<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-4408
RESOURCE AMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 72-0654145
- - ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1521 Locust Street
Suite 400
Philadelphia, PA 19102
- - ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (215) 546-5005
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, par value $.01 per share
<PAGE>
Name of each exchange on which registered: The Company's Common Stock trades on
the Nasdaq Stock Market under the symbol "REXI."
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based upon the closing price of such stock on December 9, 1998, was
approximately $232,358,000.
The number of outstanding shares of the registrant's Common Stock on December 9,
1998 was 21,859,924.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for registrant's Annual Meeting of Stockholders
to be held on March 16, 1999 are incorporated by reference in Part III of this
Form 10-K.
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RESOURCE AMERICA, INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT
ON FORM 10-K
PART I Page
Item 1: Business............................................... 4
Item 2: Properties............................................. 43
Item 3: Legal Proceedings...................................... 43
Item 4: Submission of Matters to a Vote of Security
Holders............................................ 44
PART II
Item 5: Market for Registrant's Common Equity and
Related Stockholder Matters........................ 44
Item 6: Selected Financial Data................................ 45
Item 7: Management's Discussion and Analysis of
Financial Condition and Results of
Operations......................................... 45
Item 7A: Quantitative and Qualitative Disclosures
About Market Risk.................................. 62
Item 8: Financial Statements and Supplementary Data............ 66
Item 9: Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............. 107
PART III
Item 10: Directors, Executive Officers, Promoters and
Control Persons of the Registrant.................. 107
Item 11: Executive Compensation................................. 107
Item 12: Security Ownership of Certain Beneficial Owners
and Management..................................... 107
Item 13: Certain Relationships and Related Transactions......... 107
PART IV
Item 14: Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................ 107
SIGNATURES
3
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PART I
ITEM 1 BUSINESS
General
The Company was organized as a Delaware corporation in 1966 and, until
1991, was principally involved in the energy industry. Since 1991, the Company
has expanded its business strategy to focus 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 finance 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 Resource Asset Investment Trust
("RAIT"), a real estate investment trust, and currently owns 14% 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 small
lease finance placement and advisory business. In its energy business, the
Company produces natural gas and oil. In September 1998, the Company acquired
The Atlas Group, Inc. ("Atlas"), a company primarily involved in energy finance
through the syndication of oil and gas properties.
Amounts of revenue, operating profit or loss and identifiable assets
attributable to each of the Company's industry segments for fiscal 1996 through
fiscal 1998 are shown in note 13 of the Consolidated Financial Statements.
During the past three fiscal years, the Company's revenues were distributed
across its industry segments as follows:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------
(Dollars in Thousands)
1998 1997 1996
---- ---- ----
Segment % $ % $ % $
- - ------- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Real estate finance 72 62,856 58 19,144 42 7,171
Equipment leasing 16 13,561 22 7,162 26 4,466
Energy 8 6,734 17 5,608 30 5,157
</TABLE>
Real Estate Finance
Commercial Mortgage Loan Acquisition and Resolution Strategy
Identification and Acquisition of 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, on favorable terms, commercial mortgage loans held by
large private sector financial institutions and other entities. Due to the
complexity of issues relating to these loans (including under-performance and
past or present defaults), their comparatively small size relative to a large
4
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institution's total portfolio, their lack of conformity to an institution's then
existing lending criteria and/or other factors, the lender is often not able, or
willing, to devote the necessary managerial and other resources to the loans.
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.
Efficient Resolution of Loans. The Company believes that a further
aspect of its success to date has been its ability to resolve issues 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 identify
and resolve any existing operational, financial or other issues at the property
or to manage the non-conforming aspects of the loan or its underlying 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 issues
to which commercial properties may be subject and who have, in the past,
provided effective services to the Company.
Refinancings and Sales of Senior Lien Interests in Portfolio Loans. The
Company seeks to reduce its invested cash and enhance its returns from its
commercial loan portfolio through refinancing by borrowers of the properties
underlying its loans, financing by the Company of the loans held by it, or the
sale of senior lien interests or loan participations in loans held by it. 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 cash (and in some
cases has obtained returns of amounts in excess of its invested cash), 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:
Refinancings and Sales of Senior Lien Interests in Portfolio Loans." In
addition, the Company has sold and anticipates further sales of whole loans,
senior lien interests and loan participations to RAIT (see "Business - Real
Estate Finance - Sponsorship of Real Estate Investment Trust").
Disposition of Loans. In the event a borrower does not repay a loan
when due, or upon expiration of applicable forbearance periods (See "Business -
Real Estate Finance - Commercial Mortgage Loan Acquisition and Resolution:
Forbearance Agreements"), 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 (or further
forbear) from the exercise of remedies available to it.
Market for Commercial Mortgage Loan Acquisition and Resolution Services
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
typically unable fully to meet the debt service requirements of the original
loan terms or otherwise do not conform to the holder's then-established lending
criteria. The loans are usually acquired from banks, insurance companies,
investment banks, mortgage banks, pension funds 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 was the sale of
packages of under-performing and non-performing loans by government agencies,
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which has declined in recent years. The Company believes, however, that a
permanent market for these services has emerged in the private sector as
financial institutions and other entities realize that outside specialists may
be able to address issues surrounding under-performing, defaulted,
non-conforming or similar loans more cost-efficiently than their internal staff.
Additionally, the Company believes that Japanese banks are continuing to dispose
of non-performing, under-performing and non-conforming commercial mortgages
secured by properties located in the United States in response to Japanese
domestic market and banking conditions. The sale of loans provides selling
institutions with a means of disposing of these assets, thereby obtaining
liquidity and improving their balance sheets. The trend has been reinforced,
management believes, by consolidation within the banking 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 purchase offer for any loan is based upon
the foregoing evaluations and analyses.
The Company has established the following guidelines in connection with
its loan acquisitions: (i) cash flow from the property securing the loan should
be sufficient to yield an initial cash return on the Company's cash 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) should be less than
80%; (iii) there is the possibility of either prompt refinancing of the loan by
the borrower after acquisition, refinancing of the loan by the Company or sale
by the Company of a senior lien interest, that will result in an enhanced yield
to the Company on its (reduced) funds still outstanding; 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. The Company is not,
however, bound by these guidelines and 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. While the Company
has met the initial cash return on net investment guideline in acquiring its
loans, as of September 30, 1998, the Company had in its portfolio 10 loans (57%
of the Company's commercial loan portfolio by book value, including four loans
acquired in 1998 constituting 47% of the Company's commercial loan portfolio by
book value) 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
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the most recent appraisal) exceeded 80%. While the Company has historically
acquired loans in the $1.0 million to $15.0 million range, it has expanded its
focus to also include larger loans which meet its investment objectives. The
Company currently has seven loans in its portfolio which had initial acquisition
costs in excess of $15.0 million. After borrower refinancings or sales of senior
lien interests in six of these loans, the Company had an investment in two loans
that exceeded $15.0 million, one of which has not been refinanced. 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), or as to the amount it may invest in any one loan,
the ratio of initial investment cost-to-appraised value of the underlying
property or the cash yield on the Company's remaining investment. See "Business
- - - Real Estate Finance - Commercial Mortgage Loan Acquisition and Resolution:
Sale of Senior Lien Interests and Refinancings" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations: Real Estate Finance."
As part of the acquisition process, the Company typically resolves
existing issues 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. With
respect to non-conforming loans or their related properties, or where a property
underlying a loan has operational problems, the Company will typically require
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.
Upon acquisition of a loan, the Company typically requires that all
revenues from the property underlying the loan be paid into an operating account
which the Company or its managing agent control. 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
7
<PAGE>
Company may agree that the revenues be paid to an account controlled by the
senior lienor, with the excess over amounts payable to the senior lienor being
paid directly to the Company. As of September 30, 1998, revenues were being paid
directly to senior lienholders with respect to two loans (loans 7 and 40). 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"), the Company may direct that property revenues be paid
to BCMI, as the Company's managing agent. As of September 30, 1998, revenues are
being paid to BCMI with respect to two loans (loans 25 and 30). Where the
Company believes that operating problems with respect to an underlying property
have been substantially resolved, the Company may permit the borrower to retain
revenues and pay property expenses directly. As of September 30, 1998, the
Company permitted borrowers with respect to six loans (loans 24, 27, 31, 32, 37
and 41) to do so.
Commercial Mortgage Loan Acquisition and Resolution: Refinancings
and Sales of Senior Lien Interests
In evaluating a potential commercial mortgage loan, the Company places
significant emphasis on the likelihood of its being able to finance its interest
or 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 refinancing or sale of a senior lien interest,
the Company will typically retain an interest in the loan, which is subordinated
to the interest of the refinance lender or senior lienholder.
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.
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 September 30, 1998, senior lien interests with an aggregate
balance of $12.0 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, five in 2000 and one in
2001). Five other senior lien interests obligate the Company, upon their
respective maturities (all in fiscal 2003), 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 (which will aggregate
$2.1 million, $11.9 million, $2.5 million, $10.7 million and $2.8 million,
8
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respectively, assuming all debt service payments have been made). See "Business
- - - Real Estate Finance - Commercial Mortgage Loan Acquisition and Resolution:
Loan Status."
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 two loans aggregating $2.8 million
and constituting 1.5%, by book value, of the Company's loans as of September 30,
1998), 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, a
pledge of the borrower's equity and/or a similar device.
Commercial Mortgage Loan Acquisition and Resolution: Forbearance Agreements
Commercial mortgage loans acquired by the Company that are in default
typically 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 management of the underlying properties with respect to substantially
all of the loans owned by the Company as of September 30, 1998. In eight
instances, the President of BCMI (or an entity affiliated with him) has also
acted as the general partner, president or trustee of the borrower. The minimum
payments required under a Forbearance Agreement (generally related to
anticipated cash flow from the property after operating expenses) are normally
materially less than the debt service payments called for by the original terms
of the loan. The difference between the minimum required payments under the
Forbearance Agreement and the payments called for by the original loan terms
continues to accrue, but (except for amounts recognized as an accretion of
discount; see "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.
When a loan is refinanced by the Company or the borrower, or the
Company sells a senior lien interest in the loan, the Forbearance Agreement
typically will remain in effect, subject to such modifications as may be
required by the refinance lender or senior lien holder.
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
depend 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
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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.
Commercial Mortgage Loan Acquisition and Resolution: Loan Status
At September 30, 1998, the Company's loan portfolio consisted of 41
loans of which 32 loans were acquired as first mortgage liens and nine loans
were acquired as junior lien obligations. The Company's strategy has been to
acquire loans in anticipation of financing the loan by the Company, selling a
senior lien interest in the loan or in anticipation of the borrower's
refinancing of the loan. As of September 30, 1998, the Company had sold senior
lien interests in 21 loans in its portfolio (including senior interests in five
loans initially acquired by the Company as junior lien loans) and borrowers with
respect to 10 of the Company's loans had obtained refinancing. After such sales
and refinancings, the Company held subordinated interests in 35 loans of which
two interests, constituting approximately 1.5% 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").
<PAGE>
The following table sets forth certain information relating to the
Company's investments in commercial mortgage loans, grouped by the type of
property underlying the loans, as of September 30, 1998. Loans 2, 4, 6, 8, 9,
10, 12, 19, 23, and 38 are not included in the table because they were sold to
RAIT during the 1998 fiscal year.
<TABLE>
<CAPTION>
Loan Outstanding
Loan Type of Acquired Loan
Number Property Location Seller/Originator (Fiscal Year) Receivable(1)
- - ------ -------- -------- ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
005 Office Pennsylvania Shawmut Bank(10) 1993 $ 6,871,095
011(32) Office Washington, D.C. First Union Bank(10) 1995 1,496,017
014 Office Washington, D.C. Nomura/Cargill/Eastdil Realty(13) 1995 16,981,029
020 Office New Jersey Cargill/Eastdil Realty(13) 1996 7,537,780
026(32) Office Pennsylvania FirsTrust FSB/The Metropolitan Fund 1997 8,900,194
027(22) Office Pennsylvania Lehman Brothers Holdings, Inc. 1997 57,103,389
029(24)(32) Office Pennsylvania Castine Associates, L.P. 1997 7,655,240
035(26) Office Pennsylvania Jefferson Bank 1997 2,434,553
036 Office North Carolina Union Labor Life Insurance Co. 1997 4,626,269
044(31) Office Washington, DC Dai-Ichi Kangyo Bank 1998 100,725,247
046 Office Pennsylvania CoreStates Bank, N.A. 1998 6,014,713
048(33) Office Pennsylvania Institutional Property Assets 1998 65,665,695
049(37) Office Maryland BRE/Maryland 1998 98,856,915
------------
Office Totals $384,868,136
------------
001 Multifamily Pennsylvania Alpha Petroleum Pension Fund 1991 $ 8,852,591
003 Multifamily New Jersey RAM Enterprises/Glenn Industries 1993 2,860,838
Pension Plan
015 Condo/ North Carolina First Bank/South Trust Bank(14) 1995/1997 3,564,318
Multifamily
021(18) Multifamily Pennsylvania Bruin Holdings/Berkeley Federal 1996/1997 9,821,038
Savings Bank
022 Multifamily Pennsylvania FirsTrust FSB 1996 5,257,097
024 Multifamily Pennsylvania U.S. Dept. of Housing & Urban
Development 1996 3,404,809
028 Condo/ North Carolina First Bank/SouthTrust Bank(23) 1997 1,724,363
Multifamily
031 Multifamily Connecticut John Hancock Mutual Life 1997 10,121,734
Insurance Company
032 Multifamily New Jersey John Hancock Mutual Life 1997 12,532,447
Insurance Company
034(25) Multifamily Pennsylvania Resource America, Inc. 1997 404,537
</TABLE>
<PAGE>
[TABLE RESTUBBED FROM ABOVE]
<TABLE>
<CAPTION>
Value of
Property
Loan Securing Cost of
Number Loan(2) Investment(3)
- - ------ ---------- -------------
<S> <C> <C>
005 $ 1,700,000 $ 1,246,629
011(32) 1,500,000 1,187,419
014 14,000,000 11,995,336
020 4,600,000 3,358,762
026(32) 5,000,000 2,485,078
027(22) 34,000,000 19,252,051
029(24)(32) 4,025,000 3,057,928
035(26) 2,550,000 1,695,498
036 4,150,000 3,077,343
044(31) 98,000,000 79,192,515
046 5,300,000 3,737,114
048(33) 65,000,000 58,657,176
049(37) 99,000,000 88,511,074
----------- -----------
Office Totals $338,825,000 $277,453,923
----------- -----------
001 $ 5,300,000 $ 4,742,767
003 1,350,000 1,334,167
015 3,702,000 2,792,309
021(18) 4,222,000 2,498,065
022 4,110,000 2,461,114
024
3,250,000 2,740,159
028 1,773,000 1,028,143
031 7,500,000 4,777,959
032 13,278,000 7,397,888
034(25) 450,000 401,500
</TABLE>
11
<PAGE>
(Continued)
<TABLE>
<CAPTION>
Loan Outstanding
Loan Type of Acquired Loan
Number Property Location Seller/Originator (Fiscal Year) Receivable(1)
- - ------ -------- -------- ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
037 Multifamily Florida Howe, Soloman & Hall 1997 $ 7,421,526
Financial, Inc.
