<PAGE>
Registration No. 333-47393
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SECURITIES AND EXCHANGE COMMISSION
PRE-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
RESOURCE AMERICA, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
72-0654145
(I.R.S. Employer Identification No.)
1521 Locust Street, Philadelphia, Pennsylvania 19102 (215-546-5005)
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Steven J. Kessler, 1521 Locust Street, Philadelphia, Pennsylvania 19102
(215-546-5005)
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
J. Baur Whittlesey, Esq. Dave Muchnikoff, P.C.
Ledgewood Law Firm, P.C. Silver, Freedman & Taff, L.L.P.
1521 Locust Street 1100 New York Avenue, N.W.
Philadelphia, PA 19102 Washington, D.C. 20005-3934
(215) 735-0663 (202) 682-0354
---------------------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the registration statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box / /.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box / /.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering / /.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering / /.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box / /.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED APRIL 21, 1998
PROSPECTUS
[GRAPHIC OMITTED]
RESOURCE AMERICA, INC.
1,500,000 Shares of Common Stock
---------------------
Resource America, Inc. (the "Company") is hereby offering (this
"Offering") for sale 1,500,000 shares of its common stock, $.01 par value per
share (the "Common Stock").
The Common Stock is quoted on the Nasdaq National Market System ("Nasdaq")
under the symbol "REXI." The last sales price of the Common Stock on March 25,
1998, as reported on Nasdaq, was $57.00 per share. See "Price Range of Common
Stock and Dividend Policy."
---------------------
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors" beginning on page 11 hereof for a discussion of certain factors that
should be considered carefully by prospective purchasers.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
Per Share ......... $ $ $
Total (3) ......... $ $ $
================================================================================
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of the offering, estimated to be $____________.
(3) The Company has granted the several Underwriters a 30-day option to
purchase up to 225,000 additional shares of Common Stock to cover
over-allotments. If all such shares of Common Stock are purchased, the
total Price to Public, Underwriting Discount and Proceeds to Company will
be $_____________, $____________ and $____________, respectively. See
"Underwriting."
The shares of Common Stock are offered by the Underwriters, subject to
receipt and acceptance by the Underwriters, approval of certain legal matters
by counsel for the Underwriters and certain other conditions. The Underwriters
reserve the right to withdraw, cancel or modify such offers and to reject
orders in whole or in part. It is expected that delivery of the shares of
Common Stock will be made in New York, New York on or about ____________, 1998.
---------------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
BANCAMERICA ROBERTSON STEPHENS
JANNEY MONTGOMERY SCOTT INC.
The date of this Prospectus is April , 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, accordingly, files
reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and
other information filed with the Commission are available for inspection and
copying at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W. Washington, D.C. 20549, and at
the Commission's Regional Offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at Seven World Trade Center,
New York, New York 10048. Copies of such documents may also be obtained from
the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, copies
of such documents may be obtained through the Commission's Internet address at
http://www.sec.gov. The Common Stock is authorized for quotation on Nasdaq and,
accordingly, such materials and other information can also be inspected at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street,
N.W., Washington, D.C. 20006.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-3 (No. 333-47393) (together with any amendments thereto, the "Registration
Statement"), under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the securities offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, omits certain information
contained in the Registration Statement as permitted by the rules and
regulations of the Commission. For further information with respect to the
Company and the securities offered hereby, reference is made to the
Registration Statement and the exhibits and financial statements, notes and
schedules filed as part thereof or incorporated by reference therein, which may
be inspected at the public reference facilities of the Commission at the
addresses set forth above. Statements made in this Prospectus concerning the
contents of any documents referred to herein are not necessarily complete, and
in each instance are qualified in all respects by reference to the copy of such
document filed as an exhibit to the Registration Statement or incorporated by
reference therein.
This Prospectus contains certain forward-looking statements which involve
substantial risks and uncertainties. These forward-looking statements can
generally be identified as such because the context of the statement includes
words such as the Company "believes," "anticipates," "expects," "estimates,"
"intends," or other words of similar intent. Similarly, statements that
describe the Company's future plans, objectives and goals are also
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from those expressed or implied in these
forward-looking statements as a result of certain factors, including those set
forth in "Risk Factors" and elsewhere in this Prospectus.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING
TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES. SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, previously filed with the Commission (File No.
0-4408) pursuant to Section 13 of the Exchange Act, are incorporated by
reference herein and made a part hereof: (i) the Company's Annual Report on
Form 10-K for the year ended September 30, 1997; (ii) the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1997; (iii) the
Company's Current Reports on Form 8-K dated January 14, 1998 and March 13,
1998; and (iv) the description of the Company's Common Stock contained in Form
8-A, including any amendment or report filed for the purpose of updating such
description.
All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior
to the termination of this Offering shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing of
such documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
All information appearing in this Prospectus should be read in conjunction
with, and is qualified in its entirety by, the information and financial
statements (including notes thereto) appearing in the documents incorporated
herein by reference, except to the extent set forth in the immediately
preceding statement.
The Company will provide without charge, to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any and all of the documents referred to above which have been or may be
incorporated in this Prospectus by reference (other than exhibits not
specifically incorporated by reference therein). Written or oral requests for
such copies should be directed to: Secretary, Resource America, Inc., 1521
Locust Street, Philadelphia, Pennsylvania 19102 (215) 546-5005.
3
<PAGE>
PROSPECTUS SUMMARY
The Company
General
The Company operates a specialty finance business focused on 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
conduct 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
residential mortgage lending business. The Company has also sponsored a real
estate investment trust and currently owns 15% of the trust's common shares of
beneficial interest. Within its equipment leasing business, the Company focuses
primarily on small ticket equipment lease financing, although it also manages
five publicly-owned equipment leasing partnerships and has a lease finance
placement and advisory business.
Real Estate Finance
The Company's commercial mortgage loan acquisition and resolution business
involves the purchase, at a discount, of troubled commercial real estate
mortgage loans, 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 December
31, 1997, the Company's commercial mortgage loan portfolio has grown to 43
loans with aggregate outstanding loan balances of $318.3 million. These loans
were acquired at an investment cost of $184.9 million (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 and senior lien
interests to which the properties were subject at the time of acquisition).
While the Company has historically acquired loans in the $1.0 million to $15.0
million range, it has recently shifted its focus also to include larger loans
which meet its investment objectives. See "-- Recent Developments" and "Risk
Factors -- General -- Ability to Generate Growth Opportunities." 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 35%, 36% and 35%, respectively, while its
gross profit (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 the same periods were $16.5 million,
$6.3 million and $5.3 million, respectively. The yield on net investment in
commercial mortgage loans for the quarter ended December 31, 1997 was 30%,
while gross profit for that period was $7.3 million.
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 properties underlying
its loans. At December 31, 1997, senior lenders held outstanding obligations of
$93.2 million. For the quarter ended December 31, 1997, the ratio of cash flow
(based upon (i) with respect to loans acquired prior to October 1, 1997, cash
flows for the quarter ended December 31, 1997, and (ii) with respect to loans
acquired on or after October 1, 1997, cash flow estimates, historical
information or information on cash flows for periods other than for the quarter
ended December 31, 1997) to the required debt service on senior lien interests
averaged 2.48 to 1. See "Business -- Real Estate Finance -- Commercial
4
<PAGE>
Mortgage Loan Acquisition and Resolution: Loan Status." The excess of operating
cash flow over required debt service on senior lien obligations is, pursuant to
agreements with most borrowers, generally retained by the Company as debt
service on the outstanding balance of the Company's loans.
The Company's residential mortgage lending business provides first and
second mortgage loans on one-to-four family residences to borrowers who
typically do not conform to guidelines established by the Federal National
Mortgage Association ("Fannie Mae") because of past credit impairment or other
reasons. Through its subsidiaries, Fidelity Mortgage Funding, Inc. ("FMF")
which commenced lending operations in October 1997 and Tri-Star Financial
Services, Inc. ("Tri-Star") which was acquired in November 1997, the Company is
licensed as a residential mortgage lender in 23 states and is currently
originating loans in 11 states (Connecticut, Delaware, Indiana, Kentucky,
Maryland, Mississippi, New Jersey, North Carolina, Ohio, Pennsylvania and
Virginia). The Company concentrates on mid-size residential mortgage loans with
a targeted average loan of approximately $50,000. 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 originate non-conforming loans. The Company pursues a
strategy of selling its residential mortgage loan portfolio on a regular basis.
The Company is currently an approved loan seller to 16 investors.
The Company sponsored Resource Asset Investment Trust ("RAIT"), a real
estate investment trust which is publicly traded on the American Stock
Exchange. The Company sold 10 loans and senior lien interests in two other
loans to RAIT in January 1998. The aggregate price paid by RAIT for the loans
and the senior lien interests was $20.2 million (including $2.1 million
attributable to senior lien interests acquired by the Company in anticipation
of sale of the loans to RAIT and thereafter sold to RAIT, at cost). The Company
realized a gain on this sale of $3.1 million. The Company anticipates selling
further loans to RAIT. See "Business -- Real Estate Finance -- Sponsorship of
Real Estate Investment Trust" and "Management -- Certain Relationships and
Related Party Transactions."
Equipment Leasing
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 acquisition, the Company manages five publicly-held
equipment leasing partnerships involving $49.8 million (original equipment
cost) in leased assets at December 31, 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 within the dealer
distribution channels is under-served by equipment lessors, banks and other
financial institutions, affording the Company a market opportunity with
significant growth potential. During the first quarter of fiscal 1998, the
Company received 3,608 lease applications involving equipment with an aggregate
cost of $47.8 million, approved 1,907 applications involving equipment with an
aggregate cost of $18.6 million, and entered into 1,551 transactions involving
equipment with an aggregate cost of $16.0 million. During fiscal 1997, the
Company received 8,344 lease applications involving equipment with an aggregate
cost of $113.4 million, approved 5,054 applications 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.
5
<PAGE>
The Company pursues a strategy of selling equipment leases originated by
it in bulk on a servicing retained basis. See "Business -- Equipment Leasing --
Strategy: Focus on Lease Sales." During the first quarter of fiscal 1998 and
during fiscal 1997, the Company sold equipment leases with an aggregate book
value of approximately $14.4 million and $30.2 million, respectively, to third
parties. The Company's income from retained servicing was not material during
either the first fiscal quarter of 1998 or fiscal 1997.
Energy
The Company produces natural gas and, to a lesser extent, oil from
locations principally in Ohio, Pennsylvania and New York. At December 31, 1997,
the Company had a net investment of $12.4 million in its energy operations,
including interests in 1,264 individual wells 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. From time to time, the
Company receives indications of interest in the acquisition of its energy
operations, and continually pursues the increase of its reserve base through
selective acquisition of producing properties and other assets. Within the past
nine months, the Company has acquired the assets of two small energy companies.
Recent Developments
Commercial Loan Purchase. On March 13, 1998, the Company and RAIT
purchased a defaulted loan in the original principal amount of $80.0 million,
plus accrued fees, restructuring charges, interest and costs (the "Loan"). The
purchase price of the Loan was $85.5 million, $75.5 million of which was
contributed by the Company and $10.0 million of which was contributed by RAIT.
There can be no assurance that the Company will realize the full outstanding
amount of the Loan. The Loan is secured by a first priority mortgage lien on an
office building known as the "Evening Star Building" located at 1101
Pennsylvania Avenue, N.W., Washington, D.C. (the "Property"). The Property has
been valued by an independent valuation firm at not less than $90.0 million.
Such valuation is only an estimate of value and should not be relied upon as a
precise measure of market value. Contemporaneously with the purchase of the
Company's interest in the Loan, the Company obtained senior secured financing
of $55.0 million. RAIT's participation interest in the Loan entitles it to
receive a priority return of its investment, after repayment of the senior
secured financing. See "Business -- Recent Developments -- Commercial Loan
Purchase" and "-- Commercial Mortgage Loan Acquisition and Resolution:
Accounting for Discounted Loans."
Commercial Mortgage Loan Credit Facility. In March 1998, the Company,
through certain operating subsidiaries, established an $18.0 million revolving
credit facility with Jefferson Bank for its commercial mortgage loan
operations. No borrowings have been made under this facility to date. See
"Business -- Recent Developments -- Commercial Mortgage Loan Facility." See
also "Management -- Certain Relationships and Related Party Transactions --
Relationship with Jefferson Bank."
6
<PAGE>
The Offering
Common Stock offered to the
public.................. 1,500,000 shares(1)
Common Stock to be outstanding after
the Offering 6,250,717 shares(1)(2)
Use of Proceeds.......... The net proceeds from the sale of Common Stock by
the Company will be used primarily for the
acquisition of additional commercial real estate
mortgage loans and, to a lesser extent, for the
expansion of equipment leasing operations, the
acquisition of selected energy properties and assets
and for other general corporate purposes.
Nasdaq Stock
Market symbol.......................................................... REXI
- -------------
(1) Based on 4,750,717 shares of Common Stock outstanding as of March 25, 1998.
Assumes that the Underwriters' over-allotment option to purchase up to
225,000 shares of Common Stock is not exercised.
(2) Does not give effect to employee stock options to purchase up to 262,431
shares of Common Stock outstanding at March 25, 1998.
7
<PAGE>
Summary Consolidated Financial Data
The financial data set forth below should be read in conjunction with, and
is qualified in its entirety by, the Consolidated Financial Statements of the
Company, including the notes thereto, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
As of and for
the Quarter Ended
December 31,
--------------------------
1997 1996
-------------- ----------
(in thousands, except
ratios
and per share data)
<S> <C> <C>
Statement of Operations Data:
Revenues:
Real estate finance --
Interest(1) .................................. $ 4,668 $ 1,427
Fees ......................................... 1,775 1,407
Gains on refinancings and sales of senior
lien interests .............................. 2,949 385
------- -------
Total ....................................... 9,392 3,219
Equipment leasing ............................. 3,172 1,202
Energy production ............................. 1,232 950
Energy services ............................... 583 389
Interest ...................................... 698 84
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Total revenues .............................. 15,077 5,844
Costs and expenses:
Real estate finance .......................... 1,523 163
Equipment leasing ............................ 1,325 883
Energy exploration and production ............ 574 412
Energy services .............................. 309 224
General and administrative ................... 927 592
Provision for possible losses ................ 318 10
Interest ..................................... 3,870 409
Other ........................................ (3) (88)
------- -------
Total costs and expenses .................... 8,843 2,605
Income before income taxes, depreciation,
depletion and amortization ................... 6,234 3,239
Depreciation, depletion and amortization ...... 508 379
Income before income taxes .................... 5,726 2,860
Net income .................................... 3,951 2,285
Segment Profitability (Loss):(2)
Real estate finance ........................... $ 7,467 $ 2,865
Equipment leasing ............................. 1,430 214
Energy exploration, production and services 518 372
Corporate (excluding taxes)(3) ................ (3,692) (679)
Balance Sheet and Other Data:
Assets:
Current assets ............................... $34,343 $ 8,721
Net investment in real estate loans .......... 128,884 49,693
Net investment in leasing assets ............. 13,214 5,388
Net investment in energy property and
equipment ................................... 12,379 11,036
Net other assets ............................. 19,099 5,573
------- -------
Total assets ................................ 207,919 80,411
Liabilities:
Current liabilities .......................... $16,690 $ 2,449
Long-term debt less current maturities(4)..... 118,116 22,496
Deferred income taxes and long-term
liabilities ................................. 2,656 2,589
------- -------
Total liabilities ........................... 137,462 27,534
Stockholders' equity(5) ....................... 70,457 52,877
Stockholders' equity per common share(6)(7) ... 14.86 14.89
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
As of and for the
Year Ended September 30,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ------------ ------------ ----------- -----------
(in thousands, except ratios and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Real estate finance --
Interest(1) .................................. $ 9,001 $ 2,853 $ 3,422 $ 1,401 $ 606
Fees ......................................... 2,556 675 963 25 --
Gains on refinancings and sales of senior
lien interests .............................. 7,587 3,643 1,729 1,096 --
-------- --------- --------- --------- ---------
Total ....................................... 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
Costs and expenses:
Real estate finance .......................... 1,069 852 801 248 114
Equipment leasing ............................ 3,822 2,339 -- -- --
Energy exploration and production ............ 1,823 1,582 1,733 2,004 1,735
Energy services .............................. 909 869 1,026 1,131 1,106
General and administrative ................... 2,851 1,756 2,265 1,901 1,841
Provision for possible losses ................ 653 7 -- -- --
Interest ..................................... 5,273 872 1,091 310 41
Other ........................................ (101) (7) (1) 30 (383)
-------- ----------- ----------- --------- ---------
Total costs and expenses .................... 16,299 8,270 6,915 5,624 4,454
Income before income taxes, depreciation,
depletion and amortization ................... 16,545 8,721 4,679 2,556 2,112
Depreciation, depletion and amortization ...... 1,614 1,368 1,335 1,347 1,478
Income before income taxes .................... 14,931 7,353 3,344 1,209 634
Net income .................................... 10,951 5,147 2,714 1,309 590
Segment Profitability (Loss):(2)
Real estate finance ........................... $ 16,546 $ 6,281 $ 5,276 $ 2,237 $ 455
Equipment leasing ............................. 2,457 1,916 -- -- --
Energy exploration, production and services 1,699 1,646 1,317 1,114 1,720
Corporate (excluding taxes)(3) ................ (5,845) (2,497) (3,248) (2,105) (1,393)
Balance Sheet and Other Data:
Assets:
Current assets ............................... $ 72,269 $ 6,106 $ 3,924 $ 3,985 $ 2,150
Net investment in real estate loans .......... 88,816 21,798 17,991 10,386 7,329
Net investment in leasing assets ............. 8,152 729 -- -- --
Net investment in energy property and
equipment ................................... 11,400 11,265 11,964 12,786 13,542
Net other assets ............................. 14,482 4,061 3,671 7,639 2,210
-------- ---------- ---------- --------- ---------
Total assets ................................ 195,119 43,959 37,550 34,796 25,231
Liabilities:
Current liabilities .......................... $ 10,841 $ 1,664 $ 1,329 $ 1,355 $ 723
Long-term debt less current maturities(4)..... 118,786 8,966 8,523 8,627 813
Deferred income taxes and long-term
liabilities ................................. 663 2,206 1,147 674 834
-------- ---------- ---------- --------- ---------
Total liabilities ........................... 130,290 12,836 10,999 10,656 2,370
Stockholders' equity(5) ....................... 64,829 31,123 26,551 24,140 22,861
Stockholders' equity per common share(6)(7) ... 13.79 16.43 14.21 12.52 11.59
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
As of and for
the Quarter Ended
December 31,
--------------------------
1997 1996
------------ ------------
(in thousands, except
ratios
and per share data)
<S> <C> <C>
Assets under management:
Real estate(8) .............................. 330,131 139,608
Leasing(9) .................................. 114,876 83,503
Energy(10) .................................. 38,867 32,145
------- -------
Total assets under management .............. 483,874 255,256
Selected Ratios:
Operating ratios -
Return on equity(11) ........................ 23% 22%
Yield on net real estate investment(12) ..... 30% 36%
Balance sheet ratios:
Real estate loan to value(13) ............... 82% 80%
Earnings to fixed charges(14) ............... 2.48 8.00
Common Share Information:
Net income per common share (basic)(15) ...... $ .83 $ .91
Weighted average number of common
shares outstanding (basic) .................. 4,733 2,507
Net income per common share (diluted)(16)..... $ .81 $ .66
Weighted average number of common
shares (diluted) ............................ 4,906 3,476
Cash dividends per common share .............. $ .10 $ .10
</TABLE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
As of and for the
Year Ended September 30,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ----------- -----------
(in thousands, except ratios and per share data)
<S> <C> <C> <C> <C> <C>
Assets under management:
Real estate(8) .............................. 233,666 100,520 52,955 26,328 13,303
Leasing(9) .................................. 105,940 79,649 103,439 -- --
Energy(10) .................................. 37,809 32,147 33,688 36,067 38,500
------- ------- ------- ------ ------
Total assets under management .............. 377,415 212,316 190,082 62,395 51,803
Selected Ratios:
Operating ratios -
Return on equity(11) ........................ 23% 18% 11% 6% 3%
Yield on net real estate investment(12) ..... 35% 36% 35% 31% 12%
Balance sheet ratios:
Real estate loan to value(13) ............... 82% 86% 78% 79% 82%
Earnings to fixed charges(14) ............... 3.83 9.44 4.07 4.89 16.45
Common Share Information:
Net income per common share (basic)(15) ...... $ 3.15 $ 2.72 $ 1.43 $ .66 $ .30
Weighted average number of common
shares outstanding (basic) .................. 3,478 1,890 1,904 1,970 1,975
Net income per common share (diluted)(16)..... $ 2.51 $ 1.88 $ 1.23 $ .64 $ .30
Weighted average number of common
shares (diluted) ............................ 4,358 2,757 2,235 2,076 1,990
Cash dividends per common share .............. $ .40 $ .38 $ .09 $ -- $ --
</TABLE>
<PAGE>
- -------------
(1) Interest income includes accreted discounts of $1.7 million and $793,000
for the quarters ended December 31, 1997 and 1996, respectively, and $4.1
million, $954,000, $1.2 million, $602,000, and $256,000 for the fiscal
years ended September 30, 1997, 1996, 1995, 1994 and 1993, respectively.
(2) Represents segment revenues minus segment costs less depreciation,
depletion and amortization attributable to the segment, but without
allocation of corporate overhead.
(3) Includes interest expense, interest income on cash not invested in
operations, general and administrative expenses, and depreciation and
amortization not allocated to operations of other segments. Interest
expense was $3.9 million and $409,000 for the quarters ended December 31,
1997 and 1996, respectively, and $5.3 million, $872,000, $1.1 million,
$310,000 and $41,000 for the years ended September 30, 1997, 1996, 1995,
1994 and 1993, respectively.
(4) In July 1997, the Company completed a private offering of 12% senior
notes and received net proceeds (after placement expenses) of $110.4
million.
(5) In December 1996, the Company completed a public offering of shares of
Common Stock and received net proceeds (after underwriting and offering
expenses) of $19.5 million.
(6) Based on shares of Common Stock outstanding of 4.7 million and 3.6
million at December 31, 1997 and 1996, respectively, and 4.7 million, 1.9
million, 1.9 million, 1.9 million, and 2.0 million at September 30, 1997,
1996, 1995, 1994, 1993, respectively.
(7) Giving effect to the issuance of 1.5 million shares in this Offering at
an assumed price of $57.00 (the closing price of the Common Stock on
Nasdaq on March 25, 1998), and after deduction of underwriting discounts
and estimated offering expenses, stockholders' equity per common share
would have been $24.10 on December 31, 1997.
(8) Represents the stated, or face, amount of outstanding loans plus accrued
interest and penalties.
(9) Represents the aggregate of (i) the original cost of equipment under
lease and cash held by equipment leasing limited partnerships managed by
the Company, and (ii) gross lease receivables under leases held in the
Company's portfolio or serviced by the Company for third parties.
(10) Represents the original cost of assets held by the Company and energy
partnerships and joint ventures managed by the Company.
(11) Calculated as net income divided by average stockholders' equity.
(12) Calculated as gross real estate finance revenues (including gains on
refinancings and sales of senior lien interests in commercial mortgage
loans) divided by the average book cost of real estate finance assets.
9
<PAGE>
(13) Calculated as the aggregate book value of loans with respect to any
property (including all loans with liens senior to or of the same
seniority with the loan interest held by the Company) divided by the
appraised value of the property.
(14) Calculated by dividing income from continuing operations before income
taxes, extraordinary gains and cumulative effect of a change in accounting
principle plus fixed charges by fixed charges. Fixed charges represent
total interest expense, including amortization of debt expense and
discount relating to indebtedness.
(15) Calculated as net income divided by the weighted average number of shares
of Common Stock outstanding during the period, in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128.
(16) Calculated as net income divided by the weighted average number of shares
of Common Stock outstanding during the period and dilutive potential
Common Stock in accordance with SFAS No. 128. Dilutive potential shares of
Common Stock include shares issuable under the terms of various stock
option and warrant agreements (including, during fiscal 1994 through
fiscal 1997, warrants exercised during fiscal 1997) net of the number of
such shares that could have been reacquired (at the weighted average price
of the Common Stock during the period) with the proceeds received from the
exercise of the options and warrants.
10
<PAGE>
RISK FACTORS
In addition to the other information contained or incorporated by
reference in this Prospectus, the following factors should be considered
carefully in evaluating an investment in the Common Stock. The cautionary
statements set forth below and elsewhere in this Prospectus, or which are
incorporated by reference herein, should be read as accompanying
forward-looking statements included or incorporated by reference herein. The
risks described in the statements set forth below could cause the Company's
results to differ materially from those expressed in or indicated by such
forward-looking statements.
General
Ability to Generate Funding for Growth. The success of the Company's
future operations will depend largely upon the continued availability of
outside funds for its real estate finance and equipment leasing operations.
Funding for the Company's operations has been derived from a number of
different sources, including internally generated funds, borrowings, and the
sale of its notes and Common Stock. See "Business -- Sources of Funds" and "--
Recent Developments." The future availability of third-party financing for each
of the Company's specialty finance businesses will depend on a number of
factors over which the Company has limited or no control, including general
conditions in the credit markets, the size, pricing and liquidity of the
markets for the types of mortgage loans or equipment leases in the Company's
portfolio and the financial performance of the Company's loans and equipment
leases. There can be no assurance that the Company will be able to generate
funding on satisfactory terms and in acceptable amounts and thus sustain its
growth. Moreover, any failure to renew or obtain adequate funding under a
credit or financing facility or other borrowing could have a material adverse
effect on the Company's results of operations and financial condition. To the
extent the Company is not successful in maintaining or replacing existing
financing, and, in particular, replacing or refinancing the $115.0 million
principal amount of its 12% Senior Notes (the "Senior Notes") when they become
due in August 2004, the Company would have to curtail its activities (and, with
respect to the Senior Notes, possibly sell assets in order to repay the Senior
Notes), which would have a material adverse effect on the Company's results of
operations and financial condition.
Certain Financing Limitations Imposed by Senior Notes. The Indenture
pursuant to which the Senior Notes were issued permits the Company to incur
both secured and unsecured debt in the future, subject to specific limitations.
Such limitations include (i) a prohibition against incurring debt, of equal
seniority with or junior to the Senior Notes, which has a maturity prior to
that of the Senior Notes, and (ii) a prohibition from incurring further debt
where the ratio of debt (excluding debt used to acquire mortgage loans,
equipment leases or other assets, obligations to repurchase assets sold,
guarantees of either of the foregoing and certain other obligations) to the
Company's consolidated net worth would exceed 2.0 to 1.0. For a description of
certain other limitations imposed by the Indenture, see "Business -- Sources of
Funds." Such limitations may restrict the ability of the Company to obtain
financing in the future.
Ability to Generate Growth Opportunities. The success of the Company's
finance operations will also depend on its continued ability to generate
attractive opportunities for acquiring commercial mortgage loans at a discount
and originating and reselling equipment leases and residential mortgage loans.
In each area, the Company will rely primarily upon the knowledge, experience
and industry contacts of its senior management to generate appropriate
opportunities. See "Management." There can be no assurance that the Company
will generate opportunities satisfactory to it sufficient to sustain growth or
that, in its commercial mortgage loan acquisition and resolution activities,
that the Company will be able to acquire loans in the same manner, on similar
terms or at similar levels of discount as its current portfolio loans. In this
regard the Company has recently shifted its focus to also include larger loans
which, due to their size, increase the risks to the Company. The availability
of loans for acquisition on terms acceptable to the Company, and the ability
of the Company to originate satisfactory equipment leases and residential
mortgage loans, will depend upon a number of factors over which the Company
has no control, including economic conditions, interest rates and the market
for and value of properties securing loans which the Company may seek to
acquire. The Company may also be affected by competition from other acquirors
of troubled loans and by the willingness of financial institutions and other
entities to dispose of troubled or under-performing loans in their portfolios.
The Company's growth strategy with respect to both equipment leasing and
residential mortgage lending involves expanding these businesses through
increased penetration into existing markets and expansion into
11
<PAGE>
new markets while maintaining satisfactory premiums on sale, interest rate
spreads and underwriting criteria. Implementation of this strategy will depend
in large part on the Company's ability to (i) expand its network of
manufacturers, distributors and other vendors to join with the Company in
vendor programs for equipment leasing and, with respect to residential mortgage
lending, establishing direct-sourced origination activities in markets with a
sufficient concentration of borrowers meeting the Company's underwriting
criteria, (ii) hire, train and retain skilled employees, and (iii) continue to
expand in the face of increasing competition from other lessors and mortgage
lenders. There can be no assurance that the Company will be able to implement
these growth strategies, or that such strategies will be effective.
Risks Related to Management of Growth. The Company has recently undergone
a period of significant growth, and further expansion may significantly strain
the Company's management, financial and other resources. There can be no
assurance that the Company will manage its growth effectively or that the
Company will be able to attract and retain the personnel necessary to meet its
business objectives. If the Company is unable to manage its growth effectively,
the Company's business, operating results and financial condition could be
materially adversely affected.
Interest Rate Risks. As an entity engaged in real estate finance and
equipment leasing, the Company will be subject to risks relating to changes in
interest rates. In general, in a period of rising interest rates, the resale
value of loans or leases with fixed interests rates will decrease. Changing
interest rate environments will also affect the Company's rate of return on its
investments. In commercial mortgage loan acquisition and resolution, a rising
interest rate environment will increase the Company's cost of funds, such as
the interest rates payable on new senior lien interests sold by the Company or
new borrower refinancings, while not necessarily resulting in an increase in
interest paid to or accrued by the Company, thus reducing the Company's return
on its funds invested. Interest rate changes will also affect the Company's
return on commercial mortgage loan originations. In particular, during a period
of declining rates, the amounts becoming available to the Company for
investment due to repayment of its commercial mortgage loans, sales of senior
lien interests, borrower refinancing or (particularly with its residential
mortgage loans) prepayments may be invested at lower rates than the Company had
been able to obtain in prior investments, or than the rates on the repaid
loans. In addition, in residential mortgage lending and equipment leasing, the
return expected, and the rates charged, by the Company are based on interest
rates prevailing in the market at the time of loan origination or lease
approval. Until the Company's residential loans or leases are sold, they are
funded from the Company's credit facilities or from working capital. Should the
Company be unable to sell residential loans or leases with fixed rates within a
reasonable period of time after funding, the Company's operating margins could
be adversely affected by increases in interest rates. Further, increases in
interest rates could cause a reduction in demand for the Company's residential
mortgage and lease funding.
Economic Slowdown May Adversely Affect Volume of Residential Mortgage
Loans and Equipment Leases. Periods of economic slowdown may reduce the demand
for residential mortgage loans as people elect not to purchase new homes due to
economic uncertainty and also may adversely affect the financial condition of
potential borrowers so that they do not meet the Company's underwriting
criteria. In addition, economic slowdowns may cause a decline in real estate
values. Any material decline in real estate values will reduce the ability of
borrowers to use home equity to support borrowings by negatively affecting
loan-to-value ratios of the home equity collateral. Similarly, small businesses
may defer the leasing of new equipment or may suffer a decline in profitability
which would inhibit their ability to obtain lease financing. To the extent that
the loan-to-value ratios of prospective borrowers' home equity collateral (for
residential mortgage loans) or the debt service ratios (for equipment leasing)
do not meet the Company's underwriting criteria, the volume of loans and leases
originated by the Company could decline which could have a material adverse
effect on the Company's operations and financial condition.
Credit Risks. Loans and equipment leases are subject to the risk of
default in payment by borrowers and lessees. Defaults by borrowers and lessees
could adversely affect the Company's financial position. Upon a default, the
Company will attempt to recover outstanding loan or lease balances through
foreclosure, repossession of equipment or similar procedures. With respect to
any particular loan or equipment lease, instituting any of these procedures
could adversely impact the Company's yield on such loan or lease. There
12
<PAGE>
can be no assurance that, in the event of default, the amount realizable from
the property securing a defaulted loan or the equipment subject to a defaulted
lease will be sufficient to recover amounts invested by or owed to the Company.
See "Risk Factors -- Real Estate Finance Considerations -- Lien Priority" and
"-- Equipment Leasing Considerations -- Residuals."
The commercial mortgage loans acquired in the Company's commercial
mortgage loan acquisition and resolution operations typically do not provide
for recourse against the borrowers and, accordingly, in seeking to collect
amounts owed on a loan, the Company must rely solely on the value of the
property underlying the loan to satisfy the obligation. This value will be
affected by numerous factors beyond the Company's control, including general or
local economic conditions, neighborhood real property values, interest rates,
operating expenses (such as real estate taxes and insurance costs), occupancy
rates and the presence of competitive properties. In addition, most of the
Company's loans require a substantial lump sum payment at maturity. The ability
of a borrower to pay a lump sum, and thus the ability of the Company to collect
promptly all amounts due upon maturity, may be dependent on the borrower's
ability to obtain suitable refinancing or otherwise raise a substantial amount
of cash which, in turn, will depend upon factors (such as those referred to
previously) over which the Company has no control. To the extent that the
Company sells a senior lien position in a loan, or the loan is refinanced, the
Company will typically retain a subordinated interest in the loan, which may be
unsecured. See "Risk Factors -- Real Estate Finance Considerations -- Lien
Priority." Such retained interests are relatively illiquid investments and are
subject to materially increased risks of collection upon default.
The Company focuses its marketing efforts in residential mortgage lending
on borrowers who may be unable to obtain mortgage financing from conventional
mortgage sources. Loans made to such borrowers may entail a higher risk of
delinquency and higher losses than loans made to borrowers who qualify to
utilize conventional mortgage sources. Delinquencies, foreclosures and losses
generally increase during economic slowdowns or recessions. Further, any
material decline in real estate values increases the loan-to-value ratios of
loans previously made by the Company, thereby weakening collateral coverages
and increasing the possibility of a loss in the event of a borrower default.
Any sustained period of increased delinquencies, foreclosures or losses after
the loans are sold could adversely affect the pricing of the Company's future
residential loan sales and the ability of the Company to sell its residential
loans in the future.
The Company specializes in acquiring and originating equipment leases
involving equipment with a purchase price of less than $100,000, generally
involving small and mid-size commercial businesses located throughout the
United States. Small business leases may entail a greater risk of
non-performance and higher delinquencies and losses than leases entered into
with larger lessees because small businesses generally have lesser financial
resources with which to meet lease obligations and may be more susceptible to
changes in economic conditions. Although the Company seeks to mitigate this
risk through the use of its Small Business Credit Scoring System, its asset
tracking systems and its loan servicing and collection procedures, there can be
no assurance that the Company will not be subject to higher risks of default
than firms leasing to larger entities. Moreover, because of the Company's short
operating history in leasing, only limited performance data is available with
respect to leases funded by the Company. Thus, historical delinquency and loss
statistics are not necessarily indicative of future performance. The failure of
the Company's lessees to comply with the terms of their leases will result in
the inability of such leases to qualify to serve as collateral under the
Company's warehouse facilities or to be sold to investors, which may materially
adversely affect the Company's liquidity. Additionally, delinquencies and
defaults experienced in excess of levels estimated by management in determining
the Company's allowance for credit losses could have a material adverse effect
on the Company's ability to obtain financing and effect lease sales or other
transactions which may, in turn, have a material adverse effect on the
Company's financial condition and result of operations.
Dependence on Lease and Residential Loan Sales. Gains on sales of
residential loans and equipment leases generated by the Company represent a
material and growing source of the Company's revenues and net income,
aggregating $3.2 million or 21% of the Company's revenues for the three months
ended December 31, 1997. The gain on sale of leases sold represented
approximately 56% of revenues from leasing operations for the quarter ended
December 31, 1997 and approximately 52% of the Company's revenues from leasing
operations in fiscal 1997. The gain on sale of residential mortgage loans
represented 84% of the Company's revenues from residential mortgage loan
operations for the quarter ended December 31, 1997 (the quarter in
13
<PAGE>
which such operations commenced). Furthermore, the Company will rely in
significant part on proceeds from residential loan and equipment lease sales to
generate cash for further investments and for repayment of borrowings used by
the Company to originate residential loans and equipment leases. The Company
sells virtually all of its residential loan and equipment leases in the
secondary market to a limited number of institutional purchasers. Several
factors affect the Company's ability to complete such lease and residential
mortgage sales, including the credit quality of the Company's lease and
mortgage originations, compliance of the Company's originations with
eligibility requirements established by buyers, and, to the extent that such
buyers engage in securitization transactions or other structured finance
techniques in order to fund their purchases, conditions in the asset-backed
securities markets. There can be no assurance that such purchasers will
continue to purchase loans or equipment leases or that the purchase terms will
be similar to those obtained by the Company to date. To the extent that the
Company cannot successfully replace such purchasers or negotiate favorable
terms for such purchases, the Company's results of operations and financial
condition could be materially adversely affected. See "Risk Factors -- Real
Estate Finance Considerations -- Note Received in Sale of Certain Residential
Loans" and "-- Equipment Leasing Considerations -- Sale of Equipment Leases."
For a discussion of the Company's revenue recognition and accounting policies
pertaining to its equipment leasing operations, see "Business -- Equipment
Leasing -- Revenue Recognition and Lease Accounting."
Risks Related to Representations and Warranties in Residential Loan and
Equipment Lease Sales. The Company engages in bulk residential loan and
equipment lease sales pursuant to agreements that typically require the Company
to repurchase or substitute loans or equipment leases in the event of a breach
of a representation or warranty made to the purchaser, any misrepresentation
during the mortgage loan origination process or, in some cases, upon any fraud
or first payment default on an equipment lease or mortgage loan. Any claims
asserted against the Company in the future by one of its lease or loan
purchasers may result in liabilities or legal expenses that could have a
material adverse effect on the Company's results of operations and financial
condition.
Fluctuations in Periodic Results. The Company may experience significant
fluctuations in quarterly or other periodic operating results due to a number
of factors, including variations in the volume of commercial mortgage loans
purchased and in the volume of residential mortgage loans and equipment leases
originated by the Company, fees obtained in connection with the Company's
commercial loan activities, timing of sales of senior lien interests or
borrower refinancings of commercial loans, loan prepayments, differences
between the Company's cost of funds and average yield on its residential
mortgage loans and leases prior to sale, default rates on loans or leases
originated by the Company, variations in prices obtainable, or demand for,
natural gas and oil, the degree to which the Company encounters competition in
its markets and general economic conditions. In addition, both the residential
lending and equipment leasing businesses are relatively young and still
evolving and, accordingly, involve greater uncertainties and risk of loss. As a
result, results for any one quarter or period should not be relied upon as
being indicative of performance in future quarters or periods. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Competition. In each of its business operations, the Company is subject to
intense competition from numerous competitors, many of whom possess far greater
financial, marketing, operational and other resources than the Company and who
may have lower costs of funds than the Company. In this regard, the Company
will also have to compete for the capital necessary to fund both its real
estate finance and equipment leasing operations based largely upon the
performance of its portfolio loans and equipment leases.
Although the commercial mortgage loan acquisition and resolution business
is generally competitive in virtually all of its aspects, the Company's focus
on the acquisition of troubled commercial real estate 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 the Company's competitors possess greater financial and other resources
than the Company. As a result, there can be no assurance that the Company will
be able to effect acquisitions of discounted loans in the same manner and on
the same terms as in the past or that there will not be significant variations
in the profitability of the Company's commercial mortgage loan acquisition and
resolution business.
