<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-22525
-----------------------
SIERRACITIES.COM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 76-0438432
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
600 TRAVIS STREET
SUITE 7050
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 221-8822
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 [ ]
The number of shares of the registrant's common stock outstanding on May 1,
2000 was 19,048,640.
================================================================================
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIERRACITIES.COM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
Lease financing receivables, net ................................................ $ 872,954 $ 871,948
Cash and cash equivalents ....................................................... 24,730 57,083
Other receivables ............................................................... 8,230 7,613
Investment in trust certificates ................................................ 16,179 9,808
Marketable securities ........................................................... 2,956 3,460
Goodwill and other intangible assets, net ....................................... 43,031 43,500
Property and equipment, net ..................................................... 11,864 11,723
Other assets .................................................................... 10,551 8,627
Current tax receivables ......................................................... -- 590
----------- -----------
Total assets ............................................................... $ 990,495 $ 1,014,352
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Nonrecourse debt ............................................................. $ 746,510 $ 766,095
Other debt ................................................................... 26,602 27,425
Subordinated notes payable ................................................... 1,000 1,000
Other liabilities:
Accounts payable and accrued liabilities ..................................... 18,367 23,620
Holdback reserves payable .................................................... 29,916 27,883
Income taxes payable ......................................................... 20 --
Deferred income taxes ........................................................ 68 375
----------- -----------
Total liabilities .......................................................... 822,483 846,398
----------- -----------
Redeemable preferred stock ...................................................... -- 70
Stockholders' equity:
Common stock, $.01 par value, 100,000,000 shares authorized, 19,048,640
shares and 19,025,311 shares issued and outstanding, respectively ........ 190 190
Additional paid-in capital ................................................... 158,864 158,654
Retained earnings ............................................................ 9,293 9,147
Accumulated other comprehensive loss ......................................... (335) (107)
----------- -----------
Total stockholders' equity ................................................. 168,012 167,884
----------- -----------
Total liabilities and stockholders' equity ................................. $ 990,495 $ 1,014,352
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
1
<PAGE> 3
SIERRACITIES.COM INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
2000 1999
------- --------
<S> <C> <C>
Gain on sale of lease financing receivables through securitization transactions ....... $ 1,727 $ --
Gains from direct sales of lease financing receivables ................................ 2,344 3,170
Interest income ....................................................................... 25,351 13,165
Servicing income ...................................................................... 1,833 1,647
Other income .......................................................................... 1,396 1,386
------- -------
Total revenues ..................................................................... 32,651 19,368
------- -------
Salaries and benefits ................................................................. 6,418 5,086
Interest expense ...................................................................... 14,005 6,320
Provision for credit losses on lease financing receivables ............................ 4,924 2,087
Depreciation and amortization ......................................................... 1,553 1,260
Other general and administrative ...................................................... 5,425 4,327
------- -------
Total expenses ..................................................................... 32,325 19,080
------- -------
Income before provision for income taxes .............................................. 326 288
Provision for income taxes ............................................................ 180 257
------- -------
Net income ............................................................................ $ 146 $ 31
======= =======
Earnings per common share, basic ...................................................... $ 0.01 $ 0.00
======= =======
Earnings per common share, diluted .................................................... $ 0.01 $ 0.00
======= =======
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
2
<PAGE> 4
SIERRACITIES.COM INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash Flows from Operations:
Net income ........................................................................... $ 146 $ 31
Reconciliation of net income to cash provided by operations:
Depreciation and amortization .................................................... 1,553 1,260
Provision for credit losses on lease financing receivables ....................... 4,924 2,087
Gain on sale of lease financing receivables ...................................... (4,071) (3,170)
Funding of lease financing receivables, held for sale ............................ (71,649) (77,653)
Principal payments received on lease financing receivables, held for sale ........ 1,627 2,954
Proceeds from sales of lease financing receivables, net of trust certificates
and marketable securities retained, if any ..................................... 187,228 81,581
Deferred income taxes ............................................................ 68 --
Accumulated translation adjustments .............................................. (228) (209)
Changes in assets and liabilities, net of effects from acquisitions:
Decrease (increase) in other receivables ................................... (617) 5,715
Increase in other assets ................................................... (1,924) (268)
Increase (decrease) in accounts payable and accrued liabilities ............ (5,253) 819
Increase in holdback reserve payable ....................................... 2,033 157
Increase in income taxes ................................................... 331 1,556
--------- ---------
Net Cash Provided by Operations ....................................... 114,168 14,860
--------- ---------
Cash Flows from Investing Activities:
Funding of lease financing receivables, held for investment ...................... (179,498) (191,586)
Principal payments received on lease financing receivables,
held for investment .......................................................... 66,592 15,801
Expenditures for property and equipment .......................................... (1,065) (1,141)
Expenditures for acquisitions, including acquisition costs,
less cash acquired ............................................................. (12,282) (45)
--------- ---------
Net Cash Used in Investing Activities ................................. (126,253) (176,971)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from securitized warehouse facilities, net of repayments ................ (20,408) 178,501
Proceeds from exercise of stock options .......................................... 140 --
--------- ---------
Net Cash Provided by (Used in) Financing Activities ................... (20,268) 178,501
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents .................................... (32,353) 16,390
Cash and Cash Equivalents at January 1, ................................................. 57,083 7,928
--------- ---------
Cash and Cash Equivalents at March 31, .................................................. $ 24,730 $ 24,318
========= =========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
<PAGE> 5
SIERRACITIES.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. THE COMPANY
Organization
SierraCities.com Inc. ("SierraCities.com"), formerly First Sierra
Financial, Inc., is a leading provider of e-finance solutions for small
businesses. Through our Internet-based technology platform, we offer on-line
end-to-end business financing fulfillment solutions for specific equipment
purchases and for general corporate purposes. We were formed in June 1994 to
acquire, originate, sell and service equipment leases relating to a wide range
of equipment, including computers and peripherals, software, telecommunications
and diagnostic equipment as well as other specialized equipment for the
healthcare, automotive, food and hospitality industries. The equipment we
finance generally has a purchase price of less than $250,000, with an average of
approximately $30,000 for leases originated in 1999 and in the first quarter of
2000. We fund the acquisition or origination of our leases from working capital
or through our securitized warehouse 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.