041 Multifamily Connecticut J.E. Roberts Companies 1998 26,767,078
042 Multifamily Pennsylvania Fannie Mae(28) 1998 5,540,485
043(29) Multifamily Pennsylvania Downingtown National Bank 1998 2,049,150
045(16) Multifamily Maryland Lennar Partners 1998 19,900,000
047(32) Multifamily New Jersey Credit Suisse First Boston
Mortgage Capital, Inc. 1998 3,336,500
050 Multifamily Illinois J.E. Roberts Companies 1998 47,144,118
051 Multifamily Illinois J.E. Roberts Companies 1998 24,987,898
----------
Multifamily Totals $195,690,527
-----------
007 Single User Minnesota Prudential Insurance, Alpha 1993 $ 5,363,557
(Retail) Petroleum Pension Fund
013(32)(36) Single User California California Federal Bank, FSB 1994 2,929,469
(Commercial)
016 Single User California Mass Mutual/Alpha Petroleum 1995/1996 7,226,604
(Retail) Pension Fund
017(15)(32) Single User West Virginia Triester Investments(10) 1996 1,506,191
(Retail)
018 Single User California Emigrant Savings Bank/Walter 1996 2,933,741
(Retail) R. Samuels and Jay Furman(17)
033 Single User Virginia Brambilla, Ltd. 1997 4,191,328
(Retail)
040 Retail Virginia Lehman Brothers Holdings 1998 45,365,832
----------
Commercial Retail Totals $ 69,516,722
----------
025 Hotel/Commercial Georgia Bankers Trust Co. 1997 $ 6,304,855
030 Hotel Nebraska CNA Insurance 1997 7,940,171
039(25)(27) Hotel Georgia Resource America, Inc. 1997 1,476,527
-----------
Hotel Totals $ 15,721,553
-----------
Balance as of September 30, 1998 $665,796,938
============
</TABLE>
<PAGE>
[TABLE RESTUBBED FROM ABOVE]
<TABLE>
<CAPTION>
Appraised
Value of
Property
Loan Securing Cost of
Number Loan(2) Investment(3)
- - ------ --------- -------------
<S> <C> <C>
037 $ 3,500,000 $ 2,760,380
041 21,000,000 14,724,961
042 5,740,000 4,234,556
043(30) 2,275,000 1,563,215
045(16) 19,500,000 1,300,000
047(32)
3,375,000 2,515,513
050 23,400,000 18,114,910
051 21,000,000 17,320,143
---------- ----------
Multifamily Totals $144,725,000 $92,707,749
----------- ----------
007 $ 2,515,000 $ 1,356,507
013(32)(36) 2,600,000 1,701,049
016 3,000,000 2,157,238
017(15)(32) 1,900,000 895,334
018 4,555,000 2,267,232
033 2,650,000 2,108,028
040 47,000,000 43,156,561
---------- ----------
Commercial Retail Totals $ 64,220,000 $53,641,949
---------- ----------
025 $ 8,500,000 $ 5,945,373
030 5,100,000 3,872,589
039(25)(27) 4,100,000 1,438,146
------------ -----------
Hotel Totals $ 17,700,000 $11,256,108
------------ -----------
$565,470,000 $435,059,729
============ ============
</TABLE>
12
<PAGE>
(Continued)
<TABLE>
<CAPTION>
Proceeds from Company's Net Maturity of Loan/
Ratio of Cost Refinancing or Interest In Expiration of
Loan of Investment to Sale of Senior Net Book Value Outstanding Loan Forbearance
Number Appraised Value Lien Interests Investment(4) of Investment(5) Receivables(6) Agreement(7)
- - ------ ---------------- -------------- ------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
005 73% $ 940,000(12) $ 306,629 $ 817,001 $ 6,031,095 02/07/01
011 79% 660,000(12) 527,419 748,554 811,017 06/01/00
014 86% 6,487,000 5,508,336 6,888,741 10,432,874 11/30/98(34)
020 73% 2,562,000 796,762 2,243,582 5,150,563 02/07/01
026 50% 2,231,693 253,385 1,312,215 6,687,291 09/30/03
027 57% 17,900,000(9)(21) 1,352,051 13,576,057 39,318,931 01/01/02
029 76% 2,625,000(20) 432,928 1,299,182 5,044,263 07/01/02
035 66% 1,750,000(38) (54,502) 570,282 684,553 09/25/02
036 74% 1,750,000(38) 1,327,343 1,800,246 2,876,269 12/31/11
044 81% 71,500,000(9) 7,692,515 20,040,925 19,342,588(31) 08/01/08
046 71% 0 3,737,114 3,753,934 6,014,713 09/30/14
048 90% 44,000,000 14,657,176 16,378,129 21,740,202 08/01/08
049 89% 60,000,000 28,511,074 35,081,713 38,856,915 10/01/03
---------- ---------- ---------- ----------
Office Totals $212,405,923 $65,048,230 $ 104,510,561 $162,991,274
----------- ---------- ----------- -----------
001 89% $ 2,570,000(8) $ 2,172,767 $ 2,632,828 $ 6,282,591 12/31/02
003 99% 627,000 707,167 735,102 2,235,969 01/01/03
015 75% 2,558,000(8) 234,309 3,564,320 1,303,246 08/25/00
021 59% 2,860,000(12)(38) (361,935) 1,081,033 6,961,038 07/01/16
022 60% 3,125,000(19)(20) (663,886) 981,399 2,144,117 10/31/98(35)
024 84% 2,318,750 421,409 809,139 926,349 11/01/22
028 58% 0 1,028,143 1,724,363 1,724,363 03/31/02
031 64% 1,800,000(38) 2,977,959 3,917,915 8,321,734 09/01/05
032 56% 6,000,000(9) 1,397,888 4,499,371 6,570,245 09/01/05
034 89% 0 401,500 402,414 404,537 10/01/02
</TABLE>
13
<PAGE>
(Continued)
<TABLE>
<CAPTION>
Proceeds from Company's Net Maturity of Loan/
Ratio of Cost Refinancing or Interest In Expiration of
Loan of Investment to Sale of Senior Net Book Value Outstanding Loan Forbearance
Number Appraised Value Lien Interests Investment(4) of Investment(5) Receivables(6) Agreement(7)
- - ------ ---------------- -------------- ------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
037 79% $ 2,096,000(11)(12) $ 664,380 $ 1,213,994 $ 5,325,526 07/01/00
041 70% 12,000,000(21) 2,724,961 6,600,194 14,825,089 07/01/03
042 74% 3,000,000(20) 1,234,556 1,760,228 2,543,278 12/31/02
043 69% 1,000,000(30) 563,215 879,702 1,049,150 07/01/02
045 7% 0 1,300,000 1,374,064 3,900,000 06/30/08
047 75% 1,800,000(38) 715,513 1,200,136 1,536,500 10/31/08
050 77% 10,000,000(9) 8,114,910 10,579,556 37,144,118 04/30/03
051 82% 0 17,320,143 17,333,232 24,987,898 09/30/02
---------- ---------- ---------- ------------
Multifamily Totals $ 51,754,750 $ 40,952,999 $ 61,288,990 $128,185,748
---------- ---------- ---------- -----------
007 54% $ 2,099,000 $ (742,493) $ 602,472 $ 3,275,960 12/31/14
013 65% 1,975,000(12) (273,951) 338,112 929,469 05/01/01
016 72% 2,375,000(12) (217,762) 538,238 4,826,604 12/31/00
017 47% 1,000,000(38) (104,666) 488,382 512,399 12/31/16
018 50% 1,969,000(12) 298,232 942,374 964,741 12/01/00
033 80% 1,383,705(8) 724,323 670,556 2,778,697 02/01/21
040 92% 35,250,000(8) $ 7,906,561 8,358,238 10,405,563 12/01/02
---------- --------- ---------- ----------
Commercial Retail Totals $ 46,051,705 $ 7,590,244 $ 11,938,372 $ 23,693,433
------------ ------------- ----------- -----------
025 70% $ 0 $ 5,945,373 $ 6,283,987 $ 6,304,855 12/31/15
030 76% 0 3,872,589 4,082,083 7,940,171 09/30/02
039 35% 0 1,438,146 1,452,527 1,476,527 11/01/02
------------ ------------- ----------- -----------
Hotel Totals $ 0 $ 11,256,108 $ 11,818,597 $ 15,721,553
------------ ------------- ----------- -----------
Balance as of September 30, 1998 $310,212,148 $124,847,581 $189,556,520 $330,592,008
============ ============ ============ ============
</TABLE>
14
<PAGE>
(1) Consists of the original stated or face value of the obligation plus
accrued interest and the amount of the senior secured interest at
September 30, 1998.
(2) The Company generally obtains appraisals on each of its properties at
least once every three years. Accordingly, appraisal dates range from
1995 to 1998.
(3) Consists of the original cost of the investment to the Company (including
acquisition costs and the amount of any senior lien obligation to which
the property remained subject) plus subsequent advances, but excludes the
proceeds to the Company from the sale of senior lien interests or
borrower refinancings.
(4) Represents the unrecovered costs of the Company's investment, calculated
as the cash investment made in acquiring the loan plus subsequent
advances less cash received from sale of a senior lien interest in or
borrower refinancing of the loan. Negative amounts represent the receipt
by the Company of proceeds from the sale of senior lien interests or
borrower refinancings in excess of the Company's investment.
(5) Represents the cost of the investment carried on the books of the Company
after accretion of discount and allocation of gains from the sale of a
senior lien interest in, or borrower refinancing of, the loan but
excludes an allowance for possible losses of $905,000. 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 September 30, 1998 (excluding
one senior lien interest of $2.3 million which is included in the cost of
investment carried on the books of the Company relating to loan 15).
(7) With respect to loans 7, 14, 17, 25, 27, 30, 31, 32, 34, 39,40,42,44, 45,
46, 47,48 and 49, 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 (29) 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 interest in place on the date of
acquisition, except that, with respect to loan 40, it represents the
amount of a refinancing of the loan by the Company contemporaneously with
the Company's investment.
(9) A senior lien interest was sold to RAIT. See "Business - Real Estate
Finance - Sponsorship of Real Estate Investment Trust."
(10) Successor by merger to the seller.
(11) Senior lien interests in sold loans 2, 4 and 10 were transferred to loan
37.
(12) 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.
(13) Seller was a partnership of these entities.
(14) Original lending institutions. In March 1997, as a result of agreements
among the borrower, the Company and a third party, Concord Investment,
L.P. ("Concord"), the borrower's partnership interests were transferred
to the Company which resold them to Concord for a mortgage note (which
wrapped around certain senior indebtedness) and cash.
(15) The loan acquired consists of a series of notes becoming due yearly
through December 31, 2016.
(16) The Company's interest is subordinate to a $4,000,000 senior lien held by
RAIT and a $12,000,000 senior lien held by an unaffiliated third party.
15
<PAGE>
(17) 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.
(18) 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, 18 are due January 1, 2015, one is due October 1, 2007, one is
due March 1, 2001 and two are due October 9, 2001. The president of BCMI
and his wife own general and limited partnership interests in the
borrowers of some of these loans. The borrower with respect to other
loans is a trust, the trustee of which is the president of BCMI and the
beneficiary of which is a limited partnership for which a director of the
Company is general partner.
(19) Includes a junior lien interest sold to Crafts House Apartments Partners,
L.P., a limited partnership in which the Chairman and Vice Chairman of
the Company beneficially own a 21.3% interest.
(20) Three senior lien interests sold to Crusader Bank, Philadelphia,
Pennsylvania. At the time of sale the Company paid off the original
senior lien interests pertaining to two of these loans. The Company has
the obligation to repurchase these senior lien interests, at Crusader's
option, on or after March 31, 2003 (loans 22 and 29) and June 25, 2003
(loan 42).
(21) Two senior lien interests were sold to Commerce Bank, N.A. ("Commerce"),
Philadelphia, Pennsylvania. The Company has the obligation to repurchase
the senior lien interest associated with loan 27, at Commerce's option,
on or after March 5, 2003, if the senior lien interest is not repaid in
accordance with its terms by the borrower.
(22) The property securing the loan is owned by two partnerships, the
"Building Partnership" and the "Garage Partnership." Pursuant to a loan
restructuring agreement which pre-dates the Company's interest in the
loan, an affiliate of the holder of the loan is required to hold the
general partnership interests in both the Building Partnership and the
Garage Partnership as additional security for the loan. The partnership
interest in the Building Partnership was assigned to a limited
partnership for which a subsidiary of the Company is general partner and
RPI Partnership, an entity for which the Vice Chairman of the Company is
the general partner and the Chairman and President of the Company are
limited partners, is a limited partner. Similarly, the Garage Partnership
interest was assigned to a limited partnership for which a subsidiary of
the Company is general partner and RPI Partnership is a limited partner.
RPI Partnership has agreed that any economic benefit distributed to it as
a result of its limited partnership interests described above will be
assigned and transferred to the Company.
(23) Original lending institutions. In connection with the transactions
referred to in note (14), Concord acquired other condominium units in the
same building. These units secured a loan in the original principal
amount of $910,000 held by the Company.
(24) From 1993 to October 1997, an officer of the Company served as the
general partner of the seller.
(25) Loan originated by the Company.
(26) The borrower is a limited partnership formed in 1991. The general partner
of the partnership is owned by the president of BCMI; the Chairman of the
Company and his wife beneficially own a 49% limited partnership interest
in the partnership and the Vice Chairman beneficially owns a 1% limited
partnership interest.
(27) Construction loan with a maximum borrowing of $3,625,000.
(28) Original lending institution.
(29) Consists of two related loans to one borrower secured by a single
property in the original principal amounts of $1,600,000 and $404,026,
(30) Senior lien interest sold to Washsquare Properties Partners, L.P., a
limited partnership in which the Chairman and Vice Chairman of the
Company beneficially own a 14.4% limited partnership interest.
16
<PAGE>
(31) The Company and RAIT jointly purchased this loan, with RAIT contributing
$10,000,000 of the purchase price. Pursuant to an order of the United
States Bankruptcy Court for the District of Columbia that was in effect
at the time the Company acquired the loan, legal title to the underlying
property had to be transferred on or before June 30, 1998. In order to
comply with that order and to maintain the control of the property that
the Company deemed necessary to protect its loan interest, Evening Star
Associates took legal title on June 19, 1998. A subsidiary of the Company
is the general partner and owns a 1% interest in Evening Star Associates;
the Chairman, Vice Chairman and President of the Company own a 94%
limited partnership interest. The latter have agreed to list their
interests in Evening Star Associates for sale through a qualified real
estate broker until December 31, 1999. Any amounts received by the
limited partners for their interests in excess of their original capital
contributions plus a 6% return will be paid to Evening Star Associates.
If no such sale occurs by December 31, 1999, the limited partners may
retain their interests.
(32) With respect to loans 13, 17 and 26, the president of BCMI is the general
partner of the borrower; with respect to loan 29, he is the general
partner for the sole limited partner of the borrower; and with respect to
loan 11, he is the president of the borrower. With respect to loan 47,
the president of the borrower is an employee of BCMI.
(33) The borrower for this loan is a partnership of which BCMI owns an 11%
interest and RAIT owns a 89% interest.
(34) The Company is negotiating an extension of the forbearance agreement with
the borrower.
(35) The borrower is currently seeking to refinance the Company's loan. The
Company has not initiated any action with respect to the expiration of
the forbearance agreement.
(36) The Chairman of the Company and his wife beneficially own a 40% limited
partnership interest in the borrower.
(37) In connection with the acquisition of this loan, the Company acquired the
right to transfer the equity interest in the borrower. Currently, a
subsidiary of the Company is the general partner of the borrower. Pending
transfer of the limited partnership interests, the Vice Chairman of the
Company holds legal title to these interests.
(38) Senior lien interest sold to Peoples Thrift Savings Bank which has the
right, upon a default by borrower, to require the Company to substitute a
performing loan.
17
<PAGE>
The following table sets forth certain information, grouped by the type
of property underlying the loans, with respect to average monthly cash flow from
the properties underlying the Company's commercial mortgage loans, average
monthly debt service payable to senior lienholders and refinance lenders,
average 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.
<TABLE>
<CAPTION>
Average Average Monthly Debt Average Monthly
Monthly Cash Service on Refinancing Payment to
Loan Flow from or Senior Lien the Company's Cash Flow
Number Property(1)(2) Interests(3) Interest Coverage
- - ------ --------------- ---------------------- --------------- ---------
<S> <C> <C> <C> <C>
005 $ 9,841 $ 6,825 $ 3,016 1.44
011 7,813 5,566 2,247 1.40
014 92,620(4) 58,551 34,069 1.58
020 27,016 19,527 7,489 1.38
026 30,283 21,600 8,683 1.40
027 175,515 161,704 13,811 1.09
029 23,667 22,254 1,413 1.06
035 23,173 14,583 8,590 1.59
036 36,719 14,583 22,136 2.52
044 815,883 456,101 359,782 1.79
046 35,141 0 35,141 N/A
048(9) 425,000 288,314 136,686 1.47
049(9) 620,000(5) 450,000(6) 170,000 1.38
---------- ---------- ----------
Office Totals $2,322,671 $1,519,608 $ 803,063 1.53
---------- ---------- ----------
001 $ 39,197 $ 26,425 $ 12,772 1.48
003 8,052 6,058 1,994 1.33
015 & 028(7) 30,297 26,113 4,184 1.16
021 26,689 22,789 3,900 1.17
022 27,537 26,997 540 1.02
024 25,926 17,962 7,964 1.44
031 72,001 15,000 57,001 4.80
032 90,712 78,805 11,907 1.15
034 5,104 0 5,104 N/A
037 25,000 17,030 7,970 1.47
041 160,346 109,192 51,154 1.50
042 32,166 25,176 6,990 1.47
043 15,851 8,343 7,508 1.90
045 12,998 0 12,998 N/A
047 15,165 15,000(8) 165 1.01
050 92,773(5) 83,333(8) 9,440 1.11
051 67,731(5) 0 67,731 N/A
---------- ---------- ----------
Multifamily Totals $ 747,545 $ 478,223 $ 269,322 1.56
---------- ---------- ----------
007 $ 20,400 $ 20,400 $ 0 1.00
013 23,503 15,833 7,670 1.48
016 23,917 19,500 4,417 1.23
017 10,690 9,087 1,603 1.18
018 25,493(9) 15,998 9,495 1.59
033 21,940 14,985 6,955 1.46
040 375,000 249,497 125,503 1.50
---------- ---------- ----------
Commercial Retail
Totals $ 500,943 $ 345,300 $ 155,643 1.45
---------- ---------- ----------
025 $ 50,205 $ 0 $ 50,205 N/A
030 77,667 0 77,667 N/A
039 12,148(10) 0 12,148 N/A
---------- ---------- ---------- -----
Hotel Totals $ 140,020 $ 0 $ 140,020 N/A
---------- ---------- ----------
Total Properties $3,711,179 $2,343,131 $1,368,048 1.58
========== ========== ==========
</TABLE>
18
<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) and (5), monthly cash flow from each of
the properties has been calculated as the average monthly amount during
the three month period ended September 30, 1998.
(3) Monthly debt service consists of required payments of principal, interest
and other regularly recurring charges payable to the holder of the
refinancing loan or participation.
(4) Average monthly cash flow from the property represents stabilized rents
for the two months ending December 31, 1998 for leases executed for which
total rental payments commence in November 1998.
(5) Estimate based on an historical analysis of the property's cash flow
prior to the Company's purchase of the loan.
(6) The Company sold a senior lien interest in the loan on September 25,
1998. The debt service is the monthly payment commencing November 1998.
(7) Loans 15 and 28 represent different condominium units in the same
property and are, accordingly, combined for cash flow purposes.
(8) The Company sold a senior lien interest in the loan on September 30,
1998. The debt service is the monthly payment commencing November 1998.
(9) Includes one-twelfth of an annual payment of $118,000 received in
December of each year.
(10) Loan 39 is a construction loan and, as such, loan payments are based upon
outstanding advances.
Commercial Mortgage Loan Acquisition and Resolution:
Accounting for Discounted Loans
The difference between the Company's cost basis in a commercial morgage
loan and the sum of projected cash flows therefrom is accreted into interest
income over the estimated life of the loan using a method which approximates the
level interest method. Projected cash flows, which include amounts realizable
from the underlying properties, are reviewed on a regular basis, as are property
appraisals. Changes to projected cash flows reduce or increase the amounts
accreted into interest income over the remaining life of the loan.