As an originator of residential mortgage loans and equipment leases, the
Company faces intense competition, primarily from mortgage banking companies,
commercial banks, credit unions, thrift institutions
14
<PAGE>
and finance companies and from equipment manufacturers that finance the sale or
lease of their products themselves. Furthermore, the current level of gains
realized by the Company and its competitors on the sale of non-conforming
residential mortgage loans is attracting and may continue to attract additional
competitors into the non-conforming mortgage loan market. In the future, the
Company may also face competition from, among others, governmental-sponsored
entities who may enter the non-conforming mortgage market.
Increased competition in the residential mortgage loan and equipment
leasing markets could have the possible effects of (i) lowering gains that may
be realized on the Company's residential mortgage loan and equipment lease
sales, (ii) reducing the volume of the Company's loan and equipment lease
originations and sales, (iii) increasing the demand for the Company's
experienced personnel and the potential that such personnel will be recruited
by the Company's competitors, and (iv) lowering the industry standard for
underwriting guidelines (for example, by providing for less stringent debt
service coverage or loan-to-value ratios) as competitors attempt to increase or
maintain market share in the face of increased competition. See "Risk Factors
- -- Risk of Economic Slowdown May Adversely Affect Volume of Residential
Mortgage Loans and Equipment Leases" and "-- Credit Risks."
As the Company expands into new geographic or industry markets, it may
face competition from residential mortgage lenders or equipment lessors with
established positions in these markets. There can be no assurance that the
Company will be able to successfully compete with such established lenders or
lessors. Further, there can be no assurance that the Company will be able to
continue to compete successfully in the markets it serves. Inability to compete
successfully would have a material adverse effect on the Company's results of
operations and financial condition.
Changing Nature of Risks. The nature of the risks associated with the
Company's operations have changed and are likely to continue to change over
time due to a corporate strategy which emphasizes the entry into and exit from
business lines based on market, economic or competitive conditions. As a
result, there can be no assurance that the risks associated with an investment
in the Company described in this Prospectus will not materially change in the
future or that there will not be additional risks associated with the Company's
future operations not described herein.
Real Estate Finance Considerations
Troubled Status of Acquired Commercial Loans and Underlying
Properties. The Company seeks to acquire commercial real estate mortgage loans
at a discount from both the unpaid principal and interest amounts of the loans
and the appraised value of the underlying properties. As a consequence, the
Company will frequently be involved with loans that are secured by properties
that, while income producing, are unable to generate sufficient revenues to pay
the full amount of debt service under the original loan terms and that are
frequently the subject of contentious and often complex disputes among various
parties regarding application of cash flow from the underlying properties, loan
terms, lease terms or similar matters. Although prior to acquisition of a loan
the Company will generally negotiate with the borrower or other parties in
interest and, where appropriate, make financial accommodations to take into
account the operating conditions of an underlying property, resolve outstanding
disputes and ensure the Company's control of the cash flow from the underlying
property, there can be no assurance that the problems which existed prior to
the Company's acquisition of the loan will not recur or that other problems may
not arise. As a result, these loans may be subject to a higher risk of default
and consequent loss to the Company than conventional loans. See "Risk Factors
- -- General -- Credit Risks."
Lien Priority. Although in its commercial mortgage loan acquisition and
resolution operations the Company normally acquires first mortgage loans, it is
not limited as to the lien priority of a loan which it may acquire. As of
December 31, 1997, ten of the Company's mortgage loans were acquired as junior
lien obligations. Moreover, a lender refinancing a loan in the Company's
portfolio will typically require, as a condition to its refinancing (the
proceeds of which generally are paid to the Company), that the Company's
remaining interest in the loan be subordinated to such lender's interest or
that the Company release its mortgage lien. At December 31, 1997, the Company
held 30 junior lien loans or subordinated senior lien interests, seven of which
(at an aggregate book value of $7.7 million, constituting approximately 6.6%,
of the book value of the Company's loan portfolio) are not formally secured by
recorded mortgages (although they
15
<PAGE>
are protected by judgment liens, unrecorded deeds in lieu of foreclosure,
borrowers' covenants not to further encumber the property without the Company's
consent, and/or similar devices). In addition, in certain circumstances,
mortgage loans, including first mortgage loans, may be subject to mechanics',
materialmens' or government liens which may be prior in right of payment to
liens held by the Company. Subordinate or junior lien loans carry a greater
credit risk, including a substantially greater risk of non-payment of interest
or principal, than senior lien financing. Where, as part of a financing
structure, the Company has an unsecured position, the risk of loss may be
materially increased. A decline in the real estate market where the property
underlying the loan is located could adversely affect the value of the property
such that the aggregate outstanding balances of senior liens and the Company's
loan may exceed the value of the underlying property.
In the event of a default on a senior mortgage, the Company may make
payments, if it has the right to do so, in order to prevent foreclosure on the
senior mortgage, thereby increasing its investment cost without necessarily
improving its lien position. In the event of a foreclosure, the Company will
only be entitled to share in the net proceeds after the payment of all senior
lienors, including senior mortgagees, and holders of mechanics', materialmens'
and government liens. It is therefore possible that the total amount which may
be recovered by the Company upon a foreclosure may be less than the outstanding
balance of the loan or the Company's investment in the loan, with a resultant
loss to the Company. It is also possible that, in some cases, a "due on sale"
clause included in a senior mortgage, which accelerates the amount due under
the senior mortgage in case of the sale of the property, may apply to the sale
of the property upon foreclosure of a junior loan, and may accordingly increase
the risks to the Company in the event of a default by the borrower on the
junior loan.
Disposition of Acquired Commercial Mortgage Loan Interests. In its
commercial mortgage loan acquisition and resolution operations, after the
Company has acquired a loan, the Company will typically sell a senior lien
position in the loan, or assist the borrower in obtaining third-party
refinancing, while retaining a junior lien position in the loan. Although the
sale of a senior lien position or a refinancing often results in the return of
an amount representing a major portion of (or sometimes exceeding) the amount
of Company's investment in the loan, in most such sales or refinancings a
reduced portion of the Company's investment in the loan remains unrecovered.
Based upon its analysis of the properties underlying the loans, the Company
believes that it will recover amounts substantially in excess of the Company's
remaining invested capital; however, there can be no assurance that, upon
termination of the loan, the borrower will be able to repay the loan or that,
if the borrower is not able to do so, the Company will be able to dispose of
its remaining loan interest for an amount equal to or in excess of its
remaining investment or that the property underlying the loan can be disposed
of for an amount equal to or in excess of the interests of senior lienors and
the Company's remaining investment.
Potential Replacement, Repurchase or Repayment of Senior Lien
Positions. Senior lien positions aggregating $12.0 million at December 31, 1997
in seven of the commercial mortgage loans in the Company's portfolio have been
sold to an institutional investor. See "Business -- Commercial Loan Acquisition
and Resolution: Loan Status." Pursuant to the terms of these sales, if the
borrower under any such loan defaults in the payment of debt service, the
Company is required to replace the defaulted obligation with a performing one.
Since the Company has sold (or intends to sell) senior positions in, or
refinanced, most of its current portfolio of loans, if the Company were
required to replace a defaulted loan with a performing loan, it may not be able
to do so without acquiring additional commercial mortgage loans. If the Company
could not fulfill its obligation, the institutional investor would have various
legal remedies, including foreclosure on and sale of the underlying property
(see "Risk Factors -- General -- Credit Risks") or requiring the Company to
repay its interest. There can be no assurance that borrowers on one or more of
such loans will not default or that, in such event, the Company would be able
to acquire additional commercial real estate mortgage loans to substitute for
the defaulted obligations or, if a replacement loan is not so acquired and
substituted, that the investor would not seek repayment from the Company.
Moreover, generally, interest only is paid on each senior lien obligation until
maturity, at which time the entire principal amount of the senior lien
obligation becomes due. Maturity dates of the senior lien obligations range
from December 1999 to June 2001. If the borrower is unable to pay or refinance
any senior lien obligation when it becomes due, the institutional investor may
foreclose on the underlying property, or require the Company to repay its
interest.
16
<PAGE>
The Company is also required to repurchase from other institutional
investors two senior loans in the event that the senior loans are not repaid,
in accordance with their terms, by June 27, and September 29, 2002 for a
repurchase price equal to the unpaid principal balance of the respective loans
plus accrued interest at the time of repurchase by the Company ($1.6 million
and $7.3 million, respectively, at maturity, assuming all debt service payments
have been made). There can be no assurance that borrowers on one or more of
such loans will not default and the Company required to repurchase the loan, or
that the borrowers will be able to repay or refinance the senior lien interests
when they become due. See "Business -- Real Estate Finance -- Loan Status."
Lack of Geographic Diversification Exposes the Company's Investments to
Higher Risk of Loss Due to Regional Economic Factors. The Company does not
expect to set specific limitations on the aggregate percentage of its portfolio
relating to properties located in any one area (whether by state, zip code or
other geographic measure). Any lack of geographic diversification that may
occur could result in the Company's investment portfolio being more sensitive
to, and the Company being less able to respond to, adverse economic
developments of a primarily regional nature, which may result in reduced rates
of return, or higher rates of default, on the Company's mortgage loans than
might be incurred with a more geographically diverse investment portfolio. At
December 31, 1997, 19 of the 43 loans in the Company's commercial mortgage loan
portfolio, aggregating $45.9 million (39%) of the book value of the Company's
commercial loan portfolio) relate to properties located in the Philadelphia,
Pennsylvania metropolitan area.
Commercial Mortgage Loan Loss Reserves. The Company records its investment
in its commercial mortgage loan portfolio at cost, which is significantly
discounted from the face value of, and accrued interest and penalties on, the
loans. The cost basis in the loans is reviewed periodically to determine
whether it is greater than the sum of the projected cash flows and appraised
values of the underlying properties. If the cost basis is found to be greater,
the Company provides an appropriate allowance through a charge to operations.
The Company did not establish any reserves with respect to its portfolio loans
for fiscal years 1994, 1995 and 1996. At December 31, 1997, the Company's
allowance for possible losses was $452,000 (0.4% of the book value of its
commercial mortgage loan portfolio at that date), of which $52,000 was recorded
in the quarter ended December 31, 1997. There can be no assurance that future
provisions for loan losses will not be materially greater than the provision
recorded at December 31, 1997 which could have a material adverse effect on the
Company's results of operations.
Compliance of Residential Mortgage Loan Operations with Applicable
Law. The Company's residential mortgage loan origination business is subject to
federal and state laws relating to truth in lending, equal credit opportunity,
settlement procedures, mortgage disclosure, debt collection practices and
similar matters. Failure to comply with these federal or state laws can lead to
loss of approved status, demands for indemnification or mortgage loan
repurchases, certain rights of rescission for borrowers, class action lawsuits
and administrative enforcement actions. Although the Company believes that it
has systems and procedures to facilitate compliance with these requirements and
believes that it is in compliance in all material respects with applicable
local, state and federal laws, rules and regulations, in the future more
restrictive laws, rules and regulations or the judicial interpretation of
existing laws, rules and regulations could make compliance more difficult or
expensive.
Residential Mortgage Lending Is a New Business Line. The Company's
residential mortgage loan business commenced lending operations in the first
quarter of fiscal 1998. As a result, the Company has had only a limited amount
of experience upon which an evaluation of its prospects in the business can be
based. Such prospects must be assessed in light of the risks, expenses and
difficulties frequently encountered in the establishment of a new business
which may materially adversely affect the Company's ability to develop the
business, and the Company's investment in it.
Note Received in Sale of Certain Residential Loans. Although the Company's
policy is to sell residential mortgage loans for cash, with servicing-released,
in the first quarter of fiscal 1998 the Company sold with servicing-retained a
pool of residential mortgage loans acquired and originated by it to an
unrelated special purpose financing entity for a note with a face value of $8.3
million (and a book value of $8.1 million after a provision for loan losses of
$174,000). The Company recognized a gain of $1.2 million on the sale. The note
was partially prepaid, in the amount of $6.2 million, in the second quarter of
fiscal 1998 through third-party
17
<PAGE>
financing arranged by the special purpose financing entity. The third party
financing was unconditionally guaranteed by the Company. The balance of the
note ($2.1 million) is due on or before December 31, 2027. The special purpose
financing entity has no material assets other than the loan pool sold to it. In
addition, the Company has subcontracted the servicing of the pool to Jefferson
Bank. See "Management -- Certain Relationships and Related Party Transactions
- -- Relationship with Jefferson Bank." Loans included in this pool are either
secured by property located in Louisiana or have loan to value ratios in excess
of 100%. Although the Company believes Jefferson Bank has the expertise to
service these loans, Jefferson Bank does not typically service residential
loans with loan to value ratios in excess of 100%. Accordingly, to the extent
that defaults under the loans in the pool are greater than anticipated by the
Company, or if loan prepayments are substantially in excess of those
anticipated by the Company, the Company may not receive full payment on the
remaining balance of the note or, with respect to defaulted loans, may possibly
be required to reacquire the loan. This would result in a charge to the
Company's earnings in the amount of any unrecovered remaining balance of the
note which could materially adversely affect the Company's results of
operations. Moreover, if the number of defaults is sufficiently large, the
Company may be required to repay some portion or all of the third party
financing pursuant to its guaranty. Any such repayment could have a material
adverse effect on the Company's results of operations and financial condition.
See "Risk Factors -- General -- Credit Risks."
Elimination of Deductibility of Mortgage Interest Could Adversely Affect
Results of Operations. Members of Congress and government officials have from
time to time suggested the elimination of the mortgage interest deduction for
federal income tax purposes, either entirely or in part, based on borrower
income, type of loan or principal amount. Because many of the Company's
residential mortgage loans may be sought by borrowers for the purpose of
consolidating consumer debt or financing other consumer needs, the competitive
advantages of tax deductible interest, when compared with alternative sources
of financing, could be eliminated or seriously impaired by such government
action. Accordingly, the reduction or elimination of these tax benefits could
have a material adverse effect on the demand for the kind of residential loans
offered by the Company.
Environmental Liabilities. In the event of a default on a portfolio loan,
the Company may acquire the underlying property through foreclosure. There is a
risk that hazardous substances, wastes, contaminants or pollutants would be
discovered on the foreclosed property after acquisition by the Company. In such
event, the Company might be required to remove such substances at its sole cost
and expense. There can be no assurance that the cost of such removal would not
substantially exceed the value of the affected property or the loan secured by
the property, that the Company would have adequate remedies against the prior
owner or other responsible parties or that the Company would not find it
difficult or impossible to sell the affected property either prior to or
following any such removal.
Equipment Leasing Considerations
Limited Equipment Leasing Operating History. The Company acquired its
equipment leasing operations in September 1995 and, in 1996, the Company
expanded these leasing operations to include small ticket equipment leasing for
its own account. Although the leasing business acquired by the Company has been
in operation since 1986, and the executives primarily responsible for
developing the Company's proprietary leasing program have had lengthy
experience in the equipment leasing industry, the Company has only a limited
amount of direct experience upon which an evaluation of its prospects in the
equipment leasing business can be based. Such prospects must be considered in
light of the expenses and difficulties frequently encountered by an acquiror in
integrating a newly-acquired business with its other operations, and in
expanding the scope of the newly-acquired business.
Demand for Company's Equipment Leasing Services. The demand for the
equipment leasing services provided by the Company is subject to numerous
factors beyond the control of the Company, including general economic
conditions, fluctuations in interest rate levels and fluctuations in demand for
the types of equipment as to which the Company provides equipment leases. In
addition, the demand for the Company's equipment lease services will be
materially affected by the ability of the Company to market its services to
manufacturers, regional distributors and other vendors.
Dependence on Vendors. The Company currently relies upon relationships it
has established with certain manufacturers and regional distributors in order
to gain access to end-users who will enter into equipment
18
<PAGE>
leases. To date, the Company has established vendor programs with nine
manufacturers or distributors and is an authorized lessor for the dealer
distribution channels of two other manufacturers. Two manufacturers, Minolta
Corporation and Lucent Technologies, accounted for 21% and 8%, respectively (by
cost) of the equipment leased by the Company since inception of leasing
operations through December 31, 1997 (and 18% and 8%, respectively, of
equipment leased by the Company during the quarter ended December 31, 1997).
See "Business -- Equipment Leasing -- Focus on Vendor Programs." In the event
that these vendors significantly reduce the number of leases placed with the
Company, and the Company cannot replace the lost lease volume, such reduction
could have a material adverse effect on the Company's financial condition and
results of operations.
Financing for Equipment Leasing Operations. The Company anticipates that
it may be required to provide credit enhancement for debt obligations incurred
under any warehouse or permanent financing utilized in its equipment leasing
operations. See "Risk Factors -- General -- Ability to Generate Funding for
Growth." These credit enhancements may include cash deposits, funding of
subordinated tranches of securitizations, the pledge of additional equipment
leases which are funded by the Company's capital, and/or (as is the case with
the Company's existing credit facility) a guaranty by the Company and
restrictive covenants concerning maintenance by the Company of minimum capital
levels or debt to equity ratios. Any such requirements may reduce the Company's
liquidity and require it to obtain additional capital. The Indenture pursuant
to which the Senior Notes were issued contains certain restrictions which may
limit the Company's ability to provide credit enhancement. See "Risk Factors --
General -- Ability to Generate Funding for Growth."
The Company anticipates that warehouse financing (as is the case with the
Company's existing credit facility) will bear interest at variable rates while
its permanent funding will typically be at fixed rates set at the time the
financing is provided. Accordingly, the Company will be subject to interest
rate risk to the extent interest rates increase between the time a lease is
funded by warehouse facilities and the time of permanent funding. Increases in
interest rates during this period could narrow or eliminate the spread between
the effective interest rates on the Company's equipment leases and the rates on
the Company's funding, or result in a negative spread.
Sale of Equipment Leases. The Company has sold its entire interest in
originated equipment leases and the related equipment to unaffiliated special
purpose financing entities (each, an "Intermediate Purchaser") for cash and
promissory notes. See "Business -- Equipment Leasing -- Revenue Recognition and
Lease Accounting." At December 31, 1997, the Company held $9.0 million of such
notes and had recognized gains on lease sales related to such notes of $5.5
million. The Intermediate Purchaser resells the leases to a financial
institution which provides the cash portion of the purchase price payable to
the Company. The Company typically will provide credit enhancement in
connection with a refinancing or resale, generally in the form of a guarantee
of the refinancing and/or a commitment to replace defaulted leases in excess of
permitted limits. The Intermediate Purchasers have no material assets other
than the leases and equipment purchased from the Company. If lease defaults are
greater than anticipated by the Company, the ability of an Intermediate
Purchaser to repay its notes to the Company may be adversely affected. The
ability of the Intermediate Purchaser to repay the notes could also be
adversely affected if the realization of residuals is less than anticipated by
the Company. See "Risk Factors -- Equipment Leasing Considerations --
Residuals." Accordingly, lease defaults that are greater than anticipated and
residual earnings that are less than anticipated could result in a charge to
the Company's earnings in the amount of the notes not recoverable by the
Company. Moreover, if the number of lease defaults is sufficiently large, the
Company may be required, under the terms of any credit enhancement provided by
it, to repay some portion or all of the financing arranged by the Intermediate
Purchaser or to replace defaulted leases with performing leases. See "Risk
Factors -- Equipment Leasing Considerations -- Potential Replacement of
Leases." Any such repayment or replacement could have a material adverse effect
on the Company's results of operations and financial condition.
While the existing forward lease sale commitment among the Company, an
Intermediate Purchaser and certain institutional purchasers (see "Business --
Sources of Funds -- Forward Sale Commitment") does not require the Company to
provide credit enhancement, if lease defaults are greater than anticipated, not
only will the ability of the Intermediate Purchaser to repay its note be
adversely affected, the institutional purchasers
19
<PAGE>
may terminate the commitment. To preserve the ability of the Intermediate
Purchaser to pay its note, and/or to prevent termination of the commitment, the
Company may determine to replace defaulted leases. Any such replacement could
result in a charge to the Company's earnings.
Residuals. "Residuals" are proceeds received upon the sale or re-leasing
of equipment upon lease termination or from the extension of lease terms beyond
their original expiration dates. To the date of this Prospectus, as part of its
equipment lease sales the Company has sold its entire interest in the leased
equipment, including residuals, to Intermediate Purchasers in exchange for cash
and promissory notes. The promissory notes will typically include all of the
Company's gain on the sale and a portion of its capital investment. Payment of
the notes will, to a material extent, depend upon residuals realized. The
Company may be required to establish an allowance for possible losses against
the notes if residuals are less than anticipated at the time of sale. If the
Company is required to establish an allowance, it would result in a charge to
earnings; any such charge could materially adversely affect the Company's
results of operations. See "Business -- Equipment Leasing -- Revenue
Recognition and Lease Accounting." In the future, the Company anticipates that
it may retain residuals for its own account in which case the gain on sale of
leases would be materially reduced as the recognition of revenues, if any, from
residuals would be recorded subsequently upon lease termination. Realization of
residuals are subject to a number of factors including the ability or
willingness of a lessee to continue to lease or to acquire the equipment,
unusual wear and tear on or use of the equipment, equipment obsolescence,
excessive supply of similar equipment, reductions in manufacturers' prices for
similar equipment and similar matters which could materially adversely affect
the amount of residuals obtainable. To the extent that the Company retains
residuals, a decline in their value could adversely affect the Company's
operating results and financial condition.
Potential Replacement of Leases. Under the terms of certain of its lease
sales, the Company may be required to replace a lease if the lessee defaults in
its obligations under the lease. If the Company were required to replace a
lease, the pool of leases otherwise available for sale by the Company would be
reduced. In addition, the Company would have to repossess the leased equipment
in order to attempt to recover the lease balance. There can be no assurance
that the amount realizable from equipment subject to a defaulted lease will be
sufficient to recover amounts invested by the Company. See "Risk Factors --
General -- Credit Risks."
Energy Industry Considerations
Volatility of Oil and Gas Prices. Historically, the markets for natural
gas and oil have been volatile and are likely to continue to be volatile in the
future. Prices for natural gas and oil are subject to wide fluctuation in
response to relatively minor changes in the supply of and demand for natural
gas and oil, market uncertainty and other factors over which the Company has no
control. These factors include the extent of domestic production and
importation of foreign natural gas and/or oil, political instability in oil and
gas producing countries and regions, the ability of members of the Organization
of Petroleum Exporting Countries to agree upon price and production levels for
oil, the effect of federal regulation on the sale of natural gas and/or oil in
interstate commerce, and other governmental regulation of the production and
transportation of natural gas and/or oil. Certain other factors outside the
Company's control, such as operational and transportation difficulties of
pipeline or oil purchasing companies, may also limit sales. In addition, the
price level of natural gas obtainable by the Company depends upon the needs of
the purchasers to which the producer has access. Depending on the purchasers'
needs, the price obtainable for natural gas produced by the Company, or the
amount of natural gas which the Company is able to sell, the revenues of the
Company from its energy operations may be materially adversely affected.
Possible Decline in Production. Production of oil and gas from a
particular well generally declines over time until it is no longer economical
to produce from the well, at which time the well is plugged and abandoned. The
Company's wells have been drilled at various times from 1966 to the present.
The Company's wells generally have productive lives of 15 to 20 years and have
been subject to normal production declines. To date, these declines have been
offset largely by the acquisition of additional wells and, to a materially
lesser extent, drilling of wells. The Company cannot predict whether the
Company will acquire further energy assets or drill further wells, or as to the
timing or cost thereof.
20
<PAGE>
Operating Hazards and Uninsured Risks. The oil and natural gas business
involves certain operating hazards such as well blowouts, craterings,
explosions, uncontrollable flows of oil, natural gas or well fluids, fires,
formations with abnormal pressures, pipeline ruptures or spills, pollution,
releases of toxic gas and other environmental hazards and risks, any of which
could result in substantial losses to the Company. In addition, the Company may
be liable for environmental damage caused by previous owners of property
purchased or leased by the Company. As a result, substantial liabilities to
third parties or governmental entities may be incurred, the payment of which
could materially adversely affect the Company's results of operations or
financial condition. In accordance with customary industry practices, the
Company maintains insurance against some, but not all, of such risks and
losses. The Company may elect to self-insure if it believes that the cost of
insurance, although available, is excessive relative to the risks presented.
The occurrence of an event that is not covered, or not fully covered, by
insurance could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, pollution and
environmental risks generally are not fully insurable.
Carrying Value of Energy Properties May Be Subject to Reduction. The
Company annually reviews the carrying value of its oil and natural gas
properties under the full cost accounting rules of the Commission. Under these
rules, capitalized costs of proved oil and natural gas properties may not
exceed the present value of estimated future net revenues from proved reserves,
discounted at 10%. Application of the "ceiling" test generally requires pricing
future revenue at the unescalated prices in effect as of the end of each fiscal
year and requires a write-down for accounting purposes if the ceiling is
exceeded, even if prices were depressed for only a short period of time. The
Company may be required to write-down the carrying value of its oil and natural
gas properties when oil and natural gas prices are depressed or unusually
volatile. If a write-down is required, it could result in a material charge to
earnings, but would not impact cash flow from operating activities. Once
incurred, a write-down of oil and natural gas properties is not reversible at a
later date.
Uncertainty of Estimates of Oil and Natural Gas Reserves. The estimates of
the Company's proved oil and natural gas reserves and the estimated future net
revenues therefrom referred to immediately above are based upon reserve reports
that rely upon various assumptions, including assumptions required by the
Commission as to oil and natural gas prices, drilling and operating expenses,
capital expenditures, taxes and availability of funds. The process of
estimating oil and natural gas reserves is complex, requiring significant
decisions and assumptions in the evaluation of available geological,
geophysical, engineering and economic data for each reservoir. As a result,
such estimates are inherently imprecise. Actual future production, oil and
natural gas prices, revenues, taxes, development expenditures, operating
expenses and quantities of recoverable oil and natural gas reserves may vary
substantially from those estimated by the Company or contained in the reserve
reports. Any significant variance in these assumptions could materially affect
the estimated quantity of the Company's reserves. The Company's properties also
may be susceptible to hydrocarbon drainage from production by other operators
on adjacent properties. In addition, the Company's proved reserves may be
subject to downward or upward revision based upon production history, results
of future exploration and development, prevailing oil and natural gas prices,
mechanical difficulties, governmental regulation and other factors, many of
which are beyond the Company's control.
Governmental Regulation and Environmental Matters. Oil and gas operations
are subject to various federal, state and local government regulations that may
be changed from time to time in response to economic or political conditions.
Matters subject to regulation include discharge permits for drilling
operations, drilling bonds, reports concerning operations, the spacing of
wells, unitization and pooling of properties and taxation. From time to time,
regulatory agencies have imposed price controls and limitations on production
by restricting the rate of flow of oil and gas wells below actual production
capacity in order to conserve supplies of oil and gas. In addition, the
development, production, handling, storage, transportation and disposal of oil
and gas, by-products thereof and other substances and materials produced or
used in connection with oil and gas operations are subject to complex
regulation under federal, state and local laws and regulations primarily
relating to protection of human health and the environment. The Company is also
subject to changing and extensive tax laws, the effects of which cannot be
predicted. The Company believes that it is in compliance with applicable
regulations, although there can be no assurance that this is or will remain the
case. The implementation of new,
21
<PAGE>
or the modification of existing, laws or regulations could have a material
adverse effect on the Company. No assurance can be given that existing
environmental laws or regulations, as currently interpreted or reinterpreted in
the future, or future laws or regulations will not materially adversely affect
the Company's financial condition and results of operations.
Restrictions on Payment of Dividends
Under the terms of the Senior Notes, the Company may not pay dividends or
make other distributions on the Common Stock in excess of 25% of aggregated
consolidated net income (offset by 100% of any deficit) on a cumulative basis.
See "Business -- Sources of Funds -- Senior Notes." Accordingly, the Company's
ability in the future to pay (or increase the amount of) cash dividends on its
Common Stock may be restricted, depending upon the amount of its future income.
Importance of Key Employees
The Company's future success will depend upon the continued services of
the Company's senior management and, with respect to its leasing operations,
the Chairman and Chief Executive Officer of its leasing subsidiary. The
unexpected loss of the services of any of these management personnel could have
a material adverse effect upon the Company. See "Management." The Company does
not maintain key man life insurance on, nor (except for employment agreements
with Edward E. Cohen, the Chairman, Chief Executive Officer and President of
the Company, Abraham Bernstein, the Chairman and Chief Executive Officer of its
small ticket leasing subsidiary, and Daniel G. Cohen, the Chairman and Chief
Executive Officer of the Company's residential mortgage lending business and an
Executive Vice President of the Company) does it have employment agreements
with, any of its senior management.
Shares Eligible for Future Sale
Upon consummation of this Offering, the Company will have 6,250,717 shares
of Common Stock outstanding (assuming the Underwriters do not exercise their
over-allotment option). Following this Offering, sales of substantial amounts
of the Common Stock in the public market pursuant to Rule 144 or otherwise, or
the availability of such shares for sale, could adversely affect the prevailing
market prices for the Common Stock and impair the Company's ability to raise
additional capital through the sale of equity securities should it desire to do
so. See "Shares Eligible for Future Sale."
Forward Looking Statements
This Prospectus, and the information incorporated by reference herein, may
include certain statements and estimates provided by the Company with respect
to the Company's anticipated operations. Such statements and estimates reflect
various assumptions made by the Company about circumstances and events, many of
which have not yet taken place, as well as reflecting a substantial degree of
judgment by management as to the scope and presentation of such information.
There can be no assurance that any of such statements or estimates of
anticipated operations will prove to be correct, and no representations and
warranties are made as to the accuracy of such statements or estimates. Actual
results may vary and such variations may be material.
22
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The following table sets forth the high and low sale prices of the Common
Stock, as reported by Nasdaq, on a quarterly basis for the Company's last two
full fiscal years and for fiscal 1998 through March 25, 1998:
High Low
----------- -----------
Fiscal 1998
-----------
Second Quarter (through March 25, 1998) ......... $ 57.00 $ 43.50
First Quarter ................................... 56.50 42.75
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 March 25, 1998, there were 4,750,717 shares of Common Stock
outstanding held by approximately 800 holders of record.
The Company has paid regular quarterly cash dividends on its Common Stock
of $.10 per share commencing with the third quarter of fiscal 1996. The Company
paid dividends of $.094 and $.089 per share during the second and first fiscal
quarters of 1996, respectively.
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. The Company anticipates effecting a two-for-one stock
split in the form of a 100% stock dividend in fiscal 1998. See "Description of
Capital Stock -- General."
Under the terms of the Senior Notes, the payment of cash dividends on the
Common Stock is restricted unless certain financial tests are met. See "
Business -- Sources of Funds -- Senior Notes."
23
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of December 31, 1997, and as adjusted as of that date to give effect
to the sale of 1,500,000 shares of Common Stock by the Company in this Offering
at an assumed price of $57.00 per share (the closing price of the Common Stock
on Nasdaq on March 25, 1998) and after deducting underwriters' discounts and
estimated offering expenses. The following data should be read in conjunction
with the consolidated financial statements and notes thereto of the Company
which are included elsewhere herein. See also "Selected Consolidated Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
As of December 31, 1997
---------------------------
Actual As Adjusted
------------ ------------
(in thousands)
<S> <C> <C>
Current portion of long-term debt ...................................... $ 5,100 $ 5,100
Long-term debt:
Other debt ............................................................ 3,116 3,116
Senior Notes .......................................................... 115,000 115,000
--------- ---------
Total long-term debt ................................................ $ 123,216 $ 123,216
========= =========
Stockholders' equity
Preferred Stock, $1.00 par value, 1,000,000 shares authorized, none
issued .............................................................. $ -- $ --
Common Stock, $.01 par value, 8,000,000 shares authorized,
4,742,919 shares issued; 6,242,919 shares issued, as adjusted(1) .... 55 70
Additional paid-in capital ............................................ 59,343 139,325
Retained earnings ..................................................... 25,486 25,486
Less treasury stock, at cost(1) ....................................... (14,074) (14,074)
Less loan receivable from Employee Stock Ownership Plan ............... (353) (353)
--------- ---------
Total stockholders' equity ............................................ 70,457 150,454
--------- ---------
Total capitalization ................................................... $ 193,673 $ 273,670
========= =========
</TABLE>
- ------------
(1) The number of issued shares of Common Stock excludes 717,682 shares held by
the Company as treasury stock as of December 31, 1997 and excludes 5,618
shares issued pursuant to exercise of options subsequent to December 31,
1997. From January 1, 1998 through March 25, 1998, the Company issued
2,180 shares of Common Stock under its employee retirement savings plan.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The financial data set forth below should be read in conjunction with, and
is qualified in its entirety by, the Consolidated Financial Statements of the
Company, including the notes thereto, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
As of and for
the Quarter Ended
December 31,
---------------------------
1997 1996
-------------- -----------
(in thousands, except ratios
and per share data)
<S> <C> <C>
Statement of Operations Data:
Revenues:
Real estate finance --
Interest(1) ...................................... $ 4,668 $ 1,427
Fees ............................................. 1,775 1,407
Gains on refinancings and sales of senior
lien interests .................................. 2,949 385
------- -------
Total ........................................... 9,392 3,219
Equipment leasing .................................. 3,172 1,202
Energy production .................................. 1,232 950
Energy services .................................... 583 389
Interest ........................................... 698 84
------- -------
Total revenues .................................. 15,077 5,844
Costs and expenses:
Real estate finance ............................... 1,523 163
Equipment leasing ................................. 1,325 883
Energy exploration and production ................. 574 412
Energy services ................................... 309 224
General and administrative ........................ 927 592
Provision for possible losses ..................... 318 10
Interest .......................................... 3,870 409
Other ............................................. (3) (88)
------- -------
Total costs and expenses ........................ 8,843 2,605
Income before income taxes, depreciation,
depletion and amortization ........................ 6,234 3,239
Depreciation, depletion and amortization ........... 508 379
Income before income taxes ......................... 5,726 2,860
Net income ......................................... 3,951 2,285
Segment Profitability (Loss):(2)
Real estate finance ................................ $ 7,467 $ 2,865
Equipment leasing .................................. 1,430 214
Energy exploration, production and services ........ 518 372
Corporate (excluding taxes)(3) ..................... (3,692) (679)
Balance Sheet and Other Data:
Assets:
Current assets .................................... $ 34,343 $ 8,721
Net investment in real estate loans ............... 128,884 49,693
Net investment in leasing assets .................. 13,214 5,388
Net investment in energy property and equipment 12,379 11,036
Net other assets .................................. 19,099 5,573
------- -------
Total assets .................................... 207,919 80,411
Liabilities:
Current liabilities ............................... $ 16,690 $ 2,449
Long-term debt less current maturities(4) ......... 118,116 22,496
Deferred income taxes and long-term liabilities.... 2,656 2,589
------- -------
Total liabilities ............................... 137,462 27,534
Stockholders' equity(5) ............................ 70,457 52,877
Stockholders' equity per common share(6)(7) ........ 14.86 14.89
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
As of and for the
Year Ended September 30,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------- ------------- ----------- -----------
(in thousands, except ratios and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Real estate finance --
Interest(1) ...................................... $ 9,001 $ 2,853 $ 3,422 $ 1,401 $ 606
Fees ............................................. 2,556 675 963 25 --
Gains on refinancings and sales of senior
lien interests .................................. 7,587 3,643 1,729 1,096 --
-------- -------- -------- -------- --------
Total ........................................... 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
Costs and expenses:
Real estate finance ............................... 1,069 852 801 248 114
Equipment leasing ................................. 3,822 2,339 -- -- --
Energy exploration and production ................. 1,823 1,582 1,733 2,004 1,735
Energy services ................................... 909 869 1,026 1,131 1,106
General and administrative ........................ 2,851 1,756 2,265 1,901 1,841
Provision for possible losses ..................... 653 7 -- -- --
Interest .......................................... 5,273 872 1,091 310 41
Other ............................................. (101) (7) (1) 30 (383)
-------- -------- -------- -------- --------
Total costs and expenses ........................ 16,299 8,270 6,915 5,624 4,454
Income before income taxes, depreciation,
depletion and amortization ........................ 16,545 8,721 4,679 2,556 2,112
Depreciation, depletion and amortization ........... 1,614 1,368 1,335 1,347 1,478
Income before income taxes ......................... 14,931 7,353 3,344 1,209 634
Net income ......................................... 10,951 5,147 2,714 1,309 590
Segment Profitability (Loss):(2)
Real estate finance ................................ $ 16,546 $ 6,281 $ 5,276 $ 2,237 $ 455
Equipment leasing .................................. 2,457 1,916 -- -- --
Energy exploration, production and services ........ 1,699 1,646 1,317 1,114 1,720
Corporate (excluding taxes)(3) ..................... (5,845) (2,497) (3,248) (2,105) (1,393)
Balance Sheet and Other Data:
Assets:
Current assets .................................... $ 72,269 $ 6,106 $ 3,924 $ 3,985 $ 2,150
Net investment in real estate loans ............... 88,816 21,798 17,991 10,386 7,329
Net investment in leasing assets .................. 8,152 729 -- -- --
Net investment in energy property and equipment 11,400 11,265 11,964 12,786 13,542
Net other assets .................................. 14,482 4,061 3,671 7,639 2,210
-------- -------- -------- -------- --------
Total assets .................................... 195,119 43,959 37,550 34,796 25,231
Liabilities:
Current liabilities ............................... $ 10,841 $ 1,664 $ 1,329 $ 1,355 $ 723
Long-term debt less current maturities(4) ......... 118,786 8,966 8,523 8,627 813
Deferred income taxes and long-term liabilities.... 663 2,206 1,147 674 834
-------- -------- -------- -------- --------
Total liabilities ............................... 130,290 12,836 10,999 10,656 2,370
Stockholders' equity(5) ............................ 64,829 31,123 26,551 24,140 22,861
Stockholders' equity per common share(6)(7) ........ 13.79 16.43 14.21 12.52 11.59
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
As of and for
the Quarter Ended
December 31,
--------------------------
1997 1996
------------ ------------
(in thousands, except
ratios
and per share data)
<S> <C> <C>
Assets under management:
Real estate(8) ................................... 330,131 139,608
Leasing(9) ....................................... 114,876 83,503
Energy(10) ....................................... 38,867 32,145
------- -------
Total assets under management .................. 483,874 255,256
Selected Ratios:
Operating ratios --
Return on equity(11) ............................. 23% 22%
Yield on net real estate investment(12) .......... 30% 36%
Balance sheet ratios:
Real estate loan to value(13) .................... 82% 80%
Earnings to fixed charges(14) .................... 2.48 8.00
Common Share Information:
Net income per common share (basic)(15) ........... $ .83 $ .91
Weighted average number of common shares
outstanding (basic) .............................. 4,733 2,507
Net income per common share (diluted)(16) ......... $ .81 $ .66
Weighted average number of common shares
(diluted) ........................................ 4,906 3,476
Cash dividends per common share ................... $ .10 $ .10
</TABLE>
<TABLE>
<CAPTION>
As of and for the
Year Ended September 30,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ----------- -----------
(in thousands, except ratios and per share data)
<S> <C> <C> <C> <C> <C>
Assets under management:
Real estate(8) ................................... 233,666 100,520 52,955 26,328 13,303
Leasing(9) ....................................... 105,940 79,649 103,439 -- --
Energy(10) ....................................... 37,809 32,147 33,688 36,067 38,500
------- ------- ------- ------ ------
Total assets under management .................. 377,415 212,316 190,082 62,395 51,803
Selected Ratios:
Operating ratios --
Return on equity(11) ............................. 23% 18% 11% 6% 3%
Yield on net real estate investment(12) .......... 35% 36% 35% 31% 12%
Balance sheet ratios:
Real estate loan to value(13) .................... 82% 86% 78% 79% 82%
Earnings to fixed charges(14) .................... 3.83 9.44 4.07 4.89 16.45
Common Share Information:
Net income per common share (basic)(15) ........... $ 3.15 $ 2.72 $ 1.43 $ .66 $ .30
Weighted average number of common shares
outstanding (basic) .............................. 3,478 1,890 1,904 1,970 1,975
Net income per common share (diluted)(16) ......... $ 2.51 $ 1.88 $ 1.23 $ .64 $ .30
Weighted average number of common shares
(diluted) ........................................ 4,358 2,757 2,235 2,076 1,990
Cash dividends per common share ................... $ .40 $ .38 $ .09 $ -- $ --
</TABLE>
<PAGE>
- ------------
(1) Interest income includes accreted discounts of $1.7 million and $793,000
for the quarters ended December 31, 1997 and 1996, respectively, and $4.1
million, $954,000, $1.2 million, $602,000, and $256,000 for the fiscal
years ended September 30, 1997, 1996, 1995, 1994 and 1993, respectively.
