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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-4408
RESOURCE AMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 72-0654145
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1521 Locust Street
Suite 400
Philadelphia, PA 19102
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (215)546-5005
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, par value $.01 per share
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Name of each exchange on which registered: The Company's Common Stock trades on
the Nasdaq Stock Market under the symbol "REXI."
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based upon the closing price of such stock on November 30, 1997, was
$200,277,600.
The number of outstanding shares of the registrant's Common Stock on November
30, 1997 was 4,749,463.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for registrant's 1998 Annual Meeting of
Shareholders to be held on February 17, 1998 are incorporated by reference in
Part III of this Form 10-K.
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RESOURCE AMERICA, INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT
ON FORM 10-K
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PART I
Item 1: Business....................................................................... 4
Item 2: Properties..................................................................... 38
Item 3: Legal Proceedings.............................................................. 38
Item 4: Submission of Matters to a Vote of Security
Holders............................................................. 38
PART II
Item 5: Market for the Registrant's Common Equity and
Related Stockholder Matters......................................... 39
Item 6: Selected Financial Data........................................................ 40
Item 7: Management's Discussion and Analysis of
Financial Condition and Results of
Operations.......................................................... 40
Item 8: Financial Statements and Supplementary Data.................................... 51
Item 9: Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............................. 85
PART III
Item 10: Directors, Executive Officers, Promoters and
Control Persons of the Registrant................................... 86
Item 11: Executive Compensation................................................ 86
Item 12: Security Ownership of Certain Beneficial Owners
and Management...................................................... 86
Item 13: Certain Relationships and Related Transactions........................ 86
PART IV
Item 14: Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................................. 87
SIGNATURES
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PART I
ITEM 1. BUSINESS
General
The Company is a specialty finance company engaged primarily in real
estate finance and equipment leasing. For approximately 25 years prior to 1991,
the Company was principally involved in the energy industry and it continues to
have energy industry operations, including natural gas and oil production. Since
1991, the Company's business strategy has focused on locating and developing
niche finance businesses in which the Company can realize attractive returns by
targeting well-defined financial services markets and by developing specialized
skills to service those markets on a cost-effective basis. To date, the Company
has developed two main businesses: real estate finance and equipment leasing.
Within its real estate finance business, the Company has developed a commercial
mortgage loan acquisition and resolution business and a non-conforming
residential mortgage lending business. Within its equipment leasing business,
the Company focuses primarily on small ticket equipment lease financing,
although it also manages six publicly-owned equipment leasing partnerships and
has a lease finance placement and advisory business.
The Company's commercial mortgage loan acquisition and resolution
business involves the purchase at a discount of troubled commercial real estate
mortgage loans at prices generally ranging from $1 million to $10 million and
the restructuring and refinancing of those loans. These loans are generally
acquired from private market sellers, primarily financial institutions. Loans
acquired by the Company typically involve legal and other disputes among the
lender, the borrower and/or other parties in interest, and generally are secured
by properties which are unable to produce sufficient cash flow to fully service
the loans in accordance with the original lender's loan terms. Since fiscal 1991
(when it entered this business), and through September 30, 1997, the Company's
aggregate commercial mortgage loan portfolio has grown to 38 loans with an
outstanding loan balance (excluding discounts) of $233.7 million, acquired at an
investment cost (including subsequent advances, which had been anticipated by
the Company at the time of acquisition and were included in its analysis of loan
costs and yields) of $120.4 million. During the fiscal years ended September 30,
1997, 1996 and 1995, the Company's yield on its net investment in commercial
mortgage loans (including gains on sale of senior lien interests in, and gains,
if any, resulting from refinancings of commercial mortgage loans) equalled
34.7%, 36.2% and 34.6%, respectively, while its gross profit (that is, revenues
from loan activities minus costs attributable thereto, including interest and
provision for possible losses, and less depreciation and amortization, without
allocation of corporate overhead) from its commercial mortgage loan activities
for fiscal years 1997, 1996 and 1995 were $16.5 million, $6.3 million and $5.3
million, respectively.
The Company seeks to reduce the amount of its own capital invested in
commercial mortgage loans after their acquisition, and to enhance its returns,
through sale at a profit of senior lien interests in its loans (typically on a
recourse basis) or through borrower refinancing of the
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properties underlying its loans. At September 30, 1997, senior lenders held
outstanding obligations of $55.5 million, secured by properties with an
aggregate appraised value of $125.4 million, resulting in a ratio of senior lien
obligations-to-appraised value of property of 44%. For the three months ended
September 30, 1997, the operating cash flow coverage on the required debt
service on senior lien interests averaged 202%. Such calculation excludes (i)
proceeds from the sale of senior lien interests or from refinancings and (ii)
cash flows from and senior lien interests with respect to nine loans acquired
during the fourth quarter of fiscal 1997 as to which the Company had less than
three months' cash flow experience at September 30, 1997 (see "Commercial
Mortgage Loan Acquisition and Resolution: Loan Status"). If such nine loans had
been included (utilizing for this purpose their cash flows for periods
subsequent to September 30, 1997 as set forth in "- Real Estate Finance
- -Commercial Mortgage Loan Acquisition and Resolution: Loan Status"), the
operating cash flow coverage would have averaged 273%. The excess of operating
cash flow over required debt service on senior lien obligations is, pursuant to
agreements with the borrowers, retained by the Company as debt service on the
outstanding balance of the Company's loans.
The Company has sponsored a real estate investment trust (the "REIT")
and has undertaken to sell 10 loans to the REIT (including one loan consisting
of four related obligations). The Company will not retain a junior lien interest
in any of these loans. In addition, the Company has undertaken to sell a senior
participation in another of its loans to the REIT. The aggregate price to be
paid by the REIT for the loans and the senior participation will be $27.7
million. The Company's carried cost of investment in these loans was $22.2
million at September 30, 1997. The Company anticipates selling further loans to
the REIT. See "Sponsorship of Real Estate Investment Trust."
The Company's residential mortgage lending business provides first and
second mortgage loans on one- to four-family residences to borrowers who do not
conform to guidelines established by Fannie Mae because of past credit
impairment or other reasons. Through its subsidiaries, Fidelity Mortgage
Funding, Inc. ("FMF") and Tri-Star Financial Services, Inc. ("Tri-Star") (which
was acquired in November 1997 and which, following regulatory approvals, the
Company anticipates merging into FMF), the Company is licensed as a residential
mortgage lender in 19 states and is currently originating loans in eleven states
(Connecticut, Delaware, Indiana, Kentucky, Maryland, Mississippi, New Jersey,
North Carolina, Ohio, Pennsylvania and Virginia). The Company began its
residential mortgage lending business during fiscal 1997 and commenced
originating loans in the first quarter of fiscal 1998. The Company's operational
strategy is to concentrate on mid-size residential mortgage loans with targeted
average loan of approximately $75,000. The Company markets its services directly
to consumers and anticipates establishing "private label" lending programs (that
is, programs where the Company will process, fund and service loans originated
by an institution, under the institution's name) for institutions which, because
of a lack of expertise in the area or for other reasons, do not otherwise make
non-conforming loans.
The Company's equipment leasing business commenced in September 1995
with the acquisition of an equipment leasing subsidiary of a regional insurance
company. Through this
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acquisition, the Company assumed the management of six publicly-held equipment
leasing partnerships involving $55.2 million (original equipment cost) in leased
assets at September 30, 1997. More importantly, through this acquisition the
Company acquired an infrastructure of operating systems, computer hardware and
proprietary software (generally referred to as a "platform"), as well as
personnel, which the Company utilized in fiscal 1996 as a basis for the
development of an equipment leasing business for its own account. As part of its
development of this business, in early 1996 the Company hired a team of four
experienced leasing executives, including the former chief executive officer of
the U.S. leasing subsidiary of Tokai Bank, a major Japanese banking institution.
The Company's operational strategy for equipment leasing is to focus on leases
with equipment costs of between $5,000 to $100,000 ("small ticket" leasing),
with a targeted average transaction of approximately $10,000 per lease. The
Company markets its equipment leasing products through vendor programs with
equipment manufacturers, distributors and other vendors such as Minolta
Corporation and Lucent Technologies, Inc. The Company believes that the small
ticket leasing market is under-served by equipment lessors, banks and other
financial institutions, affording the Company a niche market with significant
growth potential. During fiscal 1997, the Company received 8,344 lease proposals
involving equipment with an aggregate cost of $113.4 million, approved 5,054
such proposals involving equipment with an aggregate cost of $67.2 million and
entered into 3,214 transactions involving equipment with an aggregate cost of
$34.6 million. During fiscal 1997, the Company sold, on a servicing retained
basis, equipment leases with an aggregate net book value of approximately $30.2
million to third parties. The Company anticipates similar equipment lease sales
in the future. The Company's income from retained servicing was not material
during fiscal 1997.
The Company produces natural gas and, to a lesser extent, oil from
locations principally in Ohio, Pennsylvania and New York. At September 30, 1997,
the Company had a net investment of $11.4 million in its energy operations,
including interests in 1,129 individual wells (including overriding interests)
owned directly by the Company or through 64 partnerships and joint ventures
managed by the Company. While the Company has focused its business development
efforts on its specialty finance operations over the past several years, its
energy operations historically have provided a steady source of cash flow and
tax benefits.
Real Estate Finance
Commercial Mortgage Loan Acquisition and Resolution Strategy
Identification and Acquisition of Troubled Commercial Mortgage Loans.
The Company believes that the success to date of its commercial mortgage loan
acquisition and resolution business has been due in large part to its ability to
identify and acquire troubled commercial mortgage loans which, due to
operational difficulties at the underlying properties, legal or factual
disputes, or other problems, are unable to fully meet debt service requirements
under the original loan terms and can be acquired at a discount from the unpaid
principal and interest amounts of the loan and the estimated value of the
underlying property. A principal part of this strategy is the Company's focus on
commercial mortgage loans with purchase prices generally ranging from $1 million
to $10 million held by large private sector financial institutions. Due to the
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comparatively small size of these loans relative to a large institution's total
portfolio, the lender is often not able, or willing, to devote the managerial
and other resources necessary to resolve the problems to which the loans are
subject, and thus is sometimes willing to dispose of these loans at prices
favorable to the Company. The Company, which offers to acquire a loan quickly
and for immediate cash, provides a convenient way for an institution to dispose
of these loans and to eliminate future work-out costs. The Company believes that
the trend of consolidation in the banking industry, and the implementation of
risk-based capital rules in the insurance industry, may cause an increase in the
amount of smaller loans available for sale and provide the Company significant
opportunities for growth.
Efficient Resolution of Loans. The Company believes that a further
aspect of its success to date has been its ability to resolve problems
surrounding loans it has identified for acquisition. The principal element of
this strategy is the cost-effective use of management and third-party resources
to negotiate and resolve disputes concerning a troubled loan or the property
securing it, and to identify and resolve any existing operational or other
problems at the property. To implement this strategy, the Company has taken
advantage of the background and expertise of its management and has identified
third-party subcontractors (such as property managers and legal counsel)
familiar with the types of problems to which smaller commercial properties may
be subject and who have, in the past, provided effective services to the
Company.
Refinancing or Sale of Senior Lien Interests in Portfolio Loans. The
Company seeks to reduce its invested capital and enhance its returns through
sale, at a profit, of senior lien interests in its loans or through refinancing
of the properties underlying its loans by borrowers. In so doing, the Company
has in the past obtained, and in the future anticipates obtaining, a return of a
substantial portion of its invested capital (and in some cases has obtained
returns of amounts in excess of its invested capital), which it will typically
seek to reinvest in further loans, while maintaining a significant continuing
position in the original loan. See "- Commercial Mortgage Loan Acquisition and
Resolution: Sale of Senior Lien Interests and Refinancings." The Company also
anticipates sales of whole loans to the REIT (see "- Sponsorship of Real Estate
Investment Trust"). The Company's strategic plan contemplates continued growth
in its commercial mortgage loan portfolio, in part through the liquidity
provided by such sales or refinancings.
Disposition of Loans. In the event a borrower does not repay a loan
when due, the Company will seek to foreclose upon and sell the underlying
property or otherwise liquidate the loan. In appropriate cases and for
appropriate consideration, the Company may agree to forbear from the exercise of
remedies available to it. See "- Commercial Mortgage Loan Acquisition and
Resolution: Forbearance Agreements" and "- Loan Status."
Market for Commercial Mortgage Loan Acquisition and Resolution Services
The discounted loans acquired by the Company to date are secured by
commercial properties (generally multi-family housing, small office buildings,
hotels or single-user retail properties) which, while income producing, are
unable to meet fully debt service requirements of the original loan under its
then current terms. The loans are usually acquired from banks,
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insurance companies, investment bankers, mortgage bankers or other similar
financial organizations. Typically, the loans identified by the Company for
acquisition (and the properties securing them) have been the subject of complex
and/or contentious legal and other disputes, operational difficulties or other
problems demanding commitments of managerial and other resources that are
perceived by the selling institutions to be inordinate relative to the
comparatively small asset value of these loans in the institution's total
portfolio.
The market for commercial mortgage loan acquisition and resolution
services of the type provided by the Company is, the Company believes,
relatively new. A major impetus to this market has been the sale of packages of
under-performing and non-performing loans by government agencies, in particular
the Resolution Trust Corporation ("RTC") and Federal Deposit Insurance
Corporation ("FDIC"). While the need for loan acquisition and resolution
services by governmental agencies has declined in recent years (the RTC
terminated its loan pool packaging and sales operations on December 31, 1995,
and any RTC assets remaining to be sold at that time were transferred to the
FDIC for sale), the Company believes that a permanent market for these services
is emerging in the private sector as financial institutions and other
organizations realize that outside specialists may be able to resolve troubled
loans more cost-efficiently than their internal staff. Moreover, the sale of
loans provides selling institutions with a means of disposing of
under-performing assets, thereby obtaining liquidity and improving their balance
sheets. The trend has been reinforced, management believes, by consolidation
within the banking industry, the implementation of risk-based capital rules
within the insurance industry, and by the standardization of financing criteria
by real estate conduits and other "securitization" outlets.
Acquisition and Administration Procedures for Commercial Mortgage Loan
Acquisition and Resolution Operations
Prior to acquiring any commercial mortgage loans, the Company conducts
an acquisition review. This review includes an evaluation of the adequacy of the
loan documentation (for example, the existence and adequacy of notes, mortgages,
collateral assignments of rents and leases, and title policies ensuring first or
other lien positions) and other available information (such as credit and
collateral files). The value of the property securing the loan is estimated by
the Company based upon a recent independent appraisal obtained by the borrower
or seller of the loan, an independent appraisal obtained by the Company, or upon
valuation information obtained by the Company and thereafter confirmed by an
independent appraisal. One or more members of the Company's management makes an
on-site inspection of the property and, where appropriate, the Company will
require further inspections by engineers, architects or property management
consultants. The Company may also retain environmental consultants to review
potential environmental issues. The Company obtains and reviews available
rental, expense, maintenance and other operational information regarding the
property, prepares cash flow and debt service analyses and reviews all pertinent
information relating to any legal or other disputes to which the property is
subject. The amount of the Company's offer to purchase any such loan is based
upon the foregoing evaluations and analyses. The Company generally will not
acquire a loan unless (i) current net cash flow from the property securing the
loan is sufficient to yield an immediate cash return on the Company's investment
of not less than 10% per annum, (ii) the
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ratio of the Company's initial investment to the appraised value of the property
underlying the loan (utilizing an appraisal dated within one year of
acquisition) is less than 80%, (iii) there is the possibility of either prompt
refinancing of the loan by the borrower after acquisition, or sale by the
Company of a senior lien interest, that will result in an enhanced yield to the
Company on its (reduced) funds still outstanding (see "- Commercial Mortgage
Loan Acquisition and Resolution: Sale of Senior Lien Interests and
Refinancings"), and (iv) there is the possibility of a substantial increase in
the value of the property underlying the loan over its appraised value,
increasing the potential amount of the loan discount recoverable by the Company
at loan termination. On occasion, the Company will acquire a loan that does not
meet one or more of the criteria specified above if, in the Company's judgment,
other factors make the loan an appropriate investment opportunity. The Company
currently has in its portfolio eight loans in which the ratio of the cost of
investment to the appraised value (both at the time of acquisition and at the
date of the most recent appraisal) of the underlying property exceeds 80%. The
Company has a policy that appraisals of properties underlying loans be updated
no less often than every three years. Also, the Company has acquired loans
outside of its targeted investment cost range of $1 million to $10 million and,
as opportunities arise, may do so in the future. Five of the Company's portfolio
loans were acquired at a lesser investment cost, while two loans were acquired
at a greater cost ($10.6 million and $19.2 million, respectively). The Company
is not limited by regulation or contractual obligation as to the types of
properties that secure the loans it may seek to acquire or the nature or
priority of any lien or other encumbrance it may accept with respect to a
property. The Company also does not have restrictions regarding whether, after
sale of a senior lien interest or a refinancing, its interest in a particular
loan must continue to be secured (although the Company will typically retain a
subordinated lien position), the amount it may invest in any one loan, or the
ratio of initial investment cost-to-appraised value of the underlying property.
As part of the acquisition process, the Company typically resolves
disputes relating to the loans or the underlying properties. Through
negotiations with the borrower and, as appropriate or necessary, with other
creditors or parties in interest, the Company seeks to arrive at arrangements
that reflect more closely the current operating conditions of the property and
the present strategic position of the various interested parties. Where
appropriate, the Company will offer concessions to assure that the Company's
future control of the property's cash flow is free from dispute. These
arrangements are normally reflected in an agreement (a "Forbearance Agreement")
pursuant to which foreclosure or other action on the mortgage is deferred so
long as the arrangements reflected in the Forbearance Agreement are met. The
Company also seeks to resolve operational problems of the properties by
appointment of a property manager acceptable to it (see "- Commercial Mortgage
Loan Acquisition and Resolution: Forbearance Agreements") and may advance funds
for purposes of paying property improvement costs, unpaid taxes and similar
items. Prior to loan acquisition, the Company includes in its pre-acquisition
analysis of loan costs and yields an estimate of such advances. See "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations: Results of Operations: Commercial Mortgage Loan Acquisition and
Resolution."
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Upon acquisition of a loan, the Company typically requires that all
revenues from the property underlying the loan be paid into an operating account
on which the Company or its managing agent is the sole signatory. All
expenditures with respect to a property (including debt service, taxes,
operational expenses and maintenance costs) are paid from the Company's account
and are reviewed and approved by a senior officer of the Company prior to
payment. The Company further requires that its approval be obtained before any
material contract or commercial lease with respect to the property is executed.
To assist it in monitoring the loan, the Company requires that the borrower
prepare a budget for the property not less than sixty days prior to the
beginning of a year, which must be reviewed and approved by the Company, and
submit both a monthly cash flow statement and a monthly occupancy report. The
Company analyzes these reports in comparison with each other and with account
activity in the operating account referred to above.
The Company may alter the foregoing procedures in appropriate
circumstances. Where a borrower has refinanced a loan held by the Company (or
where the Company has acquired a loan subject to existing senior debt), the
Company may agree that the revenues be paid to an account controlled by the
senior lienor, with the excess over amounts payable to the senior lienor being
paid directly to the Company. As of September 30, 1997, one of the Company's
loans (loan 17; see "- Commercial Mortgage Loan Acquisition and Resolution: Loan
Status") is subject to such a provision. Where the property is being managed by
Brandywine Construction & Management, Inc. ("BCMI"), a property manager
affiliated with the Company (see "- Commercial Mortgage Loan Acquisition and
Resolution: Forbearance Agreements"), the Company may direct that property
revenues be paid to BCMI, as the Company's managing agent. As of September 30,
1997, revenues are being paid to BCMI with respect to two loans (loans 25 and
30). Where the Company believes that operating problems with respect to an
underlying property have been substantially resolved, the Company may permit the
borrower to retain revenues and pay property expenses directly. The Company
currently permits borrowers with respect to three loans (loans 24, 27 and 37) to
do so.
Commercial Mortgage Loan Acquisition and Resolution: Sale of Senior Lien
Interests and Refinancings
In evaluating a potential mortgage loan, the Company places significant
emphasis on the likelihood of its being able to sell a senior lien interest on
favorable terms after the acquisition and/or the borrower's likely ability, with
or without the Company's assistance, to secure favorable refinancing. When a
loan is refinanced, or a senior lien interest sold, the Company will obtain net
sale or refinance proceeds in an amount representing a major portion of (and
sometimes exceeding) the amount of its investment in the loan. After sale of a
senior lien interest or refinancing, the Company will typically retain an
interest in the loan, which is usually subordinated to the interest of the
senior lienholder or refinance lender.
Where a senior lien interest is sold, the outstanding balance of the
Company's loan at the time of sale remains outstanding, including as a part of
that balance the amount of the senior lien interest. Thus, the Company's
remaining interest effectively "wraps around" the senior lien
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interest. Typically, the interest rate on the senior lien interest is less than
the stated rate on the Company's loan. Senior lien interests with an aggregate
balance of $12.0 million at September 30, 1997, relating to nine of the
Company's loans, obligate the Company, in the event of a default on a loan, to
replace such loan with a performing loan. These senior lien interests become due
upon the expiration of their respective Forbearance Agreements (two each in
1998, 1999, 2000 and 2001 and one in 2016). Three other senior lien interests,
with an aggregate balance of $10.3 million at September 30, 1997, obligate the
Company, upon their respective maturities, all in fiscal 2002, to repurchase the
senior lien interest (if not theretofore paid off) at a price equal to the
outstanding balance of the senior lien interest plus accrued interest. See
"Commercial Mortgage Loan Acquisition and Resolution: Loan Status."
Where a refinancing is effectuated, the Company reduces the amount
outstanding on its loan by the amount of net refinancing proceeds received by it
and either converts the outstanding balance of the original note (both principal
and accrued interest, as well as accrued penalties) into the stated principal
amount of an amended note on the same terms as the original note, or retains the
original loan obligation as paid down by the amount of refinance proceeds
received by the Company. As with senior lien interests, the interest rate on the
refinancing is less than the interest rate on the Company's retained interest.
After sale of a senior lien interest or a refinancing, the Company's
retained interest will usually be secured by a subordinate lien on the property.
In certain situations, however, (including seven loans constituting 8.3%, by
book value, of the Company's loans), the Company's retained interest may not be
formally secured by a mortgage because of conditions imposed by the senior
lender, although it may be protected by a judgment lien, an unrecorded
deed-in-lieu of foreclosure, the borrower's covenant not to further encumber the
property without the Company's consent, and/or a similar device.
Commercial Mortgage Loan Acquisition and Resolution: Forbearance Agreements
Substantially all of the commercial mortgage loans acquired by the
Company are subject to Forbearance Agreements with borrowers pursuant to which
the holder of the loan (the Company, upon loan acquisition) (i) agrees, subject
to receipt of specified minimum monthly payments, to defer the exercise of
existing rights to proceed on the defaulted loan (including the right to
foreclose), (ii) receives the rents from the underlying property (either
directly or through a managing agent approved by the Company, subject to certain
exceptions; see "- Acquisition and Administration Procedures for Commercial Loan
Acquisition and Resolution Operations") and (iii) requires the borrower to
retain a property management firm acceptable to the holder. The Forbearance
Agreements also provide that any cash flow from the property (after payment of
Company-approved expenses and debt service on senior lien interests) above the
minimum payments will be retained by the Company and applied to accrued but
unpaid debt service on the loan. As a result of provision (iii), BCMI, an
affiliated property management company, has assumed responsibility for
supervisory and, in many cases, day to day management of the underlying
properties with respect to substantially all of the loans the Company currently
owns. In ten instances, the President of BCMI (or an entity affiliated with him)
has also acted as the
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general partner or trustee of the borrower. The minimum payments required under
a Forbearance Agreement (generally related to anticipated cash flow from the
property after operating expenses) are normally materially less than the debt
service payments called for by the original terms of the loan. The difference
between the minimum required payments under the Forbearance Agreement and the
payments called for by the original loan terms continues to accrue, but (except
for amounts recognized as an accretion of discount; see "- Commercial Mortgage
Loan Acquisition and Resolution: Accounting for Discounted Loans") are not
recognized as revenue to the Company until actually paid.
At the end of the term of a Forbearance Agreement, the borrower is
required to pay the loan in full. The borrower's ability to do so, however, will
be dependent upon a number of factors, including prevailing conditions at the
underlying property, the state of real estate and financial markets (generally
and as regards the particular property), and general economic conditions. In the
event the borrower does not or cannot do so, the Company anticipates that it
will seek to sell the property underlying the loan or otherwise liquidate the
loan. Alternatively, the Company anticipates that it might, in appropriate
cases, and for appropriate additional consideration, agree to further
forbearance.
An existing Forbearance Agreement remains in effect with no
modifications when the Company sells a senior lien interest in a loan. In such
instance, the purchaser's interest is in the loan subject to the terms of the
Forbearance Agreement. However, when a borrower refinances a loan, the
Forbearance Agreement is thereby amended to (i) reflect the pay down of the loan
balance, (ii) acknowledge the existence of the refinancing and (iii) provide for
the continued effectiveness of all provisions of the Forbearance Agreement for
the term specified therein, except that where specific provisions of the
Forbearance Agreement are inconsistent with the terms of the refinancing, the
terms of the refinancing have priority. In some refinancings, the refinance
lender may require that the borrower issue an amended note (a "retained interest
note") to reflect the reduction of the borrower's indebtedness to the Company
and, where applicable, any other revised terms.
Commercial Mortgage Loan Acquisition and Resolution: Loan Status
At September 30, 1997, the Company's loan portfolio consisted of 38
loans of which 28 loans were acquired as first mortgage liens and 10 loans were
acquired as junior lien obligations. The Company's strategy has been to acquire
loans in anticipation of selling a senior lien interest in the loan or in
anticipation of the borrower's refinancing of the loan. At September 30, 1997,
the Company had sold a senior lien interest in 14 loans in its portfolio,
(including senior interests in five loans acquired by the Company as junior lien
loans) and borrowers with respect to 12 of the Company's loans have obtained
refinancing (including a refinancing of one loan acquired by the Company as a
junior lien loan). After such sales and refinancings, the Company holds
subordinated interests in 30 loans of which seven interests, constituting
approximately 8.3% of the book value of the Company's loan portfolio, are not
collateralized by recorded mortgages (see "- Commercial Mortgage Loan
Acquisition and Resolution: Sale of Senior Lien Interests and Refinancings").
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<PAGE>
The Company anticipates that 10 of its loans, and a senior lien
interest in an eleventh loan will be sold to the REIT. See "- Sponsorship of
Real Estate Investment Trust" and Note 9 to the following table.
-13-
<PAGE>
The following table sets forth certain information relating to the
Company's investments in real estate loans at September 30, 1997.
<TABLE>
<CAPTION>
Loan Outstanding
Loan Type of Acquired Loan
Number Property Location Seller/Originator (Fiscal Year) Receivable(1)
- ------ -------- -------- ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
001 Multifamily Pennsylvania Alpha Petroleum Pension Fund 1991 $ 8,471,635
002(9) Multifamily Pennsylvania CoreStates Bank(10) 1992 1,555,120
003 Multifamily New Jersey RAM Enterprises/Glenn Industries 1993 2,695,748
Pension Plan
004(9) Multifamily Pennsylvania St. Paul Federal Bank for Savings(12) 1993 1,481,638
005 Office Pennsylvania Shawmut Bank(10) 1993 6,273,329
006(9) Office/Retail Virginia Nationsbank(10) 1993 5,761,455
007 Single User Minnesota Prudential Insurance, Alpha 1993 4,441,379
(Retail) Petroleum Pension Fund
008(9) Multifamily Pennsylvania Nomura/Cargill/Eastdil Realty(13) 1994 5,389,823
009(9) Multifamily Pennsylvania Mellon Bank(10) 1995 1,638,263
010(9) Multifamily Pennsylvania RIVA Financial 1994 1,579,540
011 Office Washington, D.C. First Union Bank(10) 1995 1,410,289
012(9) Multifamily Pennsylvania CoreStates Bank(10)(12) 1995 3,036,879
013 Single User California California Federal Bank, FSB 1995 2,985,207
(Commercial)
014 Office Washington, D.C. Nomura/Cargill/Eastdil Realty(13) 1995/1997 14,786,192
015 Condo/ North Carolina First Bank, South Trust Bank(14) 1997 3,572,780
Multifamily
016 Single User California Mass Mutual, Alpha Petroleum 1995/1996 6,924,661
(Retail) Pension Fund
017 Single User West Virginia Triester Investments(10)(15) 1996 1,786,434
(Retail)
018 Single User California Emigrant Savings Bank, Walter 1996 2,933,154
(Retail) R. Samuels and Jay Furman(16)
019(9) Multifamily Pennsylvania Summit Bancorp(10) 1996 4,724,376
020 Office New Jersey Cargill/Eastdil Realty(13) 1996 7,026,381
021 Multifamily Pennsylvania Bruin Holdings/Berkeley Federal 1996/1997 9,743,475
Savings Bank
022 Multifamily Pennsylvania FirsTrust FSB 1996/1997 4,465,421
023(9) Multifamily Pennsylvania Jefferson Bank 1996 711,924 (20)
024 Multifamily Pennsylvania U.S. Dept. of Housing & Urban
Development 1996 3,427,673
025 Hotel/Commercial Georgia Bankers Trust Co. 1997 6,029,552
026 Office Pennsylvania FirsTrust FSB 1997 7,983,948
</TABLE>
<PAGE>
RESTUBBED FROM TABLE ABOVE
<TABLE>
<CAPTION>
Appraised Value
Loan Type of of Property Cost of
Number Property Location Seller/Originator Securing Loan(2) Investment(3)
- ------ -------- -------- ----------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
001 Multifamily Pennsylvania Alpha Petroleum Pension Fund $ 5,300,000 $ 4,628,323
002(9) Multifamily Pennsylvania CoreStates Bank(10) 900,000 547,813
003 Multifamily New Jersey RAM Enterprises/Glenn Industries 1,350,000 1,324,780
Pension Plan
004(9) Multifamily Pennsylvania St. Paul Federal Bank for Savings(12) 1,200,000 862,356
005 Office Pennsylvania Shawmut Bank(10) 1,700,000 1,242,218
006(9) Office/Retail Virginia Nationsbank(10) 2,800,000 2,388,018
007 Single User Minnesota Prudential Insurance, Alpha 2,515,000 1,354,382
(Retail) Petroleum Pension Fund
008(9) Multifamily Pennsylvania Nomura/Cargill/Eastdil Realty(13) 3,200,000 1,614,174
009(9) Multifamily Pennsylvania Mellon Bank(10) 2,700,000 1,362,884
010(9) Multifamily Pennsylvania RIVA Financial 800,000 456,356
011 Office Washington, D.C. First Union Bank(10) 2,000,000 1,180,030
012(9) Multifamily Pennsylvania CoreStates Bank(10)(12) 2,200,000 1,296,565
013 Single User California California Federal Bank, FSB 2,400,000 1,694,799
(Commercial)
014 Office Washington, D.C. Nomura/Cargill/Eastdil Realty(13) 11,000,000 10,566,013
015 Condo/ North Carolina First Bank, South Trust Bank(14) 3,702,000 2,787,774
Multifamily
016 Single User California Mass Mutual, Alpha Petroleum 3,000,000 2,083,399
(Retail) Pension Fund
017 Single User West Virginia Triester Investments(10)(15) 1,900,000 1,070,597
(Retail)
018 Single User California Emigrant Savings Bank, Walter 4,555,000 2,224,658
(Retail) R. Samuels and Jay Furman(16)
019(9) Multifamily Pennsylvania Summit Bancorp(10) 5,725,000 3,758,685
020 Office New Jersey Cargill/Eastdil Realty(13) 4,600,000 2,981,599
021 Multifamily Pennsylvania Bruin Holdings/Berkeley Federal 4,222,000 2,453,501
Savings Bank
022 Multifamily Pennsylvania FirsTrust FSB 4,110,000 2,409,598
023(9) Multifamily Pennsylvania Jefferson Bank 600,000 427,474
024 Multifamily Pennsylvania U.S. Dept. of Housing & Urban
Development 3,250,000 2,730,183
025 Hotel/Commercial Georgia Bankers Trust Co. 8,500,000 5,877,058
026 Office Pennsylvania FirsTrust FSB 5,000,000 3,581,137
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
Loan Outstanding
Loan Type of Acquired Loan
Number Property Location Seller/Originator (Fiscal Year) Receivable(1)
- ------ -------- -------- ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
027(9) Office Pennsylvania Lehman Brothers Holdings, Inc. 1997 $ 52,644,228
028 Condo/ North Carolina First Bank, SouthTrust Bank(23) 1997 1,678,680
Multifamily
029 Commercial/ Pennsylvania Castine Associates, L.P.(24) 1997 6,962,930
Retail
030 Hotel Nebraska CNA Insurance 1997 6,456,907
031 Multifamily Connecticut John Hancock Mutual Life 1997 6,251,307
Insurance Company
032 Multifamily New Jersey John Hancock Mutual Life 1997 12,210,777
Insurance Company
033 Single User/ Virginia Brambilla, Ltd. 1997 3,970,564
Retail
034 Multifamily Pennsylvania Resource America, Inc.(26) 1997 400,622
035 Office Pennsylvania Jefferson Bank 1997 2,321,627
036 Office North Carolina Union Labor Life Insurance Co. 1997 4,475,257
037 Multifamily Florida Howe, Soloman & Hall 1997 6,876,566
Financial, Inc.
038(9) Office/Retail Pennsylvania Resource Asset Investment Trust(26) 1997 8,580,000
-------------
Balance as of September 30, 1997 $233,665,613
============
</TABLE>
RESTUBBED FROM TABLE ABOVE
<TABLE>
<CAPTION>
Appraised Value
Loan Type of of Property Cost of
Number Property Location Seller/Originator Securing Loan(2) Investment(3)
- ------ -------- -------- ----------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
027(9) Office Pennsylvania Lehman Brothers Holdings, Inc. $ 34,000,000 $ 19,240,747
028 Condo/ North Carolina First Bank, SouthTrust Bank(23) 1,773,000 1,028,143
Multifamily
029 Commercial/ Pennsylvania Castine Associates, L.P.(24) 4,000,000 2,978,752
Retail
030 Hotel Nebraska CNA Insurance 4,000,000 3,740,922
031 Multifamily Connecticut John Hancock Mutual Life 7,500,000 4,678,000
Insurance Company
032 Multifamily New Jersey John Hancock Mutual Life 12,425,000 7,410,218
Insurance Company
033 Single User/ Virginia Brambilla, Ltd. 2,650,000 1,995,705
Retail
034 Multifamily Pennsylvania Resource America, Inc.(26) 450,000 400,000
035 Office Pennsylvania Jefferson Bank 2,550,000 1,582,088
036 Office North Carolina Union Labor Life Insurance Co. 4,150,000 3,050,200
037 Multifamily Florida Howe, Soloman & Hall 3,500,000 2,796,393
Financial, Inc.
038(9) Office/Retail Pennsylvania Resource Asset Investment Trust(26) 10,600,000 8,580,000
------------- -------------
Balance as of September 30, 1997 $176,827,000 $120,385,542
============ ============
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
Proceeds from Company's Net Maturity of Loan/
Ratio of Cost Refinancing or Interest In Expiration of
Loan of Investment to Sale of Senior Net Carried Cost Outstanding Loan Forbearance
Number Appraised Value Lien Interests Investment(4) of Investment(5) Receivables(6) Agreement(7)
- ------ --------------- -------------- ------------- ---------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
001 87% $ 2,570,000 (8) $ 2,058,323 $ 2,503,108 $ 5,945,935 12/31/02
002 61% 575,000 (11) (27,187) 185,295 955,120 10/31/98
003 98% 627,000 697,780 725,350 2,058,198 01/01/03
004 72% 871,000 (11) (8,644) 238,958 585,638 10/31/98
005 73% 940,000 (11) 302,218 785,814 5,433,329 02/07/01
006 85% 840,000 1,548,018 1,670,669 4,881,874 07/31/98
007 54% 2,099,000 (744,618) 555,149 2,295,519 12/31/14
008 50% 934,300 679,874 1,058,457 4,287,524 07/31/98
009 50% 654,600 708,284 579,159 750,691 11/01/99
010 57% 575,000 (11) (118,644) 133,073 979,540 09/02/99
011 59% 660,000 (11) 520,030 670,564 725,289 09/30/99
012 59% 1,079,000 217,565 747,650 1,778,063 12/02/99
013 71% 1,975,000 (11) (280,201) 328,767 985,207 05/01/01
014 96% 6,487,000 4,079,013 5,297,790 8,041,969 11/30/98
015 75% 2,558,000 (8) 229,774 3,572,780 1,211,780 08/25/00
016 69% 2,375,000 (11) (291,601) 469,130 4,524,661 12/31/00
017 56% 693,000 (8) 377,597 965,512 1,116,845 12/31/18
018 49% 1,969,000 (11) 255,658 886,261 964,154 12/01/00
019 66% 3,020,000 738,685 956,429 1,539,656 12/29/00
020 65% 2,562,000 419,599 1,856,859 4,623,458 02/07/01
021 60% 2,010,000 (11) 443,501 1,496,972 7,733,475 07/01/16 (17)
022 59% 2,636,000 (18)(19) (226,402) 862,459 1,795,337 10/31/98
023 71% 450,000 (21) (22,526) 128,641 263,041 03/28/01
024 84% 2,318,750 411,433 804,390 927,673 11/01/22
025 69% - 5,877,058 6,102,725 6,029,552 12/31/15
026 72% 2,240,000 (22) 1,341,137 2,312,620 5,738,258 09/30/03
</TABLE>
-16-
<PAGE>
<TABLE>
<CAPTION>
Proceeds from Company's Net Maturity of Loan/
Ratio of Cost Refinancing or Interest In Expiration of
Loan of Investment to Sale of Senior Net Carried Cost Outstanding Loan Forbearance
Number Appraised Value Lien Interests Investment(4) of Investment(5) Receivables(6) Agreement(7)
- ------ --------------- -------------- ------------- ---------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
027 57% $7,920,000 (18) $11,320,747 $16,615,724 $44,644,228 01/01/02
028 58% - 1,028,143 1,678,680 1,678,680 03/31/02
029 75% 750,000 (25) 2,228,752 2,464,174 6,212,930 07/01/02
030 94% - 3,740,922 3,816,425 6,456,907 09/30/02
031 62% - 4,678,000 4,704,270 6,251,307 09/01/05
032 60% - 7,410,218 7,451,074 12,210,777 09/01/05
033 80% - 1,995,705 628,671 2,595,241 02/01/21
034 89% - 400,000 400,000 400,622 10/01/02
035 63% 750,000 (25) 832,088 1,081,234 1,571,627 09/25/02
036 76% - 3,050,200 3,074,544 4,475,257 12/31/11
037 80% - 2,796,393 2,826,741 6,876,566 07/01/00
038 81% - 8,580,000 8,580,000 8,580,000 03/31/02
----------- ------------ ------------ -------------
Balance as of September 30, 1997 $53,138,650 $67,246,892 $89,216,118 $178,125,928
=========== =========== =========== ============
</TABLE>
-17-
<PAGE>
(1) Consists of the stated, or face value of the obligation plus accrued
interest and penalties and the outstanding balance of the senior lien
interest at September 30, 1997.
(2) The Company's policy is to obtain an appraisal of a property underlying a
loan at least once every three years. Accordingly, appraisal dates range
from 1994 to 1997.
(3) Consists of the original cost of the investment to the Company (including
acquisition costs and the amount of any senior lien interest to which the
property remained subject) plus subsequent advances, but excludes the
proceeds to the Company from the sale of senior lien interests or
borrower refinancings.
(4) Represents the unrecovered costs of the Company's investment, calculated
as the cash investment made in acquiring the loan plus subsequent
advances less cash received from sale of a senior lien interest in or
borrower refinancing of the loan. Negative amounts represent the receipt
by the Company of proceeds from the sale of senior lien interests or
borrower refinancings in excess of the Company's investment.
(5) Represents the cost of the investment carried on the books of the Company
after accretion of discount and allocation of gains from the sale of a
senior lien interest in or borrower refinancing of the loan, but excludes
an allowance for possible losses of $400,000. For a discussion of
accretion on discount and allocation of gains, see "- Commercial Mortgage
Loan Acquisition and Resolution: Accounting for Discounted Loans."
(6) Consists of the amount set forth in the column "Outstanding Loan
Receivable" less the outstanding balance of senior lien interests at
September 30, 1997.
(7) With respect to loans 6, 7, 8, 14, 25, 27, 30, 31, 32, 34, 35 and 38, the
date given is for the maturity of the subordinate note for the residual
loan balance received by the Company in connection with the refinancing.
For the remaining loans, the date given is the expiration date of the
related Forbearance Agreement.
(8) Represents the amount of the senior lien interest in place on date of
acquisition.
(9) It is anticipated that these loans will be sold to the REIT. See "-
Sponsorship of Real Estate Investment Trust."
(10) Successor by merger to the Seller.
(11) Senior lien interest sold subject to the right of the holder (Citation
Insurance Company, a subsidiary of Physicians Insurance Company of Ohio),
upon default, to require the Company to substitute a performing loan.
(12) Seller was a wholly-owned subsidiary of this institution.
-18-
<PAGE>
(13) Seller was a partnership of these entities.
(14) Original lending institutions. In March 1997, as a result of agreements
among the borrower, the Company and a third party, Concord Investment,
L.P. ("Concord"), the borrower's partnership interests were transferred
to the Company which resold them to Concord for a mortgage note (which
wrapped around certain senior indebtedness), and cash.
(15) The loan acquired consists of a series of notes becoming due yearly
through December 31, 2018. The notes are being paid in accordance with
their terms and, accordingly, a Forbearance Agreement was not required.
(16) Amounts advanced by the Company were used in part to repay the loan of
Emigrant Savings Bank; the balance was applied to purchase a note held by
Messrs. Samuels and Furman.
(17) The loan acquired consists of 31 separate mortgage loans on 49 individual
condominium units in a single building. Nine of such loans are due July
1, 2016, eighteen are due January 1, 2015, one is due October 1, 2007,
one is due March 1, 2001 and two are due October 9, 2001.
(18) Two senior lien interests were sold to Commerce Bank, N.A. ("Commerce").
The Company has the obligation to repurchase these senior lien interests,
at Commerce's option, on or after June 27, 2002 (loan 22) and September
29, 2002 (loan 27), if the senior lien interest is not repaid in
accordance with its terms by the borrower.
(19) Junior lien interest sold to Crafts House Apartments Partners, L.P., a
limited partnership in which officers and directors of the Company
beneficially own a 21.3% interest.
(20) Includes a note for $14,948 which is payable to the Company on demand.
(21) Senior lien interest sold to Crusader Bank. If not repaid at its maturity
date, the Company is required to repurchase the interest at a price equal
to its unpaid principal balance plus accrued interest.
(22) Senior lien interest sold to CRC-Axewood Partners, L.P., a limited
partnership in which officers and directors of the Company beneficially
own an 18.3% interest.
(23) Original lending institutions. In connection with the transactions
referred to in Note (14), Concord acquired other condominium units in the
same building. These units secured a loan in the original principal
amount of $910,000 held by the Company. As part of that acquisition, the
Company made an additional mortgage loan to Concord of $797,675.
(24) From 1993 to October 1997 an officer of the Company served as the General
Partner.
-19-
<PAGE>
(25) Senior lien interest sold to Peoples Thrift Savings Bank.
(26) Consists of four related loans to one borrower secured by two properties.
-20-
<PAGE>
The following table sets forth the average monthly cash flow from the
properties underlying loans 1 through 29, the average monthly debt service
payable to senior lienholders and refinance lenders and the average monthly
payment with respect to the Company's retained interest, based on three months
ended September 30, 1997:
<TABLE>
<CAPTION>
Average Average Monthly Debt Average Monthly
Monthly Cash Service on Payment to
Loan Flow from Refinancing or the Company's
Number Property (1)(2) Senior Lien Interests(3) Interest (2)
------- --------------- ------------------------ ----------------
<S> <C> <C> <C>
001 $ 37,581 $ 26,425 $ 11,156
002 7,646 4,875 2,771
003 6,629 6,058 571
004 10,718 7,280 3,438
005 12,262 6,825 5,437
006 24,964 8,021 16,943
007 21,300 20,400 900
008 27,839 10,670 17,169
009 21,646 7,359 14,287
010 8,467 4,875 3,592
011 11,843 5,566 6,277
012 19,517 10,317 9,200
013 27,821 15,833 11,988
014 156,369 58,551 97,818
015 & 028 (4) 33,834 26,113 7,721
016 23,917 19,500 4,417
017 10,690 9,190 1,500
018 24,827 (5) 15,998 8,829
019 58,364 25,300 33,064
020 41,732 19,527 22,205
021 19,204 16,331 2,873
022 30,731 24,365 6,366
023 6,065 3,932 2,133
024 28,066 17,474 10,592
025 45,967 - 45,967
026 26,537 10,800 15,737
027 224,958 102,713 122,245
029 20,997 6,250 (6) 14,747
---------- -------- --------
$ 990,491 (7) $490,548 (7) $499,943 (7)
========== ======== ========
</TABLE>
-21-
<PAGE>
(1) "Cash Flow" as used in this table is that amount equal to the operating
revenues from property operations less operating expenses, including real
estate and other taxes pertaining to the property and its operations, and
before depreciation, amortization and capital expenditures.
(2) Except as set forth in Note (4), monthly cash flow from each of the
properties has been calculated as the average monthly amount during the
three-month period ended September 30, 1997.
(3) Monthly debt service consists of required payments of principal, interest
and other regularly recurring charges payable to the holder of the
refinancing loan or senior lien interest.
(4) Loans 15 and 28 are secured by different condominium units in the same
property and are, accordingly combined for cash flow purposes.
(5) Includes one twelfth of an annual payment of $110,000 received in
December of each year.
(6) Prior to September 29, 1997, this note was subordinate to a senior lien
interest of approximately $952,000 with monthly debt service of $8,990.
On September 29, 1997, the senior lien interest was repaid through sale
of a senior lien interest to another institution.
(7) Excludes amounts attributable to loans 30 through 38, which are referred
to in the table below. For certain information regarding the combined
results for all loans (including estimated results) see Note (4) to the
table below.
The loans in the following table have been recently acquired by the
Company and, accordingly, the table sets forth monthly cash flow, debt service
and payment to the Company's interest based upon the Company's experience with
such loans for periods after September 30, 1997, as noted. Except as set forth
in Note (3) below, "cash flow" and "monthly debt service" are as defined in
notes (1) and (3) to the previous table.
Monthly Debt Monthly
Monthly Cash Service on Payment to
Loan Flow from Refinancing or the Company's
Number Property Senior Lien Interests Interest
------ -------- --------------------- --------
030 $ 60,194 (1) $ - $ 60,194
031 41,445 (1) - 41,445
032 76,056 (1) - 76,056
033 21,940 (2) - 21,940
034 5,577 (1) - 5,577
035 25,131 (1) 6,250 18,881
036 31,598 (1) - 31,598
037 25,000 (1) - 25,000
038 77,400 (3) - 77,400 (3)
-------- ------ --------
$364,341 (4) $6,250 (4) $358,091 (4)
======== ====== ========
-22-
<PAGE>
(1) Based upon cash flow for the three months ended November 30, 1997.
(2) Based upon cash flow for the two months ended November 30, 1997.
(3) Loan was originated by, and it is anticipated will be sold to, the REIT
and is a non- discounted loan. Accordingly "cash flow" consists of
required payments of principal and interest on the loan.
(4) Combined with the prior table, total monthly cash flow would be
$1,354,832 total monthly debt service on refinancings or senior lien
interests would be $496,798 and total monthly payment to the Company's
interest would be $858,034.
All of the Company's portfolio loans are currently performing in
accordance with their respective repayment terms under Forbearance Agreements or
retained interest notes.
Commercial Mortgage Loan Acquisition and Resolution: Accounting for Discounted
Loans
The difference between the Company's cost basis in a loan and the sum
of projected cash flows from, and the appraised value of, the underlying
property (up to the amount of the loan) is accreted into interest income over
the estimated life of the loan using a method which approximates the level yield
method. The projected cash flows from the property are reviewed on a quarterly
basis and changes to the projected amounts reduce or increase the amounts
accreted into interest income over the remaining life of the loan on a method
approximating the level yield method.
The Company records the investments in its loan portfolio at cost,
which is significantly discounted from the face value of, and accrued interest
and penalties on, the notes. This discount (as adjusted to give effect to
refinancings and sales of senior lien interests) totaled $86.3 million, $40.0
million and $16.1 million at September 30, 1997, 1996 and 1995, respectively.
The cost basis in the various loans is periodically reviewed to determine that
it is not greater than the sum of the projected cash flows and the appraised
value of the underlying properties. If the cost basis were found to be greater,
the Company would provide, through a charge to operations, an appropriate
allowance. For the year ended September 30, 1997, the Company recorded a
provision for possible losses of $400,000 to reflect the increase in size of its
commercial loan portfolio. For the years ended September 30, 1996 and 1995, no
such provision was required.
Gains on the sale of a senior lien interest in a loan (or gains, if
any, from the refinancing of a loan) are allocated between the portion of the
loan sold or refinanced and the portion retained based upon the fair value of
those respective portions on the date of such sale or refinancing. Any gain
recognized on a sale of a senior lien interest or a refinancing is brought into
income on the date of such sale or refinancing.
Commercial Mortgage Loan Acquisition and Resolution: Competition
-23-
<PAGE>
Although the commercial mortgage loan acquisition and resolution
business is intensely competitive in virtually all of its aspects, the Company's
focus on the acquisition of relatively small troubled commercial mortgage loans
subject to complex and/or contentious situations is a niche in which the Company
believes there are relatively few, specialized investors. In the overall market
for the acquisition of real estate obligations, however, there are a substantial
number of competitors (including investment partnerships, financial
institutions, investment companies, public and private mortgage funds and other
entities), many of which possess far greater financial resources than the
Company. The Company's ability to add to its loan portfolio will depend on its
success in obtaining funding for the acquisition of additional mortgages. In
raising such funds in the financial capital markets, the Company will have to
compete for capital based largely on the Company's overall financial performance
and, more specifically, the performance of the Company's loan portfolio.
Residential Mortgage Loans
The Company's residential mortgage loan business focuses upon loans to
individuals secured by one- to four-family residences. Depending upon the credit
qualification of a borrower, the Company may originate loans for its portfolio
with a loan-to-value ratio of up to 60% (for the least qualified borrowers) to
90% (for the most qualified borrowers). In addition, the Company originates "125
Loans" (that is, loans with a cumulative loan-to-value ratio of up to 125%)
provided that such loans are approved for acquisition by third-party purchasers
prior to funding. On November 5, 1997, the Company acquired Tri-Star, an
originator of non-conforming residential mortgage loans, which operates in six
states (Delaware, Maryland, New Jersey, Pennsylvania, Ohio and Virginia).
Tri-Star originated $46 million in mortgage loans in calendar year 1996 and, for
the first ten months of 1997, originated $51 million of residential mortgage
loans. FMF and Tri-Star, through which the Company conducts its residential
mortgage lending operations, are currently separate subsidiaries of the Company
which the Company anticipates merging upon completion of regulatory requirements
relating to transfer of residential mortgage lending licenses.
The Company originates residential mortgage loans directly with
consumers rather than acquiring such loans in bulk from other originators. The
Company primarily originates its loans through retail/consumer direct channels
(principally direct mail) under the trade name USDirect Mortgage. Potential
customers are identified using statistical models predicting consumer need and
capacity for a mortgage loan. The Company also anticipates entering into
"private label" arrangements with financial institutions and other entities to
originate loans by providing loan underwriting, processing and other services to
these institutions for their non-conforming borrowers. The Company reduces the
time and costs related to underwriting, processing and funding residential
mortgage loans, and attempts to increase the consistency of its loan
underwriting, through an automated underwriting and processing system which
incorporates a proprietary credit evaluation system developed from industry data
and parameters established by FMF's management. Although to date the Company has
funded substantially all of its loans through internally available resources,
the Company (through FMF) has arranged two warehouse
-24-
<PAGE>
lines of credit, with an aggregate credit amount of $20 million, to fund its
lending operations. See "- Sources of Funds."
The Company anticipates that, in the first quarter of fiscal 1998, it
will commence sales or securitizations of residential mortgage loans held in its
portfolio. The Company (through FMF) is approved as a loan seller to six
investors (Unicor Mortgage, Inc., Industry Mortgage Company, Key Home Equity,
Delta Funding Corporation, Cityscape Corporation and The Money Store). The
Company anticipates that, initially, all loan sales will be on a
service-released basis. However, as FMF and Tri-Star develop their operations
and increase staffing, they may sell loans on a service-retained basis and may
retain certain loans for their portfolios.
Sponsorship of Real Estate Investment Trust
The Company is the sponsor of the REIT which has filed a registration
statement with the Securities and Exchange Commission for the public offer and
sale of its common shares of beneficial interest. The REIT's primary business
will be to acquire or originate mortgage loans in situations that, generally, do
not conform to the underwriting standards of institutional lenders or sources
that provide financing through securitization. Although the REIT may acquire
mortgage loans at a discount, it seeks to acquire such loans where the workout
process has been initiated and where, unlike the mortgage loans acquired by the
Company, there is no need for the REIT's active intervention. It is anticipated
that the REIT will commence operations in December, 1997.
As sponsor of the REIT, the Company will acquire 9.8% of the REIT's
common shares of beneficial interest upon completion of the REIT offering, at an
anticipated cost of approximately $11.4 million, and have the right to purchase
up to 15% of the REIT's common shares. So long as the Company owns 5% or more of
the REIT's common shares, the Company will have the right to nominate one person
to the REIT's board of trustees. The Company will sell 10 of its mortgage loans
and a senior lien interest in an eleventh loan (representing a net investment by
the Company at September 30, 1997 of $22.2 million) to the REIT, as part of the
REIT's initial investments, for $27.7 million. The Company may sell further
loans to the REIT, to a maximum of 30% of the REIT's investments (on a cost
basis), excluding the initial investments. Betsy Z. Cohen, spouse of the
Company's Chairman and Chief Executive Officer, is the Chairman and Chief
Executive Officer of the REIT. Jonathan Z. Cohen, the son of Mrs. Cohen and
Edward E. Cohen, Chairman and Chief Executive Officer of the Company, is the
Company's nominee to the REIT's board of trustees. To mitigate potential
conflicts of interest, the Company has agreed to certain restrictions for a
period of two years following completion of the REIT's offering of common
shares, including agreements not to sponsor another mortgage REIT and to provide
certain rights of first refusal on originated mortgage loans (but not mortgage
loans acquired from third parties) and on mortgage loans that the Company seeks
to sell.
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<PAGE>
Equipment Leasing
General
The Company conducts its leasing operations through three corporate
divisions: Fidelity Leasing, Inc. ("FLI"), which conducts the Company's small
ticket leasing operations; F.L. Partnership Management, Inc. ("FLPM"), which
manages six public leasing partnerships; and FL Financial Services, Inc.
("FLFS"), which provides lease finance placement and advisory services. The
Company's primary focus in its equipment leasing operations is on the
development of FLI, which commenced small ticket leasing operations in June
1996. FLPM's operations will be reduced over the next several years as
partnership assets are sold and cash is distributed back to the investors. FLPM
does not anticipate forming new limited partnerships in the future. FLFS will
continue to operate its lease finance placement and advisory business which,
while profitable, is not expected to constitute a material source of revenues
for the Company.