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 loans. This discount to face value and
accrued interest and penalties (as adjusted to give effect to refinancings and
sales of senior lien interests) totaled $139.7 million, $86.3 million and $40.0
million at September 30, 1998, 1997 and 1996, respectively. The carrying value
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 carrying value were found to be greater, the
Company would provide, through a charge to operations, an appropriate allowance.
In establishing the Company's allowance for possible losses, the Company also
considers the historic performance of the Company's loan portfolio,
characteristics of the loans in the portfolio and the properties underlying
those loans, industry statistics and experience regarding losses in similar
loans, payment history on specific loans as well as general economic conditions
in the United States, in the borrower's geographic area or in the borrower's (or
its tenant's) specific industries.
19
<PAGE>
For the year ended September 30, 1998, the Company recorded a provision
for possible losses of $505,000 to reflect the increase in size of its
commercial mortgage loan portfolio, thereby increasing its allowance for
possible losses to $905,000.
Gains on the sale of a senior lien interest in a loan (or gains, if
any, from the refinancing of a loan) are allocated between the portion of the
loan sold or refinanced and the portion retained based upon the fair value of
those respective portions on the date of such sale or refinancing. Any gain
recognized on a sale of a senior lien interest or a refinancing is brought into
income on the date of such sale or refinancing.
Commercial Mortgage Loan Acquisition and Resolution: Competition
The commercial mortgage loan acquisition and resolution business is
competitive in virtually all of its aspects. There are a substantial number of
competitors (including investment partnerships, financial institutions,
investment companies, public and private mortgage funds and other entities),
many of which possess far greater financial resources than the Company. This
competition has in the past caused, and may in the future cause, the Company's
loan acquisition costs to increase, thus reducing both the amount of loan
discount the Company can obtain and the yield of the investment to the Company.
In addition, the Company's ability to add to its loan portfolio will depend on
its success in obtaining funding for the acquisition of additional mortgages.
Subject to general market conditions and investor receptivity to the investment
potential of specialty finance companies in general and real estate and
equipment leasing companies in particular, the Company will have to compete for
capital based largely on the Company's overall financial performance and, more
specifically, the performance of the Company's loan portfolio. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
Residential Mortgage Loans
During fiscal 1998, the Company's residential mortgage lending business
emphasized providing first and second mortgage loans on one-to-four family
residences to borrowers who typically do not conform to guidelines established
by the Federal Home Loan Mortgage Corporation ("Freddie Mac") because of past
credit impairment or other reasons. The Company originated approximately $74.8
million of such loans in fiscal 1998. Subsequent to the fiscal year end, and as
a result of conditions in the capital markets (which affected the Company's
ability to obtain warehouse lines of credit and to resell residential mortgage
loans it originated), the Company determined to focus more heavily on
establishing private label programs for institutions. Under these programs the
Company operates the residential lending function of an institution for its
account, under its name and funded by the institution. No private label programs
had been established at September 30, 1998. In addition, with respect to loans
originated for its own account for resale, the Company has determined to place
more emphasis on originating conforming loans and has become a Freddie Mac
qualified lender. During fiscal 1998, approximately 7% of the Company's
residential mortgage loans conformed to Freddie Mac guidelines. The Company
currently is licensed as a residential mortgage lender in 25 states and is
originating loans in 18 states.
The Company originates residential mortgage loans with a targeted
average loan size of approximately $50,000. As of September 30, 1998, the
average loan size was approximately $44,000. Depending upon the credit
qualification of a borrower, the Company may originate loans for its portfolio
20
<PAGE>
with a loan-to-value ratio of up to 60% (for the least qualified borrowers) to
90% (for the most qualified borrowers). During fiscal 1998, the Company also had
a program for originating "125 loans" (that is, loans with a cumulative
loan-to-value ratio of up to 125%). Approximately 29% of the Company's
residential mortgage loans originated in fiscal 1998 were 125 loans. Subsequent
to fiscal year end, the Company terminated its 125 loan program due to
conditions in the capital markets and the consequent withdrawal of entities to
whom the Company sold its 125 loans. As of September 30, 1998, the Company held
$3.9 million of 125 loans, all of which are held for sale.
During fiscal 1998, the Company utilized two warehouse lines of credit,
which have since expired, to fund its residential lending operations. The
Company is currently in the process of obtaining a new warehouse line of credit;
pending the establishment of a new line of credit, lending operations for the
Company's account are being internally funded. See "Business - Sources of
Funds."
The Company's policy is to sell loans originated for its own account
for cash. During the first quarter of fiscal 1998, however, the Company engaged
in a sale of a pool of loans for a note. The Company's policy is generally to
sell loans on a servicing-released basis; however, with respect to the sale of a
group 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.
As an originator of residential mortgage loans, the Company faces
intense competition, primarily from mortgage banking companies, commercial
banks, credit unions, thrift institutions and finance companies. This
competition is particularly intense in the area of conforming loan originations
and results in loan yields and fees that are less than in the non-conforming
loan market.
Sponsorship of Real Estate Investment Trust
The Company has sponsored 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 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 the sponsor of RAIT, the Company has acquired 14% of RAIT's common
shares at a cost of approximately $12.0 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"). In connection with
RAIT's initial public offering, 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 $20.1 million. The Company subsequently
sold the balance of its interest in one of the loans in which RAIT had acquired
a senior lien interest to RAIT at the carrying value of such interest to the
Company. In addition, RAIT separately acquired a $6.0 million participation in
loan 32, a $12.0 million participation in loan 44, a $4.0 million participation
in loan 45 and a $10.0 million participation in loan 50, each of which is senior
21
<PAGE>
to the Company's interest. RAIT also purchased an 89% interest in a partnership
that owns the property securing a portion of loan 48. 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, President and director of the Company, is the Chairman and
Chief Executive Officer of RAIT. Jonathan Z. Cohen, a son of Mr. and Mrs. Cohen
and a Vice President of the Company, is the Company's nominee to the Board of
Trustees and is the Secretary of RAIT.
To limit conflicts between RAIT and the Company, it has been agreed
that, until January 14, 2000, (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
believes that complying with these restrictions has not materially affected the
Company's current operations, nor does it anticipate that it will do so in the
future. The Company has also agreed that if, following January 14, 2000, 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 $50.1 million (original
equipment cost) in leased assets at September 30, 1998. 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 continue to be reduced over the next several years
22
<PAGE>
as partnership assets are sold and cash is distributed back to the investors.
FLPM does not anticipate forming new limited partnerships in the future. FLFS
will continue to operate its lease finance placement and advisory business
which, while profitable, is not expected to constitute a material source of
revenues for the Company.
Strategy
Focus on Small Ticket Leasing. The Company focuses on leasing equipment
that costs 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 actively pursues 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 currently has
programs established with 10 manufacturers or distributors of equipment in a
variety of equipment categories, including Lucent Technologies
(telecommunications) and Minolta (office automation). In addition, in fiscal
1998 the Company became the exclusive lessor for Tech Data Corporation, the
world's second largest distributor of information technology equipment. Two of
the Company's vendor programs (for Minolta Corporation and for Lucent
Technologies) accounted for 16% and 10%, respectively, of the equipment (by
cost) leased by the Company during fiscal 1998. In 1998, the Company also
pursued a marketing strategy of providing leasing on a private label basis to
the small business customers of commercial banks. Through September 30, 1998,
program agreements had been signed with three banks, including Huntington Bank,
a $40.0 billion (total assets) bank based in Columbus, Ohio.
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.
23
<PAGE>
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 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 four hours after receipt of a request.
Focus on Lease Sales. The Company sells substantially all of its
leases. In fiscal 1997, the Company sold four separate pools of leases and the
equipment underlying the leases (including the residual interest) to special
purpose lease financing entities (each, an "Intermediate Purchaser") which then
sold interests in the leases to an institutional buyer. In the first quarter of
fiscal 1998, the Company entered into an arrangement with an unaffiliated
Intermediate Purchaser and a group of institutional buyers to periodically sell
leases (including lease residuals) to a maximum of $50.0 million of leases. The
Company has utilized $27.7 million of availability under this arrangement
through September 30, 1998. In June 1998, the Company entered into a second
lease sale facility with an affiliated Intermediate Purchaser to a maximum of
$100.0 million. Under this latter facility, the Company retains lease residuals
(that is, the proceeds received from the sale or re-leasing of equipment upon
lease termination or from the extension of the lease term beyond its original
expiration date). The Company has utilized $50.2 million of availability under
this facility through September 30, 1998. See "Business - Sources of Funds -
Forward Lease Sale Facilities." To date, the Company has retained the servicing
rights on the leases it sells. Selling the leases allows the Company to recover
a significant amount of its investment in the leased equipment, freeing capital
for further leasing activity.
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 and
computer systems. 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 fiscal years 1998, 1997 and 1996.
24
<PAGE>
Equipment Volume by Product Type
(% by dollar volume of equipment purchased)
<TABLE>
<CAPTION>
Year Ended
September 30
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Document processing and storage.............. 40% 49% 73%
Telecommunications........................... 32 37 21
Computer systems............................. 15 8 6
Other........................................ 13 6 -
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
The Company has developed a credit evaluation system, known as the
"Small Business Credit Scoring System," in order to respond to the inability of
small businesses to supply standardized financial information for credit
analysis (for example, audited financial statements). The system operates by
assigning point amounts, or "scores," to various factors (such as business
longevity, type of business, payment history, bank account balances and credit
ratings) deemed relevant by the Company in determining whether an end-user is a
creditworthy lessee. The scoring system declines approval of end-users with low
scores, approves end-users with high scores and refers mid-range scores to
credit analysts for further consideration and decision. Information is obtained
from the end-user, from reports by standard credit reporting firms and from
reports provided by consumer credit bureaus. The credit scoring system is also
based upon industry data and the past experience of the Company and will be
reviewed and modified as required in response to actual portfolio performance.
Financial statements may be required for larger transactions (in the $30,000 to
$100,000 range) as a complement to the scoring system.
The Company oversees its leasing program through lease administration
and management systems which control invoicing, collection, sales and property
taxes, and financial and other reporting to management (including reports
regarding regular payments, payment shortages, advance payments, security
deposits, insurance payments and late or finance charges). The Company has
supplemented the system with an internal audit department (which evaluates the
safeguarding of assets, reliability of financial information and compliance with
the Company's credit policies) and a collection department.
The Company markets its leasing services primarily through the
establishment of vendor programs. See "Business - Equipment Leasing - Strategy -
Focus on Vendor Programs." As of September 30, 1998, the Company had vendor
program relationships with 10 vendors, including Minolta Corporation and Minolta
Business Systems. In addition, three manufacturers, including Lucent
Technologies, Inc. and Tech Data Corporation, 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
25
<PAGE>
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.
In April 1998, the Company commenced retaining for its own account the
residual interest in leases sold by it and anticipates that it will derive a
significant portion of its leasing profits (if any) from residuals. Currently,
repayment of notes received by the Company from Intermediate Purchasers of the
Company's equipment leases in earlier sales depends, to a significant extent, on
realization of residuals. See "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 significant 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 the
lease meets one of the following criteria: (i) it transfers ownership of the
equipment to the customer by the end of the lease term; (ii) it contains a
bargain purchase option; (iii) the 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
26
<PAGE>
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. The estimates are based upon available industry data
and senior management's prior experience with respect to comparable equipment.
Current estimates of residual values will vary from the original recorded
estimates. Residual values are reviewed periodically to determine if the fair
market value of the equipment is below its recorded estimate. If required,
residual values are adjusted downward to reflect adjusted estimates of fair
market value. Generally accepted accounting principles do not permit upward
adjustments to residual values.
Sales of Leases. The Company sells a large percentage of the leases it
originates (until recently including residuals) 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. 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 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. (Only cash is received on sales that do not include residuals.)
Gains on the sale of leases 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 which includes residuals, 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 or accept
retransfer of non-performing leases in the pool.
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 characteristics and assumptions of future losses.
The Company's policy is to charge off to the allowance those lease contracts
which are delinquent and for which management has made a determination that the
probability of collection is remote. Recoveries on leases previously charged off
are restored to the allowance. For the fiscal year ended September 30, 1998, the
Company recorded a provision for possible losses of $1.4 million or
27
<PAGE>
approximately 1% of lease receivables under management. For the year ended
September 30, 1997, it recorded a provision for possible losses of $253,000.
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.
During fiscal 1998, the Company sold leases with a book value of
approximately $78.4 million to an Intermediate Purchaser in return for cash of
$78.0 million, on a servicing retained basis, and notes with a face value of
$8.0 million, resulting in a gain of $7.6 million. During fiscal 1997, the
Company sold leases with a book value of approximately $30.2 million, on a
servicing retained basis, 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 fiscal 1998 and 1997, $8.6 million of principal payments
were made on these notes.
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, the Company assumed that the cash flows on the
underlying leases sold were discounted at rates ranging from 6.1% to 7.8% per
annum during the fiscal year ended September 30, 1998.
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 September
30, 1998 of $34.4 million, including $21.1 million (book value) of equipment
with an original cost of $50.1 million and investments in direct financing
leases of $8.0 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. The partnerships commenced their liquidation periods at various
times between December 1995 and December 1998.
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 4% to 6% of gross rents except that, if leases are
full-payout leases, management fees range from 2% 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% (one partnership) or
12% (three 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).
28
<PAGE>
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
$789,000, $657,000 and $650,000 during fiscal years 1998, 1997 and 1996,
respectively.
Competition
The Company believes that, although the small ticket leasing business
has experienced substantial consolidation in the past few years, the business of
equipment leasing remains highly competitive. The Company believes, however,
that small ticket leasing, to be viable, requires the financing and monitoring
of large amounts of equipment and related assets. Because of the complexity and
cost of developing and maintaining the platforms and vendor programs to handle
such high volumes, the Company believes that there are substantial barriers to
others entering into this business. Accordingly, the Company believes that its
principal competitors are and will be primarily major financial institutions and
their affiliates.
Recent Developments
On December 15, 1998, the Company entered into an agreement to acquire
JLA Credit Corporation ("JLA"). JLA is the small-ticket United States leasing
subsidiary of Japan Leasing Corporation, headquartered in Tokyo, Japan. Like
FLI, JLA underwrites, finances and services non-cancelable, full-payout
equipment leases. JLA originated leases with an aggregate original equipment
purchase price of $151.0 million and $168.0 million during the year ended
December 31, 1997 and during the eleven months ending November 30, 1998,
respectively. As of October 31, 1998, JLA had a net investment in leases of
$324.4 million and total assets of $367.0 million. JLA's equipment leasing
business focuses on small ticket leasing programs from vendors and manufacturers
primarily in the high technology, machine tool, printing and Japanese business
segments. Lease transactions generally range in equipment size from $25,000 to
$500,000 to small and medium size businesses. Key vendor relationships include
Heidelberg, Scitex and Buycomp.
The Company expects to acquire JLA for a combination of cash, including
financing to be arranged by the Company, and assumption of existing JLA debt.
The Company values the transaction at approximately $350.0 million. Subject to a
financing contingency, the Company anticipates that the transaction will close
in January 1999.
29
<PAGE>
Energy Operations
General
The Company produces natural gas and, to a lesser extent, oil from
locations principally in Ohio, Pennsylvania and New York. On September 29, 1998,
the Company acquired Atlas by merger. See "Business - Energy Operations -
Acquisition of Atlas." As a result of that acquisition, at September 30, 1998
the Company had (either directly or through partnerships and joint ventures
managed by it) interests in 2,505 wells (including royalty or overriding
interests with respect to 182 wells), of which the Company operates
approximately 2,200 wells, 1,250 miles of natural gas pipelines and 301,000
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 customers, such as gas
brokers and local utilities, under a variety of contractual arrangements. Oil
produced from wells operated by the Company is sold at the well site to regional
oil refining companies at the prevailing spot price for Appalachian crude oil.
The Company seeks to increase its reserve base through selective acquisition of
producing properties and assets, through further development of its existing oil
and gas interests and acquisition of energy industry companies. For further
information, see Note 14 to Consolidated Financial Statements.
Acquisition of Atlas
On September 29, 1998, the Company acquired Atlas, a company
principally involved in the energy finance business, by merger with Atlas
America, Inc., a newly-formed, wholly-owned subsidiary of the Company. Atlas
owned interests in, operated or managed more than 1,400 natural gas and oil
wells and 650 miles of gas gathering pipelines, located predominantly in
Pennsylvania and Ohio. Atlas also had undeveloped oil and gas leases covering
more than 155,000 acres and managed more than 25 energy-related partnerships and
joint ventures which it had syndicated through public and private offerings.
Pursuant to the Agreement and Plan of Merger dated July 13, 1998, as
amended, (the "Agreement"), the former shareholders of Atlas received 2,063,496
shares of the Company's Common Stock ("Common Stock"), options to acquire
120,213 shares of Common Stock for nominal consideration and cash of $6.9
million. Atlas shareholders also received certain "piggy-back" registration
rights, effective during the period from September 30, 1999 through September
29, 2000, with respect to the shares of Common Stock received by them. Atlas
shareholders are also eligible to receive incentive compensation should Atlas'
post-acquisition earnings exceed a specified amount during the four years
following the merger. The incentive compensation is equal to 10% of Atlas'
aggregate earnings in excess of that amount equal to an annual (but
uncompounded) return of 15% on $63.0 million. The $63.0 million base amount will
increase by the amounts (if any) the Company pays for any post-merger energy
acquisitions. Incentive compensation is payable, at the Company's option, in
cash or in shares of Common Stock, valued at the average closing price of the
Common Stock for the ten trading days preceding September 30, 2003.