(2) Represents segment revenues minus segment costs less depreciation,
depletion and amortization attributable to the segment, but without
allocation of corporate overhead.
(3) Includes interest expense, interest income on cash not invested in
operations, general and administrative expenses, and depreciation and
amortization not allocated to operations of other segments. Interest
expense was $3.9 million and $409,000 for the quarters ended December 31,
1997 and 1996, respectively, and $5.3 million, $872,000, $1.1 million,
$310,000 and $41,000 for the years ended September 30, 1997, 1996, 1995,
1994 and 1993, respectively.
(4) In July 1997, the Company completed a private offering of Senior Notes and
received net proceeds (after placement expenses) of $110.4 million.
(5) In December 1996, the Company completed a public offering of shares of
Common Stock and received net proceeds (after underwriting and offering
expenses) of $19.5 million.
(6) Based on shares of Common Stock outstanding of 4.7 million and 3.6 million
at December 31, 1997 and 1996, respectively, and 4.7 million, 1.9 million,
1.9 million, 1.9 million, and 2.0 million at September 30, 1997, 1996,
1995, 1994, 1993, respectively.
(7) Giving effect to the issuance of 1.5 million shares in this Offering at an
assumed price of $57.00 (the closing price of the Common Stock on Nasdaq
on March 25, 1998), and after deduction of underwriting discounts and
estimated offering expenses, stockholders' equity per common share would
have been $24.10 on December 31, 1997.
(8) Represents the stated, or face, amount of outstanding loans plus accrued
interest and penalties.
(9) Represents the aggregate of (i) the original cost of equipment under lease
and cash held by equipment leasing limited partnerships managed by the
Company, and (ii) gross lease receivables as of the end of the period
under leases held in the Company's portfolio or serviced by the Company
for third parties.
(10) Represents the original cost of assets held by the Company and energy
partnerships and joint ventures managed by the Company.
(11) Calculated as net income divided by average stockholders' equity.
(12) Calculated as gross real estate finance revenues (including gains on
refinancings and sales of senior lien interests in commercial mortgage
loans) divided by the average book cost of real estate finance assets.
(13) Calculated as the aggregate book value of loans with respect to any
property (including all loans with liens senior to or of the same
seniority with the loan interest held by the Company) divided by the
appraised value of the property.
(14) Calculated by dividing income from continuing operations before income
taxes, extraordinary gains and cumulative effect of a change in accounting
principle plus fixed charges by fixed charges. Fixed charges represent
total interest expense, including amortization of debt expense and
discount relating to indebtedness.
(15) Calculated as net income divided by the weighted average Common Stock
outstanding during the period, in accordance with SFAS No. 128.
(16) Calculated as net income divided by the weighted average number of shares
of Common Stock outstanding during the period and dilutive potential
Common Stock, in accordance with SFAS No. 128. Dilutive potential shares
of Common Stock include shares issuable under the terms of various stock
option and warrant agreements (including, during fiscal 1994 through
fiscal 1997, warrants exercised during fiscal 1997) net of the number of
such shares that could have been reacquired (at the weighted average price
of the Common Stock during the period) with the proceeds received from the
exercise of the options and warrants.
26
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Common
Stock offered hereby, after deducting the underwriting discount and estimated
offering expenses, are estimated (based on the closing price of the Common
Stock of $57.00 on March 25, 1998 as reported on Nasdaq) to be $80.0 million
($92.1 million, assuming the Underwriters exercise their over-allotment
option). The Company intends to use the net proceeds primarily for the
acquisition of additional commercial real estate mortgage loans and, to a
lesser extent, the expansion of equipment leasing operations, the acquisition
of selected energy properties and assets and for other general corporate
purposes.
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 the Company's shift in focus to specialty finance businesses
following substantial increases in working capital due to the sale, in December
1996, of 1.7 million shares of Common Stock (from which it received net
proceeds of $19.5 million) and the issuance, in July 1997, of $115 million of
Senior 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 $193.7
million as of December 31, 1997.
Overview of First Quarter of Fiscal 1998. The Company's gross revenues
were $15.1 million in the first quarter of fiscal 1998, an increase of $9.2
million (158%) from $5.8 million in the first quarter of fiscal 1997. As of
December 31, 1997, total assets were $207.9 million, an increase of $12.8
million (7%) from $195.1 million at September 30, 1997. Of the increases in
total revenues during the first quarter of fiscal 1998, the revenues from the
Company's real estate finance business increased to $9.4 million, an increase
of $6.2 million (192%) from $3.2 million in the first quarter of fiscal 1997.
Equipment leasing revenues were $3.2 million in the first quarter of fiscal
1998, an increase of $2.0 million (164%) from $1.2 million in the first quarter
of fiscal 1997. Energy revenues were $1.8 million in the first quarter of
fiscal 1998, an increase of $476,000 (36%) from $1.3 million in the first
quarter of fiscal 1997. Real estate finance (commercial and residential
mortgage loans) and equipment leasing revenues were 83% and 76% of total
revenues in the first quarter of fiscal 1998 and 1997, respectively. Energy
revenues were 12% and 23% of total revenues in the first quarter of fiscal 1998
and 1997, respectively. Real estate finance and equipment leasing assets were
75% and 73% of total assets at December 31, 1997 and 1996, respectively. Energy
assets were 8% and 16% of total assets at December 31, 1997 and 1996,
respectively.
Overview of Fiscal 1997. 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. 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 mortgage loan acquisition
and resolution business increased to $19.1 million, 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. Real estate finance and equipment leasing revenues 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 in fiscal 1997, 1996 and 1995,
respectively. Real estate finance and equipment leasing assets were 53%, 57%
and 51% of total assets at September 30, 1997, 1996, and 1995, respectively.
Energy assets were 8%, 29% and 37% of total assets at September 30, 1997, 1996
and 1995, respectively.
27
<PAGE>
Results of Operations: Real Estate Finance
The following table sets forth certain information relating to the revenue
recognized and expenses incurred in the Company's real estate finance
operations during the periods indicated:
<TABLE>
<CAPTION>
Quarter Ended Year Ended
December 31, September 30,
-------------------- ---------------------------------
1997 1996 1997 1996 1995
--------- -------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Commercial mortgage loan acquisition and
resolution:
Interest ........................................... $2,722 $ 634 $ 4,877 $1,899 $2,246
Accreted discount .................................. 1,666 793 4,124 954 1,176
Fees ............................................... 1,775 1,407 2,556 675 963
Gains on refinancings and sale of senior lien
interests ........................................ 1,528 385 7,587 3,643 1,729
------ ------ ------- ------ ------
7,691 3,219 19,144 7,171 6,114
------ ------ ------- ------ ------
Residential mortgage lending:
Gain on sale of residential mortgage loans ......... 1,421 -- -- -- --
Interest ........................................... 280 -- -- -- --
------ ------ ------- ------ ------
1,701 -- -- -- --
------ ------ ------- ------ ------
$9,392 $3,219 $19,144 $7,171 $6,114
====== ====== ======= ====== ======
Expenses:
Commercial mortgage loan acquisition and
resolution: ........................................ $ 380 $ 163 $ 1,069 $ 852 $ 801
Residential mortgage lending ........................ 1,143 -- -- -- --
------ ------ ------- ------ ------
$1,523 $ 163 $ 1,069 $ 852 $ 801
====== ====== ======= ====== ======
</TABLE>
Quarter Ended December 31, 1997 Compared to Quarter Ended December 31, 1996
During the first quarter of fiscal 1998, the Company purchased or
originated four commercial mortgage loans for a total cost of $63.5 million
(including $35.3 million of costs with respect to one loan which were reduced
immediately upon loan acquisition by first mortgage financing arranged by the
Company), as compared to the purchase of four loans for a total cost of $27.9
million in the first quarter of fiscal 1997. The average net investment in the
four loans (excluding the $35.3 million financing referred to in the preceding
sentence) purchased during the first quarter of fiscal 1998 was $7.0 million
and ranged from a high of $14.5 million to a low of $1.5 million whereas in the
first quarter of fiscal 1997, the average net investment in the four loans was
$7.0 million and ranged from a high of $19.2 million to a low of $508,000. In
addition, during the first quarter of fiscal 1998 the Company originated a
construction loan with respect to a hotel property in Savannah, Georgia, in the
amount of $3.6 million, of which $339,000 was drawn down during the quarter.
The Company also increased its investment in certain existing loans by an
aggregate of $2.0 million and $1.0 million in the first quarters of fiscal 1998
and 1997, respectively, for the purpose 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 the loans were acquired and were included in its analysis of loan
costs and yields. The average balance of the Company's investments in
commercial mortgage loans was $102.9 million and $35.7 million for the first
quarters of fiscal 1998 and fiscal 1997, respectively.
The Company purchased certain commercial mortgage loans in the fourth
quarter of fiscal 1997 and the first quarter of fiscal 1998 which have not yet
been refinanced or in which senior lien interests have not yet been sold.
Refinancings and senior lien interests generally bear lower rates of interest
and are included within the balance of the obligation owed to the Company,
thereby typically increasing the Company's yield on its
28
<PAGE>
funds remaining invested. As a consequence of the increase in loans which have
not yet been refinanced or in which senior lien interests have not yet been
sold, the Company's yield on its average loan balances decreased in the first
quarter of fiscal 1998 to 30% from 36% in the first quarter of fiscal 1997.
Revenues from commercial mortgage loan acquisition and resolution
operations increased to $7.7 million in the first quarter of fiscal 1998 from
$3.2 million in the first quarter of fiscal 1997, an increase of 139%. The
increase in the first quarter of fiscal 1998 was attributable to (i) an
increase of $3.0 million (207%) in interest income (including accretion of
discount) resulting from an increase in the average amount of loans outstanding
during that period as compared to the same period in the prior fiscal year;
(ii) gains recognized on the refinancing or sale of senior lien interests in
loans held by the Company which increased to $1.5 million in the first quarter
of fiscal 1998 from $385,000 in the first quarter of fiscal 1997, an increase
of $1.1 million (297%), as a result of an increased number of loans refinanced
or in which senior lien interests were sold (seven in the first quarter of
1998, resulting in gross proceeds of $40.6 million, as compared to three in the
first quarter of fiscal 1997, resulting in gross proceeds of $2.2 million); and
(iii) an increase in fee income to $1.8 million in the first quarter of fiscal
1998 from $1.4 million in the first quarter of fiscal 1997, an increase of
$368,000 (26%). Of these fees, $830,000 were for financial advisory and
consultation services related to the organization and capitalization of RAIT.
The Company also received a $900,000 fee for services to a borrower whose loan
the Company later acquired. Gains on sale of senior lien interests in loans and
the amount (if any) of fees received vary from transaction to transaction and
there may be significant variations in the Company's gain on sale and fee
income from period to period.
Costs and expenses of the Company's commercial mortgage loan acquisition
and resolution operations increased $217,000 (133%) in the first quarter of
fiscal 1998 compared to the first quarter of fiscal 1997. 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
$7.3 million in the first quarter of fiscal 1998 from $3.1 million in the first
quarter of fiscal 1997 (139%).
On October 1, 1997, the Company's residential mortgage lending business
commenced operations. On November 5, 1997 the Company acquired Tri-Star, an
originator of residential mortgage loans, for $3.5 million of which $2.5
million was paid through the issuance of Common Stock and the remainder in
cash. During the first quarter of fiscal 1998, the Company originated 263
residential mortgage loans (including residential loans originated by Tri-Star
subsequent to its acquisition) for a cost of $11.8 million and acquired, from
an unaffiliated third party, a portfolio of 37 loans for a cost of $2.7
million. The Company may opportunistically purchase residential mortgage loans
although its focus is on loan originations.
The Company sold residential mortgage loans with a book value of $4.4
million during the first quarter of fiscal 1998 in several different
transactions, receiving $4.6 million in cash. These sales resulted in an
aggregate gain of $180,000. In addition, the Company sold other residential
mortgage loans, including the portfolio of 37 loans referred to above, to an
unrelated special purpose financing entity for a note with a face value of $8.3
million and a book value of $8.1 million (i.e., the face value of the note net
of a $174,000 provision for possible loan losses). The Company recognized a
gain of $1.2 million on this sale, in accordance with SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." See Note 2, Notes to Consolidated Financial Statements. The note
was partially prepaid in the amount of $6.2 million in February 1998 through
third-party financing arranged by the special purpose financing entity. The
third party financing was guaranteed by the Company. The balance of the note is
due on or before December 31, 2027. In calculating the gain on sale for the
sale to the special purpose financing entity, the Company made the following
assumptions: (i) the cash flows on the underlying loans sold were discounted at
a rate of 8% per annum; (ii) there would be a "constant prepayment rate" (that
is, a rate that assumes a constant percentage of the remaining principal is
prepaid each month) of 1% per month for the 37 loans acquired and 1.75% per
month for the loans originated by the Company; and (iii) a $174,000 provision
for possible loan losses (approximately 2.1% of the face value of the note),
which provision reduced the face value of the note. See "Risk Factors Real
Estate Considerations - Note Received in Sale of Certain Residential Loans."
Costs and expenses associated with residential mortgage lending operations
were $1.1 million, reflecting the commencement of operations during the
quarter.
29
<PAGE>
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
During fiscal 1997, the Company purchased or originated 18 commercial real
estate loans, for a total cost of $71.7 million, as compared to the purchase of
nine commercial real estate loans for a total cost of $15.1 million in fiscal
1996. The average net investment in the 18 loans was $4.0 million (with
individual investments ranging from a high of $19.2 million to a low of
$400,000) during fiscal 1997, as compared to an average net investment of $1.7
million in nine loans (with individual investments ranging from a high of $3.8
million to a low of $100,000) during fiscal 1996. 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 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 the loans were
acquired 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 fiscal 1996; (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%); and (iii) an
increase in fee income to $2.6 million in fiscal 1997 from $675,000 in fiscal
1996, an increase of $1.9 million (279%), as a result of an increase in the
number of transactions in which fee income was earned. The Company sold senior
lien interests in or refinanced nine loans during fiscal 1997 and eight loans
during fiscal 1996, realizing proceeds of $16.5 million and $17.9 million,
respectively.
Costs and expenses of the Company's real estate finance operations
increased 25% in fiscal 1997 compared to fiscal 1996. The increase was
primarily a result of higher personnel costs associated with the expansion of
the Company's commercial mortgage lending operations.
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 commercial mortgage loans during fiscal years 1996
and 1995, respectively, realizing proceeds of $17.9 million and $10.2 million,
respectively.
During fiscal 1996, the Company purchased or originated nine commercial
mortgage 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 the loans were acquired 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 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.
30
<PAGE>
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 and expenses incurred in the Company's equipment leasing operations
during the periods indicated:
<TABLE>
<CAPTION>
Quarter Ended Year Ended
December 31, September 30,
--------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Revenues:
Small ticket leasing -
Gain on sale of leases .............................. $1,788 $ 313 $3,711 $ --
Interest and fees ................................... 601 76 1,081 7
Partnership management ................................ 531 513 1,713 3,809
Lease finance placement and advisory services ......... 252 300 657 650
------ ------ ------ ------
$3,172 $1,202 $7,162 $4,466
====== ====== ====== ======
Expenses:
Small ticket leasing .................................. $ 797 $ 353 $2,051 $ 425
Partnership management ................................ 338 372 1,243 1,471
Lease finance placement and advisory services ......... 190 158 528 443
------ ------ ------ ------
$1,325 $ 883 $3,822 $2,339
====== ====== ====== ======
</TABLE>
Quarter Ended December 31, 1997 Compared to Quarter Ended December 31, 1996
During the first quarter of fiscal 1998 the Company experienced continued
growth in its leasing business, originating 1,551 leases having a cost of $16.0
million, as compared to 307 leases having a cost of $4.4 million during the
first quarter of fiscal 1997. In the first quarter of fiscal 1998, the Company
sold leases with a book value of approximately $14.4 million to an Intermediate
Purchaser in return for cash of $12.3 million and a note with a face value of
$3.9 million, as compared to the first quarter of fiscal 1997, where the
Company sold leases with a book value of $3.0 million to an Intermediate
Purchaser in exchange for a note with a face value of $3.3 million. Revenues
from equipment leasing increased to $3.2 million in the first quarter of fiscal
1998 from $1.2 million in the first quarter of fiscal 1997, an increase of $2.0
million (164%). The increase in revenues in the first quarter of fiscal 1998
was attributable to (i) an increase in the gain on sale of leases of $1.5
million (471%) resulting from the increased number of leases originated by the
Company and, thus, available for sale; and (ii) an increase in interest and fee
income of $525,000 (691%) resulting from the increased volume of lease
transactions. For a discussion of the Company's revenue recognition and
accounting policies pertaining to its equipment leasing operations, see
"Business - Equipment Leasing - Revenue Recognition and Lease Accounting."
Equipment leasing costs and expenses increased $442,000 (50%) in the first
quarter of fiscal 1998 as compared to the first quarter of fiscal 1997. This
increase was primarily a result of higher operating costs associated with the
increase in lease originations.
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
In fiscal 1997, the Company received 8,344 lease proposals involving
equipment with an aggregate cost of $113.4 million, approved 5,054 of such
proposals involving equipment with an aggregate cost of $67.2 million, and
entered into 3,214 transactions and acquired equipment for lease with a cost of
$34.6 million. During fiscal 1997, the Company sold leases with a book value of
approximately $30.2 million to Intermediate Purchasers 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.
31
<PAGE>
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 currently acts as general partner for five limited
partnerships which held a total of $49.8 million (original equipment cost) in
leased assets at December 31, 1997.
Results of Operations: Energy
Quarter Ended December 31, 1997 Compared to Quarter Ended December 31, 1996
During the first quarter of fiscal 1998 oil and gas production revenues
increased 30%, compared to the same period of the previous fiscal year. A
comparison of the Company's revenues, daily production volumes, and average
sales prices follows:
Quarter Ended
December 31,
-----------------------
1997 1996
----------- ----------
Revenues (in thousands)
Gas ............................................... $ 1,017 $ 755
Oil ............................................... 201 185
Production Volumes
Gas (thousands of cubic feet ("mcf")/day) ......... 4,198 3,309
Oil (barrels ("bbls")/day) ........................ 124 91
Average Sales Price
Gas (per mcf) ..................................... $ 2.63 $ 2.48
Oil (per bbl) ..................................... 17.52 22.19
Natural gas revenues increased 35% in the quarter ended December 31, 1997,
compared to the same period of the prior fiscal year, due to a 27% increase in
production volumes. Additionally, the average sales price per mcf increased 6%
in the quarter ended December 31, 1997.
Oil revenues increased 8% in the quarter ended December 31, 1997, compared
to the same period of fiscal 1997, due to a 37% increase in production volumes
which was partially offset by a 21% decrease in the average sales price per
barrel as compared to the quarter ended December 31, 1996. Both gas and oil
volumes were favorably impacted by two acquisitions of producing properties
located in Ohio and New York. These acquisitions accounted for an increase of
32% and 15% in gas and oil volumes, respectively, as compared to the first
quarter of fiscal 1997. The Company spent $1.8 million to acquire interests in
431 wells during the twelve months ended December 31, 1997.
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 the
quarters ended December 31, 1997 and 1996 is as follows:
Quarter Ended
December 31,
------------------
1997 1996
-------- --------
Production Costs
As a percent of sales ......................... 42% 38%
Gas (per mcf) ................................. $ 1.14 $ 1.03
Oil (per bbl) ................................. $ 6.79 $ 6.19
Production costs increased 42% ($153,000) in the quarter ended December
31, 1997 from the quarter ended December 31, 1996 as a result of the
acquisition of the working interests mentioned above.
Amortization of oil and gas property costs as a percentage of oil and gas
revenues was 15% in the quarter ended December 31, 1997 compared to 19% in the
quarter ended December 31, 1996. The variance from year to year was 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.
32
<PAGE>
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996 and
Year Ended September 30, 1995
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 the Company's revenues, daily production volumes, and
average sales prices for the periods indicated is as follows:
Year Ended September 30,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
Sales (in thousands)
Gas(1) ................... $ 3,178 $ 2,722 $ 2,762
Oil ...................... $ 705 $ 627 $ 610
Production volumes
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
- ------------
(1) Excludes sales of residual gas and sales to landowners.
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 $2.1 million in fiscal 1997 from
$1.8 million in fiscal 1996 and $1.7 million in fiscal 1995.
The Company continues to experience normally declining production from its
properties located in New York state. This decline was 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 fiscal 1996. The impact on revenues from
these wells was realized in the Company's financial statements commencing with
fiscal 1997. In fiscal 1995, the Company participated in the drilling of three
successful exploratory wells and recompleted one successful development well.
The impact on revenues from these wells was realized in the Company's financial
statements commencing with fiscal 1996.
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 the
fiscal years 1997, 1996 and 1995, is as follows:
Year Ended September 30,
----------------------------
1997 1996 1995
-------- -------- --------
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
Production costs increased $215,000 (15%) in fiscal 1997 from fiscal 1996
as a result of an 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 year period. The fiscal
1997 increase was the result of an increase in delay rentals paid
33
<PAGE>
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 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 was 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)
Quarter Ended December 31, 1997 Compared to Quarter Ended December 31, 1996
Interest income increased 786% ($613,000) in the quarter ended December
31, 1997 as compared to the quarter ended December 31, 1996 as a result of the
substantial increase in the Company's uncommitted cash balances ($69.3 million
at the beginning of the first quarter of fiscal 1998 as compared to $4.2
million at the beginning of the first quarter of fiscal 1997), and the
temporary investment of such balances. The Company deployed $41.2 million of
its cash balances during the first quarter of fiscal 1998 primarily in its real
estate finance and equipment leasing operations, reducing its cash balance to
$28.1 million at the end of the first quarter of fiscal 1998.
General and administrative expense increased 57% ($335,000) in the quarter
ended December 31, 1997, as compared to the quarter ended December 31, 1996,
primarily as a result of the payment of compensation and benefits to executive
officers and occupancy costs.
Interest expense increased to $3.9 million in the first quarter of fiscal
1998 from $409,000 in the first quarter of fiscal 1997, an increase of $3.5
million (846%) reflecting the increase in borrowings to fund the growth of the
Company's real estate finance and equipment leasing operations. In July 1997,
the Company issued $115.0 million of Senior Notes.
For a discussion of provisions for possible losses, see "Business -- Real
Estate Finance -- Commercial Mortgage Loan Acquisition and Resolution:
Accounting for Discounted Loans" and "-- Equipment Leasing -- Revenue
Recognition and Lease Accounting -- Sales of Leases."
The effective tax rate increased to 31% in the quarter ended December 31,
1997, from 20% in the quarter ended December 31, 1996, based upon the Company's
anticipated earnings and stability in the amount of the Company's depletion,
tax credits and tax exempt interest.
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996 and
Year Ended September 30, 1995
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
finance 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 increased borrowing
to fund the growth of the Company's real estate finance and small ticket
leasing operations. In July 1997, the Company issued $115.0 million of the
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). The purchase money financing 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.
34
<PAGE>
For a discussion of provisions for possible losses, see "Business -- Real
Estate Finance -- Commercial Mortgage Loan Acquisition and Resolution:
Accounting for Discounted Loans" and "-- Equipment Leasing -- Revenue
Recognition and Lease Accounting -- Sales of Leases."
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 commercial mortgage 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.
Liquidity and Capital Resources
The Company's primary liquidity needs are for continued expansion of its
real estate finance and small ticket leasing subsidiaries, activities that are
the core of the Company's growth strategy. The Company will add to its
commercial mortgage loan acquisition and resolution loan portfolio as
economically attractive opportunities become available and will also continue
to originate residential loans. In addition, it expects substantial ongoing
growth in its small ticket leasing activities. In energy, the Company is
seeking to increase its reserve base through selective acquisition of producing
properties and other assets and further development of its mineral interests.
The Company from time to time may also consider acquisitions of energy industry
companies.
Thus far, the Company has been able to finance each of these activities
through a variety of sources, including internally generated funds, borrowings,
and sales of its notes and Common Stock. See "Business -- Sources of Funds."
The Company expects to finance future activities in a similar manner.
Quarter Ended December 31, 1997 Compared to Quarter Ended December 31, 1996
Sources and (uses) of cash for the quarters ended December 31, 1997 and
1996 were as follows:
Quarter Ended December 31,
--------------------------
1997 1996
------------ ------------
(in thousands)
Provided by (used in) operations ......... $ (2,643) $ 2,840
(Used in) investing activities ........... (41,431) (32,559)
Provided by financing activities ......... 2,881 32,886
--------- ---------
$ (41,193) $ 3,167
========= =========
The Company had $28.1 million in cash and cash equivalents on hand at
December 31, 1997, as compared to $69.3 million at September 30, 1997. The
Company's ratio of current assets to current liabilities was 2.1 to 1 at
December 31, 1997 and 6.7 to 1 at September 30, 1997. Working capital at
December 31, 1997 was $17.7 million as compared to $61.4 million at September
30, 1997. The Company's ratio of earnings to fixed charges was 2.5 to 1 in the
quarter ended December 31, 1997 as compared to 8.0 to 1 in the quarter ended
December 31, 1996.
Cash used in operating activities in the first quarter of fiscal 1998
increased $5.5 million as compared to the first quarter of fiscal 1997,
primarily as a result of an increase in accounts receivable including fees
earned and advances made to RAIT and the sale of a senior lien interest for an
interest bearing note.
The Company's cash used in investing activities increased $8.9 million in
the first quarter of fiscal 1998 as compared to the first quarter of fiscal
1997. This increase resulted primarily from an increase in the amount of cash
used to fund real estate finance and small ticket leasing activities. In
commercial mortgage loan acquisition and resolution, the Company invested $63.5
million and $27.9 million in the acquisition or origination of five and four
loans in the first quarters of fiscal years 1998 and 1997, respectively. In
addition, the Company advanced funds on existing commercial mortgage loans of
$2.0 million and $1.0 million, respectively, in the same periods. Proceeds
received upon refinancings or sales of senior lien interests
35
<PAGE>
amounted to $39.6 million and $2.2 million in the first quarters of fiscal
years 1998 and 1997, respectively. These proceeds reflect the sale of senior
lien interests in or refinancing of six and three loans, respectively, for
which gains were recognized on five and one loans, respectively.
The Company invested $14.2 million in 300 residential mortgage loans
during the quarter ended December 31, 1997. The Company sold 234 of these loans
for $12.8 million, of which $4.6 million was in cash and $8.3 million was by a
promissory note (with a book value of $8.1 million after a provision for loan
losses of $174,000) of which $6.2 million was paid in the second quarter of
fiscal 1998 with the balance of $2.1 million being payable in 2027. See "Risk
Factors -- Real Finance Considerations -- Note Received in Sale of Certain
Residential Loans."
In small ticket leasing, cost of equipment acquired for lease represents
the equipment cost and initial direct costs associated with leasing operations.
Proceeds received upon the sale of equipment lease receivables totaled $12.3
million in the quarter ended December 31, 1997.
The increase in other assets of $974,000 during the quarter ended December
31, 1997 principally represents a note of $765,000 from the purchaser of a loan
from the Company.
The Company's cash flow provided by financing activities decreased $30.0
million during the first quarter of fiscal 1998 as compared to the first
quarter of fiscal 1997. In the first quarter of fiscal 1998, the Company's
residential mortgage loan business borrowed $6.7 million under its warehouse
line and repaid $2.2 million. In the first quarter of fiscal 1997, the Company
completed a public offering of shares of Common Stock, receiving net proceeds
of $19.5 million, and borrowed $14.1 million (including $13.4 million of
purchase money financing) to finance its commercial mortgage loan and
acquisition operations.
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
The Company raised 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
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 18 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 from the sale of senior lien interests or borrower
refinancings amounted to $16.5 million and $17.9 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 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' activity 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.
36
<PAGE>
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 $17.9 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.
Dividends
In the quarter ended December 31, 1997 and fiscal years 1997, 1996 and
1995, $470,000, $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.
37
<PAGE>
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. For its commercial mortgage loan acquisition and resolution
operations, the Company 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 cost of such remediation
will not be material to the Company.
The Company has made inquiries concerning the year 2000 issue to its
significant suppliers of services and, with respect to its energy operations,
to 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
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.
38
<PAGE>
BUSINESS
General
The Company operates a specialty finance business focused on real estate
finance and equipment leasing. The Company was organized as a Delaware
corporation in 1966. For approximately 25 years prior to 1991, the Company was
principally involved in the energy industry and it continues to conduct 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 residential mortgage
lending business. The Company has also sponsored RAIT, a real estate investment
trust, and currently owns 15% of RAIT's common shares of beneficial interest.
Within its equipment leasing business, the Company focuses primarily on small
ticket equipment lease financing, although it also manages five publicly-owned
equipment leasing partnerships and has a lease finance placement and advisory
business.
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 fully to 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 acquiring commercial mortgage loans held by large private sector financial
institutions and other entities. Due to the complexity of these loans and/or
their comparatively small size 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 "Business -- Real Estate Finance --
Commercial Mortgage Loan Acquisition and Resolution: Sale of Senior Lien
Interests and Refinancings." In addition, the Company has sold and anticipates
further sales of whole loans and
39
<PAGE>
senior lien interests to RAIT (see "Business -- Real Estate Finance --
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 "Business -- Real Estate Finance -- Commercial Mortgage
Loan Acquisition and Resolution: Forbearance Agreements" and "-- Commercial
Mortgage Loan Acquisition and Resolution: Loan Status."
Market for Commercial Mortgage Loan Acquisition and Resolution Services
Discounted loans acquired by the Company are, at the time of acquisition,
secured by commercial properties (generally multi-family housing, office
buildings, hotels or single-user retail properties) which, while income
producing, are unable fully to meet the debt service requirements of the
original loan terms. The loans are usually acquired from banks, insurance
companies, investment banks, mortgage banks or other similar financial
organizations.
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 the creation of this market had 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
entities 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 loan, 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 a cash return
on the Company's investment of not less than 10% per annum; (ii) the ratio of
the Company's initial investment to the appraised value of the property
underlying the loan (generally 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
40
<PAGE>
outstanding (see "Business -- Real Estate Finance -- 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. As of December 31, 1997, the
Company had in its portfolio 11 loans in which the ratio of the cost of
investment to the appraised value of the underlying property (both at the time
of acquisition and at the date of the most recent appraisal) exceeded 80%. The
Company has a policy that appraisals of properties underlying loans be updated
no less often than every three years. While the Company has historically
acquired loans in the $1.0 million to $15.0 million range, it has recently
shifted its focus to also include larger loans which meet its investment
objectives. See also "Business -- Recent Developments -- Commercial Loan
Purchase." 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 "Business -- Real
Estate Finance -- 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 "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations --
Commercial Mortgage Loan Acquisition and Resolution."
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 60 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.
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. Where the property is being managed by Brandywine
Construction & Management, Inc. ("BCMI"), a property manager affiliated with
the Company (see "Business -- Real Estate Finance -- Commercial Mortgage Loan
Acquisition and Resolution: Forbearance Agreements" and "Management -- Certain
Relationships and Related Party Transactions"), the Company may direct that
property revenues be paid to BCMI, as the Company's managing agent. As of
December 31, 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
41
<PAGE>
substantially resolved, the Company may permit the borrower to retain revenues
and pay property expenses directly. As of December 31, 1997, the Company
permitted borrowers with respect to four loans (loans 24, 27, 37 and 41) to do
so. (Loan number designations correspond to the designations set forth in the
table included as part of "Business -- Real Estate Finance -- Commercial
Mortgage Loan Acquisition and Resolution: Loan Status.")
Commercial Mortgage Loan Acquisition and Resolution: Sale of Senior Lien
Interests and Refinancings
In evaluating a potential commercial 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 interest.
Typically, the interest rate on the senior lien interest is less than the
stated rate on the Company's loan. As of December 31, 1997, senior lien
interests with an aggregate balance of $12 million relating to seven 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 (one in
1999, three in 2000, two in 2001 and one in 2016). Two other senior lien
interests 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 ($1.6 million and $7.3 million, respectively, assuming all
debt service payments have been made). See "Business -- Real Estate Finance --
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 typically 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 aggregating
$7.7 million and constituting 6.6%, by book value, of the Company's loans as of
December 31, 1997), 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 "Business -- Real Estate Finance -- 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 has assumed responsibility for
supervisory and, in many cases, day to day
42
<PAGE>
management of the underlying properties with respect to substantially all of
the loans owned by the Company as of December 31, 1997. In ten instances, the
President of BCMI (or an entity affiliated with him) has also acted as the
general partner or trustee of the borrower; an entity affiliated with him is
also the general partner of the sole limited partner of an eleventh borrower.
See "Management -- Certain Relationships and Related Party Transactions --
Relationship with BCMI." 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 "Business -- Real Estate
Finance -- 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 without modification
when the Company sells a senior lien interest in a loan. In such instance, the
purchaser's interest in the loan is subject to the terms of the Forbearance
Agreement. However, when a borrower refinances a loan, the Forbearance
Agreement is 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 a
term specified 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 December 31, 1997, the Company's loan portfolio consisted of 43 loans
of which 33 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. As of that date, the
Company had sold senior lien interests in 14 loans in its portfolio (including
senior interests in six loans initially acquired by the Company as junior lien
loans) and borrowers with respect to 12 of the Company's loans had obtained
refinancing. After such sales and refinancings, the Company held subordinated
interests in 30 loans of which seven interests, constituting approximately 6.6%
of the book value of the Company's loan portfolio, are not collateralized by
recorded mortgages (see "Business -- Real Estate Finance -- Commercial Mortgage
Loan Acquisition and Resolution: Sale of Senior Lien Interests and
Refinancings").
During the second quarter of fiscal 1998, the Company sold 10 of its
loans, and senior lien interests in two loans, to RAIT as indicated by Note (9)
to the following table. For certain information regarding this sale see
"Business -- Real Estate Finance -- Sponsorship of Real Estate Investment
Trust."
43
<PAGE>
The following table sets forth certain information relating to the
Company's investments in commercial mortgage loans as of December 31, 1997.