Strategy
Focus on Small Ticket Leasing. The Company focuses on leasing equipment
costing between $5,000 and $100,000. By so doing, the Company takes advantage
not only of the background and expertise of its leasing management team, but
also of the servicing platform the Company has acquired and developed, which has
the capacity to monitor the large amounts of equipment and related assets
involved in a small-ticket leasing operation. In addition, small ticket items
represent a substantial portion of the equipment sought by small business, a
segment of the end-user market the Company believes is under-served by equipment
lessors, banks and other financial institutions, thereby affording the Company a
niche market with significant growth potential (see "Strategy - Focus on Leasing
to Small Businesses," below). Moreover, the small size of a typical transaction
relative to the Company's total lease portfolio reduces the Company's credit
risk exposure from any particular transaction.
Focus on Vendor Programs. The significant majority of equipment leased
to end-user customers by the Company will be purchased from manufacturers or
regional distributors with whom the Company is establishing vendor programs. In
so doing, the Company utilizes the manufacturer's or distributor's sales
organization to gain access to the manufacturer's end-user base without
incurring the costs of establishing independent customer relationships. The
Company is actively pursuing the establishment of multiple vendor programs in an
effort to reduce its reliance on any one vendor and, thus, to reduce the risk of
tying the success of the Company's leasing operations to the continuation of a
relationship with one (or a small group) of vendors. The Company has currently
established programs with ten manufacturers or distributors. Two of such
manufacturers (Minolta Corporation and Lucent Technologies, Inc.) accounted for
23% and 6.6%, respectively, of the equipment (by cost) leased by the Company
during fiscal 1997.
Focus on Leasing to Small Businesses. The Company focuses its marketing
programs and resources on lease programs for small business end-users (generally
those with 500 or fewer
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<PAGE>
employees). The Company has acquired and developed credit evaluation and scoring
systems (based upon credit evaluation services provided by Dunn & Bradstreet)
which it believes significantly reduce the credit risk in dealing with small
business end-users (see "- Small Ticket Leasing"). The Company also believes
that small business end-users, while sensitive to the size of a monthly lease
payment, are less sensitive than large end-users to the interest rate structure
of a lease, allowing the Company to increase its yield by lengthening lease
terms to lower monthly rent. The Company currently offers lease terms from one
to five years to meet the needs of its end-users and will consider other lease
terms in appropriate circumstances.
Focus on Full-Payout Leases. The Company seeks to reduce the financial
risk associated with the lease transactions it originates through the use of
full-payout leases. The principal benefit from this lease format is the
repayment to the Company during the lease term of its invested capital plus an
amount sufficient to cover its transaction costs and, typically, a minimum
return on its invested capital. To the extent possible, the Company seeks to
substantially increase this return through amounts received upon remarketing the
equipment or through continued leasing of the equipment after expiration of the
initial lease term.
Focus on Providing Service. The Company provides service and support to
its small business customers and vendors by seeking to minimize the time
required to respond to customer applications for lease financing and by
providing sales training programs to its vendors and their sales staff (which it
customizes to their particular needs) regarding the use of lease financing for
marketing purposes to increase a vendor's equipment sales and market share. The
Company has acquired and developed proprietary management systems to assist it
in providing lease quotes and application decisions to its customers, generally
within 4 hours after receipt of a request.
Small Ticket Leasing
The Company offers full-payout leases with options, exercisable by the
lessee at the end of the lease term, either to purchase the equipment at fair
market value, to purchase the equipment for a fixed price negotiated at the time
the lease is signed, or to continue as a lessee on a month-to-month basis. A
"full-payout lease" is a lease under which the non-cancelable rental payments
due during the initial lease term are at least sufficient to recover the
purchase price of the equipment under the lease, related acquisition fees and,
typically, a minimum return on the Company's invested capital. The Company's
leases have a provision which requires the lessee to make all lease payments
under all circumstances. The leases are also net leases, requiring the lessee to
pay (in addition to rent) any other expenses associated with the use of
equipment, such as maintenance, casualty and liability insurance, sales or use
taxes and personal property taxes. The Company offers lease terms from one to
five years and will consider other lease terms in appropriate circumstances.
The equipment that the Company presently purchases for lease includes
document processing and storage equipment, telecommunications systems, computer
equipment, small manufacturing machines and office furniture. The table below
sets forth the distribution of
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<PAGE>
equipment purchased by the Company, by product type and percentage of dollar
volume of equipment purchased, during fiscal years 1997 and 1996.
Equipment Volume by Product Type
(% by dollar volume of equipment purchased)
Fiscal Year Ended September 30,
1997 1996
---- ----
Document processing and storage......... 49% 73%
Telecommunications...................... 37% 21%
Computer systems........................ 8% 6%
Other................................... 6% -
---- ---
Total................................. 100% 100%
==== ====
The Company has developed a credit evaluation system, known as the
"Small Business Credit Scoring System," which is intended to respond to the
inability of small businesses to supply standardized financial information for
credit analysis (for example, audited financial statements). The system operates
by assigning point amounts, or "scores," to various factors (such as business
longevity, type of business, payment history, bank account balances and credit
ratings) deemed relevant by the Company in determining whether an end-user is a
creditworthy lessee. The scoring system declines approval of end-users with low
scores, approves end-users with high scores and refers mid-range scores to
credit analysts for further consideration and decision. Information is obtained
from the end-user, from reports by standard credit reporting firms and from
reports provided by consumer credit bureaus. The credit scoring system is also
based upon industry data and the past experience of the Company and will be
reviewed and modified as required in response to actual portfolio performance.
Financial statements may be required for larger transactions (in the $30,000 to
$100,000 range) as a complement to the scoring system.
The Company oversees its leasing program through lease administration
and management systems which control invoicing, collection, sales and property
taxes and financial and other reporting to management (including reports
regarding regular payments, payment shortages, advance payments, security
deposits, insurance payments and late or finance charges). The Company has
supplemented the system with an internal audit department (which evaluates the
safeguarding of assets, reliability of financial information and compliance with
the Company's credit policies) and a collection department.
The Company is marketing its leasing services primarily through the
establishment of vendor programs. See "- Strategy: Focus on Vendor Programs."
The Company has currently entered into vendor program relationships with nine
vendors: Minolta Corporation (copiers), Celsis Incorporated (microbial testing
systems), American Marbacom Communications (Teleco) (telephone systems), CSi
(test equipment), Telrad Communications (telephone systems), CT
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<PAGE>
Solutions (computer telephony), ATI Communications (telephone systems), the
National Association of College Stores (affinity program) and Millipore Corp.
(test equipment). In addition, Lucent Technologies (telecommunications
equipment) has designated the Company as an authorized lessor for its dealer
distribution channel. Under a typical vendor program, the Company will work with
the vendor and the lessee to structure the lease, finance the lease, purchase
the related equipment and administer the lease, including providing all billing
and collection services (except for private-label leasing, referred to below).
At the end of the initial lease term, the Company and the vendor will typically
coordinate the re-marketing of the equipment. The Company seeks to establish
vendor relationships by (i) obtaining manufacturers' endorsements of the
Company's finance programs, (ii) offering inventory financing credit lines to a
manufacturer's vendors, (iii) developing customized sales training programs to
offer to vendors and (iv) assisting the manufacturers and their vendors in
establishing a sales package including the lease financing provided by the
Company. The Company also competes by establishing private-label leasing
programs with its vendors. Private-label leasing involves the lease by a vendor
of its own equipment on a lease form bearing the vendor's name as lessor (but
otherwise identical to the Company's lease form), the sale of the lease and
equipment to the Company, and the provision of basic administrative services by
the vendor (such as billing and collecting rent). The Company will provide
assistance, particularized rental payment structures and other customized lease
terms, remarketing, customized invoicing and management information reports. The
Company also seeks to develop programs marketing directly to end-user groups,
primarily through small business affinity groups or associations, participations
in trade shows and conventions, and media advertising.
Although there can be no assurance, it is anticipated that a
significant portion of the Company's revenues from leasing operations will be
derived from residuals. The Company anticipates that residuals will principally
involve the original end-users; however, equipment not sold or re-leased to
end-users will be disposed of in the secondary market. While residual
realization is generally higher with original end-users than in the secondary
market, the secondary market (essentially, networks of distributors and dealers
in various equipment categories) is well developed in the product categories the
Company currently pursues and transactions in these product categories have
historically resulted in residual recoveries, on average, equal to the book
value of the equipment. Equipment reacquired by the Company prior to lease
termination (through lease default or otherwise) will be sold in the secondary
market.
Partnership Management
The Company acts as the general partner and manager of six public
limited partnerships formed between 1985 and 1990 with total assets at September
30, 1997 of $36.1 million, including $19.5 million (book value) of equipment
with an original cost of $55.2 million. The partnerships primarily lease
computers and related peripheral equipment to investment grade, middle market,
capital intensive companies. The principal stated objective of each of the
limited partnerships is to generate leasing revenues for distribution to the
investors in the partnerships.
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<PAGE>
For its services as general partner, the Company receives management
fees, an interest in partnership cash distributions and a reimbursement of
specified expenses related to administration of the partnerships (including
costs of non-executive personnel, legal, accounting and third-party contractor
fees and costs, and costs of equipment used in a partnership's behalf).
Management fees range from 3% to 6% of gross rents except that, if leases are
full payout leases, management fees range from 1% to 3% of gross rents. In four
of the partnerships, management fees are subordinated to the receipt by limited
partners of a cumulative annual cash distribution of 11% (two partnerships) or
12% (two partnerships) of the limited partners' aggregate investment. The
Company's interest, as general partner, in cash distributions from the
partnerships is 5% (one partnership), 3.5% (one partnership) and 1% (four
partnerships).
Lease Finance Placement and Advisory Business
The Company also operates a lease finance placement and advisory
business which focuses on two related types of leasing transactions: the
origination of leases by others and the identification of third-party lease
funding sources. Lease transactions generated by the division are typically full
payout leases. The Company generally receives between 1% and 4% of the equipment
cost at the time the transaction is closed for its services in arranging a
transaction. In some of the transactions it generates, the Company also enters
into a remarketing agreement that entitles it to fees upon residual sale. Lease
finance placement and advisory services generated revenues of $657,000 and
$650,000 during fiscal years 1997 and 1996, respectively.
Competition
The Company believes that, although the small ticket leasing business
has experienced substantial consolidation in the past few years, the business of
equipment leasing remains highly competitive. The Company believes, however,
that small ticket leasing, to be viable, requires the financing and monitoring
of large amounts of equipment and related assets. Because of the complexity and
cost of developing and maintaining the platforms and vendor programs to handle
such high volumes, the Company believes that there are substantial barriers to
others entering into this business. Accordingly, the Company believes that its
principal competitors are and will be primarily major financial institutions and
their affiliates. The Company also believes that the scale on which these
competitors generally operate inhibits their attention to the needs of the
Company's targeted market of small manufacturers and regional distributors and
provides the Company with an under-served market niche.
Energy Operations
General
The Company produces natural gas and, to a lesser extent, oil from
locations principally in Ohio, Pennsylvania and New York. At September 30, 1997,
the Company had (either directly or through partnerships and joint ventures
managed by it) interests in 1,129 wells, including overriding interests (of
which the Company operates 799 wells), 530 miles of natural gas
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<PAGE>
pipelines and 81,000 acres of mineral rights, including the Company's
acquisition in June 1997 from a third party of wells, pipelines and acreage.
Natural gas produced from wells operated by the Company is collected in gas
gathering pipeline systems owned by partnerships managed by the Company (and in
which the Company also has an interest) and by systems directly owned by the
Company, and is sold to a number of customers, such as gas brokers and local
utilities, under a variety of contractual arrangements. Oil produced from wells
operated by the Company is sold at the well site to regional oil refining
companies at the prevailing spot price for Appalachian crude oil.
Well Operations
The following table sets forth information as of September 30, 1997
regarding productive oil and gas wells in which the Company has a working
interest:
Number of Productive Wells
--------------------------
Gross(1) Net(1)
---------- --------
Oil Wells......................... 157 60
Gas Wells......................... 810 526
--- ---
Total.......................... 967 586
=== ===
- ----------
(1) Includes the Company's equity interest in wells owned by 64
partnerships and joint ventures. Does not include royalty or overriding
interests with respect to 162 wells held by the Company.
The following table sets forth net quantities of oil and natural gas
produced, average sales prices, and average production (lifting) costs per
equivalent unit of production, for the periods indicated, including the
Company's equity interests in the production of 64 partnerships and joint
ventures, for the periods indicated.
<TABLE>
<CAPTION>
Average
Lifting
Production Average Sales Price Cost per
------------------------- ------------------------ Equivalent
Fiscal Year Oil(bbls) Gas(mcf) per bbl per mcf mcf(1)
----------- --------- -------- ------- ------- ------
<S> <C> <C> <C> <C>
1997 35,811 1,227,887 $19.68 $2.59 $1.13
1996 33,862 1,165,477 $18.53 $2.34 $1.04
1995 36,420 1,198,245 $16.74 $2.31 $1.06
</TABLE>
- ----------
(1) Oil production is converted to mcf equivalents at the rate of six
mcf per barrel.
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<PAGE>
Neither the Company nor the partnerships and joint ventures it manages
are obligated to provide any fixed quantities of oil or gas in the future under
existing contracts.
Exploration and Development
The following table sets forth information with respect to the number
of wells completed in Ohio and New York (the only areas in which Company
drilling activities occurred) at any time during fiscal years 1997, 1996 and
1995, regardless of when drilling was initiated.
<TABLE>
<CAPTION>
Exploratory Wells Development Wells
----------------- -----------------
Productive Dry Productive Dry
Fiscal ---------------- --------------- -------------- -------------
Year Gross Net Gross Net Gross Net Gross Net
---- ----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1.0 .50 - - - - - -
1996 3.0 .52 1.0 .29 2.0 1.50 - -
1995 3.0 .36 2.0 .36 1.0 .87 2.0 1.75
</TABLE>
All drilling has been on acreage held by the Company. The Company does
not own its own drilling equipment; rather, it acts as a general contractor for
well operations and subcontracts drilling and certain other work to third
parties.
Oil and Gas Reserve Information
An evaluation of the Company's estimated proved developed oil and gas
reserves as of September 30, 1997, was verified by E.E. Templeton & Associates,
Inc., an independent petroleum engineering firm. Such study showed, subject to
the qualifications and reservations therein set forth, reserves of 15.2 million
mcf of gas and 358,000 barrels of oil at September 30, 1997. See Note 13 to the
Consolidated Financial Statements.
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<PAGE>
The following table sets forth information with respect to the
Company's developed and undeveloped oil and gas acreage as of September 30,
1997. The information in this table includes the Company's equity interest in
acreage owned by 64 partnerships and joint ventures.
<TABLE>
<CAPTION>
Developed Acreage Undeveloped Acreage
--------------------- ------------------------
Gross Net Gross Net
----- --- ----- ---
<S> <C> <C> <C> <C>
Arkansas........................... 2,560 403 - -
Kansas............................. 160 20 - -
Louisiana.......................... 1,819 206 - -
Mississippi........................ 40 3 - -
New York........................... 12,772 10,649 14,498 13,457
Ohio............................... 61,224 36,652 18,489 17,450
Oklahoma........................... 4,243 635 - -
Pennsylvania....................... 2,271 1,679 - -
Texas.............................. 4,520 209 - -
------ ------ ------ ----
89,609 50,456 32,987 30,907
====== ====== ====== ======
</TABLE>
The terms of the oil and gas leases held by the Company's managed
partnerships and by the Company for its own account vary, depending upon the
location of the leased premises and the minimum remaining terms of undeveloped
leases, from less than one year to five years. Rentals of approximately $27,600
were paid in fiscal 1997 to maintain leases on such acreage in force.
The Company believes that the partnership, joint venture and Company
properties have satisfactory title. The developed oil and gas properties are
subject to customary royalty interests generally contracted for in connection
with the acquisition of the properties, burdens incident to operating
agreements, current taxes and easements and restrictions (collectively,
"Burdens"). Presently, the partnerships, joint ventures and the Company are
current with respect to all such Burdens.
At September 30, 1997, the Company had no individual interests in any
oil and gas property that accounted for more than 10% of the Company's proved
developed oil and gas reserves, including the Company's interest in reserves
owned by 64 partnerships and joint ventures.
Pipeline Operation
The Company operates, on behalf of three limited partnerships of which
it is both a general and limited partner (in which it owns 13%, 46% and 22%
interests), and for its own account, various gas gathering pipeline systems
totaling approximately 530 miles in length. Such pipeline systems are located in
Ohio, New York and Pennsylvania.
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<PAGE>
Well Services
The Company provides a variety of well services to wells of which it is
the operator and to wells operated by independent third party operators. These
services include well operations, petroleum engineering, well maintenance and
well workover and are provided at rates in conformity with general industry
standards.
Sources and Availability of Raw Materials
The Company contracts for drilling rigs and purchases tubular goods
necessary for the drilling and completion of wells from a substantial number of
drillers and suppliers, none of which supplies a significant portion of the
Company's annual needs. During fiscal 1997 and 1996, the Company faced no
shortage of such goods and services. The duration of the current supply and
demand situation cannot be predicted with any degree of certainty due to
numerous factors affecting the oil and gas industry, including selling prices,
demand for oil and gas, and governmental regulations.
Major Customers
The Company's natural gas is sold under contract to various purchasers.
For the years ended September 30, 1997 and 1996, gas sales to two purchasers
accounted for 29% and 12%, and 29% and 13%, respectively, of the Company's total
production revenues. Gas sales to one purchaser individually accounted for
approximately 15% of total revenues from energy production for fiscal 1995.
Competition
The oil and gas business is intensely competitive in all of its
aspects. The oil and gas industry also competes with other industries in
supplying the energy and fuel requirements of industrial, commercial and
individual customers. Domestic oil and gas sales are also subject to competition
from foreign sources. Moreover, competition is intense for the acquisition of
leases considered favorable for the development of oil and gas in commercial
quantities. The Company's competitors include other independent oil and gas
companies, individual proprietors and partnerships. Many of these entities
possess greater financial resources than the Company. While it is impossible for
the Company to accurately determine its comparative industry position with
respect to its provision of products and services, the Company does not consider
its oil and gas operations to be a significant factor in the industry.
Markets
The availability of a ready market for oil and gas produced by the
Company, and the price obtained therefor, will depend upon numerous factors
beyond the Company's control including the extent of domestic production, import
of foreign natural gas and/or oil, political instability in oil and gas
producing countries and regions, market demands, the effect of federal
regulation
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<PAGE>
on the sale of natural gas and/or oil in interstate commerce, other governmental
regulation of the production and transportation of natural gas and/or oil and
the proximity, availability and capacity of pipelines and other required
facilities. Currently, the supply of both crude oil and natural gas is more than
sufficient to meet projected demand in the United States. These conditions have
had, and may continue to have, a negative impact on the Company through
depressed prices for its oil and gas reserves.
Governmental Regulation
The exploration, production and sale of oil and natural gas are subject
to numerous state and federal laws and regulations. Compliance with the laws and
regulations affecting the oil and gas industry generally increases the Company's
costs of doing business in, and the profitability of its energy operations.
Inasmuch as such regulations are frequently changing, the Company is unable to
predict the future cost or impact of complying with such regulations. The
Company is not aware of any pending or threatened matter involving a claim that
it has violated environmental regulations which would have a material effect on
its operations or financial position.
Sources of Funds
Historically, the Company has relied upon internally generated funds to
finance its growth. Since fiscal 1992, internally generated funds have been
augmented by sales of senior lien interests and refinancings by borrowers of the
Company's portfolio loans (see "- Commercial Mortgage Loan Acquisition and
Resolution: Sale of Senior Lien Interests and Refinancings"), by the issuance,
in May 1994, of an $8 million principal amount 9.5% Senior Note (which has since
been repaid) and, for the acquisition of one loan, purchase money financing of
$13.4 million (which has since been repaid). During fiscal 1997, the Company
entered into an initial $20 million credit facility for its equipment leasing
operations and completed two capital markets transactions: a public offering of
its common stock resulting in $19.5 million in net proceeds to the Company and a
private placement of $115 million of its 12% Senior Notes due 2004 ("Senior
Notes") to a small group of institutional investors, resulting in $110.6 million
of net proceeds to the Company. In addition, in fiscal 1997 the Company sold
equipment leases with an the aggregate book value of $30.2 million for $33.9
million (including notes in aggregate face amount of $13.3 million).
Senior Notes. The Senior Notes are unsecured general obligations of the
Company, payable interest only until maturity on August 1, 2004. The Senior
Notes are not subject to mandatory redemption except upon a Change in Control of
the Company, as defined in the indenture (the "Indenture") pursuant to which the
Senior Notes were issued, when the Noteholders have the right to require the
Company to redeem the Senior Notes at 101% of principal amount plus accrued
interest. No sinking fund has been established for the Senior Notes. At the
Company's option, the Senior Notes may be redeemed in whole or in part on or
after August 1, 2002 at a price of 106% of principal amount (through July 31,
2003) and 103% of principal amount (through July 31, 2004), plus accrued
interest to the date of redemption. The Indenture
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<PAGE>
contains covenants that, among other things, (i) require the Company to maintain
certain levels of net worth (generally, an amount equal to $50 million plus a
cumulative 25% of the Company's consolidated net income) and liquid assets
(generally, an amount equal to 100% of required interest payments for the next
succeeding interest payment date); and (ii) limit the ability of the Company and
its subsidiaries to (a) incur indebtedness (not including secured indebtedness
used to acquire or refinance the acquisition of loans, equipment leases or other
assets), (b) pay dividends or make other distributions in excess of 25% of
aggregate consolidated net income (offset by 100% of any deficit) on a
cumulative basis, (c) engage in certain transactions with affiliates, (d)
dispose of certain subsidiaries, (e) create liens and guarantees with respect to
pari passu or junior indebtedness and (f) enter into any arrangement that would
impose restrictions on the ability of subsidiaries to make dividend and other
payments to the Company. The Indenture also restricts the Company's ability to
merge, consolidate or sell all or substantially all of its assets and prohibits
the Company from incurring additional indebtedness if the Company's "Leverage
Ratio" exceeds 2.0 to 1.0. As defined by the Indenture, the Leverage Ratio is
the ratio of all indebtedness (excluding debt used to acquire assets,
obligations of the Company to repurchase loans or other financial assets sold by
the Company, guarantees of either of the foregoing, non-recourse debt and
certain securities issued by Securitization Entities, as defined in the
Indenture), to the consolidated net worth of the Company. The Indenture also
prohibits the Company from incurring pari passu or junior indebtedness with a
maturity date prior to that of the Senior Notes.
Senior Lien Interests. In fiscal years 1994 and 1995, Physicians
Insurance Company of Ohio ("PICO") provided refinancing of $12 million with
respect to the Company's portfolio loans through the purchase of senior lien
interests in such loans. See "- Commercial Mortgage Loan Acquisition and
Resolution: Sale of Senior Lien Interests and Refinancings" and "- Loan Status."
If a borrower defaults in the payment of debt service on any of these senior
lien interests, the Company is required to replace the defaulted obligation with
a performing obligation. The Company receives an annual mortgage servicing fee
of 0.25% of the principal amount of any senior lien interests sold to PICO. In
connection with the sale of these senior lien interests and the issuance of the
9.5% Senior Note, PICO was issued warrants to purchase 983,150 shares of the
Company's common stock. PICO exercised these warrants in July 1997, from which
the Company realized $3.66 million. The 983,150 shares were subsequently resold
by PICO in a separate private placement to a small group of institutional
investors.
In fiscal 1996 and 1997, Commerce Bank, Philadelphia, Pennsylvania,
purchased senior lien interests in four of the Company's loans for $13.8 million
(of which two senior lien interests, for $4.0 million, have since been repaid).
The remaining senior lien interests must be repaid before June 27, 2002 ($1.8
million) and September 29, 2002 ($8 million). If either interest is not repaid
by its maturity date, the Company is required to repurchase it from Commerce for
a price equal to its unpaid principal balance plus accrued interest.
In fiscal 1997, Crusader Bank, Philadelphia, Pennsylvania ("Crusader")
purchased a senior lien interest in one of the Company's loans for $450,000. The
interest must be repaid before
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<PAGE>
May 21, 2002. If not repaid by its maturity date, the Company is required to
repurchase the interest for a price equal to its unpaid principal balance plus
accrued interest.
In fiscal 1997, People's Thrift Savings Bank, Norristown, Pennsylvania
("People's Thrift") purchased senior lien interests in two of the Company's
loans, each in the amount of $750,000.
Each interest must be repaid before September 30, 2002.
The Company receives no servicing fees from the Commerce Bank, Crusader
Bank or People's Thrift Savings Bank senior lien interests.
Lease Financing Credit Facility. FLI entered into an initial $20
million revolving credit facility with term loan availability with CoreStates
Bank and First Union Bank for its equipment leasing operations. The facility
has, in addition to customary covenants, the following principal terms: (i)
revolving credit lines will have an interest rate equal to an adjusted London
Interbank Offered Rate ("LIBOR") plus 175 basis points, while term loans will
have an interest rate equal to an adjusted LIBOR plus 225 basis points; (ii) the
loans will be secured by a first lien on the equipment leases being financed
(and on the underlying equipment), a guaranty by the Company and a pledge of the
capital stock of FLI and Resource Leasing, Inc. (the direct parent of FLI and a
wholly-owned subsidiary of the Company); (iii) revolving credit loans may be
converted to term loans (with terms of 18, 24 or 36 months), provided that term
loans must be in increments of $2 million and no more than five term loans may
be outstanding at any time; (iv) adjustable rate term loans may, at the option
of FLI, be converted into fixed rate term loans at then quoted rates; (v) FLI
will be required to maintain a debt (excluding non-recourse debt) to "worth"
ratio of 4.5 to 1.0, a minimum tangible net worth equal to $5 million plus 75%
of FLI's net income, and specified ratios of cash flow to the sum of debt
service plus 25% of outstanding obligations under the revolving line of credit
plus mandatory principal payments; and (vi) the Company will be required to
maintain minimum shareholders' equity of $40 million. The facility expires on
March 31, 1998 but may be renewed annually by the lenders. During fiscal 1997,
the maximum borrowing by the Company under this facility was $7.1 million, all
of which was repaid prior to fiscal year end.
Residential Mortgage Loan Credit Facilities. On September 23, 1997, FMF
entered into a $5 million credit facility with CoreStates Bank, bearing interest
at either (i) the CoreStates prime rate, (ii) the federal funds rate plus 250
basis points, or (iii) an adjusted LIBOR plus 150 basis points, with the rate to
be elected by FMF, and with the right in FMF to elect different rate formulas
for separate draws under the credit facility. The credit facility will be
secured by a first lien interest in the loans being financed by facility draws.
Under the facility, FMF is required to maintain a minimum tangible net worth of
$1 million, and a debt to tangible net worth ratio of 5.0 to 1.0 (where debt
includes the unused portion of any financing commitment but excludes
subordinated debt). The facility expires on September 22, 1998 unless renewed by
the parties.
On October 16, 1997, FMF established a $15 million warehouse credit
facility with Morgan Stanley Mortgage Capital, Inc., bearing interest at LIBOR
or, if unavailable, the
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<PAGE>
interbank eurodollars market rate, plus 90 basis points. The facility is secured
by a first lien interest in the loans being financed by facility draws. Under
the credit facility, FMF is required to maintain tangible net worth (capital and
subordinated debt minus advances to affiliates and intangible assets
representing start up costs in excess of $1 million), and a ratio of total
indebtedness to tangible net worth of 10.0 to 1.0. The facility expires on
October 16, 1998.
Oil and Gas Credit Facility. On October 9, 1997, the Company obtained a
$5 million credit facility from KeyBank for purposes of acquiring oil and gas
assets. The credit facility permits draws based on a percentage of reserves of
oil and gas properties pledged as security for the facility. Draws under the
facility bear interest at KeyBank's prime rate plus 25 basis points. The
facility requires the Company to maintain a tangible net worth in excess of $31
million, a 2.0 to 1.0 ratio of current assets to current liabilities, a 1.5 to
1.0 ratio of cash flow to maturities of long-term debt coming due within the
calculation period and a ratio of adjusted debt to tangible net worth of not
more than 2.0 to 1.0, The facility terminates on June 30, 1999.
Employees
As of September 30, 1997, the Company employed 137 persons, including 8
in general corporate, 37 in real estate finance, 63 in equipment leasing and 29
in energy.
ITEM 2. PROPERTIES
The Company's executive office is located in Philadelphia, and is
leased under an agreement providing for rents of $65,000 per year through May
2000. The Company's equipment leasing and residential mortgage loan headquarters
are located in Ambler, Pennsylvania, and are leased by the Company under
agreements providing for rents of $355,000 per year (including space leased
beginning July 1, 1997). The agreements terminate June 30, 1998 and June 30,
2007. The Company owns a 9,600 square foot office building and related land in
Akron, Ohio, housing its energy and accounting operations. The Company also
maintains two energy field offices in Ohio and New York and an equipment lease
brokerage office in California at an aggregate rent of $46,000 per year.
Aggregate rent for all of the Company's offices was $238,600 for fiscal 1997.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to various routine legal proceedings arising out
of the ordinary course of its business. Management believes that none of these
actions, individually or in the aggregate, will have a material adverse effect
on the financial condition or operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq Stock Market under
the symbol "REXI." The following table sets forth the high and low sale prices,
as reported by Nasdaq, on a quarterly basis for the Company's last two full
fiscal years and the 1998 fiscal year through November 30, 1997:
High Low
---- ---
Fiscal 1998
First Quarter (through November 30, 1997) $56.50 $44.50
Fiscal 1997
Fourth Quarter.................................... 51.50 25.00
Third Quarter..................................... 26.25 19.00
Second Quarter.................................... 26.50 17.75
First Quarter..................................... 19.00 12.25
Fiscal 1996
Fourth Quarter.................................... 17.50 12.00
Third Quarter..................................... 21.19 12.83
Second Quarter ................................... 16.23 7.43
First Quarter..................................... 8.63 6.58
As of November 30, 1997, there were 4,749,463 shares of Common Stock
outstanding held by 800 holders of record.
The Company paid regular quarterly cash dividends on its Common Stock
of $.10 per share for each quarter in fiscal 1997 and for the last two quarters
of fiscal 1996. The Company paid dividends of $.094 and $.089 per share during
the second and first fiscal quarters of 1996.
The Company declared and paid 6% stock dividends in January 1996 and
April 1996, and effected a five-for-two stock split in the form of a 150% stock
dividend in May 1996. Under the terms of the Senior Notes, the payment of
dividends on the Company's Common Stock is restricted unless certain financial
tests are met. See "- Sources of Funds: Senior Notes."
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data as of and for the five years ended September
30, 1997 are as follows (all amounts in thousands except per share data):
<TABLE>
<CAPTION>
For the Years Ended September 30,
---------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues
Real estate finance $19,144 $ 7,171 $ 6,114 $ 2,522 $ 606
Equipment leasing 7,162 4,466 - - -
Energy production 3,936 3,421 3,452 3,442 3,409
Energy services 1,672 1,736 1,879 2,080 2,445
Interest 930 197 149 136 106
------- ------- ------- ------- ------
Total revenues 32,844 16,991 11,594 8,180 6,566
Income from continuing operations
before income taxes 14,931 7,353 3,344 1,209 634
Provision (benefit) for income taxes 3,980 2,206 630 (100) 44
Income from continuing operations 10,951 5,147 2,714 1,309 590
Net income per share (primary) 2.51 1.88 1.23 .64 .30
Cash dividends per common share .40 .38 .09 - -
Balance Sheet Data
Total assets 195,119 43,959 37,550 34,796 25,231
Long-term debt less current maturities 118,786 8,966 8,523 8,627 813
Stockholders' equity 64,829 31,123 26,551 24,140 22,861
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company's operating results and financial condition reflect an
acceleration of its shift in focus to a specialty finance company from an energy
company following substantial increases in working capital due to the sale, in
December 1996, of 1.7 million common shares (from which it received net proceeds
of $19.5 million) and the issuance, in July 1997, of $115 million of senior
unsecured notes (from which it received net proceeds of $110.6 million). These
capital market transactions were primarily responsible for increasing the
Company's capitalization (stockholders' equity plus long-term debt) to $183.6
million in fiscal 1997 from $40.1 million in fiscal 1996, an increase of $143.5
million (358%). The Company's gross revenues were $32.8 million in fiscal 1997,
an increase of $15.8 million (93%) from $17.0 million in fiscal 1996, as
compared to an increase in fiscal 1996 of $5.4 million (47%) from $11.6 million
in fiscal 1995.
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<PAGE>
As of September 30, 1997, total assets were $195.1 million, an increase of
$151.1 million (343%), from $44.0 million at September 30, 1996, as compared to
an increase of $6.4 million (17%) from $37.6 million at September 30, 1995. Of
the increases in total revenue during that period, the revenues from the
Company's commercial real estate mortgage loan acquisition and resolution
business were $19.1 million in fiscal 1997, an increase of $12.0 million (167%)
from $7.2 million in fiscal 1996, as compared to an increase of $1.1 million
(17%) in fiscal 1996 from $6.1 million in fiscal 1995. In addition, leasing
revenues were $7.2 million in fiscal 1997, an increase of $2.7 million (60%)
from $4.5 million in fiscal 1996, the year in which leasing operations
commenced. Energy revenues remained relatively constant at $5.6 million, $5.2
million and $5.3 million in fiscal 1997, 1996 and 1995, respectively. Specialty
finance revenues (real estate finance and equipment leasing) were 80%, 68% and
53% of total revenues in fiscal 1997, 1996 and 1995, respectively. Energy
revenues were 17%, 30% and 46% of total revenues at September 30, 1997, 1996 and
1995, respectively. Specialty finance assets were 53%, 57% and 51% of total
assets in fiscal 1997, 1996, and 1995, respectively. Energy assets were 8%, 29%
and 37% of total assets at September 30, 1997, 1996 and 1995, respectively.
Results of Operations: Commercial Mortgage Loan Acquisition and Resolution
The following table sets forth certain information relating to the
revenue recognized on the Company's commercial loan portfolio during the periods
indicated:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Interest........................................ $ 4,877 $ 1,899 $ 2,246
Accreted discount............................... 4,124 954 1,176
Fees............................................ 2,556 675 963
Gains on refinancings and sale
of senior lien interests...................... 7,587 3,643 1,729
------- ------- -------
Total........................................... $19,144 $7,171 $6,114
------- ------ ------
Average balance of investments, net............. $55,307 $19,804 $17,683
Yield on net average balance.................... 34.7% 36.2% 34.6%
</TABLE>
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
During fiscal 1997, the Company purchased or originated eighteen loans,
for a total cost of $71.7 million, as compared to the purchase of nine loans for
a total of $15.1 million in fiscal 1996. The average investment in the eighteen
loans was $4.0 million and ranged from a high of $19.2 million to a low of
$400,000, whereas in fiscal 1996, the average investment in the nine loans was
$1.7 million and ranged from a high of $3.8 million to a low of $100,000. In
addition, the Company increased its investment in certain existing loans by an
aggregate of $1.9 million in fiscal 1997, and an aggregate of $2.6 million in
fiscal 1996 for purposes of paying for
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<PAGE>
property improvement costs, unpaid taxes and similar items relating to
properties underlying portfolio loans. The increased investments had been
anticipated by the Company at the time of loan acquisition and were included in
its analysis of loan costs and yields.
Revenues from commercial mortgage loan acquisition and resolution
operations increased to $19.1 million in fiscal 1997 from $7.2 million in fiscal
1996, an increase of 167%. The increase in fiscal 1997 was attributable to (i)
an increase of $6.1 million (215%) in interest income (including accretion of
discount) resulting from an increase in the average amount of loans outstanding
during fiscal 1997 as compared to the prior fiscal year and (ii) gains
recognized on the refinancing of loans and sale of senior lien interests in
loans held by the Company which increased to $7.6 million in fiscal 1997 from
$3.6 million in fiscal 1996, an increase of $4.0 million (108%). Fees increased
to $2.6 million in fiscal 1997 from $675,000 in fiscal 1996 an increase of $1.9
million (279%) due to the Company's increased ability to utilize its expertise
in financial, partnership and income tax structuring; services related to
bankruptcy issues of borrowers; and real estate management oversight services.
Fees vary from transaction to transaction and there may be significant
variations in the Company's fee income from period to period. The Company sold
senior lien interests in or refinanced eight loans during each of fiscal 1997
and fiscal 1996, realizing proceeds of $16.5 million and $18.0 million,
respectively. Real estate costs and expenses increased 25% in fiscal 1997
compared to fiscal 1996. The increase was primarily a result of higher personnel
costs associated with the expansion of this operation. As a consequence of the
foregoing, the Company's gross profit from commercial mortgage loan acquisition
and resolution operations increased to $16.5 million in fiscal 1997 from $6.3
million in fiscal 1996 (163%).
Year Ended September 30, 1996 Compared to Year Ended September 30, 1995
Revenues from commercial mortgage loan acquisition and resolution
operations increased to $7.2 million in fiscal 1996 from $6.1 million in fiscal
1995. This increase was attributable to increases of 111% in gains recognized on
the refinancing of loans and sale of senior lien interests in loans held by the
Company. Fees decreased 30% in fiscal 1996 as compared to fiscal 1995 due to a
reduction in the number of refinancings of, and sales of senior lien interests
in, certain of the Company's portfolio loans occurring during fiscal 1996 as
compared to fiscal 1995. The Company sold senior lien interests in or refinanced
eight and eleven loans during fiscal years 1996 and 1995, respectively,
realizing proceeds of $18.0 million and $10.2 million, respectively.
During fiscal 1996, the Company purchased or originated nine real
estate loans, for a total cost of $15.1 million, as compared to seven loans for
a total of $13.6 million in fiscal 1995. In addition, the Company increased its
investment in certain existing loans by $2.6 million in fiscal 1996 and $1.3
million in fiscal 1995 for purposes of paying for property improvement costs,
unpaid taxes and similar items relating to properties underlying portfolio
loans. The increased investments had been anticipated by the Company at the time
of loan acquisition and were included in its analysis of loan costs and yields.
In addition, in fiscal 1996 the Company increased its investment in loans by
$535,000 in connection with its repurchase of certain senior lien interests to
facilitate borrower refinancings and received a note for $317,000 (thus
increasing
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<PAGE>
its investment in loans) in connection with granting its consent to the sale
(subject to the Company's existing mortgage loan) of another property by a
borrower. Real estate costs and expenses increased 6% in fiscal 1996 as compared
to fiscal 1995. The increase was primarily a result of higher personnel costs
associated with the expansion of these operations. It should be noted that
certain reclassifications have been made to the consolidated financial
statements for fiscal years 1996 and 1995 to conform to the fiscal 1997
presentation.
As a consequence of the foregoing, the Company's gross profit from
commercial mortgage loan acquisition and resolution operations increased to $6.3
million for fiscal 1996 from $5.3 million for fiscal 1995 (19%).
Results of Operations: Equipment Leasing
The following table sets forth certain information relating to the
revenue recognized in the Company's equipment leasing operations during the
periods indicated:
Years Ended
September 30,
------------------
1997 1996
---- ----
(in thousands)
Small ticket leasing
Gain on sale of leases........................ $3,711 $ -
Interest and fees............................. 1,081 7
Partnership management........................... 1,713 3,809
Lease finance placement and
advisory services.............................. 657 650
------ ------
Total......................................... $7,162 $4,466
====== ======
The following table sets forth certain information relating to expenses
recognized in the Company's equipment leasing operations during the periods
indicated:
Years Ended
September 30,
------------------
1997 1996
---- ----
(in thousands)
Small ticket leasing.............................. $2,051 $ 425
Partnership management............................ 1,243 1,471
Lease finance placement and
advisory services............................... 528 443
------ ------
Total.......................................... $3,822 $2,339
====== ======
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<PAGE>
In June 1996, the Company entered the "small ticket" leasing business
and began writing leases in August 1996. In fiscal 1997, the Company acquired
equipment for lease with a cost of $34.6 million. During the year ended
September 30, 1997, the Company sold leases with a book value of approximately
$30.2 million to special-purpose financing entities in return for cash of $20.6
million and notes with face values of $13.3 million, resulting in gains on sale
of $3.7 million. During fiscal 1997, the Company collected $8.5 million in
principal payments on the notes.
Small ticket leasing expenses increased as a result of the start-up of
small ticket leasing activities in June 1996. Partnership management expenses
decreased as a result of the liquidation of one partnership. Lease placement and
advisory expenses increased as a result of an increase in commissions paid.
The decrease in partnership management revenue in fiscal 1997 as
compared to the prior year period was the result of the liquidation, in
accordance with the terms of its partnership agreement, of one leasing
partnership in the first quarter of fiscal 1996. Partnership management revenue
in fiscal 1996 includes the settlement of the Company's general partner share of
revenues from prior fiscal periods. The Company now acts as general partner for
six limited partnerships which held a total of $55.2 million (original equipment
cost) in leased assets at September 30, 1997.
Results of Operations: Energy
Oil and gas revenues from production sales increased 16% in fiscal 1997
as compared to fiscal 1996, which remained essentially constant from fiscal
1995.
A comparison of oil and gas sales revenue, daily production volumes,
and average sales prices for the years indicated is as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales (in thousands)
Gas(1)....................................... $ 3,178 $ 2,722 $ 2,762
Oil........................................... $ 705 $ 627 $ 610
Production volumes (in thousands)
Gas (mcf/day)(1).............................. 3,364 3,184 3,283
Oil (bbls/day)................................ 98 93 100
Average sales prices
Gas (per mcf)................................. $ 2.59 $ 2.34 $ 2.31
Oil (per bbl).............................. $ 19.68 $ 18.53 $ 16.74
</TABLE>
- ----------
(1) Excludes sales of residual gas and sales to landowners.
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<PAGE>
Natural gas revenues from production sales increased 17% in fiscal 1997
from fiscal 1996 due to a 6% increase in production volumes and an 11% increase
in the average price per mcf of natural gas. In fiscal 1996, natural gas
revenues decreased 1% from fiscal 1995 as a result of a 3% decrease in
production volumes partially offset by a 1% increase in the average price per
mcf of natural gas. Oil revenues increased by 12% in fiscal 1997 from fiscal
1996 due to a 6% increase in the average price per barrel and a 5% increase in
production volumes. Primarily as a result of these changes, the Company's
operating profit from energy production (energy production revenues less energy
production and exploration costs) increased to $1.6 million in fiscal 1997 from
$1.4 million in fiscal 1996 and $1.1 million in fiscal 1995.
The Company continues to experience normally declining production from
its properties located in New York State. This decline has been offset by the
acquisition of additional well interests in Ohio in June 1997. The Company
participated in the drilling of three successful exploratory wells and two
successful developmental wells during 1996. The impact on revenues from these
wells were realized in the Company's financial statements in fiscal 1997. In
fiscal 1995, the Company participated in the drilling of three successful
exploratory wells and recompleted one successful development well.
A comparison of the Company's production costs as a percentage of oil
and gas sales, and the production cost per equivalent unit for oil and gas for
fiscal years 1997, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Production Costs
As a percent of sales........................ 42% 42% 44%
Gas (mcf).................................... $1.13 $1.04 $1.06
Oil (bbl).................................... $6.80 $6.23 $6.36
</TABLE>
Production costs increased $215,000 (15%) in fiscal 1997 from fiscal
1996 as a result of a increase in the number of wells requiring cleanout and
workover operations. These operations are conducted on an as-needed basis and,
accordingly, costs incurred by the Company may vary from year to year.
Production costs also increased in fiscal 1997 as the result of the acquisition
of interests in 288 wells in Ohio. Production costs decreased $81,000 (5%) in
fiscal 1996 from fiscal 1995, a result of a decrease in the number of wells
requiring cleanout and workover operations.
Exploration costs increased $26,000 (16%) in fiscal 1997 and decreased
$69,000 (30%) in fiscal 1996 from the previous fiscal periods. The fiscal 1997
increase was the result of an increase in delay rentals paid on lease acreage
held by the Company. During fiscal 1997, the Company participated in one
successful exploratory well and had lease value impairments totalling $6,000.
The 1996 decrease resulted from a decrease in delay rentals and impairment of
lease costs which resulted from a termination of certain leases in New York
State in fiscal
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<PAGE>
1995 and reduced costs relating to dry holes. During fiscal 1996 the Company
participated in one exploratory dry hole and had lease impairments totaling
$50,000. During fiscal 1995, the Company's participation in two exploratory dry
holes and lease impairments and delay rentals totaled $145,000.
Amortization of oil and gas property costs as a percentage of oil and
gas revenues was 18% in fiscal 1997, 23% in fiscal 1996 and 27% in fiscal 1995.
The variance from year to year is directly attributable to changes in the
Company's oil and gas reserve quantities, product prices and fluctuations in the
depletable cost basis of oil and gas properties. See Note 2 to the Consolidated
Financial Statements.
Results of Operations: Other Income (Expense)
General and administrative expense increased by $1.1 million (62%) for
fiscal 1997 as compared to fiscal 1996 primarily as a result of costs associated
with the Company's residential mortgage loan business, higher legal and
professional fees and the payment of incentive and retirement compensation to
executive officers. General and administrative expense decreased $509,000 (22%)
for the year ended September 30, 1996 as compared to the same period in fiscal
1995 primarily as a result of a decrease in executive compensation due to the
death of a senior officer in July 1995 and the reclassification of wages which
were previously in general and administrative expense to real estate expense.
Interest expense increased to $5.3 million in fiscal 1997 from $872,000
in fiscal 1996, an increase of $4.4 million (505%) reflecting the increases in
borrowings to fund the growth of the Company's real estate finance and small
ticket leasing operations. In July 1997, the Company issued $115 million of its
Senior Notes and in December 1996, the Company incurred purchase money financing
of $13.4 million to fund the acquisition of a series of mortgage loans on a
property located in Philadelphia, Pennsylvania (see Note 6 to Consolidated
Financial Statements). This borrowing was repaid in July 1997. Interest expense
decreased $219,000 during fiscal 1996 as a result of a decrease in average debt
outstanding during the period due to loan repayments.
The effective tax rate decreased to 27% in fiscal 1997 from 30% in
fiscal 1996 which increased from 19% in fiscal 1995. The fiscal 1997 decrease
resulted from the purchase of real estate loans which generate tax exempt
interest as well as the investment in several low-income housing partnerships
and the low income housing tax credits associated with such investments. The
increase from fiscal 1995 to fiscal 1996 was the result of a continuing decrease
in the generation of depletion (for tax purposes) and tax credits in relation to
net income.
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<PAGE>
Liquidity and Capital Resources
Sources and uses of cash and cash equivalents for the three years ended
September 30, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Provided by operating activities................ $ 4,091 $2,959 $1,578
Used in investing activities.................... (63,139) (1,060) (6,113)
Provided by (used in) financing
activities................................... 124,173 (202) 4,395
-------- ------- ------
$ 65,125 $1,697 $ (140)
======== ====== ======
</TABLE>
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
As discussed above, the Company was able to raise net proceeds of $19.5
million from its equity offering and $110.6 million from its offering of Senior
Notes during fiscal 1997. These activities, coupled with the Company's increased
profitability, resulted in the Company having $69.3 million in cash and cash
equivalents on hand at September 30, 1997, as compared to $4.2 million at
September 30, 1996. The Company's ratio of current assets to current liabilities
was 6.7 to 1.0 at September 30, 1997 and 3.7 to 1.0 at September 30, 1996. The
Company's ratio of earnings to fixed charges was 3.8 to 1.0 at September 30,
1997 and 9.4 to 1.0 at September 30, 1996. Working capital at September 30, 1997
was $61.4 million as compared to $4.4 million at September 30, 1996, as the
Company had not fully deployed the proceeds from the Senior Notes offering.
Cash provided by operating activities increased $1.1 million, or 38%,
during fiscal 1997, as compared to fiscal 1996. The fiscal 1997 increase was
primarily the result of an increase in operating income in the commercial real
estate mortgage loan acquisition and resolution and equipment leasing
businesses.
The Company's cash used in investing activities increased $62.1 million
in fiscal 1997 as compared to fiscal 1996. The increase resulted primarily from
increases in the amount of cash used to fund commercial mortgage loan
acquisition and resolution activities. The Company invested $71.7 million and
$15.1 million in the acquisition of eighteen and nine loans in fiscal years 1997
and 1996, respectively. In addition, the Company advanced funds on existing
loans of $1.9 million and $2.6 million in fiscal years 1997 and 1996,
respectively.
Proceeds received upon refinancings or the sale of senior lien
interests amounted to $16.5 million and $18.5 million in fiscal years 1997 and
1996, respectively. Cash used for capital expenditures increased $694,000, or
63%, during fiscal year 1997 over fiscal 1996. The 1997
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<PAGE>
increase includes $507,000 in capital expenditures relating to the Company's
residential mortgage loan business. During fiscal 1997, the Company invested
$1.2 million in 288 wells, operating rights and pipelines located in Ohio. The
cost of equipment acquired for lease was $34.6 million in fiscal 1997 as
compared to $731,000 in fiscal 1996, an increase of $33.9 million, as a result
of the full year's activity for the small ticket leasing business in fiscal 1997
as compared to two months in fiscal 1996.
The Company's cash flow provided by financing activities increased
$124.4 million during fiscal 1997, as compared to fiscal 1996 as a result of the
additional borrowings discussed above.
Year Ended September 30, 1996 Compared to Year Ended September 30, 1995
The Company had $4.2 million in cash and cash equivalents on hand at
September 30, 1996, as compared to $2.5 million at September 30, 1995. The
Company's ratio of current assets to current liabilities was 3.7 to 1.0 at
September 30, 1996 and 3.0 to 1.0 at September 30, 1995. Working capital at
September 30, 1996 was $4.4 million as compared to $2.6 million at September 30,
1995.
Cash provided by operating activities increased $1.4 million, or 88%
during fiscal 1996, as compared to fiscal 1995. This increase was primarily the
result of an increase in operating income in the commercial mortgage loan
acquisition and resolution and equipment leasing businesses.
The Company's cash used in investing activities decreased $5.1 million
or 83% during fiscal 1996, as compared to fiscal 1995. The change resulted
primarily from changes in the amount of cash used to fund commercial mortgage
loan acquisition and resolution activities. The Company invested $15.1 million
and $13.6 million in the acquisition of nine and seven loans in fiscal years
1996 and 1995, respectively. In addition, the Company advanced funds on existing
loans of $2.6 million and $1.3 million in fiscal years 1996 and 1995,
respectively, and in fiscal 1996 increased its investment in certain existing
loans by $852,000.
Proceeds received upon refinancings or the sale of senior lien
interests amounted to $18.5 million and $10.2 million in fiscal years 1996 and
1995, respectively. Cash used for capital expenditures increased $280,000, or
34% during fiscal year 1996 over the previous period. This increase includes
$506,000 in capital expenditures relating to the start-up of small ticket
leasing operations. Cost of equipment acquired for lease represents the
equipment cost and initial direct costs associated with the start up of small
ticket leasing operations. The Company commenced leasing operations for its own
account in June 1996 and began to write leases in August 1996.
Cash flow provided by financing activities decreased $4.6 million
during fiscal 1996, as compared to fiscal 1995. During fiscal 1995, the Company
(i) sold a $2.0 million senior lien interest, (ii) borrowed $2.5 million and
(iii) was able to release for corporate investment purposes $4.9 million of
restricted cash as a result of the purchase of loans for the Company's
portfolio.
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<PAGE>
Dividends
In fiscal years 1997, 1996 and 1995, $1.4 million, $757,000 and
$161,000 were paid in dividends, respectively. The Company has paid regular
dividends since August 1995.
The determination of the amount of future cash dividends, if any, to be
declared and paid is in the sole discretion of the Company's Board of Directors
and will depend on the various factors affecting the Company's financial
condition and other matters the Board of Directors deems relevant.
Inflation and Changes in Prices
Inflation affects the Company's operating expenses and increases in
those expenses may not be recoverable by increases in finance rates chargeable
by the Company. Inflation also affects interests rates and movements in rates
may adversely affect the Company's profitability.
The Company's revenues and the value of its oil and gas properties have
been and will continue to be affected by changes in oil and gas prices. Oil and
gas prices are subject to fluctuations which the Company is unable to control or
accurately predict.
Computer Systems and Year 2000 Issue
The "year 2000 issue" is the result of computer programs being written
using two digits, rather than four digits, to identify the year in a date field.
Any computer programs using such a system, and which have date sensitive
software, will not be able to distinguish between the year 2000 and the year
1900. This could result in miscalculations or an inability to process
transactions, send invoices or engage in similar normal business activities.
Based upon a recent assessment by the Company, the Company has in place
year 2000 capable systems for its equipment leasing and residential mortgage
loan operations. The Company's commercial mortgage loan acquisition and
resolution operations will be required to purchase year 2000 capable computer
software, but believes that its requirements can be met by commercially
available software. The Company has determined that it will be required to
modify and, possibly, replace material portions of the software relating to its
energy operations, and has commenced the remediation process. With respect to
both its commercial mortgage loan acquisition and resolution operations and its
energy operations, the Company anticipates that remediation will be completed on
or before March 31, 1999 and that the aggregate costs of such remediations will
not be material.
The Company has made inquiries concerning the year 2000 issue to its
significant suppliers of services (including BCMI) and, with respect to its
energy operations, the two largest purchasers of its products. Based thereon,
the Company believes that it will not be materially adversely impacted by year
2000 issues pertaining to such entities. However, there can be no assurance that
the systems of third parties will be year 2000 compatible in a timely fashion,
or
-49-
<PAGE>
that failure to achieve compatibility by such entities will not have a material
adverse effect on the Company.
Environmental Regulation
A continued trend to greater environmental and safety awareness and
increasing environmental regulation has resulted in higher operating costs for
the oil and gas industry and the Company. The Company monitors environmental and
safety laws and believes it is in compliance with such laws and applicable
regulations thereunder. To date, compliance with environmental laws and
regulations has not had a material impact on the Company's capital expenditures,
earnings or competitive position. The Company believes, however, that
environmental and safety costs will increase in the future. There can be no
assurance that compliance with such laws will not, in the future, materially
impact the Company.
-50-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Certified Public Accountants
Stockholders and Board of Directors
RESOURCE AMERICA, INC.
We have audited the accompanying consolidated balance sheets of
Resource America, Inc. and subsidiaries as of September 30, 1997 and 1996, and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the three years in the period ended September 30,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Resource America, Inc. and subsidiaries as of September 30, 1997 and 1996, and
the consolidated results of their operations and cash flows for each of the
three years in the period ended September 30, 1997, in conformity with generally
accepted accounting principles.
