B
Shares exceeding 36,409 plus any accrued but unpaid dividends on such share;
and $57.22 per share of Series B Preferred Stock during any period following
the aggregate Released Preferred B Shares exceeding 36,409 plus any accrued but
unpaid dividends on such shares.
(ii) If a Redemption Acceleration Event occurs prior to
December 31, 2001, each holder of the then outstanding shares of Series B
Preferred Stock may elect to require the Corporation to redeem all (but not
less than all) of the shares of Series B Preferred Stock held by such holder at
the per share Redemption Price then in effect. The Corporation or a
representative of the Corporation shall give written notice of the occurrence
of a Redemption Acceleration Event to each such holder (the "Redemption
Acceleration Notice"). Each holder receiving such notice may elect to require
the Corporation to redeem all (but not less than all) of such holder's shares
of Series B Preferred Stock by giving written notice of such election to the
Corporation no later than 30 days following such holder's receipt of the
Redemption Acceleration Notice. If within such 30 day period any holder fails
to give the Corporation written notice of such holder's decision to require the
Corporation to redeem such holder's shares of the Series B Preferred Stock,
then such holder shall have no further rights pursuant to this Section
3(a)(ii).
(b) General. If any draw is made on the Letter of Credit, the
amount(s) so drawn shall be applied against the amounts required to be paid by
the Corporation pursuant to Section 3(a) above or (as applicable) Section 4(b)
below. From and after the effective date of redemption and the setting aside
of the funds necessary for redemption, notwithstanding that any certificate for
shares of Series B Preferred Stock (and, if applicable, any certificate for
shares of Common Stock into which shares of Series B Preferred Stock shall
have been converted) so called for redemption shall not have been surrendered
for cancellation, the shares to be redeemed shall no longer be deemed
outstanding, and the holders of certificates representing such shares shall
have with respect to such shares no rights in or with respect to the
Corporation except the right to receive, upon the surrender of such
certificates, the Redemption Price therefor. Shares of Series B Preferred
Stock redeemed by the Corporation pursuant to this Section 3, or shares of
Series B Preferred Stock otherwise purchased by the Corporation, shall not be
reissued and shall be cancelled and retired in the manner provided by the laws
of the State of Delaware, and no other shares of Series B Preferred Stock shall
be issued in lieu thereof.
4. Preference on Liquidation, Dissolution or Winding Up.
(a) Definition. A consolidation or merger of the Corporation, a
sale or transfer of substantially all of its assets as an entirety, or any
purchase or redemption of capital stock of the Corporation of any class, shall
not be regarded as "liquidation, dissolution or winding up of the affairs of
the Corporation" within the meaning of this Section 4.
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<PAGE> 36
(b) Series B Preferred Stock. During any proceedings for the
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Corporation other than in connection with a Redemption Acceleration
Event (a "Liquidation"), the holders of the Series B Preferred Stock shall be
entitled to receive (and shall not be entitled to any other payment) an amount
in cash for each share of Series B Preferred Stock equal to the Redemption
Price (the "Liquidation Preference") or funds necessary for such payment shall
have been set aside in trust for the account of the holders of the outstanding
Series B Preferred Stock so as to be and continue available therefor, before
any distribution shall be made to the holders of any stock ranking junior to
the Series B Preferred Stock upon the Liquidation of the Corporation. If the
net assets of the Corporation are insufficient to pay the Liquidation
Preference on all outstanding shares of the Series B Preferred Stock and all
outstanding shares of any other preferred stock ranking on a parity as to
Liquidation with the Series B Preferred Stock in the amounts to which the
holders of such shares are entitled, then the entire net assets of the
Corporation will be distributed ratably among the holders of the Series B
Preferred Stock and any other preferred stock ranking on a parity as to
Liquidation with the Series B Preferred Stock, based upon the aggregate amount
of the Liquidation Preference due on such shares. In calculating any amount
distributable to the holders of the Series B Preferred Stock as aforesaid,
there shall be credited against such amount any sums distributed or payable to
such holders other than pursuant to the terms hereof, whether under any letter
of credit, security or other similar right or interest.
5. Conversion. The Series B Preferred Stock shall be convertible into
Common Stock in accordance with the following provisions of this Section 5.
(a) Optional Conversion. Subject to and upon compliance with the
provisions of this Section 5, each holder of shares of Series B Preferred Stock
shall have the right at such holder's option, at any time or from time to time,
from and after the date of original issuance to convert all or less than all
(but not less than 5,000 shares per conversion) of such holder's shares of
Series B Preferred Stock into fully paid and nonassessable shares of Common
Stock, at the Conversion Rate in effect on the Conversion Date, upon the terms
hereinafter set forth. To the extent any such shares so converted are held in
escrow pursuant to the Escrow Agreement at the time of conversion, then the
converted shares of the Series B Preferred Stock so held in escrow shall be
released upon the deposit into such escrow of the shares of Common Stock into
which such shares were converted.
(b) Automatic Conversion. (i) Subject to adjustment pursuant to
the following provisions, the "Target Per Share Price" shall be $56.22. If the
number of shares of Common Stock outstanding at any time after the issuance of
the Series B Preferred Stock is increased by stock dividend payable in shares
of Common Stock or by subdivision or split-up of shares of Common Stock (each,
an "Increasing Adjustment Event"), then immediately after the record date fixed
for determination of holders of Common Stock entitled to receive the stock
dividend or the effective date of the subdivision or split-up, as the case may
be, the dollar amount then in effect pursuant to the preceding sentence shall
be reduced to equal the product resulting from the multiplication of such
dollar amount by a fraction, the numerator of such fraction being the total
number of shares of Common Stock outstanding immediately prior to such
Increasing Adjustment Event on a fully diluted basis and the denominator of
such fraction being the total number of shares of Common Stock outstanding
immediately following such Increasing Adjustment Event on a fully diluted
basis.
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If the number of shares of Common Stock outstanding at any time after the
issuance of the Series B Preferred Stock is decreased by virtue of a reverse
stock split (a "Decreasing Adjustment Event"), then immediately after date of
the reverse stock split, the dollar amount then in effect pursuant to the
second preceding sentence shall be increased to equal the product resulting
from the multiplication of such dollar amount by a fraction, the numerator of
such fraction being the total of shares of Common Stock outstanding immediately
following such Decreasing Adjustment Event on a fully diluted basis and the
denominator of such fraction being the total number of shares of Common Stock
outstanding immediately prior to such Decreasing Adjustment Event on a fully
diluted basis.
(ii) If as of any day on which the Trading Level Event has
occurred there are outstanding any Required Conversion Shares, then each share
of the Series B Preferred Stock comprising such Required Conversion Shares
shall automatically be converted, without any further act of the Corporation or
its shareholders, into fully paid and non-assessable shares of Common Stock of
the Corporation at the Conversion Rate in effect as of such day upon the terms
hereinafter set forth and unlegended certificate(s) for such shares (and, if
applicable, the Underlying Stock relating to such shares) shall be delivered to
the holders thereof within two business days thereafter.
(c) Conversion Rate. On or about the date of this Amended and
Restated Certificate the outstanding shares of Common Stock will be subdivided
or split-up on a 5.47 to one basis in anticipation of the initial public
offering of the Common Stock (the "IPO Subdivision"). Upon the occurrence of
and following the IPO Subdivision, each share of Series B Preferred Stock shall
be convertible into 5.47 shares of the Common Stock (subject to subsequent
adjustment pursuant to Section 5(g), the "Conversion Rate").
(d) Mechanics of Conversion. The holder of any shares of Series B
Preferred Stock may exercise the optional conversion right specified in
paragraph (a) above by surrendering to the Corporation or any transfer agent of
the Corporation the certificate or certificates for the shares to be converted,
accompanied by written notice stating that the holder elects to convert all of
the shares represented thereby. Optional conversion under paragraph (a) shall
be deemed to have been effected on the date when notice of an election to
convert and certificates for the shares to be converted has been delivered.
Upon an automatic conversion pursuant to Section 5(b), then on the Conversion
Date, the outstanding shares of the Series B Preferred Stock shall be converted
automatically without any action by the holders of such shares and whether or
not the certificates representing such shares are surrendered to the
Corporation or its transfer agent; provided, the Corporation shall not be
obligated to issue to any holder certificates representing the shares of Common
Stock issuable upon such conversion unless certificates representing the shares
of Series B Preferred Stock, endorsed directly or through stock powers to the
Corporation or in blank and accompanied when appropriate with evidence of the
signatory's authority, are delivered to the Corporation or any transfer agent
of the Corporation. Each date on which the Corporation has received a notice
regarding optional conversion and the date upon which an automatic conversion
occurs under paragraph (b) above is referred to herein as a "Conversion Date".
As promptly as practicable after a Conversion Date the Corporation shall issue
and deliver to or upon the written order of the applicable holders a
certificate or certificates for the number of full shares of Common Stock to
which such holders are entitled rounded down to the next whole share as
provided in paragraph (e) below. The person in whose
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name the certificate or certificates of Common Stock are to be issued shall be
deemed to have become a holder of record of such Common Stock on the Conversion
Date.
(e) Fractional Shares. No fractional shares of Common Stock or
scrip shall be issued upon conversion of shares of Series B Preferred Stock.
Instead of any fractional shares of Common Stock which would otherwise be
issuable upon conversion of any shares of Series B Preferred Stock, the number
of full shares of Common Stock issuable upon conversion thereof shall be
reduced to the next lowest number of whole shares, and the Corporation will pay
a cash adjustment in respect of any surrendered shares of Series B Preferred
Stock not converted into Common Stock in an amount equal to the Redemption
Price of such shares.
(f) Partial Conversion. Upon conversion of only a portion of the
number of shares covered by a certificate representing shares of Series B
Preferred Stock surrendered for conversion (in the case of conversion pursuant
to Section 5(a)), the Corporation shall issue and deliver to or upon the
written order of the holder of the certificate so surrendered for conversion,
at the expense of the Corporation, a new certificate representing the number of
shares of the Series B Preferred Stock representing the unconverted portion of
the certificate so surrendered.
(g) Conversion Rate Adjustments. The Conversion Rate shall be
subject to adjustment from time to time as follows:
(i) Stock Dividends. If the number of shares of Common
Stock outstanding at any time after the IPO Subdivision is increased
by a stock dividend payable in shares of Common Stock or by a
subdivision or split-up of shares of Common Stock, then immediately
after the record date fixed for the determination of holders of Common
Stock entitled to receive such stock dividend or the effective date of
such subdivision or split-up, as the case may be, the Conversion Rate
shall be proportionately adjusted so that the holder of any shares of
Series B Preferred Stock surrendered for conversion after such date
shall be entitled to receive the number of shares of Common Stock of
the Corporation which such holder would have owned and been entitled
to receive immediately following such action had such shares of Series
B Preferred Stock been converted immediately prior thereto. If the
number of shares of Common Stock outstanding at any time after the IPO
Subdivision is decreased by a reverse stock split, then immediately
after the effective date of such reverse stock split the Conversion
Rate shall be proportionately adjusted so that the holder of any
shares of Series B Preferred Stock surrendered for conversion after
such date shall be entitled to receive the number of shares of Common
Stock of the Corporation which such holder would have owned and been
entitled to receive immediately following such action had such shares
of Series B Preferred Stock been converted immediately prior thereto.