<TABLE>
<CAPTION>
Loan Type of
Number Property Location
- ------------ ----------------- ------------------
<S> <C> <C>
001 Multifamily Pennsylvania
002(9) Multifamily Pennsylvania
003 Multifamily New Jersey
004(9) Multifamily Pennsylvania
005 Office Pennsylvania
006(9) Office/Retail Virginia
007 Single User Minnesota
(Retail)
008(9) Multifamily Pennsylvania
009(9) Multifamily Pennsylvania
010(9) Multifamily Pennsylvania
011 Office Washington, D.C.
012(9) Multifamily Pennsylvania
013 Single User California
(Commercial)
014 Office Washington, D.C.
015 Condo/ North Carolina
Multifamily
016 Single User California
(Retail)
017 Single User West Virginia
(Retail)
018 Single User California
(Retail)
019(9) Multifamily Pennsylvania
020 Office New Jersey
021 Multifamily Pennsylvania
022 Multifamily Pennsylvania
023(9) Multifamily Pennsylvania
024 Multifamily Pennsylvania
025 Hotel/ Georgia
Commercial
026 Office Pennsylvania
027(9) Office Pennsylvania
028 Condo/ North Carolina
Multifamily
029 Commercial/ Pennsylvania
Retail
030 Hotel Nebraska
031 Multifamily Connecticut
032 Multifamily New Jersey
033 Single User Virginia
(Retail)
034 Multifamily Pennsylvania
035 Office Pennsylvania
036 Office North Carolina
037 Multifamily Florida
Sub Total
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Loan Outstanding Appraised Value
Loan Acquired Loan of Property
Number Seller/Originator (Fiscal Year) Receivable(1) Securing Loan(2)
- ------------ --------------------------------------- --------------- ------------------ -----------------
<S> <C> <C> <C> <C>
001 Alpha Petroleum Pension Fund 1991 $ 8,537,276 $ 5,300,000
002(9) CoreStates Bank(10) 1992 1,579,496 900,000
003 RAM Enterprises/Glenn Industries 1993 2,737,559 1,350,000
Pension Plan
004(9) St. Paul Federal Bank for Savings(12) 1993 1,486,601 1,200,000
005 Shawmut Bank(10) 1993 6,408,289 1,700,000
006(9) Nationsbank(10) 1993 5,804,115 2,800,000
007 Prudential Insurance, Alpha 1993 5,050,886 2,515,000
Petroleum Pension Fund
008(9) Nomura/Cargill/Eastdil Realty(14) 1994 5,394,281 3,200,000
009(9) Mellon Bank(10) 1995 1,640,973 2,700,000
010(9) RIVA Financial 1994 1,600,713 800,000
011 First Union Bank(10) 1995 1,427,447 2,000,000
012(9) CoreStates Bank(10)(12) 1995 3,037,884 2,200,000
013 California Federal Bank, FSB 1994 2,969,853 2,400,000
014 Nomura/Cargill/Eastdil Realty(14) 1995 14,977,664 12,250,000
015 First Bank/South Trust Bank(15) 1995/1997 3,553,137 3,702,000
016 Mass Mutual/Alpha Petroleum 1995/1996 6,992,873 3,000,000
Pension Fund
017 Triester Investments(10)(16) 1996 1,453,966 1,900,000
018 Emigrant Savings Bank/Walter 1996 2,835,687 4,555,000
R. Samuels and Jay Furman(19)
019(9) Summit Bancorp(10) 1996 4,675,262 5,725,000
020 Cargill/Eastdil Realty(13) 1996 7,114,661 4,600,000
021 Bruin Holdings/Berkeley Federal 1996/1997 9,260,609 4,222,000
Savings Bank
022 FirsTrust FSB 1996 4,655,151 4,110,000
023(9) Jefferson Bank 1996 718,848(24) 600,000
024 U.S. Dept. of Housing & Urban 1996 3,427,028 3,250,000
Development
025 Bankers Trust Co. 1997 5,975,639 8,500,000
026 FirsTrust FSB/ 1997 8,498,640 5,000,000
The Metropolitan Fund
027(9) Lehman Brothers Holdings, Inc. 1997 53,183,775 34,000,000
028 First Bank/SouthTrust Bank(27) 1997 1,703,755 1,773,000
029 Castine Associates, L.P.(28) 1997 7,127,386 4,025,000
030 CNA Insurance 1997 7,274,234 4,000,000
031 John Hancock Mutual Life 1997 10,024,031 7,500,000
Insurance Company
032 John Hancock Mutual Life 1997 12,260,126 12,425,000
Insurance Company
033 Brambilla, Ltd. 1997 4,015,686 2,650,000
034 Resource America, Inc.(29) 1997 398,697 450,000
035 Jefferson Bank 1997 2,331,275 2,550,000
036 Union Labor Life Insurance Co. 1997 4,514,732 4,150,000
037 Howe, Soloman & Hall 1997 6,998,319 3,500,000
Financial, Inc. ------------ ------------
$231,646,554 $167,502,000
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Proceeds from
Ratio of Cost Refinancing or
Cost of of Investment to Sale of Senior
Investment(3) Appraised Value Lien Interests
- --------------- ------------------ ----------------------------
<S> <C> <C>
$ 4,704,540 89% $ 2,570,000(8)
547,813 61% 0(11)
1,325,081 98% 627,000
862,356 72% 0(11)
1,229,417 72% 940,000(13)
2,391,040 85% 840,000
1,354,382 54% 2,099,000
1,614,174 50% 934,300
1,393,031 52% 654,600
457,356 57% 0(11)
1,180,030 59% 660,000(13)
1,296,565 59% 1,079,000
1,694,799 71% 1,975,000(13)
10,571,763 86% 6,487,000
2,787,774 75% 2,558,000(8)
2,114,520 70% 2,375,000(13)
895,113 47% 1,000,000(17)(18)
2,227,199 49% 1,969,000(13)
3,758,685 66% 3,020,000
3,225,589 70% 2,562,000
2,454,437 58% 2,760,000(20)
4,016,498 98% 2,636,000(22)(23)
480,643 80% 450,000(25)
2,740,093 84% 2,318,750
5,877,874 69% 0
2,484,966 50% 2,240,000(26)
19,243,749 57% 7,920,000(22)
1,028,143 58% 0
2,986,618 74% 1,000,000(17)
3,673,462 92% 0
4,760,894 63% 0
7,374,894 59% 0
2,003,684 76% 1,383,705(8)
400,000 89% 0
1,591,662 62% 1,000,000(17)
3,053,846 74% 0
2,772,641 79% 2,096,000(11)(13)
------------ -----------
$112,575,331 $56,154,355
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Company's Net Maturity of Loan/
Interest In Expiration of
Net Book Value Outstanding Loan Forbearance
Investment(4) of Investment(5) Receivables(6) Agreement(7)
- --------------- ------------------ ------------------ ------------------
<S> <C> <C> <C>
$ 2,134,540 $ 2,580,970 $ 5,967,276 12/31/02
547,813 785,295 1,579,496 10/31/98
698,081 731,656 2,103,068 01/01/03
862,356 1,134,958 1,486,601 10/31/98
289,417 784,776 5,568,289 02/07/01
1,551,040 1,670,669 4,928,075 07/31/98
(744,618) 567,169 2,919,116 12/31/14
679,874 1,270,541 4,296,133 07/31/98
738,431 564,876 755,711 11/01/99
457,356 734,073 1,600,713 09/02/99
520,030 685,655 742,447 09/30/99
217,565 747,650 1,781,319 12/02/99
(280,201) 325,972 969,853 05/01/01
4,084,763 5,472,297 8,299,802 11/30/98
229,774 3,553,137 1,218,418 08/25/00
(260,480) 481,117 4,592,873 12/31/00
(104,887) 465,347 453,966 12/31/16
258,199 833,952 866,687 12/01/00
738,685 992,855 1,496,823 12/29/00
663,589 1,878,059 4,715,532 02/07/01
(305,563) 1,034,292 6,500,609 (21)
1,380,498 995,483 1,992,593 10/31/98
30,643 128,642 271,107 03/28/01
421,343 814,710 933,181 11/01/22
5,877,874 6,102,863 5,975,639 12/31/15
244,966 2,372,008 6,257,369 09/30/03
11,323,749 17,253,179 45,209,204 01/01/02
1,028,143 1,703,755 1,703,755 03/31/02
1,986,618 2,312,861 6,127,386 07/01/02
3,673,462 3,740,136 7,274,234 09/30/02
4,760,894 4,951,443 10,024,031 09/01/05
7,374,894 7,464,646 12,260,126 09/01/05
619,979 633,604 2,653,184 02/01/21
400,000 398,422 398,697 10/01/02
591,662 928,445 1,331,275 09/25/02
3,053,846 3,110,677 4,514,732 12/31/11
676,641 1,162,202 4,902,319 07/01/00
----------- ----------- ------------
$56,420,976 $81,368,392 $174,671,639
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Loan Type of
Number Property Location
- ------------ --------------- --------------
<S> <C> <C>
Balance Forward
038(9) Office/Retail Pennsylvania
039 Hotel Georgia
040 Retail Virginia
041 Multifamily Connecticut
042 Multifamily Pennsylvania
043 Multifamily Pennsylvania
</TABLE>
<TABLE>
<CAPTION>
Loan Outstanding Appraised Value
Loan Acquired Loan of Property
Number Seller/Originator (Fiscal Year) Receivable(1) Securing Loan(2)
- ------------ ------------------------------------- --------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
$ 231,646,554 $ 167,502,000
038(9) Resource Asset Investment Trust(30) 1997 8,351,314 10,600,000
039 Resource America, Inc.(29) 1998 342,691(31) 4,100,000
040 Lehman Brothers Holdings 1998 45,005,722 47,000,000
041 J.E. Roberts Companies 1998 26,695,085 18,500,000(32)
042 Fannie Mae(33) 1998 4,290,337 5,000,000(32)
043 Downingtown National Bank/D, Ltd. 1998 1,957,557(34) 2,275,000
---------------- -----------------
Balance as of December 31, 1997 $ 318,289,260 $ 254,977,000
================ =================
</TABLE>
<PAGE>
- ------------
(1) Consists of the stated or face value of the obligation plus accrued
interest and the amount of the senior lien interest at December 31, 1997.
(2) The Company generally obtains appraisals on each of its properties 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 calculated 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 $452,000. 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 senior lien interests at December 31, 1997 (excluding
one senior lien interest of $2,334,719 which is included in the cost of
investment carried on the books of the Company relating to loan 17).
(7) With respect to loans 6, 7, 8, 14, 25, 27, 30, 31, 32, 34, 35, 38 and 39,
the date given is for the maturity of the Company's interest in the loan.
For loan 43, the date given is the expiration date of the Forbearance
Agreement with respect to the loan in the original principal amount of
$404,026 (see note (34) below). For the remaining loans, the date given
is the expiration date of the related Forbearance Agreement.
(8) Represents the amount of the senior lien in place on date of acquisition,
except that, with respect to loan 40, it represents the amount of a
senior lien interest sold contemporaneously with the Company's
investment.
(9) Loans 2, 4, 6, 8, 9, 10, 12, 19, 23, and one of the four loans (in the
amount of $900,000) comprising loan 38 were sold to RAIT on January 23,
1998 (see note (30) below). In addition, senior lien interests in loans
27 and 38 were sold to RAIT on January 23, 1998. See "Business -- Real
Estate Finance -- Sponsorship of Real Estate Investment Trust."
(10) Successor by merger to the Seller.
(11) In December 1997, senior lien interests in loans 2, 4 and 10 were
transferred to loan 37.
(12) Seller was a wholly-owned subsidiary of this institution.
(13) 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.
46
<PAGE>
<TABLE>
<CAPTION>
Proceeds from
Ratio of Cost Refinancing or
Cost of of Investment to Sale of Senior
Investment(3) Appraised Value Lien Interests
- --------------- ------------------ --------------------
<S> <C> <C>
$112,575,331 $ 56,154,355
8,580,000 81% 0
338,633 8% 0
43,154,886 92% 35,250,000(8)
14,546,344 79% 0
4,234,556 85% 0
1,518,188 67% 1,000,000(35)
------------ ------------
$184,947,938 $ 92,404,355
============ ============
</TABLE>
<TABLE>
<CAPTION>
Company's Net Maturity of Loan/
Interest In Expiration of
Net Book Value Outstanding Loan Forbearance
Investment(4) of Investment(5) Receivables(6) Agreement(7)
- --------------- ------------------ ------------------ ------------------
<S> <C> <C> <C>
$56,420,976 $ 81,368,392 $174,671,639
8,580,000 8,351,314 8,351,314 12/31/02
338,633 201,155 342,691 11/30/02
7,904,886 8,081,017 9,806,748 12/01/02
14,546,344 14,426,655 26,695,085 06/30/03
4,234,556 4,262,517 4,290,337 12/31/02
518,188 803,012 957,557 12/17/02
----------- ------------ ------------
$92,543,583 $117,494,062 $225,115,371
=========== ============ ============
</TABLE>
<PAGE>
- ------------
(14) Seller was a partnership of these entities.
(15) 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.
(16) The loan acquired consists of a series of notes becoming due yearly
through December 31, 2016. The notes are being paid in accordance with
their terms and, accordingly, a Forbearance Agreement was not required.
(17) Senior lien interest sold to Peoples Thrift Savings Bank.
(18) Original senior lien interest repaid by the Company in December 1997.
(19) Amounts advanced by the Company were used in part to directly repay the
loan of Emigrant Savings Bank; the balance was applied to purchase a note
held by Messrs. Samuels and Furman.
(20) Senior lien interest sold to People's Thrift Savings Bank in 17
individual condominium units in a single building.
(21) 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.
(22) Two senior lien interests were sold to Commerce Bank, N.A. ("Commerce"),
Philadelphia, Pennsylvania. 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.
(23) 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.
(24) Includes a note for $14,948 which is payable to the Company on demand.
(25) Senior lien interest sold to Crusader Bank. The senior lien interest was
paid off in connection with the acquisition of this loan by RAIT.
(26) 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.
(27) 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.
(28) From 1993 to October 1997, an officer of the Company served as the General
Partner.
(29) Loan originated by the Company.
(30) Consists of three related loans to one borrower secured by two properties.
A fourth related loan, in the amount of $100,000, was repaid in the first
quarter of fiscal 1998. The loans were originated by RAIT and funded by
the Company pending closing of RAIT's public offering. Upon completion of
that offering in the second quarter of fiscal 1998, the Company sold one
of the loans (in the principal amount of $900,000) and $4.9 million of
senior lien interests in the two remaining loans to RAIT, at cost. See
note (9) above.
(31) Construction loan with a maximum borrowing of $3,625,000.
(32) Company's estimate of the value of the property, pending completion of
appraisal.
(33) Original lending institution.
(34) Consists of two related loans to one borrower secured by a single property
in the original principal amounts of $1,600,000, due in October 2006, and
$404,026 which is subject to a Forbearance Agreement expiring in December
2002.
(35) Senior lien interest sold to Washsquare Properties Partners, L.P., a
limited partnership in which officers and directors of the Company
beneficially own a 17.8% limited partnership interest.
47
<PAGE>
The following table sets forth certain information with respect to monthly
cash flow from the properties underlying the Company's commercial mortgage
loans, monthly debt service payable to senior lienholders and refinance
lenders, monthly payments with respect to the Company's retained interest and
the ratio of cash flow from the properties to debt service payable on senior
lien interests. It should be noted that monthly cash flow for loans 39 through
43 is based upon estimates or historical information different than the average
cash flow for the three months ended December 31, 1997 utilized for all other
loans.
<TABLE>
<CAPTION>
Monthly Monthly Debt Service
Monthly Cash Debt Service on Payment to Coverage Ratio
Loan Flow from Senior Lien the Company's on Senior Lien
Number Property(1)(2) Interests(3) Interest Interests
- --------------- ------------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
001 $ 41,717 $ 26,425 $ 15,292 1.58
002 6,168 4,875 1,293 1.27
003 6,874 6,058 816 1.13
004 10,949 7,280 3,669 1.50
005 14,643 6,825 7,818 2.15
006 28,504 8,021 20,483 3.55
007 20,400 20,400 0 1.00
008 30,290 10,670 19,620 2.84
009 26,012 7,359 18,653 3.53
010 6,953 4,875 2,078 1.43
011 11,179 5,566 5,613 2.01
012 17,536 10,317 7,219 1.70
013 20,011 15,833 4,178 1.26
014 88,168 58,551 29,617 1.51
015 & 028(4) 27,492 26,113 1,379 1.05
016 23,917 19,500 4,417 1.23
017 10,690 9,190 1,500 1.16
018 25,529(5) 15,998 9,531 1.60
019 49,346 25,300 24,046 1.95
020 39,742 19,527 20,215 2.04
021 23,783 16,331 7,452 1.46
022 26,767 24,365 2,402 1.10
023 5,108 3,932 1,176 1.30
024 6,435 0 6,435 N/A
025 48,838 0 48,838 N/A
026 37,357 10,800 26,557 3.46
027 160,158 74,570 85,588(6) 2.15
029 26,510 8,333(7) 18,177 3.18
030 60,194 0 60,194 N/A
031 41,667 0 41,667 N/A
032 102,831 0 102,831 N/A
033 21,940 14,985 6,955 1.46
034 5,112 0 5,112 N/A
035 27,954 8,333(7) 19,621 3.35
036 23,950 0 23,950 N/A
037 25,000 0 25,000 N/A
038 69,013 0 69,013(8) N/A
----------- ---------- ---------- ----
$ 1,218,737(9) $ 470,332(9) $ 748,405(9) 2.59
----------- ---------- ---------- ----
039 $ 3,814(10) $ 0 $ 3,814 N/A
040 375,000(11) 249,497 125,503 1.50
041 154,699(12) 0 154,699 N/A
042 34,080(12) 0 34,080 N/A
043 16,418(12) 8,333 8,085 1.97
----------- ---------- ---------- ----
$ 584,011 $ 257,830 $ 326,181 2.27
----------- ---------- ---------- ----
Total (loans
1 through 43) $ 1,802,748 $ 728,162 $1,074,586 2.48
=========== ========== ========== ====
</TABLE>
48
<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 notes (4), (10), (11), and (12) monthly cash flow
from each of the properties has been calculated as the average monthly
amount during the three month period ended December 31, 1997.
(3) Monthly debt service consists of required payments of principal, interest
and other regularly recurring charges payable to the holder of the
refinanced loan or senior lien interest.
(4) Loans 15 and 28 represent 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) A senior lien interest of $4.9 million in loan 27 was sold to RAIT. (See
note (9) to the previous table). As a result of this sale, the cash flow
to the Company will decrease by $44,755 per month.
(7) Includes additional debt service of $2,083 per month attributable to a
senior lien interest sold in December 1997.
(8) Loan 38 consisted of four related loans of which one was repaid in the
first quarter of fiscal 1998. (See notes (9) and (30) to the previous
table). One loan in the amount of $900,000 was sold to RAIT. In addition,
RAIT acquired senior lien interests in two of the remaining loans in the
amount of $4.9 million. As a result of these sales the cash flow to the
Company will decrease by $48,180 per month.
(9) Excludes amounts attributable to loans 39 through 43, which are referred
to in the table below.
(10) Monthly cash flow currently consists of interest only since loan 39 is a
construction loan.
(11) Based upon average cash flow for the three months ended January 31, 1998.
(12) Estimate based on an historical analysis of the property's cash flow prior
to the Company's purchase of the loan.
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 commercial mortgage loan
portfolio at cost, which is significantly discounted from the face value of,
and accrued interest and penalties on, the notes. This discount to face value
and accrued interest and penalties (as adjusted to give effect to refinancings
and sales of senior lien interests) totaled $110.4 million, $86.3 million,
$40.0 million and $16.1 million at December 31, 1997, and 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 quarter ended December
31, 1997, the Company recorded a provision for possible losses of $52,000. 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
mortgage loan portfolio. As of December 31, 1997, the allowance for possible
loan losses totalled $452,000. 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.
49
<PAGE>
Residential Mortgage Loans
The Company's residential mortgage lending business provides first and
second mortgage loans on one-to-four family residences to borrowers who
typically do not conform to guidelines established by Fannie Mae because of
past credit impairment or other reasons. Through its subsidiaries, FMF and
Tri-Star (which was acquired in November 1997 and which, following regulatory
approvals regarding transfer of mortgage lending licenses, the Company
anticipates merging into FMF), the Company is licensed as a residential
mortgage lender in 23 states and is currently originating loans in 11 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 a targeted average loan of approximately
$50,000. Currently, the average loan size is approximately $44,000. 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). The Company
also originates "125 Loans," that is, loans with a cumulative loan-to-value
ratio of up to 125%. FMF originates 125 Loans that have been approved for
acquisition by third-party purchasers prior to funding. Tri-Star acts as a
delegated underwriter of 125 Loans for one investor, originating loans which
comply with such investor's underwriting criteria. During the quarter ended
December 31, 1997, the Company originated $11.8 million in residential mortgage
loans, of which $3.5 million were 125 Loans. Approximately 12% of the Company's
residential mortgage loans for the quarter ended December 31, 1997 conform to
Fannie Mae guidelines although the Company does not seek to originate these
loans and does not expect to establish goals with respect to the aggregate
percentage of conforming loans in its portfolio.
The Company typically 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, under their names, 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.
The Company (through FMF) has arranged two warehouse lines of credit, with an
aggregate credit amount of $35 million, to fund its lending operations. See
"Business -- Sources of Funds."
The Company is approved as a loan seller to 16 investors. The Company's
policy is to sell its loans for cash. During the first quarter of fiscal 1998,
however, the Company engaged in a sale of a pool of loans for a note. See "Risk
Factors -- Real Estate Finance Considerations -- Note Received in Sale of
Certain Residential Loans." The Company's policy is generally to sell loans on
a servicing-released basis, however, with respect to the sale of $6.9 million
of originated and acquired loans, the sale was on a servicing-retained basis.
The Company has subcontracted the servicing of these loans to Jefferson Bank.
See "Risk Factors -- Real Estate Finance Considerations -- Note Received in
Sale of Certain Residential Loans" and "Management -- Certain Relationships and
Related Party Transactions -- Jefferson Bank." As FMF and Tri-Star develop
their operations and increase staffing, they may retain servicing for their own
account and may retain certain loans for their portfolios.
Sponsorship of Real Estate Investment Trust
The Company is the sponsor of RAIT, a publicly-held real estate investment
trust whose common shares of beneficial interest are listed on the American
Stock Exchange. RAIT's primary business is to acquire or originate commercial
mortgage loans in situations that, generally, do not conform to the
underwriting standards of institutional lenders or sources that provide
financing through securitization. Although RAIT may acquire
50
<PAGE>
commercial mortgage loans at a discount, it seeks to acquire such loans where
the workout process has been initiated and where, unlike the commercial
mortgage loans acquired by the Company, there is no need for RAIT's active
intervention. RAIT commenced operations on January 14, 1998.
As sponsor of RAIT, the Company acquired 15% of RAIT's common shares of
beneficial interest upon completion of the offering of such shares, at a cost
of approximately $7.0 million. So long as the Company owns 5% or more of RAIT's
common shares, the Company will have the right to nominate one person to RAIT's
board of trustees (the "Board of Trustees"). The Company sold 10 of its
mortgage loans and senior lien interests in two other loans (representing a net
investment by the Company at December 31, 1997 of $17.1 million, including $2.1
million of senior lien interests acquired by the Company in connection with the
sale) to RAIT, as part of RAIT's initial investments, for $20.2 million. The
Company may sell further loans to RAIT, to a maximum of 30% of RAIT's
investments (on a cost basis), excluding the initial investments. Betsy Z.
Cohen, spouse of the Company's Chairman and Chief Executive Officer, Edward E.
Cohen, and mother of Daniel G. Cohen, the Chairman and Chief Executive Officer
of FMF and an Executive Vice President and director of the Company, is the
Chairman and Chief Executive Officer of RAIT. Jonathan Z. Cohen, the son of Mr.
and Mrs. Cohen and the Secretary and a director of Resource Energy, Inc., a
wholly-owned subsidiary of the Company through which its energy operations are
conducted ("Resource Energy"), is the Company's nominee to the Board of
Trustees.
To limit conflicts between RAIT and the Company, it has been agreed that,
for two years following the completion of the RAIT offering, (i) the Company
will not sponsor another real estate investment trust with investment
objectives and policies which are the same as, or substantially similar to,
those of RAIT; (ii) if the Company originates a proposal to provide wraparound
or other junior lien or subordinated financing (as opposed to acquiring
existing financing) with respect to multifamily, office or other commercial
properties to a borrower (other than to a borrower with an existing loan from
the Company), the Company must first offer the opportunity to RAIT; and (iii)
if the Company desires to sell any loan it has acquired that conforms to RAIT's
investment objectives and policies with respect to acquired loans, it must
first offer to sell it to RAIT. The Company anticipates that complying with
these restrictions will not materially affect the Company's operations for the
foreseeable future. The Company has also agreed that if, after the expiration
of the two year period, the Company sponsors a real estate investment trust
with investment objectives similar to those of RAIT, the Company's
representative on the Board of Trustees (should the Company have a
representative on the Board at that time) will recuse himself or herself from
considering or voting upon matters relating to financings which may be deemed
to be within the lending guidelines of both RAIT and the real estate investment
trust then being sponsored by the Company.
Equipment Leasing
General
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 acquisition, the Company assumed the management of five
publicly-held equipment leasing partnerships involving $49.8 million (original
equipment cost) in leased assets at December 31, 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 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 five 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 August
1996. FLPM's operations will be reduced over the next several years as
partnership assets are sold and cash is
51
<PAGE>
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 ("small ticket" leasing). 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 businesses thereby affording the Company a niche market with significant
growth potential (see "Business -- Equipment Leasing -- Strategy -- Focus on
Leasing to Small Businesses"). 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) accounted for 21% and 8%, respectively, of the equipment (by
cost) leased by the Company from the beginning of operations through December
31, 1997 (18% and 8%, respectively, for the quarter ended December 31, 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 employees). The Company has acquired and
developed credit evaluation and scoring systems (based upon credit evaluation
services provided by Dun & Bradstreet) which it believes significantly
increases its ability to evaluate the credit risk in dealing with small
business end-users (see "Business -- Equipment Leasing -- 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. 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. 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.
Focus on Lease Sales. The Company sells virtually all of its leases. In
fiscal 1997, the Company effected four sales in which it sold discrete pools of
leases and the equipment underlying the leases (including the residual
interest) to Intermediate Purchasers which then sold interests in the leases to
an institutional buyer.
52
<PAGE>
In the first quarter of fiscal 1998, the Company entered into an arrangement
with an Intermediate Purchaser and a group of institutional buyers to
periodically sell leases originated by the Company, to a maximum of $50.0
million of leases. The Company has sold $14.4 million of leases under this
arrangement. See "Business -- Sources of Funds -- Forward Sale Commitment." To
date, the Company has retained the servicing rights on the leases it sells. The
Company anticipates that in the future it will enter into sale arrangements
similar to that concluded in the first quarter of fiscal 1998; however, the
Company may retain the residual interest in the equipment in the future.
Selling the leases allows the Company to recover a significant amount of its
investment in the leased equipment, freeing capital for further leasing
activity. See "Risk Factors -- Equipment Leasing Considerations -- Sale of
Leases."
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.
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 equipment purchased by the Company, by principal
product type and percentage of dollar volume of equipment purchased, during the
quarters ended December 31, 1997 and 1996 and fiscal years 1997 and 1996.
Equipment Volume by Product Type
(% by dollar volume of equipment purchased)
<TABLE>
<CAPTION>
Quarter Ended Year Ended September
December 31, 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Document processing and storage ......... 48% 68% 49% 73%
Telecommunications ...................... 38% 19% 37% 21%
Computer systems ........................ 10% 10% 8% 6%
Other ................................... 4% 3% 6% --
-- -- -- --
100% 100% 100% 100%
=== === === ===
</TABLE>
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,
53
<PAGE>
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 "Business -- Equipment Leasing --
Strategy -- Focus on Vendor Programs." The Company has currently entered into
vendor program relationships with eight vendors: Minolta Corporation (copiers),
Celsis Incorporated (microbial testing systems), American Marbacom
Communications (Teleco) (telephone systems), CSi (test equipment), Telrad
Communications (telephone systems), ATI Communications (telephone systems), the
National Association of College Stores (affinity program) and Millipore Corp.
(test equipment). In addition, Lucent Technologies (telecommunications
equipment) and Softmart (computer software) have designated the Company as an
authorized lessor for their dealer distribution channels. 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 in the future
the Company may retain the residual interest in leases sold by it and derive a
significant portion of its leasing profits from residuals. Currently, repayment
of notes received by the Company from Intermediate Purchasers of the Company's
equipment leases depends, to a significant extent, on realization of residuals.
See "Risk Factors -- Equipment Leasing Considerations -- Residuals" and "--
Sale of Leases," see also "Business -- Equipment Leasing -- Revenue Recognition
and Lease Accounting." 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.
Revenue Recognition and Lease Accounting
General. The manner in which lease finance transactions are characterized
and reported for accounting purposes has a major impact upon the Company's
reported revenue, net earnings and the resulting financial measures. Lease
accounting methods significant to the Company's leasing operations are
discussed below.
Direct Financing Leases. The Company classifies its lease transactions, as
required by the Statement of Financial Accounting Standards No. 13, Accounting
for Leases ("FASB No. 13") as direct financing leases (as distinguished from
sales-type or operating leases). Direct financing leases transfer substantially
all benefits and risks of equipment ownership to the customer. A lease is a
direct financing lease if the creditworthiness of the customer and the
collectibility of lease payments are reasonably certain and it meets one of the
following criteria: (i) the lease transfers ownership of the equipment to the
customer by the end of the lease term; (ii) the
54
<PAGE>
lease contains a bargain purchase option; (iii) the lease term at inception is
at least 75% of the estimated economic life of the leased equipment; or (iv)
the present value of the minimum lease payments is at least 90% of the fair
market value of the leased equipment at inception of the lease. The Company's
net investment in direct financing leases consists of the sum of the total
future minimum lease payments receivable and the estimated unguaranteed
residual value of leased equipment, less unearned income. Unearned lease
income, which is recognized as revenue over the term of the lease by the
effective interest method, 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.
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.
Residual Values. Unguaranteed residual value represents the estimated
amount to be received at lease termination from lease extensions or disposition
of the leased equipment financed under direct financing leases. The estimates
are based upon available industry data and senior management's prior experience
with respect to comparable equipment. The residual values are recorded as
investment in direct financing leases, on a net present value basis. The
estimated residual values will vary, both in amount and as a percentage of the
original equipment cost depending upon several factors including the equipment
type, market conditions and the term of the lease. Amounts to be realized at
lease termination depend on the 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 value is below its recorded value.
Any required changes are recorded in accordance with FASB No. 13. In accordance
with generally accepted accounting principles, residual values can only be
adjusted downward.
Sales of Leases. The Company sells a large percentage of the leases it
originates (including residual values) through indirect securitization
transactions and other structured finance techniques. In a securitization
transaction, the Company sells and transfers a pool of leases to a bankruptcy
remote Intermediate Purchaser unaffiliated with the Company. Typically, the
Intermediate Purchaser will have no material assets apart from the leases sold
to it. The Intermediate Purchaser in turn simultaneously sells and transfers
its interest in the leases (excluding the residual value) to a financial
institution in return for cash equal to a percentage of the aggregate present
value of the finance lease receivables being sold. The consideration paid to
the Company for the lease receivables and the residuals sold to the
Intermediate Purchaser consists of the cash advanced by the financial
institution and an interest bearing note from the Intermediate Purchaser.
Gains on the sale of leasing portfolios are recorded at the date of sale
in the amount by which the sales price exceeds the book value of the underlying
leases. Subsequent to a sale, the Company has no remaining interest in the pool
of leases or equipment except (i) a security interest is retained in the pool
when a note is received as part of the sale proceeds and (ii) under certain
circumstances, the Company is obligated to replace non-performing leases in the
pool. See "Risk Factors -- Equipment Leasing Considerations -- Sale of Leases"
and "-- Potential Replacement of Leases" and "-- Residuals."
The Company maintains an allowance for possible losses in connection with
payments due under lease contracts held in the Company's portfolio and its
retained interest in leases securitized or sold. The allowance is determined by
management's estimate of future uncollectible lease contracts based on the
Company's historical loss experience, an analysis of delinquencies, economic
conditions and trends and management's expectations of future trends, industry
statistics and lease portfolio (including leases under the Company's
management) characteristics and assumptions of future losses. The Company's
policy is to charge off to the allowance those lease contracts which are
delinquent for which management has determined in the probability of collection
to be remote. Recoveries on leases previously charged off are restored to the
allowance. For the quarter ended December 31, 1997, the Company recorded a
provision for possible losses of $250,000 to reflect the increase in the number
of its lease originations. For the year ended September 30, 1997, it recorded a
provision for possible losses of $253,000. At December 31, 1997 the allowance
for possible lease losses was $492,000 or approximately 1% of lease receivables
under management.
To the extent that the Company determines to retain residuals for its own
account, the Company's gain on sale from any pool of leases so sold may be
materially reduced, although the Company's revenues in subsequent years from
realization of residuals may be increased. For a discussion of certain risks
relating to realization of residuals, see "Risk Factors -- Equipment Leasing
Considerations -- Residuals."
55
<PAGE>
During the fiscal year ended September 30, 1997, the Company sold leases
on a servicing retained basis, with a book value of approximately $30.2 million
to Intermediate Purchasers in return for cash of $20.6 million and notes with a
total face value of $13.3 million resulting in a gain of $3.7 million. During
that fiscal year, $8.5 million of principal payments were made on these notes.
In the first quarter of fiscal 1998 the Company sold leases with a book value
of approximately $14.4 million to an Intermediate Purchaser in return for cash
of $12.3 million and a note with a face value of $3.9 million.
The Company accounts for the sale and servicing of lease equipment in
accordance with SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." See Note 2, Notes to
Consolidated Financial Statements. In calculating the gains on sale to
Intermediate Purchasers noted above, the Company assumed that the cash flows on
the underlying leases sold were discounted at rates ranging from 7.78% to 9.0%
per annum. See "Risk Factors -- Equipment Leasing Considerations -- Sale of
Leases" and "-- Potential Replacement of Leases."
Partnership Management
The Company acts as the general partner and manager of five public limited
partnerships formed between 1986 and 1990 with total assets at December 31,
1997 of $36.1 million, including $18.5 million (book value) of equipment with
an original cost of $49.8 million. The partnerships primarily lease computers
and related peripheral equipment to investment grade, middle market, and
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.
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 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 $252,000 and
$300,000 during the quarters ended December 31, 1997 and 1996, respectively,
and $657,000 and $650,000 during fiscal years 1997 and 1996, respectively.
Energy Operations
General
The Company produces natural gas and, to a lesser extent, oil from
locations principally in Ohio, Pennsylvania and New York. At December 31, 1997,
the Company had (either directly or through partnerships and joint ventures
managed by it) interests in 1,264 wells (including royalty or overriding
interests with respect to 182 wells), of which the Company operates 908 wells,
590 miles of natural gas pipelines and 91,000 acres (net) of mineral rights.
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
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<PAGE>
Appalachian crude oil. From time to time, the Company receives indications of
interest in the acquisition of its energy operations, and continually pursues
the increase of its reserve base through selective acquisition of producing
properties and other assets. Within the past nine months, the Company has
acquired the assets of two small energy companies. For further information, see
Note 11 to Consolidated Financial Statements.
Well Operations
The following table sets forth information as of December 31, 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 ......... 161 62
Gas Wells ......... 921 612
--- ---
1,082 674
===== ===
- ------------
(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 182 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 Period(1) Oil(bbls) Gas(mcf) per bbl per mcf mcf(2)
- ------------------ ----------- ------------ ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
1998 11,450 386,171 $ 17.52 $ 2.63 $ 1.14
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) All periods are fiscal years, except that 1998 is for the first fiscal
quarter ended December 31, 1997.
(2) Oil production is converted to mcf equivalents at the rate of six mcf per
barrel.
<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 the first quarter of fiscal year 1998
and fiscal years 1997, 1996, and 1995, regardless of when drilling was
initiated.
<TABLE>
<CAPTION>
Exploratory Wells Development Wells
--------------------------------- -----------------------------------------
Productive Dry Productive Dry
Fiscal --------------- --------------- ------------------- -------------------
Period(1) Gross Net Gross Net Gross Net Gross Net
- --------------- ------- ----- ------- ----- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 -- -- -- -- -- -- -- --
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>
- ------------
(1) All periods are fiscal years, except that 1998 is for the first fiscal
quarter ended December 31, 1997.
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.
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<PAGE>
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. See Note 13 to the Consolidated
Financial Statements.
The following table sets forth information with respect to the Company's
developed and undeveloped oil and gas acreage as of December 31, 1997. The
information in this table includes the Company's equity interest in acreage
owned by 64 partnerships and joint ventures.
Developed Acreage Undeveloped Acreage
--------------------- ---------------------
Gross Net Gross Net
--------- --------- --------- ---------
Arkansas ............. 2,560 403 -- --
Kansas ............... 160 20 -- --
Louisiana ............ 1,819 206 -- --
Mississippi .......... 40 3 -- --
New York ............. 30,065 21,025 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 -- --
------ ------ ------ ------
106,902 60,832 32,987 30,907
======= ====== ====== ======
The terms of the oil and gas leases held by the Company for its own
account and by its managed partnerships 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 in fiscal
1997 and $16,400 for the quarter ended December 31, 1997 were paid 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 December 31, 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 20%, 46% and 25%
interests), and for its own account, various gas gathering pipeline systems
totaling approximately 590 miles in length. The pipeline systems are located in
Ohio, New York and Pennsylvania.
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.
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<PAGE>
Major Customers
The Company's natural gas and oil is sold to various purchasers. In fiscal
1998 through January 31, 1998, gas and oil sales to three purchasers accounted
for 36%, 14% and 11%, respectively, of the Company's total production revenues.
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 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. During fiscal 1997, the Company augmented its internally
generated funds by a $5.0 million credit facility (increased to $20.0 million
in the first quarter of fiscal 1998) for its residential mortgage lending
operations and a $5.0 million credit facility for oil and gas asset
acquisitions 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 $115.0 million of the Senior Notes due 2004 to a
small group of institutional investors, resulting in $109.7 million of net
proceeds to the Company. In addition, during fiscal 1997 the Company entered
into an initial $20.0 million credit facility for its equipment leasing
operations. In the first quarter of fiscal 1998, the Company entered into a
$50.0 million forward sales commitment and an additional $15.0 million
warehouse credit facility for its residential mortgage lending operations. See
Note 6 to Consolidated Financial Statements. See also "Business -- Recent
Developments."
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<PAGE>
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 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.
Lease Financing Credit Facility. FLI maintains a $20.0 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
loans bear interest at adjusted LIBOR rate plus 175 basis points, while term
loans bear interest at adjusted LIBOR plus 225 basis points; (ii) the loans are
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 $2.0 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
$5.0 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 stockholders' equity of $40.0 million. The
facility expires on May 29, 1998 but may be renewed annually by the lenders.
The Company is currently negotiating with the lenders for a renewal of the
facility and believes that the facility will be renewed on similar terms. There
can, however, be no assurance that the facility will be renewed or that the
renewal terms will be similar to the existing terms. See "Risk Factors --
General -- Ability to Generate Funding for Growth." 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. As of December 31, 1997 there were
no borrowings under this line.
Forward Sale Commitment. In December 1997, the Company, through FLI,
entered into an arrangement (the "Commitment") with SW Leasing Portfolio IV,
Inc. ("SW"), as the Intermediate Purchaser, and First Union National Bank
("First Union") and Variable Funding Capital Corporation ("VFCC"), as the
ultimate investors, pursuant to which (1) SW will purchase equipment leases
(meeting specific eligibility requirements) and the underlying equipment from
FLI for a purchase price equal to the sum of the present value of scheduled
payments (the "Discounted Contract Balance") as of the date of sale and the
residual value of the equipment (the "Residual Value"), (2) First Union and
VFCC will purchase, for a price equal to the product of .88
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<PAGE>
multiplied by the aggregate Discounted Contract Balances on the date of sale,
up to $50.0 million of equipment leases from SW from time to time on or before
December 17, 1998 and (3) FLI acts as servicing agent for the equipment leases
purchased by First Union and VFCC from SW. SW uses the cash received by it
from First Union and VFCC to pay a portion of the purchase price of the leases
and pays the balance with a promissory note in an original principal amount
equal to the aggregate Residual Value and the non-advanced portion of the
aggregate Discounted Contract Balances. Lease collections in excess of fees
associated with the leases and a return to First Union and VFCC (equivalent to
LIBOR, the First Union prime rate, or the federal funds rate plus 1%,
depending on the circumstances) may be reinvested in eligible leases (unless
the capital limit (the product of the aggregate Discounted Contract Balances
multiplied by .88) has been exceeded, in which event the amount of such excess
must be paid to First Union and VFCC) or paid to SW in order to pay down the
promissory note to FLI. Under the Commitment, FLI is obligated to provide a
substitute equipment lease to First Union and VFCC in the event a lease is
terminated or prepaid in full prior to its scheduled expiration date and the
prepayment amount is less than the Discounted Contract Balance on the date of
prepayment plus any outstanding servicer advances. In addition, SW and FLI are
obligated to accept re-transfer of, or provide a substitute lease for, any
lease which does not meet the eligibility requirements. The Commitment is
subject to early termination under certain circumstances, including (i) if the
ratio of the average Discounted Contract Balances (for each of the previous
three months) for all leases delinquent in payments by 60 days or more to the
aggregate Discounted Contract Balances (for each of the previous three months)
for all non-delinquent leases exceeds 3% or (ii) if the ratio of the aggregate
Discounted Contract Balances (for each of the preceding six months) for all
defaulted leases (i.e., leases which the Company has determined are not
collectible or subject to repossession or which are delinquent in payments by
120 days or more) to the aggregate Discounted Contract Balances (for each of
the preceding six months) for all non-defaulted leases exceeds 2.75%. In the
first quarter of fiscal 1998, the Company sold to SW equipment leases with an
aggregate book value of $14.4 million in return for cash of $12.3 million and
a promissory note for $3.9 million.
Residential Mortgage Loan Credit Facilities. FMF maintains a $20.0 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 $1.0
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. As of December 31, 1997, the Company had no borrowings under
this facility.
FMF has also established a $15.0 million warehouse credit facility with
Morgan Stanley Mortgage Capital, Inc., bearing interest at LIBOR or, if
unavailable, the 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 $1.0 million), and a
ratio of total indebtedness to tangible net worth of 10.0 to 1.0. The facility
expires on October 16, 1998. There were $4.4 million of borrowings outstanding
under this facility at December 31, 1997.
Oil and Gas Credit Facility. In October 1997, the Company obtained a $5.0
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
$31.0 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. As of
December 31, 1997, there were no borrowings outstanding under this line.
Employees
As of December 31, 1997, the Company employed 226 persons, including 8 in
general corporate, 112 in real estate finance, 80 in equipment leasing and 26
in energy.
61
<PAGE>
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 small ticket 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 on June 30, 1998 and
June 30, 2007. The Company leases space for management operations with respect
to its five public leasing partnerships in Philadelphia for $87,000 per year.
That lease expires on January 24, 2003. 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, as month to month tenancies, for which aggregate rent for
fiscal 1997 was $24,000. The Company also maintains a brokerage office in
California for which the rent is $25,000 per year through July 1999. Aggregate
rent for all of the Company's offices was $238,600 for fiscal 1997.
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.
Recent Developments
Commercial Loan Purchase. On March 13, 1998, the Company and RAIT jointly
purchased the Loan, in the original principal amount of $80.0 million (plus
accrued fees, restructuring charges, interest and costs), for a purchase price
of $85.5 million. The Company contributed $75.5 million of the purchase price
and RAIT contributed $10.0 million. The rights and interests of the Company and
RAIT with respect to the Loan are set forth in a Participation Agreement, the
terms of which are described below. The Company holds legal title to the Loan.
There can be no assurance that the Company will realize the full outstanding
amount of the Loan. See "Business -- Commercial Mortgage Loan Acquisition and
Resolution: Accounting for Discounted Loans."