The Agreement requires the Company to indemnify the officers and
directors of Atlas until September 29, 2000 against claims based upon their
service as officers and directors of Atlas (except for claims based upon breach
of the Agreement or upon a failure to disclose information as required by the
Agreement) and against claims alleging wrongdoing by any of them outside the
scope of their employment with Atlas. The Agreement requires the principal Atlas
30
<PAGE>
shareholders to indemnify the Company for losses resulting from a breach of any
representation or warranty given by Atlas. The maximum aggregate amount that the
shareholders are required to pay as a result of this indemnification is $10.0
million. The shareholders will have no indemnification obligation until the
aggregate loss (including expenses) exceeds $750,000 and then only to the extent
such loss exceeds $250,000. As security for this indemnification, 698,651 shares
of the Common Stock issued in connection with the merger are being held in
escrow until September 29, 2002.
The merger consideration paid by the Company was based upon the
Company's valuation of Atlas' assets and the price of the Common Stock. There
were no material relationships between the Company, its officers, directors or
affiliates, and Atlas or its officers, directors or affiliates, prior to the
merger. The cash paid in connection with the merger was derived from the
Company's working capital. It is anticipated that any cash required for payment
of incentive compensation will come from the earnings of Atlas from which the
incentive compensation has been derived.
Well Operations
The following table sets forth information as of September 30, 1998
regarding productive oil and gas wells in which the Company has a working
interest, including wells acquired in connection with the acquisition of Atlas:
Number of Productive Wells
--------------------------
(Unaudited)
Gross(1) Net(1)
-------- ------
Oil wells ................... 180 73
Gas wells ................... 2,143 1,015
----- -----
2,323 1,088
===== =====
(1) Includes the Company's equity interest in wells owned by 84
partnerships and joint ventures. Does not include royalty or overriding
interests with respect to 182 wells held by the Company.
31
<PAGE>
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 51 partnerships and joint
ventures.
<TABLE>
<CAPTION>
Average
Lifting
Production Average Sales Price Cost per
------------------------- ---------------------- Equivalent
Fiscal Period Oil(bbls) Gas(mcf) per bbl per mcf mcf(1)
- - ------------- --------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
1998(2) 48,113 1,485,008 $14.38 $2.66 $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
</TABLE>
(1) Oil production is converted to mcf equivalents at the rate of six mcf per
barrel.
(2) Excludes production relating to Atlas, which was not acquired by the Company
until the end of the 1998 fiscal year.
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 fiscal years 1998, 1997 and
1996, regardless of when drilling was initiated.
<TABLE>
<CAPTION>
Exploratory Wells Development Wells
--------------------------------------- -------------------------------------
Productive Dry Productive Dry
Fiscal --------------- ---------------- --------------- --------------
Period Gross Net Gross Net Gross Net Gross Net
- - ------ ----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998(1) 1.0 .25 2.0 .75 3.0 3.0 -- --
1997 1.0 .50 -- -- -- -- -- --
1996 3.0 .52 1.0 .29 2.0 1.50 -- --
</TABLE>
- - ----------
(1) Excludes wells drilled by Atlas, which was not acquired by the Company until
the end of the 1998 fiscal year.
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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Oil and Gas Reserve Information
An evaluation of the Company's estimated proved developed oil and gas
reserves as of September 30, 1998, including those acquired with Atlas, was
reviewed by Wright & Company, Inc., an independent petroleum engineering firm.
Such study showed, subject to the qualifications and reservations therein set
forth, reserves of 90.0 million mcf of gas and 573,000 barrels of oil. See Note
14 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 September 30,
1998, including acreage acquired in connection with the acquisition of Atlas.
The information in this table includes the Company's equity interest in acreage
owned by 84 partnerships and joint ventures.
<TABLE>
<CAPTION>
Developed Acreage Undeveloped Acreage
--------------------- -------------------
Gross Net Gross Net
----- --- ----- ---
<S> <C> <C> <C> <C>
Arkansas............................ 2,560 403 - -
Kansas.............................. 160 20 - -
Kentucky............................ 9,838 4,919 9,771 4,885
Louisiana........................... 1,819 206 - -
Mississippi......................... 40 3 - -
New York............................ 23,738 18,816 18,528 15,749
Ohio................................ 122,526 80,227 44,008 42,793
Oklahoma............................ 4,243 635 - -
Pennsylvania........................ 39,786 39,194 59,822 59,822
Tennessee........................... - - 1,804 1,804
Texas............................... 4,520 209 - -
West Virginia....................... 4,692 2,346 58,177 29,038
----- ----- ------ ------
213,922 146,978 192,110 154,091
======= ======= ======= =======
</TABLE>
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 $72,000 in fiscal 1998
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 September 30, 1998, 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 84 partnerships and joint ventures.
33
<PAGE>
Pipeline Operations
The Company operates, on behalf of four limited partnerships of which
it is both a general and limited partner (in which it owns 22%, 46%, 26% and 50%
interests and including one partnership for which Atlas acts as a general and
limited partner), and for its own account, various gas gathering pipeline
systems (including those owned by Atlas) totaling approximately 1,250 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 1998, the Company faced no shortage of
such goods and services. The duration of the current supply and demand situation
cannot be predicted with any degree of certainty due to numerous factors
affecting the oil and gas industry, including selling prices, demand for oil and
gas, and governmental regulations.
Major Customers
The Company's natural gas and oil is sold to various purchasers. During
fiscal 1998, gas sales to two purchasers accounted for 35% and 14%,
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.
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.
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<PAGE>
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
The Company historically relied upon internally generated funds to
finance its growth. During the past two fiscal years, the Company has augmented
its internally generated funds with the proceeds of one debt and two equity
offerings (which generated aggregate net proceeds of $249.3 million) and lines
of credit to the Company and its subsidiaries. The following is a summary of the
terms of the Company's debt offering and the lines of credit outstanding as of
December 1, 1998.
12% Senior Notes. The 12% Senior Notes (the "12% Notes") are unsecured
general obligations of the Company, with interest only payable until maturity on
August 1, 2004. The 12% Notes are not subject to mandatory redemption except
upon a change in control of the Company, as defined in the Indenture governing
the 12% Notes, when the Noteholders have the right to require the Company to
redeem the 12% Notes at 101% of principal amount plus accrued interest. No
sinking fund has been established for the 12% Notes. At the Company's option,
the 12% 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 $50.0 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
35
<PAGE>
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 12% Notes.
Commercial Mortgage Loan Credit Facility. In March 1998, the Company,
through certain operating subsidiaries, established an $18.0 million revolving
credit facility (with current permitted draws of $5.0 million) 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. Credit availability is based upon the
amount of assets pledged as security for the facility and is subject to approval
by Jefferson Bank of additional collateral. The facility expires on April 1,
1999. There were no borrowings under this facility during fiscal 1998. See
"Certain Relationships and Related Party Transactions."
Lease Financing Credit Facility. The Company's equipment leasing
subsidiary, FLI, maintains a $20.0 million revolving credit facility with term
loan availability with First Union National Bank and European American Bank. The
facility has, in addition to customary covenants, the following principal terms:
(i) no single advance may exceed the lesser of (a) 95% of the cost of the leases
being financed or (b) $500,000 or, in the case of leases to investment grade
lessees, $1,000,000; (ii) revolving credit loans bear interest, at FLI's
election, at (a) an adjusted LIBOR rate plus 150 basis points or (b) the rate
for one month U.S. dollar deposits as reported by Telerate (London) plus 150
basis points, while term loans bear interest at the adjusted LIBOR rate plus 150
basis points; (iii) term loans must be for not less than $2.0 million per loan;
(iv) 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); (v) revolving credit loans
may be converted to term loans and paid in accordance with applicable
amortization schedules; (vi) adjustable rate term loans may, at the option of
FLI, be converted into fixed rate term loans at then quoted rates; and (vii) FLI
will be required to maintain a debt (excluding non-recourse debt) to tangible
net worth ratio of 5.5 to 1.0 or less, a minimum tangible net worth equal to
$8.0 million plus 75% of FLI's net income, and a ratio of cash flow (income
before taxes, depreciation, amortization and extraordinary items, plus interest
expense) to the sum of interest expense, mandatory principal payments and 25% of
outstanding obligations under the revolving line of credit, of 1.5 to 1.0. The
facility expires on March 31, 2000 but may be renewed for additional 18 month
periods by the lenders. In fiscal 1998, there was an aggregate of $33.8 million
in borrowings under this line, all of which were repaid prior to September 30,
1998.
Forward Lease Sale Facilities. In December 1997, the Company, through
FLI, entered into an arrangement (the "1997 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"
36
<PAGE>
and collectively with First Union, the "Purchaser"), as the ultimate investors,
for the sale of equipment leases by FLI. In June 1998, the Company entered into
a similar arrangement (the "1998 Commitment" and together with the 1997
Commitment, the "Commitments") with Fidelity Leasing SPC I, Inc. (a wholly-owned
special purpose lease finance subsidiary of FLI) ("FSP"), as the Intermediate
Purchaser, and the Purchaser. Under the Commitments, (i) SW or FSP 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, with respect to the 1997 Commitment only, the residual value of the
equipment (the "Residual Value"), (ii) the Purchaser will purchase, for a price
equal to the product of .88 (.90 in the 1998 Commitment) multiplied by the
aggregate Discounted Contract Balances on the date of sale, up to $50.0 million
of equipment leases ($100.0 million of equipment leases for the 1998 Commitment)
from time to time during the one year term of each Commitment, and (iii) FLI
acts as servicing agent for the equipment leases purchased. With respect to
transactions under the 1997 Commitment, SW uses the cash received by it from the
Purchaser to pay a portion of the purchase price of the leases and pays the
balance of the purchase price 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. With respect to transactions under the
1998 Commitment, FSP uses the cash received by it from the Purchaser to pay
portion of the purchase price of the leases; the unpaid balance of the purchase
price constitutes a contribution to FSP's capital by the Company. Lease
collections in excess of fees associated with the leases and a return to the
Purchaser (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 or .90, as the case may be, has been
exceeded, in which event the amount of such excess must be paid to the Purchaser
or paid to SW or FSP, as the case may be). Payments made to SW will be available
to pay down the promissory note, while the payments to FSP will be distributed
to FLI. Under the Commitments, FLI is obligated to provide a substitute
equipment lease to the Purchaser 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 services advances. In addition, SW and FSP, as the case may be, and
FLI, in either case, are obligated to accept retransfer of, or provide a
substitute lease for, any lease which does not meet the eligibility
requirements. The Commitments are 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 nine months) for all defaulted leases (i.e., leases which FLI 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 nine months) for all non-defaulted leases
exceeds 2.75%.
In fiscal 1998, the Company sold to SW equipment leases under the 1997
Commitment with an aggregate book value of $31.8 million in return for cash of
$27.7 million and promissory notes for $8.0 million and sold FSP equipment
leases under the 1998 Commitment with an aggregate book value of $46.5 million
in return for cash of $50.2 million, retaining lease residuals with a book value
of $3.9 million.
37
<PAGE>
Oil and Gas Credit Facilities. The Company maintains a $5.0 million
credit facility with 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 September 30, 1998, the Company
had $5.0 million outstanding under this line.
Prior to its acquisition by the Company, Atlas maintained a $40.0
million credit facility (with $27.0 million of permitted draws) at PNC Bank
("PNC"). This line has been continued by the Company. The credit facility is
divided into two principal parts: a revolving credit facility and a term loan
facility. The revolving credit facility has $20.0 million of permitted draws,
with a term ending in 2001 and with draws bearing interest at one of two rates
(elected at borrower's option) which increase as the amount outstanding under
the facility increases: (i) PNC prime rate plus between 0 to 50 basis points, or
(ii) LIBOR plus between 137.5 to 212.5 basis points. The term loan facility has
$7.0 million of permitted draws, with a term ending in 2003, and with draws
bearing interest at one of two rates (elected at borrower's option), which
increase as the amount outstanding under the facility increases: (i) PNC prime
rate plus between 12.5 to 62.5 basis points, or (ii) LIBOR plus between 150 to
225 basis points. The credit facility contains certain financial covenants of
Atlas, including maintaining a current ratio of .75 to 1.0, a ratio of fixed
charges to earnings of 2.0 to 1.0 and a leverage ratio (essentially a ratio of
debt to equity) of not less than 3.75 to 1.0, reducing to 3.50 to 1.0 in January
1999, 3.25 to 1.0 in October 1999 and 3.0 to 1.0 in March 2000. The credit
facility also imposes the following limits: (a) Atlas' exploration expense can
be no more than 20% of capital expenditures plus exploration expense, without
PNC's consent; (b) sales, leases or transfers of property by Atlas are limited
to $1.0 million without PNC's consent; and (c) Atlas cannot incur debt in excess
of $2.0 million to lenders other than PNC without PNC's consent. As of September
30, 1998 there was $20.0 million outstanding under the revolving credit facility
and $7.0 million outstanding under the term loan facility.
Other. During fiscal 1998, FMF maintained two credit facilities, both
of which have expired. FMF is currently in the process of obtaining a new credit
facility; however, no such facility has yet been established and there can be no
assurance that FMF will be able to obtain such a facility on acceptable terms.
Employees
As of September 30, 1998, the Company employed 309 persons, including
15 in general corporate, 56 in real estate finance, 96 in equipment leasing and
142 in energy.
Cautionary Statements for Purposes of the Safe Harbor
Statements made by the Company in written or oral form to various
persons, including statements made in filings with the Securities and Exchange
Commission, that are not strictly historical facts are "forward-looking"
statements that are based on current expectations about the Company's business
and assumptions made by management. Such statements should be considered as
subject to risks and uncertainties that exist in the Company's operations and
38
<PAGE>
business environment and could render actual outcomes and results materially
different than predicted. The following includes some, but not all, of the
factors or uncertainties that could cause the Company to miss its projections:
o The Company's real estate finance and equipment leasing businesses are
dependent on outside capital in order to sustain current growth.
Historically, funding for the Company's operations has been derived
from a number of different sources, including internally generated
funds, proceeds from the sale of senior lien interests and refinancings
of commercial mortgages, sales of residential loans and equipment
leases, borrowings and the sale of its notes and Common Stock. A
decrease in availability of such outside funds could have a material
adverse effect on the Company's results of operations and financial
condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations: Liquidity and Capital Resources."
o Variations in the volume of commercial mortgage loans purchased or
originated by the Company or in the volume of residential mortgage
loans and equipment leases originated by the Company could materially
affect the Company's results of operations and financial condition.
o Unforeseen interest rate increases could reduce the resale value of
leases with fixed interest rates, could increase the Company's costs of
funds (such as the interest rates payable on new senior lien interests
sold by the Company on, or new borrower refinancings of its commercial
loan portfolio), and could reduce demand for the Company's residential
mortgage loans and lease funding. 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 equipment leases are sold, they are
funded from credit facilities or working capital. An increase in
interest rates during the period between funding by the Company of the
residential loan or equipment lease and its resale could adversely
affect the Company's operating margin. During a period of declining
rates, the amounts becoming available to the Company for investment may
have to be invested at lower rates that the Company had been able to
obtain in prior investments.
o Declines in real property values generally and/or in those specific
markets where the properties securing the Company's commercial mortgage
and residential loans are located could materially affect the value of
and default rates under those loans and, with respect to residential
mortgage loans, may reduce consumer demand.
o In each of its business operations, the Company is subject to intense
competition from numerous persons, many of whom possess far greater
financial, marketing, operational and other resources than the Company
and may have lower costs of funds than the Company.
o Many of the Company's commercial mortgage loans 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 or are subject to other problems. Although prior to
acquisition of a loan the Company will generally negotiate with the
borrower or other parties in interest to resolve outstanding issues,
ensure the Company's control of the cash flow and, where appropriate,
make financial accommodations to take into account the operating
39
<PAGE>
conditions of the underlying property, there may be a higher risk of
default with these loans as compared to conventional loans.
o Many of the Company's commercial mortgage loans were acquired as or
became (as a result of borrower refinancing) junior lien obligations.
Subordinate liens carry a greater credit risk, including a
substantially greater risk of non-payment of interest or principal,
than senior lien financing. In the event of foreclosure, the Company
will be entitled to share only in the net proceeds after payment of all
senior lienors. It is therefore possible that the Company will not
recover the full amount of its outstanding loan or of its unrecovered
investment in the loan, either of which events could have a material
adverse effect on the Company's results of operations and financial
condition.
o At September 30, 1998, the Company's allowance for possible losses was
$905,000 (.5% of book value of its commercial mortgage loan portfolio
at that date). There can be no assurance that this allowance will prove
to be sufficient or that future provisions for loan losses will not be
materially greater, either of which could have a material adverse
effect on the Company's results of operations.
o Unforeseen and drastic changes in governmental truth-in-lending, equal
credit opportunity, settlement procedures, mortgage disclosure, debt
collection practices, environmental and similar policies affecting the
Company's business could make compliance more difficult (or impossible)
and expensive.
o In the first quarter of fiscal 1998 the Company sold, on a
servicing-retained basis, a pool of residential mortgage loans that
were both acquired and originated by it to an unaffiliated special
purpose mortgage financing entity for a note with a face value of $8.3
million. The note was partially prepaid during fiscal 1998 through
third-party financing, which financing was unconditionally guaranteed
by the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations: Real
Estate Finance." The $1.4 million balance of the note 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 and approximately
75% of these loans have loan to value ratios in excess of 100%. 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. This would result in
a charge to the Company's earnings in the amount of any unrecovered
remaining balance of the note. 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.
o The Company currently relies in its equipment leasing business upon
relationships it has established with certain manufacturers and
regional distributors in order to gain access to end-users who will
enter into equipment leases. To date, the Company has established
vendor programs with 10 manufacturers or distributors. Two
manufacturers, Minolta Corporation and Lucent Technologies, accounted
for 16% and 10%, respectively, of the equipment (by cost) leased by the
40
<PAGE>
Company during fiscal 1998. 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.
o During fiscal 1997 and the first six months of fiscal 1998, the Company
typically sold some portion or all of its interest in originated
equipment leases and the related equipment to Intermediate Purchasers
for cash and promissory notes. At September 30, 1998, the Company held
$14.1 million of such notes. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations." 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 an Intermediate Purchaser to repay the notes could also be adversely
affected if the realization of residuals is less than anticipated by
the Company. 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. Any such repayment or
replacement could have a material adverse effect on the Company's
results of operations and financial condition.
o Through March 31, 1998, as part of its equipment lease sales the
Company sold its entire interest in the leased equipment, including
residuals, to Intermediate Purchasers in exchange for cash and
promissory notes. At April 1, 1998, the Company commenced retaining
residuals for its own account, which materially reduces the gain on
sale of leases as the recognition of revenues, if any, from residuals
will be recognized over the term of the lease. Realization of residuals
is 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. At
September 30, 1998, the Company held unrealized residuals with a book
value of $6.3 million.
o 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.
