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.