The Loan is secured by a first priority mortgage lien on an office
building known as the "Evening Star Building" located at 1101 Pennsylvania
Avenue, N.W., Washington, D.C. (the "Property"). The Property has been valued
by an independent valuation firm at not less than $90.0 million. Such valuation
is only an estimate of value and should not be relied upon as a precise measure
of market value. As part of the purchase of its interest in the Loan, the
Company received an assignment of all of the seller's rights against the
borrower under the Loan (the "Bankruptcy Rights") pursuant to the bankruptcy
plan of reorganization (the "Plan") governing the Property. The Bankruptcy
Rights include the right to appoint a liquidating agent to manage, control and
take possession of the Property; the right to receive all net cash flow from
the Property, the right to approve leases and all other material contracts
related to the Property; and the right, but not the obligation, to cause title
to the Property to be transferred on or before June 30, 1998.
In addition to paying its portion of the purchase price of the Loan, the
Company incurred closing costs of approximately $3.0 million, comprised of
certain expenses that the Plan required the holder of the Loan to pay.
Approximately $1.5 million of these closing costs was paid into an escrow
account. In the event title is transferred, the $1.5 million will be delivered
to the borrower pursuant to the Plan.
Financing for the Company's purchase of its interest in the Loan was
provided by a loan, in the principal amount of $55.0 million, from Merrill
Lynch Capital Mortgage Inc. (the "Senior Financing"). The Senior Financing
bears interest at LIBOR plus 2.5% until September 9, 1998, and at LIBOR plus
4.0% from September 10, 1998 until July 1, 1999, when the Senior Financing
matures. The Company is currently seeking 10-year, fixed rate financing to
replace the Senior Financing, and anticipates (although there can be no
assurance) closing on such financing before September 10, 1998. The Company
incurred fees and expenses of approximately $950,000 in connection with the
Senior Financing.
RAIT's participation interest in the Loan entitles it to receive (i)
distributions from the monthly net cash flow of the Property, after monthly
debt service payments on the Senior Financing, in an amount sufficient to pay
interest on its $10.0 million investment at 10% per annum and (ii) the first
$10.0 million of principal payments from the Loan after the prior repayment of
the Senior Financing. In addition, RAIT received advance interest of
approximately $510,000.
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<PAGE>
Commercial Mortgage Loan Credit Facility. In March 1998, the Company,
through certain operating subsidiaries, established an $18.0 million revolving
credit facility with Jefferson Bank for its commercial mortgage loan
operations. The credit facility bears interest at the prime rate reported in
the Wall Street Journal plus .75%, and is secured by the borrowers' interests
in certain commercial loans and by a pledge of their outstanding capital stock.
In addition, repayment of the credit facility is guaranteed by the Company. The
facility expires on April 1, 1999. No borrowings have been made under this
facility to date. See "Management -- Certain Relationships and Related Party
Transactions."
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<PAGE>
MANAGEMENT
Directors and Executive Officers
The following sets forth certain information regarding the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position with the Company
- ------------------------------------- ----- -----------------------------------------------------
<S> <C> <C>
Edward E. Cohen(1) .................. 59 Chairman of the Board of Directors, President, Chief
Executive Officer and Director
Daniel G. Cohen(2) .................. 28 Executive Vice President and Director
Scott F. Schaeffer(1) ............... 35 Executive Vice President and Director
Steven J. Kessler ................... 55 Senior Vice President and Chief Financial Officer
Freddie M. Kotek .................... 42 Senior Vice President
Michael L. Staines(2) ............... 48 Senior Vice President, Secretary and Director
Nancy J. McGurk ..................... 42 Vice President-Finance and Treasurer
Carlos C. Campbell(1) ............... 59 Director
Andrew M. Lubin(3) .................. 50 Director
Alan D. Schreiber, M.D.(3) .......... 55 Director
John S. White(2) .................... 56 Director
</TABLE>
- ------------
(1) Term as director expires in 1999.
(2) Term as director expires in 2000.
(3) Term as director expires in 1998.
Edward E. Cohen has been Chairman of the Board of Directors of the Company
since 1990, its Chief Executive Officer and a director since 1988 and its
President since 1995. He is Chairman of the Board of Directors and a director
of BCMI, a real estate construction and management company. See "Management -
Certain Relationships and Related Party Transactions." Since 1981, Mr. Cohen
has been Chairman of the Executive Committee and a director of JeffBanks, Inc.
(a bank holding company with total assets of approximately $1.2 billion). From
1991 to 1996, Mr. Cohen was affiliated with Ledgewood Law Firm, P.C., most
recently in an of counsel capacity. See "Legal Matters." From 1969 through
1989, Mr. Cohen was Chairman of the Board or Chairman of the Executive
Committee of State National Bank of Maryland (now First Union Bank of Maryland)
and/or its holding company. Mr. Cohen is the father of Daniel G. Cohen.
Daniel G. Cohen has been an Executive Vice President and Director of the
Company since July, 1997. Prior thereto, since 1995, Mr. Cohen had been a
Senior Vice President of the Company. Mr. Cohen is also Chairman, Chief
Executive Officer and a director of FMF, the residential mortgage loan
origination subsidiary of the Company. Prior to joining the Company in November
1995, Mr. Cohen was principally engaged in graduate studies. Mr. Cohen is the
son of Edward E. Cohen.
Scott F. Schaeffer has been an Executive Vice President and Director of
the Company since July, 1997. Prior thereto, Mr. Schaeffer had been, since
1995, a Senior Vice President of the Company. Mr. Schaeffer has been President
of Resource Properties, Inc. (a wholly owned subsidiary of the Company) since
1992.
Steven J. Kessler has been Senior Vice President and Chief Financial
Officer of the Company since August 1997. Prior thereto, Mr. Kessler was Vice
President (Finance and Acquisitions) at Kravco Company (a national shopping
center developer and operator) from March 1994 until joining the Company. From
1983 through March of 1994, he was Chief Financial Officer and Chief Operating
Officer at Strouse Greenberg & Co., Inc., a regional full service real estate
company, and Vice President (Finance) and Chief Accounting Officer at its
successor, The Rubin Organization. Prior thereto, he was a partner at the
international accounting and consulting firm of Touche Ross & Co. (now Deloitte
& Touche LLP), Philadelphia, Pennsylvania.
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<PAGE>
Freddie M. Kotek has been a Senior Vice President of the Company since
1995 and an Executive Vice President of Resource Properties, Inc. (a wholly
owned subsidiary of the Company) since 1993. Prior thereto, he was a First Vice
President of Royal Alliance Associates (an investment banking and brokerage
firm) from 1991 to 1993, and a Senior Vice President and Chief Financial
Officer of Paine Webber Properties (a real estate investment firm) from 1990 to
1991.
Michael L. Staines has been Senior Vice President, Secretary and a
director of the Company since 1989 and President and a director of Resource
Energy since its organization in 1993.
Nancy J. McGurk has been Vice President-Finance of the Company since 1992
and Treasurer and Chief Accounting Officer of the Company since 1984.
Carlos C. Campbell has been a director of the Company since 1990. He is
President of C.C. Campbell and Company (a management consulting firm), Vice
Chairman of the Board of Directors of Computer Dynamics, Inc. (a computer
services corporation) and a director of Sensys, Inc. (a telecommunication/asset
management corporation).
Andrew M. Lubin has been a director of the Company since 1994. He has been
President of Delaware Financial Group, Inc. (a private investment firm) since
1984.
Alan D. Schreiber, M.D. has been a director of the Company since 1994. Dr.
Schreiber has been a Professor of Medicine and Assistant Dean for Research and
Research Training at the University of Pennsylvania School of Medicine since
1973 and Chairman of the Scientific Advisory Board of Inkine Pharmaceutical
Co., Inc. since 1997. From 1993 to 1997, Dr. Schreiber was Chief Scientific
Officer of CorBec Pharmaceuticals, Inc., a Company he founded. Dr. Schreiber's
wife is an employee of Company.
John S. White has been a director of the Company since 1993. He has been
Chairman of the Board and Chief Executive Officer of DCC Securities Corporation
(a securities brokerage firm) since 1990.
Other Significant Employees
The following sets forth certain information regarding other significant
employees of the Company:
Abraham Bernstein, age 64, is the Chairman, Chief Executive Officer and
President of the small ticket equipment leasing subsidiary of the Company. From
1982 to 1993, he was the President and Chief Executive Officer of Tokai
Financial Services, Inc., the equipment leasing subsidiary of Tokai Bank of
Japan. From 1993 to 1995, the contractual period during which Mr. Bernstein's
restrictive covenant with Tokai was in effect, Mr. Bernstein was a Managing
Director of the Rittenhouse Consulting Group (a financial consulting company).
Crit DeMent, age 44, is the Executive Vice President of FLI. Prior
thereto, from 1983 through 1996 he was Vice President-Marketing and Leasing
Associate-Senior Account Representative for Tokai Financial Services, Inc.
Joseph T. Ellis, Jr., age 36, is the Director of Vendor Services for FLI.
Prior thereto, from 1985 through February 1996, he held various marketing and
sales positions with Tokai Financial Services, Inc., most recently as the
Director of Program Management and Strategic Market Development.
Frank V. Pellegrini, age 50, has been the Chairman, Chief Executive
Officer and President of Tri-Star since 1993. Prior to that, he was Senior Vice
President of Home American Financial Services, Inc. (now known as Upland
Mortgage Corporation), a residential mortgage lender.
Kathy B. Schauer, age 46, has served since February 1997 as the President,
Chief Operating Officer and a director of FMF. Immediately prior to joining
FMF, Ms. Schauer served as Director of Business and Product Development at
Standard & Poors Rating Services (where she was involved in the development and
implementation of credit scoring and pricing models for the residential
mortgage market), and, prior thereto, served in executive capacities with Smith
Barney, Meridian Bancorp and J.P. Morgan. From 1985 to 1993, Ms. Schauer was a
Vice President (Mortgage Products Group) of CS First Boston.
65
<PAGE>
Bruce R. Schmidt, age 40, is Senior Vice President of FMF. From 1993 until
March 1997, Mr. Schmidt was Director of Marketing for Advanta Corp., a national
consumer home equity lender. Prior thereto, from 1988 to 1993, he was Vice
President, Marketing, for Nutri/System, Inc., a national weight loss program
company.
Jeffrey C. Simmons, age 39, has been Executive Vice President and a
director of Resource Energy since 1997. From 1994 to 1997 he was Vice
President-Exploration of the Company and from 1988 to 1994 he was Director of
Well Services of the Company.
Certain Relationships and Related Party Transactions
In the ordinary course of its business operations, the Company has ongoing
relationships with several related entities, primarily a property management
firm, a bank and RAIT. As particular opportunities have arisen, the Company has
purchased commercial mortgage loans from, or involving borrowers which are,
affiliated with officers of the Company. In three instances (excluding sales to
RAIT) the Company has sold senior or junior lien interests in commercial loans
to purchasers affiliated with officers of the Company. At December 31, 1997,
loans held with respect to related borrowers or acquired from related lenders
constitute 7% ($8.2 million), by book value, of the Company's commercial loan
portfolio, while the senior lien interests sold to related purchasers
constituted 4% ($4.1 million) of all senior lien interests with respect to the
Company's commercial loan portfolio. Transactions with affiliates must be
approved by the Company's Board of Directors, including a majority of the
disinterested directors. In addition, acquisitions of commercial mortgage loans
must be approved by the Investment Committee of the Board of Directors (which
consists of two disinterested directors). The Company believes that the terms
of its transactions with related parties are no less favorable than those
available from unrelated third parties. A more detailed description of these
relationships and transactions is set forth below.
Relationship with BCMI. The Company holds commercial mortgage loans of
borrowers whose underlying properties are managed by BCMI, a firm of which
Edward E. Cohen is Chairman of the Board of Directors and a minority
stockholder (approximately 8%). The Company has advanced funds to certain of
these borrowers for improvements on their properties, which have been performed
by BCMI. The President of BCMI (or an entity affiliated with him) has also
acted as the general partner or trustee of ten of the borrowers; an entity
affiliated with him is the general partner of the sole limited partner of an
eleventh borrower. BCMI has agreed to subordinate its management fees to
receipt by the Company of minimum required debt service payments under the
obligations held by the Company.
Relationship with Jefferson Bank. The Company maintains normal banking and
borrowing relationships with Jefferson Bank, a subsidiary of JeffBanks, Inc.
See also "Business -- Recent Developments -- Commercial Mortgage Loan Credit
Facility." The Company anticipates that it may effect other borrowings in the
future from Jefferson Bank. The Company, through FMF, subcontracts any
residential mortgage loan servicing duties to Jefferson Bank. See "Business --
Real Estate Finance -- Residential Mortgage Loans." Edward E. Cohen and his
spouse are officers and directors of JeffBanks, Inc. (and his spouse is
Chairman and Chief Executive Officer of Jefferson Bank and JeffBanks, Inc.),
and are principal stockholders thereof. Daniel G. Cohen is a director of
Jefferson Bank. Jefferson Bank is also a tenant at two properties which secure
loans held by the Company and, at one of such properties, subleases space to
RAIT.
Relationship with RAIT. The Company sponsored the formation and public
offering of common shares of beneficial interest of RAIT. See "Business -- Real
Estate Finance Sponsorship of Real Estate Investment Trust." RAIT raised $49.3
million (including the Company's investment) in the offering which was
completed in January 1998. The Company acquired 15% of RAIT's outstanding
shares for an investment of approximately $7.0 million. Edward E. Cohen's
spouse, Betsy Z. Cohen, is Chairman and Chief Executive Officer of RAIT. The
Company has the right to nominate one person for election to the Board of
Trustees until such time as its ownership of RAIT's outstanding common shares
is less than 5%. One of the current trustees, Jonathan Z. Cohen, is serving as
the Company's nominee. Jonathan Z. Cohen is the son of Edward E. Cohen
(Chairman, Chief Executive Officer and President of the Company), the brother
of Daniel G. Cohen (Executive Vice President and director of the Company and
Chairman and Chief Executive Officer of FMF), and is the Secretary and a
director of Resource Energy. The Company had advanced funds to RAIT for legal,
accounting
66
<PAGE>
and filing fees and expenses, salaries of RAIT's executive officers, rent and
other organizational expenses and for the expenses incurred by the Company in
sponsoring RAIT including an allocation of compensation of Company employees.
These advances were without interest and were repaid from the proceeds of RAIT
offering.
In connection with RAIT's offering, the Company, through its subsidiaries,
sold ten loans and senior lien interests in two additional loans to RAIT (the
"Initial Investments") at an aggregate purchase price of $20.2 million
(including $2.1 million attributable to senior lien interests acquired by the
Company in connection with the sales to RAIT). Two of the Initial Investments
were originated for RAIT; one was sold to RAIT at cost and RAIT purchased a
senior lien interest in the other at cost. The Company realized a gain on the
sale of the Initial Investments of $3.1 million. See also "Business -- Recent
Developments -- Commercial Loan Purchase." The Company anticipates that,
subject to certain limitations, it will sell additional investments to RAIT.
Relationships with Certain Borrowers. The Company has from time to time
purchased loans in which affiliates of the Company are affiliates of the
borrowers, as discussed in the following paragraphs. (Loan numbers are as set
forth in the table of loans in "Business -- Real Estate Finance -- Commercial
Mortgage Loan Acquisition and Resolution: Loan Status.")
In August 1997, the Company, through a subsidiary, acquired a loan (loan
35) 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 Mr.
Schaeffer, the Company's executive vice president and a director, is the
general partner and Edward E. Cohen, together with his spouse, are limited
partners. The Company leases its headquarters space at such property. The lease
provides for rents of $65,000 per year through May 2000. Ledgewood Law Firm,
P.C., a law firm which provides legal services to the Company, and BCMI are
also tenants at such property.
In June 1997, the Company acquired a loan (loan 29) with a face amount of
$7.0 million from a partnership in which Mr. Schaeffer and Edward E. Cohen,
together with his wife, are limited partners. Mr. Schaeffer was previously the
general partner of such partnership. The Company acquired such loan at a cost
of $3.0 million.
In December 1994, the Company acquired a loan (loan 13) with a face amount
of $3.0 million from California Federal Bank, FSB at a cost of $1.7 million.
The loan is secured by a property owned by a borrower whose general partner is
the President of BCMI. Edward E. Cohen, together with his wife, is a limited
partner in such partnership. The borrower refinanced the Company's loan in
September 1995, applying $2.0 million of the proceeds to the repayment of the
Company's loan. As a result, the Company obtained a gain on its investment of
$303,000, while maintaining a continuing interest in the loan of approximately
$1.0 million.
In August 1994, the Company acquired from third parties a loan (loan 8),
in the original principal amount of $ 3.4 million (and with a then-outstanding
balance of $4.4 million), for an investment of $1.6 million. The borrower is a
limited partnership of which Mr. Lubin, a director of the Company, is currently
the general partner. Mr. Lubin assumed such position after the Company's
acquisition of the loan. Previously, the general partner had been the President
of BCMI. The borrower subsequently refinanced the loan with another third party
and repaid the Company $934,000, leaving the Company with a net investment of
$419,000. This loan was sold to RAIT in January 1998.
Relationships with Certain Lienholders. The Company has sold two senior
lien interests and one junior lien interest in its commercial loans to entities
in which officers of the Company have minority interests as discussed in the
following paragraphs.
In December 1997, the Company purchased from third parties, for an
aggregate of $1.52 million, two loans (loan 43) in the aggregate original
principal amount of $2.0 million and with an aggregate outstanding balance at
the time of purchase of $1.96 million. The loans are secured by an apartment
building. The Company sold to a limited partnership in which Edward E. Cohen
and Scott F. Schaeffer beneficially own a 17.8% interest a senior lien interest
in one of the loans for $1.0 million, reducing the Company's net investment to
$518,000 and leaving the Company with a retained interest in outstanding loan
receivables of $1.0 million (at a book value of $803,000).
67
<PAGE>
From November 1996 to June 1997 the Company acquired from third parties
loans (loan 26) relating to one property in the aggregate original principal
amount of $5.8 million (and with aggregate outstanding balances at the
respective times of purchase of $7.6 million) for an investment of $2.5
million. The Company sold a senior lien interest in the loan for $2.2 million
reducing the Company's net investment to $235,000 and leaving the Company with
a retained interest in outstanding loan receivables of $5.9 million (at a book
value of $2.3 million). The purchaser was a limited partnership in which Edward
E. Cohen and Scott F. Schaeffer beneficially own an 18.3% limited partnership
interest.
In June 1996, for an investment of $2.4 million the Company acquired from
third parties a loan (loan 22), in the original principal amount of $3.3
million (and with a then-outstanding balance of $3.3 million). The Company sold
a junior lien interest in the loan for $875,000, leaving the Company with a net
investment of $1.5 million, to a limited partnership in which Messrs. Edward E.
Cohen and Scott F. Schaeffer beneficially own a 21.3% limited partnership
interest.
Relationship with Financing Institution. The Company has in the past
obtained material amounts of financing from Physicians Insurance Company of
Ohio ("PICO") by the sale to PICO, in May 1994, of an $8 million principal
amount 9.5% senior note and by the sale to PICO, in fiscal years 1995 and 1996,
of $12 million of senior lien interests in seven of the Company's portfolio
loans, together with warrants to purchase 983,150 shares of Common Stock. In
July 1997, the Company repaid the senior note in full and PICO exercised, and
subsequently sold, the common shares underlying the warrants to institutional
investors in private transactions pursuant to which the Company granted certain
registration rights. See "Shares Eligible for Future Sale." Following such
transactions, John R. Hart, an executive officer and director of PICO who had
become a director of the Company in connection with the PICO financings,
resigned from the Board of Directors of the Company.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of shares of
Common Stock owned, as of March 25, 1998, by (a) each person who, to the
knowledge of the Company, is the beneficial owner of 5% or more of the
outstanding shares of Common Stock, (b) each of the Company's present
directors, (c) each of the Company's executive officers, and (d) all of the
Company's present executive officers and directors as a group. This information
is reported in accordance with the beneficial ownership rules of the Securities
and Exchange Commission under which a person is deemed to be the beneficial
owner of a security if that person has or shares voting power or investment
power with respect to such security or has the right to acquire such ownership
within 60 days. Shares of Common Stock issuable pursuant to options or warrants
are deemed to be outstanding for purposes of computing the percentage of the
person or group holding such options or warrants but are not deemed to be
outstanding for purposes of computing the percentage of any other person. See
note (2) below, for information concerning outstanding options.
<TABLE>
<CAPTION>
Common Stock
------------------------------------------------------
Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class
- --------------------------------------------- ---------------------------------------- -----------
<S> <C> <C>
Directors(1)
Carlos C. Campbell .......................... 160 *
Daniel G. Cohen ............................. 6,368(2) *
Edward E. Cohen ............................. 426,657(2)(3)(4)(6) 8.89%
Andrew M. Lubin ............................. 280 *
Scott F. Schaeffer .......................... 100,371(2)(3)(4)(5) 2.11%
Alan D. Schreiber, M.D. ..................... 5,370 *
Michael L. Staines .......................... 44,390(2)(3)(4) *
John S. White ............................... 0 *
Executive Officers(1)
Steven J. Kessler ........................... 0 *
Freddie M. Kotek ............................ 26,401(2)(3)(4) *
Nancy J. McGurk ............................. 24,914(2)(3)(4) *
All present officers and directors as a group
(11 persons) ............................... 580,178(2)(3)(4)(5)(6) 11.98%
Other owners of 5% or More of Outstanding
Shares(7)
Friedman, Billings, Ramsey Investment
Management, Inc. ........................... 314,005 6.61%
Keefe Managers, Inc. ........................ 450,000 9.47%
Kramer Spellman L.P. ........................ 536,800 11.30%
Wellington Management Company, LLP. ......... 548,500 11.55%
</TABLE>
- ------------
* Less than 1%
(1) The address for each director and executive officer is 1521 Locust Street,
Fourth Floor, Philadelphia, Pennsylvania 19102.
(2) Includes shares allocated under the Resource America, Inc. Employee Savings
Plan (the Company's 401(k) plan) in the amounts of: Mr. E. Cohen -- 3,199
shares; Mr. Kotek -- 1,568 shares; Ms. McGurk -- 4,718 shares; Mr.
Schaeffer -- 876 shares; Mr. Staines -- 558 shares; and Mr. D. Cohen --
750 shares, as to which each has voting power.
(3) Includes shares issuable on exercise of options granted in 1993 and 1995
under the 1989 Key Employee Stock Option Plan in the amounts of: Mr. E.
Cohen -- 47,753 shares; Mr. Schaeffer -- 5,618 shares; Mr. Staines --
22,472 shares; Mr. Kotek -- 9,832 shares; and Ms. McGurk -- 5,618 shares.
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<PAGE>
(4) Includes shares allocated under the 1989 Employee Stock Ownership Plan in
the amounts of: Mr. E. Cohen -- 20,089 shares; Mr. Staines -- 13,624
shares; Mr. Schaeffer -- 7,047 shares; Mr. Kotek -- 5,170 shares; and Ms.
McGurk -- 8,960 shares, as to which each has voting power.
(5) Includes 60,815 shares held by a limited partnership, of which Mr.
Schaeffer is the general partner and in which he has a 10% interest.
(6) Includes Mr. Cohen's proportionate interest (aggregating 54,733 shares) in
shares held by a limited partnership in which Mr. Cohen is the limited
partner.
(7) Includes shares held by entities managed by the named persons. The address
for Friedman, Billings, Ramsey Investment Management, Inc., an affiliate
of Friedman, Billings, Ramsey & Co., Inc., is 1001 19th Street North, 18th
Floor, Arlington, Virginia 22209; the address for Keefe Managers, Inc. is
375 Park Avenue, Suite 3108, New York, New York 10152; the address for
Kramer Spellman L.P. is 2050 Center Avenue, Suite 300, Fort Lee, New
Jersey 07024; and the address for Wellington Management Company, LLP. is
75 State Street, Boston, Massachusetts 02109.
70
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
The Company is authorized to issue 50,000,000 shares of capital stock,
consisting of 49,000,000 shares of Common Stock, par value $.01 per share, and
1,000,000 shares of preferred stock, par value $1.00 per share ("Preferred
Stock"). As of March 25, 1998, there were 4,750,717 shares of Common Stock
outstanding and no shares of Preferred Stock outstanding. The Company intends,
during the 1998 fiscal year, to issue a stock dividend of two shares of Common
Stock for each outstanding Share of Common Stock (the "Stock Dividend"). There
can be no assurance that the Stock Dividend will be declared by the Board of
Directors.
Common Stock
Holders of Common Stock are entitled to dividends when, as and if declared
by the Company's Board of Directors and in such amounts as the Board of
Directors may deem advisable. See "Price Range of Common Stock and Dividend
Policy." In the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, holders of Common Stock are
entitled, after payment or provision for payment of the debts or other
liabilities of the Company, and subject to the prior rights of holders of any
Preferred Stock which may then be outstanding, to share ratably in the
remaining assets of the Company. Shares of Common Stock do not possess
preemptive rights. Holders of Common Stock are entitled to one vote for each
share held of record on each matter submitted to a vote at a meeting of
stockholders. For a description of certain provisions of the Company's
Certificate of Incorporation and Delaware law which affect the voting rights of
stockholders of the Company and provide for a classified board of directors,
see "Description of Capital Stock -- Anti-Takeover Provisions of Delaware Law"
and " -- Classes of Directors."
Preferred Stock
Preferred Stock may be issued from time to time in one or more series and
the Board of Directors, without further approval of the stockholders, is
authorized to fix the dividend rights and terms, conversion rights, voting
rights, redemption rights and terms, liquidation preferences, sinking funds and
any other rights, preferences, privileges and restrictions applicable to each
such series of Preferred Stock. The issuance of Preferred Stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, adversely affect the voting
power of the holders of Common Stock and, under certain circumstances, make it
more difficult for a third party to gain control of the Company. The Company
has no current plan to issue any Preferred Stock.
Anti-Takeover Provisions of Delaware Law
The Company is a Delaware corporation and consequently is subject to
certain anti-takeover provisions of the Delaware General Corporation Law (the
"Delaware Law"). Under the business combination provision contained in Section
203 of the Delaware Law ("Section 203"), a Delaware corporation may not engage
in any business combination with any interested stockholder for a period of
three years following the date such stockholder became an interested
stockholder, unless (i) prior to such date the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, or (ii) upon
completion of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding, for purposes of determining the number of shares
outstanding, (a) shares owned by persons who are directors and also officers
and (b) employee stock plans, in certain instances), or (iii) on or subsequent
to such date the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders by at least
two-thirds of the outstanding voting stock that is not owned by the interested
stockholder. Section 203 defines an interested stockholder of a corporation to
be any person (other than the corporation and any direct or indirect
majority-owned subsidiary of the corporation) who (i) owns, directly or
indirectly, 15% or more of the outstanding voting stock of the corporation or
(ii) is an affiliate or associate of the corporation and was the owner of 15%
or more of the outstanding voting stock of the corporation at any
71
<PAGE>
time within the three-year period immediately prior to the date on which it is
sought to be determined whether such person (and the affiliates and the
associates of such person) is an interested stockholder. Section 203 defines
business combinations to include certain mergers, consolidations, asset sales,
transfers and other transactions resulting in a financial benefit to the
interested stockholder.
The restrictions imposed by Section 203 will not apply to a corporation if
(i) the corporation's original certificate of incorporation contains a
provision expressly electing not to be governed by Section 203 or (ii) the
corporation, by the action of stockholders holding a majority of outstanding
voting stock, adopts an amendment to its certificate of incorporation or
by-laws expressly electing not to be governed by Section 203 (such amendment
will not be effective until 12 months after adoption and shall not apply to any
business combination between such corporation and any person who became an
interested stockholder of such corporation on or prior to such adoption). The
Company has not opted out of Section 203. Section 203 could under certain
circumstances make it more difficult for a third party to gain control of the
Company, deny stockholders the receipt of a premium on their Common Stock and
have a depressive effect on the market price of the Common Stock.
Classes of Directors
The Board of Directors is currently classified into three classes. One
class of directors is elected each year and the members of such class hold
office for a three-year term or until each of their successors is duly elected
and qualified. The classification of directors will have the effect of making
it more difficult for a third party to change the composition of the Board of
Directors without the support of the incumbent Board. At least two annual
stockholder meetings, instead of one, will be required to effect a change in
the control of the Board, unless stockholders remove directors for cause.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
72
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company's Certificate of Incorporation authorizes the issuance of
50,000,000 shares of capital stock, consisting of 49,000,000 shares of Common
Stock and 1,000,000 shares of Preferred Stock. Upon completion of this
offering, there will be outstanding 6,250,717 shares of Common Stock (assuming
no exercise of the Underwriters' over-allotment option).
The 1,500,000 shares of Common Stock to be sold in this offering
(1,725,000 shares if the Underwriters' over-allotment option is exercised in
full) will be available to the public without restriction or further
registration under the Securities Act, except for shares purchased by
affiliates of the Company (in general, any person who has a control
relationship with the Company), which shares will be subject to the resale
limitations of Rule 144 promulgated under the Securities Act ("Rule 144"). The
Company, its executive officers and directors, and Friedman, Billings, Ramsey
Investment Management, Inc. have agreed not to offer, sell or contract to sell
or otherwise dispose of Common Stock without the prior consent of Friedman,
Billings, Ramsey & Co., Inc. ("FBR") or, in the case of sale by Friedman,
Billings, Ramsey Investment Management, Inc., the Company, for a period of 120
days following the conclusion of the Offering. See "Underwriting".
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year is entitled to sell, within any three month period, a number of shares
which does not exceed the greater of 1% of the then outstanding shares of the
Common Stock or the average weekly trading volume of the Common Stock during
the four calendar weeks preceding the date on which notice of the sale is filed
with the Commission. Sales under Rule 144 may also be subject to certain manner
of sale provisions, notice requirements and the availability of current public
information about the Company. Any person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the three months preceding a sale, and who has beneficially owned
shares within the definition of "restricted securities" under Rule 144 for at
least two years, is entitled to sell such shares under Rule 144(k) without
regard to the volume limitation, manner of sale provisions, public information
requirements or notice requirements.
Pursuant to a contractual obligation, the Company has filed a registration
statement on Form S-3 with the Commission in order to register the resale of an
aggregate of 983,150 shares of Common Stock by certain selling stockholders.
All of the shares included in the registration statement may be sold to the
public without restriction, at the discretion of the selling stockholders. The
Company has agreed to maintain the effectiveness of the registration statement
until March 20, 2000.
There are currently outstanding options held by officers and directors to
purchase 262,431 shares of Common Stock.
The Company has reserved an additional 207,795 shares of Common Stock for
future option grants.
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or availability of such shares for future sale will have
on the market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of Common Stock (including shares issued upon the exercise
of outstanding options), or the perception that such sales could occur, could
adversely affect prevailing market prices for the Common Stock.
73
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through Friedman, Billings,
Ramsey & Co., Inc., BancAmerica Robertson Stephens and Janney Montgomery Scott
Inc., as their representatives (the "Representatives"), have severally agreed
to purchase from the Company the following respective number of shares of
Common Stock at the offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:
Underwriter Number of Shares
----------- ----------------
Friedman, Billings, Ramsey & Co., Inc ......
BancAmerica Robertson Stephens .............
Janney Montgomery Scott Inc. ...............
Total .................................... 1,500,000
=========
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares offered hereby (other than those
covered by the over-allotment option described below), if any of such shares
are purchased.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the shares of Common Stock to the public at the offering price
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $________ per share. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $_______
per share to certain other dealers. After the initial offering, the offering
price and other selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 225,000
additional shares of Common Stock at the initial offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 1,500,000, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 1,500,000 shares are being offered.
The Company, its executive officers and directors, and entities affiliated
with FBR have agreed not to offer, sell or contract to sell or otherwise
dispose of any shares of Common Stock without the prior consent of FBR or, in
the case of sale by affiliates of Friedman, Billings, Ramsey Investment
Management, Inc., the Company, for a period of 120 days following the
conclusion of the Offering.
The Company has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act.
In connection with this offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock. Such transactions may include stabilization transactions
pursuant to which the Representatives may bid for or purchase Common Stock for
the purpose of stabilizing its market price. The Underwriters also may create a
short position for the account of the Underwriters by selling more Common Stock
in connection with this offering than they are committed to purchase from the
Company and in such case the Representatives may purchase Common Stock in the
open market following completion of this offering to cover all or a portion of
such short position. The Underwriters may also cover all or a portion of such
short position by exercising the Underwriters' over-allotment option referred
to above. In addition, the Representatives, on behalf of the Underwriters, may
impose "penalty bids" under contractual arrangements with the Underwriters
whereby they may reclaim from an Underwriter (or dealer participating in this
offering), for the account of other Underwriters, the selling concession with
respect to Common Stock that is distributed in this offering but subsequently
purchased for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the
74
<PAGE>
maintenance of the price of the Common Stock at a level above that which might
otherwise prevail in the open market. The imposition of a penalty bid might
also affect the price of the Common Stock to the extent that it could
discourage resales of the security. Neither the Company nor any of the
Underwriters makes any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Underwriters will engage in such
transactions or that such transactions, once commenced, will not be
discontinued without notice.
The Underwriters and dealers may engage in passive market making
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for or purchase shares of Common Stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive
market maker generally may not exceed 30% of its average daily trading volume
in the Common Stock during a specified two-month prior period, or 200 shares,
whichever is greater. A passive market maker must identify passive market
making bids as such on the Nasdaq electronic inter-dealer reporting system.
Passive market making may stabilize or maintain the market price of the Common
Stock above independent market levels. Underwriters and dealers are not
required to engage in passive market making and may end passive market making
activities at any time.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales of the Common Stock offered hereby to any accounts over
which they exercise discretionary authority.
As of March 25, 1998, Friedman, Billings, Ramsey Investment Management,
Inc., an affiliate of FBR, was the beneficial owner of 314,005 shares of the
Common Stock, representing 6.6% of all Common Stock issued and outstanding.
LEGAL MATTERS
The legality of the Common Stock offered hereby is being passed upon by
Ledgewood Law Firm, P.C., Philadelphia, Pennsylvania. Certain legal matters
will be passed upon for the Underwriters by Silver, Freedman & Taff, L.L.P.,
Washington, D.C.
INDEPENDENT AUDITORS
The consolidated financial statements and schedules of the Company and its
subsidiaries as of September 30, 1997 and 1996 and for each of the three years
in the period ended September 30, 1997 included in this Prospectus have been so
included in reliance upon the reports of Grant Thornton LLP, independent
certified public accountants, upon the authority of such firm as experts in
accounting and auditing.
75
<PAGE>
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.
Grant Thornton LLP
Cleveland, Ohio
November 6, 1997, except for
Earnings Per Share disclosures
in Footnote 2 to the financial
statements for which the date is
February 19, 1998
F-1
<PAGE>
RESOURCE AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30,
December 31, ---------------------------
1997 1997 1996
-------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ...................................... $ 28,086 $ 69,279 $ 4,154
Accounts and notes receivable .................................. 5,309 2,414 1,479
Prepaid expenses and other current assets ...................... 948 576 473
--------- --------- ---------
Total current assets ......................................... 34,343 72,269 6,106
Investments in Real Estate Loans (less allowance for possible
losses of $468, $400, and $0) .................................. 128,884 88,816 21,798
Notes Secured by Equipment Leases ............................... 9,008 4,761 --
Net Investment in Direct Financing Leases (less allowance for
possible losses of $492, $248 and $7) .......................... 4,206 3,391 729
Property and Equipment
Oil and gas properties and equipment (successful efforts) ...... 25,967 24,939 24,035
Gas gathering and transmission facilities ...................... 1,609 1,606 1,536
Other .......................................................... 3,652 2,874 1,666
--------- --------- ---------
31,228 29,419 27,237
Less accumulated depreciation, depletion, and amortization ..... (16,073) (15,793) (14,857)
--------- --------- ---------
15,155 13,626 12,380
Other Assets (less accumulated amortization of $1,307, $1,014
and $885) ...................................................... 16,323 12,256 2,946
--------- --------- ---------
$ 207,919 $ 195,119 $ 43,959
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt ........................... $ 5,100 $ 708 $ 105
Accounts payable ............................................... 1,754 1,339 585
Accrued interest ............................................... 6,180 2,734 253
Accrued liabilities ............................................ 2,884 1,967 344
Estimated income taxes ......................................... 772 4,093 377
--------- --------- ---------
Total current liabilities .................................... 16,690 10,841 1,664
Long-Term Debt, less current maturities ......................... 118,116 118,786 8,966
Other Long-Term Liabilities ..................................... 1,830 663 --
Deferred Income Taxes ........................................... 826 -- 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 ...... 55 54 20
Additional paid-in capital ..................................... 59,343 56,787 21,761
Retained earnings .............................................. 25,486 22,005 12,458
Less treasury stock, at cost ................................... (14,074) (13,664) (2,699)
Less loan receivable from Employee Stock Ownership Plan
("ESOP") ..................................................... (353) (353) (417)
--------- --------- ---------
Total stockholders' equity ................................... 70,457 64,829 31,123
--------- --------- ---------
$ 207,919 $ 195,119 $ 43,959
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended
December 31, Years Ended September 30,
--------------------------- -----------------------------------------
1997 1996 1997 1996 1995
------------ ------------ ---------- ------------ -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES
Real Estate Finance ........................ $ 9,392 $ 3,219 $19,144 $ 7,171 $6,114
Equipment Leasing .......................... 3,172 1,202 7,162 4,466 --
Energy: Production ......................... 1,232 950 3,936 3,421 3,452
Services ............................... 583 389 1,672 1,736 1,879
Interest on Corporate Investments .......... 698 84 930 197 149
-------- -------- ------- -------- ------
15,077 5,844 32,844 16,991 11,594
COSTS AND EXPENSES
Real Estate Finance ........................ 1,523 163 1,069 852 801
Equipment Leasing .......................... 1,325 883 3,822 2,339 --
Energy: Exploration and Production ......... 574 412 1,823 1,582 1,733
Services ............................... 309 224 909 869 1,026
General and Administrative ................. 927 592 2,851 1,756 2,265
Depreciation, Depletion and
Amortization .............................. 508 379 1,614 1,368 1,335
Interest ................................... 3,870 409 5,273 872 1,091
Provision for Possible Losses .............. 318 10 653 7 --
Other -- Net ............................... -- -- (27) -- (2)
-------- -------- ------- -------- ------
9,354 3,072 17,987 9,645 8,249
-------- -------- ------- -------- ------
Income from Operations ................. 5,723 2,772 14,857 7,346 3,345
-------- -------- ------- -------- ------
OTHER INCOME (EXPENSE)
Gain (Loss) on Sale of Property ............ 3 88 74 7 (1)
-------- -------- ------- -------- ------
Income Before Income Taxes ................. 5,726 2,860 14,931 7,353 3,344
Provision for Income Taxes ................. 1,775 575 3,980 2,206 630
-------- -------- ------- -------- ------
Net Income ................................. $ 3,951 $ 2,285 $10,951 $ 5,147 $2,714
======== ======== ======= ======== =======
Net Income Per Common Share -- Basic $ .83 $ .91 $ 3.15 $ 2.72 $ 1.43
-------- -------- ------- -------- -------
Weighted Average Common Shares
Outstanding ............................... 4,733 2,507 3,478 1,890 1,904
======== ======== ======= ======== ========
Net Income Per Common Share --
Diluted ................................... $ .81 $ .66 $ 2.51 $ 1.88 $ 1.23
-------- -------- ------- -------- --------
Weighted Average Common Shares ............. 4,906 3,476 4,358 2,757 2,235
======== ======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<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>
Common Stock Additional
---------------------- Paid-In Retained
Shares Amount Capital Earnings
------------ -------- ------------ -----------
<S> <C> <C> <C> <C>
Balance, October 1, 1994 ................ 817,912 $ 8 $ 19,136 $ 7,979
Treasury shares acquired ................
