Whatever Happened to....

                       Republic Leasing of Anaheim 

   (Never told before... only rumors and innuendoes exist.

Here for the first time is an insider’s viewpoint, from perhaps what can be

viewed today as an “historic document.” It was not written in

hindsight or “Monday morning quarterback,” but during the actual

time of events, June, 2000..  It is fascinating with historic accuracy.)

This exclusive report comes from an 18-page letter to David Solomon, President of the Redstone Group that put up the initial seed money to start First Sierra. While he was not involved in the operation, David Solomon is credited with raising the initial money.  He was well respected by all parties, as he is today.

"The company was basically started by Thomas J. Depping. 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,

Executive Vice-President and Chief Financial Officer has been with the

company since 1995, along with Fred Van Etten...

" . From that meeting in 1993 to April 1994, Tom Depping sold some movers

and shakers in Houston to raise the capital to start First Sierra. When Bob

Quinn left ATT in May, 1994, he and Tom along with Fred Van Etten, Pete

Smith and Sandy Ho actually began the operations at First Sierra.". He

is the one, however, who began acquiring other smaller leasing companies

with the idea of making one large network with a very low cost of funds

for all “branches” to enjoy..  Mark McQuitty calls  that the “plot”.

Also mentioned is Michael Sabel, the stockbroker manager than took First Sierra public at Friedman, Billings and Ramsey-a stockbroker company. It is reported

that Michael Sabel came up with the name SierraCities.com, ironically a few weeks before the bubble burst on all dot.coms

The letter to David Solomon is quite dramatic from a very concerned ex-branch

manager and major stockholder of the company.  It came at a time of what

the Equipment Leasing and Finance Foundation study called “ The Perfect Storm.”    http://www.leasefoundation.org/pdfs/perfectstorm.pdf    

                           Part 1

  “Introduction:

       **Cause for Concern**”

Mark McQuitty migrated from New Zealand when he was 18 years old, “ with nothing but a few hundred dollars in my pocket,” he remembers. “ In  1992, with a only $5,000 each loaned off our respective credit cards and in the middle of a recession, Jim Raeder and I started The Republic Group, Inc. (commonly referred to as Republic Leasing of Anaheim, as they were located in Anaheim, California. Not to be confused with Republic Leasing of South Carolina. Editor).

“ With no outside financial assistance ...not even a company working capital credit line right up to the merger date.... and through hard work and determination, we built a 200 employee company with a 130 man sales force in only six years, that we later sold to First Sierra in an all stock deal.”

“In the course of our six years of independence, the company was recognized by INC magazine as one of the nation’s fastest growing companies in back to back years. 1996 saw the company attain the ranking of #59 on the list. In 1997, we grew and became the 30th fastest growing company in the US out of the 500 companies.

“We had made it clear to all that we didn’t want to do the deal if Tom Depping was going to change anything materially, or try to micro-manage our operation.

“Because of the representations we had made to them regarding the agreement we had with Tom Depping that no changes or tinkering would occur, all but one out of the 130 sales reps agreed to come with us.  You know, First Sierra stock rose to $7 on the news of our acquisition.

“ We had an operation that was like a highly tuned precision engine, “McQuitty

explains. “ It wouldn’t respond well to Saturday morning backyard tinkering by amateurs. An assimilation team was promised but it never materialized. No sooner had the ink dried on the agreement, than corporate began dismantling the Anaheim back office in an effort to consolidate with the main office.

“This move in effect decimating the risk management team we had put in place, which had worked spectacularly for the life of the company in preventing bad deals from leaking into the system and/ or any sales-induced fraud from occurring, “ he said. “ Our crew was on top of everything with excellent control. And no sooner than the back office being dismantled, corporate went after our sales force.”

“Michael Sabel showed up on our doorstep, supposedly for a routine visit,

but what turned out to be orders to fire 100 employees just before Christmas.