We have also audited Schedule IV as of September 30, 1997. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/ Grant Thornton LLP
- --------------------------------
Grant Thornton LLP
Cleveland, Ohio
November 6, 1997
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<PAGE>
RESOURCE AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(in thousands)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ................................... $ 69,279 $ 4,154
Accounts and notes receivable ............................... 2,414 1,479
Prepaid expenses and other current assets ................... 576 473
--------- ---------
Total current assets ................................. 72,269 6,106
Investments in Real Estate Loans (less allowance for
possible losses of $400 and $0) ............................. 88,816 21,798
Notes Secured by Equipment Leases ............................. 4,761 --
Net Investment in Direct Financing Leases
(less allowance for possible losses of $248 and $7) .. 3,391 729
Property and Equipment
Oil and gas properties and equipment (successful efforts) ... 24,939 24,035
Gas gathering and transmission facilities ................... 1,606 1,536
Other ....................................................... 2,874 1,666
--------- ---------
29,419 27,237
Less accumulated depreciation, depletion, and amortization .. (15,793) (14,857)
--------- ---------
13,626 12,380
Other Assets (less accumulated amortization of $1,014 and $885) 12,256 2,946
--------- ---------
$ 195,119 $ 43,959
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt ........................ $ 708 $ 105
Accounts payable ............................................ 1,339 585
Accrued interest ............................................ 2,734 253
Accrued liabilities ......................................... 1,967 344
Estimated income taxes ...................................... 4,093 377
--------- ---------
Total current liabilities ............................ 10,841 1,664
Long-Term Debt, less current maturities ....................... 118,786 8,966
Other Long-Term Liabilities ................................... 663 --
Deferred Income Taxes ......................................... -- 2,206
Commitments and Contingencies
Stockholders' Equity
Preferred Stock, $1.00 par value; 1,000,000 authorized shares -- --
Common Stock, $.01 par value; 8,000,000 authorized shares ... 54 20
Additional paid-in capital .................................. 56,787 21,761
Retained earnings ........................................... 22,005 12,458
Less treasury stock, at cost ................................ (13,664)
Less loan receivable from Employee Stock Ownership Plan ..... (353) (417)
--------- ---------
Total stockholders' equity ........................... 64,829 31,123
--------- ---------
$ 195,119 $ 43,959
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-52-
<PAGE>
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C>
REVENUES
Real Estate Finance ....................... $ 19,144 $ 7,171 $ 6,114
Equipment Leasing ......................... 7,162 4,466 --
Energy: Production ........................ 3,936 3,421 3,452
Services ........................ 1,672 1,736 1,879
Interest .................................. 930 197 149
----------- ----------- -----------
32,844 16,991 11,594
COSTS AND EXPENSES
Real Estate Finance ....................... 1,069 852 801
Equipment Leasing ......................... 3,822 2,339 --
Energy: Exploration and Production ........ 1,823 1,582 1,733
Services ........................ 909 869 1,026
General and Administrative ................ 2,851 1,756 2,265
Depreciation, Depletion and Amortization .. 1,614 1,368 1,335
Interest .................................. 5,273 872 1,091
Provision for Possible Losses ............. 653 7 --
Other - Net ............................... (27) -- (2)
----------- ----------- -----------
17,987 9,645 8,249
----------- ----------- -----------
Income from Operations ........... 14,857 7,346 3,345
OTHER INCOME (EXPENSE)
Gain (Loss) on Sale of Property ........... 74 7 (1)
----------- ----------- -----------
Income Before Income Taxes ................ 14,931 7,353 3,344
Provision for Income Taxes ................ 3,980 2,206 630
----------- ----------- -----------
Net Income ................................ $ 10,951 $ 5,147 $ 2,714
=========== =========== ===========
Net Income Per Common Share - Primary ..... $ 2.51 $ 1.88 $ 1.23
----------- ----------- -----------
Weighted Average Common Shares Outstanding 4,358,400 2,756,900 2,235,400
=========== =========== ===========
Net Income Per Common Share - Fully Diluted $ 2.50 $ 1.87 $ 1.18
----------- ----------- -----------
Weighted Average Common Shares Outstanding 4,385,200 2,763,000 2,292,700
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-53-
<PAGE>
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Additional ESOP Total
Common Stock Paid-In Retained Treasury Stock Loan Stockholders'
Shares Amount Capital Earnings Shares Amount Receivable Equity
------ ------ ------- -------- ------ ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1994 817,912 $ 8 $ 19,136 $ 7,979 (131,402) $ (2,437) $(546) $24,140
Treasury shares acquired (21,298) (284) (284)
Cash dividends ($.09 per share) (161) (161)
Warrants issued 78 78
Repayment of ESOP loan 64 64
Net income 2,714 2,714
- -------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1995 817,912 $ 8 $ 19,214 $10,532 (152,700) $(2,721) $(482) $26,551
Treasury shares issued (24) 1,889 39 15
6% stock dividends 82,688 1 2,453 (2,453) 1
5 for 2 stock split effected
in the form of a 150%
stock dividend 1,136,609 11 (11)
Issuance of common stock 10,000 77 77
Treasury shares acquired (1,637) (17) (17)
Cash dividends ($.38 per share) (757) (757)
Warrants issued 41 41
Repayment of ESOP loan 65 65
Net income 5,147 5,147
- -------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 2,047,209 $20 $21,761 $12,458 (152,448) $(2,699) $(417) $31,123
Treasury shares issued (34) 23,023 483 449
Issuance of common stock 3,363,436 34 35,060 35,094
Treasury shares acquired (579,623) (11,448) (11,448)
Cash dividends ($.40 per share) (1,404) (1,404)
Repayment of ESOP loan 64 64
Net income 10,951 10,951
- -------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 5,410,645 $54 $56,787 $22,005 (709,048) $(13,664) $(353) $64,829
========= === ======= ======= ======== ======== ===== =======
</TABLE>
See accompanying notes to consolidated financial statements
-54-
<PAGE>
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................ $ 10,951 $ 5,147 $ 2,714
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ...................... 1,614 1,368 1,335
Amortization of discount on senior note and deferred
finance costs .................................... 657 75 74
Provision for losses ............................... 653 7 --
Deferred income taxes .............................. (2,206) 1,059 473
Accretion of discount .............................. (4,124) (954) (1,176)
Gain on asset dispositions ......................... (11,375) (3,650) (1,727)
Property impairments and abandonments .............. 38 71 56
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable ......... (935) (175) 81
(Increase) decrease in prepaid expenses
and other current assets ......................... (103) (310) 88
Increase (decrease) in accounts payable ............ 754 (137) (291)
Increase (decrease) in accrued income taxes ........ 3,716 377 (100)
Increase in other liabilities ...................... 4,451 81 51
--------- --------- ---------
Net cash provided by operating activities ............. 4,091 2,959 1,578
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, less cash acquired ........... (1,226) -- (877)
Cost of equipment acquired for lease .................. (34,567) (731) --
Capital expenditures .................................. (1,791) (1,097) (817)
Principal payments on notes receivable ................ 8,514 -- --
Proceeds from sale of assets .......................... 37,713 18,577 10,348
Increase in other assets .............................. (3,319) (152) (59)
Investments in real estate loans ...................... (69,857) (17,650) (14,708)
Payments received (revenue recognized) in excess of
revenue recognized (cash received) on leases ........ 1,394 (7) --
--------- --------- ---------
Net cash used in investing activities ................. (63,139) (1,060) (6,113)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings .................................. 129,320 536 2,000
Dividends paid ........................................ (1,404) (756) (161)
(Increase) decrease in other assets ................... (5,376) (31) 4,864
Principal payments on debt ............................ (22,148) (27) (4,524)
Purchase of treasury stock ............................ -- (17) (284)
Increase in short term borrowings ..................... -- -- 2,500
Proceeds from issuance of stock ....................... 23,781 93 --
--------- --------- ---------
Net cash provided by (used in) financing activities ... 124,173 (202) 4,395
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ...... 65,125 1,697 (140)
Cash and cash equivalents at beginning of year ........ 4,154 2,457 2,597
--------- --------- ---------
Cash and cash equivalents at end of year .............. $ 69,279 $ 4,154 $ 2,457
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
-55-
<PAGE>
NOTE 1-NATURE OF OPERATIONS
Resource America, Inc. (the "Company") is a specialty finance company
engaged in three lines of business: (1) the financing of mortgage loans,
including the acquisition and resolution of commercial real estate loans and,
beginning in the fiscal year ending September 30, 1998, the origination,
acquisition and sale of residential loans; (2) commercial equipment leasing, and
(3) energy operations, including natural oil and gas production. Based on net
assets and net income, the financing of mortgage loans is the dominant current
business line.
The markets for the Company's business lines are as follows: in the
financing of mortgage loans, the Company obtains its commercial mortgage loans
on properties located throughout the United States from various financial
institutions and other organizations, while its residential mortgage loans will
be obtained through direct mail supported by outbound telemarketing and several
wholesale channels to potential borrowers throughout the United States; in
commercial equipment leasing, the Company markets its equipment leasing products
nationwide through equipment manufacturers, regional distributors and other
vendors; and in energy, gas is sold to a number of customers such as gas brokers
and local utilities; oil is sold at the well site to regional oil refining
companies in the Appalachian basin.
The Company's ability to acquire and resolve commercial mortgage loans,
obtain residential mortgage loans and to fund equipment lease transactions will
be dependent on the continued availability of funds. The availability of
third-party financing for each of these specialty finance businesses will be
dependent upon a number of factors over which the Company has limited or no
control, including general conditions in the credit markets, the size and
liquidity of the market for the types of real estate loans or equipment leases
in the Company's portfolio and the respective financial performance of the loans
and equipment leases in the Company's portfolio.
The Company's growth will also depend on its continued ability to
generate attractive opportunities for acquiring commercial mortgage loans at a
discount and to originate equipment leases. The availability of loans for
acquisition on terms acceptable to the Company will be dependent upon a number
of factors over which the Company has no control, including economic conditions,
interest rates, the market for and value of properties securing loans which the
Company may seek to acquire, and the willingness of financial institutions to
dispose of troubled or under-performing loans in their portfolios.
Mortgage loans and equipment leases are subject to the risk of default
in payment by borrowers and lessees. Mortgage loans are further subject to the
risk that declines in real estate values could result in the Company being
unable to realize the property values projected.
-56-
<PAGE>
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company, and its wholly owned subsidiaries and its pro rata share of the assets,
liabilities, income, and expenses of the oil and gas partnerships in which the
Company has an interest. All material intercompany transactions have been
eliminated. All per share amounts and references to numbers of shares give
effect to 6% stock dividends paid in both January and April 1996 and a
five-for-two stock split (effected in the form of a 150% stock dividend) in May
1996.
Use of Estimates
Preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever
events or circumstances indicate that the carrying amount of an asset may not be
recoverable. If it is determined that an asset's estimated future cash flows
will not be sufficient to recover its carrying amount, an impairment charge will
be recorded to reduce the carrying amount for that asset to its estimated fair
value.
Stock-Based Compensation
The Company adopted the disclosure only option under Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock Based
Compensation, effective January 1, 1997. As such, the Company recognizes
compensation expense with respect to stock option grants to employees using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25.
Accordingly, SFAS No. 123 had no impact on the Company's financial position or
results of operations (see Note 9).
Transfers of Financial Assets
The Company adopted SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities effective
January 1, 1997. This statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, and is to be applied prospectively. Earlier or retroactive application was
not permitted. The adoption of SFAS 125 did not have a material impact on the
Company's financial position or results of operations.
-57-
<PAGE>
Oil and Gas Properties
The Company follows the successful efforts method of accounting.
Accordingly, property acquisition costs, costs of successful exploratory wells,
all development costs, and the cost of support equipment and facilities are
capitalized. Costs of unsuccessful exploratory wells are expensed when such
wells are determined to be nonproductive. The costs associated with drilling and
equipping wells not yet completed are capitalized as uncompleted wells,
equipment, and facilities. Geological and geophysical costs and the costs of
carrying and retaining undeveloped properties, including delay rentals, are
expensed as incurred.
Production costs, overhead, and all exploration costs other than costs
of exploratory drilling are charged to expense as incurred.
Unproved properties are assessed periodically to determine whether
there has been a decline in value and, if such decline is indicated, a loss is
recognized. The Company compares the carrying value of its oil and gas producing
properties to the estimated future cash flow, net of applicable income taxes,
from such properties in order to determine whether their carrying values should
be reduced. No adjustment was necessary during the fiscal years ended September
30, 1997, 1996 or 1995.
On an annual basis, the Company estimates the costs of future
dismantlement, restoration, reclamation, and abandonment of its gas and oil
producing properties. Additionally, the Company evaluates the estimated salvage
value of equipment recoverable upon abandonment. At both September 30, 1997 and
1996 the Company's evaluation of equipment salvage values was greater than or
equal to the estimated costs of future dismantlement, restoration, reclamation,
and abandonment.
Depreciation, Depletion and Amortization
Proved developed oil and gas properties, which include intangible
drilling and development costs, tangible well equipment, and leasehold costs,
are amortized on the unit-of-production method using the ratio of current
production to the estimated aggregate proved developed oil and gas reserves.
Depreciation of property and equipment, other than oil and gas
properties, is computed using the straight-line method over the estimated
economic lives, which range from 3 to 25 years.
Other Assets
Included in other assets are intangible assets that consist primarily of
contracts acquired through acquisitions recorded at fair value on their
acquisition dates, the excess of the acquisition cost over the fair value of the
net assets of a business acquired (goodwill) and deferred financing costs. The
contracts acquired are being amortized on a declining balance
-58-
<PAGE>
method over their respective estimated lives, ranging from five to thirteen
years, goodwill is being amortized on a straight-line basis over fifteen years,
deferred financing costs are being amortized over the terms of the related loans
(two to seven years) and other costs are being amortized over varying periods of
up to five years.
Other assets at September 30, 1997 and 1996 were:
September 30,
-------------
1997 1996
---- ----
(in thousands)
Contracts acquired............................ $ 1,636 $ 549
Goodwill...................................... 709 518
Deferred financing costs...................... 5,240 512
Investment in real estate partnerships........ 1,827 22
Restricted cash............................... 1,052 935
Other ........................................ 1,792 410
------- ------
Total.................................... $12,256 $2,946
======= ======
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating the fair value of each class of financial instruments for which it is
practicable to estimate fair value.
For cash and cash equivalents, receivables and payables, the carrying
amounts approximate fair value because of the short maturity of these
instruments. For long-term debt, including current maturities, the fair value of
the Company's long-term debt approximates historically recorded cost since
interest rates approximate market.
Based upon available market information and appropriate valuation
methods, the Company believes the carrying cost of investments in direct
financing leases approximates fair value.
For investments in real estate loans, the Company believes the carrying
amounts of the loans are reasonable estimates of their fair value considering
the nature of the loans and the estimated yield relative to the risks involved.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of periodic temporary
investments of excess cash. The Company places its temporary excess cash
investments in high quality short-term money
-59-
<PAGE>
market instruments, principally at Jefferson Bank (see Note 3), and other high
quality financial institutions. The amounts of these instruments may at times
be in excess of the FDIC insurance limit. At September 30, 1997, the Company
had $67.7 million in deposits at Jefferson Bank, of which $66.6 million is over
the FDIC insurance limit. No losses have been experienced on such investments.
Revenue Recognition
Real Estate Finance
The difference between the Company's cost basis in a loan and the sum
of projected cash flows from, and the appraised value of, the underlying
property (up to the amount of the loan) is accreted into interest income over
the estimated life of the loan using a method which approximates the level
interest method. Projected cash flows and appraised values of the property are
reviewed on a regular basis and changes to the projected amounts reduce or
increase the amounts accreted into interest income over the remaining life of
the loan.
Gains on the sale of a senior lien interest in a loan (or gains, if
any, from the refinancing of a loan) are recognized based on an allocation of
the Company's cost basis between the portion of the loan sold or refinanced and
the portion retained based upon the fair value of those respective portions on
the date of sale or refinance. Any gain recognized on a sale of a senior lien
interest or a refinancing is brought into income at the time of such sale or
refinancing.
Equipment Leasing
Direct finance leases, as defined by SFAS No. 13, Accounting for
Leases, are accounted for by recording on the balance sheet the total future
minimum lease payments receivable plus the estimated unguaranteed residual value
of leased equipment less the unearned lease income. Unearned lease income
represents the excess of the total future minimum lease payments plus the
estimated unguaranteed residual value expected to be realized at the end of the
lease term over the cost of the related equipment. Unearned lease income is
recognized as revenue over the term of the lease by the effective interest
method. Initial direct costs incurred in consummating a lease are capitalized as
part of the investment in direct finance leases and amortized over the lease
term as a reduction in the yield.
Gains arising from the sale of direct financing leases and notes
secured by equipment leases occur when the Company obtains permanent funding
through the sale of a pool of leases to a third party. Subsequent to a sale, the
Company has no remaining interest in the pool of leases or equipment except (i)
if a note is delivered as part of the sale proceeds, a security interest in the
pool, and (ii) the obligation of the Company under certain circumstances to
replace non-performing leases in the pool. Upon consummation of the sale
transaction, the Company records a provision for anticipated losses under its
guaranty. At
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<PAGE>
September 30, 1997 the Company had guaranteed approximately $5.5 million of
lease receivables with respect to leases sold.
Equipment leasing revenues also consist of management fees, brokerage
fees and a share of net income from partnerships in which a subsidiary of the
Company serves as general partner. Management fees are earned for management
services provided to the partnerships. Such fees are recognized as earned (see
Limited Partnerships, below).
Energy Operations
Working interest, royalties and override revenues are recognized as
production and delivery takes place. Well service income is recognized as
revenue as services are performed.
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<PAGE>
Cash Flow Statements
The Company considers temporary investments with a maturity at the date
of acquisition of 90 days or less to be cash equivalents.
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Cash paid during the year for:
Interest........................................... $ 2,727 $797 $1,104
Income taxes....................................... 2,094 770 255
Non-cash activities include the following:
Sales of leases in exchange for notes.............. $13,275 $- $ -
Debt assumed upon acquisition of real
estate loan...................................... 2,381 - -
Receipt of note in satisfaction of
real estate sale................................. 3,500 - -
Note payable issued in acquisition................. 925 - -
Stock issued in acquisition........................ 315 - -
Details of acquisition:
Fair value of assets acquired...................... $ 2,466 $- $1,189
Debt issued........................................ (925) - -
Stock issued....................................... (315) - -
Liabilities assumed................................. - - (312)
-------- ------- --------
Net cash paid........................................ $ 1,226 $ - $ 877
======= ====== ======
</TABLE>
Limited Partnerships
The Company conducts certain energy and leasing activities through, and
a portion of its revenues and are attributable to, limited partnerships
("Partnerships"). The Company serves as general partner of the Partnerships and
assumes customary rights and obligations for the Partnerships. As the general
partner, the Company is liable for Partnership liabilities and can be liable to
limited partners if it breaches its responsibilities with respect to the
operations of the Partnerships.
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<PAGE>
The Company is entitled to receive management fees, reimbursement for
administrative costs incurred, and to share in the Partnerships' revenue and
costs and expenses according to the respective Partnership agreements. Such fees
and reimbursements are recognized as income and are included in energy services
and equipment leasing revenue. Amounts reimbursed for costs incurred as operator
of certain oil and gas partnership properties and as the general partner in
certain equipment leasing partnerships for the years ended September 30, 1997,
1996 and 1995 approximated $1.8 million, $1.6 million, and $.5 million,
respectively. The Company includes in its operations the portion of the oil and
gas Partnerships' revenues and expenses applicable to its interests therein.
Income Taxes
The Company records deferred tax assets and liabilities, as
appropriate, to account for the estimated future tax effects attributable to
temporary differences between the financial statement and tax bases of assets
and liabilities and the value at currently enacted tax rates, of operating loss
carryforwards. The deferred tax provision or benefit each year represents the
net change during that year in the deferred tax asset and liability balances.
Earnings Per Share
Earnings per common share-primary are determined by dividing net income
by the weighted average number of common shares and common share equivalents
outstanding during the period. Common share equivalents include shares issuable
under the terms of various stock option and warrant agreements net of the number
of such shares that could have been reacquired (at the weighted average price of
the Company's Common Stock during the period) with the proceeds received from
the exercise of the options and warrants (see Notes 8 and 9). Fully diluted
earnings per share reflect the additional dilution resulting from using in the
computation the higher period-ending market price of the Company's shares.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128 "Earnings per Share." Under this statement the calculation
of primary earnings per share ("EPS") is changed to exclude the dilutive effect
of stock options and is referred to as Basic EPS. This statement is effective
for financial statements issued for periods ending after December 15, 1997;
earlier adoption is not permitted. If SFAS No. 128 had been adopted for fiscal
1997, 1996 and 1995 it would have resulted in the following EPS:
Year Ended September 30,
------------------------
1997 1996 1995
---- ---- ----
Basic EPS.................... $3.15 $2.72 $1.43
Diluted EPS.................. 2.51 1.88 1.23
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<PAGE>
Reclassifications
Certain reclassifications have been made to the fiscal years 1996 and
1995 consolidated financial statements to conform with the fiscal 1997
presentation.
NOTE 3-TRANSACTIONS WITH RELATED PARTIES
Until April 1996, the Chairman of the Company was of counsel to
Ledgewood Law Firm, P.C. ("LLF") which provides legal services to the Company.
LLF was paid $803,000, $402,000 and $562,000 during fiscal 1997, 1996 and 1995,
respectively, for legal services rendered to the Company. The Chairman of the
Company receives certain debt service payments from LLF related to the
termination of his affiliation with such firm and its redemption of his interest
therein.
The Company holds commercial real estate loans of borrowers whose
underlying properties are managed by Brandywine Construction & Management, Inc.
("BCMI"). The Chairman of the Company is Chairman of the Board of Directors and
a minority shareholder (approximately 8%) of BCMI. The Company has advanced
funds to certain of these borrowers for improvements on their properties which
have been performed by BCMI. In several instances, the President of BCMI has
also acted as the general partner of the borrower or as an officer of a
corporate general partner. BCMI has subordinated receipt of its management fees
to receipt by the Company from the properties of minimum debt service payments
required under the obligations held by the Company.
The Company also maintains normal banking and borrowing relationships
with Jefferson Bank, a subsidiary of JeffBanks, Inc. The Chairman of the Company
is an officer and director of JeffBanks, Inc. and, together with his spouse, is
a principal shareholder thereof; his spouse is Chairman and Chief Executive
Officer of Jefferson Bank. Another officer and director of the Company is a
director of Jefferson Bank. The Company anticipates that it may, in the future,
effect borrowings from Jefferson Bank; it anticipates that any such borrowings
will be on terms similar to those which could be obtained by an unrelated
borrower. Jefferson Bank is also a tenant at two properties which secure loans
held by the Company. Management believes that the terms of the leases with
Jefferson Bank are typical of similar leases for similar space.
In August 1997, the Company, through a subsidiary, acquired a loan with
a face amount of $2.3 million from Jefferson Bank at a cost of $1.6 million. The
loan is secured by a property owned by a partnership in which an officer of the
Company and the Chairman of the Company, together with his wife, are limited
partners. The Company leases its headquarters space at such property. LLF and
BCMI are also tenants at such property (see Note 10). In September 1997, the
Company sold a senior lien interest in this loan to an unrelated party,
recognizing a gain of $224,000.
In June 1997, the Company acquired two loans with an aggregate face
amount of $7.0 million from a partnership in which an officer of the Company and
the Chairman of the Company, together with his wife, are limited partners. The
officer of the Company was
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<PAGE>
previously the general partner of such partnership. The Company acquired such
loan at a cost of $3.0 million. In September 1997, the Company sold a senior
lien interest in one loan to an unrelated third party and was paid off with
respect to the other loan, recognizing an aggregate gain of $804,000.
In June 1997 the Company sold two senior lien interests to two
different limited partnerships for $875,000 and $2.25 million, realizing gains
of $310,000 and $811,000, respectively. Officers and directors of the Company
hold beneficial interests in these partnerships totalling 21.3% and 18.3%,
respectively.
In December 1996, the Company, through a subsidiary, acquired a loan
with a face amount of $52.7 million from an unaffiliated third party at a cost
of $19.3 million. The property securing such loan is owned by two partnerships:
1845 Associates (the "Building Partnership"), which owns the office building and
Mutual Associates (the "Garage Partnership"), which owns the parking garage.
Pursuant to a loan restructuring agreement entered into in 1993, prior to the
Company having any interest in the loan, an affiliate of the holder of the loan
is required to hold, as additional security for the loan, general partnership
interests in both the Building Partnership and the Garage Partnership. The
partnership interest in the Building Partnership was assigned to a limited
partnership of which another subsidiary of the Company is general partner and
RPI Partnership is limited partner. The partnership interest in the Garage
Partnership was assigned to a limited partnership of which a third subsidiary of
the Company is general partner and RPI Partnership is limited partner. RPI
Partnership is a limited partnership in which officers of the Company, including
the Chairman, are limited partners. Although the Company does not anticipate any
economic benefit to RPI Partnership, any which may be received will be assigned
and transferred to the Company.
Management believes that any other such commercial real estate
transactions and balances involving parties that may be considered to be related
parties are not material.
The Company administers the activities of certain energy partnerships
that it sponsors (see Note 2). Energy service revenues primarily represent
services provided to Partnerships and joint ventures managed by the Company. In
accordance with industry practice, the Company charges each producing well in
the Partnerships and joint ventures a fixed monthly overhead fee and a
proportionate share of certain lease operating expenses. These charges are to
reimburse the Company for certain operating and general and administrative
expenses.
NOTE 4-INVESTMENTS IN REAL ESTATE LOANS
The Company has focused its real estate activities on the purchase of
income producing mortgages at a discount from both the face value of such
mortgages and the appraised value of the properties underlying the mortgages.
Cash received by the Company for payment on each mortgage is allocated between
principal and interest with the interest portion of the cash received being
recorded as income to the Company. Additionally, the
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<PAGE>
Company records as income the accretion of a portion of the discount to the
underlying collateral value. This accretion of discount amounted to $4.1 million
and $1.0 million during the years ended September 30, 1997 and 1996,
respectively. As the Company sells senior lien interests or receives funds from
refinancings in such mortgages, a portion of the cash received is employed to
reduce the cumulative accretion of discount included in the carrying value of
the Company's investment in real estate loans.
At September 30, 1997 and 1996, the Company held real estate loans
having aggregate face values of $233.7 million and $79.1 million, respectively,
which were being carried at aggregate costs of $88.8 million and $21.8 million,
including cumulative accretion. Amounts receivable, net of senior lien
interests, were $178.1 million and $61.8 million at September 30, 1997 and 1996,
respectively. The following is a summary of the changes in the carrying value of
the Company's investments in real estate loans for the years ended September 30,
1997 and 1996:
Year Ended September 30,
------------------------
1997 1996
------ ------
(in thousands)
Balance, beginning of year................. $21,798 $17,991
New loans.................................. 71,720 15,127
Additions to existing loans................ 1,860 2,564
Reserve for possible losses................ (400) -
Accretion of discount...................... 4,124 954
Collections of principal................... (517) (9,377)
Cost of loans sold......................... (9,769) (5,461)
------- -------
Balance, end of year....................... $88,816 $21,798
======= =======
A summary of activity in the Company's allowance for possible losses
related to real estate loans for the year ended September 30, 1997 is as
follows:
Balance, beginning of year................. $ -
Provision for possible losses.............. 400,000
Writeoffs.................................. -
--------
Balance, end of year....................... $400,000
========
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<PAGE>
NOTE 5-INVESTMENT IN DIRECT FINANCING LEASES
Components of the net investment in direct financing leases as of
September 30, 1997 and 1996, as well as future minimum lease payments
receivable, including residual values, are as follows:
<TABLE>
<CAPTION>
September 30,
-------------
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Total minimum lease payments receivable.............. $4,186 $847
Initial direct costs, net of amortization............ 75 67
Unguaranteed residual................................ 310 75
Unearned lease income................................ (932) (253)
Allowance for possible losses........................ (248) (7)
------- -----
Net investment in direct financing leases............ $3,391 $729
====== ====
</TABLE>
At September 30, 1997, minimum lease payments for each of the five
succeeding fiscal years are as follows: 1998 - $1.4 million; 1999 - $1.0
million; 2000 - $914,000; 2001 - $502,000; and 2002 - $365,000.
A summary of activity in the Company's allowance for possible losses
related to direct financing leases for the years ended September 30, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Balance, beginning of year........................... $ 7 $ -
Provision for possible losses........................ 253 7
Write offs........................................... (12) -
----- ---
Balance, end of year................................. $248 $ 7
==== ===
</TABLE>
Unguaranteed residual value represents the estimated amount to be
received at contract termination from the disposition of equipment financed
under direct financing leases. Amounts to be realized at contract termination
depend on fair market value of the related equipment and may vary from the
recorded estimate. Residual values are reviewed periodically to determine if the
equipment's fair market is below its recorded value.
Certain of the leases include options to purchase the underlying
equipment at the end of the lease term at fair value or the stated residual
which is not less that the book value at termination.
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<PAGE>
NOTE 6-LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30,
-------------
1997 1996
---- ----
(in thousands)
<S> <C> <C>
12% senior unsecured notes payable, interest due semi-annually, principal due
August 2004........................................................................ $115,000 $ -
9.5% senior secured note payable, repaid in July 1997.............................. - 7,902
Loan payable to a bank, secured by a certificate of deposit, 20 equal semiannual
installments of $32,143 through February, 2003, and quarterly payments of
interest at 1/2% above the prime rate through 2003 (See Note 9).................... 353 418
Unsecured loan, monthly installments of approximately $5,200 including interest
at 2.25% above the prime rate (but not less than 7% nor greater than 14.25%)
through April 2004 at which time the unpaid balance is due. This loan was
refinanced in December 1996 ....................................................... - 536
Loans payable, secured by real estate, monthly installments totaling
approximately $39,000 including interest ranging from prime (8.5% at September
30, 1997) to 10.25%, due at various times from December 2001 through
January 2019....................................................................... 3,216 215
Unsecured note payable, due in two equal annual Installments of principal and
interest beginning March 1998, interest at LIBOR (6 9/32% at
September 30, 1997)................................................................ 925 -
-------- -------
119,494 9,071
Less current maturities............................................................ 708 105
-------- -------
$118,786 $ 8,966
======== =======
</TABLE>
As of September 30, 1997 the long-term debt maturing over the next five
years is as follows: 1998 - $708,000; 1999 - $727,000; 2000 - $285,000; 2001 -
$309,000; and 2002 - $712,000.
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<PAGE>
In July 1997, the Company issued $115 million of 12% Senior Unsecured
Notes (the "12% Notes") due August 2004 in a private placement. Provisions of
the 12% Notes limit dividend payments, mergers and indebtedness, place
restrictions on liens and guarantees and require the maintenance of certain
financial ratios. At September 30, 1997, the Company was in compliance with such
provisions. In November 1997, the Company filed a registration statement with
the Securities and Exchange Commission offering to exchange the privately placed
12% Notes with a like amount of fully registered 12% Notes.
In May 1994, the Company privately placed with an insurance company a
9.5% senior secured note in the principal amount of $8 million together with an
immediately exercisable detachable warrant to purchase, at any time through May
24, 2004, 449,440 shares, subject to adjustment, of the Company's common stock
at an exercise price of $3.38 per share. The value assigned to the warrant
($100,000) was accounted for as paid-in capital, resulting in a discount which
was being amortized on a straight-line basis over the life of the note. The
senior note was collateralized by substantially all of the Company's oil and gas
properties and certain of the Company's real estate loans. This note was paid in
full in July 1997 from proceeds of the offering of the 12% Notes. The warrants
were exercised in July 1997. (See Note 8.)
In December 1996, FLI, the Company's equipment leasing subsidiary,
entered into a secured revolving credit and term loan facility with a maximum
borrowing limit of $20 million with two banking institutions. Interest on the
revolving credit and term loan borrowings is payable at a rate equal to the
London Interbank Offered Rate ("LIBOR") plus 1.75% and LIBOR plus 2.25% per
annum, respectively. The credit facility expires on March 31, 1998 and is
renewable annually at the lender's discretion. A commitment fee of 3/8% per
annum is assessed on the unused portion of the borrowing limit. Borrowings under
this facility are collateralized by the leases and the underlying equipment
being financed and are guaranteed by the Company. The agreement contains certain
covenants pertaining to FLI and the Company including the maintenance of certain
financial ratios and restrictions on changes in the FLI's ownership and a key
management position. During fiscal 1997, the maximum borrowing under this
facility was $7.1 million, all of which was repaid prior to fiscal year end.
In September 1997, FMF, the Company's residential mortgage lending
business, entered into a secured credit facility with a maximum borrowing limit
of $5 million with a banking institution. Interest on each draw under this
facility is payable at FMFs election, at either the institution's prime rate, or
at the federal funds rate plus 2.5%, or at an adjusted LIBOR plus 1.5%. The
credit facility expires in September 1998 unless renewed by the parties.
Borrowings under this facility are collateralized by the mortgage loans and the
underlying property being financed. The agreement contains certain covenants
pertaining to FMF and the Company including the maintenance of certain financial
ratios. During fiscal 1997, there were no borrowings under this facility.
In October 1997, FMF established a $15 million warehouse credit
facility with a financial institution, bearing interest at LIBOR or, if
unavailable, the interbank eurodollars market rate, plus 90 basis points. The
facility is collateralized by a first lien interest in the loans being financed
by facility draws. The facility expires in October 1998. The agreement contains
certain covenants pertaining to FMF, including the maintenance of certain
financial ratios.
In October 1997, the Company obtained a $5 million credit facility from
a banking institution for purposes of acquiring oil and gas assets. The credit
facility permits draws based on a percentage of reserves of oil and gas
properties pledged as security for the facility. Draws under the facility bear
interest at the institution's prime rate plus 25 basis points. The facility
terminates in June 1999. The agreement contains certain covenants pertaining to
the Company, including the maintenance of certain financial ratios.
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<PAGE>
NOTE 7-INCOME TAXES
The following table details the components of the Company's income tax
expense for the fiscal years 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Provision for federal income tax:
Current................................... $6,186 $1,147 $157
Deferred.................................. (2,206) 1,059 473
------- ------ ----
$3,980 $2,206 $630
====== ====== ====
</TABLE>
A reconciliation between the statutory federal income tax rate and the
Company's effective federal income tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate................................ 34% 34% 34%
Statutory depletion............................... (2) (4) (4)
Non-conventional fuel and low-income
housing credits................................. (3) - (1)
Tax-exempt interest............................... (2) - -
Adjustment to valuation allowance
for deferred tax assets......................... - - (7)
Other............................................. - - (3)
----- ---- ----
27% 30% 19%
===== ==== ====
</TABLE>
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<PAGE>
The components of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
September 30,
-------------
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Deferred tax assets:
Tax credit carryforwards............................ $ 507 $ -
Alternative minimum tax credit
carryforwards...................................... - 61
Interest receivable................................. 1,490 45
Net operating loss carryforwards.................... 357 -
Provision for losses................................ 220 -
------ -------
2,574 106
Deferred tax liabilities:
Fixed asset basis difference........................ (2,290) (2,160)
ESOP benefits....................................... (120) (140)
Other items, net.................................... (164) (12)
------ --------
(2,574) (2,312)
------ -------
Net deferred tax liability......................... $ - $(2,206)
======== ========
</TABLE>
NOTE 8-STOCKHOLDERS' EQUITY
In July 1997, the Company issued 983,150 unregistered shares of the
Company's common stock pursuant to the exercise of warrants held by the holder
of the Company's 9.5% senior secured note payable due 2004, realizing proceeds
of $3.66 million. The 983,150 shares were subsequently sold by the holder in a
separate private placement to a small group of institutional investors.
In December 1996, the Company closed a public offering of 1.66 million
shares of its Common Stock. The Company received proceeds of $19.99 million,
before offering expenses of $515,000, from the offering.
In September 1996, the Company's shareholders authorized an amendment
to the Certificate of Incorporation of the Company to increase the total
authorized capital stock to 9 million shares, of which 8 million shares were
Common Stock and 1 million shares were Preferred Stock.
On December 20, 1995 and March 12, 1996, the Board of Directors
declared 6% stock dividends on the Common Stock. Furthermore, on May 9, 1996 the
Board of Directors authorized a five-for-two stock split effected in the form of
a 150% stock dividend . These
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<PAGE>
stock dividends resulted in the issuance of 1.2 million additional shares of
Common Stock. Earnings per share and weighted average shares outstanding reflect
the above transactions.
NOTE 9-EMPLOYEE BENEFIT PLANS
Employee Stock Ownership Plan
The Company sponsors an Employee Stock Ownership Plan ("ESOP"), which
is a qualified non-contributory retirement plan established to acquire shares of
the Company's Common Stock for the benefit of all employees who are 21 years of
age or older and have completed 1,000 hours of service for the Company.
Contributions to the ESOP are made at the discretion of the Board of Directors.
The ESOP has borrowed funds to purchase shares from the Company, which borrowed
the funds for the loan to the ESOP from a bank.
The Common Stock purchased by the ESOP with the money borrowed is held
by the ESOP trustee in a suspense account. On an annual basis, a portion of the
Common Stock is released from the suspense account and allocated to
participating employees. Any dividends on ESOP shares are used to pay principal
and interest on the loan. As of September 30, 1997, there were 113,930 shares
allocated to participants which constitute substantially all shares in the plan.
Compensation expense related to the plan amounted to $50,400, $50,300 and
$91,000 for the years ended September 30, 1997, 1996 and 1995, respectively.
The loan from the bank to the Company is payable in semiannual
installments through February 1, 2003. The loan from the Company to the ESOP was
fully repaid in August 1996. Both the loan obligation and the unearned benefits
expense (a reduction in shareholders' equity) will be reduced by the amount of
any loan principal payments made by the Company.
Employee Savings Plan
The Company sponsors an Employee Retirement Savings Plan and Trust
under Section 401(k) of the Internal Revenue Code which allows employees to
defer up to 10% of their income (subject to certain limitations) on a pretax
basis through contributions to the savings plan. The Company matches up to 100%
of each employee's contribution. Included in general and administrative expenses
are $131,900, $44,700 and $28,100 for the Company's contributions for the years
ended September 30, 1997, 1996 and 1995, respectively.
Stock Options
The Company has three employee stock option plans, those of 1984, 1989
and 1997. The 1984 and 1989 plans authorize the granting of up to 56,180 and
589,890 (as amended during the fiscal year ended September 30, 1996) shares,
respectively, of the Company's common stock in the form of incentive stock
options ("ISO's"), non-qualified stock options and stock appreciation rights
("SAR's"). No further grants may be made under these two plans.
-72-
<PAGE>
In April 1997, the stockholders approved the Resource America, Inc.,
1997 Key Employee Stock Option Plan ("Employee Plan"). This plan, for which
275,000 shares were reserved, provides for the issuance of ISO's and
non-qualified stock options. In fiscal 1997, options for 25,000 shares were
issued under this plan.
Options under the 1984, 1989 and 1997 plans become exercisable as to
25% of the optioned shares each year after the date of grant, and expire not
later than ten years after grant. The Company received $506,400 from the
exercise of stock options in fiscal 1997.
Transactions for all three stock option plans are as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 348,316 $ 6.21 202,248 $2.88 202,248 $2.88
Granted 25,000 $ 39.50 202,248 $8.58 - $ -
Exercised (144,663) $ 3.50 (28,090) $2.76 - $ -
Cancelled - $ - (28,090) $2.76 - $ -
-------- ------- -------
Outstanding - end of year 228,653 $ 11.56 348,316 $6.21 202,248 $2.88
======== ======= =======
Exercisable, at end of year 63,554 $ 7.06 109,551 $2.92 101,124 $2.88
======== ======= =======
Available for grant 250,000 - 5,618
======== ======= =======
Weighted average fair
value per share of options
granted during the year $35.93 $6.51 -
====== ===== ===
</TABLE>
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------ ----------------------
Weighted
Average Weighted Weighted
Range of Contractual Average Average
Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price
- --------------- ------ ------------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
$2.76 - $3.04 16,854 5.56 $ 2.76 16,854 $ 2.76
$8.19 - $9.01 186,799 5.66 $ 8.61 46,700 $ 8.61
$39.50 - $39.50 25,000 9.91 $ 39.50 - $39.50
------- --------
228,653 63,554
======= ======
</TABLE>
In addition, a key employee of Fidelity Leasing, Inc. ("FLI"), a wholly
owned subsidiary of the Company, has received options to purchase 10% of the
common stock of FLI (1 million shares) at an aggregate price of $220,000 and,
should FLI declare a dividend, will receive payments on the options in an amount
equal to the dividends that would have been paid on the shares subject to the
options had they been issued. In the event that, prior to becoming a public
company, FLI issues stock to anyone other than the Company or the key
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<PAGE>
employee, the employee is entitled to receive such additional options as will
allow him to maintain a 10% equity position in FLI upon exercise of all options
held by such employee (excluding shares issuable pursuant to the employee option
plan referred to below), at an exercise price equal to the price paid or value
received in the additional issuance. FLI does not anticipate making any such
issuances.
The options issued to the key employee vest 25% per year beginning in
March 1997 (becoming fully invested in March 2000), and terminate in March 2005.
The options become fully vested and immediately exercisable in the event of a
change in control of FLI. The key employee has certain rights, commencing after
March 5, 2000, to require FLI to register his option shares under the Securities
Act of 1933. In the event FLI does not become a public company by March 5, 2001,
the key employee may require that FLI thereafter buy, for cash, FLI shares
subject to his options at a price equal to ten times FLI's net earnings (as
defined in the agreement) per share for the fiscal year ended immediately prior
to the giving of notice of his exercise of this right. FLI is required to
purchase 25% of such employee's shares in each year following such employee's
exercise of this right.
FLI has also established another option plan providing for the granting
of options, at the discretion of FLI's board of directors, for up to 500,000
shares of common stock to other employees of FLI. As of September 30, 1997,
options for 393,000 shares had been issued to certain employees.
Transactions for both FLI stock option plans are as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------
1997 1996
-------------------------- -------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C>
Outstanding - beginning of year 1,000,000 $.22 - $ -
Granted 393,000 $.22 1,000,000 $.22
Exercised - $ - - $ -
Cancelled - $ - - $ -
--------- ---------
Outstanding - end of year 1,393,000 $ - 1,000,000 $.22
========= =========
Exercisable, at end of year 250,000 $.22 - $ -
========= =========
Available for grant 107,000 500,000
========= =========
Weighted average fair
value per share of options
granted during the year $ .11 $ .10
========= =========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Range of Contractual Average Average
Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price
- --------------- ------ ------------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$.22 - $.22 1,393,000 8.79 $.22 250,000 $.22
========= =======
</TABLE>
Fidelity Mortgage Funding, Inc. ("FMF"), another wholly-owned
subsidiary of the Company (and in which the Company owns 17 million shares of
common stock), has established an option plan pursuant to which 3 million shares
of FMF's common stock (representing 15% of FMF's common stock on a fully-diluted
basis) have been reserved for options which may be issued to key employees.
Under the program, a director and officer of the Company who is also the
Chairman of FMF has received options to purchase 2 million shares (representing
10% of FMF's common stock on a fully-diluted basis) at an aggregate price of
$235,294 ($.118 per share) and, should FMF declare a dividend, will receive
payments on the options in an amount equal to the dividends that would have been
paid on the shares subject to the options had they been issued. The options
generally will have the same terms as those relating to the FLI options, except
that (i) the option term and vesting period commenced in April 1997 and (ii) the
period during which the officer/director may sell FMF shares to FMF will
commence in April 2002. The options become fully vested and immediately
exercisable in the event of a change in control or potential change in control
of FMF or the Company. In addition, as part of the program, at September 30,
1997, FMF had granted options to (i) its President and Chief Operating Officer
to purchase 800,000 shares at an aggregate price of $100,000 ($.125 per share)
(representing 4% of FMF's common stock on a fully-diluted basis), and (ii) to
certain other of its employees to purchase 145,000 shares at an aggregate price
of $18,125 ($.125 per share), leaving 55,000 shares reserved for issuance of
options under the plan at September 30, 1997.
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<PAGE>
Transactions for the FMF stock option plan are as follows:
<TABLE>
<CAPTION>
Year Ended September 30, 1997
-----------------------------
Weighted
Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Outstanding - beginning of year - -
Granted 2,945,000 $.120
Exercised - -
Cancelled - -
----------
Outstanding - end of year 2,945,000 $.120
Exercisable, at end of year - -
==========
Available for grant 55,000
==========
Weighted average fair
value per share of options
granted during the year $ .06
==========
</TABLE>
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Range of Contractual Average Average
Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price
- --------------- ------ ------------ -------------- ------ --------------
<S> <C> <C> <C>
$.118 - $.125 2,945,000 9.63 $.120 - -
</TABLE>
As discussed in Note 2, the Company accounts for its stock-based awards
using the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
interpretations. Accordingly, no compensation expense has been recognized in the
financial statements for these employee stock arrangements.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income and earnings per share as if the Company had
adopted the fair value method for stock options granted after June 30, 1996. No
such options were granted in fiscal 1996. Under SFAS No. 123, the fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the Black-Scholes option pricing model
with the following weighted average assumptions: expected life, 5 or 10 years
following vesting; stock volatility, 96%, 87% and 144% in 1997, 1996 and 1995
respectively; risk free interest rate, 6.6%, 6.0% and 6.0% in 1997, 1996 and
1995 respectively; and no dividends during the expected term. The
-76-
<PAGE>
Company's calculations are based on a multiple option valuation approach and
forfeitures are recognized as they occur. If the computed fair values of the
awards had been amortized to expense over the vesting period of the awards, pro
forma net income would have been $10.5 million ($2.40 per share) in fiscal 1997.
In addition to the various stock option plans, in May 1997 the
stockholders approved the Resource America, Inc. Non-Employee Director Deferred
Stock and Defined Compensation Plan (the "Director Plan") for which 25,000
shares were reserved for issuance. Each director vests in shares granted under
the Director Plan on the fifth anniversary of the date of grant. If a director
terminates service prior to such fifth anniversary, all of the shares granted
are forfeited. In May 1997, 1,000 shares were granted under the Director Plan to
each of the Company's four non-employee directors. The fair value of the grants
($22.50 per share, $90,000 in total) is being charged to operations over the
five year vesting period.
NOTE 10-COMMITMENTS
The Company leases office space under leases with varying expiration
dates through 2002 (see Note 3). Rental expense was $238,600, $188,900 and
$60,500 for the years ended September 30, 1997, 1996 and 1995, respectively. At
September 30, 1997, future minimum rental commitments for the next five fiscal
years were as follows:
1998...................... $445,300
1999...................... 437,000
2000...................... 437,000
2001...................... 415,100
2002...................... 399,800
As of September 30, 1997, the Company had outstanding commitments to
fund the purchase of equipment which it intends to lease, with an aggregate cost
of $11.4 million. The Company believes, based on its past experience, that
approximately $4.0 million will be funded.
As of September 30, 1997, subsidiaries of the Company had two warehouse
lines of credit which allow them to borrow up to $25 million. As of September
30, 1997, no funds were outstanding with respect to these lines of credit.
The Company has an employment agreement with its Chairman pursuant to
which the Company has agreed to provide him with a supplemental employment
retirement plan ("SERP") and with certain financial benefits upon termination of
his employment. Under the SERP, he will be paid an annual benefit of 75% of his
Average Income after he has reached Retirement Age (each as defined in the
employment agreement). Upon termination, he is entitled to receive lump sum
payments in various amounts of between 25% and five times Average Compensation
(depending upon the reason for termination) and, for termination due to
disability, a monthly benefit equal to the SERP benefit (which will terminate
upon
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<PAGE>
commencement of payments under the SERP). During fiscal 1997, the Company
accrued $240,000 with respect to these commitments.
NOTE 11-ACQUISITIONS
In June 1997, the Company acquired equity interests in 288 wells
(representing 78 wells net to the Company's interest) and operating rights to an
additional 62 wells, together with 220 miles of natural gas pipelines and 21,830
gross acres (9,340 net acres) of mineral rights, for $1.25 million in cash,
$925,000 by a note and 17,000 shares of the Company's Common Stock. The
acquisition was accounted for as a purchase and, accordingly, the assets and
liabilities acquired have been recorded at their estimated fair market values at
the date of acquisition. The purchase price resulted in an excess of costs over
net assets acquired (goodwill) of approximately $400,000, which is being
amortized on a straight line basis over 15 years.
In April 1997, the Company acquired all the outstanding shares of Bryn
Mawr Resources, Inc. ("BMR") for 579,623 shares of common stock. BMR's only
asset was 579,623 shares of the Company's Common Stock held by subsidiaries of
BMR (excluding 3,807 shares of the Company's Common Stock attributable to
minority interests held by third parties in BMR's subsidiaries).
These acquisitions were immaterial to the results of operations of the
Company, and therefore pro forma information is excluded.
-78-
<PAGE>
NOTE 12-INDUSTRY SEGMENT INFORMATION AND MAJOR CUSTOMERS
The Company operates in three principal industry segments - real
estate, leasing and energy. Segment data for the years ended September 30, 1997,
1996 and 1995 are as follows:
Year Ended September 30,
--------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
Revenue:
Real estate $ 19,144 $ 7,171 $ 6,114
Leasing 7,162 4,466 -
Energy 5,608 5,157 5,332
Corporate 930 197 148
-------- ------- -------
$ 32,844 $16,991 $11,594
======== ======= =======
Depreciation, Depletion and
Amortization:
Real estate $ 36 $ 38 $ 37
Leasing 398 204 -
Energy 1,202 1,061 1,254
Corporate (22) 65 44
-------- ------- -------
$ 1,614 $ 1,368 $ 1,335
======== ======= =======
Operating Profit (Loss):
Real estate $ 16,546 $ 6,281 $ 5,276
Leasing 2,457 1,916 -
Energy 1,699 1,646 1,317
Corporate (5,845) (2,497) (3,248)
--------- -------- --------
$ 14,857 $ 7,346 $ 3,345
======== ======= =======
Identifiable Assets:
Real estate $ 92,287 $22,087 $18,225
Leasing 10,647 3,019 991
Energy 15,016 12,675 13,790
Corporate 77,169 6,178 4,544
-------- ------- -------
$195,119 $43,959 $37,550
======== ======= =======
Capital Expenditures:
Real Estate $ 59 $ 17 $ 172
Leasing 585 531 -
Energy 1,513 501 637
Corporate 507 48 8
-------- -------- ---------
$ 2,664 $ 1,097 $ 817
======== ======= ========
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<PAGE>
Operating profit (loss) represents total revenue less costs
attributable thereto, including interest and provision for possible losses, and
less depreciation, depletion and amortization, excluding general corporate
expenses.
The Company's natural gas is sold under contract to various purchasers.
For the years ended September 30, 1997 and 1996, gas sales to two purchasers
accounted for 29% and 12% and 29% and 13% of the Company's total production
revenues, respectively. Gas sales to one purchaser individually accounted for
15% of total revenues for the year ended September 30, 1995.
In commercial mortgage loan acquisition and resolution, interest and
fees earned from a single borrower in the fiscal year ended September 30, 1997
approximated 20%, while for the fiscal year ended September 30, 1996 interest
and fees from a (different) single borrower approximated 24% of total revenues.
No single borrower generated revenues in excess of 10% in fiscal 1995.
NOTE 13-SUPPLEMENTAL OIL AND GAS INFORMATION
Results of operations for oil and gas producing activities:
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Revenues................................. $3,936 $3,421 $3,452
Production costs......................... (1,636) (1,421) (1,502)
Exploration expenses..................... (187) (161) (230)
Depreciation, depletion, and
amortization.......................... (712) (781) (922)
Income taxes............................. (197) (96) -
------- ------- ------
Results of operations for
producing activities.................. $1,204 $ 962 $ 798
====== ====== ======
</TABLE>
-80-
<PAGE>
Capitalized Costs Related to Oil and Gas Producing Activities
The components of capitalized costs related to the Company's oil and
gas producing activities (less impairment reserve of $28,000 in fiscal 1997,
$22,000 in fiscal 1996 and $30,000 in fiscal 1995), are as follows:
<TABLE>
<CAPTION>
September 30,
------------------------------------------
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Proved properties........................ $23,254 $22,549 $22,416
Unproved properties...................... 846 482 650
Pipelines, equipment and other
interests............................. 2,445 2,540 2,488
------- ------- -------
Total.................................... 26,545 25,571 25,554
Accumulated depreciation, depletion
and amortization....................... (15,145) (14,306) (13,590)
------- ------- -------
Net capitalized costs................ $11,400 $11,265 $11,964
======= ======= =======
</TABLE>
Costs Incurred in Oil and Gas Producing Activities
The costs incurred by the Company in its oil and gas activities during
fiscal years 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Property acquisition costs:
Unproved properties....................... $321 $ 2 $ 5
Proved properties......................... 782 157 388
Exploration costs........................... 238 317 317
Development costs........................... 144 176 211
</TABLE>
Oil and Gas Reserve Information (unaudited)
The Company's estimates of net proved developed oil and gas reserves
and the present value thereof have been verified by E.E. Templeton & Associates,
Inc., an independent petroleum engineering firm. The Company does not estimate
the value of its proven undeveloped reserves.
The Company's oil and gas reserves are located within the United
States. There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting
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<PAGE>
future net revenues and the timing of development expenditures. The reserve data
presented represent estimates only and should not be construed as being exact.
In addition, the standardized measures of discounted future net cash flows may
not represent the fair market value of the Company's oil and gas reserves or the
present value of future cash flows of equivalent reserves, due to anticipated
future changes in oil and gas prices and in production and development costs and
other factors for which effects have not been provided.
The standardized measure of discounted future net cash flows is
information provided for the financial statement user as a common base for
comparing oil and gas reserves of enterprises in the industry.
<TABLE>
<CAPTION>
Gas Oil
(mcf) (bbls)
----- ------
<S> <C> <C>
Balance at September 30, 1994........................ 12,112,116 296,859
Purchases of reserves in-place....................... 893,104 23,284
Current additions.................................... 430,330 3,641
Sales of reserves in-place........................... (79,294) (628)
Revisions to previous estimates...................... 624,471 14,423
Production........................................... (1,198,245) (36,420)
---------- -------
Balance at September 30, 1995........................ 12,782,482 301,159
Purchase of reserves in-place........................ 293,602 8,880
Current additions.................................... 237,070 726
Sales of reserves in-place........................... (18,645) (1,885)
Revision to previous estimates....................... 723,242 35,002
Production........................................... (1,165,477) (33,862)
---------- -------
Balance at September 30, 1996........................ 12,852,274 310,020
Purchase of reserves in-place........................ 1,903,853 45,150
Current additions.................................... 15,984 0
Sales of reserves in-place........................... (1,393) 0
Revision to previous estimates....................... 1,614,704 38,654
Production........................................... (1,227,887) (35,811)
---------- -------
Balance at September 30, 1997........................ 15,157,535 358,013
========== =======
</TABLE>
-82-
<PAGE>
Presented below is the standardized measure of discounted future net
cash flows and changes therein relating to proved developed oil and gas
reserves. The estimated future production is priced at year-end prices. The
resulting estimated future cash inflows are reduced by estimated future costs to
develop and produce the proved developed reserves based on year-end cost levels.
The future net cash flows are reduced to present value amounts by applying a 10%
discount factor.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Future cash inflows............................ $42,634 $ 34,516 $ 30,257
Future production and
development costs........................... (21,585) (16,764) (15,200)
Future income tax expense...................... (2,740) (2,732) (1,260)
------- -------- --------
Future net cash flows.......................... 18,309 15,020 13,797
Less 10% annual discount for
estimated timing of cash flows............... (8,186) (6,671) (5,987)
------- -------- --------
Standardized measure of discounted
future net cash flows........................ $10,123 $ 8,349 $ 7,810
======= ======== ========
</TABLE>
-83-
<PAGE>
The following table summarizes the changes in the standardized measure
of discounted future net cash flows from estimated production of proved
developed oil and gas reserves after income taxes.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year...................... $ 8,349 $7,810 $7,961
Increase (decrease) in discounted
future net cash flows:
Sales and transfers of oil and gas
net of related costs.......................... (2,411) (1,928) (1,870)
Net changes in prices and production
costs......................................... 512 1,392 (187)
Revisions of previous quantity
estimates..................................... 2,483 697 418
Extensions, discoveries, and improved
recovery less related costs................... 10 145 253
Purchases of reserves in-place.................. 1,474 242 612
Sales of reserves in-place, net of
tax effect.................................... (1) (26) (46)
Accretion of discount........................... 997 851 842
Net change in future income taxes............... (14) (924) (240)
Other........................................... (1,276) 90 67
--------- ------- -------
Balance, end of year............................ $10,123 $8,349 $7,810
======= ====== ======
</TABLE>
NOTE 14 - FORMATION OF RESOURCE ASSET INVESTMENT TRUST
The Company is the sponsor of Resource Asset Investment Trust (the
"REIT"), a recently formed real estate investment trust. The REIT has been
formed to acquire and provide mortgage financing in situations that generally do
not conform to the debt underwriting standards of institutional lenders or
sources that provide financing through securitization.