(ii) Reorganizations. In case of any capital
reorganization of the Corporation, or of any reclassification of the
Common Stock, or in case of the consolidation of the Corporation with
or the merger of the Corporation with or into any other corporation,
partnership or other business entity in which the Corporation is not
the survivor, or of the sale, lease or other transfer of all or
substantially all of the assets of the Corporation to any other
corporation, partnership or other business entity, each share of
Series B Preferred Stock
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shall, effective simultaneously with such capital reorganization,
reclassification, consolidation, merger, sale or lease, be convertible
into the number of shares of stock or other securities or property to
which the Common Stock issuable (at the time of such capital
reorganization, reclassification, consolidation, merger, sale or
lease) upon conversion of such share of Series B Preferred Stock would
have been entitled immediately following such capital reorganization,
reclassification, consolidation, merger, sale or lease in place of (or
in addition to, in the case of any such event after which Common Stock
remains outstanding) the shares of Common Stock into which such share,
of Series B Preferred Stock would otherwise have been convertible; and
in any such case, if necessary, the provisions set forth herein with
respect to the rights and interests thereafter of the holders of the
shares of Series B Preferred Stock shall be appropriately adjusted so
as to be applicable, as nearly as may reasonably be, to any share of
stock or other securities or property thereafter deliverable on the
conversion of the shares of Series B Preferred Stock.
(h) Notice to Holders. If the Corporation proposes to take any
action of the type described in paragraph (g) above, the Corporation shall give
notice to each holder of the Series B Preferred Stock and to the Corporation's
transfer agent by mail, first class postage prepaid, at such holder's address
appearing on the Corporation's records. Such notice shall specify the record
date, if any, with respect to any such action and the approximate date on which
such action is to take place. Such notice shall also set forth such facts with
respect thereto as shall be reasonably necessary to indicate the effect of such
action (to the extent such effect may be known at the date of such notice) on
the Conversion Rate and the number, kind or class of shares or other securities
or property which shall be deliverable or purchasable upon the occurrence of
such action or deliverable upon conversion of the Series B Preferred Stock. In
the case of any action which would require the fixing of a record date, such
notice shall be given at least ten days prior to the date so fixed, and in case
of all other action, such notice shall be given at least 15 days prior to the
taking of such proposed action. The Corporation shall also provide to each
such holder notice of the consummation of such action.
(i) Costs. The Corporation shall pay all documentary, stamp,
transfer or other transactional taxes attributable to the issuance or delivery
of shares of Common Stock of the Corporation or other securities or property
upon conversion of the shares of Series B Preferred Stock; provided, that the
Corporation shall not be required to pay any taxes which may be payable in
respect of any transfer involved in the issuance or delivery of any certificate
for such shares or securities in the name other than that of the holder of the
shares of Series B Preferred Stock in respect of which such shares are being
issued.
(j) Reservation of Shares. The Corporation shall reserve at all
times so long as any shares of Series B Preferred Stock remain outstanding,
free from preemptive rights, out of its treasury stock or its authorized but
unissued shares of Common Stock, or both, solely for the purpose of effecting
the conversion of shares of Series B Preferred Stock, sufficient shares of
Common Stock to provide for the conversion of all outstanding shares of Series
B Preferred Stock and set aside and keep available any other property
deliverable upon conversion of all outstanding shares of Series B Preferred
Stock.
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<PAGE> 40
(k) Valid Issuance. All shares of Common Stock or other
securities which may be issued upon conversion of the shares of Series B
Preferred Stock will upon issuance by the Corporation be duly and validly
issued, fully paid and nonassessable and free from all taxes, liens and charges
with respect to the issuance thereof and the Corporation shall take no action
which will cause a contrary result.
6. Voting Rights. At any annual or special meeting of shareholders or
otherwise in respect of any matter submitted for the vote of shareholders
generally, each share of Series B Preferred Stock shall entitle the holder to
such number of votes per share as shall equal the number of shares of Common
Stock (rounded to the nearest whole share) into which such shares of Series B
Preferred Stock is then convertible. The provisions of this Section 6 shall
apply to any shares of Series B Preferred Stock so long as such shares are
outstanding, and shall terminate with respect to such shares when such shares
are no longer outstanding, whether by repurchase, conversion into Common Stock,
or otherwise.
7. Certain Transferabilitv Rights and Restrictions.
(a) Application. The following provisions of this Section 7 apply
to all shares of Series B Preferred Stock (collectively, "Stock"). Such
provisions shall continue to bind all shares of Stock, and each original holder
of such shares and each transferee thereof agrees by acceptance of any
certificate representing such shares to be so bound by such provisions, from
the date of issuance until the earlier to occur of (i) the dissolution or
termination of existence of the Corporation, (ii) the written consent of the
Board of Directors and the holders of 66-2/3% of the outstanding Stock, and
(iii) as to any particular share of Series B Preferred Stock, the conversion of
such share into Common Stock. Every certificate representing shares of Stock
shall be inscribed with a legend referring to the restrictions set forth in
this Section 7.
(b) General. Without the prior approval of the Board of Directors
in each instance, no shares of Stock subject may be sold, assigned, pledged,
encumbered, transferred or otherwise hypothecated in any manner (by gift,
pursuant to any marital dissolution, in any bankruptcy or insolvency
proceeding, or otherwise), except as provided in this Section 7.
(c) Right of First Refusal. If any holder of Stock desires to
sell, assign, transfer or otherwise dispose of any shares of Stock (other than
pursuant to Sections 3 or 4), then such holder (for purposes of this paragraph
(c), the "Selling Shareholder"), prior to making any such sale, shall first
offer such shares of Stock (for purposes of this paragraph (c), the "Option
Shares") for sale to the Corporation, in accordance with the following
provisions of this paragraph (c).
(i) Option Price: Terms: Offering Notices. The price per
Option Share at which the Selling Shareholder shall be required to
offer the Option Shares (for purposes of this paragraph (c), the
"Option Price") and the terms of such offer, shall be the price at
which and the terms upon which any proposed third party purchaser
shall have offered to purchase the Option Shares from the Selling
Shareholder and which the Selling Shareholder is prepared to accept.
Each offer required to be made by the Selling Shareholder pursuant to
this paragraph (c) shall be made by a written notice (for purposes of
this paragraph (c), the
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<PAGE> 41
"Offering Notice") which shall state that the offer is being made
pursuant to this paragraph (c) and which shall set forth the number of
Option Shares, the name or names of the proposed purchaser or
purchasers of the Option Shares, the price per share offered by such
proposed purchaser or purchasers for the Option Shares, the method of
payment of the purchase price and the scheduled date of consummation
of such proposed sale. A copy of the written offer from any proposed
third-party purchaser shall be attached to each Offering Notice.
(ii) Offer to the Corporation. The Selling Shareholder
shall offer the Option Shares to the Corporation by delivering an
Offering Notice to the Corporation. Within 30 days following the
Corporation's receipt of such Offering Notice, the Corporation shall
deliver to the Selling Shareholder a written reply notice accepting
the offer of the Selling Shareholder with respect to all (but not less
than all) of the Option Shares or rejecting such offer. If by such
written reply notice the Corporation accepts the offer made by the
Selling Shareholder, the reply notice shall constitute an agreement
binding on the Selling Shareholder and the Corporation to sell and
purchase, respectively, the Option Shares at a price per share equal
to the Option Price. If within such 30-day period, the Corporation
shall have failed to deliver a reply notice accepting the offer of the
Selling Shareholder as to all of the Option Shares, the Corporation
shall be deemed to have rejected such offer.
(iii) Lapse of Option. If the foregoing offer to sell
Option Shares has been made by the Selling Shareholder and has not
been accepted by the Corporation, then the Selling Shareholder may
sell not less than all of the Option Shares at any time within, but
not subsequent to, 60 days after the lapse of the option granted
pursuant to this paragraph (c); provided, no sale of the Option Shares
shall be made at any price lower than the Option Price or on terms
materially different from those specified in the Offering Notice or to
any person or persons other than the persons specified in the Offering
Notice or to any person or persons other than the persons specified in
the Offering Notice. If after the lapse of such 60-day period the
Option Shares shall not have been sold, all of the provisions of this
paragraph (c) shall apply to any future sale or other disposition of
shares of Stock owned by the Selling Shareholder.
(iv) Consummation of Purchases. Each transaction of
purchase and sale of Option Shares pursuant to this paragraph (c)
shall be completed by delivery of the stock certificates representing
the Option Shares endorsed in blank, or accompanied by duly executed
stock powers, and by actual registration of the transfer of the Option
Shares on the books of the Corporation upon payment of the purchase
price to the Selling Shareholder (the Corporation agreeing to effect
such registration upon the tender of such certificates, endorsed or
accompanied by such executed stock powers). Any such transaction
shall be closed at such time and place as shall be agreed upon by the
parties thereto, or, if no such agreement is reached, at the principal
office of the Corporation on the 30th day following the date of
delivery of the last reply notice given in connection with such
transaction or, if such day shall not be a business day, on the first
business day thereafter during normal business hours.
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(v) Certain Permitted Dispositions. Subject to the
restrictions set forth in paragraph (b) above, transfers by holders of
Stock to Affiliates, upon the death of any such holder to such
holder's estate or other legal representative, or the pledge of Stock
by such holder (but not any disposition in foreclosure or other
remedy) shall not be subject to the right of first refusal under this
paragraph (c), provided, the provisions of this Section 7 shall
continue to bind the shares of Stock held by any such transferee.
8. Registration Rights. Subject to paragraph (g) below and the other
provisions of this Section 8, the holders of the Series B Preferred Stock shall
be entitled to have the shares of Common Stock issuable upon conversion of
their Series B Preferred Stock included in any registration of Common stock
under the Securities Act filed by the Corporation with the Securities and
Exchange Commission (the "Commission").
(a) Piggyback Rights; Demand Rights. (1) If at any time or from
time to time the Corporation proposes to file with the Commission a
registration statement (whether on Form S-1, S-2 or S-3, SB-1, SB-2, or any
equivalent form then in effect) for the registration under the Securities Act
of any shares of Common Stock for sale to the public by the Corporation or on
behalf of a shareholder of the Corporation for cash (excluding any shares of
Common Stock issuable by the Corporation upon the exercise of employee or
director stock options or in connection with the merger or consolidation of the
Corporation or one of its subsidiaries with one or more other corporations if
the Corporation is the surviving corporation), the Corporation shall give each
holder of the Series B Preferred Stock at least 15 days' prior written notice
of the filing of the proposed registration statement. The notice shall include
a list of the states and foreign jurisdictions, if any, in which the
Corporation intends to qualify such shares, and shall also include the
Corporation's estimate of the range of the offering price per share of Common
Stock. On the written request of any holder of the Series B Preferred Stock
received by the Corporation within 15 days after the date of the Corporation's
notice, the Corporation shall, subject to the conditions and in accordance with
the procedures set forth in paragraphs (b) and (c) below, and at its own
expense as provided in paragraph (e) below, include in the coverage of such
registration statement and qualify for sale under the blue sky or securities
laws of the various states, the number of shares (but not less than 5,000
shares, subject to adjustment to give effect to any stock dividends, splits or
combinations, recapitalizations or other similar corporate events) of Common
Stock (herein called the "Specified Shares") held and so requested to be
registered by each such holder; provided, if the managing underwriter for the
Corporation indicates its belief in writing that the effect of including in the
coverage of such registration statement all or part of the Specified Shares and
the shares of Common Stock requested to be so included by other stockholders
having contractual registration rights ("Other Requesting Stockholders") will
materially and adversely affect the sale of the shares of Common Stock proposed
to be sold by the Corporation (which statement of the managing underwriter
shall also state the maximum number of shares, herein called the "Maximum
Shares"), if any, which can be sold by such all such holders without materially
and adversely affecting the sale of the shares proposed to be sold by the
Corporation), then the number of Specified Shares which the holders of the
Series B Preferred Stock and the Other Requesting Stockholders shall
collectively have the right to include in such registration statement shall be
reduced to the number of Maximum Shares set forth in such statement of the
managing underwriter, such reduction to be effected on a pro rata basis in
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accordance with the number of all such shares requested to be so registered by
the holders of the Series B Preferred Stock and the Other Requesting
Stockholders.