Cash dividends ($.09 per share).......... (161)
Warrants issued ......................... 78
Repayment of ESOP loan ..................
Net income .............................. 2,714
--------- --- -------- --------
Balance, September 30, 1995 ............. 817,912 $ 8 $ 19,214 $ 10,532
Treasury shares issued .................. (24)
6% stock dividends ...................... 82,688 1 2,453 (2,453)
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
Treasury shares acquired ................
Cash dividends ($.38 per share).......... (757)
Warrants issued ......................... 41
Repayment of ESOP loan ..................
Net income .............................. 5,147
--------- --- -------- --------
Balance, September 30, 1996 ............. 2,047,209 $20 $ 21,761 $ 12,458
Treasury shares issued .................. (34)
Issuance of common stock ................ 3,363,436 34 35,060
Treasury shares acquired ................
Cash dividends ($.40 per share).......... (1,404)
Repayment of ESOP loan ..................
Net income .............................. 10,951
--------- --- -------- --------
Balance, September 30, 1997 ............. 5,410,645 $54 $ 56,787 $ 22,005
(Unaudited)
Treasury shares issued .................. 34
Issuance of common stock ................ 49,956 1 2,522
Treasury shares acquired ................
Cash dividends ($.10 per share).......... (470)
Net Income .............................. 3,951
--------- --- -------- --------
Balance, December 31, 1997 .............. 5,460,601 $55 $ 59,343 $ 25,486
========= === ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Treasury Stock ESOP Total
---------------------------- Loan Stockholders'
Shares Amount Receivable Equity
------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Balance, October 1, 1994 ................ (131,402) $ (2,437) $ (546) $ 24,140
Treasury shares acquired ................ (21,298) (284) (284)
Cash dividends ($.09 per share).......... (161)
Warrants issued ......................... 78
Repayment of ESOP loan .................. 64 64
Net income .............................. 2,714
-------- --------- ------ ----------
Balance, September 30, 1995 ............. (152,700) $ (2,721) $ (482) $ 26,551
Treasury shares issued .................. 1,889 39 15
6% stock dividends ...................... 1
5 for 2 stock split effected in the
form of a 150% stock
dividend................................
Issuance of common stock ................ 77
Treasury shares acquired ................ (1,637) (17) (17)
Cash dividends ($.38 per share).......... (757)
Warrants issued ......................... 41
Repayment of ESOP loan .................. 65 65
Net income .............................. 5,147
-------- --------- ------ ----------
Balance, September 30, 1996 ............. (152,448) $ (2,699) $ (417) $ 31,123
Treasury shares issued .................. 23,023 483 449
Issuance of common stock ................ 35,094
Treasury shares acquired ................ (579,623) (11,448) (11,448)
Cash dividends ($.40 per share).......... (1,404)
Repayment of ESOP loan .................. 64 64
Net income .............................. 10,951
-------- --------- ------ ----------
Balance, September 30, 1997 ............. (709,048) $ (13,664) $ (353) $ 64,829
(Unaudited)
Treasury shares issued .................. 1,366 30 64
Issuance of common stock ................ 2,523
Treasury shares acquired ................ (10,000) (440) (440)
Cash dividends ($.10 per share).......... (470)
Net Income .............................. 3,951
-------- --------- ------ ----------
Balance, December 31, 1997 .............. (717,682) $ (14,074) $ (353) $ 70,457
======== ========= ====== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Quarter Ended
December 31, Years Ended September 30,
-------------------------- -----------------------------------------
1997 1996 1997 1996 1995
------------ ------------ ----------- -------------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................. $ 3,951 $ 2,285 $ 10,951 $ 5,147 $ 2,714
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .......................... 508 379 1,614 1,368 1,335
Amortization of discount on senior note and
deferred finance costs ............................... 208 24 657 75 74
Provision for possible losses .......................... 318 10 653 7 --
Deferred income taxes .................................. 826 382 (2,206) 1,059 473
Accretion of discount .................................. (1,666) (793) (4,124) (954) (1,176)
Gain on asset dispositions ............................. (4,740) (785) (11,375) (3,650) (1,727)
Property impairments and abandonments .................. -- -- 38 71 56
Change in operating assets and liabilities:
Net of effects from purchase of subsidiaries ...........
(Increase) decrease in accounts receivable ............. (3,086) 316 (935) (175) 81
(Increase) decrease in prepaid expenses and other
current assets ....................................... (372) 236 (103) (310) 88
Increase (decrease) in accounts payable ................ 367 377 754 (137) (291)
Increase (decrease) in accrued income taxes ............ -- -- 3,716 377 (100)
Increase in other liabilities .......................... 1,043 409 4,451 81 51
--------- --------- --------- -------- ---------
Net cash provided by (used in) operating activities ..... (2,643) 2,840 4,091 2,959 1,578
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, less cash acquired ............. (997) -- (1,226) -- (877)
Cost of equipment acquired for lease .................... (15,972) (4,411) (34,567) (731) --
Capital expenditures .................................... (1,811) (130) (1,791) (1,097) (817)
Principal payments on notes receivable .................. -- -- 8,514 -- --
Proceeds from sale or refinancings of assets ............ 56,305 2,323 37,713 18,577 10,348
Increase in notes receivable ............................ (355) -- -- -- --
Increase in other assets. ............................... (974) (1,536) (3,319) (152) (59)
Investments in real estate loans ........................ (79,232) (28,881) (69,857) (17,650) (14,708)
Increase in other long-term liabilities ................. 1,168 -- -- -- --
Payments received (revenue recognized) in excess of
revenue recognized (cash received) on leases ........... 437 76 1,394 (7) --
--------- --------- --------- ----------- ---------
Net cash used in investing activities ................... (41,431) (32,559) (63,139) (1,060) (6,113)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings. ................................... -- 15,570 129,320 536 2,000
Short-term borrowings ................................... 6,670 (110) -- -- 2,500
Dividends paid .......................................... (470) (190) (1,404) (756) (161)
(Increase) decrease in other assets ..................... (15) -- (5,376) (31) 4,864
Principal payments on long-term borrowing ............... (704) (2,043) (22,148) (27) (4,524)
Principal payments on short-term borrowing .............. (2,245) -- -- -- --
Purchase of treasury stock .............................. (440) -- -- (17) (284)
Proceeds from issuance of stock ......................... 85 19,659 23,781 93 --
--------- --------- --------- ---------- ---------
Net cash provided by (used in) financing activities ..... 2,881 32,886 124,173 (202) 4,395
--------- --------- --------- ---------- ---------
Increase (decrease) in cash and cash equivalents ........ (41,193) 3,167 65,125 1,697 (140)
Cash and cash equivalents at beginning of period ........ 69,279 4,154 4,154 2,457 2,597
--------- --------- --------- ---------- ---------
Cash and cash equivalents at end of period .............. $ 28,086 $ 7,321 $ 69,279 $ 4,154 $ 2,457
========= ========= ========= ========== =========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of December 31, 1997 and for the three months ended
December 31, 1997 and 1996 is unaudited)
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.
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.
F-6
<PAGE>
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of December 31, 1997 and for the three months ended
December 31, 1997 and 1996 is unaudited)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
In the opinion of management, all adjustments (consisting of normally
recurring accruals) necessary for a fair statement of the results of operations
for the interim period included herein have been made.
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.
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 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.
F-7
<PAGE>
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of December 31, 1997 and for the three months ended
December 31, 1997 and 1996 is unaudited)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
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 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 December 31, 1997 and September 30, 1997 and 1996 were:
<TABLE>
<CAPTION>
September 30,
December 31, ---------------------
1997 1997 1996
-------------- --------- ---------
(Unaudited)
(in thousands)
<S> <C> <C> <C>
Contracts acquired ............................. $ 1,712 $ 1,636 $ 549
Goodwill ....................................... 4,061 709 518
Deferred financing costs ....................... 5,092 5,240 512
Investment in real estate partnerships ......... 1,827 1,827 22
Restricted cash ................................ 854 1,052 935
Other .......................................... 2,777 1,792 410
------- ------- ------
$16,323 $12,256 $2,946
======= ======= ======
</TABLE>
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.
F-8
<PAGE>
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of December 31, 1997 and for the three months ended
December 31, 1997 and 1996 is unaudited)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
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 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 December 31, 1997 and September 30, 1997, the Company had $27.9
million and $67.7 million, respectively, in deposits at Jefferson Bank, of
which $26.9 million and $66.6 million, respectively, were 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 December 31, 1997 and September 30, 1997, the Company had
guaranteed approximately $4.9 million and $5.5 million, respectively, 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).
F-9
<PAGE>
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of December 31, 1997 and for the three months ended
December 31, 1997 and 1996 is unaudited)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
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.
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>
Quarter Ended Years Ended
December 31, September 30,
----------------------- --------------------------------
1997 1996 1997 1996 1995
----------- --------- ----------- ------ ---------
(Unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash paid during the periods for:
Interest .................................................... $ 173 $ 575 $ 2,727 $797 $1,104
Income taxes ................................................ 4,180 450 2,094 770 255
Non-cash activities include the following:
Notes received in exchange for -
Sales of leases ........................................... $ 3,891 $3,260 $13,275 $ -- $ --
Sale of mortgages ......................................... 8,093 -- -- -- --
Debt assumed upon acquisition of real estate loan ........... -- -- 2,381 -- --
Receipt of note in satisfaction of real estate sale ......... 1,000 -- 3,500 -- --
Note payable issued in acquisition .......................... 925 -- --
Stock issued in acquisition ................................. 2,500 -- 315 -- --
Details of acquisition:
Fair value of assets acquired ............................... $ 3,545 $ -- $ 2,466 $ -- $1,189
Debt issued ................................................. -- -- (925) -- --
Stock issued ................................................ (2,500) -- (315) -- --
Liabilities assumed .......................................... (48) -- -- -- (312)
-------- ------ ------- ---- ------
Net cash paid ................................................ $ 997 $ -- $ 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.
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 quarters ended
December 31, 1997 and 1996 was $880,000 and $673,000, respectively, and 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.
F-10
<PAGE>
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of December 31, 1997 and for the three months ended
December 31, 1997 and 1996 is unaudited)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
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
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128 "Earnings per Share." This statement is effective for financial
statements issued for periods ending after December 15, 1997; earnings per
share data included herein have been restated to reflect the new standard.
Under this statement the previous calculation of primary earnings per share
("EPS") is changed to exclude the dilutive effect of stock options and is
referred to as Basic EPS.
Earnings per share-basic are determined by dividing net income by the
weighted average number of common shares outstanding during the period.
Earnings per share - diluted are computed by dividing net income by the
weighted average number of shares and dilutive potential common shares
outstanding during the period. Dilutive potential common shares 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).
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for the quarter ended December 31, 1996 to conform with the
presentation for the quarter ended December 31, 1997. In addition, certain
reclassifications have been made to the consolidated financial statements for
the fiscal years ended September 30, 1996 and 1995 to conform with the
presentation for the fiscal year ended September 30, 1997.
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 stockholder (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 stockholder thereof; his spouse is Chairman and Chief Executive
Officer
F-11
<PAGE>
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of December 31, 1997 and for the three months ended
December 31, 1997 and 1996 is unaudited)
NOTE 3--TRANSACTIONS WITH RELATED PARTIES -- (Continued)
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 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 Walnut Associates (the "Building Partnership"), which owns the office
building and Mutual Associates Ltd. (the "Garage Partnership"), which owns the
parking garage. Pursuant to a 1993 loan restructuring agreement, 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. As part of the loan purchase transaction, a partnership
interest in the Building Partnership was assigned by an affiliate of the loan
Seller to a limited partnership of which subsidiaries of the Company are the
general and limited partners. Similarly, a 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.
In December 1997 the Company sold a senior lien interest to a limited
partnership for $1,000,000 in the form of an interest bearing note, realizing a
gain of $267,000. The note was repaid in February 1998. Officers and directors
of the Company hold an aggregate beneficial interest in the partnership of
17.8%.
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.
F-12
<PAGE>
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of December 31, 1997 and for the three months ended
December 31, 1997 and 1996 is unaudited)
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 Company records as income
the accretion of a portion of the discount to the underlying collateral value.
For the quarters ended December 31, 1997 and 1996, the accretion of discount
amounted to $1.7 millon and $793,000, respectively. 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 utilized to reduce the cumulative accretion of discount included in
the carrying value of the Company's investment in real estate loans.
At December 31, 1997 and at September 30, 1997 and 1996, the Company held
real estate loans having aggregate face values of $330.1 million, $233.7
million and $100.5 million, respectively, which were being carried at aggregate
costs of $128.9 million, $88.8 million and $21.8 million, including cumulative
accretion. Amounts receivable, net of senior lien interests, were $236.9
million, $178.1 million, $61.8 million at December 31, 1997 and 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:
<TABLE>
<CAPTION>
Quarter Ended Year Ended
September 30,
December 31, -----------------------
1997 1997 1996
--------------- ---------- ----------
(Unaudited)
(in thousands)
<S> <C> <C> <C>
Balance, beginning of period ............ $ 88,816 $ 21,798 $ 17,991
New loans ............................... 63,648 71,720 15,127
Additions to existing loans ............. 1,998 1,860 2,564
Reserve for possible losses ............. (52) (400) --
Accretion of discount ................... 1,666 4,124 954
Collections of principal ................ (35,250) (517) (9,377)
Cost of loans sold ...................... (3,784) (9,769) (5,461)
Investment in residential loans ......... 11,842 -- --
--------- -------- --------
Balance, end of period .................. $ 128,884 $ 88,816 $ 21,798
========= ======== ========
</TABLE>
A summary of activity in the Company's allowance for possible losses
related to real estate loans for the quarter ended December 31, 1997 and for
the year ended September 30, 1997 is as follows:
<TABLE>
<CAPTION>
Quarter Ended Year Ended
December 31, September 30,
1997 1997
--------------- --------------
(Unaudited)
(in thousands)
<S> <C> <C>
Balance, beginning of period .......... $400 $ --
Provision for possible losses ......... 68 400
Writeoffs ............................. -- --
---- ----
Balance, end of period ................ $468 $400
==== ====
</TABLE>
F-13
<PAGE>
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of December 31, 1997 and for the three months ended
December 31, 1997 and 1996 is unaudited)
NOTE 5 -- INVESTMENT IN DIRECT FINANCING LEASES
Components of the net investment in direct financing leases as of December
31, 1997 and 1996 and September 30, 1997 and 1996, as well as future minimum
lease payments receivable, including residual values, are as follows:
<TABLE>
<CAPTION>
September 30,
December 31, -----------------------
1997 1997 1996
-------------- --------- -----------
(Unaudited)
(in thousands)
<S> <C> <C> <C>
Total future minimum lease payments receivable ......... $ 5,383 $4,186 $ 847
Initial direct costs, net of amortization .............. 95 75 67
Unguaranteed residual .................................. 425 310 75
Unearned lease income .................................. (1,205) (932) (253)
Allowance for possible losses .......................... (492) (248) (7)
-------- ------ --------
Net investment in direct financing leases .............. $ 4,206 $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 quarter ended December 31, 1997 and
the years ended September 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Quarter Ended Year Ended
September 30,
December 31, ----------------
1997 1997 1996
--------------- -------- -----
(Unaudited)
(in thousands)
<S> <C> <C> <C>
Balance, beginning of period .......... $248 $ 7 $--
Provision for possible losses ......... 250 253 7
Write offs ............................ (6) (12) --
------ ----- ---
Balance, end of period ................ $492 $ 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.
F-14
<PAGE>
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of December 31, 1997 and for the three months ended
December, 31, 1997 and 1996 is unaudited)
NOTE 6 -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30,
December 31, ------------------------
1997 1997 1996
-------------- ----------- ----------
(Unaudited)
(in thousands)
<S> <C> <C> <C>
12% senior unsecured notes payable, interest due semi-
annually, principal due August 2004 .......................... $115,000 $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) ...................................................... 353 353 418
Secured warehouse credit facility at 0.9% above LIBOR
(6.62% at December 31, 1997) ................................. 4,425 -- --
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 .................................... 2,513 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) 925 925 --
-------- -------- -------
123,216 19,494 9,071
Less current maturities ....................................... 5,100 708 105
-------- -------- -------
$118,786 $118,786 $ 8,966
======== ======== =======
</TABLE>
As of September 30, 1997 the long-term debt maturing over the next five
fiscal years is as follows: 1998 -- $708,000; 1999 -- $727,000; 2000 --
$285,000; 2001 -- $309,000; and 2002 -- $712,000.
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.
F-15
<PAGE>
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of December 31, 1997 and for the three months ended
December 31, 1997 and 1996 is unaudited)
NOTE 6 -- LONG-TERM DEBT -- (Continued)
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 lenders' 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.
There were no borrowings under this facility during the quarter ended December
31, 1997.
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. In December 1997, the limit was
raised to $20 million. Interest on each draw under this facility is payable at
FMF's 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 the quarter ended December 31, 1997, borrowings under this facility
were $6.7 million of which $2.3 million was repaid prior to December 31, 1997.
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 this institutions 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.
F-16
<PAGE>
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of December 31, 1997 and for the three months ended
December 31, 1997 and 1996 is unaudited)
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.
Year Ended September 30,
---------------------------------
1997 1996 1995
----------- --------- -------
(in thousands)
Provision for Federal income tax:
Current ....................... $ 6,186 $1,147 $157
Deferred ...................... (2,206) 1,059 473
-------- ------ ----
$ 3,980 $2,206 $630
======== ====== ====
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
--------- --------- ---------
(in thousands)
<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>
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 possible losses ........................ 220 --
-------- --------
2,574 106
Deferred tax liabilities:
Depreciation ......................................... (2,290) (2,160)
ESOP benefits ........................................ (120) (140)
Other items, net ..................................... (164) (12)
-------- --------
(2,574) (2,312)
-------- --------
Net deferred tax liability ........................... $ -- $ (2,206)
======== ========
</TABLE>
F-17
<PAGE>
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of December 31, 1997 and for the three months ended
December 31, 1997 and 1996 is unaudited)
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 from the offering of
$19.99 million, before offering expenses of $515,000.
In September 1996, the Company's stockholders 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 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 was $12,600 for both quarters
ended December 31, 1997 and 1996. 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 stockholders' 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 $67,900 and $17,100 for the quarters ended December 31, 1997 and 1996,
respectively. 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.
F-18
<PAGE>
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of December 31, 1997 and for the three months ended
December 31, 1997 and 1996 is unaudited)
NOTE 9 -- EMPLOYEE BENEFIT PLANS -- (Continued)
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.
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 the first quarter of fiscal 1998 and in fiscal 1997, options
for 42,205 and 25,000 shares, respectively, 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 ExercisePrice 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>
Exercisable 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>
$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>
F-19
<PAGE>
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of December 31, 1997 and for the three months ended
December 31, 1997 and 1996 is unaudited)
NOTE 9 -- EMPLOYEE BENEFIT PLANS -- (Continued)
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
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> <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>
F-20
<PAGE>
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of December 31, 1997 and for the three months ended
December 31, 1997 and 1996 is unaudited)
NOTE 9 -- EMPLOYEE BENEFIT PLANS -- (Continued)
<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.
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 $ .12
Exercised ................................... -- --
Cancelled ................................... -- --
---------
Outstanding -- end of year ..................... 2,945,000 $ .12
Exercisable, at end of year .................... -- --
=========
Available for grant ............................ 55,000
=========
Weighted average fair value per share of options
granted during the year ...................... $ .06
===========
</TABLE>
F-21
<PAGE>
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of December 31, 1997 and for the three months ended
December 31, 1997 and 1996 is unaudited)
NOTE 9 -- EMPLOYEE BENEFIT PLANS -- (Continued)
<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>
$.118 - $.125 2,945,000 9.63 $ .12 -- --
========= ========
</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 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 ($3.02 per share -- basic; $2.40 per share
- -- diluted) 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. Future
minimum rental commitments for the next five fiscal years were as follows:
December 31, 1997 September 30, 1997
------------------- -------------------
(Unaudited)
1998 ................. $506,801 $445,300
1999 ................. 523,825 437,000
2000 ................. 523,825 437,000
2001 ................. 501,925 415,100
2002 ................. 486,625 399,800
F-22
<PAGE>
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of December 31, 1997 and for the three months ended
December 31, 1997 and 1996 is unaudited)
NOTE 10--COMMITMENTS -- (Continued)
As of December 31, 1997 and September 30, 1997, the Company had
outstanding commitments to fund the purchase of equipment which it intends to
lease, with an aggregate cost of $4.1 million and $11.4 millon, respectively.
The Company believes, based on its past experience, that approximately $1.8
million and $4.0 millon, respectively, will be funded.
As of December 31, 1997 and September 30, 1997, subsidiaries of the
Company had four and two warehouse lines of credit which allow them to borrow
up to $60 million and $25 millon, respectively. As of December 31, 1997, $4.4
million was outstanding with respect to these lines of credit. No borrowings
were outstanding at September 30, 1997.
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 commencement of payments under the SERP). During the first quarter of
fiscal 1998, the Company accrued $87,000 with respect to these commitments.
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).
In December 1997, the Company acquired equity interests in approximately
135 wells (representing approximately 88 net wells, together with 60 miles of
natural gas pipelines and 17,000 gross acres of mineral rights, for $900,000 in
cash. This acquisition was recorded as a purchase.
These acquisitions were immaterial to the results of operations of the
Company, and therefore pro forma information is excluded.
F-23
<PAGE>
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of December 31, 1997 and for the three months ended
December 31, 1997 and 1996 is unaudited)
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 quarters ended December 31, 1997 and
1996 and for years ended September 30, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
As of and for the
------------------------------------------------------------------
Quarter Ended Year Ended
December 31, September 30,
-------------------------- -------------------------------------
1997 1996 1997 1996 1995
------------ ----------- ----------- ---------- ----------
(Unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenue:
Real estate ............................ $ 9,392 $ 3,219 $ 19,144 $ 7,171 $ 6,114
Leasing ................................ 3,172 1,202 7,162 4,466 --
Energy ................................. 1,815 1,339 5,608 5,157 5,332
Corporate .............................. 698 84 930 197 148
-------- ------- -------- -------- --------
$ 15,077 $ 5,844 $ 32,844 $ 16,991 $ 11,594
======== ======= ======== ======== ========
Depreciation, Depletion and Amortization:
Real estate ............................ $ 158 $ 10 $ 36 $ 38 $ 37
Leasing ................................ 138 81 398 204 --
Energy ................................. 239 288 1,202 1,061 1,254
Corporate .............................. (27) -- (22) 65 44
-------- ------- -------- -------- --------
$ 508 $ 379 $ 1,614 $ 1,368 $ 1,335
======== ======= ======== ======== ========
Operating Profit (Loss):
Real estate ............................ $ 7,467 $ 2,865 $ 16,546 $ 6,281 $ 5,276
Leasing ................................ 1,430 214 2,457 1,916 --
Energy ................................. 518 372 1,699 1,646 1,317
Corporate .............................. (3,692) (679) (5,845) (2,497) (3,248)
-------- ------- -------- -------- --------
$ 5,723 $ 2,772 $ 14,857 $ 7,346 $ 3,345
======== ======= ======== ======== ========
Identifiable Assets:
Real estate ............................ $140,280 $51,518 $ 92,287 $ 22,087 $ 18,225
Leasing ................................ 16,251 7,192 10,647 3,019 991
Energy ................................. 16,242 12,895 15,016 12,675 13,790
Corporate .............................. 35,146 8,806 77,169 6,178 4,544
-------- ------- -------- -------- --------
$207,919 $80,411 $195,119 $ 43,959 $ 37,550
======== ======= ======== ======== ========
Capital Expenditures:
Real Estate ............................ $ 561 $ 5 $ 59 $ 17 $ 172
Leasing ................................ 174 54 585 531 --
Energy ................................. 1,239 71 1,513 501 637
Corporate .............................. -- -- 507 48 8
-------- ------- -------- -------- --------
$ 1,974 $ 130 $ 2,664 $ 1,097 $ 817
======== ======= ======== ======== ========
</TABLE>
F-24
<PAGE>
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of December 31, 1997 and for the three months ended
December, 31, 1997 and 1996 is unaudited)
NOTE 12--INDUSTRY SEGMENT INFORMATION AND MAJOR CUSTOMERS -- (Continued)
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>
Quarter Ended
December 31, Year Ended September 30,
-------------------- ---------------------------------------
1997 1996 1997 1996 1995
--------- -------- ----------- ----------- -----------
(Unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues ................................ $1,232 $ 950 $ 3,936 $ 3,421 $ 3,452
Production costs ........................ (519) (366) (1,636) (1,421) (1,502)
Exploration expenses .................... (56) (46) (187) (161) (230)
Depreciation, depletion, and amortization (185) (198) (712) (781) (922)
Income taxes ............................ (146) (134) (197) (96) --
------ ------ -------- -------- --------
Results of operations for producing
activities ............................. $ 326 $ 206 $ 1,204 $ 962 $ 798
====== ====== ======== ======== ========
</TABLE>
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, $22,000, and $30,000
at September 30, 1997, 1996, and 1995, respectively and $29,000 at December 31,
1997), are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
-------------- ------------------------------------------
1997 1997 1996 1995
-------------- ------------ ------------ ------------
(Unaudited)
(in thousands)
<S> <C> <C> <C> <C>
Proved properties ........................ $ 24,142 $ 23,254 $ 22,549 $ 22,416
Unproved properties ...................... 974 846 482 650
Pipelines, equipment and other interests . 2,460 2,445 2,540 2,488
--------- --------- --------- ---------
27,576 26,545 25,571 25,554
Accumulated depreciation, depletion and
amortization ............................ (15,198) (15,145) (14,306) (13,590)
--------- --------- --------- ---------
Net capitalized costs ................. $ 12,378 $ 11,400 $ 11,265 $ 11,964
========= ========= ========= =========
</TABLE>
F-25
<PAGE>
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of December 31, 1997 and for the three months ended
December 31, 1997 and 1996 is unaudited)
NOTE 13--SUPPLEMENTAL OIL AND GAS INFORMATION -- (Continued)
Costs Incurred in Oil and Gas Producing Activities
The costs incurred by the Company in its oil and gas activities during the
quarters ended December 31, 1997 and 1996, and during the fiscal years 1997,
1996 and 1995 are as follows:
Quarter Ended Year Ended
December 31, September 30,
--------------- ------------------------
1997 1996 1997 1996 1995
------ ------ ------ ------ ------
(Unaudited)
(in thousands)
Property acquisition costs:
Unproved properties ......... $ 5 $ 1 $321 $ 2 $ 5
Proved properties ........... 990 38 782 157 388
Exploration costs ............ 185 44 238 317 317
Development costs ............ 73 7 144 176 211
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 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.
F-26
<PAGE>
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of December 31, 1997 and for the three months ended
December 31, 1997 and 1996 is unaudited)
NOTE 13--SUPPLEMENTAL OIL AND GAS INFORMATION -- (Continued)
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.
Gas Oil
(mcf) (bbls)
--------------- ------------
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
========== =======
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>
F-27
<PAGE>
RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(information as of December 31, 1997 and for the three months ended
December 31, 1997 and 1996 is unaudited)
NOTE 13--SUPPLEMENTAL OIL AND GAS INFORMATION -- (Continued)
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--EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS'
REPORT
The Company is the sponsor of Resource Asset Investment Trust ("RAIT"), a
recently formed real estate investment trust which commenced operations in
January 1998. RAIT 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 chairman of RAIT 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 RAIT's board of trustees.
In January 1998, the Company sold 10 loans and senior lien interests in
two other loans. The aggregate price paid by RAIT for the loans and the senior
lien interests was $20.1 million (including $2.0 million attributable to senior
lien interests acquired by the Company and sold to RAIT, at cost, in connection
with such purchase. The Company realized a gain on such sale of $3.0 million.
The Company anticipates selling further loans to RAIT.
F-28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No person is authorized to give any information or to make any
representation not contained in this Prospectus and any information or
representation not contained herein must not be relied upon as having been
authorized by the Company or any Underwriter. This Prospectus does not
constitute an offer of any securities other than the securities to which it
relates or an offer to any person in any jurisdiction where such an offer would
be unlawful. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company since the date hereof.
-----------------------------------
TABLE OF CONTENTS
-----------------------------------
Page
------
Available Information ........................ 2
Additional Information ....................... 2
Incorporation of Certain Documents by
Reference ................................. 3
Prospectus Summary ........................... 4
Risk Factors ................................. 11
Price Range of Common Stock and
Dividend Policy ........................... 23
Capitalization ............................... 24
Selected Consolidated Financial Data ......... 25
Use of Proceeds .............................. 27
Management's Discussion and Analysis
of Financial Condition and Results of
Operations ................................ 27
Business ..................................... 39
Management ................................... 64
Security Ownership of Certain Beneficial
Owners and Management ..................... 69
Description of Capital Stock ................. 71
Shares Eligible for Future Sale .............. 73
Underwriting ................................. 74
Legal Matters ................................ 75
Independent Auditors ......................... 75
Consolidated Financial Statements ............ F-1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,500,000 Shares
[GRAPHIC OMITTED]
RESOURCE AMERICA, INC.
Common Stock
----------
PROSPECTUS
----------
FRIEDMAN, BILLINGS, RAMSEY
& CO., INC.
BANCAMERICA ROBERTSON
STEPHENS
JANNEY MONTGOMERY
SCOTT INC.
____________, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
Registration and Filing Fees:
Securities and Exchange Commission ......... $ 23,981
NASD ....................................... 17,500
--------
Total Registration and Filing Fees ......... $ 41,481
Printing and Engraving* ....................... $ 70,000
Legal* ........................................ 400,000
Blue Sky* ..................................... 10,000
Accounting* ................................... 80,000
Transfer Agent ................................ --
Total Other Expenses* ......................... $198,519
--------
Total Expenses ................................ $800,000
========
- ------------
* Estimate
Item 15. Indemnification of Directors and Officers
As permitted by Section 102(b)(7) of the Delaware General Corporation Law,
the Company's Certificate of Incorporation provides that directors of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, relating to prohibited
dividends or distributions or the repurchase or redemption of stock, or (iv)
for any transaction from which the director derives an improper personal
benefit. In addition, the Company's By-laws provide for indemnification of the
Company's officers and directors to the fullest extent permitted under Delaware
law. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
The Company maintains directors' and officers' liability insurance against
any actual or alleged error, misstatement, misleading statement, act, omission,
neglect or breach of duty by any director or officer, excluding certain matters
including fraudulent, dishonest or criminal acts or self-dealing.
II-1
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
a. Exhibits.
<TABLE>
<CAPTION>
<S> <C>
1. Form of Underwriting Agreement.
2. Agreement and Plan of Merger among Tri-Star Financial Services, Inc. Frank
Pellegrini, Resource Tri-Star Acquisition Corp. and the Registrant(1)
3.1 Restated Certificate of Incorporation of the Registrant.(2)
3.2 Bylaws of the Registrant, as amended.(2)
4. Form of certificate for Common Stock.(2)
4.2 Indenture with respect to 12% senior notes due 2004 (including form of note).(3)
5. Opinion of Ledgewood Law Firm, P.C., as to the legality of the securities being
registered (including consent).
10.1 Receivables Purchase Agreement (lease sales)(4)
10.2 Purchase and Sale Agreement (lease sales)(4)
12. Statement regarding computation of ratios.(1)
23.1 Consent of E. E. Templeton & Associates, Inc.(4)
23.2 Consent of Grant Thornton LLP
23.3 Consent of Ledgewood Law Firm, P.C. (included in Exhibit 5)
24. Power of Attorney (included as part of signature pages to this registration
statement).
</TABLE>
- ------------
(1) Filed previously as an Exhibit to the Company's Annual Report on Form 10-K
for the year ended September 30, 1997.
(2) 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.
(3) 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.
(4) Filed previously as an Exhibit to this Registration Statement as filed with
the Commission on or about March 5, 1998.
Item 17. Undertakings.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions of registrant's Certificate of
Incorporation, Bylaws or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the
II-2
<PAGE>
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant undertakes that:
1. For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
2. For the purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Philadelphia, Commonwealth of Pennsylvania, on April
21, 1998.
RESOURCE AMERICA, INC.
By: /s/ Edward E. Cohen
------------------------------------
Edward E. Cohen, Chairman of the
Board of Directors, Chief Executive
Officer and President
II-4
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below in so signing also makes,
constitutes and appoints Edward E. Cohen, Steven J. Kessler, Michael L.
Staines, and each of them acting alone, his true and lawful attorney-in-fact,
with full power of substitution, for him in any and all capacities to execute
and cause to be filed with the Securities and Exchange Commission any and all
amendments and post-effective amendments to this registration statement with
exhibits thereto and other documents in connection therewith, and hereby
ratifies and confirms all that said attorney-in-fact or said attorney-in-fact's
substitute or substitutes may do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
EDWARD E. COHEN, Chairman of Date: April 21, 1998
the Board of Directors,
Chief Executive Officer,
President and Director
(Chief Executive Officer)
CARLOS C. CAMPBELL, Director Date: April 21, 1998
DANIEL G. COHEN, Executive Vice Date: April 21, 1998
President and Director
ANDREW M. LUBIN, Director Date: April 21, 1998
SCOTT F. SCHAEFFER, Executive Vice Date: April 21, 1998
President and Director
ALAN D. SCHREIBER, M.D., Date: April 21, 1998
Director
MICHAEL L. STAINES, Senior Date: April 21, 1998
Vice President, Secretary
and Director
JOHN S. WHITE, Director Date: April 21, 1998
STEVEN J. KESSLER, Senior Vice President Date: April 21, 1998
- -- Finance and Chief Financial Officer
NANCY J. MCGURK, Vice Date: April 21, 1998
President -- Finance
(Chief Accounting Officer)
By: /s/ Steven J. Kessler
---------------------------------
STEVEN J. KESSLER,
as attorney-in-fact for each such
person pursuant to power of
attorney heretofore filed as part
</TABLE>
II-5
<PAGE>
1,500,000 SHARES
RESOURCE AMERICA, INC.
COMMON STOCK, $.01 PAR VALUE
UNDERWRITING AGREEMENT
________, 1998
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
BANCAMERICA ROBERTSON STEPHENS
JANNEY MONTGOMERY SCOTT INC.
As Representatives of the Several Underwriters
c/o Friedman, Billings, Ramsey & Co., Inc.
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
Dear Sirs:
Resource America, Inc., a Delaware corporation (the "Company")
confirms its agreement with the several underwriters named in Schedule A
annexed hereto (the "Underwriters", which term shall also include any
underwriter substituted as hereinafter in Section 9 provided), for whom you
are acting as representatives (in such capacities, the "Representatives"),
whereby the Company proposes to issue and sell 1,500,000 shares of its
authorized but unissued Common Stock, $.01 par value per share (the "Common
Stock"). Said 1,500,000 shares are herein called the "Firm Common Shares." In
addition, the Company proposes to grant to the Underwriters an option to
purchase up to 225,000 additional shares of Common Stock (the "Optional Common
Shares"), as provided in Section 1 hereof. The Firm Common Shares and, to the
extent such option is exercised, the Optional Common Shares are hereinafter
collectively referred to as the "Common Shares."
You have advised the Company that the Underwriters propose to make a
public offering of their respective portions of the Common Shares on the
effective date of the registration statement hereinafter referred to, or as
soon thereafter as in your judgment is advisable (the "Offering").
The Company hereby confirms its agreement with respect to the
purchase of the Common Shares by you and the Underwriters, as the case may be,
as follows:
<PAGE>
SECTION 1. Purchase, Sale and Delivery of Common Shares. On the basis
of the representations, warranties and agreements herein contained, but
subject to the terms and conditions herein set forth, (i) the Company agrees
to issue and sell to you and the Underwriters, as the case may be, all of the
Firm Common Shares, and (ii) you and the Underwriters agree, severally and not
jointly, to purchase from the Company such Firm Common Shares. The purchase
price per share to be paid by the Underwriters to the Company shall be $____
per share.
Delivery of the Firm Common Shares to be purchased by you or the
Underwriters and payment therefor shall be made at the offices of Friedman,
Billings, Ramsey & Co., Inc., Potomac Tower, 18th Floor, 1001 Nineteenth
Street North, Arlington, Virginia (or such other place as may be agreed upon
by the Company and the Representatives) on the third (or, if the purchase set
forth in the above paragraph is determined after 4:30 p.m., Washington, D.C.
time, the fourth) business day following the first date that any of the Common
Shares are released by you for sale to the public (the "First Closing Date");
provided, however, that if the Prospectus is at any time prior to the First
Closing Date recirculated to the public, the First Closing Date shall occur
upon the later of the third full business day following the first date that
any of the Common Shares are released by you for sale to the public or the
date that is 48 hours after the date that the Prospectus has been so
recirculated.
Delivery of certificates for the Firm Common Shares shall be made by
or on behalf of the Company to you, for your account or for the respective
accounts of the Underwriters, as the case may be, against payment by you for
your account or for the accounts of the several Underwriters, as the case may
be, of the purchase price therefor by wire transfer or certified or official
bank checks payable in next day funds to the order of the Company. The
certificates for the Firm Common Shares shall be registered in such names and
denominations as you shall have requested at least two full business days
prior to the First Closing Date, and shall be made available for checking and
packaging on the business day preceding the First Closing Date at a location
in Arlington, Virginia, as may be designated by you. Time shall be of the
essence, and delivery at the time and place specified in this Agreement is a
further condition to your obligation or the obligations of the Underwriters,
as the case may be.
In addition, on the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein
set forth, the Company hereby grants an option to you or to the several
Underwriters, as the case may be, to purchase, severally and not jointly, up
to an aggregate of 225,000 Optional Common Shares at the purchase price per
share to be paid for the Firm Common Shares, for use solely in covering any
over-allotments made by you for your account or the account of the
Underwriters, as the case may be, in the sale and distribution of the Firm
Common Shares. The option granted hereunder may be exercised at any time (but
not more than once) within 30 days after the first date that any of the Common
Shares are released by you for sale to the public, upon notice by you to the
Company setting forth the aggregate number of Optional Common Shares as to
which you or the Underwriters, as the case may be, are exercising the option,
the names and denominations in which the certificates for such shares are to
be registered and the time and place at which such certificates will be
delivered. Such
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time of delivery (which may not be earlier than the First Closing Date), being
herein referred to as the "Second Closing Date," shall be determined by you,
but if at any time other than the First Closing Date shall not be earlier than
three nor later than five full business days after delivery of such notice of
exercise. The First Closing Date and the Second Closing Date, if any, are
collectively herein referred to as a "Closing Date". The number of Optional
Common Shares to be purchased by each Underwriter shall be determined by
multiplying the number of Optional Common Shares to be sold by the Company
pursuant to such notice of exercise by a fraction, the numerator of which is
the number of Firm Common Shares to be purchased by such Underwriter as set
forth opposite its name in Schedule A and the denominator of which is
1,500,000 (subject to such adjustments to eliminate any fractional share
purchases as you in your discretion may make). Certificates for the Optional
Common Shares will be made available for checking and packaging on the
business day preceding the Second Closing Date at a location in Arlington,
Virginia, as may be designated by you. The manner of payment for and delivery
of the Optional Common Shares shall be the same as for the Firm Common Shares
purchased from the Company as specified in the two preceding paragraphs. At
any time before lapse of the option, you may cancel such option by giving
written notice of such cancellation to the Company.
If applicable, you have advised the Company that each Underwriter has
authorized you to accept delivery of its Common Shares, to make payment and
receipt therefor. If applicable, you, individually and not as the
Representatives of the Underwriters, may (but shall not be obligated to) make
payment for any Common Shares to be purchased by any Underwriter whose funds
shall not have been received by you by the First Closing Date or the Second
Closing Date, as the case may be, for the account of such Underwriter, but any
such payment shall not relieve such Underwriter from any of its obligations
under this Agreement.