The REIT has filed a Registration Statement with the Securities and
Exchange Commission with respect to the public offer and sale of its common
shares of beneficial interest ("Common Shares"). The Company plans to acquire
815,000 Common Shares upon the completion of the offering at a cost anticipated
to be $13.95 per share (representing the anticipated initial public offering
price net of underwriting discounts or commissions). After acquisition of such
shares, the Company would own approximately 9.8% of the REIT's outstanding
Common Shares (8.6% assuming exercise by the underwriters of their
over-allotment option).
-84-
<PAGE>
The chairman of the REIT is the spouse of the chairman of the Company;
their son, who is not otherwise an officer or director of the Company, is the
Company's representative on the REIT's board of trustees. The Company has
undertaken to sell certain of its loans, or interests therein, to the REIT, and
will be reimbursed for certain of its costs in connection with its sponsorship
of the REIT, upon completion of the public offering.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-85-
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS OF THE REGISTRANT
The information required by this item is set forth under the caption
"Directors and Executive Officers" of the Company's definitive proxy statement,
with respect to its 1998 annual meeting of shareholders, to be filed on or
before January 28, 1998 (the "Proxy Statement"), and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption
"Compensation of Executive Officers and Directors" in the Proxy Statement, and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the captions
"Security Ownership of Certain Beneficial Owners and Management" and "Certain
Relationships and Related Party Transactions" in the Proxy Statement, and are
incorporated herein by reference.
-86-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. Financial Statements
Report of Independent Certified
Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in
Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
a. Inapplicable
b. Schedule IV - Mortgage Loans on Real Estate
All other schedules are not applicable or are omitted
since either (i) the required information is not
material or (ii) the information required is included
in the consolidated financial statements and the
Notes thereto.
3. Exhibit No. Description
2. Agreement and Plan of Merger among
Tri-Star Financial Services, Inc.,
Frank Pellegrini, Resource Tri-Star
Acquisition Corp. and the Registrant
3.1 Restated Certificate of
Incorporation of the Registrant.(1)
3.2 Bylaws of the Registrant, as
amended.(1)
4.1 Indenture with respect to 12% Senior
Notes due 2004 (including form of
note).(2)
10.1 1984 Key Employee Stock Option Plan,
as amended.(3)
10.2 1989 Key Employee Stock Option Plan,
as amended.(3)
10.3 Employee Stock Ownership Plan.(4)
10.4 1997 Key Employee Stock Option
Plan.(5)
10.5 1997 Stock Option Plan for
Directors.(5)
10.6 1997 Non-Employee Director Deferred
Stock and Defined Compensation
Plan.(5)
10.7 Employment Agreement between Edward
E. Cohen and Registrant(6)
-87-
<PAGE>
10.8 Contribution Agreement between
Resource Leasing, Inc. and Abraham
Bernstein.(1)
10.9 Employment Agreement between
Fidelity Leasing, Inc. and Abraham
Bernstein.(1)
10.10 Employment Agreement between
Fidelity Mortgage Funding, Inc. and
Daniel G. Cohen.(6)
10.11 Loan and Security Agreement between
CoreStates Bank, N.A. and First
Union National Bank, and
Registrant.(7)
10.12 Warehousing Agreement between
Fidelity Mortgage Funding, Inc. and
CoreStates Bank, N.A.
10.13 Master Loan and Security Agreement
between Fidelity Mortgage Funding,
Inc. and Morgan Stanley Mortgage
Capital Inc.
10.14 Loan Agreement between Registrant
and KeyBank, N.A.
11.1 Calculation of Primary and Fully
Diluted Earnings per Share.
21.1 List of Subsidiaries.
23.1 Consent of E. E. Templeton &
Associates, Inc.
27 Financial Data Schedule.
- ----------
(1) Filed previously as an Exhibit to the Company's Registration Statement
on Form S-1 (Registration No. 333-13905) and by this reference
incorporated herein.
(2) Filed previously as an Exhibit to the Company's Registration Statement
on Form S-4 (Registration No. 333-40231) and by this reference
incorporated herein.
(3) Filed previously as an Exhibit to the Company's Registration Statement
on Form S-8 May 2, 1996 and by this reference incorporated herein.
(4) Filed previously as an Exhibit to the Company's Annual Report on Form
10-K for the year ended September 30, 1989 and by this reference
incorporated herein.
(5) Filed previously as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997.
(6) Filed previously as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997.
-88-
<PAGE>
(7) Filed previously as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1996.
-89-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
RESOURCE AMERICA, INC. (Registrant)
December 17, 1997 By: /s/ Edward E. Cohen
-----------------------
Chairman of the Board, Chief
Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of December 17, 1997.
/s/ Edward E. Cohen Chairman of the Board, Chief Executive
- ------------------------------ Officer and President
EDWARD E. COHEN
/s/ Scott F. Schaeffer Executive Vice President and Director
- ------------------------------
SCOTT F. SCHAEFFER
/s/ Daniel G. Cohen Executive Vice President and Director
- ------------------------------
DANIEL G. COHEN
/s/ Michael L. Staines Senior Vice President, Secretary and
- ------------------------------ Director
MICHAEL L. STAINES
/s/ Carlos C. Campbell Director
- ------------------------------
CARLOS C. CAMPBELL
/s/ Andrew M. Lubin Director
- ------------------------------
ANDREW M. LUBIN
/s/ Alan D. Schrieber Director
- ------------------------------
ALAN D. SCHRIEBER
/s/ John S. White Director
- ------------------------------
JOHN S. WHITE
/s/ Steven J. Kessler Senior Vice President and Chief Financial
- ------------------------------ Officer
STEVEN J. KESSLER
/s/ Nancy J. McGurk Vice President-Finance and Treasurer
- ------------------------------ (Chief Accounting Officer)
NANCY J. McGURK
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<PAGE>
SCHEDULE IV
RESOURCE AMERICA, INC. & SUBSIDIARIES
MORTGAGE LOANS ON REAL ESTATE
September 30, 1997
<TABLE>
<CAPTION>
Final Periodic Face
Maturity Payment Prior Amount of
Description Interest Rate Date Terms Liens Mortgages
- ----------- ------------- --------- -------- ----- ---------
<S> <C> <C> <C> <C> <C>
First Mortgages
Hotel/Commercial Office, GA Fixed rate of 14% 12/31/15 (a) $ - $ 5,800,000
Hotel, NE Fixed rate of 14.5% 09/30/02 (a) - 6,005,000
Apartment Building, FL Fixed rate of 13% 07/01/00 (a) - 4,100,000
Office Building, NC Fixed rate of 11.5% 12/31/11 (a) - 3,500,000
Apartment Building, NJ Fixed rate of 11.25% 09/01/05 (a) - 11,615,000
Apartment Building, CT Fixed rate of 10.85% 09/01/05 (a) - 7,520,000
Apartment Building, PA Fixed rate of 14% 10/01/02 (a) - 400,000
Office/Retail Building, PA Fixed rate of 14% 12/31/02 (a) - 8,580,000
4 loans, amounts ranging Two loans with fixed rates
of from $100,000 to $7,580,000 16%; remaining loan rates from
9.7% to 10.6%
Junior Lien Loans
Rental Apartments, 14 loans, Five loans with fixed rates atFrom 06/01/88 - 19,321,800 32,638,000
original loan amounts ranging 12%, all remaining loans have to 10/01/07
from $618,000 to $7,193,000 varying rates from 7.3% to 16%
in PA, NJ and NC One loan with interest at 85% of
the 30-day rate on $100,000
CDs as published by the Wall
Street Journal plus 2.75%
Condominium Units, NC Fixed rate of 8.0% 03/31/02 (a) $ 2,361,000 3,550,000
Office buildings, 8 loans, original Fixed rate from 9% to 12% From 07/31/98 (a) 7,803,300 19,836,000
amounts ranging from $900,000 prime plus 3.5% and prime to 09/30/03
to $20,000,000 in PA, VA, plus 5%
NJ and Washington, D.C. 09/30/99 (a)
Office Building, PA Fixed rate of 8% 01/01/02 (a) 8,000,000 40,644,000
Office Building, Washington, D.C.,
2 loans Fixed rate of 12% 11/30/98 (a) 6,744,200 13,283,000
</TABLE>
RESTUBBED FROM TABLE ABOVE
<TABLE>
<CAPTION>
Principal
Final Periodic Carrying Subject to
Maturity Payment Amount of Delinquent
Description Interest Rate Date Terms Mortgages Interest
- ----------- ------------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
First Mortgages
Hotel/Commercial Office, GA Fixed rate of 14% 12/31/15 (a) $ 6,102,725 -
Hotel, NE Fixed rate of 14.5% 09/30/02 (a) 3,816,425 $ -
Apartment Building, FL Fixed rate of 13% 07/01/00 (a) 2,826,741 -
Office Building, NC Fixed rate of 11.5% 12/31/11 (a) 3,074,544 -
Apartment Building, NJ Fixed rate of 11.25% 09/01/05 (a) 7,451,074 -
Apartment Building, CT Fixed rate of 10.85% 09/01/05 (a) 4,704,270 -
Apartment Building, PA Fixed rate of 14% 10/01/02 (a) 400,000 -
Office/Retail Building, PA Fixed rate of 14% 12/31/02 (a) 8,580,000 -
4 loans, amounts ranging Two loans with fixed rates
of from $100,000 to $7,580,000 16%; remaining loan rates from
9.7% to 10.6%
Junior Lien Loans
Rental Apartments, 14 loans, Five loans with fixed rates atFrom 06/01/88 - 12,098,621 80,860
original loan amounts ranging 12%, all remaining loans have to 10/01/07
from $618,000 to $7,193,000 varying rates from 7.3% to 16%
in PA, NJ and NC One loan with interest at 85% of
the 30-day rate on $100,000
CDs as published by the Wall
Street Journal plus 2.75%
Condominium Units, NC Fixed rate of 8.0% 03/31/02 (a) 3,572,780 -
Office buildings, 8 loans, original Fixed rate from 9% to 12% From 07/31/98 (a) 8,377,760 114,932
amounts ranging from $900,000 prime plus 3.5% and prime to 09/30/03
to $20,000,000 in PA, VA, plus 5%
NJ and Washington, D.C. 09/30/99 (a)
Office Building, PA Fixed rate of 8% 01/01/02 (a) 16,615,724 -
Office Building, Washington, D.C.,
2 loans Fixed rate of 12% 11/30/98 (a) 5,297,790 -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Final Periodic Face
Maturity Payment Prior Amount of
Description Interest Rate Date Terms Liens Mortgages
- ----------- ------------- --------- -------- ----- ---------
<S> <C> <C> <C> <C> <C>
Industrial Building, Pasadena, CA 2.75% over the average cost of 05/01/01 (a) $ 2,000,000 $ 3,000,000
funds to FSLIC-insured savings
and loan institutions
Retail Buildings, 6 loans, Fixed rates from 8.5% to 13.6% From 11/01/98 - 9,309,800 19,945,000
original loan amounts ranging One loan with variable interest to 12/31/19
from $1,776,000 to $5,198,000 in 90% of prime plus 5%
CA, MN, PA, VA and WV ----------- ------------
$55,540,100 $180,416,000
=========== ============
</TABLE>
RESTUBBED FROM TABLE ABOVE
<TABLE>
<CAPTION>
Principal
Final Periodic Carrying Subject to
Maturity Payment Amount of Delinquent
Description Interest Rate Date Terms Mortgages Interest
- ----------- ------------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Industrial Building, Pasadena, CA 2.75% over the average cost of 05/01/01 (a) $ 328,767 $ -
funds to FSLIC-insured savings
and loan institutions
Retail Buildings, 6 loans, Fixed rates from 8.5% to 13.6% From 11/01/98 - 5,968,897 -
original loan amounts ranging One loan with variable interest to 12/31/19
from $1,776,000 to $5,198,000 in 90% of prime plus 5%
CA, MN, PA, VA and WV ----------- --------
$89,216,118 $195,792
=========== ========
</TABLE>
Reconciliation of the total carrying amount of real estate loans for
the year follows:
Balance at October 1, 1996 $21,797,768
Additions during the period:
New mortgage loans $71,720,511
Amortization of discount 4,123,670
Additions of existing loans 1,860,117 77,704,298
----------- -----------
$99,502,066
Deductions during the period:
Collections of principal 517,136
Cost of mortgages sold 9,768,812 10,285,948
----------- -----------
Balance at September 30, 1997 $89,216,118
===========
(a) All net cash flows from the property
(b) Cost for Federal income tax purposes equals $90,054,045
-2-
<PAGE>
WAREHOUSING--AGREEMENT
BETWEEN
FIDELITY MORTGAGE FUNDING, INC.
AND
CORESTATES BANK, N.A.
<PAGE>
TABLE OF CONTENTS
1. Definitions ............................................................1
2. The Loan ...............................................................9
2.01 Commitment .............................................................9
2.02 The Note ...............................................................9
2.03 Use of Proceeds .......................................................10
2.04 Special Non-Conforming Loans ..........................................10
2.05 Advance Rates .........................................................10
2.06 Payment of Interest and Principal .....................................11
2.07 Rate of Interest on Loan ..............................................11
2.08 Banker's Year .........................................................16
2.09 Direct Charge .........................................................16
2.10 Reserve Requirements; Change in Circumstances .........................16
2.11 Administration Fee: ...................................................18
3. Conditions of Lending .................................................18
3.01 Documentation Required Prior to First Advance Only ....................18
3.02 Documentation Required In Connection With All Advances ................19
3.03 Wet Advances ..........................................................20
3.04 Continuing Warranties .................................................20
3.05 Other Requested Documents .............................................20
4. Continuing Representations and Warranties .............................20
4.01 Borrower's Organization ...............................................21
4.02 Financial Statements ..................................................21
4.03 Authority .............................................................22
4.04 Title to Collateral ...................................................22
4.05 Warranties as to Each Consumer Loan ...................................22
4.06 [INTENTIONALLY OMITTED] ...............................................23
4.07 Borrower's Locations ..................................................23
4.08 No Default ............................................................23
4.09 Outstanding Judicial Proceedings ......................................23
4.10 Accuracy of Submitted Information; No Material Omissions ..............23
4.11 Loans Not Usurious ....................................................24
4.12 Subsidiaries ..........................................................24
5. Collateral ............................................................24
5.01 Security Interest .....................................................24
5.02 Separate Assignments ..................................................25
5.03 Deposit and Other Accounts ............................................25
5.04 Servicing Rights ......................................................26
5.05 Financing Statements ..................................................26
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5.06 Limited Power of Attorney .............................................26
5.07 Delivery in Trust .....................................................26
6. Affirmative Covenants .................................................27
6.01 Note Payments .........................................................27
6.02 Circumstances Requiring Immediate Repayment of Separate Bank Advance ..27
6.03 Casualty Insurance ....................................................27
6.04 Other Insurance .......................................................27
6.05 Enforcement of Consumer Paper .........................................28
6.06 Costs of Collection ...................................................28
6.07 Notation of Assignments ...............................................28
6.08 Execution of Additional Documents .....................................28
6.09 Submission of Financial Statements ....................................28
6.10 Maintenance of Books and Records; Audits ..............................29
6.11 Compliance with Administrative Requests of Lender .....................30
6.12 Submission of Pipeline Report .........................................30
6.13 Notification of Default ...............................................30
6.14 Notification of Borrower's Default.....................................30
6.15 Maintenance of Take-Out Commitments ...................................30
6.16 Financial Covenants ...................................................30
6.17 Tax Returns ...........................................................31
6.18 Payment of Taxes ......................................................31
6.19 New Locations .........................................................31
6.20 Additional Reports ....................................................31
6.21 Accounts ..............................................................31
6.22 Compliance With Laws ..................................................31
6.23 Notice of Litigation ..................................................31
6.24 Payment of Obligations When Due .......................................32
6.25 Landlord's Waiver .....................................................32
6.26 ERISA .................................................................32
6.27 Credit Policy .........................................................32
6.28 Management ............................................................32
7. Negative Covenants ....................................................32
7.01 No Compromise of Collateral ...........................................32
7.02 Improper Use of Proceeds ..............................................33
7.03 [INTENTIONALLY OMITTED] ...............................................33
7.04 No Misleading Information .............................................33
7.05 No Change in Ownership ................................................33
7.06 No Change in Organization .............................................33
7.07 No Sale of Assets .....................................................33
7.08 No Liens ..............................................................33
7.09 No Guaranties .........................................................34
7.10 No Indebtedness .......................................................34
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8 Default ...............................................................34
8.01 Events of Default .....................................................34
8.02 Remedies Upon Default .................................................36
8.03 Remedies Cumulative ...................................................37
8.04 Indemnity .............................................................37
9. Sale of Consumer Paper ................................................38
9.01 Delivery of Consumer Paper by Lender ..................................38
9.02 Reassignment of Consumer Paper by Lender ..............................39
10. Collections ...........................................................39
11. Miscellaneous .........................................................39
11.01 Notices .............................................................39
11.02 Successors and Assigns ..............................................39
11.03 Assignment by Lender; Participations ................................40
11.04 Delay - No Waiver ...................................................40
11.05 (a) Entire Agreement - Supplemental Policies and Procedures .......40
(b) Partial Invalidity ............................................41
(c) Counterparts ..................................................41
(d) No Assignment by Borrower .....................................41
(e) Materiality; Reliance by Lender: ..............................41
(f) No Third Party Beneficiary ....................................41
(g) Confidentiality ...............................................41
11.06 Interpretation of Accounting Terms ..................................42
11.07 PENNSYLVANIA LAW; CONSENT TO JURISDICTION AND SERVICE ...............42
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WAREHOUSING AGREEMEMT
THIS AGREEMENT made and entered into as of this 23rd day of September,
1997, by and between CORESTATES BANK, N.A., a national banking association
with offices at 1339 Chestnut Street, Philadelphia, Pennsylvania 19102
(hereinafter called "Lender"), and FIDELITY MORTGAGE FUNDING, INC., a
Delaware corporation with its principal place of business at 7 East
Skippack Pike, Ambler, Pennsylvania 19002 (hereinafter called "Borrower")
WITNESSETH
Lender and Borrower desire to enter into certain secured credit
arrangements on the terms hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual undertakings herein
and of each advance made by Lender to Borrower hereunder, the parties agree
as follows:
1. Definitions.
1.01 For all purposes of this Agreement, except as otherwise expressly
provided or unless the context otherwise requires, the terms defined in
this Paragraph shall have the meanings assigned to them in this Paragraph
and include the plural as well as the singular.
1.02 The terms which follow have the meanings herein ascribed to them:
Agreement means this Agreement as executed as of the date first above
written or, if amended or supplemented as herein provided, as so amended or
supplemented.
Applicable Percentage means (i) with respect to Non-Conforming Loans,
97% except to the extent provided in Section 2.05 hereof with respect to
Non-Conforming Loans for which Cash
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Collateral has been provided, and (ii) with respect to Special Non-
Conforming Loans, 95%.
Business Days mean days, other than a Saturday or Sunday, on which
Lender is open for business.
Cash-Collateral shall have the meaning given thereto in Section 2.05
hereof.
Closing Media means a title company and/or disbursing attorney or
other agent, in each case satisfactory to Lender.
Collateral means (a) Consumer Loans, Consumer Paper and Consumer Loan
Collateral and all other property rights, proceeds and payments relating to
Consumer Loans (whether or not Eligible Loans), (b) all other property of
Borrower hereinafter described in Paragraph 5, including Servicing Rights,
(c) all property from time to time deposited with, delivered or to be
delivered to or held by or for Lender pursuant to this Agreement, including
Cash Collateral, and (d) all proceeds of the foregoing; all of the
foregoing whether now existing or hereafter arising or acquired.
Committed Purchase Price means, with respect to a Consumer Loan, the
price at which the Investor under the applicable Take-Out Commitment has
agreed to purchase said Consumer Loan, provided that Lender shall receive
an amount at least equal to the Separate Bank Advance made against such
Consumer Loan.
Consumer Loans means loans against which any Separate Bank Advance
is made or secured pursuant to the terms of this Agreement.
Consumer Loan Collateral means personal or real property or
guaranties of third parties granted or otherwise obtained as security for
the obligations and liabilities of the obligor under a Consumer Loan.
Consumer Paper means any instrument, chattel paper, lease, installment
sales contract, promissory note, Mortgage, security agreement and any other
document or agreement evidencing and/or securing a Consumer Loan.
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Eligible Loans means Consumer Loans, each of which meets the following
requirements, unless and to the extent otherwise agreed to by Lender in
writing upon Borrower's request made in connection with a request for a
Separate Bank Advance:
(a) it is either a Non-Conforming Loan or, subject to Section 2.04
hereof, a Special Non-Conforming Loan;
(b) it is evidenced by Consumer Paper, which is valid and binding and
is executed by a bona fide third person which is a natural person with
capacity to contract and whose personal liability is not limited by the
terms thereof;
(c) the proceeds thereof are intended to be used by the obligor for
personal, family or household purposes;
(d) it is payable at either a variable or fixed rate of interest;
(e) it is, if a Special Non-Conforming Loan, subject to a Take-Out
Commitment;
(f) it is not contractually past due or otherwise in default;
(g) it was originated or acquired by Borrower not more than 30 days
prior to the date of Borrower's request for a Separate Bank Advance
therefor;
(h) the principal thereof and interest thereon is payable over a fixed
term acceptable to Lender, and is not an "interest only", "balloon" loan
having a repayment term unacceptable to Lender or "open-ended" loan (within
the meaning of Regulation Z, 12 CFR Part 226.1 et seq.);
(i) it is in compliance (to the extent each is applicable) with the
requirements of the Fair Credit Reporting Act, the Real Estate Settlement
Procedures Act of 1974, the Truth-In-Lending Act (and Regulation Z and
comparable applicable regulations of the Federal Home Loan Bank Board) and
the Equal Credit Opportunity Act (and Regulation B), each as currently and
from time to time hereafter amended, and any other law or regulation that
may from time to time be applicable to each Consumer Loan;
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(j) the Mortgage securing such Consumer Loan is insured by a prepaid
ALTA mortgagee's title insurance policy, on the most current form then in
use, or an equivalent satisfactory to Lender and the Investor from a title
insurance company satisfactory to Lender licensed to do business in the
jurisdiction in which the mortgaged premises are located insuring the
Borrower and its successors or assigns, as their respective interest may
appear, in an amount at least equivalent to the current principal balance
of the respective Consumer Loan, which title insurance policy shall insure
the Mortgage as a lien on fee simple title to the mortgaged premises having
the priority required by the definition of "Non-Conforming Loan" or
"Special Non-Conforming Loan", as applicable, with any such second mortgage
liens junior only to superior mortgages the indebtedness secured by which
is included in the determination of loan to value ratios required by the
definition of "Non-Conforming Loans" or "Special Non-Conforming Loan", as
applicable, and shall not be subject to any exceptions or objections other
than those which are permitted under the definition of "Mortgage", or are
otherwise satisfactory to Lender;
(k) the principal balance thereof, when added to the balance remaining
on any indebtedness secured by a superior lien, does not as of the date of
origination exceed the loan to value ratio required by the definition of
"Non-Conforming Loans" or "Special Non-Conforming Loans", as applicable;
(1) it is secured by a Mortgage and:
(i) the mortgaged premises are covered by fire and hazard
insurance in amounts and with insurers acceptable to Lender, with
mortgagee's endorsement satisfactory to Lender naming Borrower, its
successors or assigns, as mortgagee;
(ii) if the mortgaged premises are within an area identified by
the United States Secretary of Housing and Urban Development as an
area having special flood hazards, the mortgaged premises are covered
by flood insurance under the National Flood Insurance Act of 1968, as
currently amended (the "NFIA"), in the amount of the outstanding
principal balance of the Consumer Loan and any priority mortgage or
the maximum limit of coverage under the NFIA, whichever is more,
naming Borrower, its successors or assigns, as mortgagee;
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(m) the mortgaged premises are covered by an appraisal prepared by an
MAI or state certified appraiser and in such form as is acceptable to
Lender;
(n) it conforms to the representations and warranties set forth in
Section 4.05 hereof;
(o) it has not been repurchased or otherwise taken back by Borrower
from an Investor, previously pledged as collateral to another lender or
previously submitted as collateral to any other lender and rejected by such
lender; and
(p) it is otherwise satisfactory to Lender in its sole business
discretion.
Lender may in its discretion by written notice to Borrower adjust or
revise or add to the foregoing requirements for all Consumer Loans for
which a request for a Separate Bank Advance is thereafter made.
"FHLMC" shall mean the Federal Home Loan Mortgage Corporation or any
successor thereto.
"FNMA" shall mean the Federal National Mortgage Association, a
corporation in conformance with Title III of the National Housing Act, as
amended, or any successor thereto.
Investor means a bank, trust company, savings and loan association,
pension fund, governmental authority, insurance company, institutional
investor, investment brokerage firm, mortgage banker, or other entity,
determined by Lender, in its sole discretion, to be acceptable.
Leverage Ratio shall mean a fraction, the numerator of which is the
sum of outstanding Liabilities plus (without duplication) the unused
portion of any credit or lending commitment (including the Loan), minus
Subordinated Debt, and the denominator of which is Tangible Net Worth,
determined separately for Borrower (without consolidation or combination
with any other person or entity) in accordance with generally accepted
accounting principles consistently applied.
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<PAGE>
Liabilities means all liabilities and indebtedness that, in accordance
with generally accepted accounting principles consistently applied, should
be classified as liabilities on a balance sheet.
Loan means the credit facility established by Lender for the Borrower
as set forth in Section 2 hereof.
Maximum Loan Amount means $5,000,000.
Maximum Tranches means, as of any date, (i) four minus (ii) two if
principal on such date also bears interest under both the Prime Rate Option
and the Fed Funds Option, one if principal, on such date also bears
interest under either the Prime Rate Option or the Fed Funds Option, but
not both, and zero if principal on such date does not bear interest under
either the Prime Rate Option or the Fed Funds Option.
Mortgage means a mortgage or a deed of trust on residential real
estate, and securing a Consumer Loan and also creating a valid enforceable
lien on the fee simple title to real estate referred to therein (and all
buildings and improvements thereon) subject only to (i) where permitted by
the definition of "Non-Conforming Loans", a superior mortgage the
indebtedness secured by which is included in the determination of required
loan to value ratios, (ii) liens for taxes not yet due and payable or
similar governmental charges not yet due and payable or still subject to
payment without interest or penalty, (iii) zoning restrictions, utility
easements, covenants, or conditions and restrictions of record, which shall
neither defeat nor render invalid such lien or the priority thereof, nor
materially impair the marketability or value of such real estate, nor be
violated by the existing improvements or the intended use thereof.
Net Worth means the excess of assets over Liabilities as would be
shown on a balance sheet of Borrower, prepared in accordance with generally
accepted accounting principles consistently applied, determined separately
for Borrower without consolidation or combination with any other person or
entity.
Non-Conforming Loan means each Consumer Loan that is secured by a
first or second priority Mortgage on residential 1 to 4 family real estate
that is underwritten in accordance with
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<PAGE>
Borrower's present credit underwriting standards as set forth in
Schedule 1 hereto as such standards may hereafter be changed subject to
the prior written approval of Lender.
Operating Account means a demand deposit account of Borrower at Lender
for use by Borrower for its general business operations and for the payment
to Lender of interest, fees and other amounts payable from time to time
hereunder.
Restricted Account means a demand deposit account of Borrower at
Lender to which there may be deposited from time to time monies paid by
Investors in connection with a release of Collateral as contemplated by
Sections 2.06 and 9.01 hereof, which account shall be restricted in that
Borrower shall not be entitled to withdraw monies therefrom and Lender
shall be authorized to charge or otherwise make withdrawals from such
account for amounts due in connection with a release of Collateral or
otherwise.
Separate Bank Advance means each separate advance under the Loan.
Servicing Rights means all rights of the Borrower to service
(including subservice) any loan, whether or not a Consumer Loan, and to
receive any payment or compensation for the servicing of any such loan, and
all rights under or in connection with any agreement at any time entered
into by Borrower with respect to the servicing or subservicing of loans by
Borrower; and including all rights to receive from any mortgagor or other
obligor on whose behalf the Borrower has advanced funds, payment or
reimbursement of the amount so advanced.
Special Non-Conforming Loans means each Consumer Loan that is secured
by a multi-family dwelling in excess of four (4) dwelling units and/or is a
mixed-use dwelling used partially for non-residential purposes that is
underwritten in accordance with Borrower's present credit underwriting
standards as set forth in Schedule 2 hereto as such standards may hereafter
be changed subject to the prior written approval of Lender.
Special Non-Conforming Loans Sublimit means $1,000,000.
Subordinated Debt means unsecured indebtedness for borrowed money the
repayment of which is subordinated to all of
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Borrower's obligations and indebtedness to Lender pursuant to a
written subordination agreement in form and substance satisfactory to
Lender.
Subsidiary means a corporation of which 50% or more of the outstanding
voting stock (except for directors' qualifying shares, if and to the extent
required by law) is owned, at the time of determination, directly or
indirectly, by Borrower.
Take-Out Commitment means an existing written commitment to Borrower
from an Investor substantially in the form, or containing the type of
information which has been, previously agreed to by Lender as satisfactory,
under the terms of which such Investor agrees to purchase Consumer Paper or
specific Consumer Paper at a committed price, and which is in full force
and effect.
Tangible Net Worth means, at any time, (a) the sum of Net Worth plus
Subordinated Debt less (b) the sum of: (i) cost of treasury shares, (ii)
surplus from write-up of assets, (iii) franchises, licenses, permits,
patents, patent applications, experimental expense, organizational expense
in excess of $1,000,000 as of September 30, 1997 and other like
intangibles, including the excess paid for assets acquired over their
respective book values on the books of the entity from which acquired, (iv)
investments in, loans to and receivables from shareholders, directors,
employees, subsidiaries, affiliated entities and partners, (v) any amounts
of capitalized purchase servicing or capitalized excess servicing reflected
as an asset, and (vi) other intangible assets, including good will,
determined separately for Borrower in accordance with generally accepted
accounting principles consistently applied.
Termination Date means September 22, 1998 or such later date to which
the parties may, without obligation to do so, hereafter agree in writing.
Warehouse Account means a demand deposit account of Borrower at Lender
to which proceeds of a Separate Bank Advance may be deposited and from
which such proceeds may be disbursed, in accordance with instructions from
Borrower to Lender, directly to the Borrower or to the Closing Media in
connection with Borrower's origination or acquisition of an Eligible Loan,
subject, however, to such escrow arrangements as Lender shall reasonably
require, as more fully set forth in Section 2.01 hereof.
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<PAGE>
Wet Advance means a Separate Bank Advance with respect to which the
original Consumer Paper and copy of original Mortgage required to be
delivered by Borrower pursuant to Sections 3.02.02 and 3.02.03 hereof shall
instead be delivered pursuant to Section 3.03 hereof. From and after the
date on which the Consumer Paper and copy of Mortgage with respect to any
such Wet Advance are received by Lender, such Separate Bank Advance shall
cease to be a Wet Advance for all purposes hereof.
Wet Advance Sublimit means an amount equal to 20% of the Maximum Loan
Amount.
2. The Loan.
2.01 Commitment: Borrower may from time to time prior to the
Termination Date request Lender to make an advance and lend to Borrower an
amount (a "Separate Bank Advance"), in connection with any Eligible Loan
acceptable as Collateral to Lender, and, subject to the terms and
conditions of this Agreement, Lender shall make such Separate Bank Advance
to Borrower. The aggregate unpaid principal amount at any one time
outstanding of all the Separate Bank Advances shall not exceed the Maximum
Loan Amount. Separate Bank Advances will be made by crediting the Warehouse
Account with the proceeds thereof and disbursing the same either to the
Borrower or to the Closing Media in such manner and subject to such escrow
arrangements as Lender shall reasonably require.
2.02 The Note: The Loan, which shall be in the form of a revolving
credit, shall be evidenced by Borrower's promissory note (hereinafter
called the "Note"), issued to Lender, in form and content satisfactory to
Lender. All terms of the Note are incorporated herein. The Note shall be
dated the date of this Agreement, shall bear interest payable at the rate
and in the manner provided for in Sections 2.06 and 2.07 hereof, and shall
evidence all advances of the Loan.
2.02.01 Borrower agrees that the date and amount of each advance
of the Loan shall be as set forth in the books and records of Lender
relating to such matters which shall be presumed accurate but subject
to verification and correction by Borrower within 30 days of
Borrower's receipt of a statement.
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<PAGE>
2.03 Use of Proceeds: The proceeds of the Loan shall be used by
Borrower solely to finance its origination or acquisition of Eligible Loans
pending sale thereof to Investors. Use of Loan proceeds for any other
purpose, including but not limited to, the repurchase of loans purchased by
an Investor and subsequently returned to Borrower, shall constitute an
Event of Default for all purposes of this Agreement.
2.04 Special Non-Conforming Loans: Notwithstanding anything to the
contrary contained herein, Lender will have no obligation to make any
Separate Bank Advance with respect to a Special Non-Conforming Loan except
to the extent Lender, in its sole discretion, determines to do so on a case
by case basis upon Borrower's request therefor, provided that (i) such
Special Non-Conforming Loan otherwise constitutes an Eligible Loan
hereunder, (ii) it is subject to a Take-Out Commitment and (iii) the
aggregate principal amount at any time outstanding of all Separate Bank
Advances for Special Non-Conforming Loans does not exceed the Special
Non-Conforming Loans Sublimit.
2.05 Advance Rates: Each advance of the Loan shall not exceed the
Applicable Percentage of the lesser of i) the Committed Purchase Price, ii)
the aggregate principal balance of the Eligible Loans with respect to which
such Separate Bank Advance is made, iii) the purchase price paid by
Borrower for such Consumer Loan under its dealer contract or iv) the market
value of such Consumer Loan as determined by Lender in its sole business
judgment. Notwithstanding the definition of "Applicable Percentage" to the
contrary, the Applicable Percentage applicable to any Separate Bank Advance
made with respect to a Non-Conforming Loan may exceed 97% to up to 100%
provided that Borrower first provides Lender with cash collateral ("Cash
Collateral") as security for such Separate Bank Advance and all other
liabilities and obligations, in an amount equal to the amount by which such
Separate Bank Advance made at such higher Applicable Percentage exceeds the
amount that such Separate Bank Advance would have been if made at the 97%
Applicable Percentage. Such Cash Collateral will secure the entire Separate
Bank Advance and all other obligations and liabilities of Borrower to
Lender and will be released only when the entire Separate Bank Advance,
with interest, is repaid in full and no outstanding Event of Default has
theretofore occurred.
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<PAGE>
2.06 Payment of Interest and Principal: Borrower shall pay monthly
installments of interest on the first day of each month. The proceeds
payable to Borrower by an Investor from the sale of Consumer Loans upon
which a Separate Bank Advance has been made shall (and Borrower shall, and
authorizes Lender to, direct the Investor that such proceeds shall) be
forwarded via federal wire transfer by the Investor directly to the
Restricted Account, and the amount so received shall first be applied to
all amounts advanced by Lender with respect to such Consumer Loans and any
other amounts (including without limitation any amounts due upon any
declaration incident to an Event of Default) due and owing Lender
pursuant to this Agreement, and the balance, if any, of such proceeds shall
be remitted to Borrower by crediting its Operating Account with the amount
thereof; should Borrower ever receive such proceeds from the Investor, the
same will be held in trust for the Lender and immediately remitted to
Lender with all necessary endorsements (which Lender is authorized to make
on Borrower's behalf) for application as aforesaid. Should the aggregate
unpaid principal amount at any time outstanding of all Separate Bank
Advances exceed the Maximum Loan Amount, the Borrower will immediately
upon Lender's demand repay the principal thereof to the extent of such
excess. The entire principal balance of the Loan shall be due and payable
in full on the Termination Date.
2.07 Rate of Interest on Loan:
(a) Unless a LIBOR election is made pursuant to the terms of
subsection (b) hereof, the daily outstanding principal balance of the
Loan shall bear interest under one or both of the following options
(herein, the "Prime Rate Option" or the "Fed Funds Option"): a per
annum rate equal to, at Borrower's option, (i) Lender's Prime rate of
interest (herein, the "Prime-Based Rate) or (ii) the Fed Funds Rate
plus 2.50 percentage points (herein, the "Fed Funds Based Rate"). As
used herein, (i) "Prime" means that rate (which is not necessarily the
lowest rate of interest charged by Lender to any borrower or group or
class of borrowers) so designated and established by Lender, as such
rate may change from time to time and (ii) "Fed Funds Rate" means the
daily rate of interest announced from time to time by the Board of
Governors of the Federal Reserve System as the "Federal Funds Rate".
Interest at the Prime Rate Option or the Fed Funds Option shall
change from time to time effective as of the date in each change in
the Prime rate or the Fed Funds Rate, as applicable. Borrower shall,
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<PAGE>
on the first Business Day of each month with respect to principal of
the Loan then outstanding and for which Borrower desires the Prime
Rate Option or the Fed Funds Option to apply, and at the time of each
Separate Bank Advance with respect to the principal amount thereof
and for which Borrower desires the Prime Rate Option or the Fed
Funds Option to apply, specify to Lender in writing the interest
rate Option to be applicable to any portion of principal for the
balance of the then calendar month, it being understood that both
the Prime Rate Option and the Fed Funds Option can be applicable
simultaneously to different portions of principal outstanding under
the Loan. Should Borrower fail to specify a rate of interest as
aforesaid or in accordance with subsection (b) below, then the
Option theretofore in effect will be deemed to have been selected
unless such principal is a new Separate Bank Advance, in which case
the Prime Rate Option will be deemed to have been selected.
(b) (1) As used in this subsection (b), the following terms
shall have the following meanings:
(A) "LIBOR Rate" means for any day during each Rate Period
(a) the per annum rate of interest (computed on a basis of a year
of 360 days and actual days elapsed) determined by Lender as
being the composite rate available to Lender at approximately
11:00 a.m. London time in the London Interbank Market, as
referenced by Telerate (page 3750), in accordance with the usual
practice in such market, for the Rate Period elected by Borrower,
in effect two (2) London business days prior to the funding date
for a requested LIBOR Rate advance for deposits of dollars in
amounts equal (as nearly as may be estimated) to the amount of
the LIBOR Rate advance which shall then be loaned by Lender to
Borrower as of the time of such determination, as such rate (the
"Base Rate") may be adjusted by the reserve percentage applicable
during the Rate Period in effect (or if more than one such
percentage shall be applicable, the daily average of such
percentages for those days in such Rate Period during which any
such percentage shall be so applicable) under regulations issued
from time to time, by the Board of Governors of the Federal
Reserve System (or any successor) for determining the maximum
reserve requirement (including without limitation, any emergency,
supplemental or other marginal reserve requirement) for Lender
with respect to liabilities or assets consisting of or including
"Eurocurrency Liabilities" as such term is defined in Regulation
D of the Board of Governors of the Federal Reserve System, as in
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effect from time to time, having a term equal to such Rate
Period ("Eurocurrency Reserve Requirement"), plus (b) 1.50
percentage points. Such reserve adjustment shall be effectuated
by calculating, and the LIBOR Rate shall be equal to, (a) the
quotient of (i) the Base Rate divided by (ii) one minus the
Eurocurrency Reserve Requirement, plus (b) 1.50 percentage
points.
(B) "Notification" means telephonic notice (which shall be
irrevocable) by Borrower to Lender that Borrower has requested
that the LIBOR Rate shall apply to some portion of the principal
amount of the Loan in accordance with the provisions of Section
2.07 (b) (2) hereof, which notice shall be given no later than
10:00 a.m. Philadelphia time, on the day which is at least 3
Business Days prior to the Business Day on which such election is
to become effective, and which notice shall specify (i) the
principal amount of the Loan to be subject to such rate(s);
(ii) whether such amount is a new advance, a renewal of a
previous request of such rate, a conversion from one interest
rate to another, or a combination thereof; (iii) the Rate
Period(s) selected; and (iv) the date on which such request is to
become effective (which date shall be a date selected in
accordance with subsection (2) hereof).
(C) "Rate Period" means for any portion of principal for
which Borrower elects the LIBOR Rate the period of time for which
such rate shall apply to such principal portion. Rate Periods for
principal earning interest at the LIBOR Rate shall be for periods
of 1 week or 1, 2 or 3 months and for no other length of time,
Provided, that, no Rate Period may end after the Termination
Date.
(2) (A) By giving Notification, and so long as no Event of
Default is outstanding, Borrower may request to have all or a
portion of the outstanding principal of the Loan as hereinafter
permitted earn interest at the LIBOR Rate as follows: (i) with
respect to the principal amount of any Separate Advance under the
Loan, from the date of such advance until the end of the Rate
Period specified in the Notification; and/or (ii) with respect
to the principal amount of any portion of Loan outstanding and
earning interest at the LIBOR Rate at the time of the
Notification related to such principal amount, from the
expiration of the then current Rate Period related to such
principal amount until the end of the Rate Period specified in
the Notification; and/or (iii) with
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respect to all or any portion of the principal amount of Loan
outstanding and earning interest at the Prime-Based Rate or the
Fed Funds Based Rate at the time of Notification, from the date
set forth in the Notification until the end of the Rate Period
specified in the Notification.
(B) Borrower understands and agrees: (i) that subject to the
provisions of this Agreement, the Prime-Based Rate, the Fed Funds
Based Rate and the LIBOR Rate may apply simultaneously to
different parts of the outstanding principal of the Loan, (ii)
that the LIBOR Rate may apply simultaneously to various portions
of the outstanding principal for various Rate Periods, (iii) that
the LIBOR Rate applicable to any portion of outstanding principal
may be different from the LIBOR Rate applicable to any other
portion of outstanding principal, (iv) that the principal portion
of the Loan for which a LIBOR Rate election is being made shall
not be less than $1,000,000 per election and, if in excess
thereof, shall be in integral multiples of $1,000,000, (v) that
no more than the Maximum Tranches of principal of the Loan
bearing interest at the LIBOR Rate may be outstanding at any one
time, (vi) that the Borrower's right to elect the LIBOR Rate will
not be available at any time upon or after the occurrence of an
Event of Default, and (vii) that Lender shall have the right to
terminate any Rate Period, and the interest rate applicable
thereto, prior to maturity of such Rate Period, if Lender
determines in good faith (which determination shall be
conclusive) that continuance of such interest rate has been made
unlawful by any law, to which Lender may be subject, in which
event the principal to which such terminated Rate Period
relates thereafter shall earn interest at the Prime-Based Rate or
the Fed Funds Based Rate, at Borrower's election.
(3) After expiration of any Rate Period, any principal portion
corresponding to such Rate Period which has not been converted or
renewed in accordance with this Section shall earn interest
automatically at the LIBOR Rate as if Borrower had made an election
therefor in accordance herewith for the same Rate Period as the Rate
Period then expired (or if the Rate Period which would be deemed to
have been selected would extend beyond the Termination Date, then at
the Prime-Based Rate).
(4) Borrower shall indemnify Lender against any loss or expense
(including loss of margin) which Lender has
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sustained or incurred as a consequence of: (a) any payment of any
principal amount earning interest at the LIBOR Rate on a day other
than the last day of the corresponding Rate Period (whether or not
any such payment is made pursuant to acceleration upon or after an
Event of Default, demand by Lender otherwise made or prepayment
otherwise required under this Agreement, by reason of an
application of proceeds incident to an insured loss or condemnation
of property, or for any other reason, and whether or not any such
payment is consented to the Lender or any Lender, unless Lender
shall have expressly waived such indemnity in writing); (b) any
attempt by Borrower to revoke in whole or part any Notification
given pursuant to this Agreement; or (c) any attempt by Borrower to
convert or renew any principal amount earning interest at the LIBOR
Rate on a day other than the last day of the corresponding Rate
Period (whether or not such conversion or renewal is consented to
by Lender, unless Lender shall have expressly waived such indemnity
in writing).
(5) In the event that, as a result of any changes in applicable
law or the interpretation thereof, it becomes unlawful for Lender to
maintain Eurodollar liabilities sufficient to fund any LIBOR Rate
loan, then Lender's obligation to convert to or maintain a LIBOR Rate
shall be suspended until such time as Lender may again cause the LIBOR
Rate to be applicable to the Loan and such principal earning interest
at the LIBOR Rate shall accrue interest instead at the Prime-Based
Rate and/or the Fed Funds Based Rate, as elected by Borrower.
(6) In the event that the Borrower shall have requested the LIBOR
Rate in accordance herewith and Lender shall have reasonably
determined that Eurodollar deposits equal to the amount of the
principal to earn interest at the LIBOR Rate and for the Rate Period
specified are unavailable, impractical or unlawful with respect to
Lender, or that the rate based on the LIBOR Rate will not adequately
and fairly reflect the cost to Lender of the LIBOR Rate applicable to
the specified Rate Period, of making or maintaining the principal
amount of the Loan at the LIBOR Rate specified by the Borrower during
the Rate Period specified, or that by reason of circumstances
affecting Eurodollar markets, adequate and reasonable means do not
exist for ascertaining the rate based on the LIBOR Rate applicable to
the specified Rate Period, Lender shall promptly give notice of such
determination to the Borrower that the LIBOR Rate is not available. A
determination by Lender
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<PAGE>
hereunder shall be conclusive evidence of the correctness of the
fact and amount of such additional costs or unavailability. Upon
such a determination, (i) the right of Borrower to select, convert
to, or maintain a LIBOR Rate shall be suspended until Lender shall
have notified the Borrower that such conditions shall have ceased
to exist, and (ii) that portion of the Loan subject to the
requested LIBOR Rate shall accrue interest instead at the Prime-
Based Rate and/or the Fed Funds Based Rate, at Borrower's Option.
(c) To the extent permitted by law, upon and during the
continuance of an Event of Default, the rate of interest shall,
commencing three (3) days after Lender gives Borrower written
notice thereof, increase by three (3) percentage points in
excess of the otherwise applicable rate ("Default Rate").
(d) Interest shall continue to accrue on the unpaid
principal balance of the Loan at the applicable contract rate set
forth in this Agreement even if all sums due hereunder are
accelerated and reduced to judgment.
2.08 Banker's Year: All interest calculations shall be based on a 360
day year for the actual days elapsed.
2.09 Direct Charge: Borrower authorizes Lender to charge Borrower's
Operating Account with the amount of any interest, fees or other sums from
time to time due by Borrower to Lender.
2.10 Reserve Requirements: Change in Circumstances:
(a) Notwithstanding any other provision herein, if after the date
of this Agreement any change in applicable law or regulation or in the
interpretation or administration thereof by any governmental authority
charged with the interpretation or administration thereof (whether or
not having the force of law) shall impose, modify or deem applicable
any reserve, special deposit or similar requirement against assets of,
deposits with or for the account of or credit extended by Lender, or
shall impose on Lender any other condition affecting this Agreement,
Lender's commitment or the Loan extended by Lender, and the result of
any of the foregoing shall be to increase the cost to Lender of making
or maintaining such Loan or to reduce the amount of any sum received
or receivable by Lender hereunder (whether of principal, interest or
otherwise) by an amount deemed by Lender to be material, then
16
<PAGE>
the Borrower will, subject to subpart (c) below, pay to Lender upon
demand such additional amount or amounts as will compensate Lender
for such additional costs incurred or reduction suffered.
(b) If Lender shall have determined that after the date of this
Agreement the applicability of any law, rule, regulation or guideline
adopted pursuant to or arising out of the July 1988 report of the
Basle Committee on Banking Regulations and Supervisory Practices
entitled "International Convergence of Capital Measurement and Capital
Standards," or the adoption after the date hereof, of any other law,
rule, regulation or guideline regarding capital adequacy, or any
change in any of the foregoing or in the interpretation or
administration of any of the foregoing by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by Lender (or any lending office
of Lender) or Lender's holding company with any request or directive
regarding capital adequacy (whether or not having the force of law) of
any such authority, central bank or comparable agency, has or would
have the effect of reducing the rate of return on Lender's capital or
on the capital of Lender's holding company, if any, as a consequence
of this Agreement, Lender's commitment or any Loan advance by Lender
pursuant hereto to a level below that which Lender or Lender's holding
company could have achieved but for such adoption, change or
compliance (taking into consideration Lender's policies and the
policies of Lender's holding company with respect to capital adequacy)
by an amount deemed by Lender to be material, then from time to time
the Borrower shall, subject to subpart (c) below, pay to Lender such
additional amount or amounts as will compensate Lender or Lender's
holding company for any such reduction suffered.
(c) A certificate of Lender setting forth such amount or amounts
(including computation of such amount or amounts) as shall be
necessary to compensate Lender or its holding company as specified in
paragraph (a) or (b) above, as the case may be, shall be delivered to
the Borrower not less than 30 days prior to the date (the
"Implementation Date") such additional compensation will be
implemented, retroactively if necessary but in no event with respect
to increased costs or reduction in amounts received or receivable or
in return on capital incurred or suffered with respect to any period
more than 90 days prior to delivery of such certificate. Within 30
days of delivery to Borrower of such certificate, Borrower may by
written notice to Lender elect to
17
<PAGE>
terminate the Loan effective as of the Implementation Date, in
which event Borrower shall on the Implementation Date repay to Lender
all principal, interest and other reasonable fees and expenses owing
under this Agreement (including the additional compensation otherwise
due by reason of this Section 2.10 through the date of final
repayment) and release Lender from any further commitment or
obligation hereunder. If Borrower does not elect to terminate the Loan
as aforesaid, Borrower shall on the Implementation Date pay to Lender
the amount shown as due on any such certificate.
(d) Failure on the part of Lender to demand compensation for any
increased costs or reduction in amounts received or receivable or
reduction in return on capital with respect to any period shall not,
except as next noted, constitute a waiver of Lender's right to demand
compensation with respect to such period or any other period,
provided, that Lender shall not be entitled to compensation for any
increased costs or any such reduction with respect to any period more
than 90 days prior to delivery of a certificate as set forth in
subparagraph (c) above. The protection of this Section shall be
available to Lender regardless of any possible contention of the
invalidity or inapplicability of the law, rule, regulation, guideline
or other change or condition which shall have occurred or been
imposed. Each determination by Lender under this Section shall be in
good faith and shall be conclusive absent manifest error.
2.11 Administration Fee: Borrower will pay Lender an
administration fee of $32.00 per Consumer Loan upon and at the time at
which any Separate Bank Advance is made hereunder.
3. Conditions of Lending.
3.01 Documentation Required Prior to First Advance Only:
Delivery by Borrower of each of the following to Lender shall be
conditions precedent to the making of the first advance of the Loan:
3.01.01 The executed Note of Borrower;
3.01.02 A certified copy of a resolution of Borrower's Board
of Directors authorizing the borrowing herein provided for, the
execution and delivery of this Agreement and the
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Note, and the endorsing and assigning to Lender of the
Collateral as herein provided;
3.01.03 Certificates, as of the most recent dates
practicable, of the Secretary of State of Delaware, the Secretary
of State of each state in which Borrower is qualified as a
foreign corporation, and the department of revenue or taxation of
each of the foregoing states, or other evidence satisfactory to
Lender, as to the good standing of Borrower.
3.01.04 A written opinion of counsel to Borrower, dated the
date of this Agreement and addressed to Lender, in form and
substance satisfactory to Lender.
3.01.05 A certificate, dated the date of this Agreement,
signed by the president or vice president of Borrower to the
effect that:
(1) The representations and warranties set forth in
Section 4 of this Agreement are true, complete and correct
as of the date hereof;
(2) No Event of Default hereunder, and no event which,
with the giving of notice or the passage of time, or both,
could become such an Event of Default, has occurred as of
the date hereof; and
(3) All conditions set forth in this Section 3.01 have
been fulfilled.
3.02 Documentation Required In Connection With All Advances:
Borrower shall deliver to Lender a Schedule of Eligible Loans and a
Loan Cover Sheet, each in form provided by Lender for this purpose and
duly completed and executed by Borrower. Subject to Section 3.03
hereof, concurrently with the making of each Separate Bank Advance,
Borrower shall deliver to Lender the following, as applicable:
3.02.01 A copy of the applicable Take-Out Commitment if
otherwise required hereby, in form and content satisfactory to
Lender, agreeing to purchase that specific Eligible Loan(s);
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<PAGE>
3.02.02 The original Consumer Paper, duly endorsed in favor
of Borrower, its successors and assigns, without recourse;
3.02.03 Copy of the original Mortgage, together with an
original assignment thereof in recordable form and assigned in
blank, duly executed by the mortgagee;
3.02.04 An assignment by Borrower in blank in recordable
form of all Consumer Paper;
3.02.05 Such additional documents or instruments as may be
required by Lender and/or by the Investor.
3.03 Wet Advances: Notwithstanding Section 3.02 hereof to the
contrary, Lender will permit Wet Advances up to an aggregate
principal amount at any time outstanding equal to the Wet Advance
Sublimit. If on any date the aggregate principal amount outstanding of
Wet Advances exceeds the Wet Advance Sublimit, Borrower shall
immediately prepay the principal of Wet Advances in an amount equal to
such excess. In the event that for any reason (including by reason of
any fault of the Closing Media) the original Consumer Paper and copy
of Mortgage is not received by Lender within 5 Business Days following
the date on which such Wet Advance was made, Borrower shall within one
(1) day of the first to occur of Borrower's actual knowledge thereof
or Lender's written demand with respect thereto prepay the full
principal amount of such Wet Advance.
3.04 Continuing Warranties: At the time any Separate Bank Advance
is requested by Borrower, and as a precondition to the making of any
advance hereunder, no Event of Default shall have occurred and be
continuing, and no event shall have occurred which, with the lapse of
time or the giving of notice or both, shall constitute such Event of
Default; and Borrower shall have paid all fees and charges due and
payable by Borrower hereunder.
3.05 Other Requested Documents: Borrower shall deliver directly
to Lender any documents pertaining to the Eligible Loan which Lender
specifically requests.
4. Continuing Representations and Warranties.
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<PAGE>
In order to induce Lender to enter into this Agreement and to induce
Lender to make each Separate Bank Advance, Borrower warrants and represents
that as of the date hereof, at the time of the making of each Separate Bank
Advance hereunder, at the time each Consumer Paper is delivered to Lender,
and at the time of sale of each Consumer Loan to the Investor, that:
4.01 Borrower's Organization: Borrower is a corporation, duly
organized and existing and in good standing under the laws of
Delaware, and Borrower is qualified to do business in and in good
standing in every other jurisdiction where its business or operations
requires such qualification. All of Borrower's shareholders and their
respective shares of capital stock of each class, are listed on
Exhibit "A" hereto. The execution, delivery and performance of this
Agreement, the Note and other documents required of Borrower have been
duly authorized by all requisite action and will not violate the
Borrower's charter or by-laws or any applicable statutes or
regulations or any agreements or judgements to which Borrower is a
party or by which it or its property is bound. This Agreement and the
Note are valid and binding obligations of Borrower, enforceable in
accordance with their terms except as may be limited by bankruptcy,
insolvency, moratorium, reorganization and other similar laws or
equitable principles affecting the enforcement of creditors' rights
generally, and the consent or approval of governmental authorities or
of third parties is not required for the validity of Borrower's
obligations hereunder or thereunder or, if required, has been obtained
and remains in full force and effect.
4.02 Financial Statements: All financial statements and financial
information heretofore delivered to Lender are true and correct in
all material respects as of the date made. As of the date of this
Agreement and as of the date of any borrowing hereunder, there has not
been, nor does Borrower anticipate the occurrence of, nor is Borrower
aware of any circumstance which with the passage of time could
reasonably be expected to result in, any Event of Default or any
material change of an adverse nature sufficient to impair Borrower's
ability to repay every Separate Bank Advance or to continue to conduct
its business as it is being conducted on the date hereof. Borrower has
no material contingent liabilities or unusual forward or long-term
commitments which are not disclosed by or reserved against in said
financial statements
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<PAGE>
furnished to Lender or have not been disclosed to Lender in
writing. At the date of this Agreement and at the date of each
advance requested by Borrower hereunder, Borrower warrants and
reaffirms there are no material unrealized or anticipated losses
from any commitments of the Borrower except as previously disclosed
in writing to Lender.