Except as provided in paragraph (c) below, in no event shall the
Corporation be required to amend any registration statement filed pursuant to
this Section 8 after it has become effective or to amend or supplement any
prospectus to permit the continued disposition of shares of Common Stock
registered under any registration statement.
The Corporation shall have the right to select any underwriters,
including the managing underwriter, of any public offering of shares of Common
Stock subject to the provisions of this paragraph (a). Nothing in this
paragraph (a) shall create any liability on the part of the Corporation to the
holders of the Series B Preferred Stock if the Corporation for any reason
should decide not to file or to withdraw such a registration statement.
The Corporation may withdraw any registration statement and abandon
any proposed offering initiated by the Corporation without the consent of any
holder of the Series B Preferred Stock, notwithstanding the request of any such
holder to participate therein in accordance with this paragraph (a), if the
Corporation determines that such action is in the best interests of the
Corporation.
(2) (aa) At any time during the period commencing as
of 12 months following the expiration of the Corporation's initial public
offering of its Common Stock and ending 48 months thereafter (the "Demand
Period"), any holder or holders of shares of the Series B Preferred Stock who
shall have the right to acquire upon conversion of shares of the Series B
Preferred Stock 25% or more of the aggregate amount of shares of Common Stock
issuable upon conversion of the Series B Preferred Stock, may notify the
Corporation of such holder's demand for registration pursuant to this Section
8(a)(2), in which case the provisions of this Section 8(a)(2) shall apply.
Such demand shall include the number of shares of Series B Preferred Stock
owned by such holder or holders and the number of shares of Common Stock
issuable upon conversion of the Series B Preferred Stock. If any holder of
shares of Series B Preferred Stock makes a demand pursuant to this Section
8(a)(2), then all of the then outstanding shares of Series B Preferred Stock
shall be deemed covered by such demand even if part of such shares are owned by
another holder. If the demand referred to in the preceding provisions is not
made within the Demand Period, then the provisions of this Section 8(a)(2)
shall have no further force or effect (and the holders of the Series B
Preferred Stock shall have no further rights under this Section 8(a)(2)) as of
the expiration of the Demand Period.
(bb) As soon as reasonably practicable following
any demand pursuant to clause (2)(aa) preceding being made timely in accordance
with such clause, the Corporation shall (i) provide written notice of the
demand having been made and offering to include the shares of Common Stock
issuable upon conversion of shares of Series B Preferred Stock owned by each
holder not included in the demand prepare and file with the Commission a
registration statement, whether on "shelf" or other form, which form the
Corporation shall have the right to choose (as the same may be amended, the
"Registration Statement") pursuant to which all of the shares of Common Stock
issuable upon conversion of the Series B Preferred Stock then outstanding (such
shares being hereinafter, in this clause (2)(bb), referred to as the "Subject
Shares") are registered for immediate
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sale, in one or more transactions (which may involve block transactions), in
special offerings, exchange distributions and/or secondary distributions, in
the over-the-counter market, in negotiated transactions, or a combination of
such methods of sale, at market prices prevailing at the time of sale, at
prices related to such market prices or at negotiated prices; provided, such
transactions shall not include an underwritten public offering unless the
Corporation so elects in its sole discretion.
(cc) The Corporation shall use commercially
reasonably best efforts to cause the Registration Statement to become effective
within 60 days following its receipt of the demand notice. Further, the
Corporation shall use commercially reasonable efforts to cause the Registration
Statement to remain effective continuously for a three month period.
(dd) The Corporation will pay all expenses
incurred by it in complying with its registration obligations pursuant to this
clause (2), including, without limitation, all registration and filing fees,
blue sky fees and expenses, printing expenses, fees and disbursements of its
counsel and independent public accountants for the Corporation, and fees of
transfer agents and registrars, but excluding any selling commissions or
discounts allocable to the sale of the Subject Shares, fees and disbursements
of counsel and other representatives for any holder of the Subject Shares and
any stock transfer taxes payable by reason of the sale of the Subject Shares,
all of which shall be for the account of each holder of the Subject Shares.
(b) Certain Registration Conditions. Any holder of Series B
Preferred Stock for whom shares of Common Stock into which such holder's Series
B Preferred Stock is convertible are included in any registration statement
filed with the Commission pursuant to paragraph (a) of this Section 8 is
hereafter referred to as a "Selling Stockholder." Anything in this Agreement to
the contrary notwithstanding, the Corporation shall not be required to effect a
registration of any Common Stock of any Selling Stockholder pursuant to this
Section 8, or file any post-effective amendment thereto:
(i) unless such Selling Stockholder agrees (if such
shares are included pursuant to paragraph (a) of this Section 8) (x)
to sell and distribute a portion or all of such stockholder's Common
Stock in accordance with the plan or plans of distribution adopted by
and through underwriters, if any, acting for the Corporation, and (y)
to bear a pro rata share of underwriter's discounts and commissions;
(ii) unless the Corporation and the underwriters for the
Corporation, if any, shall have received from such Selling Stockholder
all such information as the Corporation and such underwriters may
reasonably request concerning such stockholder to enable the
Corporation to include in the registration statement all material
facts required to be disclosed therein. Notwithstanding the
foregoing, a Selling Stockholder shall not be required to furnish to
the Corporation any personal financial information of such stockholder
unrelated to such stockholder's holdings of Common Stock, Series B
Preferred Stock or other securities of the Corporation, provided that
each Selling Stockholder shall nonetheless be required to furnish all
information reasonably requested by any such underwriter;
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<PAGE> 45
(iii) unless such Selling Stockholder is then entitled to
convert such stockholder's shares of Series B Preferred Stock into
Common Stock and such Selling Stockholder in fact delivers to the
Corporation, contemporaneously with the notice given by such Selling
Stockholder under paragraph 8(a) hereof of their desire to have shares
of Common Stock included in such registration statement, notice of
such Stockholder's intention to convert the Series B Preferred Stock
into Common Stock subject to and upon the effectiveness of the
registration statement; and
(iv) unless such Selling Stockholder, at the request of
the Corporation or its managing underwriter, if any, agrees or
acknowledges that such Selling Stockholder (x) has a present intention
to sell such shares; and (y) agrees to execute all consents, powers of
attorney, registration statements and other documents required in
order to cause such registration statement to become effective.
(c) Covenants and Procedures. If the Corporation becomes
obligated under the provisions of paragraph (a) of this Section 8 to effect
registration of shares of Common Stock on behalf of any Selling Stockholder,
the following shall apply:
(i) The Corporation, at its own expense as provided in
paragraph (e), shall prepare and file with the Commission a
registration statement covering such shares of Common Stock and use
its best efforts to cause such registration statement to become
effective; and the Corporation will file such post-effective
amendments to such registration statement (and use its best efforts to
cause them to be effective) and such supplements as are necessary so
that current prospectuses are at all times available for a period of
at least 90 days after the effective date of such registration
statement. Each Selling Stockholder shall promptly provide the
Corporation with such information with respect to such Selling
Stockholder's shares of Common Stock to be so registered and, if
applicable, the proposed terms of the offering thereof as is required
for such registration. Further, if the shares of Common Stock to be
covered by the registration statement are not to be sold to or through
underwriters acting for the Corporation, the Corporation shall (x)
deliver to each Selling Stockholder as promptly as practicable as many
copies of preliminary prospectuses as such Selling Stockholder may
reasonably request, and such Selling Stockholder shall keep a written
record of the distribution of such preliminary prospectuses and shall
refrain from delivery of such preliminary prospectuses in any manner
or under any circumstances which would violate the Securities Act or
the securities laws of any other jurisdiction, including the various
states of the United States, (y) deliver to each Selling Stockholder,
as soon as practicable after the effective date of the registration
statement, and from time to time thereafter during such 90 day period,
as many copies of the prospectuses required to be delivered in
connection with the sale of shares of Common Stock registered under
the regish stockholder may reasonably request, copies of such amended
prospectus or of such supplement to be attached to the prospectus in
order that the prospectus, as so amended or supplemented, will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading.
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<PAGE> 46
(ii) On or prior to the date on which the
registration statement is declared effective, the Corporation shall use
its best efforts to register or qualify, and cooperate with each
Selling Stockholder, and their counsel, in connection with the
registration or qualification of the Common Stock covered by the
registration statement for offer and sale under the securities or blue
sky laws of each state and other jurisdiction of the United States as
such Selling Stockholder or underwriter reasonably requests, to use
commercially reasonable best efforts to keep each such registration or
qualification effective, including through new filings, or amendments
or renewals, during the period such registration statement is required
to be kept effective and to do any and all other acts or things
necessary or advisable to enable the disposition in all such
jurisdictions of the Common Stock covered by the applicable
registration statement, provided that the Corporation will not be
required to qualify generally to do business in any jurisdiction where
it is not then so qualified.
(iii) The Corporation shall use commercially reasonable
best efforts to cause all of each Selling Stockholder's Common Stock
included in such registration statement to be listed, by the date of
the first sale of such Common Stock pursuant to such registration
statement, on each securities exchange on which the Common Stock of
the Corporation is then listed or proposed to be listed, if any.
(iv) The Corporation shall make generally available to
each Selling Stockholder an earnings statement satisfying the
provisions of Section 11(a) of the Securities Act no later than 45
days after the end of the 12-month period beginning with the first day
of the Corporation's first fiscal quarter commencing after the
effective date of the registration statement, which earnings statement
shall cover said 12-month period, which requirement will be deemed to
be satisfied if the Corporation timely files complete and accurate
information on Forms 10-Q, 10-K and 8-K under the Securities Exchange
Act of 1934, as amended, and otherwise complies with Rule 158 under
the Securities Act as soon as feasible.
(v) The Corporation shall cooperate with each Selling
Stockholder to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legends) representing Common
Stock to be sold under the registration statement, and enable such
securities to be in such denominations and registered in such names as
the managing underwriter or underwriters, if any, or such Selling
Stockholder may request, subject to the underwriters' obligation to
return any certificates representing securities not sold.
(vi) The Corporation shall make available for inspection
by each Selling Stockholder and any attorney, accountant or other
agent retained by such Selling Stockholder (collectively, the
"Inspectors"), all financial and other records, pertinent corporate
documents and properties of the Corporation, as shall be reasonably
necessary to enable them to exercise their due diligence,
responsibility, and cause the Corporation's officers, directors and
employees to supply all nonconfidential information reasonably
requested by any such Inspector in connection with such registration
statement. As a condition to providing such access, the Corporation
may require that any and all Inspectors execute and deliver
confidentiality agreement, in form and substance acceptable to the
Corporation, and that confidentiality procedures be observed, all with
respect to such information.