“Not only had we lost control of the back office functions, but now the origination side of the business as well, something we were told were the reasons First Sierra wanted us in the first place.  It was a terrible time and both Jim and I had no idea about what was to happen.

“ Needless to say, this was catastrophic on company morale and on any remaining loyalties the surviving employees may have had to First Sierra, along with any credibility that we may have had as their managers and any belief that we were still in control.

“ We soon found out we were managers/VP’s in name only.  And to top this off,

corporate headquarters failed to keep its commitment to issue options to the top producers. They reneged on this immediately post acquisition, which had a devastating effect on morale

“It is my understanding there were only a few available and these were reserved for Mr Michael Sabel as part of his package. Again, Tom Depping did not give out options to the sales force in 1999, but did manage to get 100,000 options for himself along with a $450,000 salary/bonus package.

“Additionally, no one in the field received their bonuses, but members of corporate management. There was no attempt to keep this secret and its effect on morale was devastating. I have heard of principled CEO’s refusing this type of compensation, regardless of what their contract states, until their companies soundly rebound.

“What went wrong? False promises from Tom Depping and outright

misrepresentation. The assimilation never happened. A year passed before the sales force even had computers. The two styles of business between corporate and Anaheim didn’t mesh well. In short, the merger didn’t work Clearly there was a different corporate culture.

“  Where we put the sales rep on a pedestal and not only recognized, but celebrated their unique abilities, the corporate attitude was to treat them as a necessary evil. No effort was made to hide this.  Somehow we were labeled the “bad boys” of leasing.  (What attracted the purchase of our company was our selling ability, and we were to become the training center.)  Once we signed the dotted line, many of the middle managers in Houston who were in opposition to the merger in the first place, did everything they could to dismantle us. They did nothing to curtail this and it appeared by their statements they actually encouraged it.

“Notwithstanding the ‘98 Q3 and Q4 issues, through Q2 1999, we were still the golden haired boys as far as generating income was concerned, having netted $5,000,000 in the 1st 6 months of ‘99. Somewhere in the ensuing 2 Qtrs we experienced meltdown. Relations between the branch and corporate hit an all time low. Delinquencies began to increase company wide, as I believe credit took their eye off the ball and began buying everything with a pulse to spike earnings. Additionally, the sales force no longer had a vested interest in tending to the family farm with any passion or concern and our back office no longer existed and corporate was clueless. Where once the rep would have been motivated to intercept questionable transactions, they no longer cared, having been treated so poorly by Tom Depping and his staff. Anaheim’s last line of defense against this) our credit people, had either been terminated or re-assigned.

“The first telling sign we were in for a nightmare ride, was that as soon as Corporate had effectively assimilated ancillary fee income collections including interim rents, these dropped to a mere $20,000 a month from a Republic high of $150,000 a month. My salesmen protested loudly, as this was commissionable income they were losing. I was personally alarmed, as this was over $1 million a year net, out of the company treasury which could have offset many corporate expenses

“We were now down to 25 reps from a high of 130 pre-acquisition. However, notwithstanding this small sales force, they represented over 70% of the ‘98 revenues. The best and brightest were still committed to the company and were willing to give it another chance.

“In a lengthy e-mail I pleaded with Tom Depping not to “throw the baby out with the bath water”. He did not even open it, or respond — no doubt previewed it, then discarded it. At the time, I was next to Tom Depping, the single largest shareholder employed in the company, owning over 600,000 shares and no doubt one of the top 5 or 6 shareholders of record (I still have substantial holdings). This hit me at the time as particularly troubling. In hindsight, it is clear my departure was already being planned by Tom Depping.

“It seemed as though the strategy was now on being an internet company free from the dependence on salesmen and then tying this into internet processing company... “— no commissions and cheap cost of finds. The money would surely roll in. I guess in theory it has a certain appeal, but if Tom Depping was at all familiar with our business, he would have seen it as counter intuitive.

“Not only was the original intention of training new salesmen, but even having

salesman call on vendors or direct business, became the “old way” to create

business.  We became known as dinosaurs in our traditional way of conducting business.