4.03 Authority: All requisite action for the authorization,
execution and delivery by Borrower of this Agreement and the Note, and
for the assigning and endorsing by Borrower of the Collateral as
provided for hereunder, has been duly taken and has not been
rescinded.
4.04 Title to Collateral: Borrower is or will be the legal and
beneficial owner (subject only to potential claims of an Investor
arising solely out of a Take-Out Commitment) of the Collateral at the
time pledged, free and clear of all security interests liens and
encumbrances, and has the right to assign the same to Lender
as contemplated by this Agreement.
4.05 Warranties as to Each Consumer Loan: Each Consumer Loan upon
which any Separate Bank Advance is made is, unless otherwise agreed to
by Lender in connection with a particular Consumer Loan, an Eligible
Loan and will remain as such until the related Separate Bank Advance
is repaid in full; is in full force and effect; has not been modified
and is not past due or otherwise in default; is not subject to defense
or right of set-off on the part of the maker or makers of the Consumer
Paper; is secured by a valid Mortgage on fee simple residential real
estate, free from damage or casualty; represents a bona fide
transaction which has been carried out in accordance with all
applicable laws and regulations, including, but not limited to, the
making of all required disclosures correctly to all persons entitled
to receive them within the time specified under such laws or rules and
regulations, which shall include but not be limited to:
(a) Real Estate Settlement Procedures Act of 1974, as
amended - Regulation X;
(b) Fair Credit Reporting Act;
(c) Equal Credit Opportunity Act - Regulation B;
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<PAGE>
(d) Truth-In-Lending Act - Regulation Z;
and applicable regulations of the office of Thrift Supervision and
the Comptroller of the Currency; and for which the total
consideration to be advanced by a lender shall in fact have been
advanced less closing and other fees and costs which may
customarily be deducted from the loan proceeds.
4.06 [INTENTIONALLY OMITTED]
4.07 Borrower's Locations: The address of Borrower set forth
above in this Agreement is its chief executive office and the
addresses indicated on Exhibit "B" attached hereto are all of the
Borrower's offices or locations;
4.08 No Default: Borrower has no knowledge of any default under
any material, term or provision or any agreement to which it is a
party or by which it is bound or to which any of its property is
subject, which default would have a material adverse effect on
Borrower's creditworthiness. It is agreed that a breach of the terms
of any mortgage warehouse loan agreement with any other lender shall
be deemed to have such a material adverse effect.
4.09 Outstanding Judicial Proceedings: There are no outstanding
criminal proceedings pending or threatened, or judgements, actions or
proceedings pending or threatened before any court or governmental
authority, bureau or agency, with respect to or affecting the Borrower
wherein damages alleged or owed exceed $25,000 in any such proceeding,
judgment or action or in the aggregate for all such proceedings,
judgments or actions, nor are there any such actions, judgments or
proceedings in which Borrower is a plaintiff or complainant (excepting
routine foreclosures) wherein damages alleged or owed exceed $25,000
in any such proceeding, judgment or action or in the aggregate for all
such proceedings, judgments or actions.
4.10 Accuracy of Submitted Information; No Material Omissions:
No certificate, opinion, financial statement or any other statement
made or furnished to Lender by or on behalf of the Borrower in
connection with this Agreement or the transaction contemplated herein,
contains any untrue statement of a material
23
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fact, or omits a material fact necessary in order to make the
statements contained therein or herein not misleading.
4.11 Loans Not Usurious: The Consumer Loans are not usurious.
4.12 Subsidiaries: Borrower has no Subsidiaries and is a wholly
owned Subsidiary of Resource America, Inc.
5. Collateral.
5.01 Security Interest: Borrower hereby grants to Lender, as
collateral security for all Separate Bank Advances and for the Loan
and the Note and all other present and future obligations,
liabilities and indebtedness of Borrower of every kind (whether
principal, interest, fees, costs and expenses or otherwise) under this
Agreement (the "Secured Obligations"), a security interest in all
accounts, accounts receivable and loans receivable in respect of which
any Separate Bank Advance is made by Lender, now existing or hereafter
acquired or arising, and in all notes, instruments, mortgages and
chattel paper, including all Consumer Paper and Consumer Loan
Collateral, evicencing or securing each said account, account
receivable, loan receivable and Consumer Loans, and in all contracts,
documents, files, instruments, general intangibles, property, rights,
proceeds and payments relating thereto, including without limitation
the following:
5.01.01 All payments and prepayments of principal, interest,
and other income due or to become due thereon and all proceeds
therefrom, and all the right, title and interest of every nature
whatsoever of Borrower in and to the same and every part of such
property including, without limitation, the following:
(a) All rights, liens and security interests existing with
respect thereto or as security therefor;
(b) All hazard insurance (including without limitation flood
insurance) policies, title insurance policies or condemnation
proceeds with respect thereto;
(c) All prepayment premiums and late payment charges with
respect thereto;
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5.01.02 All real estate acquired by Borrower by deed in lieu
of foreclosure or by foreclosure attributable thereto;
5.01.03 All Take-Out Commitments related thereto and the
proceeds resulting from sales by Borrower pursuant thereto;
5.01.04 All right, title and interest of Borrower in and to
all files, surveys, certificates, correspondence, appraisals,
computer programs, tapes, discs, cards, accounting records, and
other records, information, and data of Borrower relating
thereto;
5.01.05 The proceeds from the sale or other disposition of
any Collateral;
5.01.06 Any other property and proceeds thereof that may,
from time to time hereafter, be subject to the security interests
created hereby;
5.01.07 All business records, computer tapes, software,
microfiche, etc., necessary to identify and locate the Collateral
and protect or enforce Lender's or any Lender's rights therein.
5.02 Separate Assignments: At the time of making each Separate
Bank Advance, Lender may require Borrower to deliver a separate
assignment to Lender of all of Borrower's right, title and interest in
the Consumer Paper and Consumer Loan Collateral and other property,
right, proceeds or payment forming part of the Collateral including
but not limited to all Borrower's rights in and to any applicable
Take-Out Commitment and insurance policies and proceeds and Borrower
will pay the cost of filing the same in all public offices.
5.03 Deposit and Other Accounts: Borrower hereby grants to
Lender, as security for the Secured Obligations, a lien and security
interest in, and assignment of, all amounts at any time standing to
Borrowers account in any and all deposit, restricted, operating or
other accounts now or hereafter maintained by Borrower with Lender,
including without limitation the Operating Account, Restricted Account
and Warehouse Account, which lien and security interest is in addition
to, and not in lieu of, any right of setoff otherwise available to
Lender under applicable law.
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5.04 Servicing Rights: Borrower hereby grants to Lender and each
Lender, as security for the Secured Obligations, a first lien security
interest in all Servicing Rights, if any, and all proceeds thereof.
5.05 Financing Statements: Borrower will execute one or more
financing statements covering the Collateral pursuant to the Uniform
Commercial Code, in form satisfactory to Lender, and will pay the cost
of filing the same in all public offices. A copy of this Agreement may
be recorded as a financing statement.
5.06 Limited Power of Attorney: Borrower hereby irrevocably
makes, constitutes and appoints Lender its attorney-in-fact with full
power of substitution for and on behalf and in the name of Borrower
(which Lender is under no obligation to use) to endorse any checks,
instruments or other papers in Lender's possession representing
payments on or proceeds of Consumer Paper and Consumer Loan Collateral
or Take-Out Commitments; to complete, execute, deliver and record any
assignment or other document, including financing statements, covering
the Collateral; to endorse any Consumer Paper in the name of Borrower
and do every other act or thing necessary or desirable to effect
transfer of Consumer Paper, Consumer Loan Collateral or any related
Collateral and/or to protect the interest of Lender in the Collateral;
to take all necessary and appropriate action in Borrower's name with
respect to any Separate Bank Advances hereunder and servicing of
Consumer Paper and Consumer Loan Collateral or sale of Collateral
under any Take-Out Commitment; to take any and all action which Lender
deems appropriate to commence, prosecute, settle, discontinue, defend
or otherwise dispose of any claim relating to any Take-Out Commitment,
insurance or guarantee, Consumer Paper, Consumer Loan Collateral or
other Collateral; and to sign Borrower's name whenever and wherever
appropriate to the performance of this Agreement, including, but not
limited to, execution in Borrower's name of any document necessary to
perfect or protect Lender's security interest granted hereunder. This
appointment shall be deemed coupled with an interest but shall only
extend to dealings with regard to the Collateral.
5.07 Delivery in Trust: Should Lender ever deliver any Consumer
Paper or other Collateral to Borrower for purposes of correction
thereof or otherwise, or to an Investor in connection with an
Investor's purchase thereof, or to any other person or
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<PAGE>
entity for any reason, the same shall be delivered subject to
Lender's liens and security interest therein and upon an express
trust for the benefit of Lender until the same is returned to
Lender or the Separate Bank Advance to which such Consumer Paper
relates has been repaid in full with accrued interest.
6. Affirmative Covenants.
Borrower covenants and agrees:
6.01 Note Payments: To pay the Loan (as provided in the Note and
this Agreement) when due including but not limited to interest upon
the Loan.
6.02 Circumstances Requiring Immediate Repayment of Separate Bank
Advance: To repay in full within three (3) days after the first to
occur of Borrower's actual knowledge thereof or Lender's written
demand with respect thereto, any Separate Bank Advance, plus accrued
interest, if the Consumer Loan with respect to which such Separate
Bank Advance was made (a) shall be rejected as unsatisfactory for
purchase by the pertinent Investor if a Take-Out Commitment was
required in connection with such Separate Bank Advance pursuant to the
terms hereof; (b) has not been purchased within the applicable
warehouse period specified in Schedule 1 or Schedule 2, as applicable,
hereto after funding by Lender or within the time permitted under any
applicable Take-out Commitment, whichever occurs first; (c) said
Consumer Loan becomes 31 or more days contractually past due or in
default; (d) as provided in the final sentence of Section 3.03 hereof;
or (e) the improvements covered by the applicable Mortgage have
sustained a casualty loss in excess of 5% of the appraised value of
the land and improvements, whether or not covered by insurance.
6.03 Casualty Insurance: To place, or cause to be placed, and
maintained at all times, such fire and extended coverage insurance on
all real estate or other property covered by any Consumer Loan
Collateral as may be required by the Investor or by Lender.
6.04 Other Insurance: To maintain (a) liability insurance and
fire and other hazard insurance on its properties, with responsible
insurance companies approved by the Lender, in such amounts and
against such risks as is customarily carried by similar
27
<PAGE>
businesses operating in the same vicinity; and (b) within thirty
(30) days after notice from Lender, will obtain such additional
insurance as Lender shall reasonably require, all at the sole expense
of the Borrower. Copies of such policies, as well as copies of errors
and omissions policies and Fidelity Bonds, if any, maintained by
Borrower, shall be furnished to the Lender without charge upon request
of the Lender.
6.05 Enforcement of Consumer Paper: To enforce payment and
collection, at Borrower's expense, of all Consumer Paper.
6.06 Costs of Collection: To pay the reasonable costs of
collection (including attorneys' fees) of any of the Collateral, the
enforcement or collection of which has been undertaken by Lender.
6.07 Notation of Assignments: To make appropriate notations on
its books of all assignments and liens granted to Lender hereunder,
and to give such notice thereof as Lender may from time to time
reasonably require.
6.08 Execution of Additional Documents: To execute such
additional instruments or assignments of the Collateral as Lender may
from time to time reasonably require.
6.09 Submission of Financial Statements:
6.09.01 Submission of Monthly Financial Statements: To
furnish to Lender within forty-five (45) days after the close of
each month in each fiscal year, Borrower's financial statements,
to include a balance sheet and income statement and statement of
cash flow of the Borrower for such month, subject to year end
audit adjustments, prepared by Borrower in accordance with
generally accepted accounting principles consistently applied and
certified true and correct by Borrower's Chief Financial Officer,
Controller or Vice President of Finance.
6.09.02 Submission of Ouarterly Financial Statements: To
furnish to Lender within sixty (60) days after the close of each
quarterly accounting period in each fiscal year, Borrower's
financial statements, to include a balance sheet and income
statement and statement of cash flow of the Borrower for such
period, subject to year end audit adjustments, prepared by
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Borrower in accordance with generally accepted accounting
principles consistently applied and certified true and correct by
Borrower's Chief Financial Officer, Controller or Vice President
of Finance.
6.09.03 Submission of Year End Financial Statement: To
furnish to Lender within ninety (90) days after the close of each
fiscal year: (a) a statement of shareholders' equity; (b) an
income statement for such fiscal year; (c) a cash flow statement
for such fiscal period; and (d) a balance sheet as of the end of
such fiscal year, all in reasonable detail, including all
supporting schedules and comments; the statements and balance
sheet to be audited by an independent certified public accountant
selected by the Borrower and acceptable to Lender (Lender
hereby acknowledging that Grant Thornton is acceptable); and
accompanied by such accountant's opinion letter reasonably
satisfactory to Lender and certified true and correct by
Borrower's Chief Financial Officer, Controller or Vice President
of Finance.
6.09.04 Covenant Compliance: That each financial statement
submitted pursuant to this Section 6.09 shall include (a) the
then current Tangible Net Worth, and (b) the then Leverage
Ratio. All such numbers shall be accompanied by work sheet
calculations used to arrive at reported result. Borrower shall
also provide Lender with a Covenant Compliance Worksheet in form
acceptable to Lender, certified as true, correct and complete by
Borrower's Chief Financial Officer, Controller or Vice President
of Finance.
6.09.05 Intentionally Omitted,
6.09.06 Projections: To furnish to Lender, as requested by
Lender, a projected balance sheet, income statement and cash flow
statement for each of the upcoming 12 months.
6.09.07 Management Letters: To furnish to Lender, all
reports, including management letters, from time to time issued
to Borrower by its accountants performing a year-end audit
relating to Borrower's financial and accounting policies and
procedures.
6.10 Maintenance of Books and Records; Audits: To maintain
adequate books, accounts and records in accordance with generally
accepted accounting practices with appropriate notations
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thereon of all assignments to Lender; and to permit Lender, or
its representatives at any reasonable time to inspect or examine or
audit the books, accounts and records of Borrower. Borrower shall be
responsible to Lender for such audit fees as Lender may reasonably
assess in connection with any such audit or examination, not to
exceed, unless an Event of Default shall be continuing, $4,500 per
audit.
6.11 Compliance with Administrative Requests of Lender: To comply
with such reasonable administrative directions as Lender may give in
order to provide proper servicing of the Separate Bank Advances
hereunder.
6.12 Submission of Pipeline Report: To provide when requested by
Lender, a copy of the Borrower's pipeline report in form and substance
satisfactory to Lender.
6.13 Notification of Default: In connection with any Consumer
Loan in respect of which a Separate Bank Advance has been made, to
notify Lender within two Business Days of Borrower's discovery of any
default thereunder or any claim asserted in connection therewith or of
the termination of the Take-out Commitment related thereto or of the
rejection by the Investor under said Take-Out Commitment to purchase
said Consumer Loan.
6.14 Notification of Borrower's Default: To advise Lender in
writing within three Business Days after the expiration of any
applicable cure period, of any uncured material default known to
Borrower in connection with any material agreement to which Borrower
is bound.
6.15 Maintenance of Take-Out Commitments: To keep all Take-Out
Commitments in full force and effect and subject to no lien,
assignment or other interest (other than that of the Lender)
6.16 Financial Covenants: To maintain on a consolidated basis for
the Borrower and its consolidated subsidiaries:
(a) Tangible Net Worth of not less than $1,000,000;
(b) a Leverage Ratio of not more than 5 to 1.
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6.17 Tax Returns: To furnish Lender with copies of federal income
tax returns filed by Resource America, Inc. or, if tax returns are
filed separately by Borrower, by Borrower, within ten (10) days of
Lender's written request.
6.18 Payment of Taxes: To pay or cause to be paid when due, all
taxes, assessments and charges or levies imposed upon it or on any of
its property or which it is required to withhold and pay over, except,
as to taxes other than such as to which any lien which attaches with
respect thereto has or would with the passage of time have priority
over the liens and security interests granted to Lender, where
contested in good faith by appropriate proceedings with adequate
reserves therefor having been set aside on its books provided, however
that the Borrower shall pay or cause to be paid all such taxes,
assessments, charges or levies forthwith whenever foreclosure on any
lien that attaches (or security therefor) appears imminent.
6.19 New Locations: To furnish Lender with the name and
addresses of all new offices and locations, including relocations of
existing offices, no later than thirty (30) Business Days prior to the
date Borrower commences occupation of said premises.
6.20 Additional Reports: To promptly furnish Lender with such
reports and information as it deems reasonably necessary from time to
time.
6.21 Accounts: To maintain an Operating Account, Warehouse
Account and Restricted Account with Lender.
6.22 Compliance With Laws: To comply with all present and future
laws applicable to it in the operation of its business, and all
material agreements to which it is subject.
6.23 Notice of Litigation: To give immediate notice to Lender of:
(1) any litigation in which it is a party if an adverse decision
therein would require it to pay over more than $25,000 in such
litigation or in the aggregate for all such litigation or deliver
assets the value of which exceeds such sum (whether or not the claim
is considered to be covered by insurance); and (2) the institution of
any other suit or any administrative proceeding involving it that
might materially and adversely affect its operations, financial
conditions, property or business.
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6.24 Payment of Obligations When Due: To pay when due (or within
applicable grace periods) all material indebtedness due third persons,
except when the amount thereof is being contested in good faith, by
appropriate proceedings and with adequate reserves therefor being set
aside on the books of Borrower.
6.25 Landlord's Waiver: To use its best efforts to obtain from
the landlord of each premises leased by Borrower a waiver of all
rights in or to the Collateral.
6.26 ERISA: Borrower will (1) fund all its Employee Benefit Plans
in accordance with no less than the minimum funding standards of
Section 302 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), (2) furnish Lender, promptly after the filing of
the same, with copies of all reports or other statements filed with
the United States Department of Labor, the Pension Benefit Guaranty
Corporation ("PBGC") or the Internal Revenue Service ("IRS") with
respect to all such Plans, or which Borrower, or any member of a
Controlled Group, may receive from the United States Department of
Labor, the IRS or the PBGC, with respect to all such Employee Benefit
Plans, and (3) promptly advise Lender of the occurrence of any
Reportable Event or Prohibited Transaction with respect to any such
Employee Benefit Plan(s) and the action which Borrower proposes to
take with respect thereto; or (4) promptly advise Lender of any claim
for withdrawal liability made against it or a member of its Controlled
Group.
6.27 Credit Policy: To maintain Borrower's current credit
underwriting standards and quality control procedures unless Lender
first approves any change thereof in writing.
6.28 Management: To maintain a chief financial officer, chief
executive officer and chief operating officer acceptable to Lender.
7. Negative Covenants.
Without the prior written consent of Lender, Borrower will not:
7.01 No Compromise of Collateral: Make any compromise, adjustment
or settlement in respect of any of the Collateral or accept anything
other than cash in payment of the Collateral.
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7.02 Improper Use of Proceeds: Use the proceeds of the Loan, or
permit them to be used, for any purpose other than to purchase or
originate Eligible Loans pursuant to the terms of this Agreement.
7.03 [INTENTIONALLY OMITTED].
7.04 No Misleading Information: Furnish to Lender any certificate
or document that contains any untrue statement of material fact or
omits a material fact necessary to make it not misleading in light of
the circumstances under which it was furnished.
7.05 No Change in Ownership: Permit or suffer any change in the
shareholders of the Borrower and their respective shareholder shares.
7.06 No Change in Organization: Change its name, enter into any
merger, consolidation, reorganization or recapitalization, or
reclassify its capital stock, or liquidate or dissolve or acquire any
stock in or all or substantially all of the assets of or any
partnership or joint venture interest in, or make any loan to or
investment in, any other person or entity, other than (i) consumer
loans made in the ordinary course of its business and (ii) the
acquisition of substantially all of the assets of or all of the
capital stock of Tri-Star Financial Services ("Tri-Star"), provided,
that if such acquisition is a stock acquisition, Borrower will,
concurrently with its acquisition thereof, cause Tri-Star to execute
and deliver to Lender all documents and instruments, including an
amendment to this Agreement, required by Lender for the purposes of
joining Tri-Star to this Agreement as a co-borrower.
7.07 No Sale of Assets: Borrower will not sell, transfer, lease
or otherwise dispose of all or (except for the sale of loans and other
financial products in the ordinary course of its business and the
disposition of equipment or other fixed assets which in Borrower's
reasonable judgment is no longer needed in the ordinary course of its
business) any part of its assets.
7.08 No Liens: Borrower will not mortgage, pledge, grant or
permit to exist a security interest in or lien on any of its assets of
any kind, real or personal, tangible or intangible, now
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owned or hereafter acquired including without limitation the
Collateral, except (i) for purchase money liens in equipment, (ii)
existing liens shown on Exhibit C hereto, (iii) liens in favor of
Lender hereunder, and (iv) liens on Consumer Paper, other than such as
against which Lender has made any Separate Bank Advance hereunder,
securing indebtedness permitted by Section 7.10(5) hereof.
7.09 No Guaranties: Borrower will not become liable, directly or
indirectly, as guarantor, surety, endorser or otherwise, for any
obligation or indebtedness of any other person, except for endorsement
of commercial paper for deposit or collection in the ordinary course
of business. Usual and customary representations and warranties
made by Borrower to investors, buyers and other warehouse lenders of
Consumer Paper as to the underlying obligors thereon shall not
constitute a "guaranty" for this purpose.
7.10 No Indebtedness: Borrower will not incur, create, assume or
permit to exist any indebtedness of any nature, except (1) to Lender
pursuant hereto, (2) trade indebtedness incurred in the ordinary
course of business,(3) purchase money indebtedness for equipment and
capital lease obligations not in excess of $75,000 at any time
outstanding, (4) Subordinated Debt, and (5) warehouse indebtedness in
favor of other warehouse lenders provided that any such warehouse
lender first executes an intercreditor agreement in favor of and in
form and substance acceptable to Lender.
8. Default.
8.01 Events of Default: Borrower shall be in default under this
Agreement upon the happening of any of the following events or
conditions:
8.01.01 Failure to pay any principal or interest when due or
any fee, expense or other amount required to be paid by Borrower
hereunder within five (5) days after written notice from Lender
thereof;
8.01.02 Default in the performance of any other obligation,
covenant or liability of Borrower contained or referred to herein
and, if such default relates to the covenants set forth in
Sections 6.04, 6.08, 6.20 or 6.23, the same is not cured within
30 days after Lender provides Borrower with written notice
thereof;
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8.01.03 Any warranty, representation or statement furnished
to Lender by or on behalf of Borrower in connection with this
Agreement proves to have been false in any material respect when
made or furnished;
8.01.04 Loss, theft, substantial damage, destruction,
abandonment, sale or encumbrances to or of the Collateral or any
part thereof, or the making of any levy, seizure or attachment
thereof or thereon;
8.01.05 Dissolution, termination of existence, insolvency,
business failure, appointment of a receiver for benefit of
creditors by, or the commencement of any case or proceeding under
any bankruptcy or insolvency law by or against Borrower or any of
its Subsidiaries unless said proceeding, if commenced against
Borrower or any of its Subsidiaries, is dismissed within 30 days,
from the date it is filed;
8.01.06 Occurrence of any material adverse change in the
financial or operating condition of Borrower;
8.01.07 Five (5) days or more shall elapse from the date of
release of any Consumer Paper and any other item of Collateral to
Borrower made at Lender's sole discretion subject to such terms
and conditions as Lender may from time to time require and such
Collateral has not been returned to Lender;
8.01.08 Twenty-one (21) days or more (or such greater time
as Lender may approve) shall elapse from the date of shipment or
delivery of Collateral to an Investor without Lender having
received full payment of the Separate Bank Advance(s) or portions
thereof secured thereby;
8.01.09 The occurrence of any circumstance that would cause
any Consumer Loan in respect of which a Separate Bank Advance was
made to fail to conform to the definition of Eligible Loan;
8.01.10 If presently held or later obtained, subsequent loss
of FNMA and/or FHLMC certification;
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8.01.11 Failure of Borrower to observe or perform any
agreement of any nature whatsoever with Lender;
8.01.12 Borrower's default under the terms and conditions of
any other loan or credit agreement or other material agreement
with Lender or any third party, including any contract granting
Borrower Servicing Rights.
8.02 Remedies Upon Default: Upon such default, at Lender's
election, no additional advances shall be made by Lender and/or this
Agreement may be terminated and/or all sums now or hereafter owed by
Borrower to Lender may be declared to be immediately due and payable,
and Lender may charge Borrower's DDA account for any or all sums due
and owing to Lender. Lender shall have the rights and remedies of a
secured party under the Uniform Commercial Code in addition to the
rights and remedies provided herein or in any other instrument or
paper executed by Borrower, including, at its option and in its sole
discretion, until all sums now or hereafter owed to the Lender are
paid in full, the right or rights to:
8.02.01 Communicate with and notify the obligors under any
Consumer Loans of Borrower's assignments hereunder, and note any
such assignment on Borrower's records;
8.02.02 Take over the exclusive right to collect the
Collateral at the sole expense of the Borrower, without any
obligation to preserve rights against third parties. For any
acts done or not done incident to such collection or liquidation,
Lender shall not be liable in any manner. Lender shall have the
right to settle, compromise, or adjust Collateral and the claims
or right of Borrower thereunder and accept return of the real
estate or other Consumer Loan Collateral involved, and in turn
sell and dispose of all said real estate without notice to or
approval of Borrower, Lender may employ agents and attorneys to
collect or liquidate any Collateral, and Lender shall not be
liable for such Collateral or defaults of any such Lenders and
attorneys;
8.02.03 To effect collection of any Consumer Loan, take
possession of and open any mail addressed to Borrower whether on
Borrower's premises or elsewhere and to remove, collect, and
apply all payments therein contained and as attorney in fact for
Borrower, sign the Borrower's name to any receipts, checks,
notes,
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agreements, assignments or other instruments or letters, in
order to collect, sell or liquidate the Collateral. This power
shall be irrevocable;
8.02.04 Require Borrower to assemble all books and records
of account relating to the Collateral and make them available to
Lender at its office herein set forth or such other place as may
be designated by Lender;
8.02.05 Enter the office of Borrower and take possession of
any of the Collateral including any records that pertain to the
Collateral; and
8.02.06 Undertake to service any Consumer Loans and upon the
happening of such, Borrower shall transfer to Lender all escrow
funds, records, and any other documents relating to any such
Consumer Loans then held by it.
8.03 Remedies Cumulative: All remedies available to Lender shall
be cumulative and not alternate in that the exercise of one or more of
them shall not preclude exercising one or more of the others.
8.04 Indemnity: (a) Borrower agrees to defend, protect, indemnify
and hold harmless Lender and its officers, directors, employees,
attorneys and Lenders (including, without limitation, those retained
in connection with the satisfaction or attempted satisfaction of any
of the conditions set forth herein) (collectively, the "Indemnities")
from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, claims, costs, expenses
and disbursements of any kind or nature whatsoever (including, without
limitation, the reasonable fees and disbursements of counsel for such
Indemnities in connection with any investigative, administrative or
judicial proceeding, whether or not such Indemnities shall be
designated a party thereto), imposed on, incurred by, or asserted
against such Indemnities (whether direct, indirect or consequential
and whether based on any federal or state laws or other statutory
regulations, including, without limitation, securities and commercial
laws and regulations, under common law or at equity, or on contract or
otherwise) in any manner relating to or arising out of this Agreement,
or any act, event or transaction related or attendant thereto, the
making of the Loan, the management of the Loan or the use or intended
use of the proceeds of the Loan (collectively, the
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"Indemnified Matters"); provided, that Borrower shall have no
obligation to an Indemnitee hereunder with respect to (i) Indemnified
Matters caused by or resulting from the willful misconduct or gross
negligence of that Indemnitee, as determined by a court of competent
jurisdiction, or (ii) any loss directly resulting from and which would
not have occurred but for the failure of Lender to perform its
obligations under this Agreement. To the extent that the undertaking
to indemnify, pay and hold harmless set forth in the preceding
sentence may be unenforceable because it is violative of any law or
public policy, Borrower shall contribute the maximum portion which it
is permitted to pay and satisfy under applicable law, to the payment
and satisfaction of all Indemnified Matters incurred by the
Indemnities.
(b) Without prejudice to the survival of any other obligation of
Borrower hereunder, the obligations and indemnities of Borrower
contained in this Section shall survive the termination of this
Agreement and payment in full of principal and interest hereunder and
under the Notes.
9. Sale of Consumer Paper.
So long as no Event of Default or event which with the passage of
time and/or the giving of notice would constitute an Event of Default
has occurred hereunder, Lender shall:
9.01 Delivery of Consumer Paper by Lender: Upon sale by Borrower
of any Consumer Loan on which a Separate Bank Advance has been made
hereunder and receipt by Lender of the entire proceeds thereof in an
amount sufficient to repay in full the Separate Bank Advance related
thereto, Lender shall deliver the Consumer Paper as requested by
Borrower to the Investor. Lender agrees to send the original Consumer
Paper together with the loan document delivery package received from
Borrower directly to the pertinent Investor no later than one Business
Day after receipt of said sale proceeds. Proceeds received by Lender
from the Investor shall be deposited in the Restricted Account for
application to the related Separate Bank Advance and any other amounts
then due by Borrower hereunder, and any sums remaining after full
repayment of the pertinent Separate Bank Advance and such other
amounts will be promptly credited to Borrower's Operating Account.
Lender may require Borrower to deliver a cover letter, in form
satisfactory to Lender, directing Investor to make payment directly to
Lender.
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9.02 Reassignment of Consumer Paper by Lender. Reassign to
Borrower any Consumer Paper referred to in Paragraph 6.02 hereof, and
to deliver all supporting papers, upon payment in full to Lender of
the respective Separate Bank Advance, plus accrued interest.
10. Collections.
Upon default if so requested by Lender, in writing, Borrower
shall act as the representative of, and in trust for, Lender in
receiving and collecting all monies payable on any Consumer Loan and
after collection thereof shall deposit the same in the Restricted
Account, and the same shall be held by Lender as part of the
Collateral hereunder. Lender, upon deposit in the Restricted Account
of any monies payable on any such Consumer Loan, may, in its sole
discretion, apply all or any part thereof to the payment of Borrower's
obligation arising out of the related Separate Bank Advance or toward
any other Secured Obligation.
11. Miscellaneous.
11.01 Notices: Except as to routine business matters, any and all
communications between the parties hereto or notices provided herein
to be given in writing shall be i) delivered in person, ii) sent by
both certified or registered mail, return receipt requested, and by
regular mail, iii) by overnight courier service that provides for
proof of delivery; or iv) via facsimile transmission; addressed as
follows: if to Lender, 1339 Chestnut Street, F.C.1-8-12-7,
Philadelphia, PA 19102, (Fax No. (215) 786-8304), Attention: Andrew
Tauber; if to Borrower: Fidelity Mortgage Funding, Inc., 7 East
Skippack Pike, Ambler, Pennsylvania 19002 (Fax No. (215)648-3524)
Attention: ___________, or to such other address any party may by
notice indicate to the others from time to time. Unless sooner
received, all notices shall be deemed delivered two (2) days after
mailing, as herein set forth. Actual knowledge of the contents of the
notice, however received, shall constitute proper notice hereunder.
11.02 Successors and Assigns: The terms and provisions of this
Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns. All
representations, warranties, covenants (affirmative and negative) and
agreements herein contained on the part of
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Borrower shall survive the making of any Separate Bank Advance and
the execution of Borrower's Note, and shall be effective as long as
any sums remain due and owing to Lender.
11.03 Assignment by Lender: Participations: (a) Lender may, at
any time, transfer or assign its Note and its rights under this
Agreement in whole or in part, without the prior written consent of
Borrower; (b) Lender may grant participations in its Note and in
rights under this Agreement and may, provided that Lender first has
such participant sign Lender's standard confidentiality agreement,
furnish to its participants or prospective participants financial and
other information concerning the Borrower in connection therewith.
11.04 Delay - No Waiver -- No delay in exercising, or failure to
exercise any right, power or remedy accruing to Lender through any
breach or default of Borrower under this Agreement, or any
acquiescence to any such breach or default, or to any similar breach
or default thereafter occurring, shall impair any such right, power
or remedy of Lender nor shall any waiver of any single breach or
default be deemed a waiver of any breach or default thereafter
occurring. Any waiver, permit, consent or approval of any kind or
character on the part of Lender of any provision or condition of the
Agreement, must be in writing and shall be effective only to the
extent of such writing specifically set forth. In the event Lender is
required to take any action to collect sums due under the Note or to
enforce, renegotiate, restructure or modify the terms of this
Agreement, or is required to institute, defend or otherwise
participate in any action at law or suit in equity arising from this
Agreement, or any Consumer Loan or Consumer Loan Collateral forming
part of the Collateral, Borrower, in addition to all other sums which
it may be called upon to pay, will pay Lender's fees, expenses and
costs, including the reasonable fees, incurred by Lender in connection
therewith. Nothing in this Agreement shall be deemed any waiver or
prohibition of Lender's right of set-off, except that Lender agrees to
not set-off against any legitimate custodial or escrow account in
which Borrower accumulates funds owned by individual mortgagors or
other third parties.
11.05 (a) Entire Agreement-Supplemental Policies and Procedures:
This Agreement, together with the Note and other documents executed in
connection herewith, sets forth the entire
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agreement among the parties hereto, and there are no other
agreements, express or implied, written or oral, except as set
forth herein and thereon. This Agreement may not be amended,
altered or changed except in writing by all parties hereto. It is
contemplated that from time to time Borrower and Lender will
enter into supplemental agreements establishing policies and
procedures to carry out the terms of this Agreement. Such
agreements shall constitute amendments hereto provided they are
signed by Borrower and Lender.
(b) Partial Invalidity: The inapplicability or
unenforceability of any provision of this Agreement shall not
limit or impair the operation or validity of any other provisions
of this Agreement.
(c) Counterparts: This Agreement may be executed in any
number of counterparts, each of which, when executed and
delivered, shall be an original, but such counterparts shall
together constitute one and the same instrument.
(d) No Assignment by Borrower: This Agreement shall not be
assignable by Borrower without the express written approval of
Lender.
(e) Materiality Reliance by Lender: All covenants,
agreements and representations made herein and in documents
delivered in support of this Agreement, now or in the future,
shall be deemed to have been material and relied on by Lender and
shall not merge with this Agreement.
(f) No Third Party Beneficiary: The parties hereto
understand and agree that there is no intention to confer any
benefits upon any person or legal entity not a party to this
Agreement.
(g) Confidentiality: All information and materials provided
to Lender and Lenders by Borrower shall be treated with the same
degree of confidentiality as Lender maintains with regard to
similar information of its other customers generally. Nothing
contained herein shall prevent Lender from releasing to actual or
proposed loan participants such information regarding Borrower as
Lender may deem pertinent and necessary.
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11.06 Interpretation of Accounting Terms: Each accounting term
used in this Agreement which is not specifically defined shall have
the meaning customarily given to it in accordance with generally
accepted accounting principles.
11.07 PENNSYLVANIA LAW; CONSENT TO JURISDICTION AND SERVICE: THIS
AGREEMENT AND THE NOTE SHALL BE GOVERNED BY THE LAWS OF THE
COMMONWEALTH OF PENNSYLVANIA. BORROWER AGREES AND CONSENTS TO THE
EXCLUSIVE JURISDICTION OF THE COURT OF COMMON PLEAS OF PHILADELPHIA,
PENNSYLVANIA AND/OR THE UNITED STATES DISTRICT COURT FOR THE EASTERN
DISTRICT OF PENNSYLVANIA. BORROWER AND LENDER HEREBY WAIVES ALL RIGHT
TO DEMAND A JURY TRIAL, IN ANY AND ALL ACTIONS AND PROCEEDINGS WHETHER
ARISING HEREUNDER OR UNDER ANY OTHER AGREEMENT OR UNDERTAKING AND
IRREVOCABLY AGREES TO SERVICE OF PROCESS SENT BY CERTIFIED MAIL,
RETURN RECEIPT REQUESTED, AND REGULAR MAIL TO THE ADDRESS AS SET FORTH
HEREIN, OR SUCH ADDRESS AS MAY APPEAR IN LENDER'S RECORDS.
IN WITNESS WHEREOF, the parties have executed this Agreement all
as of the day and year first hereinabove written.
CORESTATES BANK, N.A.,
By: /s/ Andrew Tauber
------------------------
Andrew Tauber
Vice President
FIDELITY MORTGAGE FUNDING, INC.
By:
------------------------
Attest:
--------------------
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SCHEDULE 1
FIDELITY MORTGAGE FUNDING, INC.
NON-CONFORMING CREDIT UNDERWRITING CRITERIA
Classes of Loans A(1) B C D(2)
Warehouse Period 90 90 90 45
Debt to Income 50% 50% 50% 60%
Loan to Value 90% 85% 80% 75%
Mortgage Loan Maximum $200,000 on any non pre-approved
Mortgage Loan. Any loan over
$200,000 provided that the loan
is pre-approved by the Bank.
Employment Must be verified on all Loans.
The Borrower can underwrite and
close NIQ and NIV Loans.
Property 1 - 4 Family Dwelling; both owner
occupied and investor properties
are eligible.
Appraisal Required on all Loans.
Closings Must be closed by counsel or
title company.
Schedule 1 [continued on next page]
(1) With respect to Class "A" Mortgage Loans, the Bank will
permit such Mortgage Loans to have a loan-to-value ratio not to
exceed one hundred percent (100%) and a debt-to-income ratio not to
exceed 45%.
(2) Limited to 10% of Maximum Loan Amount.
43
<PAGE>
The Bank in its sole discretion retains the right to accept or
reject any collateral.
From time to time, the Borrower may request a revision on the
credit underwriting criteria set out above provided (i) the
Borrower submits a revised Schedule 1 to the Bank for its written
approval; and (ii) the Bank approves the revised Schedule, in
writing, as evidenced by a letter from the Bank to the Borrower.
44
<PAGE>
Schedule 2
Fidelity Mortgage Funding, Inc.
Small Multi Family/Mixed use Loans Underwriting Criteria
(Advance Rate is 95% with a 60 day warehouse period)
Eligible Property
Residential properties which may include income from nonresidential
sources.
Minimum Debt Service Coverage Ratio
2-6 Units: Net income equal or exceed debt service.
7 or more Units: 1.20x based on net income available for debt service.
Maximum Loan to Value
70%
Occupancy
Both owner occupied and investor properties are eligible.
Loan Limits
Minimum: $50,000
Maximum: $500,000
Lien Position
First liens only
45
<PAGE>
EXHIBIT "A"
Ownership of Stock
a. 100% of authorized and issued capital stock is owned by Resource
America, Inc.
<PAGE>
EXHIBIT "B"
Location
a. 7 East Skippack Pike, Ambler, Pennsylvania 19002
<PAGE>
NOTE
$5,000,000.00 September 23, 1997
FOR VALUE RECEIVED, and intending to be legally bound, FIDELITY MORTGAGE
FUNDING, INC. ("Borrower") promises to pay to the order of CORESTATES BANK, N.A.
("Bank") at Bank's office, the lesser of FIVE MILLION ($5,000,000.00) or the
principal balance outstanding hereunder pursuant to the provisions of the
Warehousing Agreement referred to below. The actual amount due and owing from
time to time hereunder shall be evidenced by the Bank's records of receipts and
disbursements hereunder which shall be conclusive evidence of such amount.
Borrower further agrees to pay interest on the unpaid principal amount
outstanding hereunder in accordance with the terms and conditions of the
Warehousing Agreement.
This Note constitutes the "Note" referred to in that certain Warehousing
Agreement of even date herewith between Borrower and Bank, to which agreement
reference is hereby made for the terms and provisions thereof, and for
additional rights and limitations of such rights of the Borrower and Bank
thereunder, including, but not limited to, provisions for Borrower's right to
borrow, prepay and reborrow part or all of the principal hereof under certain
conditions and for the acceleration of Borrower's liabilities to Bank upon the
occurrence of certain events as therein specified.
In the event counsel is employed to collect this obligation or to protect the
security hereof, Borrower agrees to pay, upon demand, the reasonable attorneys'
fees of Bank, whether suit be brought or not, and all other costs and expenses
reasonably connected with collection.
Borrower and any endorser, guarantor or surety, jointly and severally, waive
presentment, protest and demand, notice of protest, demand and dishonor and
nonpayment of this Note, and expressly agree that this Note, or any payment
hereunder, may be extended from time to time without in any way affecting the
liability of the Borrower or any endorser hereof.
The validity and construction and enforceability of, and the rights and
obligations of Borrower and Bank under this Note and the aforesaid Warehousing
Agreement shall be governed by, construed and enforced in accordance with the
substantive laws of the Commonwealth of Pennsylvania.
If permitted by law, Borrower hereby authorizes and empowers any attorney of any
court of record upon the occurrence of any Event of Default under the
Warehousing Agreement to appear for and confess judgment against Borrower
without prior notice to Borrower or prior opportunity to be heard for such sums
as shall have become due under this Note and all other obligations hereunder of
Borrower to Bank, with or without declaration, with costs of suit (including,
without limitation, reasonable attorneys' fees and disbursements) and release of
error, without stay of execution. If a
<PAGE>
copy of this Note, verified by affidavit of Bank or someone on behalf of Bank,
shall have been filed in such action, it shall not be necessary to file the
original Note as a warrant of attorney. The authority and power to appear for
and enter judgment against Borrower shall not be exhausted by one or more
exercises thereof, or by any imperfect exercise thereof, and shall not be
extinguished by any judgment entered pursuant thereto; the authority and power
may be exercised on one or more occasions, from time to time, in the same or
different jurisdictions, as often as Bank shall deem necessary or desirable, for
all of which this Note shall be a sufficient warrant.
IN WITNESS WHEREOF, Borrower has caused these presents to be executed the day
and year first above written.
FIDELITY MORTGAGE FUNDING, INC.
By:
-----------------------------
Attest:
-------------------------
2
<PAGE>
===============================================================================
MASTER LOAN AND SECURITY AGREEMENT
------------------------------
Dated as of October 16, 1997
------------------------------
FIDELITY MORTGAGE FUNDING, INC.
as Borrower
and
MORGAN STANLEY MORTGAGE CAPITAL INC.
as Lender
===============================================================================
<PAGE>
TABLE OF CONTENTS
RECITALS 1
SECTION 1. DEFINITIONS AND ACCOUNTING MATTERS 1
1.01 Certain Defined Terms 1
1.02 Accounting Terms and Determinations 8
SECTION 2. LOANS, NOTE AND PREPAYMENTS 9
2.01 Loans 9
2.02 Notes 9
2.03 Procedure for Borrowing 9
2.04 Limitation on Types of Loans; Illegality 10
2.05 Repayment of Loans; Interest 11
2.06 Mandatory Prepayments or Pledge 11
SECTION 3. PAYMENTS; COMPUTATIONS; ETC. 11
3.01 Payments 11
3.02 Computations 12
3.03 U.S. Taxes 12
SECTION 4. COLLATERAL SECURITY 13
4.01 Collateral; Security Interest 13
4.02 Further Documentation 14
4.03 Changes in Locations, Name, etc. 14
4.04 Lender's Appointment as Attorney-in-Fact 14
4.05 Performance by Lender of Borrower's Obligations 15
4.06 Proceeds 15
4.07 Remedies 16
4.08 Limitation on Duties Regarding Presentation of Collateral 16
4.09 Powers Coupled with an Interest 17
4.10 Release of Security Interest 17
SECTION 5. CONDITIONS PRECEDENT 17
5.01 Initial Loan 17
5.02 Initial and Subsequent Loans 18
SECTION 6. REPRESENTATIONS AND WARRANTIES 19
6.01 Existence 19
6.02 Financial Condition 19
6.03 Litigation 20
6.04 No Breach 20
6.05 Action 20
6.06 Approvals 20
6.07 Margin Regulations 21
6.08 Taxes 21
6.09 Investment Company Act 21
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<PAGE>
6.10 Collateral; Collateral Security 21
6.11 Chief Executive Office 22
6.12 Location of Books and Records 22
6.13 Hedging 22
6.14 True and Complete Disclosure 22
6.15 Tangible Net Worth 22
6.16 ERISA 22
SECTION 7. COVENANTS OF THE BORROWER 22
7.01 Financial Statements 22
7.02 Litigation 24
7.03 Existence, etc. 25
7.04 Prohibition of Fundamental Changes 25
7.05 Borrowing Base Deficiency 25
7.06 Notices 25
7.07 Hedging 26
7.08 Reports 26
7.09 Underwriting Guidelines 26
7.10 Transactions with Affiliates 26
7.11 Limitation on Liens 26
7.12 Limitation on Guarantees 27
7.13 Limitation on Distributions 27
7.14 Maintenance of Tangible Net Worth 27
7.15 Maintenance of Ratio of Total Indebtedness to Tangible
Net Worth 27
7.16 Maintenance of Profitability 27
7.17 Servicing Tape 27
SECTION 8. EVENTS OF DEFAULT 27
SECTION 9. REMEDIES UPON DEFAULT 29
SECTION 10. NO DUTY OF LENDER 29
SECTION 11. MISCELLANEOUS 29
11.01 Waiver 29
11.02 Notices 30
11.03 Indemnification and Expenses 30
11.04 Amendments 31
11.05 Successors and Assigns 31
11.06 Survival 31
11.07 Captions 31
11.08 Counterparts 31
11.09 Loan Agreement Constitutes Security Agreement; Governing Law 31
11.10 Submission to Jurisdiction; Waivers 31
11.11 Waiver of Jury Trial 32
11.12 Acknowledgments 32
11.13 Hypothecation or Pledge of Loans 32
11.14 Servicing 32
11.15 Periodic Due Diligence Review 33
11.16 Intent 34
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<PAGE>
SCHEDULES
SCHEDULE 1 Representations and Warranties re: Mortgage Loans
SCHEDULE 2 Filing Jurisdictions and Offices
EXHIBITS
EXHIBIT A Form of Promissory Note
EXHIBIT B Form of Custodial Agreement
EXHIBIT C Form of Opinion of Counsel to Borrower
EXHIBIT D Form of Request for Borrowing
EXHIBIT E-1 Form of Borrower's Release Letter
EXHIBIT E-2 Form of Warehouse Lender's Release Letter
EXHIBIT F Underwriting Guidelines
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<PAGE>
MASTER LOAN AND SECURITY AGREEMENT
MASTER LOAN AND SECURITY AGREEMENT, dated as of October 16, 1997,
between FIDELITY MORTGAGE FUNDING, INC., a Delaware corporation (the
"Borrower"), and MORGAN STANLEY MORTGAGE CAPITAL INC., a Delaware corporation
(the "Lender").
RECITALS
The Borrower has requested that the Lender from time to time make
revolving credit loans to it to finance certain residential mortgage loans owned
by the Borrower, and the Lender is prepared to make such loans upon the terms
and conditions hereof. Accordingly, the parties hereto agree as follows:
Section 1. Definitions and Accounting Matters.
1.01 Certain Defined Terms. As used herein, the following terms shall
have the following meanings (all terms defined in this Section 1.01 or in other
provisions of this Loan Agreement in the singular to have the same meanings when
used in the plural and vice versa):
"'A' Credit Mortgage Loan" shall mean a Mortgage Loan made by the
Borrower to a Mortgagor with an 'A' credit history which is underwritten in
accordance with the Borrower's Underwriting Guidelines for 'A' Credit Mortgage
Loans.
"Affiliate" shall mean (i) with respect to the Lender, MS & Co. and
Morgan Stanley, Dean Witter, Discover & Co., and (ii) with respect to the
Borrower, any "affiliate" of the Borrower as such term is defined in the
Bankruptcy Code.
"Affiliate Guaranty" shall mean that certain Affiliate Guaranty dated
as of October 16, 1997, made by Resource America Inc. in favor of the Lender, as
amended from time to time.
"Affiliated Party" shall mean the collective reference to the Borrower
and the Guarantor.
"Applicable Collateral Percentage" shall mean (i) with respect to
Eligible Mortgage Loans (other than Delinquent Mortgage Loans), ninety-five
percent (95%) and (ii) with respect to Eligible Mortgage Loans that are
Delinquent Mortgage Loans, eighty-five percent (85%).
"Applicable Margin" shall mean: (i) 0.90% or (ii) in the event that MS
& Co. acts as sole or lead underwriter or placement agent in a Securitization
Transaction, then with respect to all Eligible Mortgage Loans delivered during
the ninety (90) days subsequent to the closing date of such Securitization
Transaction, 0.80%.
"'B' Credit Mortgage Loan" shall mean a Mortgage Loan made by the
Borrower to a Mortgagor with a 'B' credit history which is underwritten in
accordance with the Borrower's Underwriting Guidelines for 'B' Credit Mortgage
Loans.
"Bankruptcy Code" shall mean the United States Bankruptcy Code of
1978, as amended from time to time.
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<PAGE>
"Borrower" shall have the meaning provided in the heading hereof.
"Borrowing Base" shall mean the aggregate Collateral Value of all
Eligible Mortgage Loans.
"Borrowing Base Deficiency" shall have the meaning provided in Section
2.06 hereof.
"Business Day" shall mean any day other than (i) a Saturday or
Sunday or (ii) a day on which the New York Stock Exchange, the Federal Reserve
Bank of New York or the Custodian is authorized or obligated by law or executive
order to be closed.
"Capital Expanditures" shall mean, as to any Person for any period,
the aggregate amount paid or accrued by such Person and its Afffliates for the
rental, lease, purchase (including by way of the acquisition of securities of
any Person), construction or use of any Property during such period, the value
or cost of which, in accordance with GAAP, would appear on such Person's
consolidated balance sheet in the category of property, plant or equipment at
the end of such period.
"Capital Lease Obligations" shall mean, for any Person, all obligations
of such Person to pay rent or other amounts under a lease of (or other agreement
conveying the right to use) Property to the extent such obligations are required
to be classified and accounted for as a capital lease on a balance sheet of such
Person under GAAP, and, for purposes of this Loan Agreement, the amount of such
obligations shall be the capitalized amount thereof, determined in accordance
with GAAP.
"'C' Credit Mortgage Loan" shall mean a Mortgage Loan made by the
Borrower to a Mortgagor with a 'C' credit history which is underwritten in
accordance with the Borrower's Underwriting Guidelines for 'C' Credit Mortgage
Loans.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"Collateral" shall have the meaning provided in Section 4.01(b) hereof.
"Collateral Value" shall mean, with respect to each Mortgage Loan, the
lesser of (a) the Applicable Collateral Percentage of the Market Value of such
Mortgage Loan, and (b) 98% of the outstanding principal balance of such Mortgage
Loan; provided, that,
(i) the Collateral Value shall be deemed to be zero with respect to
each Mortgage Loan (1) in respect of which there is a breach of a
representation and warranty set forth on Schedule 1 (assuming
each representation and warranty is made as of the date
Collateral Value is determined), (2) in respect of which there is
a delinquency in the payment of principal and/or interest which
continues for a period in excess of 59 days (without regard to
any applicable grace periods), (3) which remains pledged to the
Lender hereunder later than 95 days after the date on which it is
first included in the Collateral, (4) which has been released
from the possession of the Custodian under the Custodial
Agreement to the Borrower for a period in excess of 14 days, or
(5) which is a Wet-Ink Mortgage Loan with respect to which the
original Mortgage Loan Documents have not been received by the
Custodian on the second Business Day following the Funding Date;
(ii) the aggregate Collateral Value of Mortgage Loans which are 'C'
Credit Mortgage Loans or 'D' Credit Mortgage Loans may not exceed
35% of the Maximum Credit;
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<PAGE>
(iii) the aggregate Collateral Value of Mortgage Loans which are Second
Lien Mortgage Loans may not exceed 10% of the aggregate principal
balance of the Loans outstanding;
(iv) the aggregate Collateral Value of Mortgage Loans which are
Wet-Ink Mortgage Loans may not exceed 20% of the Maximum Credit;
(v) the aggregate Collateral Value of Mortgage Loans which are
Delinquent Mortgage Loans may not exceed 5% of the aggregate
principal balance of the Loans outstanding.
"Custodial Agreement" shall mean the Custodial Agreement, dated as of
the date hereof, among the Borrower, the Custodian and the Lender, substantially
in the form of Exhibit B hereto, as the same shall be modified and supplemented
and in effect from time to time.
"Custodian" shall mean Norwest Bank Minnesota, National Association, as
custodian under the Custodial Agreement, and its successors and permitted
assigns thereunder.
"'D' Credit Mortgage Loan" shall mean a Mortgage Loan made by the
Borrower to a Mortgagor with a 'D' credit history which is underwritten in
accordance with the Borrower's Underwriting Guidelines for 'D' Credit Mortgage
Loans.
"Default" shall mean an Event of Default or an event that with notice
or lapse of time or both would become an Event of Default.
"Delinquent Mortgage Loan" shall mean an Eligible Mortgage Loan which
is more than 29 days, but less than or equal to 59 days delinquent.
"Dollars" and "S" shall mean lawful money of the United States of
America.
"Due Diligence Review" shall mean the performance by the Lender of any
or all of the reviews permitted under Section 11.15 hereof with respect to any
or all of the Mortgage Loans, as desired by the Lender from time to time.
"Effective Date" shall mean the date upon which the conditions
precedent set forth in Section 5.01 shall have been satisfied.
"Eligible Mortgage Loan" shall mean a Mortgage Loan secured by a first
or second mortgage lien on a one-to-four family residential property, as to
which the representations and warranties in Section 6.10 and Part I of Schedule
1 hereof are correct and which is either an 'A' Credit Mortgage Loan, a 'B'
Credit Mortgage Loan, a 'C' Credit Mortgage Loan, or a 'D' Credit Mortgage Loan.
"ERISA' shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time.
"ERISA Affiflate" shall mean any corporation or trade or business that
is a member of any group of organizations (i) described in Section 414(b) or (c)
of the Code of which the Borrower is a member and (ii) solely for purposes of
potential liability under Section 302(c)(11) of ERISA and
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<PAGE>
Section 412(c)(11) of the Code and the lien created under Section 302(f) of
ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the
Code of which the Borrower is a member.
"Eurodollar Rate" shall mean, with respect to each day a Loan is
outstanding (or if such day is not a Business Day, the next succeeding Business
Day), the rate per annum equal to the rate appearing at page 5 of the Telerate
Screen as one-month LIBOR on such date, and if such rate shall not be so quoted,
the rate per annum at which the Lender is offered Dollar deposits at or about
10:00 A.M., New York City time, on such date by prime banks in the interbank
eurodollar market where the eurodollar and foreign currency exchange operations
in respect of its Loans are then being conducted for delivery on such day for a
period of 30 days and in an amount comparable to the amount of the Loans to be
outstanding on such day.
"Event of Default" shall have the meaning provided in Section 8 hereof.
"Federal Funds Rate" shall mean, for any day, the weighted average of
the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, as published on the next
succeeding Business Day by the Federal Reserve Bank of New York, or, if such
rate is not so published for any day which is a Business Day, the average of the
quotations for the day of such transactions received by the Lender from three
federal funds brokers of recognized standing selected by it.
"First Lien Mortgage Loan" shall mean an Eligible Mortgage Loan secured
by the lien on the Mortgaged Property, subject to no prior liens on such
Mortgaged Property.
"Funding Date" shall mean the date on which a Loan is made hereunder.
"GAAP" shall mean generally accepted accounting principles as in effect
from time to time in the United States.
"Governmental Authority" shall mean any nation or government, any state
or other political subdivision thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government and any court or arbitrator having jurisdiction over the Borrower,
any of its Subsidiaries or any of its properties.