Subject to the terms and conditions hereof, you or the Underwriters,
as the case may be, agree to make a public offering of the Common Shares as
soon after the effective date of the Registration Statement (as hereafter
defined) as in your judgment is advisable and at the public offering price set
forth on the cover page of and on the terms set forth in the Prospectus.
SECTION 2. Representations and Warranties of the Company. The Company
represents and warrants to the several Underwriters that:
(a) A registration statement on Form S-3 (File No.
333-47393) with respect to the Common Shares has been prepared by the
Company in conformity with the requirements of the Securities Act of
1933, as amended (the "Act"), and the rules and regulations (the
"Rules and Regulations") of the Securities and Exchange Commission
(the "Commission") thereunder, and has been filed with the
Commission. The Company has prepared and has filed or proposes to
file prior to the effective date of such registration statement an
amendment or amendments to such registration statement, which
amendment or amendments have been or will be similarly prepared.
There has been delivered to you one signed copy of such registration
statement and amendments, together with two copies of each exhibit
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filed therewith. Conformed copies of such registration statement and
amendments (but without exhibits) and of the related Preliminary
Prospectus (as defined below) have been delivered to you in such
reasonable quantities as you have requested. The Company will next
file with the Commission one of the following: (i) prior to
effectiveness of such registration statement, a further amendment
thereto, including the form of final prospectus, or (ii) a final
prospectus in accordance with Rules 430A and 424(b) of the Rules and
Regulations. As filed, such amendment and form of final prospectus,
or such final prospectus, shall include all Rule 430A Information (as
defined below) and, except to the extent that you shall agree to a
modification, shall be in all substantive respects in the form
furnished to you prior to the date and time that this Agreement was
executed and delivered by the parties hereto, or, to the extent not
completed at such date and time, shall contain only such specific
additional information and other changes (beyond that contained in
the latest Preliminary Prospectus) as the Company shall have
previously advised you in writing would be included or made therein.
The term "Registration Statement" as used in this Agreement
shall mean such registration statement at the time such registration
statement becomes effective and, in the event any post-effective
amendment thereto becomes effective prior to the First Closing Date,
shall also mean such registration statement as so amended; provided,
however, that such term shall also include all Rule 430A Information
deemed to be included in such registration statement at the time such
registration statement becomes effective as provided by Rule 430A of
the Rules and Regulations. The term "Registration Statement" as used
in this Agreement shall also include any registration statement filed
pursuant to Rule 462(B) of the Rules and Regulations. The term
"Preliminary Prospectus" shall mean any preliminary prospectus
referred to in the preceding paragraph and any preliminary prospectus
included in the Registration Statement at the time it becomes
effective that omits Rule 430A Information. The term "Prospectus" as
used in this Agreement shall mean the prospectus relating to the
Common Shares in the form in which it is first filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations or,
if no filing pursuant to Rule 424(b) of the Rules and Regulations is
required, shall mean the form of final prospectus included in the
Registration Statement at the time such registration statement
becomes effective. The term "Rule 430A Information" means information
with respect to the Common Shares and the offering thereof permitted
to be omitted from the Registration Statement when it becomes
effective pursuant to Rule 430A of the Rules and Regulations.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus, and the most recent
Preliminary Prospectus has conformed in all material respects to the
requirements of the Act and the Rules and Regulations and, as of its
date, has not included any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements
therein, in
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the light of the circumstances under which they were made, not
misleading; and at the time the Registration Statement becomes
effective, and at all times subsequent thereto up to and including
each Closing Date, the Registration Statement and the Prospectus, and
any amendments or supplements thereto, (including, without
limitation, all documents incorporated or deemed to be incorporated
by reference in either the Registration Statement or Prospectus at
the time they were filed or hereafter are filed with the Commission),
will contain all material statements and information required to be
included therein by the Act and the Rules and Regulations and will in
all material respects conform to the requirements of the Act and the
Rules and Regulations, and neither the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto, (including,
without limitation, all documents incorporated or deemed to be
incorporated by reference in either the Registration Statement or
Prospectus at the time they were filed or hereafter are filed with
the Commission), will include any untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, no representation or warranty contained in this subsection
2(b) shall be applicable to information contained in or omitted from
any Preliminary Prospectus, the Registration Statement, the
Prospectus or any such amendment or supplement in reliance upon and
in conformity with written information furnished to the Company by or
on behalf of you or any Underwriter specifically for use in the
preparation thereof.
(c) The Prospectus delivered to the Underwriters for use in
connection with this offering was identical to the electronically
transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
(d) The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware
with full power and authority (corporate and other) to own, lease and
operate its properties, to conduct its business as described in the
Prospectus and to execute, deliver and perform its obligations under
this Agreement.
(e) The Company does not own or control, directly or
indirectly, any corporation, association or other entity other than
its subsidiaries, Resource Properties, Inc., Resource Energy, Inc.,
Resource Leasing, Inc. and Fidelity Mortgage Funding, Inc. ("FMF"),
and its subsidiaries' wholly owned subsidiaries, (collectively
referred to herein as the "Subsidiaries"). Neither the Company nor
the Subsidiaries own any equity interests in any other entities
except as disclosed in the Prospectus. The Subsidiaries have been
duly incorporated and are validly existing as corporations in good
standing under the laws of their respective jurisdictions of
incorporation, with full power and authority (corporate and other)
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to own and lease their properties and conduct their respective
businesses as described in the Prospectus; the Company owns directly
or indirectly of record and beneficially all of the outstanding
capital stock of the Subsidiaries, free and clear of all claims,
liens, charges and encumbrances, except as disclosed in the
Prospectus.
(f) The Company has, and upon consummation of the Offering,
will have, authorized and outstanding capital stock as set forth
under the heading "Description of Capital Stock" in the Prospectus;
the issued and outstanding shares of the Company's capital stock have
been duly authorized and validly issued, are fully paid and
nonassessable, have been issued in compliance with all federal and
state securities laws, were not issued in violation of or subject to
any preemptive rights or other rights to subscribe for or purchase
securities (except as may be disclosed in the Prospectus), and
conform in all material respects to the description thereof contained
in the Prospectus. The issued and outstanding Common Stock (except
for shares issued in connection with the acquisition of Bryn Mawr
Resources, Inc., which are restricted shares) is duly listed on the
Nasdaq Stock Market. All issued and outstanding shares of capital
stock of the Subsidiaries have been duly authorized and validly
issued and are fully paid and nonassessable. Except as disclosed in
or contemplated by the Prospectus and the financial statements of the
Company, and the related notes thereto, included in the Prospectus,
neither the Company nor the Subsidiaries have outstanding any options
to purchase, or any preemptive rights or other rights to subscribe
for or to purchase, any securities or obligations convertible into,
or any contracts or commitments to issue or sell, shares of its
capital stock or any such options, rights, convertible securities or
obligations. The description of the Company's stock option and other
stock plans or arrangements, and the options or other rights granted
and exercised thereunder, set forth in the Prospectus accurately and
fairly presents the information required to be shown with respect to
such plans, arrangements, options and rights.
(g) The Common Shares to be sold by the Company hereunder
have been duly authorized and, when issued, delivered and paid for in
the manner set forth in this Agreement, will be validly issued, fully
paid and nonassessable, free from all liens, encumbrances, and
defects, and will conform to the description thereof contained in the
Prospectus. No preemptive rights or other rights to subscribe for or
purchase exist with respect to the sale of the Common Shares by the
Company pursuant to this Agreement. The certificates used to evidence
shares of Common Stock are in due and proper form.
(h) The Company and the Subsidiaries are duly qualified in
or licensed to (to the extent required) transact business by, and are
in good standing in, each jurisdiction in which they own or lease
real property, maintain an office or conduct their respective
businesses and in which the failure, individually or in the aggregate
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with all other failures, to be so licensed or qualified or to be in
good standing would reasonably be expected to have a material adverse
effect on the financial condition, properties, assets, business,
results of operations or prospects of the Company and the
Subsidiaries taken as a whole (a "Material Adverse Effect") and the
Company has no knowledge that any proceeding has been instituted in
any such jurisdiction, revoking, limiting or curtailing, or seeking
to revoke, limit or curtail, such power and authority or
qualification.
(i) No approval, consent or authority of the stockholders of
the Company or the Board of Directors of the Company or any
governmental agency or any other third party will be required for the
issuance and sale of the Common Shares to be sold by the Company as
contemplated herein, except such as have been obtained.
(j) The Company has full legal right, power and authority to
enter into this Agreement and to perform the transactions
contemplated hereby. This Agreement has been duly and validly
authorized by the Company and upon due execution and delivery by the
Company and the other parties thereto will constitute the valid and
binding obligations of the Company, enforceable against the Company
in accordance with their terms, subject to limitations imposed by
general principles of equity (regardless of whether such
enforceability is considered in a proceeding at law or in equity) and
subject to any bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer or other laws, now or hereafter in effect,
relating to or limiting creditors' rights generally and general
principles of equity and except to the extent that the
indemnification provisions of Section 8 hereof may be limited by
federal or state securities laws and public policy considerations in
respect thereof. The making and performance of this Agreement by the
Company and the consummation of the transactions herein contemplated
will not violate any provisions of the certificate of incorporation
or bylaws, or other organizational documents of the Company or the
Subsidiaries and will not conflict with, result in the breach or
violation of, or constitute, either by itself or upon notice or the
passage of time or both, a default under any agreement, mortgage,
deed of trust, lease, franchise, license, indenture, permit or other
instrument to which the Company or any of the Subsidiaries is a party
or by which the Company or the Subsidiaries or any of their
respective properties may be bound or affected, any statute or any
authorization, judgment, decree, order, rule or regulation of any
court or any regulatory body, administrative agency or other
governmental body applicable to the Company or any of the
Subsidiaries or any of their respective properties, except where any
violation, conflict, breach or default, whether individually or in
the aggregate, would not have a Material Adverse Effect. No consent,
approval, authorization or other order of any court, regulatory body,
administrative agency or other governmental body is required for the
execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby, except for compliance with the Act,
the Blue Sky laws (including the
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securities laws in Austria, France, Germany, Italy, Switzerland, the
United Kingdom and the Canadian provinces of Alberta, British
Columbia, Ontario and Quebec) applicable to the public offering of
the Common Shares by you or the Underwriters, the clearance of such
offering with the National Association of Securities Dealers, Inc.
(the "NASD"), and the listing of the Common Shares to be sold by the
Company on the Nasdaq Stock Market.
(k) Grant Thornton, LLP, who has expressed their opinion
with respect to the financial statements and schedules filed with the
Commission as a part of the Registration Statement and included in
the Prospectus and in the Registration Statement, is an independent
accountant as required by the Act and the Rules and Regulations.
(l) The consolidated financial statements and schedules of
the Company and the Subsidiaries, and the related notes thereto,
included in the Registration Statement and the Prospectus present
fairly the financial position of the Company and the Subsidiaries as
of the respective dates of such financial statements and schedules,
and the consolidated results of operations and changes in cash flows
of the Company for the respective periods covered thereby. Such
statements, schedules and related notes have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis as certified by the independent accountants named in
subsection 2(k). No other financial statements or schedules are
required to be included in the Registration Statement. The other
financial, statistical and pro forma information and related notes
included in the Registration Statement and the Prospectus (i) present
fairly the information shown therein on a basis consistent (except as
otherwise noted therein) with the audited financial statements of the
Company included therein; and (ii) are in compliance in all material
respects with the requirements of the Act.
(m) Neither the Company nor any of the Subsidiaries (A) is
in breach of, or in default in (nor has any event occurred which with
notice, lapse of time, or both, would constitute a breach of, or
default in) the performance or observance of any obligation,
agreement, covenant or condition contained in any contract,
indenture, mortgage, deed of trust, bank loan or credit agreement,
note, lease or other agreement or instrument to which it is a party
or by which it may be bound or to which any of its properties may be
subject (collectively, the "Agreements and Instruments"), except for
any such breaches or defaults which, individually or in the aggregate
with all other breaches or defaults, would not have a Material
Adverse Effect or have an adverse effect on the legality, validity or
enforceability of this Agreement, or (B) is in breach of, or in
default under (nor has any event occurred which with notice, lapse of
time, or both would constitute a breach of, or default under) their
respective certificate of incorporation or by-laws. The issuance,
sale and delivery of the Common Shares by the Company, the execution,
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delivery and performance by the Company of this Agreement, the
consummation by the Company of the transactions contemplated hereby
and thereby, compliance by the Company with the terms of the
foregoing and the application of the proceeds from the sale of the
Common Shares as contemplated by the Prospectus (A) have been duly
authorized by all necessary corporate action on the part of the
Company (B) do not and will not conflict with or result in any breach
of or constitute a default under (nor constitute any event which with
notice, lapse of time, or both would constitute a breach of, or
default under) any provision of the certificate of incorporation or
by-laws of the Company or the Subsidiaries (C) do not and will not
conflict with or result in any breach of or constitute a default
under (nor constitute any event which with notice, lapse of time, or
both would constitute a breach of, or default under) any of the terms
or provisions of, or give rise to any right to accelerate the
maturity or require the prepayment of any indebtedness under, or
result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company, or the
Subsidiaries under any such Agreement or Instrument (except, with
respect to this clause (C), for such conflicts, breaches, defaults,
accelerations, prepayments or liens, charges or encumbrances, which,
individually or in the aggregate with all other conflicts, breaches,
defaults, accelerations, prepayments or liens, charges or
encumbrances, would not have a Material Adverse Effect) and (D) do
not and will not conflict with, or result in any breach of or
constitute a default under (nor constitute any event which with
notice, lapse of time, or both would constitute a breach of, or
default under), any federal, state or local law, regulation or rule
or any decree, judgment or order applicable to the Company or the
Subsidiaries.
(n) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to
the Registration Statement by the Act or by the Rules and Regulations
which have not been described or filed as required. The contracts so
described in the Prospectus are in full force and effect on the date
hereof; the descriptions thereof or references thereto are correct in
all material respects; and neither the Company nor any of the
Subsidiaries, nor, to the knowledge of the Company, any other party
is in breach of or default under any of such contracts.
(o) Except as disclosed in the Prospectus, there are no
legal or governmental actions, suits or proceedings pending or, to
the knowledge of the Company or any of the Subsidiaries threatened to
which the Company or any of the Subsidiaries are or may be a party or
of which property owned or leased by the Company is or may be the
subject, or related to environmental, discrimination or regulatory
matters, which actions, suits or proceedings might, individually or
in the aggregate, prevent or adversely affect the transactions
contemplated by this Agreement or are likely to result in a Material
Adverse Effect and no labor disturbance by the employees of the
Company or the Subsidiaries exists or is
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imminent which would be expected to affect adversely such condition,
properties, business, results of operations or prospects of the
Company, and the Subsidiaries, taken as a whole. Except as disclosed
in the Prospectus, no enforcement proceeding, whether formal or
informal, has been commenced against the Company or any of the
Subsidiaries, to the Company's and the Subsidiaries' knowledge, by
any governmental authority, nor have any such proceedings been
instituted, threatened or recommended. Except as disclosed in the
Prospectus, neither the Company, nor any of the Subsidiaries, nor any
of their respective officers, employees or directors is a party or
subject to the provisions of any regulatory action, injunction,
judgment, decree or order of any court, regulatory body,
administrative agency or other governmental body affecting the
business of the Company or any of the Subsidiaries.
(p) The Company and each of the Subsidiaries have good and
marketable title to all their respective properties and assets, free
and clear of all liens, charges, encumbrances or restrictions, except
such as do not materially adversely affect the value of such
properties and assets and do not interfere with the use made of such
properties and assets by the Company and the Subsidiaries as the case
may be and except as may be otherwise disclosed in the Prospectus;
all of the leases and subleases material to the business of the
Company or the Subsidiaries or under which the Company or the
Subsidiaries holds properties described in the Prospectus are in full
force and effect; and the Company or the Subsidiaries have no notice
of any material claim of any sort which has been asserted by anyone
adverse to the rights of the Company or the Subsidiaries as owner or
as lessee or sublessee under any of the leases or subleases mentioned
above, or materially affecting or questioning the rights of the
Company or the Subsidiaries to the continued possession of the leased
or subleased premises under any such lease or sublease. Except as
disclosed in the Prospectus and other than such leases and properties
as are immaterial in the aggregate, the Company or the Subsidiaries
own or lease all such properties as are necessary to their operations
as now conducted.
(q) The Company and the Subsidiaries have all necessary
licenses, authorizations, consents and approvals and have made all
necessary filings required under any federal, state, local or foreign
law, regulation or rule, and have obtained all necessary
authorizations, consents and approvals from other persons, in order
to conduct their respective businesses, except where any failures to
obtain any such licenses, authorizations, consents or approvals, or
to make any such filings, would not, individually or in the aggregate
with all other such failures, have a Material Adverse Effect; neither
the Company nor the Subsidiaries are in violation of, or in default
under, any such license, authorization, consent or approval or any
federal, state, local or foreign law, regulation or rule or any
decree, order or judgment applicable to the Company or the
Subsidiaries the effect of which, individually or
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in the aggregate with all other violations and defaults, would have a
Material Adverse Effect.
(r) The Company 1. makes and keeps accurate books and
records and 2. maintains internal accounting controls which provide
reasonable assurance that (A) transactions are executed in accordance
with management's authorization, (B) transactions are recorded as
necessary to permit preparation of its financial statements and to
maintain accountability for its assets, (C) access to its assets is
permitted only in accordance with management's authorization and
(D) the reported accountability for its assets is compared with
existing assets at reasonable intervals;
(s) There has been no storage, disposal, generation,
manufacture, refinement, transportation, handling or treatment of
toxic wastes, medical wastes, hazardous wastes or hazardous
substances by the Company or any of its Subsidiaries (or, to the
knowledge of the Company, any of their predecessors in interest) at,
upon or from any of the properties now or previously owned or leased
by the Company or its Subsidiaries in violation of any applicable
law, ordinance, rule, regulation, order, judgment, decree or permit
or which would require remedial action under any applicable law,
ordinance, rule, regulation, order, judgment, decree or permit,
except for any violation or remedial action which would not have, or
could not be reasonably likely to have, alone or in the aggregate
with all such violations and remedial actions, a Material Adverse
Effect; there has been no material spill, discharge, leak, emission,
injection, escape, dumping or release of any kind onto such property
or into the environment surrounding such property of any toxic
wastes, medical wastes, solid wastes, hazardous wastes or hazardous
substances due to or caused by the Company or any of its Subsidiaries
or with respect to which the Company or any of its Subsidiaries have
knowledge, except for any such spill, discharge, leak, emission,
injection, escape, dumping or release which would not have or would
not be reasonably likely to have, alone or in the aggregate with all
such spills, discharges, leaks, emissions, injections, escapes,
dumpings and releases, a Material Adverse Effect; and the terms
"hazardous wastes," "toxic wastes," "hazardous substances" and
"medical wastes" shall have the meanings specified in any applicable
local, state, federal and foreign laws or regulations with respect to
environmental protection;
(t) Since the respective dates as of which information is
given in the Prospectus, and except as described in or specifically
contemplated by the Prospectus: (i) the Company and the Subsidiaries
have not incurred any material liabilities or obligations, indirect,
direct or contingent, or entered into any material verbal or written
agreement or other transaction whether or not arising in the ordinary
course of business or which would result in a material reduction in
the future earnings of the Company and the Subsidiaries (taken as a
whole); (ii) there has not been any material increase in the
long-term debt of the Company and the
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Subsidiaries (taken as a whole); (iii) there has been no material
adverse change in the Company's and the Subsidiaries relationship
with its insurance carriers, including, without limitation,
cancellation or other termination of the Company's or the
Subsidiaries' fidelity bond or any other type of insurance coverage;
(iv) except as disclosed in the Prospectus there has been no material
change in management of the Company or the Subsidiaries; (v) the
Company and the Subsidiaries have not sustained any material loss or
interference with their respective business or properties from fire,
flood, windstorm, earthquake, accident or other calamity, whether or
not covered by insurance; (vi) the Company and the Subsidiaries have
not paid or declared any dividends (except for regularly scheduled
dividends) or other distributions with respect to its capital stock
and the Company and the Subsidiaries are not in default in the
payment of principal or interest on any outstanding debt obligations;
(vii) there has not been any change in the capital stock of the
Company; and (viii) there has not been any material adverse change in
the condition (financial or otherwise), business, properties, results
of operations or prospects of the Company and the Subsidiaries, taken
as a whole.
(u) Except as disclosed in or specifically contemplated by
the Prospectus, the Company and the Subsidiaries have sufficient
trademarks, trade names, patent rights, copyrights, licenses,
approvals and governmental authorizations to conduct their businesses
as now conducted; the expiration of any trademarks, trade names,
patent rights, copyrights, licenses, approvals or governmental
authorizations would not have a Material Adverse Effect; and the
Company and the Subsidiaries have no knowledge of any material
infringement by it of trademark, trade name rights, patent rights,
copyrights, licenses, trade secret or other similar rights of others,
and, to the Company's and the Subsidiaries knowledge, there is no
claim being made against the Company or any of the Subsidiaries
regarding trademark, trade name, patent, copyright, license, trade
secret or other infringement which could have a Material Adverse
Effect.
(v) The Company has not been advised, and has no reason to
believe, that either it or any Subsidiaries is not conducting
business in compliance with all applicable laws, rules and
regulations of the jurisdictions in which it is conducting business,
including, without limitation, all applicable local, state and
federal corporate and environmental laws and regulations; except
where failure to be so in compliance would not have a Material
Adverse Effect.
(w) The Company and the Subsidiaries have filed or caused to
be filed all material federal, state and foreign income and franchise
tax returns which, through the date hereof, have been required to be
filed (or obtained appropriate extensions of the filing dates, which
such extensions continue in effect as of the date hereof) and have
paid all taxes shown as due thereon; and the Company and the
Subsidiaries have no knowledge of any tax deficiency which has been
or might be
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asserted or threatened against the Company or the Subsidiaries which
would have a Material Adverse Effect.
(x) The Company maintains insurance of the types and in the
amounts generally deemed adequate for its businesses, including, but
not limited to, general liability insurance, fidelity bond insurance
and insurance covering real and personal property owned or leased by
the Company against theft, forgery, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of
which insurance is in full force and effect.
(y) All material transactions between the Company and the
officers, directors and major stockholders of the Company that are
required to be disclosed under the Exchange Act and the Rules and
Regulations have been accurately disclosed in the Prospectus; and the
terms of each such transaction are fair to the Company and no less
favorable to the Company than the terms that could have been obtained
from unrelated parties, except as disclosed in the Prospectus.
(z) Neither the Company nor any of the Subsidiaries is, nor
after giving effect to the consummation of the transactions
contemplated herein, will be, and the Company is not directly or
indirectly controlled by, or acting on behalf of any person which is,
an "investment company" within the meaning of the Investment Company
Act of 1940, as amended (the "1940 Act").
(aa) Except as set forth in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file
a registration statement under the Securities Act with respect to any
securities of the Company owned or to be owned by such person.
(bb) The Company has not distributed any offering material
in connection with the offering and sale of the Common Shares other
than the Preliminary Prospectus, the Prospectus, the Registration
Statement and the other materials permitted by the Act.
(cc) Except as disclosed in the Prospectus, the Company has
not: (i) placed any securities within the last 18 months (except for
notes to evidence other bank loans and reverse repurchase agreements,
securities issuable under existing benefit plans of the Company and
securities issued as part of certain acquisitions (including the
merger of Bryn Mawr Resources and certain other similar transactions
the effect of which have been reflected in the financial statements
included in the Prospectus); (ii) had any material dealings with any
member of the NASD or any person related to or associated with such
member, other than discussions and meetings relating to the proposed
Offering and routine purchases and sales of U.S.
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<PAGE>
Government and agency securities and other assets; (iii) entered into
a financial or management consulting agreement except as contemplated
hereunder and except for engagement letters with Friedman, Billings,
Ramsey & Co., Inc., including the letter dated March 5, 1998; or
(iv) engaged any intermediary between the Representatives and the
Company in connection with the Offering, and no person is being
compensated in any manner for such service.
(dd) The Company has not taken directly or indirectly, any
action designed to cause or result in, or which has constituted or
which reasonably might be expected to constitute, the stabilization
or manipulation of the price of the Common Stock to facilitate the
sale or resale of the Common Stock.
(ee) Except as otherwise described in the Registration
Statement, and except for shares of Common Stock issued pursuant to
the exercise of outstanding options held by officers and directors,
the Company has not sold or issued any shares of Common Stock during
the six-month period preceding the date of the Prospectus, including
any sales pursuant to Rule 144A under, or Regulation D or S of, the
Securities Act.
(ff) The Company has complied with, and is and will be in
compliance with, the provisions of that certain Florida act relating
to disclosure of doing business with Cuba, codified as Section
517.075 of the Florida Statutes and the rules and regulations
thereunder (collectively, the "Cuba Act") or is exempt therefrom.
(gg) The Company has not relied upon the Representatives or
legal counsel for the Representatives for any legal, tax or
accounting advice in connection with the Offering.
All representations and warranties given in this Section 2 shall be
true and correct on each Closing Date and at the time of delivery of any
Common Shares. Any certificate signed by any officer of the Company and
delivered to you or to your counsel shall be deemed a representation and
warranty by the Company to you as to the matters covered thereby. Any
certificate delivered by the Company to its counsel for purposes of enabling
such counsel to render the opinions referred to in Section 7(c) will also be
furnished to the Underwriters and their counsel and shall be deemed to be
additional representations and warranties by the Company to the Underwriters
as to the matters covered thereby and the Underwriters and their counsel are
entitled to rely thereon.
SECTION 3. Representations and Warranties of the Underwriters. You,
for yourselves or on behalf of the Underwriters, as the case may be, represent
and warrant to the Company that the information set forth in the Prospectus
(i) on the cover page of the Prospectus with respect to price, underwriting
discounts and commissions and terms of offering, (ii) on the inside cover page
14
<PAGE>
with respect to stabilization and (iii) under the caption "Underwriting" in
the Prospectus was furnished to the Company by and on behalf of the
Underwriters for use in connection with the preparation of the Registration
Statement and the Prospectus and is complete and correct in all material
respects. If applicable, the Representatives represent and warrant that they
have been authorized by each of the other Underwriters as the Representatives
to enter into this Agreement on its behalf and to act for it in the manner
herein provided.
SECTION 4. Covenants of the Company. The Company covenants and agrees
that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at
the time and date that this Agreement is executed and delivered by
the parties hereto, to become effective. If the Registration
Statement has become or becomes effective pursuant to Rule 430A of
the Rules and Regulations, or the filing of the Prospectus is
otherwise required under Rule 424(b) of the Rules and Regulations,
the Company will file the Prospectus, properly completed, pursuant to
the applicable paragraph of Rule 424(b) of the Rules and Regulations
within the time period prescribed and will provide evidence
satisfactory to you of such timely filing. The Company will promptly
advise you in writing (i) of the receipt of any comments of the
Commission, (ii) of any request of the Commission for amendment of or
supplement to the Registration Statement (either before or after it
becomes effective), any Preliminary Prospectus or the Prospectus or
for additional information, (iii) when the Registration Statement
shall have become effective and (iv) of the issuance by the
Commission or any other government agency or authority of any stop
order suspending the effectiveness of the Registration Statement or
of the institution of any proceedings for that purpose. If the
Commission shall enter any such stop order at any time, the Company
will use its best efforts to obtain the lifting of such order at the
earliest possible moment. The Company will not file any amendment or
supplement to the Registration Statement (either before or after it
becomes effective), any Preliminary Prospectus or the Prospectus of
which you have not been furnished with a copy a reasonable time prior
to such filing or to which you reasonably object or which is not in
compliance with the Act and the Rules and Regulations.
(b) The Company will prepare and file with the Commission,
promptly upon your request, any amendments or supplements to the
Registration Statement or the Prospectus which in your reasonable
judgment may be necessary or advisable to enable the Underwriter to
continue the distribution of the Common Shares and will use its best
efforts to cause the same to become effective as promptly as
possible. The Company will fully and completely comply with the
provisions of Rule 430A of the Rules and Regulations with respect to
information omitted from the Registration Statement in reliance upon
such Rule.
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<PAGE>
(c) If at any time during which a prospectus relating to the
Common Shares is required to be delivered under the Act or the Rules
and Regulations any event occurs, as a result of which the
Prospectus, including any amendments or supplements, would include an
untrue statement of a material fact, or omit to state any material
fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances then existing, not
misleading, or if it is necessary at any time to amend the
Prospectus, including any amendments or supplements, to comply with
the Act or the Rules and Regulations, the Company will promptly
advise you thereof and will promptly prepare and file with the
Commission, at its own expense, an amendment or supplement which will
correct such statement or omission or an amendment or supplement
which will effect such compliance and will use its best efforts to
cause the same to become effective as soon as possible.
(d) As soon as practicable, but not later than 45 days after
the end of the first quarter ending after one year following the
"effective date of the Registration Statement" (as defined in Rule
158(c) of the Rules and Regulations), the Company will make generally
available to its security holders an earnings statement (which need
not be audited) covering a period of 12 consecutive months beginning
after the effective date of the Registration Statement which will
satisfy the provisions of the last paragraph of Section 11(a) of the
Act.
(e) During such period as a Prospectus is required by law to
be delivered in connection with sales by an Underwriter or dealer,
the Company, at its expense, will furnish to you or mail to your
order copies of the Registration Statement, the Prospectus, the
Preliminary Prospectus and all amendments and supplements to any such
documents in each case as soon as available and in such quantities as
you may request, for the purposes contemplated by the Act. The
Prospectus and any amendments or supplements thereto furnished to the
Underwriters will be identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to
the extent permitted by Regulation S-T.
(f) The Company shall cooperate with you and your counsel in
order to qualify or register the Common Shares for sale under (or
obtain exemptions from the application of) the Blue Sky laws of such
jurisdictions as you designate, will comply with such laws and will
continue such qualifications, registrations and exemptions in effect
so long as reasonably required for the distribution of the Common
Shares. The Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any
such jurisdiction where it is not presently qualified or where it
would be subject to taxation as a foreign corporation. The Company
will advise you promptly of the suspension of the qualification or
registration of (or any such exemption relating to) the Common Shares
for offering, sale or trading in any jurisdiction or any
16
<PAGE>
initiation or threat of any proceeding for any such purpose, and in
the event of the issuance of any order suspending such qualification,
registration or exemption, the Company, with your cooperation, will
use its best efforts to obtain the withdrawal thereof.
(g) The Company shall promptly prepare and file with the
Commission, from time to time, such reports as may be required to be
filed by the Act and the Exchange Act including, without limitation,
reports with respect to the sale of the Common Shares and the
application of the proceeds thereof as may be required in accordance
with Rule 463 under the Act.
(h) During the period of five years hereafter, the Company
will furnish to you: (i) at the same time as such are furnished to
its Stockholders generally, copies of the Annual Report of the
Company containing the consolidated balance sheet of the Company and
the Subsidiaries as of the close of such fiscal year and consolidated
statements of income, stockholders' equity and cash flows for the
year then ended and the opinion thereon of the Company's independent
public accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on Form 10-K,
Quarterly Report on Form 10-Q, Current Report on Form 8-K or other
report filed by the Company with the Commission, the NASD or any
securities exchange; (iii) as soon as available, copies of any report
or communication of the Company mailed generally to holders of its
Common Stock; (iv) as soon as practicable after the filing thereof,
of each non-confidential report or other statement or document filed
by the Company with the Commission, or with any national securities
exchange or quotation system on which any securities of the Company
may be listed or quoted; and (v) from time to time, such other
non-confidential information concerning the Company as you may
reasonably request.
(i) The Company will use its best efforts to effect and
maintain the quotation of the Common Shares on the Nasdaq Stock
Market and to file with the Nasdaq Stock Market all documents and
notices required by the Nasdaq Stock Market of companies that have
securities that are traded in the over-the-counter market and
quotations for which are reported by the Nasdaq Stock Market.
(j) The Company will refrain during a period of 120 days
after the date of the Prospectus, without the prior written consent
of Friedman, Billings, Ramsey & Co., Inc. ("FBR"), from (i) offering,
pledging, selling, contracting to sell, or selling any option,
warrant, or contract to purchase, purchasing any option, warrant, or
contract to sell, granting any option for the sale of, or otherwise
disposing of or transferring, directly or indirectly, any Common
Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or filing any registration statement
under the Securities Act with respect to any of the
17
<PAGE>
foregoing or (ii) entering into any swap or any other agreement or
transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock
or any security convertible into or exchangeable for Common Stock,
whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The Company shall also cause each
executive officer and director of the Company (including Edward E.
Cohen) to furnish to the Representatives, on or prior to the date
hereof, a letter or letters, in form and substance satisfactory to
counsel for the Representatives, pursuant to which each such person
or entity shall agree to abide by the aforementioned restrictions,
unless they have received prior written consent from FBR, for a
period of 120 days from the date of the Prospectus. The foregoing
sentence shall not apply to (A) the Common Shares to be sold
hereunder; (B) any shares of Common Stock issued by the Company upon
the exercise of an option outstanding on the date hereof and referred
to in the Prospectus; or (C) any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common
Stock issued in connection with a merger, acquisition of another
entity, acquisition of assets or any other similar transaction.
(k) The Company will apply the net proceeds of the sale of
the Common Shares sold by it substantially in accordance with its
statements under the caption "Use of Proceeds" in the Prospectus.
(l) The Company will not distribute prior to the First
Closing Date any offering material in connection with the offering
and sale of the Common Shares other than the Preliminary Prospectus,
the Prospectus, the Registration Statement and the other materials
permitted by the Act.
(m) The Company will not take, directly or indirectly, any
action designed to cause or result in, or which has constituted or
which reasonably might be expected to constitute, the stabilization
or manipulation of the price of the Common Stock to facilitate the
sale or resale of the Common Shares.
(n) The Company shall pay all expenses, fees, and taxes
(other than any transfer taxes and the fees and disbursements of
counsel for the Underwriters, except as set forth under Section 5
hereof and clauses (iii) and (iv) below) in connection with (i) the
preparation and filing of the Registration Statement, each
Preliminary Prospectus, the Prospectus, and any amendments or
supplements thereto, and the printing and furnishing of copies of
each thereof to the Underwriters and to dealers (including costs of
mailing and shipment), (ii) the preparation, issuance, and delivery
of the certificates for the Common Shares to the Underwriters,
including any stock or other transfer taxes or duties payable upon
the sale of the Common Shares to the Underwriters, (iii) the word
processing
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<PAGE>
and/or printing of this Agreement and any dealer agreements, and the
reproduction and/or printing and furnishing of copies thereof to the
Underwriters and to dealers (including costs of mailing and
shipment), (iv) filing fees for the qualification of the Common
Shares for offering and sale under state laws and the determination
of their eligibility for investment under state law as aforesaid and
the printing and furnishing of copies of any blue sky surveys or
legal investment surveys to the Underwriters and to dealers, (v) any
filing for review of the public offering of the Common Shares by the
NASD, (vi) the fees and expenses of any transfer agent or registrar
for the Common Shares, (vii) the fees and expenses incurred in
connection with the inclusion of the Common Shares in the Nasdaq
Stock Market, and (viii) the performance of the Company's other
obligations hereunder
(o) The Company will not rely upon the Representatives or
legal counsel for the Representatives for any legal, tax or
accounting advice in connection with the Offering.
You may, in your sole discretion, waive in writing the performance by
the Company of any one or more of the foregoing covenants or extend the time
for their performance.
SECTION 5. Payment of Expenses. Whether or not the transactions
contemplated hereunder are consummated or this Agreement becomes effective or
is terminated, the Company agrees to pay all costs, fees and expenses incurred
in connection with the performance of its obligations hereunder and in
connection with the transactions contemplated hereby, including without
limiting the generality of the foregoing, (i) all expenses incident to the
issuance and delivery of the Common Shares (including all printing and
engraving costs), (ii) all fees and expenses of the registrar and transfer
agent of the Common Stock, (iii) all necessary issue, transfer and other stamp
taxes in connection with the issuance and sale of the Common Shares to you and
the Underwriters, (iv) all fees and expenses of the Company's counsel and the
Company's independent accountants, (v) all costs and expenses incurred in
connection with the preparation, printing, filing, shipping and distribution
of the Registration Statement, each Preliminary Prospectus and the Prospectus
(including all exhibits and financial statements) and all amendments and
supplements provided for herein, (vi) all filing fees incurred by the Company
or the Underwriters in connection with qualifying or registering (or obtaining
exemptions from the qualification or registration of) all or any part of the
Common Shares for offer and sale under the Blue Sky laws, (vii) the filing fee
of the National Association of Securities Dealers, Inc., (viii) all the costs
and expenses incurred by the Company in making road show presentations with
respect to the Offering, (ix) all costs of preparing, printing and
distribution of bound volumes of the transaction documents for you and your
counsel, and (x) all other fees, costs and expenses referred to in Item 14 of
the Registration Statement (except as otherwise set forth in this Agreement).
SECTION 6. Conditions to the Obligations of You and the Underwriters.
The obligations of you and the Underwriters to purchase and pay for the Firm
Common Shares on the First Closing Date and the Optional Common Shares on the
Second Closing Date shall be subject to the
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<PAGE>
accuracy in all material respects of the representations and warranties on the
part of the Company herein set forth as of the date hereof and as of the First
Closing Date or the Second Closing Date, as the case may be, to the accuracy
in all material respects of the statements of Company officers made pursuant
to the provisions hereof, to the performance in all material respects by the
Company of its obligations hereunder, and to the following additional
conditions:
(a) The Registration Statement shall have become effective
not later than 5:00 P.M., Washington, D.C. Time, on the date of this
Agreement, or at such later time as shall have been consented to by
you; if the filing of the Prospectus, or any supplement thereto, is
required pursuant to Rule 424(b) of the Rules and Regulations, the
Prospectus shall have been filed in the manner and within the time
period required by Rule 424(b) of the Rules and Regulations; and
prior to such Closing Date, no stop order suspending the
effectiveness of the Registration Statement shall have been issued
and no proceedings for that purpose shall have been instituted or
shall be pending or, to the knowledge of the Company or you, shall be
contemplated by the Commission and no suspension of the qualification
of the Common Shares for offering or sale in any jurisdiction, or the
initiation of any proceedings for any of such purposes, shall have
occurred or be threatened; and any request of the Commission for
inclusion of additional information in the Registration Statement, or
otherwise, shall have been complied with to your reasonable
satisfaction. The Registration Statement and all amendments thereto,
or modifications thereof, if any, and the Prospectus and all
amendments or supplements thereto, or modifications thereof, if any,
shall not contain an untrue statement of material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under
which they are made, not misleading and no amendment or supplement to
the Registration Statement or Prospectus shall have been filed to
which the Underwriters shall have objected in writing.