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o 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. 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.
o 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.
o The Company annually reviews the carrying value of its oil and natural
gas properties under the full cost accounting rules of the Securities
and Exchange Commission (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.
o 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. 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
42
<PAGE>
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.
o Unforeseen Year 2000 compliance issues, both within the Company and
among its customers and service providers and in general among the
business and governmental communities, could negatively impact the
Company's business.
ITEM 2. PROPERTIES
The Company's executive office is located in Philadelphia, and is
leased under an agreement providing for rents of $115,000 per year through May
2000. The Company's small ticket equipment leasing and residential mortgage loan
headquarters are located in Ambler, Pennsylvania, and is leased by the Company
under agreements providing for rents of $351,000 per year. The agreements
terminated on June 30, 1998 but have been extended on a month-to-month basis.
The residential mortgage loan business also leases office space in Mt. Laurel,
New Jersey under an agreement providing for rents of $220,000 per year through
October 2002. The Company leases space in Philadelphia for management operations
with respect to its five public leasing partnerships 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 and, as a result of the Atlas
acquisition, a 24,000 square foot office building in Pittsburgh, Pennsylvania
which are used for its energy operations. In addition, as a result of the Atlas
acquisition, the Company owns a 17,000 square foot field office and warehouse
facility in Jackson Centre, Pennsylvania. The Company also maintains two energy
field offices in Ohio and New York, on month-to-month tenancies, for which
aggregate rent for fiscal 1998 was $25,000. The Company also maintains a lease
brokerage office in California for which the rent is $24,000 per year through
July 1999. Aggregate rent for all of the Company's offices was $750,000 for
fiscal 1998.
ITEM 3. LEGAL PROCEEDINGS
On October 14, 1998, Theodore M. Birnbaum filed a complaint in the U.S.
District Court for the Eastern District of Pennsylvania (the "Eastern District")
on behalf of himself and all purchasers of the Common Stock between December 17,
1997 and August 28, 1998 against the Company, its directors and executive
officers and the Company's independent auditors. On December 2, 1998, Janet
Leigh and Glenn Hutton filed a similar complaint in the Eastern District,
individually and on behalf of all others similarly situated, against the
Company, the Company's Chief Executive, Financial and Accounting Officers, and
the Company's independent auditors. The complaints allege that the Company (i)
used the "accretion-of-discount" method of recognizing revenue on discounted
loans inappropriately and (ii) applied FASB 125 improperly with respect to the
calculation of the fair value of the Company's retained junior interests in
loans in which the Company had sold a senior lien interest or which the borrower
had refinanced. The complaints further allege that, as a result, the Company's
revenues and net income were inflated. The complaints seek unspecified damages.
The Company believes that the complaints are without merit and intends to defend
itself vigorously.
43
<PAGE>
The Company is also party to various routine legal proceedings arising
out of the ordinary course of its business. Management believes that none of
these actions, individually or in the aggregate, will have a material adverse
effect on the financial condition or operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq Stock Market under
the symbol "REXI." The following table sets forth the high and low sale prices,
as reported by Nasdaq, on a quarterly basis for the Company's last two full
fiscal years and the 1999 fiscal year through December 9, 1998. All amounts have
been retroactively adjusted to reflect the three-for-one stock split effected in
the form of a 200% stock dividend by the Company on June 5, 1998.
High Low
---- ---
Fiscal 1999
-----------
First Quarter (through December 9, 1998)....... $13.69 $7.56
Fiscal 1998
-----------
Fourth Quarter................................. 37.50 7.75
Third Quarter.................................. 29.25 19.75
Second Quarter ................................ 20.17 14.50
First Quarter.................................. 18.83 14.25
Fiscal 1997
-----------
Fourth Quarter................................. 17.17 8.33
Third Quarter.................................. 8.75 6.33
Second Quarter................................. 8.83 5.92
First Quarter.................................. 6.33 4.08
As of December 9, 1998, there were 21,859,924 shares of Common Stock
outstanding held by 794 holders of record.
The Company paid regular quarterly cash dividends on its Common Stock
(as adjusted for stock dividends) of $.03 per share commencing with the fourth
quarter of fiscal 1995. Under the terms of the 12% Notes, the payment of
dividends on the Company's Common Stock is restricted unless certain financial
tests are met. See "Business - Sources of Funds: 12% Notes."
44
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data as of and for the five fiscal years ended
September 30, 1998 are as follows (all amounts in thousands, except per share
data):
<TABLE>
<CAPTION>
For the Years Ended September 30,
-----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues
Real estate finance $62,856 $19,144 $ 7,171 $ 6,114 $ 2,522
Equipment leasing 13,561 7,162 4,466 - -
Energy production 4,682 3,936 3,421 3,452 3,442
Energy services 2,052 1,672 1,736 1,879 2,080
Interest and other 4,316 1,031 204 149 136
------- ------- ------- ------- ------
Total revenues $87,467 $32,945 $16,998 $11,594 $8,180
======= ======= ======= ======= ======
Income from continuing operations
before income taxes and extraordinary
item $40,740 $14,931 $7,353 $3,344 $1,209
Provision (benefit) for income taxes 13,368 3,980 2,206 630 (100)
------ ------ ----- ----- -----
Income from continuing operations
before extraordinary item $27,372 $10,951 $5,147 $2,714 $1,309
Extraordinary Item 239 - - - -
------- ------- ------ ------ ------
Net income $27,611 $10,951 $5,147 $2,714 $1,309
======= ======= ====== ====== ======
Net income per common share (basic)
before extraordinary item $1.64 $1.05 $.91 $.48 $.22
Extraordinary item .01 - - - -
----- ----- ---- ---- ----
Net income per common share (basic) $1.65 $1.05 $.91 $.48 $.22
===== ===== ==== ==== ====
Cash dividends per common share $ .13 $ .13 $ .13 $ .03 $ -
===== ===== ===== ===== ====
Balance Sheet Data
Total assets $426,447 $195,119 $43,959 $37,550 $34,796
Long-term debt less current maturities 133,016 118,786 8,966 8,523 8,627
Stockholders' equity 236,478 64,829 31,123 26,551 24,140
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The Company's operating results and financial condition reflect the
growth of the Company's real estate finance and equipment leasing businesses
following substantial increases in working capital due to the sale, in December
1996, of Common Stock (from which it received net proceeds of $19.5 million),
45
<PAGE>
the issuance, in July 1997, of $115.0 million of 12% Notes (from which it
received net proceeds of $110.6 million), and the sale, in April 1998, of Common
Stock (from which it received net proceeds of $119.2 million). These
transactions along with the acquisition of Atlas were primarily responsible for
increasing the Company's capital (stockholders' equity plus long-term debt) to
$369.5 million as of September 30, 1998.
Overview of Fiscal 1998
The Company's gross revenues were $87.5 million in fiscal 1998, an
increase of $54.5 million (165%) from $32.9 million in fiscal 1997, as compared
to an increase in fiscal 1997 of $15.9 million (94%) from $17.0 million in
fiscal 1996. Of the increases in total revenue during that period, the revenues
from the Company's real estate finance business increased to $62.9 million, an
increase of $43.7 million (228%) from $19.1 million in fiscal 1997, as compared
to an increase of $12.0 million (167%) in fiscal 1997 from $7.2 million in
fiscal 1996. Leasing revenues were $13.6 million in fiscal 1998, an increase of
$6.4 million (89%) from $7.2 million in fiscal 1997 as compared to an increase
of $2.7 million (60%) from $4.5 million in fiscal 1996, the period in which
leasing operations commenced. In addition, energy revenues were $6.7 million in
fiscal 1998, an increase of $1.1 million (20%) from $5.6 million in fiscal 1997
as compared to $5.2 million (9%) in fiscal 1996. Real estate finance and
equipment leasing revenues were 87%, 80% and 68% of total revenues in fiscal
1998, 1997 and 1996, respectively. Energy revenues were 8%, 17%, and 30% of
total revenues in fiscal 1998, 1997 and 1996, respectively. The Company
anticipates that its energy revenues, as a percentage of total revenues, will
increase in fiscal 1999 as a result of the acquisition of Atlas.
As of September 30, 1998, total assets were $426.4 million an increase
of $231.3 million (119%) from assets of $195.1 million at September 30, 1997, as
compared to an increase of $151.2 million (344%) from assets of $44.0 million at
September 30, 1996. Real estate finance and equipment leasing assets were 56%,
53% and 57% of total assets at September 30, 1998, 1997 and 1996, respectively.
Energy assets were 21%, 8% and 29% of total assets at September 30, 1998, 1997
and 1996, respectively.
46
<PAGE>
Results of Operations: Real Estate Finance
The following table sets forth certain information relating to the
revenue recognized and cost and expenses incurred in the Company's real estate
finance operations during the periods indicated:
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Revenues:
Commercial mortgage loan
acquisition and resolution:
Interest................................ $13,179 $ 4,877 $ 1,899
Accreted discount....................... 6,520 4,124 954
Fees.................................... 5,939 2,556 675
Gains on sales of senior lien
interests and loans................... 30,196 7,587 3,643
------ ------- ------
55,834 19,144 7,171
------ ------- ------
Residential mortgage lending:
Gain on sales of residential
mortgage loans........................ 4,273 -- --
Interest................................ 876 -- --
--
Origination and other income............ 1,873 -- --
------- ------- ------
7,022 -- --
------- ------- ------
$62,856 $19,144 $7,171
======= ======= ======
Costs and expenses:
Commercial mortgage loan acquisition
and resolution........................ $1,801 $ 1,069 $ 852
Residential mortgage lending............ 9,311 -- --
------ ------- ------
$11,112 $ 1,069 $ 852
======= ======= ======
</TABLE>
47
<PAGE>
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997
Commercial Mortgage Lending. In recent years and especially during
fiscal 1998, the Company's resources have increased considerably, enabling the
Company to acquire loans much larger than those it had previously acquired and
to increase the amount of its average net investment in loans. Prior to fiscal
1998, the Company had focused on acquiring loans with outstanding receivable
balances of between $1.0 million and $15.0 million, with investment costs
(invested funds before proceeds of refinancings or sales of senior lien
interests) typically between $1.0 million and $8.0 million. For loans acquired
through the fiscal year ended September 30, 1997, the average receivable balance
was $6.1 million at September 30, 1998 and the average investment cost was $3.2
million while during the year ended September 30, 1998, the average receivable
balance for loans acquired was $37.2 million and the average investment cost was
$27.8 million. During the year ended September 30, 1998, the Company acquired 12
loans for a cost of $337.1 million, as compared to the purchase of 18 loans for
a cost of $71.7 million in fiscal 1997. The loans acquired in fiscal 1998 had
outstanding receivable balances ranging from $2.0 million to $100.7 million,
with eight of such loans having receivable balances in excess of $19.0 million
(and five of those loans having receivable balances in excess of $45.0 million).
During the year ended September 30, 1997, the receivable balances of loans
acquired ranged from $401,000 to $52.6 million with only one loan having a
receivable balance in excess of $19.0 million (which such loan balance was also
in excess of $45.0 million). The Company anticipates that it will continue to
acquire loans in excess of its previous historical receivable balance and
investment cost ranges, and that such loans may constitute a substantial
percentage of the Company's commercial loan portfolio.
Revenues from commercial mortgage loan acquisition and resolution
operations increased $36.7 million (192%) to $55.8 million in the year ended
September 30, 1998. The increase was attributable to the following:
(i) An increase of $10.7 million (119%) in interest income
(including an increase of $2.4 million of accretion of
discount) resulting from an increase of $100.4 million in the
book value of loans outstanding during that period to $189.6
million as compared to $89.2 million for the same period in
the prior fiscal year.
(ii) An increase of $22.6 million (298%) in gains from
refinancings, sales of senior lien interests and sales of
loans. This increase was primarily the result of an increase
in the number of loans sold or loans in which senior lien
interests were sold (from eight loans totaling $16.5 million
in the year ended September 30, 1997 to 39 loans totaling
$279.4 million in the year ended September 30, 1998). These
sales included, during the second quarter of fiscal 1998, a
sale to RAIT of 10 mortgage loans and senior lien interests in
two other loans, resulting in proceeds of $20.1 million and a
gain of $3.1 million. In addition, during fiscal 1998, the
Company sold senior lien interests in three other loans to
RAIT, resulting in proceeds of $18.0 million and a gain of
$5.1 million.
(iii) An increase of $3.4 million (132%) in fee income to $5.9
million in the year ended September 30, 1998 from $2.6 million
in the year ended September 30, 1997. Fees received in the
year ended September 30, 1998 consisted of the following:
$830,000 for financial advisory and consultation services
related to the organization and capitalization of RAIT; $4.1
48
<PAGE>
million for services to borrowers whose loans the Company
later acquired (of these fees, $840,000 was paid by a
partnership whose partners are RAIT and BCMI); and a one-time
fee of $850,000 for services rendered to an existing borrower
in connection with the operation, leasing and supervision of
the collateral securing the Company's loan.
Gains on sale of loans and senior lien interests in loans (if any) and
the amount of fees (if any) 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.
As a consequence of the foregoing, the Company's yield (gross
commercial mortgage loan acquisition and resolution revenues, including gains
resulting from refinancings, sales of loans and sales of senior lien interests
in loans, divided by the book value of average loan balances) increased to 40%
in the year ended September 30, 1998 as compared to 35% in the year ended
September 30, 1997.
Costs and expenses of the Company's commercial mortgage loan
acquisition and resolution operations increased $732,000 (68%) to $1.8 million
in the year ended September 30, 1998. The increase was primarily a result of
hiring additional personnel, increased compensation to existing employees and
legal costs associated with the expansion of this operation.
As a result of the foregoing, the Company's gross profit from
commercial mortgage loan acquisition and resolution operations increased to
$54.0 million in the year ended September 30, 1998, as compared to $18.1 million
in the same period in the prior year.
Residential Mortgage Lending. During the year ended September 30, 1998,
the Company originated 1,771 residential mortgage loans aggregating $74.8
million. The Company may opportunistically purchase residential mortgage loans
although its focus is on residential mortgage loan originations. During fiscal
1998, the Company had a program for originating 125 loans which was terminated
at the end of the fiscal year. See "Business - Residential Mortgage Loans." At
September 30, 1998, the Company held $3.9 million of 125 loans, all of which
were held for sale.
The Company sold residential mortgage loans with a book value of $71.2
million during the year ended September 30, 1998, resulting in gains of $4.3
million. These sales included, in the first quarter of fiscal 1998, the sale of
certain originated and acquired residential mortgage loans for a note in the
principal amount of $8.3 million of which $6.8 million had been paid through
September 30, 1998. The $6.8 million payment was funded by a loan to the
purchaser from an unaffiliated bank and was guaranteed by the Company and
secured by the residential mortgage loans sold to the purchaser. The Company has
taken such guaranty into consideration in establishing its allowance for
possible losses. The Company also realized $876,000 of interest income from
loans originated and $1.9 million in fees from its origination activities.
Costs and expenses associated with residential mortgage lending
operations were $9.3 million for the year ended September 30, 1998, reflecting
commencement of operations on October 1, 1997 and the increase in loan
originations. In addition, the Company incurred $723,000 of depreciation and
amortization, $248,000 of interest expense and, in connection with a note
received in a loan sale, established a $286,000 allowance for possible loan
losses.
As a result of the foregoing, the Company's residential mortgage
lending business incurred a loss from operations of $3.5 million for the year
ended September 30, 1998.
49
<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 the 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 $18.0 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%).
50
<PAGE>
Results of Operations: Equipment Leasing
The following table sets forth certain information relating to the
revenue recognized costs and expenses incurred in the Company's equipment
leasing operations during the periods indicated:
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Revenues:
Small ticket leasing -
Gains on sale of leases................ $7,598 $3,711 $ --
Interest and fees...................... 3,481 1,081 7
Partnership management.................... 1,693 1,713 3,809
Lease finance placement and
advisory services....................... 789 657 650
------ ------ ------
$13,561 $7,162 $4,466
======= ====== ======
Year Ended September 30,
--------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
Costs and expenses:
Small ticket leasing...................... $3,337 $2,051 $ 425
Partnership management.................... 1,264 1,243 1,471
Lease finance placement and
advisory services....................... 662 528 443
------ ------ ------
$5,263 $3,822 $2,339
====== ====== ======
</TABLE>
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997
The Company experienced continued growth in its leasing business during
fiscal 1998, originating 8,793 leases having a cost of $92.6 million, as
compared to 3,177 leases having a cost of $34.6 million during the prior year.
During that period, the Company sold leases with a book value of approximately
$78.4 million to an Intermediate Purchaser in return for cash of $78.0 million
and notes with a face value of $8.0 million, resulting in gains on sale of $7.6
million, as compared to fiscal 1997, in which the Company sold leases with a
book value of $30.2 million to an Intermediate Purchaser in return for cash of
$20.6 million and a note with a face value of $13.3 million, resulting in gains
on sale of $3.7 million. Payment on the notes is subject to the level of lease
delinquencies and realization of residuals on the sold leases. Revenues from
equipment leasing were $13.6 million in fiscal 1998, an increase of $6.4 million
(89%) from $7.2 million in fiscal 1997. The increase in revenues for year ended
September 30, 1998 as compared to the prior year was attributable to (i) an
increase in the gain on sales of leases of $3.9 million (105%) resulting from
the increased number of leases originated and sold by the Company and (ii) an
increase in interest and fee income of $2.4 million (222%) resulting from the
increased volume of lease originations.