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
such date, we recorded a gain on sale of lease financing receivables when the
receivables were included 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 leases acquired and originated on our balance sheet
as long-term investments rather than selling such leases through securitization
transactions. We also modified the structure of our securitized warehouse
facilities such that they would be considered debt under generally accepted
accounting principles. 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. In the fourth quarter of 1999, we began to de-emphasize the
origination channels that generate lower return on equity and to reduce the
amount of lower yielding assets on our balance sheet, the objective of which is
to utilize our capital more effectively. In connection with this objective, in
March 2000, we completed the securitization sales process of certain lower
yielding Private Label assets which met the criteria for sales of lease
financing receivables under generally accepted accounting principles. Unlike
securitizations completed prior to July 1, 1998 in which we retain a trust
certificate interest in assets sold, for the gain on sale securitizations
completed in the fourth quarter 1999 and the Series 2000-1 completed in April
2000, we received 100% of the present value of the remaining scheduled payments
of the equipment leases securitized. We elected securitization as the sales
structure to reduce the amount of lower yielding assets on our balance sheet
since it provides us with the highest amount of sales proceeds and the most
efficient execution. We will continue to evaluate different structuring
alternatives and will use the structure that provides us with the best
execution.
We acquire and originate leases primarily through our Private Label, Retail
and Captive Finance programs. Under the Private Label program, we are 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 Retail and Captive Finance programs are
originated through relationships with equipment vendors and individual lessees.
In addition, we have 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
All dollar amounts in the tabulations in the notes to the condensed
consolidated financial statements are stated in thousands unless otherwise
4
<PAGE> 6
SIERRACITIES.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
indicated. All dollar amounts included in the text are in whole dollars, unless
otherwise indicated. Certain reclassifications have been made to the 1999
condensed consolidated financial statements to conform with the 2000
presentation.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles and
the rules and regulations of the Securities and Exchange Commission for interim
financial statements. Accordingly, the interim statements do not include all of
the information and disclosures required for annual financial statements. In the
opinion of our management, all adjustments (consisting solely of adjustments of
a normal recurring nature) necessary for a fair presentation of these interim
results have been included. All significant intercompany accounts and
transactions have been eliminated in consolidation. These condensed consolidated
financial statements and related notes should be read in conjunction with the
audited consolidated financial statements and notes thereto included in our
Annual Report on Form 10-K. The results for the interim periods are not
necessarily indicative of the results to be expected for the entire year.
Gain on Sale of Lease Financing Receivables
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 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 market value of the trust certificate,
the subordinated securities which have been retained and the servicing asset is
based on our estimate of our fair value using a discounted cash flow approach.
Gain on portfolio sales of leases is calculated as the difference between
the proceeds received, net of related selling expenses, and the carrying amount
of the related leases adjusted for our ongoing recourse obligations, if any. At
March 31, 2000, we believe that we do not have any material recourse obligations
related to receivables sold through portfolio sales.
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. For leases and loans that are securitized using the criteria for sales
of lease financing receivables under generally accepted accounting principles,
we provided an allowance for credit losses for loans and leases that were
considered impaired during the period from the funding of the loans and leases
through the date such loans and leases were sold through our securitization
program. When the securitization took place, we reduced the allowance for credit
losses for any provision previously recorded for such leases. Any losses
expected to be incurred on loans and leases sold were taken into consideration
in determining the fair value of any Trust Certificates retained and recourse
obligations accrued, if any. For loans and leases that we retain on our balance
sheet, we provide an allowance for credit losses for retained loans and leases
which we consider impaired based on management's assessment of the risks
inherent in the lease receivables. Management monitors the allowance on an
ongoing basis based on our current assessment of the risks and losses identified
in the portfolio.
Our allowance for credit losses on lease receivables and our valuation of
the Trust Certificates retained in our securitization transactions are based on
management's current assessment of the risks inherent in our lease receivables
from national and regional economic conditions, industry conditions,
concentrations, financial conditions of the obligors,
5
<PAGE> 7
SIERRACITIES.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
historical experience of certain origination channels and other factors. These
estimates are reviewed periodically and as additional provisions or write-downs
become necessary, they are reported as a reduction of earnings in the period in
which they become known.
In assessing our exposure to credit losses, management generally segregates
the leases acquired under our Private Label program from those acquired or
originated under our Retail and Wholesale programs due to the differing levels
of credit protection available to us under the various lease funding programs.
Comprehensive Income
In January 1998, we adopted the provisions 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
our first foreign subsidiary in July 1998.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
2000 1999
------- -------
<S> <C> <C>
Net income .......................................... $ 146 $ 31
Other comprehensive loss:
Foreign currency translation adjustment, net of tax.. (228) (210)
----- -----
Comprehensive loss .................................. $ (82) $(179)
===== =====
</TABLE>
Foreign Currency Translation
The financial statements of our 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
exchange rate for the period for the statement of operations. Balance sheet
translation adjustments, net of related deferred taxes, are reflected as other
comprehensive loss in the stockholders' equity section of our consolidated
balance sheet and, accordingly, have no impact on net income or loss.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (the "FASB") 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 our financial statements, however, the Statement could
increase volatility in earnings and other comprehensive income. In June 1999,
the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133" which
amends the effective date of SFAS No. 133. SFAS No. 133 is now
6
<PAGE> 8
SIERRACITIES.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
effective for fiscal years beginning after June 15, 2000. We will adopt SFAS No.