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<PAGE> 47
(vii) The Corporation shall use commercially reasonable
best efforts to obtain a "cold comfort" letter from the Corporation's
independent public accountants, and an opinion of counsel for the
Corporation, each in customary form and covering such matters of the
type customarily covered by cold comfort letters and opinions of
counsel in connection with public offerings of securities.
(d) Indemnification.
(i) Indemnification by the Corporation. In the event of
any registration under the Securities Act pursuant to this Section 8
of shares of Common Stock held by any Selling Stockholder, the
Corporation will hold harmless each Selling Stockholder and each
person, if any, who controls each Selling Stockholder within the
meaning of the Securities Act, against any losses, claims, damages or
liabilities (including legal fees and costs of court), joint or
several, to which such Selling Stockholder or controlling person may
become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained, on the effective date
thereof, in any registration statement under which such securities
were registered under the Securities Act, any final prospectus
contained therein, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading; and will reimburse each
Selling Stockholder and each such controlling person for any legal or
any other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage or liability;
provided, the Corporation shall not be liable to any such Selling
Stockholder or controlling persons in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or
alleged omission made in such registration statement or final
prospectus or such amendment or supplement in reliance upon and in
conformity with information furnished to the Corporation through a
written instrument duly executed by such Selling Stockholder or
controlling person specifically for use in the preparation thereof.
(ii) Indemnification by Selling Stockholders. It shall be
a condition precedent to the obligation of the Corporation to include
in any registration statement any shares of Common Stock then held by
a Selling Stockholder that the Corporation shall have received an
undertaking reasonably satisfactory to it and its counsel from such
Selling Stockholder to severally indemnify and hold harmless (in the
same manner and to the same extent as set forth in subparagraph (i)
above) the Corporation, each director of the Corporation, each officer
of the Corporation who shall sign such registration statement, each
underwriter of such securities and any person who controls the
Corporation or such underwriter within the meaning of the Securities
Act, with respect to any statement or omission from such registration
statement, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereto, if such statement or
omission was made in reliance upon and in conformity with information
furnished to the Corporation through a written instrument duly
executed by such Selling Stockholder specifically for use in the
preparation
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<PAGE> 48
of such registration statement, preliminary prospectus or final
prospectus or such amendment or supplement thereto.
(iii) Indemnification Procedures. Promptly after receipt
by an indemnified party of notice of the commencement of any action
involving a claim referred to in the preceding subparagraphs (i) and
(ii), such indemnified party will, if a claim in respect thereof is to
be made against an indemnifying party, give written notice to the
indemnifying party of the commencement of such action. In case any
such action is brought against an indemnified party, the indemnifying
party will be entitled to participate in and to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified
party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof,
and provided that the indemnifying party in fact assumes such defense,
the indemnifying party will not be liable to such indemnified party
for any legal or other expenses incurred after the date of such notice
by the latter in connection with the defense thereof. Whether or not
such defense is assumed by the indemnifying party, the indemnifying
party will not be subject to any liability for any settlement made
without its consent. No indemnifying party will consent to entry of
any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to
such indemnified party of a release from all liability in respect of
such claim or litigation. The indemnified party shall be entitled to
participate with its own counsel (at the indemnified party's own
expense) if reasonably necessary to avoid a conflict of interest.
(iv) Contribution. If the indemnification provided for
in this paragraph (d) from the indemnifying party is unavailable to an
indemnified party hereunder in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then the indemnifying
party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as
a result of such losses, claims, damages, liabilities or expenses in
such proportion as is appropriate to reflect the relative fault of the
indemnifying party and indemnified parties in connection with the
actions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The
relative fault of such indemnifying party and indemnified parties
shall be determined by reference to, among other things, whether any
action in question, including any untrue or alleged untrue statement
of a material fact or a material omission, has been made by, or
relates to information supplied by, such indemnifying party or
indemnified parties, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
action. The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and expenses referred to above
shall be deemed to include any legal or other fees or expenses
reasonably incurred by such party in connection with any investigation
or proceeding. For purposes of the foregoing, it would not be just
and equitable if contribution pursuant to this paragraph (d) were
determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred
to in the immediately preceding paragraph. Notwithstanding the
provisions of this subparagraph (iv), no Selling Stockholder shall be
required to contribute any amount in excess of the amount by which the
total price at which the Common Stock of such Selling
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<PAGE> 49
Stockholder was offered to the public exceeds the amount of any
damages which such Selling Stockholder has otherwise been required to
pay by reason of such untrue statement or omission. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f)
of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
(e) Expenses. All expenses incurred by the Corporation in
connection with any registration statement covering shares of Common Stock
offered by the Selling Stockholders, including, without limitation, all
registration and filing fees (including all expenses incident to filing with
the National Association of Securities Dealers, Inc.), printing expenses, fees
and disbursements of counsel for the Corporation and of its independent
certified public accountants, the reasonable fees and disbursements of one
counsel for collectively all Selling Stockholders and Other Requesting
Stockholders whose stock is included in such registration, and the expense of
qualifying such shares under state blue sky laws, shall be borne by the
Corporation; provided, all underwriter's discounts and commissions relating to
the shares of Common Stock to be sold by the Selling Stockholders shall be
borne by the Selling Stockholders.
(f) Dispositions During Registration. Upon written request by the
Corporation, the Selling Stockholders will agree, upon the registration of any
of each such Selling Stockholder's shares of Common Stock or the Common Stock
issued by the Corporation, not to sell or otherwise dispose of any shares of
Stock (other than Common Stock covered by such registration, which may be sold
in accordance with the plan or plans of distribution described in the
registration statement) owned by each such Selling Stockholder for a period of
90 days following the effective date of such registration statement or for such
longer period (not to exceed 180 days) as may be required under the plan or
plans of distribution set forth in such registration statement. Each holder of
the Series B Preferred Stock shall comply with the foregoing requirements even
if such holder's Common Stock issuable upon the conversion thereof is not being
included in such registration, if (i) at such time such holder (together with
such holder's Affiliates) owns 5% or more of the Common Stock not being
registered by such registration and (ii) other holders of 5% or more of the
Common Stock not being registered by such registration are similarly bound.
(g) Term of Registration Rights. The registration rights granted
pursuant to this Section 8 shall be effective for a period commencing upon the
date of original issuance thereof and ending on, as to any holder of shares of
Series B Preferred Stock, upon either (i) such holder's written consent or (ii)
the redemption of all of such holder's shares of Series B Preferred Stock.
9. Exclusion of Other Rights. Unless otherwise required by law, the
shares of Series B Preferred Stock shall not have any voting powers,
preferences or relative, participating, optional or other special rights other
than those specifically set forth herein.
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<PAGE> 50
EXHIBIT D
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
FIRST SIERRA FINANCIAL, INC.
FIRST SIERRA FINANCIAL, INC., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY THAT:
FIRST: The Restated Certificate of Incorporation of the Corporation
has been amended by deleting, in its entirety, the first paragraph of Article
IV thereof and inserting the following as the new first paragraph of Article
IV:
The total number of shares of stock that the Corporation
shall have authority to issue is, 101,000,000 shares of capital
stock, consisting of (i) 100,000,000 shares of common stock, par
value $.01 per share ("Common Stock") and (ii) 1,000,000 shares of
preferred stock, par value $.01 per share ("Preferred Stock").
SECOND: The amendment set forth in Paragraph FIRST has been duly
adopted in accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware, by the stockholders of the
Corporation at a meeting of the stockholders of the Corporation.
IN WITNESS WHEREOF, the Corporation has caused this certificate to
be duly executed this 14th day of October, 1998.
FIRST SIERRA FINANCIAL, INC.
By: /s/ Thomas J. Depping
---------------------------------------
Thomas J. Depping
Chairman of the Board,
President and Chief Executive Officer
<PAGE> 51
EXHIBIT E
CERTIFICATE OF DESIGNATIONS
OF PREFERRED STOCK
of
FIRST SIERRA FINANCIAL, INC.
We, Thomas J. Depping, Chairman of the Board of Directors,
and Sandy Ho, Secretary, of First Sierra Financial, Inc., a corporation
organized and existing under the General Corporation Law of the State of
Delaware (the "Corporation"), in accordance with the provisions of Section
151(g) thereof, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of
Directors by the Certificate of Incorporation, the Board of Directors on
December 15, 1998, adopted, ratified and approved this Certificate of
Designations and the series of preferred stock designated herein.
Section 1. Designation and Amount. The shares of the
series of preferred stock shall be designated as "Junior Preferred Stock,
Series C" (the "Preferred Stock") and the number of shares constituting the
series shall be 300,000.
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of any
shares of any series of preferred stock ranking prior and superior to the
shares of Preferred Stock with respect to dividends, the holders of
shares of Preferred Stock, in preference to the holders of common stock,
$.01 par value per share, of the Corporation (the "Common Stock") and of
any other junior stock, shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in cash on the 15th day of March,
June, September and December in each year (each such date being a
"Quarterly Dividend Payment Date"), commencing on the first Quarterly
Dividend Payment Date after the first issuance of a share or fraction of
a share of Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (a) $1.00 or (b) subject to the
provision for adjustment hereinafter set forth, 100 times the aggregate
per share amount of all cash dividends, and 100 times the aggregate per
share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of Common Stock or
a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect to
the first Quarterly Dividend Payment Date, since the first issue of any
share or fraction of a share of Preferred Stock. In the event the
Corporation shall at any time on or after December 28, 1998, declare or
pay any dividend on Common Stock payable in shares of Common Stock, or
1
<PAGE> 52
effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than by payment
of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the amount to which
holders of shares of Preferred Stock were entitled immediately prior to
such event under clause (b) of the preceding sentence shall be adjusted
by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Preferred Stock as provided in paragraph (A) of this Section immediately
after it declares a dividend or distribution on the Common Stock (other
than a dividend payable in shares of Common Stock); provided that, in the
event no dividend or distribution shall have been declared on the Common
Stock during the period between any Quarterly Dividend Payment Date and
the next subsequent Quarterly Dividend Payment Date, a dividend of $100
per share on the Preferred Stock shall nevertheless be payable on such
subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Preferred Stock, unless the
date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares
shall begin to accrue from the date of issue of such shares, or unless
the date of issue is a Quarterly Dividend Payment Date or is a date after
the record date for the determination of holders of shares of Preferred
Stock entitled to receive a quarterly dividend and before such Quarterly
Dividend Payment Date, in either of which events such dividends shall
begin to accrue and be cumulative from such Quarterly Dividend Payment
Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares
shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. The Board of Directors may fix a record
date for the determination of holders of shares of Preferred Stock
entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be not more than 60 days prior to the
date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of
Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth,
each share of Preferred Stock shall entitle the holder thereof to 100
votes on all matters submitted to a vote of the stockholders of the
Corporation. In the event the Corporation shall at any time on or after
December 28, 1998, declare or pay any dividend on Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or
2
<PAGE> 53
consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of
Common Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the number of votes per share to which holders of
shares of Preferred Stock were entitled immediately prior to such event
shall be adjusted by multiplying such number by a fraction, the numerator
of which is the number of shares of Common Stock outstanding immediately
after such event, and the denominator of which is the number of shares of
Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of
shares of Preferred Stock and the holders of shares of Common Stock shall
vote together as one class on all matters submitted to a vote of
stockholders of the Corporation.