51
<PAGE>
Equipment leasing costs and expenses increased $1.4 million (38%) to
$5.3 million in the year ended September 30, 1998, as compared to the prior
year. The increase was primarily a result of higher operating costs associated
with the increase in lease originations.
During the quarter ended June 30, 1998, the Company began to retain for
its own account the residual values of leases sold. Prior to this quarter the
Company had sold its residual interests, primarily for promissory notes
(aggregating $14.1 million at September 30, 1998) from Intermediate Purchasers.
The Company anticipates that it will continue to retain residual interests for
its own account; however, there is no established Company policy as to the
retention or sale of residuals and, accordingly, the Company may determine to
sell residuals in the future. The effect of retaining residuals is to reduce
revenues recognized from the sale of leases at the time of sale while increasing
revenues anticipated to be derived in the future from the realization of
residuals. At September 30, 1998, unrealized residuals were $6.3 million.
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 an aggregate face value of $13.3 million, resulting
in gains on sale of $3.7 million. During fiscal 1997, the Company collected $8.5
million in principal payments on the notes.
Small ticket leasing expenses increased as a result of the start-up of
small ticket leasing activities in June 1996. Partnership management expenses
decreased as a result of the liquidation of one partnership. Lease placement and
advisory expenses increased as a result of an increase in commissions paid.
The decrease in partnership management revenue in fiscal 1997 as
compared to the prior year period was the result of the liquidation, in
accordance with the terms of its partnership agreement, of one leasing
partnership in the first quarter of fiscal 1996. Partnership management revenue
in fiscal 1996 includes the settlement of the Company's general partner share of
revenues from prior fiscal periods.
52
<PAGE>
Results of Operations: Energy
Years Ended September 30, 1998 Compared to Year Ended September 30, 1997
Oil and gas production revenues increased 19% from fiscal 1997 to
fiscal 1998. A comparison of the Company's revenues, daily production volumes,
and average sales prices follows:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Revenues (in thousands)
Gas(1) ....................................................... $3,944 $3,178
Oil .......................................................... 692 705
Production volumes
Gas (thousands of cubic feet ("mcf")/day)(1).................. 4,069 3,364
Oil (barrels ("bbls")/day).................................... 132 98
Average sales price
Gas (per mcf)................................................. $ 2.66 $ 2.59
Oil (per bbl)................................................. $14.38 $19.68
</TABLE>
(1) Excludes sales of residual gas and sales to landowners.
Natural gas revenues increased $766,000 (24%) in fiscal 1998, compared
to the same period of the prior fiscal year, due to a 21% increase in production
volumes. Oil revenues decreased $13,000 (2%) for fiscal 1998 as compared to
fiscal 1997, due to a 27% decrease in the average sales price of oil in fiscal
1998. The decrease was significantly offset by a 35% increase in production
volumes as compared to fiscal 1997. Both gas and oil volumes were favorably
impacted by two acquisitions of interests in an aggregate of 431 wells located
in Ohio and New York, one in the third quarter of fiscal 1997 and the other in
the first quarter of fiscal 1998.
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 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1998 1997
---- ----
<S> <C> <C>
Production Costs
As a percent of sales.......................................... 43% 42%
Gas (mcf)...................................................... $1.14 $1.13
Oil (bbl)...................................................... $6.84 $6.80
</TABLE>
Production costs increased $386,000 (24%) to $2.0 million in the year
ended September 30, 1998, as compared to the same period in the prior year as a
result of the acquisition of the interests in producing properties referred to
above and well workovers.
53
<PAGE>
Amortization of oil and gas property costs as a percentage of oil and
gas revenues was 17% in the year ended September 30, 1998 compared to 18% in the
year ended September 30, 1997. The variance from period to period 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.
The Company anticipates that revenues and expenses from its energy
operations will materially increase in 1999 and subsequent years as a result of
its acquisition of Atlas.
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
Oil and gas revenues from production sales increased 16% in fiscal 1997
as compared to fiscal 1996.
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
---- ----
Revenues (in thousands)
Gas(1)................................ $ 3,178 $2,722
Oil.................................... 705 627
Production volumes
Gas (mcf/day)(1)....................... 3,364 3,184
Oil (bbls/day)......................... 98 93
Average sales prices
Gas (per mcf).......................... $ 2.59 $ 2.34
Oil (per bbl).......................... $19.68 $18.53
(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.
The Company continued 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
54
<PAGE>
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 and 1996, is as follows:
Year Ended September 30,
------------------------
1997 1996
---- ----
Production Costs
- - ----------------
As a percent of sales......... 42% 42%
Gas (mcf)..................... $1.13 $1.04
Oil (bbl)..................... $6.80 $6.23
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.
Exploration costs increased $26,000 (16%) in fiscal 1997 as compared to
fiscal 1996. The fiscal 1997 increase was the result of an increase in delay
rentals paid on lease acreage held by the Company. During fiscal 1997, the
Company participated in one successful exploratory well and had lease value
impairments totaling $6,000. During fiscal 1996 the Company participated in one
exploratory dry hole and had lease impairments totaling $50,000.
Amortization of oil and gas property costs as a percentage of oil and
gas revenues was 18% in fiscal 1997, and 23% in fiscal 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.
55
<PAGE>
Results of Operations: Other Revenues, Costs and Expenses
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997
Interest and other income increased $3.3 million (319%) to $4.3 million
in the year ended September 30, 1998, as compared to the year ended September
30, 1997, as a result of: (i) the substantial increases in the Company's
uncommitted cash balances and the temporary investment of such balances during
the year; (ii) the reimbursement to the Company, in the third quarter of fiscal
1998, of payroll and administrative costs in the amount of $513,000 for services
provided to a partnership in connection with the partnership's investment in an
unrelated business (in which the Company's president is the president of the
general partner); and (iii) the recognition of dividend income of $801,300 from
RAIT in fiscal 1998, following its formation in January 1998.
General and administrative expenses increased $1.5 million (53%) to
$4.4 million in the year ended September 30, 1998, as compared to $2.9 million
the year ended September 30, 1997, primarily as a result of the hiring of
additional corporate staff and increases in the compensation of senior officers,
together with an increase in occupancy costs as the Company leased additional
office space to accommodate its increased staff.
Interest expense increased $12.2 million (231%) to $17.5 million in the
year ended September 30, 1998 as compared to $5.3 million in the year ended
September 30, 1997 primarily reflecting an increase in borrowings as a result of
the July 1997 issuance of the 12% Notes which were utilized to fund the growth
of the Company's real estate finance and equipment leasing operations.
Provision for possible losses increased $1.6 million (239%) to $2.2
million in the year ended September 30, 1998 as compared to $653,000 in the year
ended September 30, 1997. The increase was primarily the result of increases in
the provisions for possible losses relating to equipment leasing (to $1.4
million) and for possible losses relating to real estate finance (to $791,000).
The increased provisions reflect the increases in both lease originations and
investments in real estate loans. In establishing the Company's allowance for
possible losses in connection with its real estate finance and equipment leasing
operations, the Company considers among other things, the historic performance
of the Company's loan or lease portfolios, industry standards and experience
regarding losses in similar loans or leases and payment history on specific
loans and leases, as well as general economic conditions in the United States,
in the borrower's or lessee's geographic area and in its specific industry.
The effective tax rate increased to 33% in the year ended September 30,
1998 from 27% in the year ended September 30, 1997. The fiscal 1998 increase
resulted from: (i) an increase in the statutory tax rate due to an increase in
the Company's pre-tax earnings; (ii) a decrease in the generation of depletion
for tax purposes; (iii) a decrease in low income housing tax credits; (iv) a
decrease in tax exempt interest in relationship to pre-tax income; and (v) an
increase in state income taxes. The increase in effective tax rate resulted in
an increased provision for taxes of $2.5 million for 1998 over the tax that
would have been payable had the 1997 tax rate been in effect.
56
<PAGE>
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
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.
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 12% 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. 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.
The effective tax rate decreased to 27% in fiscal 1997 from 30% in
fiscal 1996. 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.
Liquidity and Capital Resources
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997
During the past three fiscal years, the Company has derived its capital
resources from three main sources: public and private offerings of debt and
equity securities, lines of credit and purchase facilities extended by banks and
other institutional lenders with respect to equipment leaseing, residential
mortgage and energy operations, and sales of senior lien interests in or
borrower refinancings of commercial mortgage loans held in the Company's
portfolio. The Company has employed its available capital resources primarily in
the expansion of its real estate finance and small ticket leasing businesses,
and expects that it will continue to do so for the foreseeable future. However,
through its acquisition of Atlas, the Company has significantly expanded its oil
and gas operations and, as a result, may direct capital resources to oil and gas
operations as other opportunities arise or as the Company's oil and gas business
develops.
The Company believes that its future growth and earnings will be
materially dependent upon its ability to continue to generate capital resources
from prior sources or to identify new sources. As a result of recent events in
the capital markets (including significant drops in the price of equity
securities generally and the Common Stock in particular, as well as a loss of
liquidity in credit markets), the Company anticipates that generating additional
capital resources on terms similar to those available to it during the last
three fiscal years may be restricted. Accordingly, the Company's
57
<PAGE>
ability to generate continued growth in its real estate finance and equipment
leasing operations may be restricted, which could adversely affect the Company's
earnings potential.
Sources and (uses) of cash for the years ended September 30, 1998 and
1997 were as follows:
Year Ended September 30,
-----------------------
1998 1997
---- ----
(in thousands)
(Used in) provided by operations................ $(8,343) $7,023
(Used in) investing activities.................. (94,363) (66,071)
Provided by financing activities................ 111,507 124,173
------- --------
$ 8,801 $ 65,125
======= ========
The Company had $78.1 million in cash and cash equivalents on hand at
September 30, 1998, as compared to $69.3 million at September 30, 1997. The
Company's ratio of current assets to current liabilities was 1.73 to 1.0 at
September 30, 1998 and 6.7 to 1.0 at September 30, 1997. Working capital at
September 30, 1998 was $38.2 million as compared to $61.4 million at September
30, 1997. The Company's ratio of earnings to fixed charges was 3.3 to 1.0 in the
year ended September 30, 1998 as compared to 3.9 to 1.0 in the year ended
September 30, 1997.
Cash provided by operating activities in fiscal 1998 decreased $15.4
million as compared to fiscal 1997, primarily as a result of the following:
increases in net income and other non-cash adjustments of $16.7 million and $3.4
million, respectively; increases in gains on asset dispositions, accretion of
discount and collection of interest income of $30.7 million, $2.4 million and
$2.3 million respectively; increases in operating assets of $698,000; and
decreases in operating liabilities of $4.0 million.
The Company's cash used in investing activities increased $28.3 million
in the year ended September 30, 1998 as compared to the year ended September 30,
1997. This increase resulted primarily from an increase in the amount of cash
used to fund increased real estate finance and small ticket leasing activities.
In commercial mortgage loan acquisition and resolution, the Company invested
$337.1 million and $71.7 million in the acquisition or origination of 12 loans
and 18 loans in the years ended September 30, 1998 and 1997, respectively. In
addition, the Company advanced funds on existing commercial loans of $6.2
million and $1.9 million in the same respective periods. Cash proceeds received
upon refinancings or sales of senior lien interests and loans amounted to $274.4
million and $16.5 million in the years ended September 30, 1998 and 1997,
respectively. These proceeds reflect the sale of loans and senior lien interests
in or refinancing of 30 and nine loans, respectively. In small ticket leasing,
the Company invested $92.6 million and $34.6 million in the origination of 8,793
and 3,177 leases in the years ended September 30, 1998 and 1997, respectively.
Cash proceeds received upon sales of leases amounted to $78.1 million and $20.6
million in the years ended September 30, 1998 and 1997, respectively. The
Company invested $77.5 million in 1,808 residential mortgage loans during the
year ended September 30, 1998, and, during that period, received cash proceeds
from the sale of loans of $67.7 million.
58
<PAGE>
The Company's cash flow provided by financing activities decreased
$12.7 million during the year ended September 30, 1998 as compared to the year
ended September 30, 1997 since, during fiscal 1997, the Company completed both
an equity and a debt offering, while in fiscal 1998 the Company completed an
equity offering only.
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
The Company raised net proceeds of $19.5 million from a Common Stock
offering and $110.6 million from an offering of the 12% 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 12% Notes offering.
Cash provided by operating activities increased $342,000, or 5%, 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 $61.3 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 $18.0 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.
Dividends
In the years ended September 30, 1998, 1997 and 1996, $2.3 million,
$1.4 million and $757,000 were paid in dividends, respectively. The Company has
paid regular dividends since August 1995. In June 1998, the Company effected a
three-for-one stock split in the form of a 200% stock dividend.
59
<PAGE>
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, including
restrictions which may be imposed pursuant to the indenture under which the 12%
Notes were issued.
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,
which could cause a disruption of business operations. As is the case with most
other businesses, the Company is in the process of evaluating and addressing
Year 2000 compliance of both its information technology and non-information
technology systems (collectively, the "Systems").
60
<PAGE>
Based upon a recent assessment by the Company, the Company has in place
Year 2000 capable Systems for its commercial mortgage loan, equipment leasing
and residential mortgage loan operations. The Company believes that the Systems
for its energy operations (excluding those of Atlas) have completed
approximately 85% of the necessary remediation processes and that remediation
(including testing) will be completed by March 1999. The Company believes that
its embedded systems (such as natural gas monitoring systems and telephones)
are Year 2000 compliant or, if not, are either not date dependent or
would not materially affect the Company's operations. With respect to Atlas'
Systems, the Company's post-acquisition assessment has indicated that Atlas is
currently in the stage of implementing required remediation, which will include
the purchase of a new central processing system. The Company believes that the
necessary system is readily available in the retail market. The Company is also
considering, however, merging Atlas' systems with the Company's energy systems
thereby largely eliminating remediation requirements. The Company anticipates
that, whichever alternative is selected, Atlas' systems will be Year 2000
compliant by September 30, 1999.
As of September 30, 1998, the Company's costs in remediation of its
Systems has not been material. The Company anticipates that its remaining
remediation costs (including costs relating to Atlas' systems) will not exceed
$100,000.
The Company has initiated communications with all of its significant
business partners through a Vendor Readiness Survey to determine their Year 2000
compliance. Responses are evaluated as they are received to determine if
additional action is required to ensure compliance of the business partner. As
of September 30, 1998, all of the Company's principal business partners have
advised the Company that they are Year 2000 compliant or have initiated programs
that will render them Year 2000 compliant in a timely fashion.
As a result of its internal assessment and survey of its business
partners, the Company currently does not believe that Year 2000 matters will
have a material impact on its business, financial condition or results of
operations. To the extent that any of its business partners are materially
affected by Year 2000 problems, the Company intends to seek alternative firms
providing the same services that are Year 2000 compliant. In view of the
responses from its current business partners, the Company will identify
alternative firms on an as-needed basis. There can be no assurance, however,
that the Company would be able to make appropriate arrangements should the need
arise and, accordingly, it is uncertain whether or to what extent the Company
may be affected if problems with its business partners arise.
The Company is aware of the potential for claims against it and other
companies for damages for products and services that were not Year 2000
compliant. Since the Company is neither a hardware manufacturer nor a software
developer, the Company believes that it does not have significant exposure to
liability for such claims.
61
<PAGE>
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table sets forth certain information regarding 40 of the
41 loans held in the Company's portfolio as of September 30, 1998. The
presentation, for each category of information, aggregates the loans by their
maturity dates for maturities occurring in each of the fiscal years 1999 through
2003 and separately aggregates the information for all maturities arising after
the 2003 fiscal year. The Company does not believe that these loans are
sensitive to changes in interest rates since (i) the loans are subject to
forbearance or other agreements that require all of the operating cash flow from
the properties underlying the loans, after debt service on senior lien
interests, to be paid to the Company and thus are not currently being paid based
on the stated interest rates of the loans; (ii) all senior lien interests are at
fixed rates and are thus not subject to interest rate fluctuation that would
affect payments to the Company; and (iii) each loan has significant accrued and
unpaid interest and other charges outstanding to which cash flow from the
underlying property would be applied even if cash flow were to exceed the
interest rate, as originally underwritten.
<TABLE>
<CAPTION>
Portfolio Loans, Aggregated by Maturity Dates,(1)
For the Year Ending September 30,
--------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter
---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding loan
receivable
balances (to the
Company's interest) $12,576,991 $7,439,789 $17,902,472 $80,749,326 $82,004,963 $ 91,061,549
Carried cost of
loans (fixed rate) $6,888,741 $4,778,314 4,541,195 $38,165,719 $33,098,200 $59,146,355
Average stated
interest rate
(fixed rate) 12.00% 11.28% 9.53% 8.58% 9.13% 12.80%
Carried cost of
loans (variable
rate) $981,399 $748,554 $338,112 $1,299,182 $735,102 $3,753,934
Average stated
interest rate
(variable rate) 7.21% 12.00% 7.61% 12.65% 9.00% 7.93%
Average interest
payment rate (2) (2) (2) (2) (2) (2)
Principal balance
of related senior
lien interests(3) $9,661,135 $3,860,797 $9,596,217 $23,326,710 $63,310,030 $146,452,834
Average interest
rate of senior
lien interests
(fixed rate) 8.44% 9.53% 9.41% 9.75% 8.67% 7.59%
</TABLE>
62
<PAGE>
(1) Maturity dates of related Forbearance Agreement or Company's interest in the
loan.
(2) Pay rates are equal to the net cash flow from the underlying properties
after payments on senior lien interests. See "Business - Commercial Mortgage
Loan Acquisition and Resolution; Loan Status."