133 as of January 1, 2001 and are currently evaluating the impact of such
adoption on our consolidated financial statements.
3. EARNINGS PER SHARE
The reconciliation of the numerators and denominators used in the
computation of basic and diluted earnings per share is as follows (dollars in
thousands, except per share amounts):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------
2000 1999
----------- -----------
<S> <C> <C>
Earnings per common share, basic:
Net income ...................................... $ 146 $ 31
Preferred stock dividends ....................... -- --
----------- -----------
Net income available to common stockholders ..... $ 146 $ 31
=========== ===========
Weighted average shares outstanding ............. 19,035,693 14,226,138
=========== ===========
Earnings per common share, basic ................ $ 0.01 $ 0.00
=========== ===========
Earnings per common share, diluted:
Net income ...................................... $ 146 $ 31
=========== ===========
Weighted average shares outstanding ............. 19,035,693 14,226,138
Dilutive securities:
Options ....................................... 724,830 157,085
Redeemable preferred stock .................... 5,362 55,124
----------- -----------
Weighted average shares outstanding, diluted .... 19,765,885 14,438,347
=========== ===========
Earnings per common share, diluted .............. $ 0.01 $ 0.00
=========== ===========
</TABLE>
The computation of diluted earnings per share for the three months ended
March 31, 2000 excludes options to purchase approximately 331,000 shares of
common stock that have exercise prices (ranging from $18.375 to $24.00 per
share) greater than the $18.33 per share average market price for the period and
would thus be anti-dilutive if exercised.
The computation of diluted earnings per share for the three months ended
March 31, 1999 excludes options to purchase approximately 995,000 shares of
common stock that have exercise prices ranging from $11.25 to $23.94 per share
that were outstanding during the first three months of 1999, because such
options were anti-dilutive.
7
<PAGE> 9
SIERRACITIES.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
4. ALLOWANCE FOR CREDIT LOSSES
In assessing our exposure to credit losses, management generally segregates
the leases acquired under our Private Label program from those acquired or
originated under our Retail and Wholesale programs due to the differing levels
of credit protection available to us under the various lease funding programs.
The following table sets forth the allowance for credit losses for our Private
Label program and our Retail and Wholesale programs for the three months ended
March 31, 2000 and 1999:
<TABLE>
<CAPTION>
PRIVATE RETAIL/
LABEL WHOLESALE TOTAL (2)
-------- --------- ---------
<S> <C> <C> <C>
Balance at December 31, 1999 .............................................. $ 385 $ 9,736 $ 10,121
Provision for credit losses ............................................ 101 4,823 4,924
Charge-offs, net of recoveries, on leases acquired or originated ....... 9 (3,270) (3,261)
Reduction of allowance for leases sold (1) ............................. -- (756) (756)
Allowance related to leases acquired through business combinations ..... -- 255 255
Charge-offs, net of recoveries, on leases acquired through business
combinations ......................................................... -- (174) (174)
-------- -------- --------
Balance at March 31, 2000 ................................................. $ 495 $ 10,614 $ 11,109
======== ======== ========
Balance at December 31, 1998 .............................................. $ 83 $ 4,680 $ 4,763
Provision for credit losses ............................................ 74 2,013 2,087
Charge-offs, net of recoveries, on leases acquired or originated ....... 5 (84) (79)
Reduction of allowance for leases sold (1) ............................. -- (155) (155)
Charge-offs, net of recoveries, on leases acquired through business
combinations ......................................................... -- (314) (314)
-------- -------- --------
Balance at March 31, 1999 ................................................. $ 162 $ 6,140 $ 6,302
======== ======== ========
</TABLE>
- --------
(1) In connection with the sales of leases, we reduce the allowance for credit
losses for any provision previously recorded for such leases, since once
the leases are sold we retain no risk of loss related to the leases sold.
(2) During the three months ended March 31, 1999 and 2000, leases originated
through our Captive Finance program were approximately $49 million and $20
million, respectively, all of which were either acquired with substantial
cash holdback from the vendor or financed with third parties at the time of
originations without recourse to us. Therefore, no allowance for credit
losses was provided for leases originated under the Captive Finance
program.