(C) Except as set forth herein, holders of Preferred Stock shall
have no special voting rights and their consent shall not be required
(except to the extent they are entitled to vote with holders of Common
Stock as set forth herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Preferred Stock as provided in Section 2 are
in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Preferred Stock
outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends on, or
make any other distributions on, any shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding
up) to the Preferred Stock;
(ii) declare or pay dividends on or
make any other distributions on any shares of stock ranking on a
parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Preferred Stock, except dividends paid ratably
on the Preferred Stock and all such parity stock on which dividends
are payable or in arrears in proportion to the total amounts to
which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise
acquire for consideration shares of any stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding
up) to the Preferred Stock, provided that the Corporation may at
any time redeem, purchase or otherwise acquire shares of any such
parity stock in exchange for shares of any stock of the Corporation
ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Preferred Stock; or
3
<PAGE> 54
(iv) purchase or otherwise acquire
for consideration any shares of Preferred Stock, or any shares of
stock ranking on a parity with the Preferred Stock, except in
accordance with a purchase offer made in writing or by publication
(as determined by the Board of Directors) to all holders of such
shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and
classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares
of stock of the Corporation unless the Corporation could, under paragraph
(A) of this Section 4, purchase or otherwise acquire such shares at such
time and in such manner.
Section 5. Reacquired Shares. Any shares of Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of preferred stock and may be reissued as part of a new series
of preferred stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
Section 6. Liquidation, Dissolution or Winding Up. Upon
any liquidation, dissolution or winding up of the Corporation, no distribution
shall be made (1) to the holders of shares of stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding up) to the Preferred
Stock unless, prior thereto, the holders of shares of Preferred Stock shall
have received $100 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or
not declared, to the date of such payment, provided that the holders of shares
of Preferred Stock shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 100
times the aggregate amount to be distributed per share to holders of Common
Stock, or (2) to the holders of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Preferred
Stock, except distributions made ratably on the Preferred Stock and all other
such parity stock in proportion to the total amounts to which the holders of
all such shares are entitled upon such liquidation, dissolution or winding up.
In the event the Corporation shall at any time on or after December 28, 1998,
declare or pay any dividend on Common Stock payable in shares of Common Stock,
or effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or lesser number of shares
of Common Stock, then in each such case the aggregate amount to which holders
of shares of Preferred Stock were entitled immediately prior to such event
under the proviso in clause (1) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
4
<PAGE> 55
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In the event that
case the Corporation shall enter into any consolidation, merger, combination
or other transaction in which the shares of Common Stock are exchanged for or
changed into other stock or securities, cash or other property, then in any
such case the shares of Preferred Stock then outstanding shall at the same
time be similarly exchanged or changed in an amount per share (subject to the
provision for adjustment hereinafter set forth) equal to 100 times the
aggregate amount of stock, securities, cash or other property (payable in
kind), as the case may be, into which or for which each share of Common Stock
is changed or exchanged. In the event the Corporation shall at any time on or
after December 28, 1998, declare or pay any dividend on Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by reclassification or otherwise)
into a greater or lesser number of shares of Common Stock, then in each such
case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Preferred Stock shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Preferred Stock
shall not be redeemable.
Section 9. Amendment. The Certificate of Incorporation
of the Corporation shall not be amended in any manner which would materially
alter or change the powers, preferences or special rights of the Preferred
Stock so as to affect them adversely without the affirmative vote of the
holders of two-thirds or more of the outstanding shares of Preferred Stock,
voting together as a single class.
5
<PAGE> 56
IN WITNESS WHEREOF, we have executed and subscribed this
Certificate and do affirm the foregoing as true under the penalties of perjury
as of this 22nd day of December, 1998.
/s/ Thomas J. Depping
----------------------------------
Thomas J. Depping,
Chairman of the Board of Directors
ATTEST:
/s/ Sandy B. Ho
- ----------------------
Sandy B. Ho, Secretary
6
<PAGE> 1
EXHIBIT 10.2
AMENDMENT TO 1997 STOCK OPTION PLAN
The First Sierra Financial, Inc. 1997 Stock Option Plan was amended
by the Board of Directors as of January 1, 1999 in accordance with the following
resolution.
RESOLVED, that the last sentence of Paragraph V(a) of the First Sierra
Financial, Inc. 1997 Stock Option Plan is amended and restated in its entirety
to provide as follows:
The limitation set forth in the preceding sentence shall be applied
in a manner which will permit compensation generated under the Plan
to constitute "performance-based" compensation for purposes of
section 162(m) of the Code, including, without limitation, counting
against such maximum number of shares, to the extent required under
section 162(m) of the Code and applicable interpretive authority
thereunder, any shares subject to Options that are cancelled or
repriced, unless other provisions are included in any applicable
Option Agreements which operate to preserve the deductibility of the
compensation generated by the related Options.
<PAGE> 1
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") made as of the 1st day of
April, 1998 (the "Effective Date"), by and between First Sierra Financial, Inc.,
a Delaware corporation, (the "Employer"), and Sandy B. Ho (the "Employee").
Employer and Employee may be referred to herein collectively as the "Parties"
and individually as a "Party".
ARTICLE I
TERM
Employer hereby employs Employee and Employee hereby accepts employment
with Employer for a period beginning on the Effective Date and ending on the
third anniversary of the Effective Date (as extended pursuant to the following
provisions, the "Term"). As of the first day of any month following the
Effective Date, the Term shall be extended for an additional one (1) month
period unless either Employee or Employer gives the other party written notice
at least ninety (90) days prior to the first day of such month that this
Agreement shall terminate on the then scheduled expiration date of the Term. If
such notice is given, this Agreement shall automatically terminate on such
expiration date. If this Agreement is extended, the terms in effect under this
Agreement immediately preceding such extension shall apply during the extension
period. If Employee's employment hereunder is terminated by either Employer or
Employee at any time for any reason, the expiration date shall thereupon no
longer be automatically extended. This Agreement replaces all prior agreements
between the parties, oral or written regarding employment of Employee by
Employer and all such prior agreements are void upon the Effective Date of this
Agreement.
ARTICLE II
DUTIES OF EMPLOYEE
2.01 Duties. Employee is engaged to be the Executive Vice President and
Chief Financial Officer. Employee's duties and powers shall be determined from
time to time by the Chief Executive Officer of Employer. Employee shall perform
and discharge such duties in a businesslike manner, and faithfully as an officer
of Employer, and shall be subject to the supervision and direction of the Chief
Executive Officer of Employer and the Employer's Board of Directors.
2.02 Full Time Employment. Subject to the provisions set forth below,
Employee shall devote her productive time, ability, and attention to the
business of Employer during the Term. Employee shall not, directly or
indirectly, during the Term render any services of a business, commercial or
professional nature to any other person, corporation, firm or organization,
whether for compensation or otherwise, without the prior written consent of the
Chief Executive Officer of Employer.
Notwithstanding the foregoing, Employee may continue to engage in
personal and family investing; provided, however, unless prior approval is given
by Employer's
<PAGE> 2
Chief Executive Officer, such investments may not include
equipment leases or interests in non-publicly traded entities engaged in
equipment leasing.
ARTICLE III
COMPENSATION AND BENEFITS
3.01 Base Compensation. As compensation for services rendered and
Employee's covenants and agreements under this Agreement, Employee shall be
entitled to receive from Employer a base salary of one hundred eighty five
thousand and no/100ths dollars ($185,000) per year, payable in equal
semi-monthly installments from Employer's headquarters in Texas. The salary of
Employee may be increased from time to time at the sole discretion of Employer.
3.02 Bonus. Employee may be entitled to an annual bonus paid by
Employer if and as determined in the sole discretion of the Board of Directors.
3.03 Benefit Plans. During the Term, and thereafter, to the extent
provided in the applicable plan or under applicable law, Employer agrees to
include Employee in any retirement, insurance and health benefit plans adopted
by Employer for the benefit of the senior employees of Employer. Employer may
enter into and revise these plans in its sole discretion. Employee will have
three weeks paid vacation each year.
3.04 Expenses. Employer, in accordance with the rules and regulations
Employer shall issue and may revise from time to time, shall reimburse Employee
for business expenses directly and reasonably incurred in the performance of her
duties. The Employer acknowledges that the Employee will require a travel and
entertainment budget and reimbursement for reasonable travel and entertainment
expenses. Any amounts advanced or reimbursed by Employer to Employee for travel
and entertainment expenses shall be in addition to any other amounts payable to
Employee hereunder.
ARTICLE IV
TERMINATION
This Agreement shall terminate prior to the expiration of its Term upon
the occurrence of any one of the following events:
4.01 Disability. In the event that Employee is unable fully to perform
her duties and responsibilities with reasonable accommodation hereunder to the
full extent required by Employer due to illness, injury or incapacity for ninety
(90) consecutive days (during
-2-
<PAGE> 3
such ninety (90) day period Employee shall continue to be compensated as
provided in Section 3.01 hereof), this Agreement may be terminated by Employer,
and Employer and Employee shall have no further liability or obligations
hereunder; provided, however, that Employer shall continue to pay Employee the
base compensation specified in Section 3.01 hereof for the duration of the Term
at the same times specified in Section 3.01 (as reduced by any payments received
by Employee under any Employer sponsored disability benefits plan in which
Employee was participating). In the event of any dispute under this Section
4.01, Employee shall submit to a physical examination by a licensed physician
selected by Employer, and acceptable to Employee. If the physician retained by
Employer is not acceptable to Employee, then physicians selected by the Employer
and the Employee shall jointly select a third physician to perform the
examination. All costs related to the physical examination of the Employee shall
be paid by the Employer.
4.02 Death. In the event that Employee dies during the Term Employer
shall pay to Employee's executors, legal representatives or administrators the
base compensation specified in Section 3.01 hereof for the remainder of the Term
at the same time specified in Section 3.01 (as reduced by any payments received
by such executors, legal representatives and administrators under any Employer
sponsored death or disability benefits plan in which Employee was
participating).
4.03 Cause. Nothing in this Agreement shall be construed to prevent the
termination of this Agreement by Employer at any time for "cause". For purposes
of this Agreement, "cause" shall mean the habitual neglect or willful breach by
Employee of her duties as the Executive Vice President and Chief Financial
Officer of Employer which results in a material loss or damage to Employer or
embezzlement by Employee of Employer funds. Upon termination for cause, Employer
shall pay to Employee all sums due to Employee through the date of such
termination. Following such a termination, Employer shall have no further duties
or obligations to Employee.
4.04 Termination Without Cause by Employer. Employer, in its discretion
and for any reason, may terminate this Agreement at any time by delivering
written notice to Employee prior to such intended termination ("Termination
Date"). This Agreement shall terminate on the Termination Date and the Parties
shall have no further duties or obligations to each other, provided, however,
that (i) Employer shall continue to pay Employee the base compensation specified
in Section 3.01 hereof for a period of three years from the Termination Date at
the same times specified in Section 3.01 (ii) Employer shall pay Employee for
each pay period in the three year period following the Termination Date an
amount equal to one/twenty-fourth of the bonus received by Employee for the year
prior to the Termination Date, and (iii) Employer shall pay Employee at the end
of the Term a lump sum amount equal to the bonus received by Employee for the
year prior to the Termination Date multiplied by a fraction the numerator of
which is the number of days in the year prior to the Termination Date and the
denominator is 365.