“We had a staff of about 40 and were ordered to fire 15, even though they were paying for themselves and we believed we had cut the branch to the bone. Unfortunately, this became an easy task, as the competition around town was bleeding us of our best and brightest. First Sierra had effectively paid for the hiring and training of many of the employees of its Southern California competition, all of which appear to be doing well financially—unlike SierraCities.

“Soon we were down to a staff of 10, down from 200 in just over 20 months from acquisition.”

       Part II

            Fred  Van Etten is sent to fire McQuitty.

             “E-Commerce Follies:

                 **Technology vs. the Salesman**”

“Compare this to the situation two years ago. In FY ‘97, independent and with little reliance on technology, my company earned $2 million in net income. Jim  and I successfully managed a 200 employee company finding between $8 mm —$10 mm a month in small and medium ticket leases. Over the course of doing business for 6 years Republic had less than $200,000 in total buybacks and had an additional $800,000 in reserve for bad debt ( which incidentally First Sierra inherited). Delinquencies were in check and relationships with lenders were good.

  “Fred Van Etten was sent to fire me as branch manager. In April, 15 months post acquisition and no longer in control, Anaheim funded a meager $2 million in equipment cost, an 80 % reduction in volume from its pre- acquisition high and lost money for the first time in its history.

“In May, Tom Depping and I came to an agreement that releases me from the remaining year on my contract, thereby” saving “the company $225,000 in salary + expenses. ). In exchange for me walking away from the remaining year on my contract, Tom Depping presented me with an agreement to negate the terms of my employment contract that pertain specifically to the non-compete clause, in effect, allowing me to get on with my life in the only business I knows With great relief I signed and accepted this and sent it back on May ₃₀th, 2000. In exchange, I’m sure Tom Depping was pleased that he had rid himself of yet another irksome manager and noisy shareholder — about 20 top level managers in the last 2 years representing 90 % of the executive management have either been fired or have quit in frustration. I have a noticed what appears to be a pattern. It seems whenever current management is called to task on the efficacy or prudence of a particular policy or strategy, the challenger is no longer on the” e-mail list ‘~.

“After the corporate office received the agreement on May 30’, I was surprised by a visit on May 31  by John Greer, head of HE.; John Skinner, Western Regional Mgr; and Fred Van Etten, head of all the Sales and Marketing functions, who arrived on short notice  to retroactively fire me on the orders of Tom Depping — a most confusing about-face.

At this point, Mark McQuitty contacted Mr. David Solomon at the Redstone Group in Houston and in an 18 page letter explained his ‘cause for concern.

“Please allow me to introduce myself. My name is Mark McQuitty and until recently, I was the manager of the Anaheim branch of First Sierra. I’m contacting you as an extremely concerned shareholder of SierraCities. I represent a syndicate holding over two million shares of First Sierra stock, that until recently was worth $5mm and is now valued, depending on market conditions, anywhere from $5mm — $9mm.

“What follows may be shocking to you. I hope that it is an eye opener for you and the rest of the board members. I trust you’ve been kept in the dark as to what I consider gross negligence and fiscal irresponsibility by what goes for executive management in this company. I am bringing all this to the attention of you and the other members of the board, as I can no longer in good conscience stand by and watch this company, to which I have contributed so much to, be systematically destroyed by a reckless CEO.

“Sir, over the last 18 months since my company, The Republic Group, Inc., was acquired by First Sierra, I have witnessed many business decisions and myriad tacks and course changes, that have led me to seriously question the judgment and competency of the senior management of this company and perhaps at the extreme, I have felt represent gross negligence by the company chairman and/or a serious violation of his fiduciary responsibility to the shareholders. I have always been vocal in my opinions and eager to contribute to the debate on issues that directly affect my pocket book (it is my view, to do otherwise would be negligent) and this hasmade me, I suspect, an unpopular individual. Unfortunately for us all, events have borne out my protests and have validated my concerns.