8
<PAGE> 10
SIERRACITIES.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
The following table sets forth certain information regarding our allowance
for credit losses for leases originated under our Private Label program and our
Retail and Wholesale programs:
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
---------------------------------------------------------------
PRIVATE
LABEL (1) RETAIL/WHOLESALE (4) TOTAL
----------- ------------------------------------- --------
LEASES ORIGINATED LEASES ORIGINATED
WITH RECOURSE OR WITHOUT RECOURSE
CASH HOLDBACK OR CASH HOLDBACK
RESERVES RESERVES
----------------- -----------------
<S> <C> <C> <C> <C>
Lease financing receivables, net ....................... $ 256,132 $ 55,188 $550,093 $861,413(2)(3)
Allowance for credit losses ............................ 495 138 10,476 11,109
Allowance as a percentage of lease financing
receivables, net .................................. 0.19% 0.25% 1.90% 1.29%
Credit protection available for leases outstanding:
Ratio of recourse to Private Label Source
or to Retail vendors to lease financing
receivables outstanding ........................ 11.72% 32.03%
Ratio of cash holdback reserves outstanding to
total leases outstanding ....................... 3.27% 3.64%
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------------------------------------
PRIVATE
LABEL (1) RETAIL/WHOLESALE (4) TOTAL
----------- ------------------------------------- --------
LEASES ORIGINATED LEASES ORIGINATED
WITH RECOURSE OR WITHOUT RECOURSE
CASH HOLDBACK OR CASH HOLDBACK
RESERVES RESERVES
----------------- -----------------
<S> <C> <C> <C> <C>
Lease financing receivables, net ....................... $ 326,330 $ 35,429 $493,584 $855,343(2)(3)
Allowance for credit losses ............................ 385 89 9,647 10,121
Allowance as a percentage of lease financing
receivables, net .................................. 0.12% 0.25% 1.95% 1.18%
Credit protection available for leases outstanding:
Ratio of recourse to Private Label Source
or to Retail vendors to lease financing
receivables outstanding ........................ 11.40% 43.23%
Ratio of cash holdback reserves outstanding to
total leases outstanding ....................... 3.31% 1.23%
</TABLE>
- --------------------
(1) Under the Private Label program, we seek to minimize our losses through a
security interest in the equipment and leases funded through the program,
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
9
<PAGE> 11
SIERRACITIES.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Source. In determining whether a lease acquired pursuant to the Private
Label program which is considered impaired will result in a loss to us,
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.
(2) Does not reflect the reduction of allowance for credit losses provided for
the underlying lease financing receivables.
(3) Excludes lease financing receivables outstanding under the Captive Finance
program. As of March 31, 2000 and December 31, 1999, lease financing
receivables outstanding under the Captive Finance program were $22,650,000
and $26,726,000, respectively. Leases originated through our Captive
Finance program were either acquired with substantial cash holdback from
the vendor or financed with third parties at the time of origination
without recourse to us. Therefore, no allowance for credit losses was
provided for leases originated under the Captive Finance program.
(4) Management analyzes the collectibility of leases acquired or originated
pursuant to our Retail and Wholesale programs based on its underwriting
criteria, delinquency statistics, historical loss experience, current
economic conditions and other relevant factors, including availability of
recourse and cash holdback reserves.
The following table sets forth our charge-off experience with respect to
leases in our portfolio:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31, 2000
---------------------
<S> <C>
Average balance of leases outstanding during the period ... $ 898,642
=========
Net losses (recoveries) experienced on leases acquired:
Private Label program .................................. $ (9)
Retail and Wholesale programs .......................... 3,270
---------
Total ................................................ $ 3,261
=========
Net Loss Ratio as a percentage of average balance of leases
outstanding ............................................ 0.36%
=========
</TABLE>
Prior to July 1, 1998, we structured our securitization transactions to
meet the criteria for sale of lease financing receivables under generally
accepted accounting principles. During that period, the majority of the leases
were sold for the same quarter in which the leases were originated. As a result,
the average balance of leases retained on our balance sheet and the related
charge-offs were very low. Effective July 1, 1998, we altered the structure of
our securitization transactions so as to retain leases on our balance sheet. Due
to this change, the net loss ratio information as of March 31, 1999 is not
comparable to the information as of March 31, 2000. The net loss ratio as a
percentage of average balance of leases outstanding for the first three months
of 1999 was 0.02%.
10
<PAGE> 12
SIERRACITIES.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
5. DELINQUENCY STATISTICS
The following table sets forth certain information with respect to leases
which were held by us in our portfolio or serviced by us pursuant to our
securitization program. Delinquency statistics are calculated based on
application of amounts received in accordance with payment hierarchies
established within our accounting system. Based on the payment hierarchies, a
lease could be considered current even though a portion of a scheduled payment
was unpaid, due to prior application of amounts to fees.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
----------------------------------------------------------------
PRIVATE RETAIL/ CAPTIVE
LABEL WHOLESALE FINANCE(1) TOTAL (2)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Gross leases outstanding.. $ 832,403 $ 804,054 $ 24,498 $ 1,660,955
31-60 days past due ...... 0.90% 2.04% 1.80% 1.46%
61-90 days past due ...... 0.32% 0.76% 0.61% 0.54%
Over 90 days past due .... 0.39% 1.49% 1.20% 0.93%
------------- ------------- ------------- -------------
Total past due ...... 1.61% 4.29% 3.61% 2.93%
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
----------------------------------------------------------------
PRIVATE RETAIL/ CAPTIVE
LABEL WHOLESALE FINANCE(1) TOTAL
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Gross leases outstanding.. $ 794,503 $ 747,191 $ 28,864 $ 1,570,558
31-60 days past due ...... 1.03% 1.75% 0.60% 1.36%
61-90 days past due ...... 0.42% 0.89% 0.99% 0.66%
Over 90 days past due .... 0.41% 1.50% 0.47% 0.93%
------------- ------------- ------------- -------------
Total past due ...... 1.86% 4.14% 2.06% 2.95%
============= ============= ============= =============
</TABLE>
- --------------------
(1) Leases originated through our Captive Finance program were either acquired
with substantial cash holdback from the vendor (included in holdback
reserves payable on the condensed consolidated balance sheet) or financed
with third parties at the time of origination without recourse to us.
(2) As the portfolio of leases owned and serviced by us matures, we expect
delinquency rates to approach levels of delinquencies of our earlier
securitization pools which are currently in the range of 4% to 6%.