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<PAGE> 4
4.05 Termination by Employee other than for Good Reason. Employee may
terminate this Agreement at any time by delivering written notice to Employer of
Employee's intent to terminate at least 30 days prior to such intended
termination ("Departure Date"). This Agreement shall terminate on the Departure
Date and the parties shall have no further duties or obligations to each other,
provided, however, that Employee shall remain subject to all of the provisions
of Article V and Employer shall pay to Employee all sums due to Employee through
the Departure Date.
4.06 Termination by Employee For Good Reason. Employee may terminate
this Agreement at any time for Good Reason (as hereinafter defined) by
delivering written notice to Employer of Employee's intent to terminate for Good
Reason at least 30 days prior to such intended termination ("Good Reason
Departure Date"). This Agreement shall terminate on the Good Reason Departure
Date and the parties shall have no further duties or obligations to each other,
provided, however, that Employer shall pay Employee in one lump sum payment
within thirty (30) days of the Good Reason Termination Date an amount equal to
Employee's current base annual compensation specified in Section 3.01 hereof
plus the greater of (i) the amount of bonus received by Employee for the year
prior to Employee's termination of employment or (ii) the amount of bonus
received by Employee for the year prior to a Change in Control (as hereinafter
defined).
"Good Reason" shall mean termination of employment by Employee within
one year after the occurrence of Change in Control (as hereinafter defined);
"Change in Control" shall mean any of the following: (i) the Employer
shall not be the surviving entity in any merger, consolidation or other
reorganization (or survives only as a subsidiary of an entity other than a
previously wholly-owned subsidiary of the Employer), (ii) the Employer sells,
leases or exchanges all or substantially all of its assets to any other person
or entity (other than a wholly-owned subsidiary of the Employer), (iii) the
Employer is dissolved and liquidated, (iv) any person or entity, including a
"group" as contemplated by Section 13(d)(3) of the Securities Exchange Act of
1934, as amended, other than any person, entity or group which owned shares of
Common Stock of the Company immediately prior to the initial public offering of
the Company's Common Stock, acquires or gains ownership or control (including,
without limitation, power to vote) of more than 50% of the outstanding shares of
the Employer's voting stock (based upon voting power), or (v) during any
consecutive two-year period, individuals who constituted the Board of Directors
of the Employer (together with any new directors whose election by the Board of
Directors or whose nomination for election by the shareholders of the Employer
was approved by a vote of at least three-quarters of the directors still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors then in office.
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<PAGE> 5
ARTICLE V
PROPERTY RIGHTS
5.01 Non-Competition. If this Agreement is terminated other than
pursuant to Sections 4.04 or 4.06, Employee shall not for a period of one year
after such termination or expiration (the "One Year Period"), directly or
indirectly, either as an employee, employer, consultant, agent, lender,
principal, partner, stockholder, corporate officer, director, or in any other
individual or representative capacity, engage or participate in any business
that is in competition in any manner whatsoever with the business engaged in by
Employer in the continental United States at the time of such termination or
resignation. The provisions of this Section 5.01 and those contained in Section
5.02 shall not apply to any termination occurring pursuant to Sections 4.04
or 4.06.
5.02 Solicitation. If this Agreement is terminated other than pursuant
to Sections 4.04 or 4.06 during the One Year Period, Employee agrees not to,
directly or indirectly, (i) call on or solicit, with respect to the activities
prohibited by Section 5.01 of this Agreement, any person, firm, corporation or
other entity who or which at the time of such termination, or within two years
prior thereto, was or had been a customer, referral source or distributor of
Employer or any of its affiliates or (ii) solicit, influence or recommend the
employment of any person who was employed by Employer on a full or part-time
basis at the time of Employee's termination of employment; provided, if
requested by any employee of Employer, Employee shall have the right to give a
reference with respect to such employee.
5.03 Confidentiality. In return for Employee's promises under this
Article V, Employee shall receive and be entrusted with certain confidential
and/or secret information of a proprietary nature, including without limitation
names and addresses of customers of the Employer and its affiliates and business
plans of the Employer. Employee shall not directly or indirectly disclose or
use, during the term of this Agreement or at any time thereafter, any such
information which is not otherwise publicly available.
5.04 Reasonableness of Restrictions. Employee agrees that (i) the
covenants contained in Sections 5.01, 5.02 and 5.03 hereof are necessary for the
protection of Employer's business goodwill, (ii) a portion of the compensation
paid to Employee under this Agreement is paid in consideration of the covenants
herein contained, the sufficiency of which consideration is hereby acknowledged,
(iii) Employee is not, and under this Agreement will not be, engaged in a common
calling, and (iv) if the scope of any restriction
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<PAGE> 6
contained in Sections 5.01, 5.02 and 5.03 hereof is too broad to permit
enforcement of such restriction to its full extent, then such restriction shall
be enforced to the maximum permitted by law, and the parties hereto hereby
consent that such scope may be judicially modified accordingly in any proceeding
brought to enforce such restriction. The existence of any claim or cause of
action of Employee against Employer, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by Employer of
these covenants.
5.05 Enforcement. If Employee's employment is terminated pursuant to
Sections 4.03 or 4.05, Employer agrees to pay Employee her base compensation
during the One Year Period plus for each pay period during the One Year Period
Employer will pay Employee one/twenty -fourth of the amount of the bonus
received by Employee for the year preceding Employees termination of employment.
If this Agreement is not renewed at the end of its Term Employer agrees to pay
Employee her salary during the One Year Period plus for each pay period during
the One Year Period Employer will pay Employee one/twenty-fourth of the amount
of the bonus received by Employee for the year preceding Employee's termination
of employment. Employer reserves the right to waive the provisions of Sections
5.01 and 5.02 if Employee terminates this Agreement pursuant to Sections4.03 or
4.05 and such waiver will release Employer from any payment obligations under
this Section 5.05. Employee acknowledges that the restrictions contained in
Sections 5.01, 5.02 and 5.03 hereof are reasonable and necessary to protect the
legitimate interests of Employer and its affiliates, that Employer would not
have entered into this Agreement in the absence of such restrictions, and that
any violation of any provision of the covenants contained in Sections 5.01, 5.02
or 5.03 hereof will result in irreparable injury to Employer. Employee also
acknowledges that Employer shall be entitled to preliminary and permanent
injunctive relief, without the necessity of proving actual damages as well as an
equitable accounting of all earnings, profits and other benefits arising from
any such violation, which rights shall be cumulative and in addition to any
other rights or remedies to which Employer may be entitled.
5.06 Copy of Covenants. Until the expiration of the applicable
restrictions, Employee will provide, and Employer similarly may provide, a copy
of the covenants contained in Sections 5.01, 5.02 and 5.03 of this Agreement to
any business or enterprise which Employee may (i) directly or indirectly own,
manage, operate, finance, join, control or participate in the ownership,
management, operation, financing, or control of, (ii) serve as an officer,
director, employee, partner, principal, agent, representative, consultant leader
or otherwise, or (iii) with which she may use or permit her name to be used.
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<PAGE> 7
ARTICLE VI
GENERAL PROVISIONS
6.01 Arbitration. Employee and Employer agree that all disputes
concerning the terms of this Agreement or Employee's employment with Employer
will be subject solely to binding arbitration. The arbitrator selection and
conduct of the arbitration will be pursuant to the Commercial Arbitration Rules
of the American Arbitration Association. The place of the arbitration shall be
Houston, Texas and shall be governed by the laws of Texas.
6.02 Notices. Any notices to be given hereunder by either party to the
other may be effected either by personal delivery in writing or by mail,
registered or certified, postage prepaid with return receipt requested:
If to Employer:
First Sierra Financial, Inc.
Texas Commerce Tower
600 Travis, Suite 7050
Houston, TX 77002
Attention: Chief Executive Officer
If to Employee:
Sandy B. Ho
245 Merrie Way
Houston, Texas 77024
Mailed notices shall be addressed to the parties at the addresses set forth
above, but each party may change his/her address by written notice in accordance
with this Section 6.02. Notices delivered personally shall be deemed
communicated as of actual receipt; mailed notices shall be deemed communicated
as of ten (10) days after mailing.
6.03 Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the employment of Employee by Employer and contains all of the covenants and
agreements between the parties with respect to such employment in any manner
whatsoever.
6.04 Certain Acknowledgments. Employee by her execution and
delivery of this Agreement represents to Employer as follows:
(i) Employee has been advised by Employer to have this Agreement
reviewed by an attorney representing Employee, and Employee
has either
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<PAGE> 8
had this Agreement reviewed by such attorney or has chosen
not to have this Agreement reviewed because Employee,
after reading the entire Agreement, fully and completely
understands each provision and has decided not to obtain the
services of an attorney.
(ii) Employee either on her own or with the assistance and advice
of her attorney has in particular reviewed Article V and
understands and accepts (a) the restrictions imposed by
Article V and Sections 5.01 and 5.02 and (b) the restrictions
imposed upon Employee pursuant to these sections are
reasonable and necessary for the protection of the property
rights of Employer and its affiliates.
6.05 Headings. The headings or titles to Sections or Articles in this
Agreement are intended solely for convenience of the parties and no provision of
this Agreement is to be construed by reference to the heading or title of any
section.
6.06 Amendment or Modification; Waiver. No provision of this Agreement
may be amended, modified or waived unless such amendment, modification or waiver
is authorized by the Employer and is agreed to in writing, signed by Employee
and by the Chief Executive Officer of Employer thereunto duly authorized. Except
as otherwise specifically provided in this Agreement, no waiver by any party
hereto of any breach by any other party hereto of any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of a
similar or dissimilar provision or condition at the same or at any prior or
subsequent time; nor shall the receipt or acceptance of Employee's employment be
deemed a waiver of any condition or provision hereof. Employee acknowledges that
from time to time, Employer may establish, maintain and distribute employee
manuals or handbooks or personnel policy manuals, and officers or other
representatives of Employer may make written or oral statements relating to
personnel policies and procedures. Such manuals, handbooks and statements are
intended only for general guidance. No policies, procedures or statements of any
nature by or on behalf of Employer (whether written or oral, and whether or not
contained in any employee manual or handbook or personnel policy manual), and no
acts or practices of any nature shall be construed to modify this Agreement or
to create express or implied obligations of Employer.
6.07 Assignability. Employee shall not assign, pledge or encumber any
interest in this Agreement or any part thereof without the express written
consent of Employer, this Agreement being personal to Employee. This Agreement
shall, however, inure to the benefit of Employee's estate, dependents,
beneficiaries and legal representatives. This Agreement shall not be assignable
by Employer without the written consent of Employee.
6.08 Governing Law. THIS AGREEMENT HAS BEEN NEGOTIATED, EXECUTED AND
DELIVERED IN THE STATE OF TEXAS, AND SHALL IN ALL RESPECTS BE INTERPRETED,
CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE STATE OF TEXAS.
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<PAGE> 9
6.09 Severability. Each provision of this Agreement constitutes a
separate and distinct undertaking, covenant and/or provision hereof. In the
event that any provision of this Agreement shall finally be determined to be
unlawful, such provision shall be deemed severed from this Agreement, but every
other provision of this Agreement shall remain in full force and effect, and in
substitution for any such provision held unlawful, there shall be substituted a
provision of similar import reflecting the original intent of the parties hereto
to the maximum extent permissible under law.
6.10 No Duress. Employee acknowledges that no force, fear or threats or
duress of any kind have been used to obtain the agreements and covenants
contained in this Agreement.