"Guarantee" shall mean, as to any Person, any obligation of such
Person directly or indirectly guaranteeing any Indebtedness of any other Person
or in any manner providing for the payment of any Indebtedness of any other
Person or otherwise protecting the holder of such Indebtedness against loss
(whether by virtue of partnership arrangements, by agreement to keep-well, to
purchase assets, goods, securities or services, or to take-or-pay or otherwise);
provided that the term "Guarantee" shall not include (i) endorsements for
collection or deposit in the ordinary course of business, or (ii) obligations to
make servicing advances for delinquent taxes and insurance or other obligations
in respect of a Mortgaged Property, to the extent required by the Lender. The
amount of any Guarantee of a Person shall be deemed to be an amount equal to the
stated or determinable amount of the primary obligation in respect of which such
Guarantee is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith. The terms "Guarantee" and "Guaranteed" used as verbs shall have
correlative meanings.
"Guarantor" shall mean Resource America Inc., or any successor in
interest under the Affiliate Guaranty.
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<PAGE>
"Indebtedness" shall mean, for any Person: (a) obligations created,
issued or incurred by such Person for borrowed money (whether by loan, the
issuance and sale of debt securities or the sale of Property to another Person
subject to an understanding or agreement, contingent or otherwise, to repurchase
such Property from such Person); (b) obligations of such Person to pay the
deferred purchase or acquisition price of Property or services, other than trade
accounts payable (other than for borrowed money) arising, and accrued expenses
incurred, in the ordinary course of business so long as such trade accounts
payable are payable within 90 days of the date the respective goods are
delivered or the respective services are rendered; (c) Indebtedness of others
secured by a Lien on the Property of such Person, whether or not the respective
Indebtedness so secured has been assumed by such Person; (d) obligations
(contingent or otherwise) of such Person in respect of letters of credit or
similar instruments issued or accepted by banks and other financial institutions
for account of such Person; (e) Capital Lease Obligations of such Person; (f)
obligations of such Person under repurchase agreements or like arrangements; (g)
Indebtedness of others Guaranteed by such Person; (h) all obligations of such
Person incurred in connection with the acquisition or carrying of fixed assets
by such Person; and (i) Indebtedness of general partnerships of which such
Person is a general partner.
"Interest Rate Protection Agreement" shall mean, with respect to any or
all of the Mortgage Loans, any short sale of US Treasury Security, or futures
contract, or mortgage related security, or Eurodollar futures contract, or
options related contract, or interest rate swap, cap or collar agreement or
similar arrangements providing for protection against fluctuations in interest
rates or the exchange of nominal interest obligations, either generally or under
specific contingencies, entered into by the Borrower with MS & Co. or its
affiliate, and reasonably acceptable to the Lender.
"Lender" shall have the meaning provided in the heading hereto.
"Lien" shall mean any mortgage, lien, pledge, charge, security interest
or similar encumbrance.
"Loan" shall have the meaning provided in Section 2.01(a) hereof.
"Loan Agreement" shall mean this Master Loan and Security Agreement, as
the same may be amended, supplemented or otherwise modified from time to time.
"Loan Documents" shall mean, collectively, this Loan Agreement, the
Note, the Affiliate Guaranty and the Custodial Agreement.
"Market Value" shall mean, as of any date in respect of an Eligible
Mortgage Loan, the price at which such Eligible Mortgage Loan could readily be
sold as determined in good faith by the Lender. The Lender's determination of
Market Value shall be conclusive upon the parties absent manifest error on the
part of the Lender.
"Material Adverse Effect" shall mean a material adverse effect on (a)
the Property, business, operations, financial condition or prospects of the
Borrower, (b) the ability of the Borrower to perform its obligations under any
of the Loan Documents to which it is a party, (c) the validity or enforceability
of any of the Loan Documents, (d) the rights and remedies of the Lender under
any of the Loan Documents, (e) the timely payment of the principal of or
interest on the Loans or other amounts payable in connection therewith or (f)
the Collateral.
"Maximum Credit" shall mean $15,000,000.
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<PAGE>
"Mortgage" shall mean the mortgage, deed of trust or other instrument
securing a Mortgage Note, which creates a first or second lien on the fee in
real property securing the Mortgage Note.
"Mortgage File" shall have the meaning assigned thereto in the
Custodial Agreement.
"Mortgage Loan" shall mean a mortgage loan which the Custodian has been
instructed to hold for the Lender pursuant to the Custodial Agreement, and which
Mortgage Loan includes, without limitation, (i) a Mortgage Note and related
Mortgage and (ii) all right, title and interest of the Borrower in and to the
Mortgaged Property covered by such Mortgage.
"Mortgage Loan Documents" shall mean, with respect to a Mortgage Loan,
the documents comprising the Mortgage File for such Mortgage Loan.
"Mortgage Loan Schedule" shall have the meaning assigned thereto in the
Custodial Agreement.
"Mortgage Loan Schedule and Exception Report" shall mean the mortgage
loan schedule and exception report prepared by the Custodian pursuant to the
Custodial Agreement.
"Mortagae Loan Tape" shall mean a computer-readable electronic
transmission containing the following information with respect to each Mortgage
Loan, to be delivered by the Borrower to the Lender pursuant to Section 2.03(a)
hereof: (i) a field detailing whether the Mortgage Loan is an 'A' Credit
Mortgage Loan, a 'B' Credit Mortgage Loan, a 'C' Credit Mortgage Loan, or a 'D'
Credit Mortgage Loan; (ii) a field indicating whether the Mortgage Loan is a
Second Lien Mortgage Loan; (iii) a field indicating whether the Mortgage Loan is
a Wet-Ink Mortgage Loan, and (iv) such other fields as shall be mutually agreed
upon by the Borrower and the Lender.
"Mortgage Note" shall mean the original executed promissory note or
other evidence of the indebtedness of a mortgagor/borrower with respect to a
Mortgage Loan.
"Mortgaged Property" shall mean the real property (including all
improvements, buildings, fixtures, building equipment and personal property
thereon and all additions, alterations and replacements made at any time with
respect to the foregoing) and all other collateral securing repayment of the
debt evidenced by a Mortgage Note.
"Mortgagor" shall mean the obligor on a Mortgage Note.
"MS & Co." shall mean Morgan Stanley & Co. Incorporated, a registered
broker-dealer.
"Multiemployer Plan" shall mean a multiemployer plan defined as such in
Section 3(37) of ERISA to which contributions have been or are required to be
made by the Borrower or any ERISA Affiliate and that is covered by Title IV of
ERISA.
"Net Income" shall mean, for any period, the net income of the Borrower
for such period as determined in accordance with GAAP.
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<PAGE>
"Note" shall mean the promissory note provided for by Section 2.02(a)
hereof for Loans and any promissory note delivered in substitution or exchange
therefor, in each case as the same shall be modified and supplemented and in
effect from time to time.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions under ERISA.
"Person" shall mean any individual, corporation, company, voluntary
association, partnership, joint venture, limited liability company, trust,
unincorporated association or government (or any agency, instrumentality or
political subdivision thereof).
"Plan" shall mean an employee benefit or other plan established or
maintained by the Borrower or any ERISA Affiliate and covered by Title IV of
ERISA, other than a Multiemployer Plan.
"Post-Default Rate" shall mean, in respect of any principal of any Loan
or any other amount under this Loan Agreement, the Note or any other Loan
Document that is not paid when due to the Lender (whether at stated maturity, by
acceleration, by mandatory prepayment or otherwise), a rate per annum during the
period from and including the due date to but excluding the date on which such
amount is paid in full equal to 2% per annum plus the Prime Rate.
"Prime Rate" shall mean the prime rate announced to be in effect from
time to time, as published as the average rate in The Wall Street Journal.
"Property" shall mean any right or interest in or to property of any
kind whatsoever, whether real, personal or mixed and whether tangible or
intangible.
"Regulations G.T.U and X" shall mean Regulations G, T, U and X of the
Board of Governors of the Federal Reserve System (or any successor), as the same
may be modified and supplemented and in effect from time to time.
"Responsible Officer" shall mean, as to any Person, the chief executive
officer or, with respect to financial matters, the chief financial officer of
such Person.
"Second Lien Mortgage Loan" shall mean an Eligible Mortgage Loan
secured by the lien on the Mortgaged Property, subject to one prior lien on such
Mortgaged Property.
"Secured Obligations" shall have the meaning provided in Section
4.01(c) hereof.
"Securitization Transaction" shall mean a securitization transaction
backed by Mortgage Loans underwritten or placed on behalf of the Borrower which
transaction has received an investment grade rating from any
nationally-recognized rating agency and otherwise conforms to the current
standards of institutional securitization applicable to mortgage loans
substantially similar in nature to the Mortgage Loans.
"Servicer" shall have the meaning provided in Section 11.14(c) hereof.
"Servicing Agreement" shall have the meaning provided in Section
11.14(c) hereof.
"Servicing Records" shall have the meaning provided in Section 11.14(b)
hereof.
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"Settlement Agent" shall mean, with respect to any Loan, the entity
reasonably satisfactory to the Lender, (which may be a title company, escrow
company or attorney in accordance with local law and practice in the
jurisdiction where the related Wet-Ink Mortgage Loan is being originated) to
which the proceeds of such Loan are to be wired pursuant to the instructions of
the Lender.
"Subsidiary" shall mean, with respect to any Person, any corporation,
partnership or other entity of which at least a majority of the securities or
other ownership interests having by the terms thereof ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions, of such corporation, partnership or other entity (irrespective of
whether or not at the time securities or other ownership interests of any other
class or classes of such corporation, partnership or other entity shall have or
might have voting power by reason of the happening of any contingency) is at the
time directly or indirectly owned or controlled by such Person or one or more
Subsidiaries of such Person or by such Person and one or more Subsidiaries of
such Person.
"Tangible Net Worth" shall mean, as of a particular date,
(a) all amounts which would be included under capital or subordinated
debt on a balance sheet of the Borrower at such date, determined in
accordance with GAAP, less
(b) (i) amounts owing to the Borrower from Affiliates and (ii)
intangible assets in excess of $1,000,000 representing start-up costs,
determined in accordance with GAAP.
"Termination Date" shall mean October 16, 1998 or such earlier date on
which this Loan Agreement shall terminate in accordance with the provisions
hereof or by operation of law.
"Test Period" shall have the meaning provided in Section 7.16 hereof.
"Total Indebtedness" shall mean, for any period, the aggregate
Indebtedness of the Borrower during such period less the amount of any
nonspecific balance sheet reserves maintained in accordance with GAAP.
"True Sale Certification" shall mean a certification substantially in
the form of Exhibit G hereto.
"Underwriting Guidelines" shall mean the underwriting guidelines
attached as Exhibit E hereto.
"Uniform Commercial Code" shall mean the Uniform Commercial Code as in
effect on the date hereof in the State of New York; provided that if by reason
of mandatory provisions of law, the perfection or the effect of perfection or
non-perfection of the security interest in any Collateral is governed by the
Uniform Commercial Code as in effect in a jurisdiction other than New York,
"Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect in
such other jurisdiction for purposes of the provisions hereof relating to such
perfection or effect of perfection or non-perfection.
1.02 Accounting Terms and Determinations. Except as otherwise expressly
provided herein, all accounting term used herein shall be interpreted, and all
financial statements and certificates and reports as to financial matters
required to be delivered to the Lender hereunder shall be prepared, in
accordance with GAAP.
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Section 2. Loans, Note and Prepayments.
2.01 Loans.
(a) The Lender agrees to consider from time to time the Borrower's
requests that the Lender make, on the terms and conditions of this Loan
Agreement, loans (individually, a "Loan" and, collectively, the "Loans") to the
Borrower in Dollars, from and including the Effective Date to and including the
Termination Date in an aggregate principal amount at any one time outstanding up
to but not exceeding the Maximum Credit as in effect from time to time. This
Loan Agreement is not a commitment to lend but rather sets forth the procedures
to be used in connection with periodic requests for Loans. The Borrower hereby
acknowledges that the Lender is under no obligation to agree to make, or to
make, any Loan pursuant to this Loan Agreement.
(b) Subject to the terms and conditions of this Loan Agreement, during
such period the Borrower may borrow, repay and reborrow hereunder.
(c) In no event shall a Loan be made when any Default or Event of
Default has occurred and is continuing.
2.02 Notes.
(a) The Loans made by the Under shall be evidenced by a single
promissory note of the Borrower substantially in the form of Exhibit A hereto
(the "Note"), dated the date hereof, payable to the Lender in a principal amount
equal to the amount of the Maximum Credit as originally in effect and otherwise
duly completed. The Lender shall have the right to have its Note subdivided, by
exchange for promissory notes of lesser denominations or otherwise.
(b) The date, amount and interest rate of each Loan made by the Lender
to the Borrower, and each payment made on account of the principal thereof,
shall be recorded by the Lender on its books and, prior to any transfer of the
Note, endorsed by the Lender on the schedule attached to the Note or any
continuation thereof; provided that the failure of the Lender to make any such
recordation or endorsement shall not affect the obligations of the Borrower to
make a payment when due of any amount owing hereunder or under the Note in
respect of the Loans.
2.03 Procedure for Borrowing.
(a) The Borrower may request a borrowing hereunder, on any Business Day
during the period from and including the Effective Date to and including the
Termination Date, by delivering to the Lender, with a copy to the Custodian, an
irrevocable written request for borrowing, substantially in the form of
Exhibit D attached hereto, which request must be received by the Lender prior to
3:00 p.m., New York City time, one (1) Business Day prior to the requested
Funding Date. Such request for borrowing shall (i) attach a schedule identifying
the Eligible Mortgage Loans that the Borrower proposes to pledge to the Lender
and to be included in the Borrowing Base in connection with such borrowing, (ii)
specify the requested Funding Date, (iii) include a Mortgage Loan Tape
containing information with respect to the Eligible Mortgage Loans that the
Borrower proposes to pledge to the Lender and to be included in the Borrowing
Base in connection with such borrowing, and (iv) attach an officer's certificate
signed by a Responsible Officer of the Borrower as required by Section 5.02(b)
hereof.
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(b) Upon the Borrower's request for a borrowing pursuant to Section
2.03(a), the Lender may at its sole option, assuming all conditions precedent
set forth in Section 5.01 and 5.02 have been met and provided no Default shall
have occurred and be continuing, make a Loan to the Borrower on the requested
Funding Date, in the amount so requested.
(c) The Borrower shall release to the Custodian no later than 12:00
p.m., New York City time, one (1) Business Day prior to the requested Funding
Date, the Mortgage File pertaining to each Eligible Mortgage Loan (other than a
Wet-Ink Mortgage Loan) to be pledged to the Lender and included in the Borrowing
Base on such requested Funding Date, in accordance with the terms and conditions
of the Custodial Agreement.
(d) Pursuant to the Custodial Agreement, if the Custodian has received
such Mortgage File by 12:00 p.m., New York City time, on the Funding Date, then
on the Funding Date, the Custodian will deliver, to the Lender and the Borrower,
via facsimile and by modem, no later than 3:00 p.m., New York City time, a Trust
Receipt (as defined in the Custodial Agreement) in respect of all Mortgage Loans
(except Wet-Ink Mortgage Loans) pledged to the Lender on such Funding Date, and
a Mortgage Loan Schedule and Exception Report (as so defined) covering all
Wet-Ink Mortgage Loans so pledged. Subject to Section 5 hereof, such borrowing
will then be made available to the Borrower by the Lender transferring, via wire
transfer, to the following account of the Borrower: Jefferson Bank, for the A/C
of Fidelity Mortgage Funding, Inc. Warehouse Account, Account No. 004274598, ABA
No. 031 901 482, Attn: Eric Schneider, prior to the close of business on such
Funding Date, in the aggregate amount of such borrowing in funds immediately
available to the Borrower.
2.04 Limitation on Types of Loans; Illegality. Anything herein to the
contrary notwithstanding, if, on or prior to the determination of any Eurodollar
Rate:
(a) the Lender determines, which determination shall be conclusive,
that quotations of interest rates for the relevant deposits referred to in
the definition of "Eurodollar Rate" in Section 1.01 hereof are not being
provided in the relevant amounts or for the relevant maturities for purposes
of determining rates of interest for Loans as provided herein; or
(b) the Lender determines, which determination shall be conclusive,
that the relevant rate of interest referred to in the definition of
"Eurodollar Rate" in Section 1.01 hereof upon the basis of which the rate of
interest for Loans is to be determined is not likely adequately to cover the
cost to the Lender of making or maintaining Loans; or
(c) it becomes unlawful for the Lender to honor its obligation to make
or maintain Loans hereunder using a Eurodollar Rate;
then the Lender shall give the Borrower prompt notice thereof and, so
long as such condition remains in effect, the Lender shall be under no
obligation to make additional Loans, and the Borrower shall, either prepay all
such Loans as may be outstanding or pay interest on such Loans at a rate per
annum equal to the Federal Funds Rate plus 1%.
2.05 Repayment of Loan; Interest.
(a) The Borrower hereby promises to repay in full on the Termination
Date the then aggregate outstanding principal amount of the Loans.
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(b) The Borrower hereby promises to pay to the Lender interest on the
unpaid principal amount of each Loan for the period from and including the date
of such Loan to but excluding the date such Loan shall be paid in full, at a
rate per annum equal to the Eurodollar Rate plus the Applicable Margin.
Notwithstanding the foregoing, the Borrower hereby promises to pay to the Lender
interest at the applicable Post-Default Rate on any principal of any Loan and on
any other amount payable by the Borrower hereunder or under the Note that shall
not be paid in full when due (whether at stated maturity, by acceleration or by
mandatory prepayment or otherwise) for the period from and including the due
date thereof to but excluding the date the same is paid in full. The Lender
shall provide prompt notice to the Borrower that such Post-Default Rate is being
applied to such outstanding amount. Accrued interest on each Loan shall be
payable monthly on the first Business Day of each month and for the last month
of the Loan Agreement on the first Business Day of such last month and on the
Termination Date, except that interest payable at the Post-Default Rate shall
accrue daily and shall be payable upon such accrual. Promptly after the
determination of any interest rate provided for herein or any change therein,
the Lender shall give notice thereof to the Borrower.
(c) It is understood and agreed that, unless and until a Default shall
have occurred and be continuing, the Borrower shall be entitled to the proceeds
of the Mortgage Loans pledged to the Lender hereunder.
2.06 Mandatory Prepayments or Pledge.
If at any time the aggregate outstanding principal amount of Loans
exceeds the Borrowing Base (a "Borrowing Base Deficiency"), as determined by the
Lender and notified to the Borrower on any Business Day, the Borrower shall no
later than one Business Day after receipt of such notice, either prepay the
Loans in part or in whole or pledge additional Eligible Mortgage Loans (which
Collateral shall be in all respects acceptable to the Lender) to the Lender,
such that after giving effect to such prepayment or pledge the aggregate
outstanding principal amount of the Loans does not exceed the Borrowing Base.
Section 3. Payments; Computations; Etc,
3.01 Payments.
(a) Except to the extent otherwise provided herein, all payments of
principal, interest and other amounts to be made by the Borrower under this Loan
Agreement and the Note, shall be made in Dollars, in immediately available
funds, without deduction, set-off or counterclaim, to the Lender at the
following account maintained by the Lender: Account No. 40615114, for the
account of MSMCI, Citibank, N.A., ABA No. 021000089, Attn: Peter A. Mozer, not
later than 1:00 p.m., New York City time, on the date on which such payment
shall become due (and each such payment made after such time on such due date
shall be deemed to have been made on the next succeeding Business Day). The
Borrower acknowledges that it has no rights of withdrawal from the foregoing
account.
(b) Except to the extent otherwise expressly provided herein, if the
due date of any payment under this Loan Agreement or the Note would otherwise
fall on a day that is not a Business Day, such date shall be extended to the
next succeeding Business Day, and interest shall be payable for any principal so
extended for the period of such extension.
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3.02 Computations. Interest on the Loans shall be computed on the basis
of a 360-day year for the actual days elapsed (including the first day but
excluding the last day) occurring in the period for which payable.
3.03 U.S. Taxes.
(a) The Borrower agrees to pay to the Lender such additional amounts as
are necessary in order that the net payment of any amount due to the Lender
hereunder after deduction for or withholding in respect of any U.S. Tax (as
defined below) imposed with respect to such payment (or in lieu thereof, payment
of such U.S. Tax by the Lender), will not be less than the amount stated herein
to be then due and payable; provided that the foregoing obligation to pay such
additional amounts shall not apply:
(i) to any payment to the Lender hereunder unless the Lender is
entitled to submit a Form 1001 (relating to the Lender and entitling it to a
complete exemption from withholding on all interest to be received by it
hereunder in respect of the Loans) or Form 4224 (relating to all interest to
be received by the Lender hereunder in respect of the Loans), or
(ii) to any U. S. Tax imposed solely by reason of the failure by the
Lender to comply with applicable certification, information, documentation
or other reporting requirements concerning the nationality, residence,
identity or connections with the United States of America of the Lender if
such compliance is required by statute or regulation of the United States of
America as a precondition to relief or exemption from such U.S. Tax.
For the purposes of this Section 3.03, (x) "Form 1001" shall mean Form 1001
(Ownership, Exemption, or Reduced Rate Certificate) of the Department of the
Treasury of the United States of America, (y) "Form 4224" shall mean Form 4224
(Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States) of the Department of the
Treasury of the United States of America (or in relation to either such Form
such successor and related form as may from time to time be adopted by the
relevant taxing authorities of the United States of America to document a claim
to which such Form relates), and (z) "U.S. Taxes" shall mean any present or
future tax, assessment or other charge or levy imposed by or on behalf of the
United States of America or any taxing authority thereof or therein.
(b) Within 30 days after paying any such amount to the Lender, and
within 30 days after it is required by law to remit such deduction or
withholding to any relevant taxing or other authority, the Borrower shall
deliver to the Lender evidence satisfactory to the Lender of such deduction,
withholding or payment (as the case may be).
(c) The Lender represents and warrants to the Borrower that on the date
hereof the Lender is either incorporated under the laws of the United States or
a State thereof or is entitled to submit a Form 1001 (relating to the Lender and
entitling it to a complete exemption from withholding on all interest to be
received by it hereunder in respect of the Loans) or Form 4224 (relating to all
interest to be received by the Lender hereunder in respect of the Loans).
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Section 4. Collateral Security.
4.01 Collateral: Security Interest.
(a) Pursuant to the Custodial Agreement, the Custodian shall hold the
Mortgage Loan Documents as exclusive bailee and agent for the Lender pursuant to
terms of the Custodial Agreement and shall deliver to the Lender Trust Receipts
(as defined in the Custodial Agreement) each to the effect that it has reviewed
such Mortgage Loan Documents in the mamer and to the extent required by the
Custodial Agreement and identifying any deficiencies in such Mortgage Loan
Documents as so reviewed.
(b) All of the Borrower's right, title and interest in, to and under
each of the following items of property, whether now owned or hereafter
acquired, now existing or hereafter created and wherever located, is hereinafter
referred to as the Collateral:
(i) all Mortgage Loans;
(ii) all Mortgage Loan Documents, including without limitation all
promissory notes, and all Servicing Records (as defined in Section 11.14(b)
below), servicing agreements and any other collateral pledged or otherwise
relating to such Mortgage Loans, together with all files, documents,
instruments, surveys, certificates, correspondence, appraisals, computer
programs, computer storage media, accounting records and other books and
records relating thereto;
(iii) all mortgage guaranties and insurance (issued by governmental
agencies or otherwise) and any mortgage insurance certificate or other
document evidencing such mortgage guaranties or insurance relating to any
Mortgage Loan and all claim and payments thereunder;
(iv) all other insurance policies and insurance proceeds relating to
any Mortgage Loan or the related Mortgaged Property;
(v) all Interest Rate Protection Agreements;
(vi) all "general intangibles" as defined in the Uniform Commercial
Code relating to or constituting any and all of the foregoing; and
(vii) any and all replacements, substitutions, distributions on or
proceeds of any and all of the foregoing.
(c) The Borrower hereby assigns, pledges and grants a security interest
in all of its right, title and interest in, to and under the Collateral to the
Lender to secure the repayment of principal of and interest on all Loans and all
other amounts owing to the Lender hereunder, under the Note and under the other
Loan Documents (collectively, the "Secured Obligations"). The Borrower agrees to
mark its computer records and tapes to evidence the interests granted to the
Lender hereunder.
4.02 Further Documentation. At any time and from time to time, upon the
written request of the Lender, and at the sole expense of the Borrower, the
Borrower will promptly and duly execute and deliver, or will promptly cause to
be executed and delivered, such further instruments and documents and take such
further action as the Lender may reasonably request for the purpose of obtaining
or preserving the full benefits of this Loan Agreement and of the rights and
powers herein
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granted, including, without limitation, the filing of any financing or
continuation statements under the Uniform Commercial Code in effect in any
jurisdiction with respect to the Liens created hereby. The Borrower also hereby
authorizes the Lender to file any such financing or continuation statement
without the signature of the Borrower to the extent permitted by applicable law.
A carbon, photographic or other reproduction of this Loan Agreement shall be
sufficient as a financing statement for filing in any jurisdiction.
4.03 Changes in Locations, Name, etc. The Borrower shall not (i) change
the location of its chief executive office/chief place of business from that
specified in Section 6 hereof or (ii) change its name, identity or corporate
structure (or the equivalent) or change the location where it maintains its
records with respect to the Collateral unless it shall have given the Lender at
least 30 days prior written notice thereof and shall have delivered to the
Lender all Uniform Commercial Code financing statements and amendments thereto
as the Lender shall request and taken all other actions deemed necessary by the
Lender to continue its perfected status in the Collateral with the same or
better priority.
4.04 Lender's Appointment as Attorney-in-Fact.
(a) The Borrower hereby irrevocably constitutes and appoints the Lender
and any officer or agent thereof, with full power of substitution, as its true
and lawful attorney-in-fact with full irrevocable power and authority in the
place and stead of the Borrower and in the name of the Borrower or in its own
name, from time to time in the Lender's discretion, for the purpose of carrying
out the terms of this Loan Agreement, to take any and all appropriate action and
to execute any and all documents and instruments which may be necessary or
desirable to accomplish the purposes of this Loan Agreement, and, without
limiting the generality of the foregoing, the Borrower hereby gives the Lender
the power and right, on behalf of the Borrower, without assent by, but with
notice to, the Borrower, if an Event of Default shall have occurred and be
continuing, to do the following:
(i) in the name of the Borrower or its own name, or otherwise, to take
possession of and endorse and collect any checks, drafts, notes, acceptances
or"other instruments for the payment of moneys due under any mortgage
insurance or with respect to any other Collateral and to file any claim or
to take any other action or proceeding in any court of law or equity or
otherwise deemed appropriate by the Lender for the purpose of collecting any
and all such moneys due under any such mortgage insurance or with respect to
any other Collateral whenever payable;
(ii) to pay or discharge taxes and Liens levied or placed on or
threatened against the Collateral; and
(iii) (A) to direct any party liable for any payment under any
Collateral to make payment of any and all moneys due or to become due
thereunder directly to the Lender or as the Lender shall direct; (B) to ask
or demand for, collect, receive payment of and receipt for, any and all
moneys, claims and other amounts due or to become due at any time in respect
of or arising out of any Collateral; (C) to sign and endorse any invoices,
assignments, verifications, notices and other documents in connection with
any of the Collateral; (D) to commence and prosecute any suits, actions or
proceedings at law or in equity in any court of competent jurisdiction to
collect the Collateral or any thereof and to enforce any other right in
respect of any Collateral; (E) to defend any suit, action or proceeding
brought against the Borrower with respect to any Collateral; (F) to settle,
compromise or adjust any suit, action or
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proceeding described in clause (E) above and, in connection therewith, to
give such discharges or releases as the Lender may deem appropriate; and (G)
generally, to sell, transfer, pledge and make any agreement with respect to
or otherwise deal with any of the Collateral as fully and completely as
though the Lender were the absolute owner thereof for all purposes, and to
do, at the Lender's option and the Borrower's expense, at any time, and from
time to time, all acts and things which the Lender deems necessary to
protect, preserve or realize upon the Collateral and the Lender's Liens
thereon and to effect the intent of this Loan Agreement, all as fully and
effectively as the Borrower might do.
The Borrower hereby ratifies all that said attorneys shall lawfully do or cause
to be done by virtue hereof. This power of attorney is a power coupled with an
interest and shall be irrevocable.
(b) The Borrower also authorizes the Lender, at any time and from time
to time, to execute, in connection with any sale provided for in Section 4.07
hereof, any endorsements, assignments or other instruments of conveyance or
transfer with respect to the Collateral.
(c) The powers conferred on the Lender are solely to protect the
Lender's interests in the Collateral and shall not impose any duty upon the
Lender to exercise any such powers. The Lender shall be accountable only for
amounts that it actually receives as a result of the exercise of such powers,
and neither the Lender nor any of its officers, directors, or employees shall be
responsible to the Borrower for any act or failure to act hereunder, except for
its own gross negligence or willful misconduct.
4.05 Performance by Lender of Borrower's Obligations. If the Borrower
fails to perform or comply with any of its agreements contained in the Loan
Documents and the Lender may itself perform or comply, or otherwise cause
performance or compliance, with such agreement, the expenses of the Lender
incurred in connection with such performance or compliance, together with
interest thereon at a rate per annum equal to the Post-Default Rate, shall be
payable by the Borrower to the Lender on demand and shall constitute Secured
Obligations.
4.06 Proceeds. If an Event of Default shall occur and be continuing,
(a) all proceeds of Collateral received by the Borrower consisting of cash,
checks and other near-cash items shall be held by the Borrower in trust for the
Lender, segregated from other funds of the Borrower, and shall forthwith upon
receipt by the Borrower be turned over to the Lender in the exact form received
by the Borrower (duly endorsed by the Borrower to the Lender, if required) and
(b) any and all such proceeds received by the Lender (whether from the Borrower
or otherwise) may, in the sole discretion of the Lender, be held by the Lender
as collateral security for, and/or then or at any time thereafter may be applied
by the Lender against, the Secured Obligations (whether matured or unmatured),
such application to be in such order as the Lender shall elect. Any balance of
such proceeds remaining after the Secured Obligations shall have been paid in
full and this Loan Agreement shall have been terminated shall be paid over to
the Borrower or to whomsoever may be lawfully entitled to receive the same. For
purposes hereof, proceeds shall include, but not be limited to, all principal
and interest payments, all prepayments and payoffs, insurance claims,
condemnation awards, sale proceeds, real estate owned rents and any other income
and all other amounts received with respect to the Collateral.
4.07 Remedies. If an Event of Default shall occur and be continuing,
the Lender may exercise, in addition to all other rights and remedies granted to
it in this Loan Agreement and in any other instrument or agreement securing,
evidencing or relating to the Secured Obligations, all rights and remedies of a
secured party under the Uniform Commercial Code. Without limiting the generality
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of the foregoing, the Lender without demand of performance or other demand,
presentment, protest, advertisement or notice of any kind (except any notice
required by law referred to below) to or upon the Borrower or any other Person
(each and all of which demands, presentments, protests, advertisements and
notices are hereby waived), may in such circumstances forthwith collect,
receive, appropriate and realize upon the Collateral, or any part thereof,
and/or may forthwith sell, lease, assign, give option or options to purchase, or
otherwise dispose of and deliver the Collateral or any part thereof (or contract
to do any of the foregoing), in one or more parcels or as an entirety at public
or private sale or sales, at any exchange, broker's board or office of the
Lender or elsewhere upon such terms and conditions as it may deem advisable and
at such prices as it may deem best, for cash or on credit or for future delivery
without assumption of any credit risk. The Lender shall have the right upon any
such public sale or sales, and, to the extent permitted by law, upon any such
private sale or sales, to purchase the whole or any part of the Collateral so
sold, free of any right or equity of redemption in the Borrower, which right or
equity is hereby waived or released. The Borrower further agrees, at the
Lender's request, to assemble the Collateral and make it available to the Lender
at places which the Lender shall reasonably select, whether at the Borrower's
premises or elsewhere. The Lender shall apply the net proceeds of any such
collection, recovery, receipt, appropriation, realization or sale, after
deducting all reasonable costs and expenses of every kind incurred therein or
incidental to the care or safekeeping of any of the Collateral or in any way
relating to the Collateral or the rights of the Lender hereunder, including
without limitation reasonable attorneys' fees and disbursements, to the payment
in whole or in part of the Secured Obligations, in such order as the Lender may
elect, and only after such application and after the payment by the Lender of
any other amount required or permitted by any provision of law, including
without limitation Section 9-504(l)(c) of the Uniform Commercial Code, need the
Lender account for the surplus, if any, to the Borrower. To the extent permitted
by applicable law, the Borrower waives all claims, damages and demands it may
acquire against the Lender arising out of the exercise by the Lender of any of
its rights hereunder, other than those claims, damages and demands arising from
the gross negligence or willful misconduct of the Lender. If any notice of a
proposed sale or other disposition of Collateral shall be required by law, such
notice shall be deemed reasonable and proper if given at least 10 days before
such sale or other disposition. The Borrower shall remain liable for any
deficiency (plus accrued interest thereon as contemplated pursuant to Section
2.05(b) hereof) if the proceeds of any sale or other disposition of the
Collateral are insufficient to pay the Secured Obligations and the fees and
disbursements of any attorneys employed by the Lender to collect such
deficiency.
4.08 Limitation on Duties Regarding Presentation of Collateral. The
Lender's duty with respect to the custody, safekeeping and physical preservation
of the Collateral in its possession, under Section 9-207 of the Uniform
Commercial Code or otherwise, shall be to deal with it in the same manner as the
Lender deals with similar property for its own account. Neither the Lender nor
any of its directors, officers or employees shall be liable for failure to
demand, collect or realize upon all or any part of the Collateral or for any
delay in doing so or shall be under any obligation to sell or otherwise dispose
of any Collateral upon the request of the Borrower or otherwise.
4.09 Powers Coupled with an Interest. All authorizations and agencies
herein contained with respect to the Collateral are irrevocable and powers
coupled with an interest.
4.10 Release of Secure Interest. Upon termination of this Loan
Agreement and repayment to the Lender of all Secured Obligations and the
performance of all obligations under the Loan Documents the Lender shall release
its security interest in any remaining Collateral.
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Section 5. Conditions Precedent.
5.01 Initial Loan. The obligation of the Lender to make its initial
Loan hereunder is subject to the satisfaction, immediately prior to or
concurrently with the making of such Loan, of the condition precedent that the
Lender shall have received all of the following documents, each of which shall
be satisfactory to the Lender and its counsel in form and substance:
(a) Loan Documents.
(i) Note. The Note, duly completed and executed;
(ii) Custodial Agreement. The Custodial Agreement, duly executed and
delivered by the Borrower and the Custodian. In addition, the Borrower shall
have taken such other action as the Lender shall have requested in order to
perfect the security interests created pursuant to the Loan Agreement;
(b) Organzational Documents. A good standing certificate and certified
copies of the charter and by-laws (or equivalent documents) of each Affiliated
Party and of all corporate or other authority for each Affiliated Party with
respect to the execution, delivery and performance of the Loan Documents and
each other document to be delivered by each Affiliated Party from time to time
in connection herewith (and the Lender may conclusively rely on such certificate
until it receives notice in writing from any Afffliiated Party to the contrary);
(c) Legal Opinion. A legal opinion of counsel to each Affiliated Party,
substantially in the form attached hereto as Exhibit C;
(d) Mortgage Loan Schedule and Exception Report. A Mortgage Loan
Schedule and Exception Report, dated the Effective Date, from the Custodian,
duly completed;
(e) Servicing Agreement. Any Servicing Agreement, certified as a true,
correct and complete copy of the original, with the letter of the applicable
Servicer consenting to termination of such Servicing Agreement upon the
occurrence of an Event of Default attached;
(f) Affiliate Guaranty. The Affiliate Guaranty, duly executed by the
Guarantor; and
(g) Other Documents. Such other documents as the Lender may reasonably
request.
5.02 Initial and Subsequent Loans. The making of each Loan to the
Borrower (including the initial Loan) on any Business Day is subject to the
satisfaction of the following further conditions precedent, both immediately
prior to the making of such Loan and also after giving effect thereto and to the
intended use thereof:
(a) no Default or Event of Default shall have occurred and be
continuing;
(b) both immediately prior to the making of such Loan and also after
giving effect thereto and to the intended use thereof, the representations
and warranties made by the Borrower in Section 6 hereof, and elsewhere in
each of the Loan Documents, shall be true and
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complete on and as of the date of the making of such Loan in all material
respects (in the case of the representations and warranties in Section 6.10
and Schedule 1, solely with respect to Mortgage Loans included in the
Borrowing Base) with the same force and effect as if made on and as of such
date (or, if any such representation or warranty is expressly stated to have
been made as of a specific date, as of such specific date). The Lender shall
have received an officer's certificate signed by a Responsible Officer of
the Borrower certifying as to the truth and accuracy of the above, which
certificate shall specifically include a statement that the Borrower is in
compliance with all governmental licenses and authorizations and is
qualified to do business and in good standing in all required jurisdictions.
(c) the aggregate outstanding principal amount of the Loans shall not
exceed the Borrowing Base;
(d) subject to the Lender's right to perform one or more Due Diligence
Reviews pursuant to Section 11.15 hereof, the Lender shall have completed
its due diligence review of the Mortgage Loan Documents for each Loan and
such other documents, records, agreements, instruments, mortgaged properties
or information relating to such Loans as the Lender in its sole discretion
deems appropriate to review and such review shall be satisfactory to the
Lender in its sole discretion;
(e) the Lender shall have received from the Custodian a Trust Receipt
with exceptions as are acceptable to the Lender in its sole discretion in
respect of Eligible Mortgage Loans to be pledged hereunder on such Business
Day and a Mortgage Loan Schedule and Exception Report, in each case dated
such Business Day and duly completed;
(f) the Lender shall have received from the Borrower a Warehouse
Lender's Release Letter substantially in the form of Exhibit E-2 hereto (or
such other form acceptable to the Lender) or a Seller's Release Letter
substantially in the form of Exhibit E-1 hereto (or such other form
acceptable to the Lender) covering each Mortgage Loan to be pledged to the
Lender;
(g) the Lender shall have received from the Borrower a true sale
opinion and true sale certification, in forms acceptable to the Lender, with
respect to any Mortgage Loans acquired by the Borrower from an Affiliate;
and
(h) none of the following shall have occurred and/or be continuing:
(i) an event or events shall have occurred resulting in the effective
absence of a "repo market" or comparable "lending market" for financing debt
obligations secured by mortgage loans or securities for a period of (or
reasonably expected to be) at least 30 consecutive days or an event or
events shall have occurred resulting in the Lender not being able to finance
any Loans through the "repo market" or "lending market" with traditional
counterparties at rates which would have been reasonable prior to the
occurrence of such event or events;
(ii) an event or events shall have occurred resulting in the effective
absence of a "securities market" for securities backed by mortgage loans for
a period of (or reasonably expected to be) at least 30 consecutive days or
an event or events shall have occurred resulting
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in the Lender not being able to sell securities backed by mortgage loans at
prices which would have been reasonable prior to such event or events; or
(iii) there shall have occurred a material adverse change in the
financial condition of the Lender which effects (or can reasonably be
expected to effect) materially and adversely the ability of the Lender to
fund its obligations under this Loan Agreement.
Each request for a borrowing by the Borrower hereunder shall constitute a
certification by the Borrower that all the conditions set forth in this Section
5 (except with respect to Section 5.02(h) herein) have been satisfied (both as
of the date of such notice, request or confirmation and as of the date of such
borrowing).
Section 6. Representations and Warranties. The Borrower represents and
warrants to the Lender that throughout the term of this Loan Agreement:
6.01 Existence. The Borrower (a) is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization, (b) has all requisite corporate or other power, and has all
governmental licenses, authorizations, consents and approvals necessary to own
its assets and carry on its business as now being or as proposed to be
conducted, except where the lack of such licenses, authorizations, consents and
approvals would not be reasonably likely to have a material adverse effect on
its Property, business or financial condition or prospects; and (c) is qualified
to do business and is in good standing in all other jurisdictions in which the
nature of the business conducted by it makes such qualification necessary,
except where failure so to qualify would not be reasonably likely (either
individually or in the aggregate) to have a material adverse effect on its
Property, business or financial condition or prospects.
6.02 Financial Condition. Each Affiliated Party has heretofore
furnished to the Lender a copy of (a) its consolidated balance sheet and the
consolidated balance sheets of its consolidated Subsidiaries for the first three
quarterly fiscal periods of the fiscal year of the Affiliated Party ended June
30, 1997 and the related consolidated statements of income and retained earnings
and of cash flows for the Affiliated Party and its consolidated Subsidiaries for
such quarterly fiscal periods, setting forth in each case in comparative form
the figures for the previous year, (b) its consolidated balance sheet and the
consolidated balance sheets of its consolidated Subsidiaries for such fiscal
year and the related consolidated statements of income and retained earnings and
of cash flows for the Affiliated Party and its consolidated Subsidiaries for
such fiscal year, setting forth in each case in comparative form the figures for
the previous year, with the opinion thereon of Grant Thornton LLP and (c) its
consolidated balance sheet and the consolidated balance sheets of its
consolidated Subsidiaries for the quarterly fiscal periods of the Affiliated
Party ended September 30, 1995, and September 30, 1996 and the related
consolidated statements of income and retained earnings and of cash flows for
the Affiliated Party and its consolidated Subsidiaries for such quarterly fiscal
periods, setting forth in each case in comparative form the figures for the
previous year. All such financial statements are complete and correct and fairly
present, in all material respects, the consolidated financial condition of the
Affiliated Party and its Subsidiaries and the consolidated results of their
operations as at such dates and for such fiscal periods, all in accordance with
GAAP applied on a consistent basis. Since September 30, 1997, there has been no
material adverse change in the consolidated business, operations or financial
condition of the Affiliated Party and its consolidated Subsidiaries taken as a
whole from that set forth in said financial statements.
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<PAGE>
6.03 Litigation. There are no actions, suits, arbitrations,
investigations or proceedings pending or, to its knowledge, threatened against
either Affiliated Party or any of their respective Subsidiaries or affecting any
of the Property of any of them before any Governmental Authority (i) as to which
individually or in the aggregate there is a reasonable likelihood of an adverse
decision which would be reasonably likely to have a material adverse effect on
its Property, business or financial condition or prospects or (ii) which
questions the validity or enforceability of any of the Loan Documents or any
action to be taken in connection with the transactions contemplated hereby.
6.04 No Breach. Neither (a) the execution and delivery of the Loan
Documents nor (b) the consummation of the transactions therein contemplated in
compliance with the terms and provisions thereof will conflict with or result in
a breach of the charter or by-laws of either Affiliated Party, or any applicable
law, rule or regulation, or any order, writ, injunction or decree of any
Governmental Authority, or any Servicing Agreement or other material agreement
or instrument to which either Affiliated Party or any of their respective
Subsidiaries is a party or by which any of them or any of their Property is
bound or to which any of them is subject, or constitute a default under any such
material agreement or instrument or result in the creation or imposition of any
Lien (except for the Liens created pursuant to this Loan Agreement) upon any
Property of either Affiliated Party or any of their respective Subsidiaries
pursuant to the terms of any such agreement or instrument.
6.05 Action. Each Affiliated Party has all necessary corporate or other
power, authority and legal right to execute, deliver and perform its obligations
under each of the Loan Documents; the execution, delivery and performance by
each Affiliated Party of each of the Loan Documents have been duly authorized by
all necessary corporate or other action on its part; and each Loan Document has
been duly and validly executed and delivered by each Affiliated Party and
constitutes a legal, valid and binding obligation of the Affiliated Party,
enforceable against such Affiliated Party in accordance with its terms.
6.06 Approvals. No authorizations, approvals or consents of, and no
filings or registrations with, any Governmental Authority or any securities
exchange are necessary for the execution, delivery or performance by any
Affiliated Party of the Loan Documents or for the legality, validity or
enforceability thereof, except for filings and recordings in respect of the
Liens created pursuant to this Loan Agreement.
6.07 Margin Regulations. Neither the making of any Loan hereunder, nor
the use of the proceeds thereof, will violate or be inconsistent with the
provisions of Regulation G, T, U or X.
6.08 Taxes. Each Affiliated Party and their respective Subsidiaries
have filed all Federal income tax returns and all other material tax returns
that are required to be filed by them and have paid all taxes due pursuant to
such returns or pursuant to any assessment received by any of them, except for
any such taxes as are being appropriately contested in good faith by appropriate
proceedings diligently conducted and with respect to which adequate reserves
have been provided. The charges, accruals and reserves on the books of each
Affiliated Party and their respective Subsidiaries in respect of taxes and other
governmental charges are, in the opinion of each Affiliated Party, adequate.
6.09 Investment Company Act. Neither the Affiliated Party nor any of
its Subsidiaries is an "investment company", or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
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6.10 Collateral; Collateral Security.
(a) The Borrower has not assigned, pledged, or otherwise conveyed or
encumbered any Mortgage Loan to any other Person, and immediately prior to the
pledge of such Mortgage Loan to the Lender, the Borrower was the sole owner of
such Mortgage Loan and had good and marketable title thereto, free and clear of
all Liens, in each case except for Liens to be released simultaneously with the
Liens granted in favor of the Lender hereunder.
(b) The provisions of this Loan Agreement are effective to create in
favor of the Lender a valid security interest in all right, title and interest
of the Borrower in, to and under the Collateral.
(c) Upon receipt by the Custodian of each Mortgage Note, endorsed in
blank by a duly authorized officer of the Borrower, the Lender shall have a
fully perfected first priority security interest therein, in the Mortgage Loan
evidenced thereby and in the Borrower's interest in the related Mortgaged
Property.
(d) Upon the filing of financing statements on Form UCC-1 naming the
Lender as "Secured Party" and the Borrower as "Debtor", and describing the
Collateral, in the jurisdictions and recording offices listed on Schedule 2
attached hereto, the security interests granted hereunder in the Collateral will
constitute fully perfected first priority security interests under the Uniform
Commercial Code in all right, title and interest of the Borrower in, to and
under such Collateral which can be perfected by filing under the Uniform
Commercial Code.
6.11 Chief Executive Office. The Borrower's chief executive office on
the Effective Date is located at 7 East Skippack Pike, Ambler, Pennsylvania
19002.
6.12 Location of Books and Records. The location where the Borrower
keeps its books and records, including all computer tapes and records relating
to the Collateral is its chief executive office.
6.13 Hedging. Either the Borrower has not entered into Interest Rate
Protection Agreements or the Borrower has notified the Lender in writing of the
Borrower's policy with respect to Interest Rate Protection Agreements.
6.14 True and Complete Disclosure. The information, reports, financial
statements, exhibits and schedules furnished in writing by or on behalf of the
Borrower to the Lender in connection with the negotiation, preparation or
delivery of this Loan Agreement and the other Loan Documents or included herein
or therein or delivered pursuant hereto or thereto, when taken as a whole, do
not contain any untrue statement of material fact or omit to state any material
fact necessary to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading. All written
information furnished after the date hereof by or on behalf of the Borrower to
the Lender in connection with this Loan Agreement and the other Loan Documents
and the transactions contemplated hereby and thereby will be true, complete and
accurate in every material respect, or (in the case of projections) based on
reasonable estimates, on the date as of which such information is stated or
certified. There is no fact known to a Responsible Officer of the Borrower,
after due inquiry, that could reasonably be expected to have a Material Adverse
Effect that has not been disclosed herein, in the other Loan Documents or in a
report, financial statement, exhibit, schedule, disclosure letter or
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other writing furnished to the Lender for use in connection with the
transactions contemplated hereby or thereby.
6.15 Tangible Net Worth. On the Effective Date, the Tangible Net Worth
of the Borrower is not less than $4,500,000.
6.16 ERISA. Each Plan to which the Borrower or its Subsidiaries make
direct contributions, and, to the knowledge of the Borrower, each other Plan and
each Multiemployer Plan, is in compliance in all material respects with, and has
been administered in all material respects in compliance with, the applicable
provisions of ERISA, the Code and any other Federal or State law. No event or
condition has occurred and is continuing as to which the Borrower would be under
an obligation to furnish a report to the Lender under Section 7.01(d) hereof.
Section 7. Covenants of the Borrower. The Borrower covenants and agrees
with the Lender that, so long as any Loan is outstanding and until payment in
full of all Secured Obligations:
7.01 Financial Statements. The Borrower shall deliver to the Lender:
(a) as soon as available and in any event within 45 days after the end
of each of the first three quarterly fiscal periods of each fiscal year of
each Affiliated Party, the unaudited consolidated balance sheets of each
Affiliated Party and their respective consolidated Subsidiaries as at the
end of such period and the related unaudited consolidated statements of
income and retained earnings and of cash flows for each Affiliated Party and
their consolidated Subsidiaries for such period and the portion of the
fiscal year through the end of such period, setting forth in each case in
comparative form the figures for the previous year, accompanied by a
certificate of a Responsible Officer of each Affiliated Party, which
certificate shall state that said consolidated financial statements fairly
present the consolidated financial condition and, results of operations of
the respective Affiliated Party and their respective consolidated
Subsidiaries in accordance with GAAP, consistently applied, as at the end
of, and for, such period (subject to normal year-end audit adjustments);
(b) as soon as available and in any event within 90 days after the end
of each fiscal year of each Affiliated Party, the consolidated balance
sheets of each Affiliated Party and their respective consolidated
Subsidiaries as at the end of such fiscal year and the related consolidated
statements of income and retained earnings and of cash flows for each
Affiliated Party and their respective consolidated Subsidiaries for such
year, setting forth in each case in comparative form the figures for the
previous year, accompanied by an opinion thereon of independent certified
public accountants of recognized national standing, which opinion shall not
be qualified as to scope of audit or going concern and shall state that said
consolidated financial statements fairly present the consolidated financial
condition and results of operations of such Affiliated Party and its
consolidated Subsidiaries as at the end of, and for, such fiscal year in
accordance with GAAP, and a certificate of such accountants stating that, in
making the examination necessary for their opinion, they obtained no
knowledge, except as specifically stated, of any Default or Event of
Default;
(C) from time to time such other information regarding the financial
condition, operations, or business of each Affiliated Party as the Lender
may reasonably request; and
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(d) as soon as reasonably possible, and in any event within thirty (30)
days after a Responsible Officer of either Affiliated Party knows, or with
respect to any Plan or Multiemployer Plan to which either Affiliated Party
or any of their respective Subsidiaries makes direct contributions, has
reason to believe, that any of the events or conditions specified below with
respect to any Plan or Multiemployer Plan has occurred or exists, a
statement signed by a senior financial officer of the Affiliated Party
setting forth details respecting such event or condition and the action, if
any, that the Affiliated Party or its ERISA Affiliate proposes to take with
respect thereto (and a copy of any report or notice required to be filed
with or given to PBGC by the Affiliated Party or an ERISA Affiliate with
respect to such event or condition):
(i) any reportable event, as defined in Section 4043(b) of ERISA
and the regulations issued thereunder, with respect to a Plan, as to
which PBGC has not by regulation waived the requirement of Section
4043(a) of ERISA that it be notified within thirty (30) days of the
occurrence of such event (provided that a failure to meet the minimum
funding standard of Section 412 of the Code or Section 302 of ERISA,
including without limitation the failure to make on or before its due
date a required installment under Section 412(m) of the Code or Section
302(e) of ERISA, shall be a reportable event regardless of the issuance
of any waivers in accordance with Section 412(d) of the Code); and any
request for a waiver under Section 412(d) of the Code for any Plan;
(ii) the distribution under Section 4041(c) of ERISA of a notice
of intent to terminate any Plan or any action taken by the Borrower or
an ERISA Affiliate to terminate any Plan;
(iii) the institution by PBGC of proceedings under Section 4042 of
ERISA for the termination of, or the appointment of a trustee to
administer, any Plan, or the receipt by either Affiliated Party or any
ERISA Affiliate of a notice from a Multiemployer Plan that such action
has been taken by PBGC with respect to such Multiemployer Plan;
(iv) the complete or partial withdrawal from a Multiemployer Plan
by either Affiliated Party or any ERISA Affiliate that results in
liability under Section 4201 or 4204 of ERISA (including the obligation
to satisfy secondary liability as a result of a purchaser default) or
the receipt by either Affiliated Party or any ERISA Affiliate of notice
from a Multiemployer Plan that it is in reorganization or insolvency
pursuant to Section 4241 or 4245 of ERISA or that it intends to
terminate or has terminated under Section 4041A of ERISA;
(v) the institution of a proceeding by a fiduciary of any
Multiemployer Plan against either Affiliated Party or any ERISA
Affiliate to enforce Section 515 of ERISA, which proceeding is not
dismissed within 30 days; and
(vi) the adoption of an amendment to any Plan that, pursuant to
Section 401(a)(29) of the Code or Section 307 of ERISA, would result
in the loss of tax-exempt status of the trust of which such Plan is a
part if the Affiliated Party or an ERISA Affiliate fails to provide
timely security to such Plan in accordance with the provisions of said
Sections.
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The Borrower will furnish to the Lender, at the time it furnishes each set of
financial statements pursuant to paragraphs (a) and (b) above, a certificate of
a Responsible Officer of the Borrower to the effect that, to the best of such
Responsible Officer's knowledge, each Affiliated Party during such fiscal period
or year has observed or performed all of its covenants and other agreements, and
satisfied every condition, contained in this Loan Agreement and the other Loan
Documents to be observed, performed or satisfied by it, and that such
Responsible Officer has obtained no knowledge of any Default or Event of Default
except as specified in such certificate (and, if any Default or Event of Default
has occurred and is continuing, describing the same in reasonable detail and
describing the action the Affiliated Party has taken or proposes to take with
respect thereto).
7.02 Litigation. The Borrower will promptly, and in any event within 10
days after service of process on any of the following, give to the Lender notice
of all legal or arbitrable proceedings affecting any Affiliated Party or any of
their respective Subsidiaries that questions or challenges the validity or
enforceability of any of the Loan Documents or as to which there is a reasonable
likelihood of adverse determination which would result in a Material Adverse
Effect.
7.03 Existence, etc. The Borrower will:
(a) preserve and maintain its legal existence and all of its material
rights, privileges, licenses and franchises (provided that nothing in this
Section 7.03(a) shall prohibit any transaction expressly permitted under
Section 7.04 hereof);
(b) comply with the requirements of all applicable laws, rules,
regulations orders of Governmental Authorities (including, without
limitation, all environmental laws) if failure to comply with such
requirements would be reasonably likely (either individually or in the
aggregate) to have a material adverse effect on its Property, business or
financial condition, or prospects;
(c) keep adequate records and books of account, in which complete
entries will be made in accordance with GAAP consistently applied;
(d) not move its chief executive office from the address referred to in
Section 6.11 unless it shall have provided the Lender 30 days' prior
written notice of such change;
(e) pay and discharge all taxes, assessments and governmental charges
or levies imposed on it or on its income or profits or on any of its
Property prior to the date on which penalties attach thereto, except for any
such tax, assessment, charge or levy the payment of which is being contested
in good faith and by proper proceedings and against which adequate reserves
are being maintained; and
(f) permit representatives of the Lender, during normal business hours,
to examine, copy and make extracts from its books and records, to inspect
any of its Properties, and to discuss its business and affairs with its
officers, all to the extent reasonably requested by the Lender.
7.04 Prohibition of Fundamental Changes. The Borrower shall not enter
into any transaction of merger or consolidation or amalgamation, or liquidate,
wind up or dissolve itself (or suffer any liquidation, winding up or
dissolution) or sell all or substantially all of its assets; provided, that the
Borrower may merge or consolidate with (a) any wholly owned subsidiary of the
Borrower, or
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(b) any other Person if the Borrower is the surviving corporation; and provided
further, that if after giving effect thereto, no Default would exist hereunder.