6. LEASE FINANCING RECEIVABLES
Lease financing receivables consisted of the following as of March 31, 2000
and December 31, 1999:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
<S> <C> <C>
Minimum lease payments ...................... $ 1,061,981 $ 1,072,183
Estimated unguaranteed residual value ....... 19,222 17,788
Initial direct costs ........................ 18,002 16,677
Unearned income ............................. (215,142) (224,579)
Allowance for credit losses ................. (11,109) (10,121)
----------- -----------
Lease financing receivables, net .... $ 872,954 $ 871,948
=========== ===========
</TABLE>
11
<PAGE> 13
SIERRACITIES.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
7. DEBT
Total debt consisted of the following as of March 31, 2000 and December 31,
1999:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Nonrecourse Debt:
Securitized Warehouse Facilities ..................... $361,503 $343,458
Public Securitized Transactions:
Series 1998-1 securitization ..................... 63,807 71,110
Series 1999-1 securitization ..................... 158,678 176,429
Series 1999-2 securitization ..................... 148,702 159,257
-------- --------
Total Public Securitized Transactions ..... 371,187 406,796
-------- --------
Other Nonrecourse Debt ............................... 13,820 15,841
-------- --------
Total Nonrecourse Debt .................... 746,510 766,095
Other Debt (acquired through business combinations) .... 26,602 27,425
Subordinated Notes Payable ............................. 1,000 1,000
-------- --------
Total Debt ................................ $774,112 $794,520
======== ========
</TABLE>
We classify our indebtedness as either nonrecourse debt or debt based on
the structure of the debt instrument that defines our obligations. Nonrecourse
debt includes amounts outstanding related to leases included in securitized
warehouse facilities, public 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 we have 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 these circumstances are insufficient to fully
repay amounts due, the investor or financing source withstands the full risk of
loss. Other debt and subordinated notes payable includes amounts due to
financing sources for which we are responsible for full repayment of principal
and interest.
8. ACQUISITION
During the first quarter of 2000, we purchased an additional $12.3 million
of lease receivables related to Capital Alliance Financial Services, which
specializes in the leasing of specialty vehicles such as hearses, limousines and
shuttle buses.
12
<PAGE> 14
SIERRACITIES.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
9. SEGMENT INFORMATION
We acquire and originate loans and leases primarily through our Private
Label, Retail/Wholesale, and Captive Finance programs. The following tables
present certain financial information by operating segment.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenues:
Private Label ........................ $ 10,464 $ 3,815
Retail/Wholesale ..................... 21,424 14,887
Captive Finance ...................... 763 666
----------- -----------
Total .............................. $ 32,651 $ 19,368
=========== ===========
Income before provision for income taxes:
Private Label ........................ $ 5,020 $ 1,264
Retail/Wholesale ..................... 945 3,037
Captive Finance ...................... (484) (133)
Corporate ............................ (5,155) (3,880)
----------- -----------
Total .............................. $ 326 $ 288
=========== ===========
AS OF
---------------------------
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
<S> <C> <C>
Total assets:
Private Label ........................ $ 273,219 $ 356,368
Retail/Wholesale ..................... 663,434 566,798
Captive Finance ...................... 22,902 26,944
Corporate ............................ 30,940 64,242
----------- -----------
Total .............................. $ 990,495 $ 1,014,352
=========== ===========
</TABLE>
13
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
QUARTERS ENDED MARCH 31, 1999 AND 2000
Revenues increased $13.3 million, or 69%, from $19.4 million for the first
quarter of 1999 to $32.7 million for the first quarter of 2000, due to
significant growth of balance sheet assets which generated higher interest
income. In connection with our objective to reduce the amount of lower yielding
assets on our balance sheet, in March 2000 we recognized $1.7 million of gain on
sale upon completion of the securitization sales process of certain lower
yielding Private Label leases utilizing an off balance sheet structure.
Gains from direct sales of lease financing receivables decreased $0.9
million, or 26%, from $3.2 million for the first quarter of 1999 to $2.3 million
for the first quarter of 2000. The decrease is related to a decrease in the
volume of leases sold to third parties.
Interest income increased $12.2 million, or 93%, from $13.2 million for the
first quarter of 1999 to $25.4 million for the first quarter of 2000. The
increase was related to a 112% increase in our average balance of interest
bearing assets outstanding during the first quarter of 2000 primarily as a
result of an increase in the lease receivables retained on our balance sheet
after securitization.
Servicing income increased $0.2 million, or 11%, from $1.6 million for the
first quarter of 1999 to $1.8 million for the first quarter of 2000. Servicing
income consists of late charge income collected on leases owned and serviced by
us and servicing income earned on leases sold under our securitization programs.
This increase was due to an increase in late charges collected, which resulted
from an increase in the average balance of leases owned and serviced.
Salaries and benefits increased $1.3 million, or 26%, from $5.1 million for
the first quarter of 1999 to $6.4 million for the first quarter of 2000. The
increase in salaries and benefits is directly related to the overall expansion
of our business primarily due to the expansion of our Retail network and in part
due to an increase in the number of employees in our technology group. Lease
originations for our core Retail program increased 47% from the first quarter of
1999 to the first quarter of 2000. The average balance of leases owned and
serviced increased 50% from the first quarter of 1999 to the first quarter of
2000. However, due to continued enhancements made to our e-commerce technology
platform, we were able to increase efficiency and reduce the level of increase
in salaries and benefits in relation to the number of lease originations
handled.
Interest expense increased $7.7 million, or 122%, from $6.3 million in the
first quarter of 1999 to $14.0 million for the first quarter of 2000. The
increase is primarily related to a 107% increase in the average outstanding
borrowings as a result of an increase in the lease receivables retained on our
balance sheet after securitization.