EXECUTED in Houston, Texas, on the day and year first above written.
"EMPLOYER"
First Sierra Financial, Inc.
By: /s/ Thomas J. Depping
----------------------
Name: Thomas J. Depping
Title: Chief Executive Officer
"EMPLOYEE"
/s/ Sandy B. Ho
---------------
Sandy B. Ho
<PAGE> 1
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made as of the 13th the
day of April, 1998 (the "Effective Date"), by and between First Sierra
Financial, Inc., a Delaware corporation (the "Employer" or "Company"), and
David L. Pederson (the "Employee"). Employer and Employee may be referred to
herein collectively as the "Parties" and individually as a "Party." All
capitalized terms not otherwise defined in this Agreement shall have the
meaning ascribed to such terms in the Stock Purchase Agreement among David L.
Pederson, William A. Moore, Geoffrey Harrison, Nexsoft, Inc. and First Sierra
Financial, Inc.
ARTICLE I
TERM
Employer hereby agrees to employ Employee and Employee hereby agrees
to accept employment with Employer for a period beginning on the Effective Date
and ending on the earlier to occur of (i) the fifth anniversary of the
Effective Date and (ii) the date this Agreement is terminated pursuant to the
terms hereof (the "Term").
ARTICLE II
DUTIES OF EMPLOYEE
2.01 Duties. Employee is engaged, during the Term, to be an
Executive Vice President and Chief Information Officer (CIO) of Employer and a
member of the Executive Management Team and the General Manager of Employer's
Information Systems Division. Employee's duties and powers shall be determined
from time to time by the CEO of Employer and during the Term shall be
consistent with the duties of the general manager of the Information System's
Division. Employee shall perform and discharge such duties in a businesslike
manner and faithfully as an officer of Employer, and shall be subject to the
supervision and direction of the CEO of Employer and Employer's Board of
Directors. Employee shall discharge such duties during Employer's normal
business hours. Employer shall not require Employee to relocate from the
Highlands Ranch, Colorado, area without Employee's consent. Employee's travel
shall not exceed twenty percent.
2.02 Full Time Employment. Employee shall devote his productive
time, ability and attention to the business of Employer during the Term.
Employee shall not, directly or indirectly, during the Term render any services
of a business, commercial or professional nature to any other person,
corporation, form or organization, whether for compensation or otherwise,
without the prior written consent of Employer, provided, however, Employee may
comply with his obligations under that certain agreement with American Business
Leasing to provide software service and support.
<PAGE> 2
ARTICLE III
COMPENSATION AND BENEFITS
3.01 Base Compensation. As compensation for services rendered and
Employee's covenants and agreements under this Agreement, during the Term
Employee shall be entitled to receive from Employer a base salary of $175,000
per year, payable in equal semi-monthly installments, subject to withholding
and similar taxes. Employee's base salary will be reviewed on an annual basis,
tied to the Effective Date, by the Compensation Committee of Employer's Board
of Directors to determine (in the discretion of such Committee) whether any
increase will be granted.
3.02 Benefit Plans. During the Term, and thereafter, to the extent
provided in the applicable plan, Employer agrees to include Employee in any
retirement, insurance, medical, disability, dental or health benefit plans
adopted by Employer for the general benefit of the similar level employees of
Employer including, without limitation, Employer's 401K plan. Employee shall be
entitled to take 4 weeks paid vacation each year.
3.03 Expenses. Employer, in accordance with the rules and
regulations that the Board of Directors shall issue and revise from time to
time, shall timely reimburse Employee for business expenses directly and
reasonably incurred in the performance of his duties.
3.04 Incentive Plans. Employee shall be entitled to participate in
any stock option plan and bonus plan adopted by the Board of Directors for
executive level officers of the Company (i.e., those officers constituting an
executive vice president or the president). Employee acknowledges and agrees
that the extent to which Employee is entitled to participate in any such plan,
and the terms of such participation, the amount of compensation, the number of
options and the terms of such options shall be subject to the sole control and
discretion of the Board of Directors (and neither the Company nor any member of
its Board of Directors shall owe any duty or be subject to any standard of care
in making such determination).
ARTICLE IV
TERMINATION
This Agreement shall terminate prior to the expiration of its Term
upon the occurrence of any one of the following events:
4.01 Disability. If Employee is unable to perform his duties and
responsibilities hereunder to the extent required by the Board of Directors of
Employer by reason of illness, injury or incapacity for 60 consecutive days
(during such 60 day period Employee shall continue to be compensated as
provided in Section 3.01), this Agreement may be terminated by Employer, and
Employer and Employee shall have no further liability or obligations hereunder
other than Employer's obligation to pay Employee amounts that may be due (if
any) under Section 3.03 through the date of such termination and not previously
paid to Employee and any rights of Employee with respect to the plans described
in Section 3.02 that, in accordance with the terms of the applicable plan,
provide for benefits to Employee beyond such termination date. In the
<PAGE> 3
event of any dispute under this Section 4.01, Employee shall submit to a
physical examination by a licensed physician selected by Employer.
4.02 Death. If Employee dies during the Term, Employer shall pay to
Employee's executors, legal representatives or administrators the base
compensation specified in Section 3.01 hereof in respect of the period through
the date of such death together with any amount that may be due (if any) under
Section 3.03 through the date of such death and not previously paid to
Employee.
4.03 Cause. Nothing in this Agreement shall be construed to prevent
the termination of this Agreement by Employer at any time for "cause." For
purposes of this Agreement, "cause" shall mean (i) Employee shall commit an act
of theft or embezzlement from or fraud on Employer, (ii) Employee shall
willfully neglect his duties while employed by Employer and not cease such
neglect within 15 days following receipt of a notice from Employer stating with
reasonable specificity what duties are being willfully neglected and requesting
that Employee no longer neglect his duties, (iii) Employee shall habitually
breach Employer's policies and fail to comply with Employer's policies within
15 days following receipt of a notice from Employer requesting such compliance,
(iv) Employee shall be in material breach or default of this Agreement, and
shall remain in material default or breach 15 days after notice in writing, of
such breach or default, or (v) Employee shall commit an act of moral turpitude
or a crime that brings the reputation of the Company into public disrepute or
causes Employer to be viewed unfavorably by customers or suppliers, in any
event in the reasonable determination of the Company's Board of Directors. Upon
termination for cause, Employer shall pay to Employee all sums due to Employee
through the date of such termination under Section 3.01 and 3.03 (to the extent
the same have accrued), and not previously paid to Employee. Following such
termination and payment as described in the preceding sentence, Employer shall
have no further duties or obligations to Employee. Employee will also have all
rights with respect to the plans described in Section 3.02 that in accordance
with the terms of the applicable plan provides for benefits to Employee beyond
such termination date. In the event of a termination under this Section,
Employee shall remain subject to all provisions of Article V.
If Employee is terminated for cause and Employee disputes such
termination, such dispute shall be resolved by a binding mediation conducted by
a mediator with ADR Group, Inc., 1980 Post Oak Blvd., Suite 2210, Houston,
Texas 77056, (713) 621-2200. Such mediation shall be held in Houston, Texas,
within 5 days after notice terminating Employee for cause. The losing party
shall pay the mediator's fees.
4.04 Termination Without Cause by Employer. Employer, in its
discretion and for any reason, may terminate this Agreement at any time by
delivering 30 days' prior written notice to Employee prior to such intended
termination ("Termination Date"). This Agreement shall terminate on the
Termination Date and, except as provided under this Section 4.04, the Parties
shall have no further duties or obligations to each other. Employer shall pay
to Employee all amounts that may have accrued under Section 3.01 and 3.03
through the date of such termination and not previously paid to Employee and
the balance of the base compensation due Employee over the remaining portion of
the five year term; provided, if Employer so elects, Employer may pay such
remaining base compensation on a monthly basis. In the event of a termination
under this Section 4.04, Employee shall remain subject to all provisions of
Article V.
<PAGE> 4
4.05 No Termination by Employee. Employee shall not have the right
to terminate this Agreement for any reason.
4.06 Acquisition. Employee shall be entitled to a payout of the base
salary under Section 3.01 due over the remaining months in the Term if
Employee's employment is terminated following the acquisition of Employer by
another entity where Employer is not the surviving entity.
ARTICLE V
PROPERTY RIGHTS
5.01 Scope of Protection. During the period that Employee is
employed hereunder, Employee shall use his best efforts to promote the
interests of Employer consistent with his normal duties. During Employee's
employment with Employer and (to the extent applicable to periods of time
following Employee no longer being employed by Employer) during the period
commencing as of the date hereof and ending upon the earlier to occur of (a)
the expiration of one year from the period through which Employer agrees to pay
Employee following a termination pursuant to Section 4.04, and (b) the
expiration of six years from the date hereof, Employee hereby agrees that he
shall not, directly or indirectly, either through any form of ownership, or as
a director, officer, principal, agent, employee, employer, advisor, consultant,
partner or in any individual or representative capacity whatsoever, either for
his own benefit or for the benefit of any other person or entity, without the
prior written consent of the Board of Directors of Employer, engage in any of
the following acts, which acts shall be considered violations of this
Agreement: (i) license or provide software or software related services to any
person or entity engaged in any equipment or software lease or financing
business; (ii) request or advise any customer of Employer to withdraw, curtail
or cancel any of its business with Employer; (iii) induce or attempt to
influence any employee of Employer to terminate his or her employment with
Employer; (iv) disclose or communicate to any other person or entity the names
of any customers of Employer or other knowledge of the operations and business
of Employer; (v) employ or cause to be employed any individual employed by
Employer at any time during the Term; (vi) request, advise or attempt to
influence any person or entity which is a source of materials, supplies,
personnel, services, funds or information for Employer to withdraw, cancel or
curtail the sale or furnishing of such items to Employer; or (vii) use for his
own benefit or otherwise, or communicate to, divulge to, or use for the benefit
of, any other person or entity the Proprietary Software (or any other software
owned by the Company) or any confidential information and/or trade secrets
disclosed to, discovered by or otherwise known by Employee through his
employment and/or association with Employer, it being the intent of the parties
that Employee will have no rights to such Proprietary Software and will honor
such confidential information and will not, directly or indirectly, use the
confidential information in such a way as to adversely affect Employer or
Employer's business relations. It is understood and agreed that the foregoing
subsection (vii) shall apply during the period of employment and at all times
thereafter. Nothing in the foregoing shall prevent Employee after termination
of Employee's employment under this Agreement from pursuing or soliciting
Employer's customers, vendors, brokers and manufacturers regarding the
licensing, servicing or support of "Credit Bureau Software" (hereinafter
defined). "Credit Bureau Software" shall mean the credit report software
developed by Nexsoft, Inc. and known as "Credit Line."
<PAGE> 5
5.02. Reasonableness of Restrictions. Insofar as the covenants set
forth in this Agreement are concerned, Employee specifically acknowledges and
agrees as follows: (i) the covenants are reasonable and necessary to protect
the goodwill and the operations and business of Employer; (ii) the time
duration of the covenants are reasonable and necessary to protect the goodwill
and the operations and business of Employer; (iii) the geographical area
limitations of the covenants are reasonable and necessary to protect the
goodwill and the operations and business of Employer; and (iv) the covenants
are not oppressive to Employee and do not impose a greater restraint on
Employee than is necessary to protect the goodwill and the operations and
business of Employer.