7.05 Borrowing Base Deficiency. If at any time there exists a Borrowing
Base Deficiency the Borrower shall cure same in accordance with Section 2.06
hereof.
7.06 Notices. The Borrower shall give notice to the Lender:
(a) promptly upon receipt of notice or knowledge of the occurrence of
any Default or Event of Default;
(b) with respect to any Mortgage Loan pledged to the Lender hereunder,
immediately upon receipt of any principal prepayment (in full or partial) of
such pledged Mortgage Loan;
(c) with respect to any Mortgage Loan pledged to the Lender hereunder,
immediately upon receipt of notice or knowledge that the underlying
Mortgaged Property has been damaged by waste, fire, earthquake or earth
movement, windstorm, flood, tornado or other casualty, or otherwise damaged
so as to affect adversely the Collateral Value of such pledged Mortgage
Loan; and
(d) promptly upon receipt of notice or knowledge of (i) any default
related to any Collateral, (ii) any Lien or security interest (other than
security interests created hereby or by the other Loan Documents) on, or
claim asserted against, any of the Collateral or (iii) any event or change
in circumstances which could reasonably be expected to have a material
adverse effect on the Property, business or financial condition or prospects
of the Borrower.
Each notice pursuant to this Section shall be accompanied by a statement of a
Responsible Officer of the Borrower setting forth details of the occurrence
referred to therein and stating what action the Borrower has taken or proposes
to take with respect thereto.
7.07 Hedging. As soon as the Borrower's policy with respect to Interest
Rate Protection Agreements has been enacted, the Borrower shall promptly deliver
to the Lender a written summary thereof and shall thereafter maintain Interest
Rate Protection Agreements in compliance therewith. The Borrower shall deliver
to the Lender monthly a written summary of the notional amount of all
outstanding Interest Rate Protection Agreements.
7.08 Reports. The Borrower shall provide the Lender with a quarterly
report, which report shall include, among other items, a summary of the
Borrower's delinquency and loss experience with respect to mortgage loans
serviced by the Borrower, any Servicer or any designee of either, plus any such
additional reports as the Lender may reasonably request with respect to the
Borrower's or any Servicer's servicing portfolio or pending originations of
mortgage loans.
7.09 Underwriting Guidelines. Without the prior written consent of the
Lender, the Borrower shall not amend or otherwise modify the Underwriting
Guidelines.
7.10 Transactions with Affiliates. The Borrower will not enter into
any transaction, including without limitation any purchase, sale, lease or
exchange of property or the rendering of any service, with any Affiliate unless
such transaction is (a) otherwise permitted under this Loan Agreement, (b) in
the ordinary course of the Borrower's business and (c) upon fair and reasonable
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terms no less favorable to the Borrower than it would obtain in a comparable
arm's length transaction with a Person which is not an Affiliate, or make a
payment that is not otherwise permitted by this Section 7.10 to any Affiliate.
In no event shall the Borrower pledge to the Lender hereunder any Mortgage Loan
acquired by the Borrower from an Affiliate of the Borrower, unless the Borrower
has delivered to the Lender a true sale opinion, in form acceptable to the
Lender and a True Sale Certification, substantially in the form attached hereto
as Exhibit G, in connection therewith.
7.11 Limitation on Liens. The Borrower will defend the Collateral
against, and will take such other action as is necessary to remove, any Lien,
security interest or claim on or to the Collateral, other than the security
interests created under this Loan Agreement, and the Borrower will defend the
right, title and interest of the Lenders in and to any of the Collateral against
the claims and demands of all persons whomsoever.
7.12 Limitation on Guarantees. The Borrower shall not create, incur,
assume or suffer to exist any Guarantees.
7.13 Limitation on Distributions. After the occurrence and during the
continuation of any Event of Default, the Borrower shall not make any payment on
account of, or set apart assets for, a sinking or other analogous fund for the
purchase, redemption, defeasance, retirement or other acquisition of any equity
or partnership interest of the Borrower, whether now or hereafter outstanding,
or make any other distribution in respect thereof, either directly or
indirectly, whether in cash or property or in obligations of the Borrower.
7.14 Maintenance of Tangible Net Worth. The Borrower shall not permit
Tangible Net Worth at any time to be less than $3,500,000.
7.15 Maintenance of Ratio of Total Indebtedness to Tangible Net Worth.
The Borrower shall not permit the ratio of Total Indebtedness to Tangible Net
Worth at any time to be greater than 10:1.
7.16 Maintenance of Profitability. The Borrower shall not permit, for
any period of three consecutive fiscal quarters (each such period, a "Test
Period"), Net Income for such Test Period, before income taxes for such Test
Period and distributions made during such Test Period, to be less than $1.00.
7.17 Servicing Tape. The Borrower shall provide to the Lender on a
monthly basis a computer readable magnetic tape or an electronic transmission
containing servicing information, including without limitation those fields
specified by the Lender from time to time, on a loan-by-loan basis and in the
aggregate, with respect to the Mortgage Loans serviced hereunder by the Borrower
or any Servicer.
Section 8. Events of Default. Each of the following events shall
constitute an event of default (an "Event of Default") hereunder:
(a) the Borrower shall default in the payment of any principal of or
interest on any Loan when due (whether at stated maturity, upon acceleration
or at mandatory prepayment); or
(b) any Affiliated Party shall default in the payment of any other
amount payable by it hereunder or under any other Loan Document after
notification by the Lender of such default, and such default shall have
continued unremedied for five Business Days; or
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(c) any representation, warranty or certification made or deemed made
herein or in any other Loan Document by the Borrower or any certificate
furnished to the Lender pursuant to the provisions hereof or thereof shall
prove to have been false or misleading in any material respect as of the
time made or furnished (other than the representations and warranties set
forth in Schedule 1, which shall be considered solely for the purpose of
determining the Collateral Value of the Mortgage Loans; unless the Borrower
shall have made any such representations and warranties with knowledge that
they were materially false or misleading at the time made); or
(d) the Borrower shall fail to comply with the requirements of Section
7.03(a), Section 7.04, Section 7.05, Section 7.06, or Sections 7.09 through
7.17 hereof, or the Borrower shall otherwise fail to comply with the
requirements of Section 7.03 hereof and such default shall continue
unremedied for a period of five Business Days; or any Affiliated Party shall
fail to observe or perform any other covenant or agreement contained in this
Loan Agreement or any other Loan Document and such failure to observe or
perform shall continue unremedied for a period of seven Business Days; or
(e) a final judgment or judgments for the payment of money in excess of
$500,000 in the aggregate shall be rendered against any Affiliated Party or
any of its Subsidiaries by one or more courts, administrative tribunals or
other bodies having jurisdiction and the same shall not be discharged (or
provision shall not be made for such discharge) or bonded, or a stay of
execution thereof shall not be procured, within 60 days from the date of
entry thereof, and the Affiliated Party or any such Subsidiary shall not,
within said period of 60 days, or such longer period during which execution
of the same shall have been stayed or bonded, appeal therefrom and cause the
execution thereof to be stayed during such appeal; or
(f) any Affiliated Party shall admit in writing its inability to pay
its debts as such debts become due; or
(g) any Affiliated Party or any of their respective Subsidiaries shall
(i) apply for or consent to the appointment of, or the taking of possession
by, a receiver, custodian, trustee, examiner or liquidator or the like of
itself or of all or a substantial part of its property, (ii) make a general
assignment for the benefit of its creditors, (iii) commence a voluntary
case under the Bankruptcy Code, (iv) file a petition seeking to take
advantage of any other law relating to bankruptcy, insolvency,
reorganization, liquidation, dissolution, arrangement or winding-up, or
composition or readjustment of debts, (v) fail to controvert in a timely and
appropriate manner, or acquiesce in writing to, any petition filed against
it in an involuntary case under the Bankruptcy Code or (vi) take any
corporate or other action for the purpose of effecting any of the foregoing;
or
(h) a proceeding or case shall be commenced, without the application
or consent of any Affiliated Party or any of their respective Subsidiaries,
in any court of competent jurisdiction, seeking (i) its reorganization,
liquidation, dissolution, arrangement or winding-up, or the composition or
readjustment of its debts, (ii) the appointment of, or the taking of
possession by, a receiver, custodian, trustee, examiner, liquidator or the
like of the Affiliated Party or any such Subsidiary or of all or any
substantial part of its property, or (iii) similar relief in respect of the
Affiliated Party or Subsidiary under any law relating to bankruptcy,
insolvency, reorganization, liquidation, dissolution, arrangement or
winding-up, or composition or adjustment of debts, and such proceeding or
case shall continue undismissed, or an order,
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judgment or decree approving or ordering any of the foregoing shall be
entered and continue unstayed and in effect, for a period of 60 or more
days; or an order for relief against the Affiliated Party or Subsidiary
shall be entered in an involuntary case under the Bankruptcy Code; or
(i) the Custodial Agreement or any Loan Document shall for whatever
reason be terminated or cease to be in full force and effect, or the
enforceability thereof shall be contested by any Affiliated Party; or
(j) the Borrower shall grant, or suffer to exist, any Lien on any
Collateral except the Liens contemplated hereby; or the Liens contemplated
hereby shall cease to be first priority perfected Liens on the Collateral in
favor of the Lender or shall be Liens in favor of any Person other than the
Lender; or
(k) any materially adverse change in the Property, business, financial
condition or prospects of any Affiliated Party or any of its Subsidiaries
shall occur, in each case as determined by the Lender in its sole
discretion, or any other condition shall exist which, in the Lender's sole
discretion, constitutes a material impairment of any Affiliated Party's
ability to perform its obligations under this Loan Agreement, the Note or
any other Loan Document.
Section 9. Remedies Upon Default.
(a) Upon the occurrence of one or more Events of Default other than
those referred to in Section 8(g) or (h), the Lender may immediately declare the
principal amount of the Loans then outstanding under the Note to be immediately
due and payable, together with all interest thereon and fees and expenses
accruing under this Loan Agreement. Upon the occurrence of an Event of Default
referred to in Sections 8(g) or (h), such amounts shall immediately and
automatically become due and payable without any further action by any Person.
Upon such declaration or such automatic acceleration, the balance then
outstanding on the Note shall become immediately due and payable, without
presentment, demand, protest or other formalities of any kind, all of which are
hereby expressly waived by the Borrower.
(b) Upon the occurrence of one or more Events of Default, the Lender
shall have the right to obtain physical possession of the Servicing Records and
all other files of the Borrower relating to the Collateral and all documents
relating to the Collateral which are then or may thereafter come in to the
possession of the Borrower or any third party acting for the Borrower and the
Borrower shall deliver to the Lender such assignments as the Lender shall
request. The Lender shall be entitled to specific performance of all agreements
of the Borrower contained in this Loan Agreement.
Section 10. No Duty of Lender. The powers conferred on the Lender
hereunder are solely to protect the Lender's interests in the Collateral and
shall not impose any duty upon it to exercise any such powers. The Lender shall
be accountable only for amounts that it actually receives as a result of the
exercise of such powers, and neither it nor any of its officers, directors,
employees or agents shall be responsible to the Borrower for any act or failure
to act hereunder, except for its or their own gross negligence or willful
misconduct.
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Section II. Miscellaneous.
11.01 Waiver. No failure on the part of the Lender to exercise and no
delay in exercising, and no course of dealing with respect to, any right, power
or privilege under any Loan Document shall operate as a waiver thereof, nor
shall any single or partial exercise of any right, power or privilege under any
Loan Document preclude any other or further exercise thereof or the exercise of
any other right, power or privilege. The remedies provided herein are cumulative
and not exclusive of any remedies provided by law.
11.02 Notices. Except as otherwise expressly permitted by this Loan
Agreement, all notices, requests and other communications provided for herein
and under the Custodial Agreement (including without limitation any
modifications of, or waivers, requests or consents under, this Loan Agreement)
shall be given or made in writing (including without limitation by telex or
telecopy) delivered to the intended recipient at the "Address for Notices"
specified below its name on the signature pages hereof or thereof); or, as to
any party, at such other address as shall be designated by such party in a
written notice to each other party. Except as otherwise provided in this Loan
Agreement and except for notices given under Section 2 (which shall be effective
only on receipt), all such communications shall be deemed to have been duly
given when transmitted by telex or telecopy or personally delivered or, in the
case of a mailed notice, upon receipt, in each case given or addressed as
aforesaid.
11.03 Indemnification and Expenses.
(a) The Borrower agrees to hold the Lender harmless from and indemnify
the Lender against all liabilities, losses, damages, judgments, costs and
expenses of any kind which may be imposed on, incurred by or asserted against
the Lender (collectively, the "Costs") relating to or arising out of this Loan
Agreement, the Note, any other Loan Document or any transaction contemplated
hereby or thereby, or any amendment, supplement or modification of, or any
waiver or consent under or in respect of, this Loan Agreement, the Note, any
other Loan Document or any transaction contemplated hereby or thereby, that, in
each case, results from anything other than the Lender's gross negligence or
willful misconduct. Without limiting the generality of the foregoing, the
Borrower agrees to hold the Lender harmless from and indemnify the Lender
against all Costs relating to or arising out of any breach, violation or alleged
breach or violation of any consumer credit laws, including without limitation
the Truth in Lending Act and/or the Real Estate Settlement Procedures Act. In
any suit, proceeding or action brought by the Lender in connection with any
Mortgage Loan for any sum owing thereunder, or to enforce any provisions of any
Mortgage Loan, the Borrower will save, indemnify and hold the Lender harmless
from and against all expense, loss or damage suffered by reason of any defense,
set-off, counterclaim, recoupment or reduction or liability whatsoever of the
account debtor or obligor thereunder, arising out of a breach by the Borrower of
any obligation thereunder or arising out of any other agreement, indebtedness or
liability at any time owing to or in favor of such account debtor or obligor or
its successors from the Borrower. The Borrower also agrees to reimburse the
Lender as and when billed by the Lender for all the Lender's costs and expenses
incurred in connection with the enforcement or the preservation of the Lender's
rights under this Loan Agreement, the Note, any other Loan Document or any
transaction contemplated hereby or thereby, including without limitation the
reasonable fees and disbursements of its counsel. The Borrower hereby
acknowledges that, notwithstanding the fact that the Note is secured by the
Collateral, the obligation of the Borrower under the Note is a recourse
obligation of the Borrower.
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<PAGE>
(b) The Borrower agrees to pay as and when billed by the Lender all of
the out-of-pocket costs and expenses incurred by the Lender in connection with
the development, preparation and execution of, and any amendment, supplement or
modification to, this Loan Agreement, the Note, any other Loan Document or any
other documents prepared in connection herewith or therewith. The Borrower
agrees to pay to the Lender, immediately upon closing, all of the out-of-pocket
costs and expenses incurred in connection with the consummation and
administration of the transactions contemplated hereby and thereby including
without limitation (i) all the reasonable fees, disbursements and expenses of
counsel to the Lender not to exceed $10,000 and (ii) all the due diligence,
inspection, testing and review costs and expenses incurred by the Lender with
respect to Collateral under this Loan Agreement, including, but not limited to,
those costs and expenses incurred by the Lender pursuant to Sections 11.03(a),
11.14 and 11.15 hereof.
11.04 Amendments. Except as otherwise expressly provided in this Loan
Agreement, any provision of this Loan Agreement may be modified or supplemented
only by an instrument in writing signed by the Borrower and the Lender and any
provision of this Loan Agreement may be waived by the Lender.
11.05 Successors and Assigns. This Loan Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
11.06 Survival. The obligations of the Borrower under Sections 3.03 and
11.03 hereof shall survive the repayment of the Loans and the termination of
this Loan Agreement. In addition, each representation and warranty made or
deemed to be made by a request for a borrowing, herein or pursuant hereto shall
survive the making of such representation and warranty, and the Lender shall not
be deemed to have waived, by reason of making any Loan, any Default that may
arise because any such representation or warranty shall have proved to be false
or misleading, notwithstanding that the Lender may have had notice or knowledge
or reason to believe that such representation or warranty was false or
misleading at the time such Loan was made.
11.07 Captions. The table of contents and captions and section headings
appearing herein are included solely for convenience of reference and are not
intended to affect the interpretation of any provision of this Loan Agreement.
11.08 Counterparts. This Loan Agreement may be executed in any number
of counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Loan Agreement by
signing any such counterpart.
11.09 Loan Agreement Constitutes Security Agreement; Governing Law.
This Loan Agreement shall be governed by New York law without reference to
choice of law doctrine, and shall constitute a security agreement within the
meaning of the Uniform Commercial Code.
11.10 SUBMISSION TO JURISDICTION; WAIVERS. THE BORROWER HEREBY
IRREVOCABLY AND UNCONDITIONALLY:
(A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS LOAN AGREEMENT, THE NOTE AND THE OTHER LOAN
DOCUMENTS, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT
THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE
STATE OF NEW
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<PAGE>
YORK, THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN
DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF;
(B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH
COURTS AND, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY OBJECTION THAT IT MAY
NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY
SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT
COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME;
(C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY
BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR
ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS ADDRESS SET
FORTH UNDER ITS SIGNATURE BELOW OR AT SUCH OTHER ADDRESS OF WHICH THE
LENDER SHALL HAVE BEEN NOTIFIED; AND
(D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE
OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO
SUE IN ANY OTHER JURISDICTION.
11.11 WAIVER OF JURY TRIAL. EACH OF THE BORROWER AND THE LENDER HEREBY
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND
ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO
THIS LOAN AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY.
11.12 Acknowledgments. The Borrower hereby acknowledges that:
(a) it has been advised by counsel in the negotiation, execution and
delivery of this Loan Agreement, the Note and the other Loan Documents;
(b) the Lender has no fiduciary relationship to the Borrower, and the
relationship between the Borrower and the Lender is solely that of debtor
and creditor; and
(c) no joint venture exists between the Lender and the Borrower.
11.13 Hypothecation or Pledge of Loans. The Lender shall have free and
unrestricted use of all Collateral and nothing in this Loan Agreement shall
preclude the Lender from engaging in repurchase transactions with the Collateral
or otherwise pledging, repledging, transferring, hypothecating, or
rehypothecating the Collateral. Nothing contained in this Loan Agreement shall
obligate the Lender to segregate any Collateral delivered to the Lender by the
Borrower.
11.14 Servicing.
(a) The Borrower covenants to maintain or cause the servicing of the
Mortgage Loans to be maintained in conformity with accepted and prudent
servicing practices in the industry for the same type of mortgage loans as the
Mortgage Loans and in a manner at least equal in quality to the
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servicing the Borrower provides for mortgage loans which it owns. In the event
that the preceding language is interpreted as constituting one or more servicing
contracts, each such servicing contract shall terminate automatically upon the
earliest of (i) an Event of Default, (ii) the date on which all the Secured
Obligations have been paid in full or (iii) the transfer of servicing approved
by the Borrower.
(b) If the Mortgage Loans are serviced by the Borrower, (i) the
Borrower agrees that the Lender is the collateral assignee of all servicing
records, including but not limited to any and all servicing agreements, files,
documents, records, data bases, computer tapes, copies of computer tapes, proof
of insurance coverage, insurance policies, appraisals, other closing
documentation, payment history records, and any other records relating to or
evidencing the servicing of Mortgage Loans (the "Servicing Records"), and (ii)
the Borrower grants the Lender a security interest in all servicing fees and
rights relating to the Mortgage Loans and all Servicing Records to secure the
obligation of the Borrower or its designee to service in conformity with this
Section and any other obligation of the Borrower to the Lender. The Borrower
covenants to safeguard such Servicing Records and to deliver them promptly to
the Lender or its designee (including the Custodian) at the Lender's request.
(c) If the Mortgage Loans are serviced by a third party servicer (such
third party servicer, the "Servicer"), the Borrower (i) shall provide a copy of
the servicing agreement to the Lender, which shall be in form and substance
acceptable to the Lender (the "Servicing Agreement"); and (ii) hereby
irrevocably assigns to the Lender and the Lender's successors and assigns all
right, title, interest of the Borrower in, to and under, and the benefits of,
any Servicing Agreement with respect to the Mortgage Loans.
(d) If the servicer of the Mortgage Loans is the Borrower or the
Servicer is an Affiliate of the Borrower, the Borrower shall provide to the
Lender a letter from the Borrower or the Servicer, as the case may be, to the
effect that upon the occurrence of an Event of Default, the Lender may terminate
any Servicing Agreement and transfer servicing to its designee, at no cost or
expense to the Lender, it being agreed that the Borrower will pay any and all
fees required to terminate the Servicing Agreement and to effectuate the
transfer of servicing to the designee of the Lender.
(e) After the Funding Date, until the pledge of any Mortgage Loan is
relinquished by the Custodian, the Borrower will have no right to modify or
alter the terms of such Mortgage Loan and the Borrower will have no obligation
or right to repossess such Mortgage Loan or substitute another Mortgage Loan,
except as provided in the Custodial Agreement.
(f) In the event the Borrower or its Affiliate is servicing the
Mortgage Loans, the Borrower shall permit the Lender to inspect the Borrower's
or its Affiliate's servicing facilities, as the case may be, for the purpose of
satisfying the Lender that the Borrower or its Affiliate, as the case may be,
has the ability to service the Mortgage Loans as provided in this Loan
Agreement.
11.15 Periodic Due Diligence Review. The Borrower acknowledges that the
Lender has the right to perform continuing due diligence reviews with respect to
the Mortgage Loans, for purposes of verifying compliance with the
representations, warranties and specifications made hereunder, or otherwise, and
the Borrower agrees that upon reasonable (but no less than three (3) Business
Day's, unless a Default shall have occurred and be continuing) prior notice to
the Borrower, the Lender or its authorized representatives will be permitted
during normal business hours to examine, inspect, and make copies and extracts
of, the Mortgage Files and any and all documents, records, agreements,
instruments or information relating to such Mortgage Loans in the possession or
under the
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control of the Borrower and/or the Custodian. Such Due Diligence Reviews by the
Lender may be limited by the Borrower to two (2) Due Diligence Reviews per year
unless a Default shall have occurred and be continuing. The Borrower also shall
make available to the Lender a knowledgeable financial or accounting officer for
the purpose of answering questions respecting the Mortgage Files and the
Mortgage Loans. Without limiting the generality of the foregoing, the Borrower
acknowledges that the Lender may make Loans to the Borrower based solely upon
the information provided by the Borrower to the Lender in the Mortgage Loan Tape
and the representations, warranties and covenants contained herein, and that the
Lender, at its option, has the right at any time to conduct a partial or
complete due diligence review on some or all of the Mortgage Loans securing such
Loan, including without limitation ordering new credit reports and new
appraisals on the related Mortgaged Properties and otherwise re-generating the
information used to originate such Mortgage Loan. The Lender may underwrite such
Mortgage Loans itself or engage a mutually agreed upon third party underwriter
to perform such underwriting. The Borrower agrees to cooperate with the Lender
and any third party underwriter in connection with such underwriting, including,
but not limited to, providing the Lender and any third party underwriter with
access to any and all documents, records, agreements, instruments or information
relating to such Mortgage Loans in the possession, or under the control, of the
Borrower. The Borrower further agrees that the Borrower shall reimburse the
Lender for any and all out-of-pocket costs and expenses incurred by the Lender
in connection with the Lender's activities pursuant to this Section 11.15 ("Due
Diligence Costs"); provided that such Due Diligence Costs shall not exceed
$4,500 per year unless a Default shall have occurred and be continuing (the
"Due Diligence Cap").
11.16 Intent. The parties recognize that each Loan is a "securities
contract" as that term is defined in Section 741 of Title 11 of the United
States Code, as amended.
[SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement
to be duly executed and delivered as of the day and year first above written.
BORROWER
FIDELITY MORTGAGE FUNDING, INC.
By /s/ Kathy Schauer
---------------------------------
Title: President
Address for Notices:
7 East Skippack Pike
Ambler, Pennsylvania 19002
Attention: Eric Schneider
Telecopier No.: (215) 648-3524
Telephone No.: (215) 648-3502
LENDER
MORGAN STANLEY MORTGAGE
CAPITAL INC.
By
---------------------------------
Title:
Address for Notices:
1585 Broadway
New York, New York 10036
Attention: Mr. Peter Mozer
Telecopier No.: 212-761-0570
Telephone No.: 212-761-2408
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement
to be duly executed and delivered as of the day and year first above written.
BORROWER
FIDELITY MORTGAGE FUNDING, INC.
By
---------------------------
Title:
Address for Notices:
7 East Skippack Pike
Ambler, Pennsylvania 19002
Attention:___________________
Telecopier No.:______________
Telephone No.:_______________
LENDER
MORGAN STANLEY MORTGAGE
CAPITAL INC.
By
---------------------------------
Title: Vice President
Address for Notices:
1585 Broadway
New York, New York 10036
Attention: Mr. Peter Mozer
Telecopier No.: 212-761-0570
Telephone No.: 212-761-2408
<PAGE>
Schedule 1
REPRESENTATIONS AND WARRANTIES RE: MORTGAGE LOANS
Part I. Eligible Mortgage Loans
As to each residential Mortgage Loan included in the Borrowing Base on
a Funding Date (and the related Mortgage, Mortgage Note, Assignment of Mortgage
and Mortgaged Property), the Borrower shall be deemed to make the following
representations and warranties to the Lender as of such date and as of each date
Collateral Value is determined (certain defined terms used herein and not
otherwise defined in the Loan Agreement appearing in Part II to this
Schedule 1):
(a) Mortgage Loans as Described. The information set forth in the
Mortgage Loan Schedule with respect to the Mortgage Loan is complete, true and
correct in all material respects.
(b) Payments Current. Except with respect to Delinquent Mortgage Loans,
all payments required to be made up to the Funding Date for the Mortgage Loan
under the terms of the Mortgage Note have been made and credited. No payment
required under the Mortgage Loan is delinquent in excess of 59 days. The first
Monthly Payment shall be made, or shall have been made, with respect to the
Mortgage Loan on its Due Date or within the grace period, all in accordance with
the terms of the related Mortgage Note.
(c) No Outstanding Charges. There are no defaults in complying with the
terms of the Mortgage securing the Mortgage Loan, and all taxes, governmental
assessments, insurance premiums, water, sewer and municipal charges, leasehold
payments or ground rents which previously became due and owing have been paid,
or an escrow of funds has been established in an amount sufficient to pay for
every such item which remains unpaid and which has been assessed but is not yet
due and payable. Neither the Borrower nor the Qualified Originator from which
the Borrower acquired the Mortgage Loan has advanced funds, or induced,
solicited or knowingly received any advance of funds by a party other than the
Mortgagor, directly or indirectly, for the payment of any amount required under
the Mortgage Loan, except for interest accruing from the date of the Mortgage
Note or date of disbursement of the proceeds of the Mortgage Loan, whichever is
earlier, to the day which precedes by one month the Due Date of the first
installment of principal and interest thereunder.
(d) Original Terms Unmodified. The terms of the Mortgage Note and
Mortgage have not been impaired, waived, altered or modified in any respect,
from the date of origination; except by a written instrument which has been
recorded, if necessary to protect the interests of the Lender, and which has
been delivered to the Custodian and the terms of which are reflected in the
Mortgage Loan Schedule. The substance of any such waiver, alteration or
modification has been approved by the title insurer, to the extent required, and
its terms are reflected on the Mortgage Loan Schedule. No Mortgagor in respect
of the Mortgage Loan has been released, in whole or in part, except in
connection with an assumption agreement approved by the title insurer, to the
extent required by such policy, and which assumption agreement is part of the
Mortgage File delivered to the Custodian and the terms of which are reflected in
the Mortgage Loan Schedule.
Schedule 1-35-
<PAGE>
(e) No Defenses. The Mortgage Loan is not subject to any right of
rescission, set-off, counterclaim or defense, including without limitation the
defense of usury, nor will the operation of any of the terms of the Mortgage
Note or the Mortgage, or the exercise of any right thereunder, render either the
Mortgage Note or the Mortgage unenforceable, in whole or in part and no such
right of rescission, set-off, counterclaim or defense has been asserted with
respect thereto, and no Mortgagor in respect of the Mortgage Loan was a debtor
in any state or Federal bankruptcy or insolvency proceeding at the time the
Mortgage Loan was originated other than as permitted under the Underwriting
Guidelines. The Borrower has no knowledge nor has it received any notice that
any Mortgagor in respect of the Mortgage Loan is a debtor in any state or
federal bankruptcy or insolvency proceeding.
(f) Hazard Insurance. The Mortgaged Property is insured by a fire and
extended perils insurance policy, issued by a Qualified Insurer, and such other
hazards as are customary in the area where the Mortgaged Property is located,
and to the extent required by the Borrower as of the date of origination
consistent with the Underwriting Guidelines, against earthquake and other risks
insured against by Persons operating like properties in the locality of the
Mortgaged Property, in an amount not less than the greatest of (i) 100% of the
replacement cost of all improvements to the Mortgaged Property, (ii) either (A)
the outstanding principal balance of the Mortgage Loan with respect to each
First Lien Mortgage Loan or (B) with respect to each Second Lien Mortgage Loan,
the sum of the outstanding principal balance of the First Lien Mortgage Loan and
the outstanding principal balance of the Second Lien Mortgage Loan, or (iii) the
amount necessary to avoid the operation of any co-insurance provisions with
respect to the Mortgaged Property, and consistent with the amount that would
have been required as of the date of origination in accordance with the
Underwriting Guidelines. If any portion of the Mortgaged Property is in an area
identified by any federal Governmental Authority as having special flood
hazards, and flood insurance is available, a flood insurance policy meeting the
current guidelines of the Federal Insurance Administration is in effect with a
generally acceptable insurance carrier, in an amount representing coverage not
less than the least of (1) the outstanding principal balance of the Mortgage
Loan, (2) the full insurable value of the Mortgaged Property, and (3) the
maximum amount of insurance available under the Flood Disaster Protection Act of
1973, as amended. All such insurance policies (collectively, the "hazard
insurance policy") contain a standard mortgagee clause naming the Borrower, its
successors and assigns (including without limitation, subsequent owners of the
Mortgage Loan), as mortgagee, and may not be reduced, terminated or canceled
without 30 days' prior written notice to the mortgagee. No such notice has been
received by the Borrower. All premiums on such insurance policy have been paid.
The related Mortgage obligates the Mortgagor to maintain all such insurance and,
at such Mortgagor's failure to do so, authorizes the mortgagee to maintain such
insurance at the Mortgagor's cost and expense and to seek reimbursement therefor
from such Mortgagor. Where required by state law or regulation, the Mortgagor
has been given an opportunity to choose the carrier of the required hazard
insurance, provided the policy is not a "master" or "blanket" hazard insurance
policy covering a condominium, or any hazard insurance policy covering the
common facilities of a planned unit development. The hazard insurance policy is
the valid and binding obligation of the insurer and is in full force and effect.
The Borrower has not engaged in, and has no knowledge of the Mortgagor's having
engaged in, any act or omission which would impair the coverage of any such
policy, the benefits of the endorsement provided for herein, or the validity and
binding effect of either including, without limitation, no unlawful fee,
commission, kickback or other unlawful compensation or value of any kind has
been or will be received, retained or realized by any attorney, firm or other
Person, and no such unlawful items have been received, retained or realized by
the Borrower.
Schedule 1-36-
<PAGE>
(g) Compliance with Applicable Laws. Any and all requirements of any
federal, state or local law including, without limitation, usury,
truth-in-lending, real estate settlement procedures, consumer credit protection,
equal credit opportunity or disclosure laws applicable to the Mortgage Loan have
been complied with, the consummation of the transactions contemplated hereby
will not involve the violation of any such laws or regulations, and the Borrower
shall maintain or shall cause its agent to maintain in its possession, available
for the inspection of the Lender, and shall deliver to the Lender, upon demand,
evidence of compliance with all such requirements.
(h) No Satisfaction of Mortgage. The Mortgage has not been satisfied,
canceled, subordinated or rescinded, in whole or in part, and the Mortgaged
Property has not been released from the lien of the Mortgage, in whole or in
part, nor has any instrument been executed that would effect any such release,
cancellation, subordination or rescission. The Borrower has not waived the
performance by the Mortgagor of any action, if the Mortgagor's failure to
perform such action would cause the Mortgage Loan to be in default, nor has the
Borrower waived any default resulting from any action or inaction by the
Mortgagor.
(i) Location and Typee of Mortgaged Property. The Mortgaged Property is
located in an Acceptable State as identified in the Mortgage Loan Schedule and
consists of a single parcel of real property with a detached single family
residence erected thereon, or a two- to four-family dwelling, or an individual
condominium unit in a low-rise condominium project, or an individual unit in a
planned unit development or a de minimis planned unit development, provided,
however, that any condominium unit or planned unit development shall conform
with the applicable FNMA and FHLMC requirements regarding such dwellings and
that no residence or dwelling is a mobile home or a manufactured dwelling (other
than Acceptable Manufactured Housing). No Mortgaged Property is secured by a
Mixed Use Mortgage Loan, and no portion of the Mortgaged Property is used for
commercial purposes.
(j) Valid First or Second Lien. The Mortgage is a valid, subsisting,
enforceable and perfected (A) first lien and first priority security interest
with respect to each Mortgage Loan which is indicated by such Borrower to be a
First Lien Mortgage Loan (as reflected on the Mortgage Loan Tape), or (B) second
lien and second priority security interest with respect to each Mortgage Loan
which is indicated by such Borrower to be a Second Lien Mortgage Loan (as
reflected on the Mortgage Loan Tape), in either case, on the real property
included in the Mortgaged Property, including all buildings on the Mortgaged
Property and all installations and mechanical, electrical, plumbing, heating and
air conditioning systems located in or annexed to such buildings, and all
additions, alterations and replacements made at any time with respect to the
foregoing. The lien of the Mortgage is subject only to:
(1) the lien of current real property taxes and assessments not yet due
and payable;
(2) covenants, conditions and restrictions, rights of way, easements
and other matters of the public record as of the date of recording
acceptable to prudent mortgage lending institutions generally and
specifically referred to in the lender's title insurance policy delivered to
the originator of the Mortgage Loan and (a) referred to or otherwise
considered in the appraisal made for the originator of the Mortgage Loan or
(b) which do not adversely affect the Appraised Value of the Mortgaged
Property set forth in such appraisal;
Schedule 1-37-
<PAGE>
(3) other matters to which like properties are commonly subject which
do not materially interfere with the benefits of the security intended to be
provided by the Mortgage or the use, enjoyment, value or marketability of
the related Mortgaged Property; and
(4) with respect to each Mortgage Loan which is indicated by such
Borrower to be a Second Lien Mortgage Loan (as reflected on the Mortgage
Loan Tape) a prior mortgage lien on the Mortgaged Property.
Any security agreement, chattel mortgage or equivalent document related to and
delivered in connection with the Mortgage Loan establishes and creates a valid,
subsisting and enforceable (A) first lien and first priority security interest
with respect to each Mortgage Loan which is indicated by such Borrower to be a
First Lien Mortgage Loan (as reflected on the Mortgage Loan Tape), or (B) second
lien and second priority security interest with respect to each Mortgage Loan
which is indicated by such Borrower to be a Second Lien Mortgage Loan (as
reflected on the Mortgage Loan Tape), in either case, on the property described
therein and the Borrower has full right to pledge and assign the same to the
Lender. The Mortgaged Property was not, as of the date of origination of the
Mortgage Loan, subject to a mortgage, deed of trust, deed to secure debt or
other security instrument creating a lien subordinate to the lien of the
Mortgage.
(k) Validity of Mortgage Documents. The Mortgage Note and the Mortgage
and any other agreement executed and delivered by a Mortgagor or guarantor, if
applicable, in connection with a Mortgage Loan are genuine, and each is the
legal, valid and binding obligation of the maker thereof enforceable in
accordance with its terms. All parties to the Mortgage Note, the Mortgage and
any other such related agreement had legal capacity to enter into the Mortgage
Loan and to execute and deliver the Mortgage Note, the Mortgage and any such
agreement, and the Mortgage Note, the Mortgage and any other such related
agreement have been duly and properly executed by such related parties. No
fraud, error, omission, misrepresentation, negligence or similar occurrence with
respect to a Mortgage Loan has taken place on the part of any Person,
including, without limitation, the Mortgagor, any appraiser, any builder or
developer, or any other party involved in the origination of the Mortgage Loan.
The Borrower has reviewed all of the documents constituting the Servicing File
and has made such inquiries as it deems necessary to make and confirm the
accuracy of the representations set forth herein.
(l) Full Disbursement of Proceeds. The Mortgage Loan has been closed
and the proceeds of the Mortgage Loan have been fully disbursed and there is no
further requirement for future advances thereunder, and any and all
requirements as to completion of any on-site or off-site improvement and as to
disbursements of any escrow funds therefor have been complied with. All costs,
fees and expenses incurred in making or closing the Mortgage Loan and the
recording of the Mortgage were paid, and the Mortgagor is not entitled to any
refund of any amounts paid or due under the Mortgage Note or Mortgage.
(m) Ownership. The Borrower is the sole owner and holder of the
Mortgage Loan. The Mortgage Loan is not assigned or pledged, and the Borrower
has good, indefeasible and marketable title thereto, and has full right to
transfer, pledge and assign the Mortgage Loan to the Lender free and clear of
any encumbrance, equity, participation interest, lien, pledge, charge, claim or
security interest, and has full right and authority subject to no interest or
participation of, or agreement with, any other party, to assign, transfer and
pledge each Mortgage Loan pursuant to this Loan Agreement and following the
pledge of each Mortgage Loan, the Lender will hold such Mortgage Loan
Schedule 1-38-
<PAGE>
free and clear of any encumbrance, equity, participation interest, lien, pledge,
charge, claim or security interest except any such security interest created
pursuant to the terms of this Loan Agreement.
(n) Doing Business. All parties which have had any interest in the
Mortgage Loan, whether as mortgagee, assignee, pledgee or otherwise, are (or,
during the period in which they held and disposed of such interest, were) (i) in
compliance with any and all applicable licensing requirements of the laws of the
state wherein the Mortgaged Property is located, and (ii) either (A) organized
under the laws of such state, (B) qualified to do business in such state, (C) a
federal savings and loan association, a savings bank or a national bank having a
principal office in such state, or (D) not doing business in such state.
(o) CLTV. No Mortgage Loan has a CLTV greater than 100%.
(p) Title Insurance. The Mortgage Loan is covered by either (i) an
attorney's opinion of title and abstract of title, the form and substance of
which is acceptable to prudent mortgage lending institutions making mortgage
loans in the area wherein the Mortgaged Property is located or (ii) an ALTA
lender's title insurance policy or other generally acceptable form of policy or
insurance acceptable to FNMA or FHLMC and each such title insurance policy is
issued by a title insurer acceptable to FNMA or FHLMC and qualified to do
business in the jurisdiction where the Mortgaged Property is located, insuring
the Borrower, its successors and assigns, as to the first (or second, if the
Mortgage Loan is a Second Lien Mortgage Loan) priority lien of the Mortgage in
the original principal amount of the Mortgage Loan (or to the extent a Mortgage
Note provides for negative amortization, the maximum amount of negative
amortization in accordance with the Mortgage), subject only to the exceptions
contained in clauses (1), (2), (3) and, with respect to each Mortgage Loan which
is indicated by the Borrower to be a Second Lien Mortgage Loan (as reflected on
the Mortgage Loan Schedule) clause (4) of paragraph (j) of this Part I of
Schedule 1, and in the case of adjustable rate Mortgage Loans, against any loss
by reason of the invalidity or unenforceability of the lien resulting from the
provisions of the Mortgage providing for adjustment to the Mortgage Interest
Rate and Monthly Payment. Where required by state law or regulation, the
Mortgagor has been given the opportunity to choose the carrier of the required
mortgage title insurance. Additionally, such lender's title insurance policy
affirmatively insures ingress and egress and against encroachments by or upon
the Mortgaged Property or any interest therein. The title policy does not
contain any special exceptions (other than the standard exclusions) for zoning
and uses and has been marked to delete the standard survey exception or to
replace the standard survey exception with a specific survey reading. The
Borrower, its successors and assigns, are the sole insureds of such lender's
title insurance policy, and such lender's title insurance policy is valid and
remains in full force and effect and will be in force and effect upon the
consummation of the transactions contemplated by this Loan Agreement. No claims
have been made under such lender's title insurance policy, and no prior holder
or servicer of the related Mortgage, including the Borrower, has done, by act or
omission, anything which would impair the coverage of such lender's title
insurance policy, including, without limitation, no unlawful fee, commission,
kickback or other unlawful compensation or value of any kind has been or will be
received, retained or realized by any attorney, firm or other Person, and no
such unlawful items have been received, retained or realized by the Borrower.
(q) No Defaults. There is no default, breach, violation or event of
acceleration existing under the Mortgage or the Mortgage Note (other than
Mortgage Loans for which payments are delinquent for no more than fifty-nine
(59) days) and no event has occurred which, with the passage of time or with
notice and the expiration of any grace or cure period, would constitute a
default, breach, violation or event of acceleration, and neither the Borrower
nor its predecessors have waived any
Schedule 1-39-
<PAGE>
default, breach, violation or event of acceleration. With respect to each
Mortgage Loan which is indicated by such Borrower to be a Second Lien Mortgage
Loan (as reflected on the Mortgage Loan Schedule) (i) the prior mortgage is in
full force and effect, (ii) there is no default, breach, violation or event of
acceleration existing under such prior mortgage or the related mortgage note,
(iii) no event which, with the passage of time or with notice and the expiration
of any grace or cure period, would constitute a default, breach, violation or
event of acceleration thereunder, and either (A) the prior mortgage contains, a
provision which allows or (B) applicable law requires, the mortgagee under the
Second Lien Mortgage Loan to receive notice of, and affords such mortgagee an
opportunity to cure any default by payment in full or otherwise under the prior
mortgage.
(r) No Mechanics' Liens. There are no mechanics' or similar liens or
claims which have been filed for work, labor or material (and no rights are
outstanding that under the law could give rise to such liens) affecting the
Mortgaged Property which are or may be liens prior to, or equal or coordinate
with, the lien of the Mortgage.
(s) Location of Improvements: No Encroachments. All improvements which
were considered in determining the Appraised Value of the Mortgaged Property lie
wholly within the boundaries and building restriction lines of the Mortgaged
Property, and no improvements on adjoining properties encroach upon the
Mortgaged Property. No improvement located on or being part of the Mortgaged
Property is in violation of any applicable zoning and building law, ordinance or
regulation.
(t) Origination: Payment Terms. The Mortgage Loan was originated by or
in conjunction with a mortgagee approved by the Secretary of Housing and Urban
Development pursuant to Sections 203 and 211 of the National Housing Act, a
savings and loan association, a savings bank, a commercial bank, credit union,
insurance company or similar banking institution which is supervised and
examined by a federal or state authority. Principal payments on the Mortgage
Loan commenced no more than 60 days after funds were disbursed in connection
with the Mortgage Loan. The Mortgage Interest Rate is adjusted, with respect to
adjustable rate Mortgage Loans, on each Interest Rate Adjustment Date to equal
the Index plus the Gross Margin (rounded up or down to the nearest .125%),
subject to the Mortgage Interest Rate Cap. The Mortgage Note is payable in equal
monthly installments of principal and interest, which installments of interest,
with respect to adjustable rate Mortgage Loans, are subject to change due to the
adjustments to the Mortgage Interest Rate on each Interest Rate Adjustment Date,
with interest calculated and payable in arrears, sufficient to amortize the
Mortgage Loan fully by the stated maturity date, over an original term of not
more than 30 years from commencement of amortization. The due date of the first
payment under the Mortgage Note is no more than 60 days from the date of the
Mortgage Note.
(U) Customary Provisions. The Mortgage Note has a stated maturity. The
Mortgage contains customary and enforceable provisions such as to render the
rights and remedies of the holder thereof adequate for the realization against
the Mortgaged Property of the benefits of the security provided thereby,
including, (i) in the case of a Mortgage designated as a deed of trust, by
trustee's sale, and (ii) otherwise by judicial foreclosure. Upon default by a
Mortgagor on a Mortgage Loan and foreclosure on, or trustee's sale of, the
Mortgaged Property pursuant to the proper procedures, the holder of the Mortgage
Loan will be able to deliver good and merchantable title to the Mortgaged
Property. There is no homestead or other exemption available to a Mortgagor
which would interfere with the right to sell the Mortgaged Property at a
trustee's sale or the right to foreclose the Mortgage.
Schedule 1-40-
<PAGE>
(v) Conformance with Underwriting Guidelines and Agency Standards. The
Mortgage Loan was underwritten in accordance with the Underwriting Guidelines.
The Mortgage Note and Mortgage are on forms similar to those used by FHLMC or
FNMA and the Borrower has not made any representations to a Mortgagor that are
inconsistent with the mortgage instruments used.
(w) Occupancy of the Mortgaged Property. As of the Funding Date the
Mortgaged Property is lawfully occupied under applicable law. All inspections,
licenses and certificates required to be made or issued with respect to all
occupied portions of the Mortgaged Property and, with respect to the use and
occupancy of the same, including but not limited to certificates of occupancy
and fire underwriting certificates, have been made or obtained from the
appropriate authorities. The Borrower has not received notification from any
governmental authority that the Mortgaged Property is in material non-compliance
with such laws or regulations, is being used, operated or occupied unlawfully or
has failed to have or obtain such inspection, licenses or certificates, as the
case may be. The Borrower has not received notice of any violation or failure
to conform with any such law, ordinance, regulation, standard, license or
certificate. The Mortgagor represented at the time of origination of the
Mortgage Loan that the Mortgagor would occupy the Mortgaged Property as the
Mortgagor's primary residence.
(x) No Additional Collateral. The Mortgage Note is not and has not been
secured by any collateral except the lien of the corresponding Mortgage and the
security interest of any applicable security agreement or chattel mortgage
referred to in clause (y) above.
(y) Deeds of Trust. In the event the Mortgage constitutes a deed of
trust, a trustee, authorized and duly qualified under applicable law to serve as
such, has been properly designated and currently so serves and is named in the
Mortgage, and no fees or expenses are or will become payable by the Custodian or
the Lender to the trustee under the deed of trust, except in connection with a
trustee's sale after default by the Mortgagor.
(z) Delivery of Mortgage Documents. The Mortgage Note, the Mortgage,
the Assignment of Mortgage and any other documents required to be delivered
under the Custodial Agreement for each Mortgage Loan have been delivered to the
Custodian. The Borrower or its agent is in possession of a complete, true and
accurate Mortgage File in compliance with the Custodial Agreement, except for
such documents the originals of which have been delivered to the Custodian.
(aa) Transfer of Mortgage Loans. The Assignment of Mortgage is in
recordable form and is acceptable for recording under the laws of the
jurisdiction in which the Mortgaged Property is located.
(bb) Due-On-Sale. The Mortgage contains an enforceable provision for
the acceleration of the payment of the unpaid principal balance of the Mortgage
Loan in the event that the Mortgaged Property is sold or transferred without the
prior written consent of the mortgagee thereunder.
(cc) No Buydown Provisions; No Graduated Payments or Contingent
Interests. The Mortgage Loan does not contain provisions pursuant to which
Monthly Payments are paid or partially paid with funds deposited in any separate
account established by the Borrower, the Mortgagor, or anyone on behalf of the
Mortgagor, or paid by any source other than the Mortgagor nor does it contain
any other similar provisions which may constitute a "buydown" provision. The
Mortgage Loan is not
Schedule 1-41-
<PAGE>
a graduated payment mortgage loan and the Mortgage Loan does not have a shared
appreciation or other contingent interest feature.
(dd) Consolidation of Future Advances. Any future advances made to the
Mortgagor prior to the Cut-off Date have been consolidated with the principal
amount secured by the Mortgage, and the secured principal amount, as
consolidated, bears a single interest rate and single repayment term. The lien
of the Mortgage securing the consolidated principal amount is expressly insured
as having (A) first lien priority with respect to each Mortgage Loan which is
indicated by such Borrower to be a First Lien Mortgage Loan (as reflected on the
Mortgage Loan Schedule), or (B) second lien priority with respect to each
Mortgage Loan which is indicated by such Borrower to be a Second Lien Mortgage
Loan (as reflected on the Mortgage Loan Schedule), in either case, by a title
insurance policy, an endorsement to the policy insuring the mortgagee's
consolidated interest or by other title evidence acceptable to FNMA and FHLMC.
The consolidated principal amount does not exceed the original principal amount
of the Mortgage Loan.
(ee) Mortgage Property Undamaged. The Mortgaged Property is undamaged
by waste, fire, earthquake or earth movement, windstorm, flood, tornado or other
casualty so as to affect adversely the value of the Mortgaged Property as
security for the Mortgage Loan or the use for which the premises were intended
and each Mortgaged Property is in good repair. There have not been any
condemnation proceedings with respect to the Mortgaged Property and the Borrower
has no knowledge of any such proceedings.
(ff) Collection Practices: Escrow Deposits Interest Rate Adjustments.
The origination and collection practices used by the originator, each servicer
of the Mortgage Loan and the Borrower with respect to the Mortgage Loan have
been in all respects in compliance with Accepted Servicing Practices, applicable
laws and regulations, and have been in all respects legal and proper. With
respect to escrow deposits and Escrow Payments, (other than with respect to each
Mortgage Loan which is indicated by such Borrower to be a Second Lien Mortgage
Loan and for which the mortgagee under the prior mortgage lien is collecting
Escrow Payments (as reflected on the Mortgage Loan Schedule), all such payments
are in the possession of, or under the control of, the Borrower and there exist
no deficiencies in connection therewith for which customary arrangements for
repayment thereof have not been made. All Escrow Payments have been collected in
full compliance with state and federal law. An escrow of funds is not prohibited
by applicable law and has been established in an amount sufficient to pay for
every item that remains unpaid and has been assessed but is not yet due and
payable. No escrow deposits or Escrow Payments or other charges or payments due
the Borrower have been capitalized under the Mortgage or the Mortgage Note. All
Mortgage Interest Rate adjustments have been made in strict compliance with
state and federal law and the terms of the related Mortgage Note. Any interest
required to be paid pursuant to state, federal and local law has been properly
paid and credited.
(gg) Other Insurance Policies. No action, inaction or event has
occurred and no state of facts exists or has existed that has resulted or will
result in the exclusion from, denial of, or defense to coverage under any
applicable special hazard insurance policy, PMI Policy or bankruptcy bond,
irrespective of the cause of such failure of coverage. In connection with the
placement of any such insurance, no commission, fee, or other compensation has
been or will be received by the Borrower or by any officer, director, or
employee of the Borrower or any designee of the Borrower or any corporation in
which the Borrower or any officer, director, or employee had a financial
interest at the time of placement of such insurance.
Schedule 1-42-
<PAGE>
(hh) Soldiers' and Sailors' Civil Relief Act. The Mortgagor has not
notified the Borrower, and the Borrower has no knowledge, of any relief
requested or allowed to the Mortgagor under the Soldiers' and Sailors' Civil
Relief Act of 1940.
(ii) Appraisal. The Mortgage File contains an appraisal of the related
Mortgaged Property signed prior to the approval of the Mortgage Loan application
by a qualified appraiser, duly appointed by the Borrower, who had no interest,
direct or indirect in the Mortgaged Property or in any loan made on the security
thereof, and whose compensation is not affected by the approval or disapproval
of the Mortgage Loan, and the appraisal and appraiser both satisfy the
requirements of FNMA or FHLMC and Title XI of the Federal Institutions Reform,
Recovery, and Enforcement Act of 1989 as amended and the regulations promulgated
thereunder, all as in effect on the date the Mortgage Loan was originated.
(jj) Disclosure Materials. The Mortgagor has executed a statement to
the effect that the Mortgagor has received all disclosure materials required by
applicable law with respect to the making of adjustable rate mortgage loans, and
the Borrower maintains such statement in the Mortgage File.
(kk) Construction or Rehabilitation of Mortgaged Property. No Mortgage
Loan was made in connection with the construction or rehabilitation of a
Mortgaged Property or facilitating the trade-in or exchange of a Mortgaged
Property.
(ll) No Defense to Insurance Coverage. No action has been taken or
failed to be taken, no event has occurred and no state of facts exists or has
existed on or prior to the Funding Date (whether or not known to the Borrower on
or prior to such date) which has resulted or will result in an exclusion from,
denial of, or defense to coverage under any private mortgage insurance
(including, without limitation, any exclusions, denials or defenses which would
limit or reduce the availability of the timely payment of the full amount of the
loss otherwise due thereunder to the insured) whether arising out of actions,
representations, errors, omissions, negligence, or fraud of the Borrower, the
related Mortgagor or any party involved in the application for such coverage,
including the appraisal, plans and specifications and other exhibits or
documents submitted therewith to the insurer under such insurance policy, or for
any other reason under such coverage, but not including the failure of such
insurer to pay by reason of such insurer's breach of such insurance policy or
such insurer's financial inability to pay.
(mm) Capitalization of Interest. The Mortgage Note does not by its
terms provide for the capitalization or forbearance of interest.
(nn) No Equity Participation. No document relating to the Mortgage Loan
provides for any contingent or additional interest in the form of participation
in the cash flow of the Mortgaged Property or a sharing in the appreciation of
the value of the Mortgaged Property. The indebtedness evidenced by the Mortgage
Note is not convertible to an ownership interest in the Mortgaged Property or
the Mortgagor and the Borrower has not financed nor does it own directly or
indirectly, any equity of any form in the Mortgaged Property or the Mortgagor.
(oo) Proceeds of Mortgage Loan. The proceeds of the Mortgage Loan have
not been and shall not be used to satisfy, in whole or in part, any debt owed or
owing by the Mortgagor to the Borrower or any Affiliate or correspondent of the
Borrower.
Schedule 1-43-
<PAGE>
(pp) Withdrawn Mortgage Loans. If the Mortgage Loan has been released
to the Borrower pursuant to a Request for Release as permitted under Section 5
of the Custodial Agreement, then the promissory note relating to the Mortgage
Loan was returned to the Custodian within 10 days (or if such tenth day was not
a Business Day, the next succeeding Business Day).
(qq) Origination Date. The Origination Date is no earlier than nine
months prior to the date the Mortgage Loan is first included in the Borrowing
Base.
(rr) No Exception. The Custodian has not noted any material exceptions
on an Exception Report (as defined in the Custodial Agreement) with respect to
the Mortgage Loan which would materially adversely affect the Mortgage Loan or
the Lender's security interest, granted by the Borrower, in the Mortgage Loan.
(ss) Qualified Originator. The Mortgage Loan has been originated by,
and, if applicable, purchased by the Borrower from, a Qualified Originator.
(tt) Mortgage Submitted for Recordation. The Mortgage either has been
or will promptly be submitted for recordation in the appropriate governmental
recording office of the jurisdiction where the Mortgaged Property is located.
(uu) Wet-Ink Mortgage Loans. With respect to each Mortgage Loan that is
a Wet-Ink Mortgage Loan, the Settlement Agent has been instructed in writing by
the Borrower to hold the related Mortgage Loan Documents as agent and bailee for
the Lender and to promptly forward such Mortgage Loan Documents to the Custodian
for receipt within two (2) Business Days following the applicable Funding Date.
Schedule 1-44-
<PAGE>
Part II Defined Terms
In addition to terms defined elsewhere in the Loan Agreement, the
following terms shall have the following meanings when used in this Schedule 1:
"Acceptable Manufactured Housing" shall mean a fully attached
manufactured home which is considered and treated as "real estate" under
applicable state law.
"Acceptable State" shall mean any state notified by the Borrower to the
Lender from time to time and approved in writing by the Lender, which approval
has not been revoked by the Lender in their sole discretion, any such notice of
revocation to be given no later than 10 Business Days prior to its intended
effective date.
"Accepted Servicing Practices" shall mean, with respect to any Mortgage
Loan, those mortgage servicing practices of prudent mortgage lending
institutions which service mortgage loans of the same type as such Mortgage
Loans in the jurisdiction where the related Mortgaged Property is located.