(3) Maturity dates for senior lien interests are as follows:
Maturity Date of Maturity Dates of
Company's Loans Senior Lien Interests Outstanding Balance
(Fiscal Year Ended (Fiscal Year Ended of Senior Lien Interests
September 30) September 30) at September 30, 1998
------------ ------------- ---------------------
1999 2002 $ 875,000
2003 2,237,980
2010 6,548,155
2000 2000 685,000
2002 2,096,000
2005 1,079,797
2001 2000 2,000,000
2001 5,209,000
2007 2,387,217
2002 2003 22,145,435
2005 1,181,275
2003 2003 25,564,065
2004 1,000,000
2006 2,212,903
2008 34,960,269
2021 2,570,000
Thereafter 2001 2,010,000
2003 5,393,792
2004 1,800,000
2008 127,786,532
2010 5,962,202
2011 1,412,631
2014 2,087,597
63
<PAGE>
The following table sets forth information concerning one of the 41
loans held in the Company's portfolio that the Company believes may be deemed to
be interest rate sensitive. The loan matures October 1, 2003.
Outstanding receivable balance (to the
Company's interest) $38,856,915
Carried cost of loan $35,081,713
Stated interest rate Federal funds rate plus
87.5 basis points plus 200
basis points default
interest
Interest payment rate Net cash flow from property
underlying loan
Principal balance of related senior
lien interest $60,000,000
Stated interest rate (senior lien LIBOR plus 250 basis
interest) points; 8.875% maximum
rate
Current interest payment rate (senior
lien interest) 7.88%
Maturity date (senior lien interest) 10/01/01
64
<PAGE>
The following table sets forth certain information regarding the
Company's interest-bearing assets and debt as of September 30, 1998. For further
information regarding the Company's 12% Notes and credit facilities, see Item 1
"Business-Sources of Funds."
<TABLE>
<CAPTION>
Maturity Date
For the Year Ending September 30,
--------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter
---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-BEARING
ASSETS
Fixed rate -- -- -- -- $2,088,373 $13,499,007
Average interest
rate -- -- -- -- 9.00% 8.84%
Variable rate -- -- -- -- $155,283 $5,734,717
Average interest
rate -- -- -- -- 13.53% 13.53%
DEBT
Fixed rate $115,318 $126,884 $139,611 $153,618 $159,700 $105,995,087
Average interest
rate 9.30% 9.30% 9.30% 9.30% 9.28% 11.96%
Variable rate $7,149,107 $1,690,942 $1,695,751 $1,679,668 $21,593,109 --
Average interest
rate 8.65% 9.24% 9.24% 9.24% 8.56% --
</TABLE>
65
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Certified Public Accountants
Stockholders and Board of Directors
RESOURCE AMERICA, INC.
We have audited the accompanying consolidated balance sheets of
Resource America, Inc. and subsidiaries as of September 30, 1998 and 1997, 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,
1998. 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, 1998 and 1997, and
the consolidated results of their operations and cash flows for each of the
three years in the period ended September 30, 1998, in conformity with generally
accepted accounting principles.
We have also audited Schedule IV as of September 30, 1998. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
Grant Thornton LLP
Cleveland, Ohio
December 7, 1998, except for the last paragraph of Note 11 for which the date
is December 15, 1998
66
<PAGE>
RESOURCE AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 78,080 $ 69,279
Accounts and notes receivable 9,461 2,414
Prepaid expenses and other current assets 3,109 576
---------- -----------
Total Current Assets 90,650 72,269
Investments in Real Estate Loans (less allowance for
possible losses of $1,191 and $400) 202,050 88,816
Investments in Leases and Notes Receivable (less allowance for
possible losses of $1,602 and $248) 24,977 8,152
Investment in Resource Asset Investment Trust 11,912 -
Property and Equipment
Oil and gas properties and equipment 44,516 24,939
(successful efforts)
Gas gathering and transmission facilities 6,751 1,606
Other 9,133 2,874
----------- ----------
60,400 29,419
Less - accumulated depreciation, depletion
and amortization (16,915) (15,793)
----------- -----------
Net Property and Equipment 43,485 13,626
Other Assets
(less accumulated amortization of $3,112 and $1,014) 53,373 12,256
---------- ----------
$426,447 $195,119
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Borrowings under credit facilities $ 5,166 $ -
Account payable - trade 12,864 1,339
Accrued liabilities 18,648 1,967
Accrued interest 2,226 2,734
Estimated income taxes 6,242 4,093
Current portion of long-term debt 7,264 708
---------- ----------
Total Current Liabilities 52,410 10,841
Long-Term Debt 133,016 118,786
Deferred Income Taxes 1,764 -
Other Long-Term Liabilities 2,779 663
Commitments and Contingencies - -
Stockholders' Equity
Preferred stock, $1.00 par value: 1,000,000 authorized shares - -
Common stock, $.01 par value: 49,000,000 authorized shares 230 54
Net unrealized loss on investment (43) -
Additional paid-in capital 208,588 56,787
Less treasury stock, at cost (17,890) (13,664)
Less loan receivable for Employee Stock Option Plan ("ESOP") (1,591) (353)
Retained earnings 47,184 22,005
---------- ----------
Total Stockholders' Equity 236,478 64,829
---------- ----------
$426,447 $195,119
========== ==========
</TABLE>
See accompanying notes to Consolidated Financial Statements
67
<PAGE>
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands, except per share data)
REVENUES
<S> <C> <C> <C>
Real Estate Finance........................................ $62,856 $19,144 $ 7,171
Equipment Leasing.......................................... 13,561 7,162 4,466
Energy: Production........................................ 4,682 3,936 3,421
Services.......................................... 2,052 1,672 1,736
Interest and Other......................................... 4,316 1,031 204
-------- --------- ---------
87,467 32,945 16,998
COSTS AND EXPENSES
Real Estate Finance........................................ 11,112 1,069 852
Equipment Leasing.......................................... 5,263 3,822 2,339
Energy: Exploration and Production........................ 2,525 1,823 1,582
Services.......................................... 1,136 909 869
General and Administrative................................. 4,373 2,851 1,756
Depreciation, Depletion and Amortization................... 2,641 1,614 1,368
Interest .................................................. 17,464 5,273 872
Provision for Possible Losses.............................. 2,213 653 7
------- -------- ---------
46,727 18,014 9,645
------ -------- ---------
Income Before Income Taxes and Extraordinary Item.......... 40,740 14,931 7,353
Provision for Income Taxes................................. 13,368 3,980 2,206
------- -------- ---------
Income Before Extraordinary Item........................... 27,372 10,951 5,147
Extraordinary Item - gain on early
extinguishment of debt, net of taxes of $112............ 239 - -
------- -------- ---------
NET INCOME................................................. $27,611 $10,951 $ 5,147
======= ======== =======
Net Income Per Common Share - Basic; Before
Extraordinary Item....................................... $ 1.64 $ 1.05 $ .91
Extraordinary Item......................................... .01 - -
------- -------- -------
Net Income Per Common Share - Basic........................ $ 1.65 $ 1.05 $ .91
======= ======== =======
Weighted Average Common Shares Outstanding................. 16,703 10,434 5,670
======= ======== =======
Net Income Per Common Share - Diluted Before
Extraordinary item....................................... $ 1.59 $ .84 $ .62
Extraordinary Item......................................... .01 - -
------- -------- -------
Net Income Per Common Share - Diluted...................... $ 1.60 $ .84 $ .62
======= ======== =======
Weighted Average Common Shares............................. 17,268 13,074 8,271
======= ======== =======
</TABLE>
See accompanying notes to Consolidated Financial Statements
68
<PAGE>
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock ESOP
--------------- Net Unrealized Loss Paid-In ------------------ Loan
Shares Amount on Investment Capital Shares Amount Receivable
------ ------ ---------------------- ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1995 817,912 $8 - $19,214 (152,700) $(2,721) $(482)
Treasury shares issued (24) 1,889 39
6% stock dividends 82,688 1 2,453
5-for-2 stock split effected
in the form of a 150%
stock dividend 1,136,609 11
Issuance of common stock 10,000 77
Treasury shares acquired (1,637) (17)
Cash dividends
($.13 per share)
Warrants issued 41
Repayment of ESOP loan 65
Net income
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 2,047,209 $20 - $21,761 (152,448) $(2,699) $(417)
Treasury shares issued (34) 23,023 483
Issuance of common stock 3,363,436 34 35,060
Treasury shares acquired (579,623) (11,448)
Cash dividends
($.13 per share)
Repayment of ESOP loan 64
Net income
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 5,410,645 $54 - $56,787 (709,048) $(13,664) $(353)
Treasury shares issued 129 9,897 209
Issuance of common stock 4,105,541 41 151,267
Treasury shares acquired (410,000) (4,435)
Net Unrealized loss on investment (43)
3-for-1 stock split effected
in the form of a 200%
stock dividend 13,452,922 135
Loan to ESOP (1,302)
Tax benefit of stock option
plan 405
Cash dividends
($.13 per share)
Repayment of ESOP loan 64
Net income
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 22,969,108 $230 $(43) $208,588 (1,109,151) $(17,890) $(1,591)
========== ==== ===== ======== =========== ========= ========
</TABLE>
<PAGE>
[RESTUBBED FROM TABLE ABOVE]
<TABLE>
<CAPTION>
Total
Retained Stockholders'
Earnings Equity
-------- -------------
<S> <C> <C>
Balance, September 30, 1995 $10,532 $26,551
Treasury shares issued 15
6% stock dividends (2,453) 1
5-for-2 stock split effected
in the form of a 150%
stock dividend (11) -
Issuance of common stock 77
Treasury shares acquired (17)
Cash dividends
($.13 per share) (757) (757)
Warrants issued 41
Repayment of ESOP loan 65
Net income 5,147 5,147
- - --------------------------------------------------------------
Balance, September 30, 1996 $12,458 $31,123
Treasury shares issued 449
Issuance of common stock 35,094
Treasury shares acquired (11,448)
Cash dividends
($.13 per share) (1,404) (1,404)
Repayment of ESOP loan 64
Net income 10,951 10,951
- - --------------------------------------------------------------
Balance, September 30, 1997 $22,005 $64,829
Treasury shares issued 338
Issuance of common stock 151,308
Treasury shares acquired (4,435)
Net Unrealized loss on investment (43)
3-for-1 stock split effected
in the form of a 200%
stock dividend (135) -
Loan to ESOP (1,302)
Tax benefit of stock option
plan 405
Cash dividends
($.13 per share) (2,297) (2,297)
Repayment of ESOP loan 64
Net income 27,611 27,611
- - --------------------------------------------------------------
Balance, September 30, 1998 $47,184 $236,478
======= ========
</TABLE>
See accompanying notes to Consolidated Financial Statements
69
<PAGE>
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income........................................... $ 27,611 $ 10,951 $ 5,147
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization..................... 2,641 1,614 1,368
Amortization of discount on senior note and
deferred finance costs.......................... 1,045 657 75
Provision for losses.............................. 2,213 653 7
Deferred income taxes............................. (1,736) (2,206) 1,059
Accretion of discount............................. (6,520) (4,124) (954)
Collection of interest............................ 5,229 2,932 3,722
Extraordinary gain on debt extinguishment......... (239) - -
Gain on asset dispositions ....................... (42,082) (11,375) (3,650)
Property impairments and abandonments............. 260 38 71
Change in operating assets and liabilities:
Increase in accounts receivable................... (118) (935) (175)
Increase in prepaid expenses
and other current assets........................ (1,618) (103) (310)
Increase (decrease) in accounts payable.......... 1,740 754 (137)
Increase in accrued income taxes................. 2,311 3,716 377
Increase in other liabilities..................... 920 4,451 81
--------- -------- --------
Net cash (used in) provided by operating activities.. (8,343) 7,023 6,681
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash acquired (paid) in business acquisitions.... 9,061 (1,226) -
Cost of equipment acquired for lease................. (92,648) (34,567) (731)
Capital expenditures................................. (4,127) (1,791) (1,097)
Principal payments on notes receivable............... 84,782 9,031 9,377
Proceeds from sale of assets......................... 335,963 34,264 5,478
Increase in other assets............................. (12,196) (3,319) (152)
Investments in real estate loans..................... (420,920) (69,857) (17,650)
Increase in other long-term liabilities.............. 2,026 - -
Payments received (revenue recognized) in excess of
revenue recognized (cash received) on leases....... 3,696 1,394 (7)
--------- -------- ----------
Net cash used in investing activities................ (94,363) (66,071) (4,782)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings................................. 60,000 129,320 536
Short term borrowings................................ 82,652 - -
Dividends paid....................................... (2,297) (1,404) (756)
Principal payments on long-term borrowings........... (70,317) (22,148) (27)
Principal payment on short-term borrowings........... (72,487) - -
Purchase of treasury stock........................... (4,435) - (17)
Increase in other assets............................. (1,220) (5,376) (31)
Proceeds from issuance of stock...................... 119,611 23,781 93
-------- --------- ---------
Net cash provided by (used in) financing activities.. 111,507 124,173 (202)
-------- -------- -------
Increase in cash and cash equivalents................ 8,801 65,125 1,697
Cash and cash equivalents at beginning of year....... 69,279 4,154 2,457
-------- -------- --------
Cash and cash equivalents at end of year............. $78,080 $ 69,279 $ 4,154
======= ======== =======
</TABLE>
See accompanying notes to Consolidated Financial Statements
70
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-NATURE OF OPERATIONS
Resource America, Inc. (the "Company") is engaged in three lines of
business: (1) real estate finance, including the acquisition of commercial real
estate loans and, beginning in the fiscal year ended 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, real estate finance currently is the
dominant business line.
The markets for the Company's business lines are as follows: in real
estate finance, 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 are originated through
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, distributors and other vendors; and in energy, gas is sold to a
number of customers such as gas brokers and local utilities and oil is sold at
the well site to regional oil refining companies in the Appalachian basin.
The Company's ability to acquire commercial mortgage loans, originate
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 businesses will be dependent upon a
number of factors over which the Company has limited or no control, including
conditions in the capital markets (both generally and as they pertain to the
Company), 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 Company's loans and equipment leases.
The Company's growth will also depend on its continued ability to
generate attractive opportunities for acquiring commercial mortgage loans 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.
71
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company, its wholly owned subsidiaries and its pro rata share of the assets,
liabilities, income, and expenses of the 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 a
three-for-one stock split (effected in the form of a 200% stock dividend) in
June 1998.
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever
events or circumstances indicate that the carrying amount of an asset may not be
recoverable. If it is determined that an asset's estimated future cash flows
will not be sufficient to recover its carrying amount, an impairment charge will
be recorded to reduce the carrying amount for that asset to its estimated fair
value.
Stock-Based Compensation
The Company recognizes compensation expense with respect to stock
option grants to employees using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25; stock-based compensation with
respect to non-employees is recognized under the fair value method prescribed by
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock Based Compensation."
Equity Securities
The Company has classified its investment in Resource Asset Investment
Trust ("RAIT"), a real estate investment trust sponsored by the Company, as
available-for-sale. As such, it is carried at market value and the unrealized
gain or loss is reported net of tax as a separate component of stockholders'
equity.
72
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
New Accounting Standards
In fiscal 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for reporting comprehensive income in the basic financial statements.
Comprehensive income will adjust net income for changes in equity during the
period from transactions and other events and circumstances from nonowner
sources. The Company is required to adopt the provisions of SFAS No. 130 for the
fiscal year ending September 30, 1999, beginning with the quarter ending
December 31, 1998, and to restate any prior period financial statements included
for comparative purposes to reflect the application of SFAS No. 130. As the
adoption of this pronouncement will only modify disclosures, there will be no
effect on the Company's consolidated financial position, results of operations
or cash flows.
In fiscal 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131 revises the
manner in which an entity determines the operating segments it must report and
also requires the disclosure of additional segment information. The Company is
required to adopt the provisions of SFAS No. 131 for the fiscal year ending
September 30, 1999, and to restate any prior period financial statements
included for comparative purposes to reflect the application of SFAS No. 131. As
the adoption of this pronouncement will only modify disclosures, there will be
no effect on the Company's consolidated financial position, results of
operations or cash flows.
In fiscal 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"). SOP 97-2 provides guidance on the recognition of revenue for the
licensing, selling, leasing and marketing of computer software to customers. The
Company is required to adopt the provisions of SOP 97-2 for the fiscal year
ending September 30, 1999. Management believes that the adoption of this
pronouncement will not have a material effect on the Company's consolidated
financial position, results of operations or cash flows.
In fiscal 1998, the AICPA issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 requires the capitalization of certain
costs incurred in the development of software used by a company for its own
internal operations. The Company is required to adopt the provisions of SOP 98-1
for the fiscal year ending September 30, 1999. Management believes that the
adoption of this pronouncement will not have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
In fiscal 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging". SFAS No. 133 provides accounting and
reporting standards for derivative instruments. This standard will require the
Company to recognize all derivatives as either assets or liabilities in the
statement of financial position and to measure those instruments at fair value.
The Company is required to adopt the provisions of SFAS No. 133 during the first
quarter of fiscal 1999. Management believes that the adoption of this
pronouncement will not have a material effect on the Company's consolidated
financial position, results of operations or cash flows.
73
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In fiscal 1998, the AICPA issued Statement of Position 98-5, "Reporting
on the Costs of Start-Up Activities ("SOP 98-5"). SOP 98-5 requires costs of
start-up activities and organization costs, as defined, to be expensed as
incurred. The Company is required to adopt the provisions of SOP 98-5 during the
first quarter of fiscal 2000. Management believes that the adoption of this
pronouncement will not have a material effect on the Company's consolidated
financial position, results of operations or cash flows.
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 any of the fiscal years in the
three year period ended September 30, 1998.
On an annual basis, the Company estimates the costs of future
dismantlement, restoration, reclamation, and abandonment of its gas and oil
producing properties. Additionally, the Company evaluates the estimated salvage
value of equipment recoverable upon abandonment. At both September 30, 1998 and
1997 the Company's evaluation of equipment salvage values was greater than or
equal to the estimated costs of future dismantlement, restoration, reclamation,
and abandonment.