Provision for credit losses increased $2.8 million, or 136%, from $2.1
million for the first quarter of 1999 to $4.9 million for the first quarter of
2000. The increase is primarily due to an increase in lease receivables retained
on our balance sheet during the first quarter of 2000 compared to the first
quarter of 1999.
Depreciation and amortization increased $0.3 million, or 23%, from $1.3
million for the first quarter of 1999 to $1.6 million for the first quarter of
2000. Such increase was primarily attributable to a 16% increase in goodwill and
other intangible assets from March 1999 to March 2000 resulting from
acquisitions made during 1999. Additionally, we experienced a 35% increase in
fixed assets from March 1999 to March 2000 as a result of our acquisitions of
leasing companies during 1999 and the overall expansion of our business.
14
<PAGE> 16
Other general and administrative expenses increased $1.1 million, or 25%,
from $4.3 million for the first quarter of 1999 to $5.4 million for the first
quarter of 2000. Such increase was attributable to the general expansion of our
business and included an increase in expenses related to office rental, postage,
filing and title fees, credit report fees, and advertising expenses.
LIQUIDITY AND CAPITAL RESOURCES
Our small business financing business is capital intensive and requires
access to substantial short-term and long-term credit to fund the acquisition
and origination of loans and equipment leases. Since inception, we have funded
our operations primarily through borrowings under our securitized warehouse
facilities, sale of our common stock and by including certain of our leases in
public and private securitization transactions. We expect to continue to require
access to large amounts of capital to maintain and expand our volume of loans
and equipment leases and, depending upon market conditions, to complete
acquisitions of additional equipment and loan finance businesses.
We use capital to acquire and originate loans and leases, pay interest
expenses, repay obligations in connection with borrowings under our securitized
warehouse facilities, and pay operating and administrative expenses, income
taxes and capital additions.
We use our securitized warehouse facilities to fund the acquisition and
origination of loans and leases that satisfy the eligibility requirements
established under each securitized warehouse facility. These securitized
warehouse facilities provide us with advance rates that generally do not require
us to utilize our capital during the period that loans and lease receivables are
financed under such facilities. The liquidity provided under certain of our
securitized warehouse facilities is generally interim in nature and we seek to
refinance or resell the loan and lease receivables that were funded under these
interim facilities through our public securitization program within three to
twelve months.
In April 1999, we filed a shelf registration statement with the Securities
and Exchange Commission to register up to an additional $300 million of our debt
and/or equity securities. In June 1999, we utilized the shelf registration to
make an underwritten public equity offering of 4,000,000 shares of our common
stock, from which we received cash proceeds of approximately $68.4 million, net
of expenses. In July 1999, the underwriters of our offering exercised their
over-allotment option and purchased an additional 600,000 shares of our common
stock, from which we received cash proceeds of approximately $10.4 million, net
of expenses. We used the net proceeds from the offering for general corporate
purposes, including the funding of net asset originations and other working
capital needs.
We believe that our existing cash and investment balances, cash flow from
our operations, net proceeds from future securitization transactions, amounts
available under our securitized warehouse facilities and proceeds from our
securities offerings will be sufficient to fund our operations for the
foreseeable future.
SECURITIZED WAREHOUSE FACILITIES
As of March 31, 2000, our six securitized warehouse facilities had an
aggregate funding capacity of $1.0 billion. As of April 30, 2000, $502.9 million
was available for use under these facilities.
Through June 30, 1998, our securitized warehouse facilities were structured
such 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 warehouse
facilities such that advances under the facilities would be considered debt
under generally accepted accounting principles. In the fourth quarter of 1999,
we began to de-emphasize the origination channels that generate lower return on
equity and to reduce the amount of lower yielding assets on our balance sheet,
the objective of which is to utilize our capital more effectively. During 2000
we will continue this strategy to selectively reduce the amount of lower
yielding assets on our balance sheet. We will continue to evaluate different
structuring alternatives and we will use the structure that provides the best
execution.
15
<PAGE> 17
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 warehouse facilities, as well as related issuance
expenses. 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 loans and equipment leases will be principally through securitization
transactions and, to a lesser extent, through portfolio sales and sales to
third-party financing sources.
We have now completed seven permanent public securitization transactions
involving the issuance of $1.2 billion 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, the Series 1998-1 transaction in December 1998,
the Series 1999-1 transaction in April 1999, the Series 1999-2 transaction in
September 1999 and the Series 2000-1 transaction in April 2000.
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.
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-3 Note was rated B by
Duff & Phelps Credit Rating Co., and Fitch IBCA, Inc. which we retained for
future sale in the private market.
In connection with the Series 1999-1 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-3 Note was rated B by
Duff & Phelps Credit Rating Co. and Fitch IBCA, Inc., which we retained for
future sale in the private market.
In connection with the Series 1999-2 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. Class B Notes rated A by Standard and Poor's, A by Duff &
Phelps Credit Rating Co., A by Fitch IBCA, Inc. and A2 by Moody's Investor
Services, Inc. were also sold in the public market. The Class C Note, rated BBB
by Duff & Phelps Credit Rating Co. and Fitch IBCA, Inc. and the Class D Note,
rated BB by Duff & Phelps Credit Rating Co. and Fitch IBCA, Inc., were sold and
financed on a non-recourse basis in the private market. A Class E Note was rated
B by both Duff & Phelps Credit Rating Co. and Fitch IBCA, Inc. and was retained
by us for future sale in the private market.
In connection with the Series 2000-1 transaction, two tranches of Class A
Notes, rated Aaa by Moody's Investor Services, Inc. and AAA by Duff & Phelps
Credit Rating Co. were sold in the public market. A Class B Note rated AA- by
Duff & Phelps Credit Rating Co. and Aa3 by Moody's Investor Services, Inc. was
also sold in the public market.