“.... When this is all over, regardless of the outcome, I intend on moving on, contented that I stood up for what is right and fought the good fight. After all, the true measure of a successful man is not high he climbs, but how high he bounces when he falls. I’m writing you to highlight what I believe to be a series of serious managerial missteps by the current management thereby causing the company to lose money and the erosion of 80% of the companies’ market value. I believe a new team in place will stem the tide of red ink and bring back value as it is clear the market has lost faith in the current team. It is my understanding we lost $2 million in April alone. Are you aware of this? What happens when the market finds out?

     “ E-COMMERCE FOLLIES:

**Technology vs. the Salesman*^*

“We’re hemorrhaging red ink and drowning in e - commerce technology that is failing to generate any substantial ROL Whereas the sales reps have been given technology that either doesn’t work or no one knows what to do with, every month another $100,000 —$800,000 gets” invested” into the e-commerce solution. The” c-world “is clearly upon us, but contrary to what Tom Depping and present corporate management believe, it won’t replace the salesman as the deal closer, it is merely a means to allow him to market himself more efficiently.

“It would more palatable if at least some of the money invested in the IT budget was being dedicated to the branch network sales and marketing effort. Are you aware there is a list, 90 projects long, that sales and marketing have repeatedly requested from IT, all related to the roll out and implementation of the vendor driven marketing effort,that is being ignored.  This was the whole focus of the national sales conference that we spent $400,000 in May to host. Everything was supposed to be operational by then, It still isn’t. These requests have repeatedly been met by silence and this has seriously impeded the execution ofthis marketing roll-out. I’m told all the resources have to be poured into the e-commerce project.

“Tom Depping is on the record as saying he has no interest in managing a 500 person company. This must clearly be his intent, as he is currently engaged in the dismantling of the branch network and replacing it with the e-commerce solution. “This is deeply troubling, as the branches are the only reliable source of revenue generation we still possess with sufficient yields to run operations. That he has no idea how to run it profitably is no reason to destroy it. He is currently spending $45 million to make $43 million (a troubling thought!) and he has no idea how to stem this flow of red ink If you’re interested, I do. No doubt he believes this will leave him with $40 million to fritter away on his e-commerce project, or latest” brainstorm du jour”. Unfortunately, he has yet to figure out a reliable replacement to the origination machine we currently possess and paid a King’s ransom for. Gentlemen. I guarantee you the $40 million won’t come from web links or that other debacle, ILM.

“Sir, as 1 mentioned, I ran a company with 130 sales reps and I can assure you there is not enough cash throw-off to support as large a volume of back office functionaries as Houston has on its payroll. There needs to be an immediate audit of] oh titles, descriptions, functions and salaries of this horde. As an example, I made money with only one IT person and a part time CFO. Now we have an expensive bank President reduced to auditing expense accounts (why is he still on the payroll if we have shelved the bank option?)”

McQuitty goes on to questions the huge costs of software systems shelved, not

used, as if SierraCities had adopted the personality of a dot.com, who’s burn

rate was predicated on the next round of financing. McQuitty had written

letters to Depping  December,1999,  and early January of 2000, predicting

the dot.com demise, the runaway costs, and the need to get back to a sales

force to create sales and not rely on the internet. From his viewpoint,

SierraCities/First Cities was out of control.

Part III—

“MR DEPPING:

**An Unsuitable Candidate to Continue in the Capacity of CEO**

“Currently, SierraCities has less sales reps company wide than I had at Republic and many are quitting daily. I believe Tom Depping’s comfort level is zero. 1-he believes them to be high maintenance — which many are — and a waste of money — which they are not. 2. he believes he can cheaply and easily reproduce their efforts via the internet and thereby avoid expending any resources on sales associated expenses — commissions and the like. This is further substantiated by the $1 million he handed over to Intuit, in an asinine move, to get linked to its website, as if the business would come flooding in. An extremely naive belief and evidence the man is not intimate with the marketing side of our business.