(b) You shall be reasonably satisfied that since the
respective dates as of which information is given in the Registration
Statement and Prospectus, (i) there shall not have been any change in
the capital stock of the Company or the Subsidiaries or any material
change in the indebtedness (other than in the ordinary course of
business) of the Company or the Subsidiaries, (ii) except as set
forth or contemplated by the Registration Statement or the
Prospectus, no material verbal or written agreement or other
transaction shall have been entered into by the Company or the
Subsidiaries, which is not in the ordinary course of business and
which could result in a material reduction in the future earnings of
the Company and the Subsidiaries, taken as a whole, (iii) no loss or
damage (whether or not insured) to the property of the Company or the
Subsidiaries shall have been sustained which materially and adversely
affects the condition (financial or otherwise), business, results of
operations or prospects of the Company and the Subsidiaries, taken as
a whole, (iv) no legal or governmental action, suit or
20
<PAGE>
proceeding affecting the Company or the Subsidiaries which is
material to the Company and the Subsidiaries, taken as a whole, or
which affects or may affect the transactions contemplated by this
Agreement shall have been instituted or threatened, (v) no
enforcement proceeding, whether formal or informal, shall have been
commenced against the Company or the Bank by any governmental agency
nor shall any such proceeding have been instituted, threatened or
recommended, and (vi) there shall not have been any material change
in the condition (financial or otherwise), business, management,
results of operations or prospects of the Company and the
Subsidiaries, taken as a whole, which makes it impractical or
inadvisable in your judgment to proceed with the public offering or
purchase the Common Shares as contemplated hereby.
(c) There shall have been furnished to you, individually or
as Representatives of the Underwriters, as the case may be, on each
Closing Date, in form and substance reasonably satisfactory to you,
except as otherwise expressly provided below:
(i) An opinion of Ledgewood Law Firm, P.C., counsel
for the Company, addressed to you, or you as Representatives
of the Underwriters, as the case may be, and dated the First
Closing Date, or the Second Closing Date, as the case may
be, in the form of Exhibit A to this Agreement.
(ii) Such opinion or opinions of Silver, Freedman
& Taff, L.L.P., counsel for the Underwriters dated the First
Closing Date or the Second Closing Date, as the case may be,
with respect to the incorporation of the Company, the
sufficiency of all corporate proceedings and other legal
matters relating to this Agreement, the validity of the
Common Shares, the Registration Statement and the Prospectus
and other related matters as you may reasonably require, and
such counsel shall have received such documents and shall
have exhibited to them such papers and records as they may
reasonably request for the purpose of enabling them to pass
upon such matters. In connection with such opinions, such
counsel may rely on the opinion of Ledgewood Law Firm, P.C.
and representations or certificates of officers of the
Company and governmental officials.
(iii) A certificate of the Company executed by the
Chairman of the Board or President and the Chief Financial
or Accounting Officer, dated the First Closing Date or the
Second Closing Date, as the case may be, to the effect that:
21
<PAGE>
(1) The representations and warranties of
the Company set forth in Section 2 of this
Agreement are true and correct in all material
respects as of the date of this Agreement and as of
the First Closing Date or the Second Closing Date,
as the case may be, and the Company has complied in
all material respects with all the agreements and
satisfied all the conditions on its part to be
performed or satisfied on or prior to such Closing
Date;
(2) The Commission has not issued any
order preventing or suspending the use of the
Prospectus or any Preliminary Prospectus filed as a
part of the Registration Statement or any amendment
thereto; no stop order suspending the effectiveness
of the Registration Statement has been issued; and
to the best of the knowledge of the respective
signers, no proceedings for that purpose have been
instituted or are pending or contemplated under the
Act;
(3) Neither the Registration Statement nor
the Prospectus nor any amendment or supplement
thereto includes any untrue statement of a material
fact or omits to state any material fact required
to be stated therein, or necessary to make the
statements therein, in the light of the
circumstances under which they were made, not
misleading;
(4) Since the initial date on which the
Registration Statement was filed with the
Commission, no agreement, written or oral,
transaction or event has occurred which should have
been set forth in an amendment to the Registration
Statement or in a supplement to or amendment of any
prospectus which has not been disclosed in such a
supplement or amendment;
(5) Since the respective dates as of which
information is given in the Registration Statement
and the Prospectus and except as disclosed in or
contemplated by the Prospectus, (i) no material
adverse change in the business, properties,
prospects, results of operations, or condition
(financial or otherwise) of the Company and its
Subsidiaries taken as a whole shall have occurred
or become known, (ii) no transaction which is
material and unfavorable to the Company shall have
been entered into by the Company or
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<PAGE>
any of its Subsidiaries, and (iii) the Company and
the Subsidiaries, taken as a whole, have not
sustained a material loss or damage by strike,
fire, flood, windstorm, accident or other calamity
(whether or not insured).
(iv) On the date before this Agreement is executed
and also on the First Closing Date and the Second Closing
Date a letter addressed to you or to you as Representatives
of the Underwriters, as the case may be, from Grant Thornton
LLP, independent accountants, the first one to be dated the
day before the date of this Agreement, the second one to be
dated the First Closing Date and the third one (in the event
of a Second Closing) to be dated the Second Closing Date, in
form and substance reasonably satisfactory to you to the
effect that:
(1) They are independent accountants within
the meaning of the Act and the applicable
published rules and regulations
thereunder;
(2) In their opinion, the consolidated
financial statements of the Company and
its subsidiaries audited by them and
included in the Registration Statement
comply as to form in all material respects
with the applicable accounting
requirements of the Act and the published
rules and regulations thereunder with
respect to registration statements on Form
S-3;
(3) On the basis of procedures (but not an
audit in accordance with generally
accepted auditing standards) consisting
of:
(a) Reading the minutes of meetings of
the stockholders and the Board of
Directors of the Company and its
consolidated subsidiaries since
September 30, 1997 as set forth in
the minute books through a
specified date not more than five
business days prior to the date of
delivery of any such letter;
(b) Performing the procedures
specified by the American
Institute of Certified Public
Accountants for a review of
interim financial information as
described in SAS No. 71,
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<PAGE>
interim Financial Information, on
the unaudited condensed interim
financial statements of the
Company and its consolidated
subsidiaries included in the
Registration Statement under the
caption "Summary of Recent
Developments" and reading the
unaudited interim financial data
for the period from the date of
the latest audited balance sheet
included in the Registration
Statement to the date of the
latest available interim financial
data; and
(c) Making inquires of certain
officials of the Company who have
responsibility for financial and
accounting matters regarding the
specific items for which
representations are requested
below;
nothing has come to their attention as a
result of the foregoing procedures that
caused them to believe that:
(i) the unaudited condensed
interim financial
statements, included in
the Registration
Statement or incorporated
by reference into the
Registration Statement,
do not comply as to form
in all material respects
with the applicable
accounting requirements
of the Act and the
published rules and
regulations thereunder;
(ii) any material
modifications should be
made to the unaudited
condensed interim
financial statements,
included in the
Registration Statement or
incorporated by reference
into the Registration
Statement, for them to be
in conformity with
generally accepted
accounting principles;
24
<PAGE>
(iii) (i) at the date of the
latest available interim
financial data and at a
specified date not more
than five business days
prior to the date of
delivery of such letter,
there was any change in
the capital stock,
increase in long-term
debt or any decreases in
consolidated net current
assets (working capital)
or stockholders' equity
of the Company and
subsidiaries consolidated
as compared with amounts
shown in the latest
balance sheet included in
the Registration
Statement or (ii) for the
period from the date of
the latest available
financial data to a
specified date not more
than five business days
prior to delivery of such
letter, there were any
decreases, as compared
with the corresponding
period in the preceding
year, in consolidated net
income or in the total or
per share amounts of net
income, except in all
instances for changes or
decreases which the
Registration Statement
discloses have occurred
or may occur, or they
shall state any specific
changes or decreases.
(4) The letter shall also state that they have:
(a) Read the dollar amounts and percentages
and other financial information of the
Company contained in the Registration
Statement or incorporated by reference
therein and agreed such dollar amounts and
percentages respectively to appropriate
accounts in the Company's accounting
records subject to its system of internal
accounting controls and to schedules
prepared by the Company therefrom;
(b) Read the dollar amounts listed as
outstanding under "Capitalization" and
agreed such amounts or totals
25
<PAGE>
thereof to the Company's accounting
records subject to its system of internal
accounting controls; and
(c) Read the dollar and per share amounts
listed under "Summary Consolidated
Financial Data" and "Selected Consolidated
Financial Data" and agreed such amounts to
audited financial statements, unaudited
condensed interim financial statements, or
schedules prepared by the Company from its
accounting records subject to its system
of internal accounting controls.
(v) The NASD shall not have raised any objection
with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
(vi) The Representatives shall have received
evidence reasonably satisfactory to them that the executive
officers and directors of the Company (including Edward E.
Cohen) shall have agreed to refrain, during a period of 120
days after the date of the Prospectus, without the prior
written consent of FBR and (ii) Friedman, Billings Ramsey
Investment Management, Inc. ("Investment") shall have agreed
to refrain, during the period described below, without the
prior written consent of the Company, from (A) offering,
pledging, selling, or contracting to sell any option,
warrant, or contract to purchase, purchasing any option,
warrant, or contract to sell, granting any option for the
sale of, or otherwise disposing of or transferring, directly
or indirectly, any Common Stock or any securities
convertible into or exercisable or exchangeable for Common
Stock, or requesting that the Company file a registration
statement under the Securities Act with respect to any of
the foregoing, or (B) entering into any swap or any other
agreement or transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of
ownership of the Common Stock or any security convertible
into or exercisable or exchangeable for Common Stock,
whether any such swap or transaction described in clause (A)
or (B) above is to be settled by delivery of Common Stock or
such other securities, in cash or otherwise.
(vii) The Company shall have furnished to the
Underwriters such other documents and certificates as to the
accuracy and completeness of any statement in the
Registration Statement and the
26
<PAGE>
Prospectus or any amendment or supplement thereto, as of the
Closing Date, as the Underwriters may reasonably request.
(viii) The Company shall have performed such
obligations under this Agreement as are to be performed by
the terms hereof at or before the Closing Date.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are reasonably satisfactory
to you and to Silver, Freedman & Taff, L.L.P., counsel for the Underwriters.
The Company shall furnish you with such manually signed or conformed copies of
such opinions, certificates, letters and documents as you reasonably request.
The letter described in subparagraph (c)(v) above may be an original or
facsimile of the original.
If any condition to you or the Underwriters' obligations hereunder to
be satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon written notification by you as
Representatives to the Company without liability on the part of any
Underwriter or the Company, except for the expenses to be paid or reimbursed
by the Company pursuant to Section 5 hereof and except to the extent provided
in Section 9 hereof.
SECTION 7. Effectiveness of Registration Statement. Each party to
this Agreement will use its best efforts to cause the Registration Statement
to become effective, to prevent the issuance of any stop order suspending the
effectiveness of the Registration Statement and, if such stop order be issued,
to obtain as soon as possible the lifting thereof.
SECTION 8. Indemnification.
(a) The Company agrees to indemnify, defend and hold
harmless each Underwriter and each person, if any, who controls an
Underwriter, as the case may be, within the meaning of the Act
against any losses, claims, damages, liabilities or expenses, joint
or several, to which an Underwriter or such controlling person may
become subject, under the Act, the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), or other federal or state statutory
law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the
written consent of the Company), insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof as
contemplated below) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained
in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or based upon
written information supplied by the Company filed in any state or
jurisdiction to register or qualify any or all of the Common Shares
or to claim an exemption therefrom, or provided to any state or
jurisdiction to exempt the Company as a broker-dealer or its
officers, directors and employees
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<PAGE>
as broker-dealers or agents, under the securities laws thereof
(collectively, the "Blue Sky Application") or arise out of or are
based upon the omission or alleged omission to state in any of them a
material fact required to be stated therein or necessary to make the
statements in any of them not misleading, or arise from any theory of
liability whatsoever relating to or arising from or based upon the
Registration Statement, any Preliminary Prospectus, the Prospectus,
or any amendment or supplement thereto, or arise out of or are based
in whole or in part on any inaccuracy in the representations and
warranties of the Company contained herein or any failure of the
Company to perform its obligations hereunder or under law; and
subject to paragraph 8(c) will reimburse each Underwriter and each
such controlling person for any legal and other expenses as such
expenses are reasonably incurred by such Underwriter or such
controlling person in connection with investi gating, defending,
settling, compromising or paying any such loss, claim, damage,
liability, expense or action; provided, however, that the Company
will not be liable in any such case to the extent that any such loss,
claim, damage, liability or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto in
reliance upon and in conformity with the information furnished to the
Company pursuant to Section 3 hereof; provided, further, that the
foregoing indemnity with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person
asserting any such loss, claim, damage or liability purchased the
Common Shares that are the subject thereof if such person did not
receive a copy of the Prospectus (or the Prospectus as supplemented)
at or prior to the confirmation of the sale to such person in any
case where such delivery is required by the Act and the untrue
statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the
Prospectus as supplemented).
(b) You or each Underwriter, as the case may be, will
severally indemnify, defend, and hold harmless the Company, each of
its directors, each of its officers who signed the Registration
Statement, and each person, if any, who controls the Company within
the meaning of the Act, against any losses, claims, damages,
liabilities or expenses to which the Company or any such director,
officer, or controlling person may become subject, under the Act, the
Exchange Act, or other federal or state statutory law or regulation,
or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent
of such Underwriter), insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof as
contemplated below) arise out of or are based upon any untrue or
alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus,
or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material
fact required to
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<PAGE>
be stated therein or necessary to make the statements therein not
misleading, in each such case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or
alleged omission was made in the Registra tion Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, in reliance upon and in conformity with the
information furnished to the Company pursuant to Section 3 hereof;
and will reimburse the Company or any such director, officer, or
controlling person for any legal and other expense reasonably
incurred by the Company, or any such director, officer, or
controlling person in connection with investigating, defending,
settling, compromising or paying any such loss, claim, damage,
liability, expense or action. In addition to the other obligations
under this Section 8(b), you or each Underwriter, as the case may be,
severally agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding arising
out of or based upon any statement or omission, or any alleged
statement or omission, described in this Section 8(b) which relates
to information furnished to the Company pursuant to Section 3 hereof,
it will reimburse the Company (and, to the extent applicable, each
officer, director, controlling person) on a quarterly basis for all
reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation,
inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of your
or the Underwriters' obligation to reimburse the Company (and, to the
extent applicable, each officer, director, controlling person) for
such expenses and the possibility that such payments might later be
held to have been improper by a court of competent jurisdiction. To
the extent that any such interim reimbursement payment is so held to
have been improper, the Company (and, to the extent applicable, each
officer, director or controlling person) shall promptly return it to
the Underwriters together with interest, compounded daily, determined
on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company within 30 days of a
request for reimbursement, shall bear interest at the Prime Rate from
the date of such request. This indemnity agreement will be in
addition to any liability which you or such Underwriter, as the case
may be, may otherwise have.
(c) Promptly after receipt by an indemnified party under
this Section of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made
against an indemnifying party under this Section, notify the
indemnifying party in writing of the commencement thereof, but the
omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party for
indemnity, contribution or otherwise except to the extent the
indemnifying party is prejudiced as a proximate result of such
failure. In case any such action is brought against any indemnified
party and such indemnified party seeks or intends to seek indemnity
from an indemnifying party, the indemnifying party will be entitled
to participate in, and,
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<PAGE>
to the extent that it may wish, jointly with all other indemnifying
parties similarly notified, to assume the defense thereof with
counsel reasonably satisfactory to such indemnified party; provided,
however, if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified
party shall have reasonably concluded that there may be a conflict
between the positions of the indemnifying party and the indemnified
party in conducting the defense of any such action or that there may
be legal defenses available to it and/or other indemnified parties
which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the
right to select separate counsel to assume such legal defenses and to
otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of its election so to
assume the defense of such action and approval by the indemnified
party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with
the defense thereof unless (i) the indemnified party shall have
employed such counsel in connection with the assumption of legal
defenses in accordance with the proviso to the next preceding
sentence or (ii) the indemnifying party shall not have employed
counsel reasonably satisfactory to the indemnified party to represent
the indemnified party within a reasonable time after notice of
commencement of the action, in each of which cases the fees and
expenses of counsel shall be at the expense of the indemnifying party
(it being understood, however, that the indemnifying party shall not
be liable for the expenses of more than one separate counsel
representing the indemnified parties who are parties to such action;
provided, however, if an indemnified party in any such action shall
have concluded that there may be legal defenses or rights available
to it which are different from, in actual or potential conflict with,
or additional to those available to other indemnified parties, such
party shall have the right to select an additional law firm to act as
its separate counsel at its own expense).
(d) If the indemnification provided for in this Section 8 is
required by its terms but is for any reason held to be unavailable to
or otherwise insufficient to hold harmless an indemnified party under
subsections (a), (b) or (c) of this Section 8 in respect of any
losses, claims, damages, liabilities or expenses referred to herein,
then each applicable indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of any
losses, claims, damages, liabilities or expenses referred to herein
(i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and you or the Underwriters, as the
case may be, from the offering of the Common Shares or (ii) if the
allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also
the relative fault of the Company and you or the Underwriters, as the
case may be, in connection with the statements or omissions or
inaccuracies in
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<PAGE>
the representations and warranties herein which resulted in such
losses, claims, damages, liabilities or expenses, as well as any
other relevant equitable considerations. The relative benefits
received by the Company, on the one hand, and the Underwriters, on
the other hand, shall be deemed to be in the same respective
proportions as the total proceeds (net of underwriting discounts and
commissions, but before deducting expenses) from the offering of the
Common Stock received by the Company and the total underwriting
commissions received by the Underwriters bear to the aggregate public
offering price of the Common Stock. The relative fault of the Company
and the Underwriters shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact or
the inaccurate or the alleged inaccurate representation and/or
warranty relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue
statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses
referred to above shall be deemed to include, subject to the
limitations set forth in subsection (c) of this Section 8, any legal
or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any action or claim. The
provisions set forth in subsection (c) of this Section 8 with respect
to notice of commencement of any action shall apply if a claim for
contribution is to be made under this subsection (d); provided,
however, that no additional notice shall be required with respect to
any action for which notice has been given under subsection (c) for
purposes of indemnification. The Company and you or the Underwriters,
as the case may be, agree that it would not be just and equitable if
contribution pursuant to this Section 8 were determined solely by pro
rata allocation or by any other method of allocation which does not
take account of the equitable considerations referred to in this
paragraph. Notwithstanding the provisions of this Section 8, no
Underwriter shall be required to contribute any amount in excess of
the amount of the total underwriting discounts and commissions
received by such Underwriter in connection with the Common Shares
underwritten by it and distributed to the public. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
(e) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in
Sections 8(a) and 8(b) hereof, including the amounts of any requested
reimbursement payments and the method of determining such amounts,
shall be settled by a judge in a court of law, with both parties
hereby expressly waiving a trial by jury.
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<PAGE>
SECTION 9. Default of Underwriters. It shall be a condition to this
Agreement and the obligation of the Company to sell and deliver the Common
Shares hereunder, and a condition of your obligations or the obligation of
each Underwriter, as the case may be, to purchase the Common Shares in the
manner as described herein, that, except as hereinafter in this paragraph
provided, each of you or the Underwriters, as the case may be, shall purchase
and pay for all the Common Shares agreed to be purchased by you or such
Underwriter hereunder upon tender to you individually or as the
Representatives of the Underwriters, of all such shares in accordance with the
terms hereof. If any Underwriter or Underwriters default in your or their
obligations to purchase Common Shares hereunder on either the First or Second
Closing Date and the aggregate number of Common Shares which such defaulting
Underwriter or Underwriters agreed but failed to purchase on such Closing Date
does not exceed 10% of the total number of Common Shares which the
Underwriters are obligated to purchase on such Closing Date, the
non-defaulting Underwriters shall be obligated severally, in proportion to
their respective commitments hereunder, to purchase the Common Shares which
such defaulting Underwriters agreed but failed to purchase on such Closing
Date. If any Underwriter or Underwriters so default and the aggregate number
of Common Shares with respect to which such default occurs is more than the
above percentage and arrangements satisfactory to the Representatives and the
Company for the purchase of such Common Shares by other persons are not made
within 48 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company except
for the expenses to be paid by the Company pursuant to Section 5 hereof and
except to the extent provided in Section 9 hereof.
If applicable, in the event that Common Shares to which a default
relates are to be purchased by the nondefaulting entities or by another party
or parties, you or the Company shall have the right to postpone the First or
Second Closing Date, as the case may be, for not more than five business days
in order that the necessary changes in the Registration Statement, Prospectus
and any other documents, as well as any other arrangements, may be effected.
As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section. Nothing herein will relieve
you or a defaulting Underwriter from liability for its default.
SECTION 10. Effective Date. This Agreement shall become effective
immediately as to Sections 5, 8, 11 and 12 and, as to all other provisions,
(i) if at the time of execution of this Agreement the Registration Statement
has not become effective, at 5:00 P.M., New York time, on the first full
business day following the effectiveness of the Registration Statement, or
(ii) if at the time of execution of this Agreement the Registration Statement
has been declared effective, at 9:00 A.M., New York time, on the first full
business day following the date of execution of this Agreement; but this
Agreement shall nevertheless become effective at such earlier time after the
Registration Statement becomes effective as you may determine on and by notice
to the Company or by release of any of the Common Shares for sale to the
public. For the purposes of this Section 10, the Common Shares shall be deemed
to have been so released upon the release for publication of any newspaper
advertisement relating to the Common Shares or upon the release by you of
telegrams (i) advising the Underwriters that the Common Shares are released
for public offering or (ii) offering the Common Shares for sale to securities
dealers, whichever may occur first.
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<PAGE>
SECTION 11. Termination. The obligations of the several Underwriters
hereunder shall be subject to termination in the absolute discretion of the
Representatives, at any time prior to the Closing Date, (i) if any of the
conditions specified in Section 6 shall not have been fulfilled when and as
required by this Agreement to be fulfilled, or (ii) if there has been since
the respective dates as of which information is given in the Registration
Statement, any material adverse change, or any development involving a
prospective material adverse change, in or affecting the business, prospects,
management, properties, assets, results of operations or condition (financial
or otherwise) of the Company, whether or not arising in the ordinary course of
business, or (iii) if there has occurred any outbreak or escalation of
hostilities or other national or international calamity or crisis or change in
economic, political or other conditions the effect of which on the financial
markets of the United States is such as to make it, in the judgment of the
Representatives, impracticable to market the Common Shares or enforce
contracts for the sale of the Common Shares, or (iv) if trading in any
securities of the Company has been suspended by the Commission or by Nasdaq or
if trading generally on the New York Stock Exchange or in the Nasdaq
over-the-counter market has been suspended (including automatic halt in
trading pursuant to market-decline triggers other than those in which solely
program trading is temporarily halted), or limitations on prices for trading
(other than limitations on hours or numbers of days of trading) have been
fixed, or maximum ranges for prices for securities have been required, by such
exchange or the NASD or Nasdaq or by order of the Commission or any other
governmental authority, or (v) if there has been any downgrading in the rating
of any of the Company's debt securities or preferred stock by any "nationally
recognized statistical rating organization" (as defined for purposes of Rule
436(g) under the Securities Act), or (vi) any federal or state statute,
regulation, rule or order of any court or other governmental authority has
been enacted, published, decreed or otherwise promulgated which in the
reasonable opinion of the Representatives materially adversely affects or will
materially adversely affect the business or operations of the Company, or
(viii) any action has been taken by any federal, state or local government or
agency in respect of its monetary or fiscal affairs which in the reasonable
opinion of the Representatives has a material adverse effect on the securities
markets in the United States.
If the Representatives elect to terminate this Agreement as provided
in this Section 11, the Company and the Underwriters shall be notified
promptly by telephone, promptly confirmed by facsimile.
If the sale to the Underwriters of the Common Shares, as contemplated
by this Agreement, is not carried out by the Underwriters for any reason
permitted under this Agreement or if such sale is not carried out because the
Company shall be unable to comply in all material respects with any of the
terms of this Agreement, the Company shall not be under any obligation or
liability under this Agreement (except to the extent provided in Sections 5
and 9 hereof) and the Underwriters shall be under no obligation or liability
to the Company under this Agreement (except to the extent provided in Section
9 hereof) or to one another hereunder.
SECTION 12. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the parties hereto and
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<PAGE>
of their respective officers set forth in or made pursuant to this Agreement
will remain in full force and effect, regardless of any investigation made by
or on behalf of the Underwriters, the Company or any of its or their partners,
officers or directors or any controlling person, as the case may be, and will
survive delivery of and payment for the Common Shares sold hereunder and any
termination of this Agreement.
SECTION 13. Notices. All communications hereunder shall be in writing
and, if sent to the Representatives shall be mailed, delivered or telegraphed
and confirmed to you at Friedman, Billings, Ramsey & Co., Inc., 1001
Nineteenth Street, North, Arlington, Virginia 22209 Attention: Compliance
Department, with a copy to Silver, Freedman & Taff, L.L.P., 1100 New York
Avenue, N.W., Suite 700 East, Washington, D.C. 20005, Attention: Dave M.
Muchnikoff, P.C.; and if sent to the Company shall be mailed, delivered or
telegraphed and confirmed to the Company Resource America, Inc., 1521 Locust
Street, Fourth Floor, Philadelphia, PA 19102, with a copy to Ledgewood Law
Firm, 1521 Locust Street, Philadelphia, PA; Attention: J. Baur Whittlesey,
Esq. The Company or you may change the address for receipt of communications
hereunder by giving notice to the others.
SECTION 14. Successors. This Agreement will inure to the benefit of
and be binding upon the parties hereto, and to the benefit of the officers and
directors and controlling persons referred to in Section 9, and in each case
their respective successors, personal representatives and assigns, and no
other person will have any right or obligation hereunder. Notwithstanding the
foregoing, this Agreement shall not be assignable by the parties. The term
"successors" shall not include any purchaser of the Common Shares as such from
the Underwriters merely by reason of such purchase.
SECTION 15. Partial Unenforceability. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement
shall not affect the validity or enforceability of any other Section,
paragraph or provision hereof. If any Section, paragraph or provision of this
Agreement is for any reason determined to be invalid or unenforceable, there
shall be deemed to be made such minor changes (and only such minor changes) as
are necessary to make it valid and enforceable.
SECTION 16. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of the State of Virginia.
SECTION 17. General. This Agreement constitutes the entire agreement
of the parties to this Agreement and supersedes all prior written or oral and
all contemporaneous oral agreements, understandings and negotiations with
respect to the subject matter hereof. This Agreement may be executed in
several counterparts, each one of which shall be an original, and all of which
shall constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the
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<PAGE>
parties only and will not affect the construction or interpretation of this
Agreement. This Agreement may be amended or modified, and the observance of
any term of this Agreement may be waived, only by a writing signed by the
Company and you.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon
it will become a binding agreement between the Company and the Underwriters,
all in accordance with its terms.
Very truly yours,
RESOURCE AMERICA, INC.
By: ____________________________________
Name: Edward E. Cohen
Title: Chairman of the Board of
Directors and President
The foregoing Underwriting Agreement is hereby confirmed and accepted by us in
Arlington, Virginia as of the date first above written.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
BANCAMERICA ROBERTSON STEPHENS
JANNEY MONTGOMERY SCOTT INC.
BY: FRIEDMAN, BILLINGS, RAMSEY &
CO., INC.
By: _____________________________
Name: James Kleeblatt
Title: Managing Director
For itself and as Representative
of the Several Underwriters in the
attached Schedule A.
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SCHEDULE A
----------
NAME OF UNDERWRITER NUMBER OF SHARES
OF
COMMON STOCK
Friedman, Billings, Ramsey & Co., Inc...........................
BancAmerica Robertson Stephens..................................
Janney Montgomery Scott Inc.....................................
[Other Underwriters]............................................
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EXHIBIT A
The Company shall have furnished to the Underwriters, at the Closing
Date, an opinion of the Ledgewood Law Firm P.C., counsel for the Company,
addressed to the Representative and dated each Closing Date, in form and
substance satisfactory to Silver, Freedman & Taff, LLP, counsel for the
Underwriters, stating that:
(A) Each of the Company and its subsidiaries (the "Subsidiaries") has
been duly incorporated and is validly existing as a corporation in good
standing under the laws of their respective jurisdictions of incorporation and
each is duly qualified to do business as a foreign corporation and is in good
standing in all other jurisdictions where the ownership or leasing of
properties or the conduct of its business requires such qualification, except
where the failure to be so qualified would not have a Material Adverse Effect
on the Company and Subsidiaries, taken as a whole, and the Company and the
Subsidiaries have all necessary corporate power and authority to own their
properties and conduct their business as described in the Registration
Statement and Prospectus;
(B) The authorized, issued and outstanding capital stock of the
Company is as set forth under the caption "Capitalization" in the Prospectus
at the dates indicated therein; the outstanding shares of the Company's
capital stock conform in all material respects to the description thereof
contained in the Prospectus; the shares of capital stock outstanding prior to
the issuance of the Common Shares have been duly and validly issued and are
fully paid and nonassessable and were not issued in violation of any
preemptive rights of any other stockholders of the Company; the Common Shares
have been duly authorized and, when issued and delivered in accordance with
the terms of the Underwriting Agreement, will be duly and validly issued and
outstanding, fully paid and non-assessable and conform in all material
respects to the description thereof in the Registration Statement and
Prospectus; the Common Shares will not be issued in violation of or subject to
any statutory preemptive rights or any preemptive rights set forth in the
Certificate of Incorporation or Bylaws of the Company or, to the best of such
counsel's knowledge, other rights to subscribe for or purchase any securities;
without limiting the foregoing, there are no statutory preemptive or any
preemptive rights set forth in the Certificate of Incorporation or Bylaws of
the Company or, to the best of our knowledge, other rights to subscribe for or
purchase any of the Common Shares;
(C) All of the issued and outstanding shares of capital stock of the
Subsidiaries have been duly and validly authorized and issued and are fully
paid and nonassessable and are owned of record, and, to the best of our
knowledge, beneficially, by the Company. To the best of our knowledge, all
such shares of capital stock of the Subsidiaries are so owned free and clear
of all perfected and other liens, encumbrances, equities, claims, security
interests, voting trusts or other defects of title whatsoever and, except as
disclosed in the Prospectus, neither the Company nor the Subsidiaries own any
equity interest in any other entity;
(D) To the best of our knowledge, except as disclosed in or
specifically contemplated by, the Prospectus, there are no outstanding
options, warrants or other rights calling for the issuance of, and no
commitments, plans or arrangements to issue, any shares of capital stock of
the Company or any securities convertible into or exchangeable for capital
stock of the Company and no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to
A-1
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convert any obligations into shares of capital stock or ownership interests in
the Subsidiaries are outstanding;
(E)(1) The Registration Statement and the Rule 462(b) Registration
Statement, if any, have become effective under the Act, and, to the best of
our knowledge, no stop order suspending the effectiveness of the Registration
Statement or preventing the use of the Prospectus has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated by the Commission; any required filing of the Prospectus and any
supplement thereto pursuant to Rule 424(b) of the Rules and Regulations has
been made in the manner and within the time period required by such Rule
424(b);
(2) The Registration Statement, the Prospectus and each amendment or
supplement thereto (except for the financial statements, schedules and other
financial or statistical information contained or included therein as to which
we need express no opinion) comply as to form in all material respects with
the requirements of the Act and the Rules and Regulations;
(3) To the best of such counsel's knowledge, there are no franchises,
leases, contracts, agreements or documents of a character required to be
disclosed in the Registration Statement on Form S-3 or the Prospectus or to be
filed as exhibits to the Registration Statement or to the Company's Annual
Report on Form 10-K which are not disclosed or filed, as required;
(4) To the best our knowledge, there are no legal or governmental
actions, suits or proceedings pending or threatened against the Company or any
of its Subsidiaries or any of their respective properties, at law or in equity
or before or by any court, governmental authority or administrative or
regulatory authority, which are required to be summarized or described in the
Prospectus which are not summarized or described as required;
(5) To the best of our knowledge, the Company and the Subsidiaries
have obtained all material licenses, permits and other governmental
authorizations currently required for the conduct of their business except
where the failure to obtain the same would not have a Material Adverse Effect
on the Company; and all material licenses, permits and other governmental
authorizations, leases and subleases known to us are in full force and effect
and, to the best of such counsel's knowledge, the Company is in all material
respects complying therewith.
(6) Such counsel does not know of any statutes or regulations
required to be described in the Prospectus which are not so described. To the
best of our knowledge, except as disclosed in the Prospectus, there are no
legal or governmental proceedings pending to which the Company or any
Subsidiary is a party or as to which any property of the Company or any
Subsidiary is the subject which, if determined adversely to the Company or any
such Subsidiary, would individually or in the aggregate have a Material
Adverse Effect on the Company; and, except as disclosed in the Prospectus, to
our knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others.
(F) The Company has all necessary corporate power and authority to
enter into the Underwriting Agreement and to sell and deliver the Common
Shares to be sold by it to you and the Underwriters, as the case may be; the
Underwriting Agreement has been duly and validly authorized by all necessary
corporate action of the Company, has been duly and validly executed and
delivered
A-2
<PAGE>
by and on behalf of the Company, and is a valid and binding agreement of the
Company enforceable in accordance with its terms, except as enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, receivership, conservatorship or other similar laws,
regulations or procedures of general applicability relating to or effecting
enforcement of the rights of creditors of the Company, or by general equity
principles and the discretion of the court before which any proceeding is
brought (regardless of whether enforceability is considered in a proceeding in
equity or at law) and, with respect to the Underwriting Agreement, except as
to those provisions relating to indemnity or contribution for liabilities
arising under the Act as to which no opinion need be expressed; and no
approval, authorization, order, consent registration, filing, qualification,
license or permit of or with any court, regulatory, administrative or other
governmental body is required for the execution and delivery of the
Underwriting Agreement by the Company or the consummation of the transactions
contemplated by the Underwriting Agreement, except such as have been obtained
and are in full force and effect under the Act and such as may be required
under applicable blue sky laws in connection with the purchase and
distribution of the Common Shares by the Underwriters, the clearance of such
offering with the NASD, and the listing of the Common Shares by the Nasdaq
Stock Market.
(G) The execution and performance of the Underwriting Agreement and
the consummation of the transactions therein contemplated, and the application
of the proceeds from the sale of the Common Shares as contemplated by the
Registration Statement will not conflict with, result in the breach of, or
constitute, either by themselves or upon notice or the passage of time or
both, a default, or give rise to any right to accelerate the maturity of or
require the prepayment of any indebtedness, or a violation under any
agreement, mortgage, deed of trust, lease, franchise, license, indenture,
permit or other instrument known to us to which the Company or any of the
Subsidiaries is a party or by which the Company or any of the Subsidiaries or
any of its or their property may be bound or affected or, violate any statute,
judgment, decree, order, rule or regulation known to us of any court or
governmental body having jurisdiction over the Company or the Subsidiaries or
any of its or their property; which conflict, breach, default, right to
accelerate, or violation would have a Material Adverse Effect on the Company
and the Subsidiaries, taken as a whole, or violate any of the provisions of
the Certificate of Incorporation or Bylaws of the Company or any of the
Subsidiaries, or result in the creation or imposition of any material lien,
charge, or encumbrance upon or with respect to any of the properties now owned
or hereafter acquired by the Company or any of its Subsidiaries;
(H) Neither the Company nor any Subsidiary is in violation nor will
the Company's performance of its obligations under this Agreement result in a
violation of their respective Certificates of Incorporation or Bylaws, be in
breach of or default with respect to any provision of any agreement, mortgage,
deed of trust, lease franchise, license, indenture, permit or other instrument
filed as an exhibit to the Registration Statement to which the Company or any
of the Subsidiaries is a party or by which it or any of its properties may be
bound or affected, except where such breach or default would not have a
Material Adverse Effect on the Company and the Subsidiaries, taken as a whole;
and, to the best of such counsel's knowledge, the Company and the Subsidiaries
are in compliance with all laws, rules, regulations, judgments, decrees, order
and statutes of any court or jurisdiction to which they are subject, except
where noncompliance would not have a Material Adverse Effect on the Company
and the Subsidiaries, taken as a whole;
A-3
<PAGE>
(I) Except as set forth in the Prospectus under the caption "Shares
Eligible for Future Sale" and except for certain residual "piggy-back" and
demand registration rights attaching to 983,150 shares, the registration of
which is referred to therein, to the best of our knowledge no holders of
securities of the Company have rights which have not lapsed or been waived to
the registration of shares of Common Stock or other securities of the Company,
because of the filing of the Registration Statement by the Company or the
offering contemplated hereby;
(J) The form of certificate used to evidence the Company's Common
Stock complies in all material respects with all applicable statutory
requirements, any applicable requirements of the Certificate of Incorporation
and Bylaws of the Company.
(K) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the 1940
Act.
Such counsel shall also state that it has been advised by the NASD
that the Company's Common Stock, including the Common Shares, have been
approved for quotation on the Nasdaq National Market upon notice of issuance.
In addition, such counsel shall state that they have participated in
conferences with the officers and other representatives of the Company,
representatives of the independent certified public accountants of the
Company, and representatives of the Underwriters at which the contents of the
Registration Statement and Prospectus were discussed and, although such
counsel is not passing upon and does not assume responsibility for the
accuracy, completeness, or fairness of the statements contained in the
Registration Statement or Prospectus (except as and to the extent stated in
subparagraphs B, D, E and J above), on the basis of the foregoing nothing has
come to the attention of such counsel that causes them to believe either that
the Registration Statement or any amendment thereto, at the time such
Registration Statement or amendment became effective, contained an untrue
statement of a material fact or omitted to state a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, or that the
Prospectus contains an untrue statement of a material fact or omits to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading (it being
understood that, in each case, such counsel need express no view with respect
to the financial statements and other financial and statistical data included
in the Registration Statement or Prospectus).
A-4
<PAGE>
Exhibit 5
April 21, 1998
Resource America, Inc.
1521 Locust Street
Philadelphia, PA 19102
Gentlemen/Ladies:
We have acted as counsel to Resource America, Inc. ("RAI") in
connection with the preparation and filing by RAI of a registration statement
(the "Registration Statement") on Form S-3 under the Securities Act of 1933,
as amended (the "Act"), with respect to the offer and sale of up to 1,725,000
shares of the common stock of RAI, par value $.01 per share (the "Common
Stock"). In connection therewith, you have requested our opinion as to certain
matters referred to below.
In our capacity as such counsel, we have familiarized ourselves with
the actions taken by RAI in connection with the registration of the Common
Stock. We have examined the originals or certified copies of such records,
agreements, certificates of public officials and others, and such other
documents, including the Registration Statement and the amendment thereto, as
we have deemed relevant and necessary as a basis for the opinions hereinafter
expressed. In such examination, we have assumed the genuineness of all
signatures on original documents and the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
copies submitted to us as conformed or photostatic copies, and the
authenticity of the originals of such latter documents.
Based upon and subject to the foregoing, we are of the opinion that,
when issued and paid for, the Common Stock will have been validly issued and
will be fully paid and non-assessable.
<PAGE>
Resource America, Inc.
April 21, 1998
Page 2
We consent to the references to this opinion and to Ledgewood Law
Firm, P.C. in the Prospectus included as part of the Registration Statement,
and to the inclusion of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
/s/
LEDGEWOOD LAW FIRM, P.C.
/apb
<PAGE>
Consent of Grant Thornton LLP
We have issued our reports dated November 6, 1997 accompanying the
consolidated financial statements and schedules of Resource America, Inc. and
subsidiaries included in the Annual Report on Form 10-K for the year ended
September 30, 1997, which form is incorporated by reference in this Registration
Statement; we have also issued our reports dated November 6, 1997, except for
the earnings per share disclosures in footnote 2 for which the date is
February 19, 1998, accompanying the consolidated financial statements for the
years ended September 30, 1997 and 1996 and for each of the three years in the
period ended September 30, 1997, which financial statements are included in
this Registration Statement. We consent to the incorporation by reference and
the use in the Registration Statement of the aforementioned reports and to the
use of our name as it appears under the caption "Experts."
/s/ Grant Thornton LLP
- ----------------------
Cleveland, Ohio
April 21, 1998