16
<PAGE> 18
We were able to realize approximately 94% 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% of the present value of the
remaining scheduled payments of the equipment leases included in our Series
1997-1 securitization, approximately 95% of the present value of the remaining
scheduled payments of the equipment leases included in our Series 1998-1, 1999-1
and 1999-2 securitizations, and 100% of the present value of the remaining
scheduled payments of the equipment leases included in our Series 2000-1
securitization.
SUBORDINATED NOTES
In connection with the acquisition of Heritage Credit Services, Inc. in May
1997, we issued a $1.0 million subordinated note payable to the former owner.
Such note bears interest at 9% per annum, payable quarterly, with the
outstanding principal amount due in May 2002.
INTEREST RATE MANAGEMENT ACTIVITIES
The implicit yield to us on all of our leases is on a fixed interest rate
basis due to the leases having scheduled payments that are fixed at the time the
leases are originated. 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 cost we will pay when we sell or refinance such
lease through a public securitization transaction. Increases in interest rates
between the time the leases are acquired or originated by us and the time they
are sold or refinanced through a public securitization transaction could narrow
or eliminate the spread, or result in a negative spread.
We mitigate the volatility of interest rate movement between the time we
acquire or originate a lease and the time such lease is sold or refinanced
through 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 originated. 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, as applicable, 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.
Such hedging arrangements are generally implemented 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
this activity is generally limited to levels where we are confident of
origination in the near term.
YEAR 2000
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. Our computer systems experienced no significant Year 2000 problems and
no business interruptions were experienced related to the Year 2000 problem. If
any of our significant customers or other counter-parties do not successfully
and timely achieve Year 2000 compliance it could have a material effect on our
business, results of operations, or financial condition.
FORWARD-LOOKING INFORMATION
We refer you to "Item 1. Business - Safe Harbor Statement Under the Private
Securities Litigation Reform Act of 1995" in our Annual Report on Form 10-K for
the year ended December 31, 1999. In connection with the formation of our
Internet bank, there can be no assurance that we will acquire Greenbelt
Bancshares, Inc. prior to the expiration of the acquisition period granted by
the Federal Reserve Board. In the event the transaction is not completed during
the allowed acquisition period there is no certainty that the Federal Reserve
will grant us an extension of the time limit or, if extended, that we will be
able to amend our merger agreement with Greenbelt Bancshares, Inc. past the
August 1, 2000 expiration date or complete the transaction as approved by the
Federal Reserve for some other reason including, but not
17
<PAGE> 19
limited to, our ongoing discussions with Donaldson, Lufkin & Jenrette regarding
the potential division of the technology and finance operations. Our inability
to conduct certain of our operations through our planned Internet bank would
limit certain of our proposed e-commerce products and service offerings.
ITEM 3. 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 loans and 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 loans and leases is based on a fixed
interest rate. We generally obtain initial funding for loans and lease
acquisitions and originations through borrowings under our securitized warehouse
facilities and, from time to time, depending on market conditions, we include
the loans and lease receivables in a securitization transaction or portfolio
sale. Because the securitized warehouse 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 loans and leases are included in
a securitization transaction or otherwise sold. We seek to minimize our exposure
by entering into amortizing interest rate swap transactions under which the
notional amount of the contract changes monthly to match the anticipated
amortization of the underlying leases. As of March 31, 2000, 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
that were not permanently securitized.
The following earnings sensitivity analysis assumes an immediate closing of
a permanent securitization transaction on lease receivables outstanding as of
March 31, 2000 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.
12-month pre-tax earnings change from increase in benchmark Treasury by
50 basis points:
(Dollars in thousands)
<TABLE>
<S> <C>
Decrease in pre-tax earnings from increase in interest expense .. $1,646
Increase in pre-tax earnings from decrease in interest expense
due to the amortization of swap proceeds .................... 1,412
------
Net decrease in pre-tax earnings ................................ $ 234
======
</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 warehouse 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 March 31, 2000,
an increase of 50 basis points in the credit spread would result in a $1.6
million decrease in our pre-tax earnings in the next 12 months, provided that
there is no corresponding increase in the swap spread which would partially
offset the decrease in pre-tax earnings.
18
<PAGE> 20
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
March 31, 2000, our pound sterling denominated lease receivables totaled
approximately $36.7 million. As of the same date, our pound sterling denominated
borrowings had an aggregate outstanding balance of approximately $20.8 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 March 31, 2000, a 5% decrease
in the relative value of the British pound compared to the United States dollar
would result in a $144,000 decrease in our pretax earnings in the next 12
months.
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.
19
<PAGE> 21
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
In April 2000, we announced that we have retained Donaldson, Lufkin &
Jenrette to explore the division of our technology and finance operations, in
order to unlock the value of our technology business.
Our Internet infrastructure platform has historically been employed in the
origination of financial assets for our finance operations. Recently, utilizing
our application service provider (ASP) model, we have begun to provide our
platform exclusively as a customized, outsourced solution to facilitate B2B
transactions. We offer automated financing solutions for business loans,
equipment leases and our newest product, trade credit receivables. Our platform
provides real-time application processing, credit decisioning, scoring and
documentation that integrates with our advanced, automated funding, servicing
and collection technologies. By providing this efficient, automated, outsourced
solution to customers, we address a critical component in the development of
true online B2B marketplaces.