“Are you aware that of the $100 million in deals that he was so proud to announce to the market at the shareholders meeting as being originated via the e-commerce platform, 99 % are for loans that no one wants, as they cannot be pre-paid and the rates are comparably high compared to their credit cards, which they CAN pre-pay?

“.... It is desperately tying to staff a call center with minimum wage employees to do what it takes trained closers to do. Are you aware that SierraCities call center consists of four lowly paid individuals off the street with no background in sales — proof enough the e- commerce internet strategy is a dismal failure and is ALL HYPE and that Tom Depping and Only professional sales reps, of which we had hundreds, could convert these loan approvals into fundings, if it was even worth it, or possible.

 “I’ve heard the current funding rate is in the single digits — the 1 % —2 % range. For all its success, it would’ve been cheaper just to tie our engine to LendingTree.com or B-Credit, as we would be exposed to more people shopping rate — because that’s all people do on the internet...shop rate!. We’ve sacrificed our entire sales force and branch network and thrown all this money into the technology black hole and to what end? — to originate over-priced loans that will never be closed. This is clear evidence of a rudderless ship.

MR DEPPING:

**An Unsuitable Candidate to Continue in the Capacity of CEO**

Almost every misstep I have recounted thus far can be directlyand indirectly traced to the hand of Tom Depping and let me be the first to say it---- he must go, for the sake of the shareholders.

“...Whenever there is dissent, a difference of opinion, or a policy baffle of one sort or another, anyone passionate enough to challenge or resist Tom Depping or engage in a healthy debate in order to flesh out the potential weaknesses in theargument, finds themselves terminated.

“One need go no further for evidence of this than to look atall the members of senior management that have vacated Chase Tower or other regions in the last 2 years: Quinn; Hall Sr.; Hall Jr.; Brazier; Litt; Lester; Barash; Zaretsky; Madonna; Hayden; Borland; Cetto; Hayes; Mohammed; Hale; Nino; Darrington; Wing; Phung (add today Jim Constable,  Bob Henchey, Jeff Mayberry, Pete Smith, Jim Raeder, Van Etten, even Ruth Spiers , Executive Assistant to

Depping ,who resigned after 19 years with him at three different companies, allegedly over “ethics.”. Editor); et al., not to mention all the branch manager’s, ether VP’s and acquirees terminated, or quit for one reason or another. (Tim Cello offered to buy his branch back and perhaps in an ill-judged gambit, quit to force Houston’s hand and then later recanted.

“ He has the best performing portfolio in the company and Tom Depping wouldn’t allow him back, or even entertain the buyback of his branch). Rather, Tom Depping closed it down. In this list are three heads of credit and two heads of documentation. If nothing else, sir, that’s all we are, a credit and documentation firm (currently the average tenure in credit / doc / funding operations is no longer than six months). This is not only disturbing, it could prove fatal. All the level headed, leasing-experienced senior managers have gone and have been replaced by weak, inexperienced and ineffectual low level former assistants. And when new people are hired, they are non-leasing accountant types unfamiliar with the industry. You can’t run a public leasing company like this — continually replacing leasing experience with non-leasing experience.

“Oren Hall at least demonstrated acumen for the origination side of our business

... He also knew how to run the branches and to keep an eye on the ball and keep focused on the task at hand. No doubt he ran afoul of Tom Depping and then he too was gone.

“Tom Depping prefers to remain secluded, distant and be accountable to no one- Rarely is he in the office and when he is, it is rarely longer than 4 hours. There are never any senior management group meetings, as I suspect he abides by the theory of divide and conquer. Never are the executives assembled together in one room, I suspect, for fear of their collective will on strategic decision-making and the potential for broad debate on company direction. He is afraid to be challenged and thus always meets individually with his senior management in an effort to control them. This is extremely unhealthy for the corporation and further, it is indicative of a leader insecure with himself.