5.03 Enforcement. If Employee violates any of the covenants set
forth in this Agreement, Employer shall suffer irreparable damage and shall be
entitled to full injunctive relief or such other relief against Employee as may
be provided by law or in equity together with such damages as may be provided
at law or in equity. Employer shall be entitled where provided under applicable
law to specific performance of the requirements of this Agreement or to
temporary or permanent injunctive relief against any breach of any provision of
this Agreement by Employee. If either party files a lawsuit seeking specific
performance or injunctive against, or damages for, any breach of this
Agreement, the party substantially prevailing in such lawsuit shall be entitled
to recover from the other party all court costs and reasonable attorneys' fees
incurred by the prevailing party in connection with such lawsuit.
5.04 Reformation. It is the express intention of Employer and
Employee to comply with all laws which may be applicable to the covenants
contained in this Agreement. Therefore, Employer and Employee have attempted to
limit Employee's right to compete only to the extent necessary to protect (i)
Employer from unfair competition, and (ii) Employer's goodwill and its
operations and business. Employer and Employee recognize, however, that
reasonable people may differ in making such a determination. Consequently,
Employer and Employee hereby specifically agree that, in the event that any
covenant contained in this Agreement shall be determined by any court or other
constituted legal authority to be effective in any particular area or
jurisdiction only if such covenant is modified to limit its duration or scope,
such covenant may be reformed or modified by the judgment or order of such
court or authority to reflect a lawful and enforceable duration or scope. Such
covenant shall automatically be deemed to be amended and modified with respect
to that particular area or jurisdiction so as to comply with the judgment or
order of such court or authority and, as to all other areas and jurisdictions
covered by this Agreement, the terms and provisions hereof shall remain in full
force and effect as originally written. If any covenants contained in this
Agreement shall be held by any court or other constituted legal authority to be
void or otherwise unenforceable in any particular area or jurisdiction
notwithstanding the operation of this Section 5.04, such covenant automatically
shall be deemed to be amended so as to eliminate therefrom that particular area
or jurisdiction as to which such covenant is so held void or otherwise
enforceable and, as to all other areas and jurisdictions covered by this
Agreement, the terms and provisions hereof shall remain in full force and
effect as originally written.
5.05 Employee agrees and acknowledges that all nonpublic or
confidential information, ideas, concepts, improvements, discoveries,
inventions, business plans, business strategies, and software possessed,
acquired or developed by Employer at any time ("Confidential Information")
shall be the sole property of Employer. Employee agrees that all information,
ideas, concepts, improvements, discoveries, inventions, business plans,
business strategies, and software that Employee develops or conceives in the
scope of his employment
<PAGE> 6
shall be the Confidential Information of Employer and shall be solely owned by
Employer. During the term of this Agreement, Employee shall promptly disclose
all information, ideas, concepts, improvements, discoveries, inventions,
business plans, business strategies, and software, whether patentable or not,
conceived, developed, made or acquired by Employee during the term of this
Agreement that relate to the business, products or services of Employer,
regardless of whether such all information, ideas, concepts, improvements,
discoveries, inventions, business plans, business strategies, and software is
conceived, developed or discovered or acquired by Employee on the job, at home,
or elsewhere. Employee agrees to use his best efforts and exercise utmost
diligence to protect and safeguard the Confidential Information, and except as
may be expressly required by Employer in connection with Employee's performance
under this Agreement, Employee shall not, directly or indirectly, use for his
own benefit, or for the benefit of another, or disclose to another, the
Confidential Information.
5.06 By execution of this Agreement, Employee hereby assigns and
transfers to Employer or its nominee all worldwide right, title and interest,
legal and equitable, in and to all information, ideas, concepts, improvements,
discoveries, inventions, business plans, business strategies, and software,
whether patentable or not, conceived, developed or made or acquired by Employee
during the term of this Agreement that relate to the business, products or
services of Employer, regardless of whether such all information, ideas,
concepts, improvements, discoveries, inventions, business plans, business
strategies, and software is conceived, developed or discovered or acquired by
Employee on the job, at home, or elsewhere. Both during and after this
Agreement, Employee agrees to assist Employer or its nominee in the protection
of such information, ideas, concepts, improvements, discoveries, inventions,
business plans, business strategies, and software.
5.07 Upon termination of this Agreement, or at any other time upon
request, Employee shall immediately deliver to Employer all documents embodying
any of Employer's Confidential Information that are in Employee's possession or
under this control.
ARTICLE VI
GENERAL PROVISIONS
6.01 Notices. All notices, requests and other communications
hereunder shall be in writing. Any notice, request or other communication
hereunder shall be sent by (i) personal delivery (including courier service),
(ii) telecopier during normal business hours to the number indicated, or (iii)
registered or certified mail, return receipt requested, postage prepaid, and
addressed to the intended recipient as set forth below (any communication shall
be deemed given upon receipt):
<PAGE> 7
If to Employer:
First Sierra Financial, Inc.
Texas Commerce Tower, Suite 7050
600 Travis Street
Houston, TX 77002
Fax: (713) 221-1818
Attention: President
If to Employee:
David L. Pederson
3278 West Oak Leaf Place
Highlands Ranch, CO 80126
Any party may change its telecopier number or its address to which notices,
requests, and other communications hereunder are to be delivered by giving the
other party notice in the manner herein set forth.
6.02 Entire Agreement. This Agreement and the Stock Purchase
Agreement between Employer, Employee, William A. Moore, Geoffrey Harrison and
Nexsoft, Inc. supersede any and all other agreements, letters of intent,
statements, understandings, representations and warranties (if any), whether
oral or in writing, between the Parties solely with respect to the employment
of Employee by Employer and contain all of the covenants and agreements between
the parties with respect to such employment.
6.03 Certain Acknowledgments. Employee by his execution and
delivery of this Agreement represents to Employer as follows:
(i) Employee has been advised by Employer to have
this Agreement reviewed by an attorney
representing Employee, and Employee has had this
Agreement reviewed by such attorney.
(ii) Employee either on his own or with the
assistance and advice of his attorney has in
particular reviewed Article V and understands
and accepts (a) the restrictions imposed by
Article V and (b) the restrictions imposed upon
Employee pursuant to these sections are
reasonable and necessary for the protection of
the rights of Employer and its affiliates.
6.04 Headings. The headings or titles to Sections or Articles in
this Agreement are intended solely for convenience of the Parties and no
provision of this Agreement is to be construed by reference to the heading or
title of any section.
6.05 Amendment or Modification: Waiver. No provision of this
Agreement may be amended, modified or waived unless such amendment,
modification or waiver is agreed to in writing, signed by Employee and by an
officer of Employer thereunto duly authorized. Except as otherwise specifically
provided in this Agreement, no waiver by any Party hereto of any breach by any
other party hereto of any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of a similar or
dissimilar provision or condition at
<PAGE> 8
the same or at any prior or subsequent time; nor shall the receipt or
acceptance of Employee's employment be deemed a waiver of any condition or
provision hereof.
6.06 Assignability. Employee shall not assign, pledge or encumber
any interest in this Agreement or any part thereof without the express written
consent of Employer, this Agreement being personal to Employee. This Agreement,
shall, however, inure to the benefit of Employee's estate, dependents,
beneficiaries and legal representatives. This Agreement shall not be assignable
by Employer without the written consent of Employee, but if Employer shall
merge or consolidate with or into, or transfer substantially all of its assets
to, another corporation or other form of business organization, then this
Agreement shall bind the successor of Employer resulting from such merger,
consolidation or transfer. No such merger, consolidation or transfer, however,
shall relieve Employer or Employee from liability and responsibility for the
performance of their respective duties and obligations hereunder.
6.07 Governing Law. THIS AGREEMENT SHALL IN ALL RESPECTS BE
INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE
STATE OF COLORADO.
6.08 Severability. Each provision of this Agreement constitutes a
separate and distinct undertaking, covenant and/or provision hereof. In the
event that any provision of this Agreement shall finally be determined to be
unlawful, such provision shall be deemed severed from this Agreement, but every
other provision of this Agreement shall remain in full force and effect, and in
substitution for any such provision held unlawful, there shall be substituted a
provision of similar import reflecting the original intent of the Parties
hereto to the maximum extent permissible under law.
6.09 No Duress. Employee acknowledges that no force, fear or threats
or duress of any kind have been used to obtain the agreements and covenants
contained in this Agreement.
6.10 Duplicates. This Agreement may be executed in any number of
original counterparts, all of which will constitute but one and the same
instrument.
6.11 Arbitration. Any dispute arising under or in any matter
relating to this Agreement shall be required to be resolved pursuant to the
arbitration procedure set forth in Section 10(n) of the Stock Purchase
Agreement referenced in Section 6.02 above.
6.12 Confidential Information. Employee covenants and agrees that he
shall not use or disclose any proprietary or confidential information learned
from any third party pursuant to vendor agreements.
<PAGE> 9
EXECUTED as of the day and year first above written, intending to be
legally bound hereby.
EMPLOYER:
FIRST SIERRA FINANCIAL, INC.
By: /s/ THOMAS J. DEPPING
------------------------------------
Thomas J. Depping, President
EMPLOYEE:
/s/ DAVID L. PEDERSON
------------------------------------
David L. Pederson
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF FIRST SIERRRA FINANCIAL, INC
First Sierra Receivables Inc., a Delaware Corporation
First Sierra Receivables II, Inc., a Delaware Corporation
First Sierra Receivables III, Inc., a Delaware Corporation
First Sierra Receivables IV, Inc., a Delaware Corporation
First Sierra Acquisition, Inc., a Delaware Corporation
First Sierra Acquisition Corp. I., a Texas Corporation
First Sierra Acquisition Corporation II, a Delaware Corporation
First Sierra TFS, Inc., a Delaware Corporation
Corporate Capital Leasing Group, Inc., a Pennsylvania Corporation
Northcoast Capital Leasing Company, Inc., an Ohio Corporation
First Sierra Northcoast Inc., a Delaware Corporation
Financial Management Services, Inc., a Washington Corporation
All American Financial Services, Inc., a Georgia Corporation
Heritage Credit Services, Inc., a Delaware Corporation
Integrated Lease Management Inc., a California Corporation
Independent Capital Corp., a New Jersey Corporation
Vendor Leasing Services Inc., a Georgia Corporation
TFS, Inc., dba The Money Source, a Washington Corporation
21st Century Credit Leasing Services, Inc., a Florida Corporation
The Republic Group, Inc., a California Corporation
The Republic Group, LLC, a California Corporation
Republic Commercial Credit, LLC, a California Corporation
Republic Fleet Services, LLC, a California Corporation
Eagle Holdings, a California Corporation
OMNI Leasing, Inc., a Pennsylvania Corporation
Nexsoft, Inc., a Florida Corporation
Suffolk Street Group, Plc, a company incorporated in the United Kingdom
Titan Finance Limited, a company incorporated in England and Wales
Booker Montague Leasing Limited, a company incorporated in England and Wales
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K, into the Company's
previously filed registration statements on Form S-8 (333-28687), Form S-3
(333-62057) and Form S-4 (333-44361).
ARTHUR ANDERSEN LLP
Houston, Texas
March 31, 1999
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<ALLOWANCES> 1,097
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<TOTAL-ASSETS> 83,754
<CURRENT-LIABILITIES> 13,374
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3,890
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<TOTAL-REVENUES> 23,371
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