Furthermore, in fiscal 2000, we look forward to the prospect of launching
an Internet-based business-to-business bank devoted exclusively to the banking
and financing needs of our small business customers. The Board of Governors of
the Federal Reserve Board recently approved our application to become a bank
holding company by acquiring all the voting shares of Greenbelt Bancshares,
Inc., thereby acquiring Security National Bank of Quanah in Quanah, Texas. This
transaction shall not be consummated before the fifteenth calendar day after the
April 12, 2000 effective date of the Federal Reserve order, or later than three
months after the effective date of this order, unless such periods are extended
for good cause by the Board or the Federal Reserve Bank of Dallas, acting
pursuant to delegated authority. In addition, this transaction cannot be closed
while the Department of Justice reviews the anti-trust implications of this
transaction. It is anticipated that this waiting period will expire without
comment or action by the Department of Justice. A final decision by us on
implementation of this will not occur until Donaldson, Lufkin & Jenrette
complete its process of reviewing the potential division of our technology and
finance operations.
Since the beginning of 2000, we have taken important steps to continue to
build our online marketplace for small business financing. We signed a series of
agreements with leading players in the small business e-commerce arena that will
allow us to quickly and efficiently deliver our comprehensive online financing
solutions to their customers in the small business community. These alliances,
which provide us with significant access to the small business market, are as
follows:
o We entered into an agreement to provide our comprehensive web-based
loan fulfillment technology to BizProLink.com, Inc., a network of
online professional communities. BizProLink operates a comprehensive
business-to-business e-commerce marketplace, consisting of 70 vertical
business-to-business web-based communities. BizProLink's sites bring
buyers and sellers together by providing industry-focused
communities-of-interest for the exchange of business products and
services.
o We signed agreements with OneCore.com, an integrator of financial
services specifically built for small businesses and entrepreneurs,
and with WebSiteProfit.com, Inc., which owns
www.smallbusinessloans.com. These providers of business-to-business
products and services, focused specifically on the small business
community, will offer their online customers our online financing
solutions.
o To further leverage our technology which delivers automated financing
to the small business customer, we entered into an agreement with
Firstar Corporation, the 14th largest bank in the United States, to
utilize our technology platform to offer automated equipment financing
to its small business customers. Our proprietary technology will be
installed throughout Firstar's branch network, enabling small
businesses to quickly and efficiently obtain financing for equipment
purchases.
o We debuted our "Business Boulevard," which is a small business portal
built around our core e-finance products. We plan to join with select
companies to expand the business-to-business e-commerce services
available to our small business customers. In early 2000, we joined
with Demandline.com, an Internet
20
<PAGE> 22
service, that allows growing businesses to "name their price" for core
business services by pooling the buying power of thousands of growing
companies to receive corporate rates from trusted, nationally-branded
service providers. This alliance will enable us to offer core business
services to our small business customer base, including long-distance
telephone service, high-speed Internet access, Web hosting, mobile
phone service, paging, payroll and credit card processing.
o We signed agreements with PurchasePro.com, Inc., a leading provider in
browser-based, business-to-business electronic commerce, and
EqualFooting.com, Inc., an online small business marketplace for
buyers and sellers of industrial supplies.
PurchasePro.com operates a leading public procurement marketplace and
powers private exchanges with its highly scalable, browser-based
e-commerce engine. The PurchasePro.com public marketplace and the
private exchanges employing its technology make it easy for businesses
of all sizes to buy and sell a wide range of products and services.
PurchasePro.com can enable businesses to compete more efficiently by
potentially reducing procurement costs and greatly increasing employee
productivity. PurchasePro.com will utilize our Internet
infrastructure, designed to speed transactions and increase the ease
of use, to deliver real-time credit solutions to their B2B commercial
marketplace customers.
Equal Footing.com is an online marketplace enabling small businesses
in the industrial, manufacturing and construction sections to
efficiently purchase maintenance, repair and operating supplies and
equipment. The site provides immediate comparison buying from multiple
national suppliers and/or the flexibility of soliciting bids from a
larger network of small suppliers who can bid on customer requests.
EqualFooting.com will utilize our Internet infrastructure to deliver
real-time credit solutions to their B2B commercial marketplace
customers to enable greater transaction activity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT NO DOCUMENT
- ----------- ----------------------------------------------------
27 (*) - Financial Data Schedule
- --------------
(*) Filed herewith
(b) REPORTS ON FORM 8-K - the Registrant filed a Current Report on Form 8-K
dated February 1, 2000 (Date of Event: February 1, 2000) in respect to
First Sierra Financial, Inc. filing a Certificate of Ownership and Merger
on January 26, 2000 to change its corporate name to "SierraCities.com Inc."
effective February 1, 2000. The item reported in such Current Report was
Item 5, Other Information.
21
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIERRACITIES.COM INC.
(REGISTRANT)
May 15, 2000 /s/ SANDY B. HO
- ------------ -----------------------------
Date Executive Vice President
and Chief Financial Officer
(principal financial officer)
22
<PAGE> 24
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
27(*) Financial Data Schedule
- --------------
(*) Filed Herewith
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 24,730
<SECURITIES> 2,956
<RECEIVABLES> 884,063
<ALLOWANCES> 11,109
<INVENTORY> 0
<CURRENT-ASSETS> 46,467
<PP&E> 19,170
<DEPRECIATION> 7,306
<TOTAL-ASSETS> 990,495
<CURRENT-LIABILITIES> 48,303
<BONDS> 773,112
0
0
<COMMON> 190
<OTHER-SE> 167,822
<TOTAL-LIABILITY-AND-EQUITY> 990,495
<SALES> 0
<TOTAL-REVENUES> 32,651
<CGS> 0
<TOTAL-COSTS> 6,418
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,924
<INTEREST-EXPENSE> 14,005
<INCOME-PRETAX> 326
<INCOME-TAX> 180
<INCOME-CONTINUING> 146
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 146
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