“Tom Depping is not salesman, is not particularly inspiring in person and is wanting as a public speaker. These are all qualities necessary in a successful CEO of a public company and especially of a sales-oriented firm...perhaps another reason he is more comfortable with the e­-commerce model.

“Contrary to what Depping and Sabel believe, now more than ever, we need to focus on being a sales rep based origination machine. Tom Depping prefers to remain secluded, distant and be accountable to no one- Rarely is he in the office and when he is, it is rarely longer than 4 hours. There are never any senior management group meetings, as I suspect he abides by the theory of divide and conquer.

“Never are the executives assembled together in one room, I suspect, for fear of their collective will on strategic decision-making and the potential for broad debate on company direction. He is afraid to be challenged and thus always meets individually with his senior management in an effort to control them. This is extremely unhealthy for the corporation and further, it is indicative of a leader insecure with himself.

“Tom Depping is not salesman, is not particularly inspiring in person and is wanting as a public speaker. These are all qualities necessary in a successful CEO of a public company and especially of a sales-oriented firm...perhaps another reason he is more comfortable with the e­-commerce model. Furthermore, contrary to what Depping and Sabel believe, now more than ever, we need to focus on being a sales rep based origination machine.

“...Tom Depping has been selling off chunks of the portfolio, for the gain, for some time now ( and buying poor quality ones — see CAFS), In addition, he has been buying large amounts in-house on the warehouse lines, over and above the safe credit limit, solely to sell off to institutions and bulk buyers to get the gain. And when there isn’t enough of this paper, rather than buy good paper in4Ttouse to increase the size of the portfolio, it’s going right on the syndication lines and sold off to the institutions to get the gain and fool the market He’s become a “gain junkie" to pad his numbers and this gain is being spun as the profit from an aging portfolio and proof that originations from e- commerce are on the rise.

“In reality, profits and originations are down considerably. That we missed our numbers, is a capital crime. But why did we miss them? It had nothing to do with the market. The paper he was trying to sell was so bad, no one wanted it. He had spent all our income on other projects and was relying heavily on selling our assets to hit his numbers... We paid $500,000 to change our company name to SierraCities!!!

““*       in an act of desperation to meet the  ‘99 projections and notwithstanding strong arguments to the contrary, the company acquired CAFS from Prime.

“We know why they bought it, but the recommendation was to pay zero forth company and if we must, just take the portfolio, even though it consisted of poorly documented deals with immense liability at below market prices. They paid $2 million to four individuals who were responsible for bankrupting their previous owner, TNJ (before Prime). Why?

“A few facts on CAFS:

“---the portfolio deal included about $12 million in a flooring plan that we have a home for, but Depping was so desperate, he took it and serviced it out of equity.

“---Depping bought a  company he knew he couldn’t fund. This, to me, is All the findings are still being handled out of equity. Does Last month alone they funded $10 million of this paper out of equity at below market prices. How did they manage this record month? They have the lowest rates out there and no one else wants the paper.

“Does the board know this and do they also know the yields are so low, 4, that we are actually losing money. All this to fool the market short term boost with no regard for the long term consequences.

In his letter to Mr. Solomon, Mark McQuitty makes a series of suggestions and ideas on how to turn the company around.  Perhaps this paragraph very close to the closing of the 18 page letter sum up his position at the time:

“Mr Solomon, perhaps you could step in as Chairman. What this company needs right now is direction, stability and a sense of permanency. Tom Depping is lost and the market knows it.

“Mr. Van Etten is a competent man and equally respected in the company and would make a fine interim CEO, if not a permanent one. I know a well respected leasing CFO who might be available (ex Colonial] GE man) and there’s none finer nor more respected than Gebhardt in Treasury. That’s a good team. At least, this is an option- There’s only one obstacle standing in the way. Thomas Depping.”

For several years, Leasing News has tried to obtain a comment from Mr. Depping, and also others involved in the then First Sierra/Sierra Cities operation.  We welcome their comments, reaction, and will not edit anything that they communicate.