"ALTA" means the American Land Title Association.
"Appraised Value" shall mean the value set forth in an appraisal made
in connection with the origination of the related Mortgage Loan as the value of
the Mortgaged Property.
"Best's" means Best's Key Rating Guide, as the same shall be amended
from time to time.
"Combined LTV" or "CLTV" shall mean with respect to any Mortgage Loan,
the ratio of (a) the outstanding principal balance as of the related Cut-off
Date of (i) the Mortgage Loan plus (ii) the mortgage loan constituting the first
lien to (b) the Appraised Value of the Mortgaged Property.
"Cut-off Date" means the first day of the month in which the related
Funding Date occurs.
"Debt Service Ratio" means with respect to any Eligible Multifamily
Mortgage Loan or Eligible Commercial Mortgage Loan, as of any date of
determination and for any period, the applicable "Debt Service Coverage" ratio
determined in accordance with, and defined in, the Underwriting Guidelines.
"Due Date" means the day of the month on which the Monthly Payment is
due on a Mortgage Loan, exclusive of any days of grace.
"Escrow Payments" means with respect to any Mortgage Loan, the amounts
constituting ground rents, taxes, assessments, water rates, sewer rents,
municipal charges, mortgage insurance premiums, fire and hazard insurance
premiums, condominium charges, and any other payments required to be escrowed
by the Mortgagor with the mortgagee pursuant to the Mortgage or any other
document.
Schedule 1-45-
<PAGE>
"FHLMC" means the Federal Home Loan Mortgage Corporation, or any
successor thereto.
"FNMA" means the Federal National Mortgage Association, or any
successor thereto.
"Gross Margin" means with respect to each adjustable rate Mortgage
Loan, the fixed percentage amount set forth in the related Mortgage Note.
"Ground Lease" means a lease for all or any portion of the real
property comprising the Mortgaged Property, the lessee's interest in which is
held by the Mortgagor of the related Mortgage Loan.
"Index" means with respect to each adjustable rate Mortgage Loan, the
index set forth in the related Mortgage Note for the purpose of calculating the
interest rate thereon.
"Insurance Proceeds" means with respect to each Mortgage Loan, proceeds
of insurance policies insuring the Mortgage Loan or the related Mortgaged
Property.
"Interest Rate Adjustment Date" means with respect to each adjustable
rate Mortgage Loan, the date, specified in the related Mortgage Note and the
Mortgage Loan Schedule, on which the Mortgage Interest Rate is adjusted.
"Loan-to-Value Ratio" or "LTV" means with respect to any Mortgage Loan,
the ratio of the original outstanding principal amount of the Mortgage Loan to
the lesser of (a) the Appraised Value of the Mortgaged Property at origination
or (b) if the Mortgaged Property was purchased within 12 months of the
origination of the Mortgage Loan, the purchase price of the Mortgaged Property.
"Mixed Use Mortgage Loan" shall mean a Mortgage Loan secured by a
Mortgaged Property that is used primarily for residential purposes, but which is
also used for non-residential purposes.
"Monthly Payment" means the scheduled monthly payment of principal and
interest on a Mortgage Loan as adjusted in accordance with changes in the
Mortgage Interest Rate pursuant to the provisions of the Mortgage Note for an
adjustable rate Mortgage Loan.
"Mortgage Interest Rate" means the annual rate of interest borne on a
Mortgage Note, which shall be adjusted from time to time with respect to
adjustable rate Mortgage Loans.
"Mortagage Interest Rate Cap" means with respect to an adjustable rate
Mortgage Loan, the limit on each Mortgage Interest Rate adjustment as set forth
in the related Mortgage Note.
"Mortgagee" means the Borrower or any subsequent holder of a Mortgage
Loan.
"Origination Date" shall mean, with respect to each Mortgage Loan, the
date of the Mortgage Note relating to such Mortgage Loan, unless such
information is not provided by the Borrower with respect to such Mortgage Loan,
in which case the Origination Date shall be deemed to be the date that is 40
days prior to the date of the first payment under the Mortgage Note relating to
such Mortgage Loan.
Schedule 1-46-
<PAGE>
"PMI Policy" or "Primary Insurance Policy" means a policy of primary
mortgage guaranty insurance issued by a Qualified Insurer.
"Qualified Insurer" means an insurance company duly qualified as such
under the laws of the states in which the Mortgaged Property is located, duly
authorized and licensed in such states to transact the applicable insurance
business and to write the insurance provided, and approved as an insurer by FNMA
and FHLMC and whose claims paying ability is rated in the two highest rating
categories by any of the rating agencies with respect to primary mortgage
insurance and in the two highest rating categories by Best's with respect to
hazard and flood insurance.
"Qualified Originator" means an originator of Mortgage Loans reasonably
acceptable to the Lender.
"Servicing File" means with respect to each Mortgage Loan, the file
retained by the Borrower consisting of originals of all documents in the
Mortgage File which are not delivered to a Custodian and copies of the Mortgage
Loan Documents set forth in Section 2 of the Custodial Agreement.
Schedule 1-47-
<PAGE>
Schedule 2
FILING JURISDICTIONS AND OFFICES
Secretary of the Commonwealth of Pennsylvania
Prothonotary of Montgomery County
<PAGE>
EXHIBIT-A
[FORM OF PROMSSORY NOTE]
$15,000,000 October 16, 1997
New York, New York
FOR VALUE RECEIVED, FIDELITY MORTGAGE FUNDING, INC., a Delaware
corporation (the "Borrower"), hereby promises to pay to the order of MORGAN
STANLEY MORTGAGE CAPITAL INC. (the "Lender"), at the principal office of the
Lender at 1585 Broadway, New York, New York, 10036, in lawful money of the
United States, and in immediately available funds, the principal sum of FIFTEEN
MILLION DOLLARS ($15,000,000) (or such lesser amount as shall equal the
aggregate unpaid principal amount of the Loans made by the Lender to the
Borrower under the Loan Agreement), on the dates and in the principal amounts
provided in the Loan Agreement, and to pay interest on the unpaid principal
amount of each such Loan, at such office, in like money and funds, for the
period commencing on the date of such Loan until such Loan shall be paid in
full, at the rates per annum and on the dates provided in the Loan Agreement.
The date, amount and interest rate of each Loan made by the Lender to
the Borrower, and each payment made on account of the principal thereof, shall
be recorded by the Lender on its books and, prior to any transfer of this Note,
endorsed by the Lender on the schedule attached hereto or any continuation
thereof, provided, that the failure of the Lender to make any such recordation
or endorsement shall not affect the obligations of the Borrower to make a
payment when due of any amount owing under the Loan Agreement or hereunder in
respect of the Loans made by the Lender.
This Note is the Note referred to in the Master Loan and Security
Agreement dated as of October 16, 1997 (as amended, supplemented or otherwise
modified and in effect from time to time, the "Loan Agreement") between the
Borrower and the Lender, and evidences Loans made by the Lender thereunder.
Terms used but not defined in this Note have the respective meanings assigned to
them in the Loan Agreement.
The Borrower agrees to pay all the Lender's costs of collection and
enforcement (including reasonable attorneys' fees and disbursements of Lender's
counsel) in respect of this Note when incurred, including, without limitation,
reasonable attorneys' fees through appellate proceedings.
Notwithstanding the pledge of the Collateral, the Borrower hereby
acknowledges, admits and agrees that the Borrower's obligations under this Note
are recourse obligations of the Borrower to which the Borrower pledges its full
faith and credit.
The Borrower, and any endorsers or guarantors hereof, (a) severally
waive diligence, presentment, protest and demand and also notice of protest,
demand, dishonor and nonpayments of this Note, (b) expressly agree that this
Note, or any payment hereunder, may be extended from time to time, and consent
to the acceptance of further Collateral, the release of any Collateral for this
Note, the release of any party primarily or secondarily liable hereon, and (c)
expressly agree that it will not be necessary for the Lender, in order to
enforce payment of this Note, to first institute or exhaust the Lender's
remedies against the Borrower or any other party liable hereon or against any
Collateral for this Note. No extension of time for the payment of this Note, or
any installment hereof, made by agreement by the Lender with any person now or
hereafter liable for the payment of this Note, shall
<PAGE>
affect the liability under this Note of the Borrower, even if the
Borrower is not a party to such agreement; provided, however, that the Lender
and the Borrower, by written agreement between them, may affect the liability of
the Borrower.
Any reference herein to the Lender shall be deemed to include and apply
to every subsequent holder of this Note. Reference is made to the Loan Agreement
for provisions concerning optional and mandatory prepayments, Collateral,
acceleration and other material terms affecting this Note.
This Note shall be governed by and construed under the laws of the
State of New York (without reference to choice of law doctrine) whose laws the
Borrower expressly elects to apply to this Note. The Borrower agrees that any
action or proceeding brought to enforce or arising out of this Note may be
commenced in the Supreme Court of the State of New York, Borough of Manhattan,
or in the District Court of the United States for the Southern District of New
York.
FIDELITY MORTGAGE FUNDING, INC.
By:____________________________
Name:
Title:
A-2
<PAGE>
LOAN AGREEMENT
This Agreement is executed on this 9th day of October 1997, and is made
and entered into by and between RESOURCE AMERICA, INC., a Delaware corporation
having its principal offices and place of business at 1521 Locust Street,
Philadelphia, PA 19102 (the "Borrower") and KEYBANK, N.A., a national banking
association having offices at 126 Central Plaza North, Canton, Ohio 44702 (the
"Bank").
WITNESSETH:
WHEREAS, subject to the terms and conditions contained herein, Bank
presently is willing to extend to Borrower loans hereunder in the aggregate not
to exceed FIVE MILLION DOLLARS ($5,000,000).
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and with the intent to be legally bound hereby, the parties hereto agree
as follows:
SECTION 1. REVOLVING CREDIT LOAN.
1.1 Credit. Subject to the terms and conditions hereof (including but
not limited to the conditions contained in Section 7.1 hereof), and relying on
the representations and warranties herein contained, Bank agrees to, and shall
be obligated to, lend to Borrower, from time to time in accordance with the
provisions of Section 1311.14 of the Ohio Revised Code and upon request of
Borrower as provided in section 7.1, during the period (the "Revolving Credit
Period") commencing on the effective date hereof and ending on June 30, 1999
(the "Termination Date"), an amount or amounts (the "Revolving Credit") not
exceeding in the aggregate at any one time outstanding FIVE MILLION DOLLARS
($5,000,000).
The loans which Bank is willing to make to Borrower hereunder shall be
evidenced by a note substantially in the form of Exhibit "A" attached hereto
and made a part hereof with appropriate insertions (the "Revolving Credit
Note"). Notwithstanding the principal amount of the Revolving Credit Note as
stated on the face thereof is in the amount of FIVE MILLION DOLLARS
($5,000,000), the actual principal amount due from the Borrower to the Bank on
account of the Revolving Credit Note, as of any date of computation, shall be
the sum of all advances then and theretofore made on account thereof less all
payments of principal actually received by the Bank in collected funds during
the same period; such advances and payments shall be noted on the records of the
Bank which shall be the evidence of the amount outstanding under the Revolving
Credit Note.
During the Revolving Credit Period, Borrower may borrow, repay and
reborrow funds under the Revolving Credit, as it may be adjusted pursuant
hereto, provided, however, that at no time shall the unpaid principal balance
outstanding under the Revolving Credit Note exceed FIVE MILLION DOLLARS
($5,000,000). Each borrowing and reborrowing shall be in a minimum amount of ONE
HUNDRED THOUSAND DOLLARS ($100,000); and each repayment shall be in a minimum
amount of ONE HUNDRED THOUSAND DOLLARS ($100,000) or the outstanding principal
balance of, and unpaid and accrued interest on, the Revolving Credit Note,
whichever is less, and shall be applied against principal and interest in such
order and in such amounts as Bank, in its sole discretion, shall determine.
<PAGE>
1.2 Interest. Each borrowing made by Borrower hereunder shall bear
interest at an interest rate per annum equal to the Prime Rate from time to time
in effect plus one-quarter of one percent (0.25%). For purposes of this
Agreement, "Prime Rate" means the rate of interest determined and publicly
announced from time to time by the Bank as its "Prime Rate"; the Prime Rate is
one of several reference rates used by the Bank for pricing loans to its
borrowers, and such loans may be made at rates higher or lower than the Prime
Rate.
1.3 Repayment. The entire principal balance outstanding under the
Revolving Credit Note, and all unpaid and accrued interest thereon, shall be due
and payable on the Termination Date.
1.4 Adjustments to Revolving Credit.
(i) Determination of Borrowing Base. Promptly after October 1,
1998 and October 1 of each year thereafter until the Indebtedness (as defined in
Section 3 hereof) is paid in full, the Borrower shall furnish to the Bank a
report in form and substance and based upon assumptions satisfactory to the
Bank, of an independent petroleum engineer satisfactory to the Bank and/or, at
the option of Bank, the Bank will cause a petroleum engineer employed by it to
prepare a report, which report(s) shall be dated as of October 1 of such year
and shall set forth the remaining proven and producing unencumbered and
unimpaired gas and oil reserves attributable to all wells identified by the
Borrower to the Bank (the "Wells") in which the Borrower now or hereafter has an
interest, whether directly or indirectly, as an owner of a working interest,
royalty or overriding royalty, as a general or limited partner of a partnership,
as a coventurer of a joint venture or otherwise, and a projection of the rate of
gas and oil production from the Wells as well as a projection of the total
future net operating income payable to the Borrower with respect thereto for a
twenty (20) year period ("Future Net Income"), as of such dates. In addition, at
any time and from time to time, at the option of Bank, the Bank, at its expense,
may cause a petroleum engineer employed by it to prepare a report in form and
substance and based upon assumptions satisfactory to the Bank, which report(s)
shall set forth the remaining proven and producing unencumbered and unimpaired
gas and oil reserves attributable to the Wells and a projection of the rate of
gas and oil production from the Wells as well as a projection of the Future Net
Income therefrom, as of such dates as the Bank may select. After receipt of such
report(s), the Bank shall make a determination (as set forth in the following
paragraph) of the Borrowing Base as of such dates and shall send a written
notification of such determination to the Borrower.
For the purposes of this Agreement, the "Borrowing Base" shall be the
lesser of (i) Five Million Dollars ($5,000,000) or (ii) an amount determined by
Bank in its sole discretion and based upon the remaining proven and producing
unencumbered and unimpaired gas and oil reserves attributable to the Wells
[which reserves shall not exceed Ten Million Dollars ($10,000,000)], as set
forth in the engineering reports which the Bank elects to use and determined by
Bank in accordance with its then usual and customary engineering practices and
methods and economic parameters. Presently, Bank applies a valuation formula
establishing the Borrowing Base as fifty per cent (50%) of the standardized
measure of discounted future net cash flows produced from the Wells. Bank agrees
to advise Borrower of change in Bank's valuation formula. For the purposes of
this Agreement, the Bank shall determine in its sole discretion whether any oil
and gas reserves, revenues and proceeds are unencumbered or proceeds are
encumbered or impaired even though they are not subject to any liens or security
interests.
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<PAGE>
(ii) Adjustments to Borrowing Base. In the event that the principal
balance outstanding under the Revolving Credit Note shall, at any time, be in
excess of the then current Borrowing Base, the Borrower shall within thirty (30)
days after such occurrence make a payment on the Revolving Credit Note in an
amount equal to such excess (plus interest on such amount accrued to the date of
payment).
1.5 Commitment Fee. During and for the Revolving Credit Period,
Borrower shall pay to Bank a Commitment fee ("Commitment Fee") computed at the
rate of one-quarter of one percent (0.25%) per annum on the daily average
difference between the Revolving Credit, as it may be adjusted pursuant hereto,
and the principal balance outstanding under the Revolving Credit Note. The
Commitment Fee shall be due and payable quarterly, in arrears, beginning on the
first day of October, 1997 and thereafter on the first day of each calendar
quarter and on the Termination Date.
1.6 Origination Fee. In addition to interest on the Revolving Credit
Note and the Commitment Fee payable hereunder and to compensate the Bank for the
costs of the extension of credit hereunder, the Borrowers shall pay to Bank an
origination fee ("Origination Fee") in the amount of Twelve Thousand Five
Hundred Dollars ($12,500.00), payable upon the execution of this Agreement.
SECTION 2. REPRESENTATIONS AND WARRANTIES.
To induce Bank to enter into this Agreement and to make the loans
herein provided for, Borrower represents and warrants to Bank that:
2.1 Existence and Authority. Borrower is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and is duly qualified to do business, and is in good standing as a foreign
corporation, in all jurisdictions wherein its ownership of property or the
nature of its business requires such qualification and where the failure to be
so qualified would materially and adversely affect the financial condition or
operating condition of Borrower. Each Borrower has the right, power and
authority to own, and hold under lease, its properties and to carry on its
business as now being conducted.
2.2 Rights, Titles and Interests. Borrower has, and will maintain, good
and marketable rights, titles and interests in and to the Wells, free and clear
of all material liens and encumbrances, except such liens and encumbrances, if
any, set forth in writings heretofore delivered to, and acknowledged in writing
to have been received by, Bank and which are acknowledged in writing to be
acceptable to the Bank. Borrower warrants that at its expense it will defend
generally the Wells, against the claims and demands of all persons, corporations
and any other entities whatsoever. No material defaults have occurred under any
of the documents or instruments pursuant to which, or establishing that,
Borrower acquired interests in the Wells which have not been cured or waived and
such documents and instruments are in full force and effect and they have not
been modified or amended.
2.3 Financial Statements. The financial statements described below in
this section, together with the notes and reports thereto, (copies of which have
been furnished to Bank), are complete and correct, have been prepared in
accordance with generally accepted accounting principles, practices and
procedures consistently applied and present fairly the financial position of the
Borrower as at the dates set forth below and the results of its
3
<PAGE>
operations for the periods set forth below, subject only to ordinary
and usual year end audit adjustments in the case of the statements described in
clause (ii) below:
(i) Balance sheet as of September 30, 1996, and the related statements
of income, changes in stockholder's equity and changes in cash flow for the
fiscal year ended on such date, prepared and certified by Grant-Thorton, L.L.P.,
independent certified public accountants; and
(ii) Balance sheet as of June 30, 1997, the related statements of
income, changes stockholder's equity and changes in cash flow for the nine (9)
month period ended on such date, prepared and certified by the chief financial
officer of the Borrower.
Except as reflected or referred to in the above financial statements,
(a) the Borrower has no contingent or disputed liabilities or unrealized or
anticipated losses or commitments which in the aggregate are material; (b) Since
June 30, 1997, there has been no change in the condition, business or prospects,
financial or otherwise, of the Borrower as described on the financial statements
as filed with the United States Securities and Exchange Commission as of such
date and no change in the aggregate value of the property owned by the Borrower,
except changes in the ordinary course of business, none of which individually or
in the aggregate has been materially adverse.
2.4 Litigation. There is no litigation or proceeding of any kind
whatsoever pending, nor to the knowledge of Borrower threatened, nor any
judgment, order, writ, injunction, decree or award outstanding, which could
materially or adversely affect Borrower or the operation of its business, or the
Wells, nor does the Borrower know or have reasonable grounds to know of any
basis for any such action or any governmental investigation or any claim
relating to the Borrower or the operation of its business or the Wells. The
Borrower has complied with all material provisions of all agreements to which it
is a party or by which it is bound and is not in default under any of them or in
the payment of any of its material obligations.
2.5 Validity of Agreement and Revolving Credit Note. The execution and
delivery of this Agreement and the Revolving Credit Note and the documents and
instruments referred to herein and therein to be executed and/or delivered by
Borrower, as one or more may be amended, modified or supplemented (the "Loan
Documents"), the borrowings under the Loan Documents, the performance by the
Borrower of its obligations under the Loan Documents and the assignment of, and
the grant of the liens on and security interests in, the Borrower's various
rights, titles and interests, to Bank by the Loan Documents, do not, and will
not, contravene any provision of law, or of its articles of incorporation or
by-laws, or of any agreement, instrument or document or of any judicial,
arbitration or local, state or federal governmental requirement or restriction
to which Borrower is a party or by which it is bound, or result in the creation
or imposition of any lien or other encumbrance on any of the property of the
Borrower including the Wells except the liens and security interests granted by
the Loan Documents; and any and all consents or approvals of any kind
whatsoever, including approvals and consents of any local, state or federal
governmental unit, commission, authority, agency or other body, required to be
obtained in connection therewith have been obtained and are in full force and
effect. This Agreement constitutes, and the other Loan Documents when duly
executed will constitute, legal, valid and binding obligations of Borrower,
enforceable in accordance with their respective terms. Borrower is duly
authorized to execute and deliver this Agreement and the other Loan Documents;
all action necessary and proper to authorize the execution and delivery of the
Loan Documents has occurred; and Borrower is, and will
<PAGE>
continue to be, duly authorized, and has, and shall continue to have,
the right, power and authority, to execute and deliver the Loan Documents and to
make the assignment and grant the liens and security interests pursuant to the
Loan Documents as well as to borrow under the Loan Documents and to perform all
of the other terms and conditions of the Loan Documents.
2.6 Permits. Borrower has obtained, or caused to be obtained, all
material permissions, licenses, easements, rights-of-way, leasehold and fee
interests and all local, state and federal governmental approvals,
authorizations, consents and permits as well as all other rights, titles and
interests necessary to the ownership, development and operation of the Wells and
the conduct of its energy business, all of which are in full force and effect,
and which if not obtained, and kept in full force and effect, would materially
adversely affect Borrower or the operation of its energy business or the Wells.
2.7 ERISA. The Pension Benefit Guaranty Corporation ("PBGC") has not
made a determination that, with respect to any Plan (as hereinafter defined) of
the Borrower, or any subsidiary or other affiliate of the Borrower, an event or
condition has occurred which constitutes grounds under the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") for the termination of, or for
the appointment of a trustee to administer, any such plan. As used herein,
"plan" shall be defined as any employee benefit plan or other plan maintained
for employees of the Borrower, or any subsidiary or other affiliate of the
Borrower, covered by ERISA.
2.8 Regulation U. The Borrower is not engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation U of the Board of Governors of the Federal Reserve
System), and no part of the proceeds of any advance hereunder will be used to
purchase or carry any margin stock or to extend credit to others for the purpose
of purchasing or carrying any margin stock.
2.9 Compliance with Law. Borrower has complied with, and is in
compliance with, all applicable local, state and federal laws, rules and
regulations relating to all of its activities including but not limited to the
operation of the gathering system and the Wells and the offer and sale of
securities.
2.10 Taxes. All tax returns and reports of the Borrower required by law
to be filed have been duly filed, and all taxes, assessments, fees and other
governmental charges upon the Borrower or any of the property of the Borrower
and upon any of the other assets, income or franchises of the Borrower which are
due and payable have been paid or are being contested in good faith by
appropriate proceedings duly prosecuted by Borrower.
2.11 Environmental Compliance. Except as described on Exhibit V under
the heading "Environmental Matters:"
(a) no Well of the Borrower is currently on or has ever been on, or
is adjacent to any property which is on or has ever been on, any federal or
state list of Superfund Sites;
(b) no Hazardous Substances have been generated, transported,
and/or disposed of by the Borrower at a site which was, at the time of such
generation, transportation, and/or disposal, or has since become, a Superfund
Site;
5
<PAGE>
(c) except in accordance with applicable requirements of law or the
terms of a valid permit, license, certificate, or approval of the relevant
Governmental Authority, no material release of Hazardous Substances by the
Borrower or from, affecting, or related to any Well of the Borrower has
occurred; and
(d) no environmental complaint has been received by the Borrower.
SECTION 3. SECURITY.
Promptly upon request by the Bank at any time and from time to time
following the occurrence of an Event of Default (as defined in Section 8)
Borrower shall, to the fullest extent permitted by applicable law, execute and
deliver such security instruments and other documents as the Bank shall request,
in form and substance satisfactory to Bank, granting and conveying a lien or
security interest in favor of the Bank in and to any and all of the Wells and
any or all general intangibles related to the Wells to secure the payment of
principal of, and interest on, the Revolving Credit Note and all fees, costs,
expenses or other charges to be paid or reimbursed by Borrower under the Loan
Documents (the "Indebtedness") and the performance of the terms of the Loan
Documents. In addition, following the occurrence of an event of default and
notice to Borrower, Borrower shall execute such letters in lieu of transfer
orders and such division and/or transfer orders as are necessary or appropriate
to transfer and deliver to Bank proceeds from or attributable to any of the
Wells.
SECTION 4. AFFIRMATIVE COVENANTS.
For so long as any Indebtedness remains unpaid, unless Bank otherwise
consents in writing, Borrower agrees that:
4.1 Protection of Rights. Titles and Interests. Borrower will take, or
cause to be taken, all reasonable steps necessary and proper (i) to protect and
enforce its rights, titles and interests in and to the Wells and in connection
with its energy business and (ii) to comply with all duties, terms and
conditions undertaken or assumed by Borrower in connection with the Wells and
its energy business.
4.2 Operation and Maintenance. Borrower will continuously operate, or
cause to be operated, the Wells in a good and workmanlike manner and in
accordance with sound and approved industry practices. Borrower shall maintain,
or cause to be maintained, the Wells in good condition and, shall make, or cause
to be made, all necessary renewals, repairs, replacements, additions,
betterments and improvements thereto.
4.3 Permits. Borrower will obtain and keep in full force and effect, or
shall cause to be obtained and kept in full force and effect, all permissions,
licenses, easements, rights-of-way, leasehold and fee interests and all local,
state and federal governmental approvals, authorizations, consents and permits
as well as all other rights, titles and interests necessary to the ownership,
development and operation of the Wells and to the conduct of its energy
business.
6
<PAGE>
4.4 Compliance with Law. Borrower will comply with, or cause to be
complied with, all applicable local, state and federal laws, rules and
regulations relating to all of its activities including but not limited to the
operation of the Wells.
4.5 Existence. Borrower shall do, or cause to be done, all things
necessary to preserve and keep in full force and effect its existence as a
corporation, its good standing under the laws of the State of Delaware and its
qualification to do business, and its good standing as a foreign corporation, in
all jurisdictions wherein its ownership of property or the nature of its
business requires such qualification, and where the failure to be so qualified
would materially and adversely affect the financial condition or operating
condition of Borrower.
4.6 Reports and Other Information. Within ninety (90) days after the
end of each fiscal quarter of each fiscal year of the Borrower, the Borrower
shall furnish to Bank such interim financial statements as Bank shall request
(consisting of at least a balance sheet as of the close of such quarter and a
profit and loss statement and an analysis of surplus for such quarter and for
the period from the beginning of the fiscal year to the close of such quarter),
which statements shall be in such detail as Bank shall require, shall show the
Borrower's financial condition at the close of such fiscal quarter and the
results of its operations for the period then ended and shall be prepared by the
chief financial officer of Borrower in accordance with generally accepted
accounting principles, practices and procedures consistently applied and
certified by such officer, subject only to ordinary and usual year end audit
adjustments.
Within one hundred twenty (120) days after the end of each of its
fiscal years, Borrower shall furnish to Bank a copy of its annual audited
financial statements prepared in conformity with generally accepted accounting
principles, practices and procedures consistently applied by Grant-Thorton,
L.L.P., or other certified public accountants satisfactory to Bank, and
certified without qualification as to scope.
At any time and from time to time, Borrower will submit, or cause to be
submitted, to Bank promptly, in such form as Bank shall require, such other
information relating to the financial affairs of the Borrower, to the Wells, to
the business of the Borrower or otherwise as Bank shall reasonably request
including but not limited to engineering reports and supporting data relating to
the Wells and statements setting forth the quantity of gas and oil produced from
the Wells, the price paid or to be paid for such gas and oil, the Borrower's
proceeds (showing in detail the computation whereby the Borrower's proceeds are
determined) and such other information as Bank may request which may include but
not be limited to a report prepared by Borrower showing the performance of each
Well on a monthly and cumulative basis as well as such information as is
customarily set forth in a meter statement.
4.7 Records and Access. Borrower shall keep, or cause to be kept, full
and complete books and records in which correct and accurate entries will be
made of all its business transactions and the Wells and at any time and from
time to time shall give, or cause to be given, to the Bank and its
representatives full access during normal business hours to examine and copy all
of the Wells and Borrower's books, contracts and records relating to the Wells.
4.8 Payment of Taxes and Mechanics' Claims. Borrower will pay, or cause
to be paid, all taxes, assessments, license fees and other governmental charges
and all claims of mechanics and materialmen to which it or any of the Wells
shall be subject, and all other
<PAGE>
charges on or relating to the Wells, before such charges and claims become
delinquent, except that no such charge or claim need be paid for so long as its
validity or amount shall be contested in good faith by appropriate proceedings
duly prosecuted and Borrower shall have set up in its books such reserves with
respect thereto as shall be dictated by sound accounting practices; provided,
however, that all such charges and claims shall be paid, subject to refund
proceedings, if failure to pay would adversely affect the rights or titles of
Borrower to any of the Wells.
4.9 Insurance. Borrower will keep, or cause to be kept, with
financially sound and reputable insurers, such insurance with respect to its
business and property including the Wells, in such amounts and insuring against
such risks, casualties and contingencies of such types (including but not
limited to insurance for loss or damage by fire and other hazards and insurance
for liability for damage to persons and property in connection with the Wells
and the activities conducted thereon or relating thereto) as is customary for
persons, corporations and other entities of established reputations engaged in
the same or similar businesses as the Borrower and similarly situated (and with
respect to such insurance and upon request of Bank after the occurrence of any
default as defined in section 8 hereof, the Bank shall be named as mortgagee or
lender loss payee or additional insured as its interests may appear), and will
keep, or cause to be kept, such insurance as required by any applicable worker's
compensation laws, and will furnish, or cause to be furnished, certificates of
all such insurance to Bank before the initial borrowing hereunder and within one
hundred twenty (120) days after the end of each of its fiscal years. All
policies shall provide that they may not be altered or cancelled except on
thirty (30) days' prior written notice to Bank.
4.10 Duty to Plug. If and when any of the Wells ceases producing gas
and oil in paying quantities or is of no further use, or Borrower or any other
person, corporation or other entity is required to do so under any agreement or
law, Borrower will plug and abandon, or cause to be plugged and abandoned, any
and all such Wells in accordance with the local, state and/or federal laws then
in force and regulating the plugging of gas and oil wells. Borrower further
consents and agrees that it will save harmless Bank, its successors and assigns,
of and from any loss, damage and penalty through failure, if any, to plug, or
cause to be plugged, such Well or Wells as herein provided.
4.11 Expenses, Fees and Disbursements. Borrower shall pay, or cause to
be paid, all expenses, fees and disbursements incurred in connection with the
recordation, filing, satisfaction and termination of any mortgage, financing
statements and any other Loan Documents and any other instruments or documents
relating thereto and the fees, expenses and disbursements of Bank's counsel in
connection with this Agreement and the other Loan Documents, and any other
instruments or documents relating thereto, their preparation, administration and
enforcement as well as the fees, expenses and disbursements of others (including
but not limited to geologists and engineers) engaged by Bank to provide
information and advice in connection with this Agreement and the other Loan
Documents and any other instruments or documents relating thereto, their
preparation, administration and enforcement.
4.12 Assigned Payments. In connection with any amounts due to Borrower
which are assigned to Bank pursuant to any mortgage and/or security agreement
and/or any other Loan Document, following an Event of Default and upon notice to
Borrower and the payor thereof by Bank, such payments shall be made directly by
the payor thereof to Bank. Bank is, upon the occurrence of such an Event of
Default and giving notice to Borrower hereby authorized by Borrower to endorse
for and on Borrower's behalf and deposit all drafts and checks payable to
Borrower, and such authority shall continue while any Indebtedness is
<PAGE>
outstanding. In the event that any such assigned amounts paid to Bank consists
of amounts belonging in whole or in part to any person, corporation or entity
other than Borrower, the Bank shall promptly deliver such amounts or parts
thereof to such persons, corporations or satisfactory to the Bank of such
amounts or parts thereof and the identity of such persons, corporations or other
entities.
4.13 Notification. Within ten (10) days after Borrower receives notice
of any future litigation or any future judicial or administrative proceedings
pending or threatened against it which might result in Borrower being liable for
the payment or performance of obligations in excess of Five Hundred Thousand
($500,000) Dollars with respect to any single such litigation or proceeding or
in excess of One Million Dollars ($1,000,000.00) Dollars in the aggregate for
all such litigations and proceedings, Borrower shall notify the Bank, or cause
the Bank to be notified, in writing of such litigation or proceeding.
4.14 Current Ratio. The ratio of (a) current assets of the Borrower to
(b) current liabilities of Borrower shall at all times exceed 2.0 to 1.0. This
ratio shall be determined quarterly, as of the end of each calendar quarter.
4.15 Tangible Net Worth. The tangible net worth of the Borrower (as
determined by Bank in accordance with generally accepted accounting principles)
shall at all times exceed Thirty-one Million Dollars ($31,000,000).
4.16 Cash Flow. The ratio of (a) Cash Flow, [defined as the sum of (i)
net income from operations during a period after provision for federal and state
income taxes, plus (ii) depletion, depreciation, amortization and other non-cash
charges for such period] to (b) the maturities of long-term debt coming due
within the calculation period, shall at all times exceed 1.5 to 1.0. This ratio
shall be determined quarterly, on a rolling 12-month basis, as of the end of
each calendar quarter during the term of the Loan.
4.17 Adjusted Debt to Tangible Net Worth. The ratio of (a) Adjusted
Debt (defined as total liabilities minus subordinated debt) to (b) Tangible Net
Worth (defined as net worth minus intangible assets) plus subordinated debt
shall at no time exceed 2.0 to 1.0. This ratio shall be determined quarterly,
during the term of the Loans.
4.18 Additional Documents. From time to time, at the Bank's request,
whether before or after any borrowings hereunder, the Borrower at its expense
will execute and deliver, or cause to be executed and delivered, to Bank such
instruments, papers and other documents and take, or cause to be taken, such
further action as Bank reasonably may require in connection with the
transactions contemplated hereby including the enforcement of the Loan
Documents.
SECTION 5. NEGATIVE COVENANTS.
For so long as any Indebtedness remains unpaid, Borrower agrees that it
will not, without the prior written consent of Bank:
5.1 Alienation. Sell, lease, transfer or otherwise dispose of or
alienate any of the Wells, except the sale in the ordinary course of business of
gas and oil from the Wells and except the sale, lease, transfer or other
disposition or alienation in the ordinary course of business of Wells having
fair market value in the aggregate not in excess of One Hundred Thousand Dollars
($100,000) per year.
9
<PAGE>
5.2 Encumbrances. Permit, create, assume or incur any mortgage, pledge,
charge, security interest, lien or encumbrance of any kind upon any of the Wells
(whether now owned or hereafter acquired) or commit any act or make any election
which will require it to assign any of the Wells, except encumbrances (i)
created and granted in favor of the Bank to secure the Indebtedness, (ii)
relating to current taxes, assessments, license fees and other governmental
charges and claims of mechanics and materialmen not delinquent, or if delinquent
being contested in good faith as set forth in section 4.8 hereof, (iii) imposed
in the normal course of business of the Borrower in connection with obtaining
surety bonds and (iv) imposed in the normal course of business of the Borrower
on the equipment ("Equipment") of the Borrower hereafter acquired by it for its
field activities such as automobiles, pick-up trucks, 4-wheel drive vehicles,
tank trucks, service rigs, tractor trailers and bulldozers, provided that such
liens and encumbrances are imposed in connection with the financing of the
acquisition of the Equipment.
5.3 Debt. Create, assume, incur or permit to exist, any indebtedness
for money borrowed and used directly by Borrower's Energy Division, except (i)
the borrowings under the Loan Documents and (ii) the borrowings for the
acquisition of Equipment in an amount not to exceed One Hundred Thousand
($100,000) Dollars in the aggregate at any one time outstanding.
SECTION 6. BORROWING REQUIREMENTS.
Unless otherwise agreed to by Bank and subject to the performance by
Borrower of its other obligations under the Loan Documents, the Bank shall have
no obligation to advance any funds to Borrower until all legal matters incident
to the transactions contemplated by the Loan Documents are resolved in a manner
satisfactory to Bank's counsel and until Borrower shall have provided Bank with
the following:
A. The Revolving Credit Note and other Loan Documents duly executed and
all in form and substance satisfactory to Bank.
B. Evidence satisfactory to Bank authorizing the execution and delivery
by Borrower of this Agreement, the Note and the other Loan Documents.
C. Opinions of counsel for Borrower, satisfactory to Bank's counsel,
relating to such matters as the Bank may reasonably require, including opinions
that on the dates of delivery of such opinions and at the times the funds to be
lent pursuant to this Agreement are advanced (a) the representations set forth
in section 2.5 hereof (which representations shall be repeated at length in such
opinions) are accurate, and (b) to the best of the knowledge of Borrower's
counsel, the representations set forth in sections 2.1,2.2, 2.4, 2.6 and 2.9
hereof (which representations shall be repeated at length in such opinions) are
accurate.
D. Certificates executed by Borrower stating that no defaults have
occurred which are unremedied or unwaived under any agreement, lease, assignment
or other document or instrument by or through which Borrower has any rights,
titles or interests in connection with the Wells.
E. A current certificate of good standing of the Borrower and a
certificate of incumbency for the Borrower.
10
<PAGE>
F. Such other documents and instruments, and evidence of the
performance by Borrower of such other obligations, as Bank may reasonably
request.
SECTION 7. DISBURSEMENT.
7.1 Procedure. Unless otherwise agreed to by Bank, Borrower shall give
Bank at least one (1) days' written notice requesting, and specifying the date,
the amount of each borrowing or reborrowing hereunder and not later than noon on
the date specified by Borrower in such written notice, Bank shall credit one or
more of the accounts (the "Accounts") maintained by Borrower at Bank in the
amount to be borrowed or reborrowed. Each borrowing or reborrowing by Borrower
shall be conditioned on the following: that at the time of such borrowing,
reborrowing or conversion the representations and warranties contained in this
Agreement are true and correct and no event of default set forth in section 8
hereof shall have occurred and be continuing and no event which, with giving of
notice or lapse of time or both would become such an event of default, shall
have occurred or shall have failed to occur and be continuing; and each such
borrowing and reborrowing as well as such conversion shall be deemed to be a
representation and warranty by the Borrower that the foregoing conditions exist
and upon the request of Bank the Borrower shall execute and deliver to Bank a
certificate as to the existence of the foregoing conditions.
7.2 Use of Proceeds. Borrower represents, warrants and agrees that all
funds lent or advanced pursuant to this Agreement or any other Loan Document
shall be used solely for the acquisition of businesses or assets related to oil
or natural gas drilling, producing, gathering and associated activities and
facilities.
7.3 Charging Account. Borrower agrees that Bank may charge and is
hereby authorized to charge the Accounts at Bank for payment of principal of, or
interest on, the Revolving Credit Note when due and payable and all other
charges set forth in the Loan Documents when due and payable including but not
limited to the Commitment Fee and the charges set forth in sections 4.11 and
10.3 hereof.
SECTION 8. DEFAULTS.
If one or more of the following events occur:
A. Borrower makes an assignment for the benefit of its creditors,
becomes insolvent or admits in writing its inability to pay its debts as they
become due; or Borrower files a voluntary petition in bankruptcy or files a
petition or answer seeking for itself any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any
present or future statute, law or regulation; or Borrower files an answer
admitting or not contesting the material allegations of any petition filed in
any action commenced against the Borrower in bankruptcy or seeking the relief
described in this subsection 8.A, or any such action shall not have been
dismissed within thirty (30) days after it is commenced; or the Borrower takes
any action looking to the dissolution or liquidation of Borrower; or the
Borrower applies for, consents to, or acquiesces in the appointment of a
trustee, receiver or liquidator for itself or for any of its property or in the
absence of such application, consent or acquiescence such a trustee, receiver or
liquidator is appointed and is not discharged within ninety (90) days after
being appointed;
<PAGE>
B. Any garnishment proceeding by attachment, levy or otherwise in an
amount greater than $500,000 is instituted against any deposit balance
maintained, or any property deposited, with the Bank by the Borrower.
This Agreement and the other Loan Documents shall immediately and
automatically be in default, any obligation Bank has under the Loan Documents or
otherwise to make any further advances to or for the benefit of Borrower shall
immediately and automatically terminate and the principal of, and interest on,
the Note and all other Indebtedness shall immediately be due and payable without
necessity of demand, presentment, protest, notice of dishonor, notice of default
or any other notice whatsoever.
If one or more of the following events occur:
C. Default by Borrower in the payment of principal of, or interest on,
the Note or in the payment of the Commitment Fee or in the payment of items of
expense or other charges to be paid by the Borrower pursuant to the Loan
Documents, including but not limited to the items set forth in sections 4.11
or 10.3 hereof, when due and payable, and continuance thereof for ten (10) days
thereafter or for ten (10) days after bills therefor are sent to Borrower,
whichever last occurs;
D. Any court shall render a final judgment or judgments against
Borrower in an aggregate amount greater than Five Hundred Thousand Dollars
($500,000,000) in excess of any insurance protecting against the liability on
which such judgment or judgments are based and such judgment or judgments shall
not be satisfactorily stayed, discharged, vacated or set aside within ninety
(90)days after the entry thereof, or except as set forth in subsection 8.B
above, any property of Borrower shall be liened or attached under a claim or
claims in an aggregate amount greater than Five Hundred Thousand Dollars
($500,000,000) in excess of any insurance protecting against the liability on
which such lien or attachment is based and such lien or attachment shall not be
released or provided for to the satisfaction of Bank within ninety (90) days
after the property is liened or attached;
E. Borrower shall fail to take reasonable corrective measures within
thirty (30) days after notice to Borrower with respect to any litigation or any
judicial or administrative proceedings pending or threatened against Borrower,
the outcome of which, in the reasonable judgment of Bank, would materially and
adversely affect the financial condition of Borrower or the Wells;
F. The PBGC shall make a determination that there has occurred an event
or condition which constitutes grounds under ERISA for the termination of, or
for the appointment of a trustee to administer, any Plan;
G. Default in the performance of any material agreement, covenant or
obligation of Borrower set forth in this Agreement or any other Loan Document
and not constituting a specific event of default set forth in this section 8,
and continuance thereof for thirty (30) days, provided, however, that in the
event that such default cannot be cured within such thirty (30) day period
Borrower shall not be deemed to be in default hereunder so long as Borrower
undertakes and diligently pursues all action necessary to cure such default
within a reasonable time;
12
<PAGE>
H. Default in the performance of any agreement, covenant or obligation
of Borrower in any agreement between Bank and Borrower in addition to any Loan
Document, and continuance thereof for more than the permitted period of grace,
if any;
I. Except as set forth in subsections 8.C, 8.G and 8.H hereof, default
in the payment or performance of any material obligation for borrowed money, for
which the Borrower is liable (directly, by assumption, as guarantor, or
otherwise) or in the payment or performance of any material obligation secured
by any mortgage, pledge, charge, security interest, lien, or other encumbrance
with respect to any property of the Borrower, and continuance thereof for more
than the permitted period of grace, if any;
J. Any representation or warranty made by Borrower herein or in any
other Loan Document is untrue in any material respect or any certificate,
schedule, statement, report, notice or writing furnished or made to Bank in
connection with the transactions contemplated by the Loan Documents is untrue in
any material respect on the date as of which the facts set forth therein are
stated or certified; or
K. The Borrower shall fail to do, or cause to be done, all things
necessary to preserve and keep in full force and effect its existence as a
corporation, its good standing under the laws of the State of Delaware, and its
qualification to do business, and its good standing as a foreign corporation, in
all jurisdictions wherein its ownership of property or the nature of its
business requires such qualification and where failure to be so qualified would
materially and adversely affect the financial condition or operating condition
of Borrower.
Then Bank, at its option, may immediately declare this Agreement and/or
the other Loan Documents in default, may terminate any obligation it has under
the Loan Documents or otherwise to make any advance to or for the benefit of
Borrower and/or may declare the principal of, and interest on, the Revolving
Credit Note and/or all other Indebtedness immediately due and payable, whereupon
the Indebtedness shall immediately become due and payable without necessity of
demand, presentment, protest, notice of dishonor, notice of default or any other
notice whatsoever.
SECTION 9. REMEDIES.
Bank shall be entitled at its option to exercise each and every remedy
accorded it by law and/or specifically set forth in the Loan Documents, which
remedies are specifically incorporated herein by reference. Such remedies may be
asserted concurrently, cumulatively, successively or independently from time to
time so long as any part of the Indebtedness remains unpaid.
SECTION 10. MISCELLANEOUS.
10.1 Waiver and Modification. No waiver by Bank of any default shall
operate as a waiver of any other default or of the same default on a future
occasion. No failure to exercise, and no delay in exercising, on the part of
Bank, any power, remedy or right shall operate as a waiver thereof, nor shall
any single or partial exercise of any power, remedy or right preclude other or
further exercise thereof or the exercise of any other power, remedy or right.
The terms, conditions and covenants of this Agreement and the other Loan
Documents, including the Note, may only be modified or waived by a written
document executed by Borrower and Bank.
13
<PAGE>
10.2 Notices. All notices or other correspondence required or made
necessary by the terms of this Agreement and the other Loan Documents shall be
in writing and shall be considered as having been given to each party if mailed
by registered or certified mail, postage prepaid, to the respective addresses as
follows:
(a) To Borrower:
Resource America, Inc.
1521 Locust Street
Philadelphia, PA 19102
Attention: Michael L. Staines
(b) To Bank:
Key Bank, N.A.
126 Central Plaza North
Canton, Ohio 44702
Attention: Kelly J. Brennan
Each party shall have the right to change its address at any time, and
from time to time, by giving written notice thereof to the other party.
10.3 Certain Taxes. Borrower agrees to pay, and save Bank harmless
from, all liability for any federal or state documentary stamp or other tax
liability (other than the tax liabilities determined with reference to the
income or revenue of the Bank) together with any interest or penalty, which is
payable or determined to be payable with respect to the execution or delivery of
this Agreement or any other Loan Document which obligation of the Borrower shall
survive the termination of this Agreement.
10.4 Right to Cure. In the event that Borrower shall fail for any
reason to pay any fee, cost, expense or other charge to be paid or reimbursed by
Borrower, Bank shall have the right but not the duty to make such payment and if
Bank makes such payment the amount thereof shall be added to the balance of the
Indebtedness shall be payable on demand and shall bear interest at the rate
shown in the Revolving Credit Note until paid.
10.5 Venue and Jurisdiction. The parties hereto agree that any action
or proceeding arising out of or relating to the transactions contemplated by the
Loan Documents may be commenced in the Court of Common Pleas of Stark County,
Ohio and each party agrees that a summons and complaint commencing an action or
proceedings in such court shall be properly served and shall confer personal
jurisdiction if served personally or by certified mail to it at its address
designated pursuant hereto, or as otherwise provided under the laws of the State
of Ohio.
10.6 Applicable Law. This Agreement and the other Loan Documents shall
be contracts made under and governed by the laws of the State of Ohio.
10.7 Severabi1ity. In the event that any term or provision of this
Agreement or any other Loan Document, including the Note and the Mortgage, is
lawfully held or declared to be invalid, illegal or unenforceable, it shall be
deemed deleted to the extent necessary under the applicable law and the validity
of the other terms and provisions shall not be affected thereby.
14
<PAGE>
10.8 Successors and Assigns. This Agreement and the other Loan
Documents shall be binding upon the Borrower and Bank and their respective
successors and assigns, and shall inure to the benefit of Borrower, Bank and the
successors and assigns of Bank (except that Borrower shall have no right to
assign, voluntarily or by operation of law, any of its rights hereunder or under
any other Loan Document without Bank's prior written consent, and provided
further that nothing herein is intended by any party hereto to confer any rights
upon any third party as a beneficiary hereof).
10.9 Nature and Survival of Representations. All statements contained
in any certificate or other document or instrument of any kind whatsoever
delivered by or on behalf of Borrower pursuant hereto or any other Loan
Document, or in connection with the transactions contemplated hereby or thereby,
shall be deemed representations and warranties made by the Borrower in this
Agreement or other Loan Document, or pursuant hereto or thereto, and, together
with all representations and warranties contained herein or in any other Loan
Document, shall survive the execution and delivery thereof and of this Agreement
and any other Loan Document, the making of any loans under the Loan Documents,
and the making of any investigation made at any time by or on behalf of Bank.
10.10 Number and Gender. Whenever required by the context of this
Agreement or any other Loan Document the singular shall include the plural, and
vice-versa; and the masculine and feminine genders shall include the neuter
gender, and vice versa.
10.11 Headings. The headings of the sections of this Agreement are
inserted for convenience only and shall not be deemed to constitute a part
hereof.
WITNESS the due execution hereof the day and year first above written.
RESOURCE AMERICA, INC.
By:__________________________
Its:_________________________
KEYBANK, N.A.
By:__________________________
Its:_________________________
15
<PAGE>
EXHIBIT 11.1
CALCULATION OF PRIMARY AND FULLY
DILUTED EARNINGS PER SHARE
PRIMARY EARNINGS PER SHARE
Computation for Statement of Operations
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(dollars in thousands except per share data)
<S> <C> <C> <C>
Reconciliation of net income per statement of
operations to amount used in
primary earnings per share computation:
Net income $10,951 $5,147 $2,714
Add-interest on short-term debt, net of tax
effect, on application of assumed proceeds
from exercise of options and warrants in
excess of 20% limitation - 45 36
------- ------- -------
Net income, as adjusted $10,951 $5,192 $2,750
======= ====== ======
Additional Primary Computation
Net income, as adjusted per primary
computation above $10,951 $5,192 $2,750
Additional adjustment to weighted
average number of shares outstanding:
Weighted average number of shares
outstanding 3,478,290 1,890,200 1,904,400
Add-Dilutive effect of outstanding options
and warrants (as determined by the
application of the treasury stock method) 880,074 866,700 331,000
Weighted average number of shares outstanding 4,358,364 2,756,900 2,235,400
Primary earnings per shares, as adjusted $2.51 $1.88 $1.23
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in thousands except per share data)
<S> <C> <C> <C>
FULLY DILUTED EARNINGS PER SHARE
Computation for Statement of Operations
Reconciliation of net income per statement of
operations to amount used in
primary earnings per share computation:
Income (loss) before extraordinary loss $10,951 $5,147 $2,714
Add-Interest on short-term debt, net of tax
effect, on application of assumed proceeds
from exercise of options and warrants in
excess of 20% limitation - 19 -
Net income, as adjusted 10,951 5,166 2,714
Additional Fully Diluted Computation
Net income, as adjusted per primary
computation above 10,951 5,166 2,714
Additional adjustment to weighted
average number of shares outstanding:
Weighted average number of shares
outstanding 3,478,290 1,890,200 1,904,400
Add-Dilutive effect of outstanding options
and warrants (as determined by the
application of the treasury stock method) 906,925 872,800 388,300
Weighted average number of shares outstanding 4,385,215 2,763,000 2,292,700
Fully diluted earnings per share, as adjusted $2.50 $1.87 $1.18
</TABLE>
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Entity State of Incorporation
- ------ ----------------------
Resource Properties, Inc. Delaware
Resource Properties II, Inc. Delaware
Resource Properties III, Inc. Delaware
Resource Properties IV, Inc. Delaware
Resource Properties V, Inc. Delaware
Resource Properties VI, Inc. Delaware
Resource Properties VII, Inc. Delaware
Resource Properties VIII, Inc. Delaware
Resource Properties IX, Inc. Delaware
Resource Properties X, Inc. Delaware
Resource Properties XI, Inc. Delaware
Resource Properties XII, Inc. Delaware
Resource Properties XIII, Inc. Delaware
Resource Properties XIV, Inc. Delaware
Resource Properties XV, Inc. Delaware
Resource Properties XVI, Inc. Delaware
Resource Properties XVII, Inc. Delaware
Resource Properties XVIII, Inc. Delaware
Resource Properties XIX, Inc. Delaware
Resource Properties XX, Inc. Delaware
Resource Properties XXI, Inc. Delaware
Resource Properties XXII, Inc. Delaware
Resource Properties XXIII, Inc. Delaware
Resource Properties XXIV, Inc. Delaware
Resource Properties XXV, Inc. Delaware
Resource Properties XXVI, Inc. Delaware
Resource Properties XXVII, Inc. Delaware
Resource Properties XXVIII, Inc. Delaware
Resource Properties XXIX, Inc. Delaware
Resource Properties XXX, Inc. Delaware
Resource Properties XXXI, Inc. Delaware
Resource Properties XXXII, Inc. Delaware
Resource Properties XXXIII, Inc. Delaware
Resource Properties XXXIV, Inc. Delaware
Resource Properties XXXV, Inc. Delaware
Resource Properties XXXVI, Inc. Delaware
Resource Properties XXXVII, Inc. Delaware
Resource Properties XXXVIII, Inc. Delaware
Resource Properties XXXIX, Inc. Delaware
<PAGE>
Entity State of Incorporation
- ------ ----------------------
Resource Properties XL, Inc. Delaware
Resource Properties XLI, Inc. Delaware
Resource Properties XLII, Inc. Delaware
Resource Properties XLIII, Inc. Delaware
Resource Properties XLIV, Inc. Delaware
Resource Properties XLV, Inc. Delaware
Resource Programs, Inc. Delaware
Resource Commercial Mortgages, Inc. Delaware
Resource Energy, Inc. Delaware
Resource Well Services, Inc. Delaware
RAI Financial, Inc. Delaware
RPI Mortgage Funding, Inc. Delaware
Resource Financial Services, Inc. Delaware
Resource Funding, Inc. Delaware
Rancho Investments, Inc. Delaware
Resource Leasing, Inc. Delaware
Fidelity Leasing, Inc. Pennsylvania
F.L. Partnership Management, Inc. Delaware
F.L. Financial Services, Inc. Delaware
St. Julien III Corp. Pennsylvania
Fidelity Mortgage Funding, Inc. Delaware
DAC Acquisition Corporation Delaware
Bryn Mawr Resources, Inc. Delaware
Bryn Mawr Energy Company Pennsylvania
BMR Holdings, Inc. Delaware
Bryn Mawr Properties Advisors, Inc. Pennsylvania
WS Mortgage Acquisition Corporation Delaware
Tri-Star Financial Services, Inc. New Jersey
REI-NY, Inc.
-2-
<PAGE>
December 5, 1997
Resource Energy, Inc.
Attention: Mr. Jeffrey C. Simmons
2876 S. Arlington Rd.
Akron, Ohio 44312
Gentlemen:
We hereby consent to the use of our audit report dated October 23,
1997, on reserves and revenue as of October 1, 1997 from certain properties
owned by Resource Energy, Inc., as wholly owned subsidiary of Resource America,
Inc., in Resource America, Inc.'s Annual Report on Form 10-K for the fiscal year
ending September 30 1997.
Very Truly Yours,
/s/ E. E. Templeton & Associates, Inc.
- ---------------------------------------------
E. E. Templeton & Associates, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 69,279
<SECURITIES> 0
<RECEIVABLES> 2,414
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 72,269
<PP&E> 29,419
<DEPRECIATION> 15,793
<TOTAL-ASSETS> 195,119
<CURRENT-LIABILITIES> 10,841
<BONDS> 118,786
0
0
<COMMON> 54
<OTHER-SE> 64,775
<TOTAL-LIABILITY-AND-EQUITY> 195,119
<SALES> 3,936
<TOTAL-REVENUES> 32,844
<CGS> 1,823
<TOTAL-COSTS> 7,623
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 653
<INTEREST-EXPENSE> 5,273
<INCOME-PRETAX> 14,931
<INCOME-TAX> 3,980
<INCOME-CONTINUING> 10,951
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,951
<EPS-PRIMARY> 2.51
<EPS-DILUTED> 2.50
</TABLE>