Depreciation, Depletion and Amortization
Proved developed oil and gas properties, which include intangible
drilling and development costs, tangible well equipment, and leasehold costs,
are amortized on the unit-of-production method using the ratio of current
production to the estimated aggregate proved developed oil and gas reserves.
Depreciation of property and equipment, other than oil and gas
properties, is computed using the straight-line method over the estimated
economic lives, which range from three to 39 years.
74
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, except for
syndication network which is being amortized on a straight-line basis, over
their respective estimated lives, ranging from five to 30 years, goodwill is
being amortized on a straight-line basis over periods ranging from 15 to 30
years, deferred financing costs are being amortized over the terms of the
related loans (two to seven years) and other costs are being amortized over
varying periods of up to five years.
Other assets at September 30, 1998 and 1997 were:
1998 1997
---- ----
(in thousands)
Contracts acquired (including syndication network).... $14,943 $ 1,636
Goodwill.............................................. 29,335 709
Deferred financing costs.............................. 4,312 5,240
Investment in real estate partnerships................ 1,781 1,827
Restricted cash....................................... 950 1,052
Other ................................................ 2,052 1,792
-------- -------
Total............................................ $53,373 $12,256
======== =======
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.
75
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 are in excess of the Federal Deposit Insurance
Corporation ("FDIC") insurance limit. At September 30, 1998, the Company had
$53.8 million in deposits at Jefferson Bank, of which $52.3 million is over the
FDIC insurance limit. In addition, the Company had deposits of $10.1 million and
$9.7 million at two unaffiliated banks, of which $10.0 million and $9.6 million
are over the FDIC insurance limit, respectively. No losses have been experienced
on such investments.
Revenue Recognition
Real Estate Finance
The difference between the Company's cost basis in a commercial
mortgage loan and the sum of projected cash flows therefrom is accreted into
interest income over the estimated life of the loan using a method which
approximates the level interest method. Projected cash flows, which include
amounts realizable from the underlying properties, are reviewed on a regular
basis, as are property appraisals. Changes to projected cash flows 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 commercial mortgage
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
credited to income at the time of such sale or refinancing.
Loan origination fees and certain direct loan origination costs for
residential mortgage loans held for sale are deferred until the related loan is
sold.
Gain on the sale of residential mortgage loans is recorded at the trade
date in the amount by which the sales price exceeds the carrying value of the
underlying mortgage loan.
76
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equipment Leasing
Direct Financing Leases. The Company's lease transactions are
classified as direct financing leases (as distinguished from sales-type or
operating leases). These 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 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 financing 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. The estimates are based upon available industry data
and senior management's prior experience with respect to comparable equipment.
The estimated residual values are recorded as investment in direct financing
leases, on a net present value basis. Current estimates of residual values will
vary from the original recorded estimates. Residual values are reviewed
periodically to determine if the equipment's fair market value is below its
recorded estimate. If required, residual values are adjusted downward to reflect
adjusted estimates of fair market value. Generally accepted accounting
principles do not permit upward adjustments to residual values.
Sales of Leases. The Company sells a large percentage of the leases it
originates 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 separate entity (an
"Intermediate Purchaser"). 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 values) 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 received by the Company for each pool of leases and
residuals sold consists of the cash received by the Intermediate Purchaser from
the financial institution plus an interest bearing note from the Intermediate
Purchaser.
Through March 1998, the Company's lease sales included residual values.
In April 1998, the Company commenced retaining for its own account the residual
interest in leases sold by it and anticipates that it will derive a significant
portion of its leasing profits (if any) from residuals. Currently, repayment of
notes received by the Company from Intermediate Purchasers in earlier sales
77
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
depends, to a significant extent, on realization of residuals. The Company
anticipates that residuals will principally involve the original end-users;
however, equipment not sold or re-leased to end-users will be disposed of in the
secondary market. While residual realization is generally higher with original
end-users than in the secondary market, the secondary market (essentially,
networks of distributors and dealers in various equipment categories) is well
developed in the product categories the Company currently pursues and
transactions in these product categories have historically resulted in residual
recoveries, on average, equal to the book value of the equipment. Equipment
reacquired by the Company prior to lease termination (through lease default or
otherwise) will be sold in the secondary market.
Gains on the sales of equipment leases 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 the leases or equipment except for (i) residuals retained on post-March 1998
sales, (ii) security interests retained in the lease pool sold when a note is
received as part of the sale proceeds and (iii) under certain circumstances, the
obligation to replace, non-performing leases in the pool.
The Company maintains an allowance for possible losses in connection
with payments due under leases held in the Company's portfolio, its retained
interest in leases securitized or sold and its replacement obligation for
non-performing leases sold. The allowance is determined by management's estimate
of future uncollectible lease contracts, based on factors including the
Company's historical loss experience, an analysis of delinquencies, economic
conditions and trends, industry statistics and lease portfolio (including leases
under the Company's management) characteristics. The Company's policy is to
charge off to the allowance those leases which are delinquent and for which
management has determined the probability of collection to be remote. Recoveries
on leases previously charged off are restored to the allowance.
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).
Energy Operations
Working interest, royalties and override revenues are recognized as
production and delivery take place. Well service income is recognized as
revenue as services are performed.
78
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Flow Statements
The Company considers temporary investments with a maturity at
the date of acquisition of 90 days or less to be cash equivalents.
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Cash paid during the year for:
Interest............................................................... $17,677 $ 2,727 $797
Income taxes........................................................... 12,762 2,094 770
Non-cash activities include the following:
Notes received in exchange for:
Sales of leases..................................................... $ 9,277 $13,275 -
Sales of residential mortgage loans................................. 7,794 - -
Debt assumed upon acquisition of real
estate loan.......................................................... -- 2,381 -
Receipt of note in satisfaction of a
real estate sale..................................................... - 3,500 -
Note payable issued in acquisition..................................... - 925 -
Stock issued in acquisitions........................................... 32,034 315 -
Details of acquisitions:
Fair value of assets acquired.......................................... $78,180 $ 2,466 -
Debt issued............................................................ - (925) -
Stock issued........................................................... (32,034) (315) -
Liabilities assumed.................................................... (46,016) - -
Amounts due seller..................................................... (9,191) - -
-------- ------- ----
Net cash (acquired) paid............................................... ($9,061) $ 1,226 $ -
======== ====== ====
</TABLE>
Limited Partnerships
The Company conducts certain energy and leasing activities through, and
a portion of its revenues 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.
79
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 revenues. Amounts reimbursed for costs incurred as
operator of certain oil and gas partnership properties and as the general
partner in certain equipment leasing partnerships for the years ended September
30, 1998, 1997 and 1996 approximated $2.0 million, $1.8 million, and $1.6
million, respectively. The Company includes in its operations the portion of the
oil and gas Partnerships' revenues and expenses applicable to its interests
therein.
Income Taxes
The Company records deferred tax assets and liabilities, as
appropriate, to account for the estimated future tax effects attributable to
temporary differences between the financial statement and tax bases of assets
and liabilities and the value at currently enacted tax rates, of operating loss
carryforwards. The deferred tax provision or benefit each year represents the
net change during that year in the deferred tax asset and liability balances.
Earnings Per Share
In February 1997, the 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.
Basic EPS is 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 sum of the weighted average
number of shares outstanding and dilutive potential common shares issuable
during the period. Dilutive potential common shares consist of the excess of
common shares issuable under the terms of various stock option and warrant
agreements over 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).
The computations of basic and diluted earnings per share for each year were as
follows:
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Income before extraordinary item ................................ $ 27,372 $ 10,951 $ 5,147
Extraordinary gain on early extinguishment of debt .............. 239 -- --
-------- -------- --------
Net income $ 27,611 $ 10,951 $ 5,147
======== ======== ========
Basic average shares of common stock outstanding ................ 16,703 10,435 5,671
Dilutive effect of stock options and award plans ................ 565 2,639 2,600
-------- -------- --------
Diluted average shares of common stock outstanding .............. 17,268 13,074 8,271
======== ======== ========
</TABLE>
Reclassifications
Certain reclassifications have been made to the fiscal years 1997 and
1996 consolidated financial statements to conform with the fiscal 1998
presentation.
NOTE 3-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 lenders, or involving
borrowers which are, affiliated with officers of the Company. In two instances
80
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
September 30, 1998, loans held with respect to related borrowers or acquired
from related lenders constitute 33% ($62.2 million), by book value, of the
Company's commercial loan portfolio, while the participation interests sold to
related purchasers constituted 1% ($1.9 million) of all participation interests
with respect to the Company's commercial loan portfolio. Transactions with
affiliates must be approved by the Company's entire Board of Directors including
a majority of the outside directors. In addition, acquisitions of commercial
mortgage loans must be approved by the Investment Committee of the Board of
Directors (which consists of three outside directors). The Company believes that
the terms of its transactions with related parties are no less favorable than
those available with unrelated third parties. A more detailed description of
these relationships and transactions is set forth below.
Relationship with Brandywine Construction & Management, Inc. ("BCMI").
The properties underlying 26 of the Company's commercial mortgage loans are
managed by BCMI, a firm in which the Chairman of the Company is the Chairman of
the Board of Directors and a minority stockholder (approximately 8%). The
Company has advanced funds to certain 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, president or
trustee of eight of the borrowers; an entity affiliated with him is the general
partner of the sole limited partner of an ninth borrower. In addition, BCMI owns
an 11% limited partnership interest in another 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 a normal
banking and borrowing relationship with Jefferson Bank, a subsidiary of
JeffBanks, Inc. The Company anticipates that it may effect other borrowings in
the future from Jefferson Bank. The Company, through its residential mortgage
subsidiary, subcontracts any residential mortgage loan servicing to Jefferson
Bank. The Chairman of the Company and his spouse are officers and directors of
JeffBanks, Inc. (and his spouse is Chairman and Chief Executive Officer of
Jefferson Banks and JeffBanks, Inc.), and are principal stockholders thereof.
The President of the Company is a director of Jefferson Bank. Jefferson Bank is
also a tenant at two properties which secure loans held by the Company and
subleases space at one such property to RAIT.
Relationship with RAIT. The Company sponsored the formation and the
January 1998 initial public offering of common shares of beneficial interest of
RAIT. The Company acquired 15% of RAIT's outstanding shares in the initial
offering for an investment of approximately $7.0 million. In June 1998, the
Company acquired additional common shares in a secondary offering for $5.0
million, and currently holds approximately 14% of RAIT's outstanding common
shares. The spouse of the Chairman of the Company 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%. A Vice President of the Company, who
is also the son of the Chairman of the Company and the brother of its President,
currently serves as the Company's nominee. The Company advanced funds to RAIT
for legal, accounting and filing fees and for certain other expenses, salaries
of RAIT's executive officers, rent and other organizational expenses. The
Company also incurred expenses in sponsoring RAIT. These advances and expenses
were repaid, without interest, from the proceeds of RAIT's offering.
81
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with RAIT's initial offering, the Company sold ten loans
and senior lien interests in two other loans to RAIT at an aggregate purchase
price of $20.1 million (including $2.1 million attributable to senior lien
interests acquired by the Company in connection with the sales to RAIT). One of
the loans and one of the senior lien interests were originated for RAIT and sold
to it by the Company at cost. The Company realized a total gain on the sale of
the loans and senior lien interests of $3.1 million.
The Company has engaged in the following transactions with RAIT
subsequent to the sale of the initial investments:
o The Company sold senior lien interests in three loans to RAIT at an
aggregate purchase price of $18.0 million and recognized aggregate gains on
sale of $5.1 million.
o The Company and RAIT jointly acquired a loan at a purchase price of $85.5
million, $10.0 million of which was contributed by RAIT.
o The Company sold to RAIT two loans, both of which it had originated for
RAIT in connection with its sponsorship of RAIT, at their aggregate
carrying value of $7.7 million. The Company retained a $1.3 million junior
lien interest in one of these loans, which interest is subordinate to
RAIT's $4.0 million interest and the $12.0 million interest of an
unaffiliated party.
o The Company made a first mortgage loan to OSEB Associates, L.P. ("OSEB"),
which is owned by RAIT (89%) and BCMI (11%). The loan bears interest at 10%
per annum on stated principal in the amount of $65.0 million. OSEB obtained
outside financing to reduce the loan by $44.0 million; the balance of the
loan is secured by a second mortgage and pledge of partnership interests in
OSEB.
The Company anticipates that it will sell additional loans and
senior lien interests in loans to RAIT, and participate with it in other
transactions.
82
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Relationships with Certain Borrowers. The Company has from time to time
purchased loans in which affiliates of the Company are affiliates of the
borrowers.
In September 1998, the Company acquired a defaulted loan in the
original principal amount of $91.0 million. In connection with the acquisition
of the loan, the Company acquired the right to transfer the equity interest in
the borrower. Currently, a subsidiary of the Company is the general partner of
the borrower. Pending transfer of the limited partnership interests, the Vice
Chairman of the Company holds legal title to those interests.
In March 1998, the Company acquired a loan under a plan of bankruptcy.
An order of the bankruptcy court in effect when the Company acquired the loan
required that legal title to the property underlying the loan be transferred on
or before June 30, 1998. In order to comply with that order and to maintain
control of the property, Evening Star Associates took title to the property on
or about June 19, 1998. A subsidiary of the Company serves as general partner to
Evening Star Associates and holds a 1% interest; the Chairman, Vice Chairman and
President of the Company hold a 94% limited partnership interest. The latter
have agreed to list their interests in Evening Star Associates for sale through
a qualified real estate broker until December 31, 1999. Any amounts received by
the limited partners for their interests in excess of the original capital
contributions plus a 6% return will be paid to Evening Star Associates. If no
such sale occurs by December 31, 1999, the limited partners may retain their
interests.
In August 1997, the Company, 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 the Company's Vice Chairman and the
Chairman, together with the Chairman's spouse, are limited partners. The Vice
Chairman was previously the general partner of such partnership. The Company
leases its headquarters space at such property. The lease provides for rents of
$114,800 per year through May 2000. Ledgewood Law Firm, P.C., a law firm which
provides legal services to the Company, is a tenant at such property.
83
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 1997, the Company acquired a loan with a face amount of $7.0
million from a partnership in which the Vice Chairman and Chairman, together
with the Chairman's wife, are limited partners. The Vice Chairman was previously
the general partner of such partnership. The Company acquired such loan at a
cost of $3.0 million.
In December 1996, the Company 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: the Building
Partnership, which owns the office building, and the Garage Partnership, which
owns the parking garage. Pursuant to a loan restructuring agreement entered into
in 1993, an affiliate of the holder of the loan is required to hold, as
additional security for the loan, general partnership interests in both the
Building Partnership and the Garage Partnership. The partnership interest in the
Building Partnership was assigned to a limited partnership of which a subsidiary
of the Company is general partner and RPI Partnership is a limited partner. The
partnership interest in the Garage Partnership was assigned to a limited
partnership of which a subsidiary of the Company is general partner and RPI
Partnership is limited partner. RPI Partnership is a limited partnership in
which the Vice Chairman of the Company is the general partner and the Chairman
and President 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.
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 in the aggregate original principal amount
of $2.0 million and with an aggregate outstanding balance at the time of
purchase of $1.95 million. The loans are secured by an apartment building. The
Company sold a senior lien interest in one of the loans for $1.0 million to a
limited partnership in which the Chairman and Vice Chairman of the Company
beneficially own a 14.4% interest, 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). The Company
recognized a gain of $322,900 on the sale of this loan.
From November 1996 to June 1997 the Company acquired from third parties
loans 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,
for $2.2 million, a senior lien interest in one of the loans and recognized a
$28,900 gain on the sale. The purchaser was a limited partnership in which the
Chairman and Vice Chairman of the Company beneficially own an 18.3% limited
partnership interest. The senior lien interest was paid off in December 1997.
84
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 1996, for an investment of $2.4 million, the Company acquired
from third parties a loan in the original principal amount of $3.3 million (and
with a then outstanding balance of $3.3 million). The Company sold, at book
value, a junior lien interest in the loan for $875,000, to a limited partnership
in which the Chairman and Vice Chairman of the Company 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 $8.0 million principal amount
9.5% senior note and by the sale, in fiscal years 1995 and 1996, of $12.0
million of senior lien interests in seven of the Company's portfolio loans,
together with warrants to purchase 2.9 million shares of Common Stock. In July
1997, the Company repaid the senior note in full and PICO exercised, and
subsequently sold, the Common Stock underlying the warrants to institutional
investors in private transactions. 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. An outside director of the Company became a director of PICO on
November 20, 1998.
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.
Relationship with Law Firm. 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 $1.2 million, $803,000 and $402,000 during
fiscal 1998, 1997 and 1996, 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.
NOTE 4-INVESTMENTS IN REAL ESTATE LOANS
The Company has primarily focused its real estate activities on the
purchase of income producing commercial mortgages at a discount from both the
face value of such mortgages and the appraised value of the properties
underlying the mortgages. The Company records as income the accretion of a
portion of the difference between its cost basis in a commercial mortgage and
the sum of projected cash flows therefrom. Cash received by the Company for
payment on each mortgage is allocated between principal and interest. This
accretion of discount amounted to $6.5 million and $4.1 million during the years
ended September 30, 1998 and 1997, respectively. As the Company sells senior
lien interests or receives funds from refinancings in such mortgages, a portion
of the cash received is employed to reduce the cumulative accretion of discount
included in the carrying value of the Company's investments in real estate
loans. In October 1997, the Company commenced residential mortgage lending
operations.
85
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 1998 and 1997, the Company held real estate loans
having aggregate face values of $679.6 million and $233.7 million, respectively,
which were being carried at aggregate costs of $202.1 million and $88.8 million,
including cumulative accretion. Amounts receivable, net of senior lien interests
and deferred costs, were $344.3 million and $178.1 million at September 30, 1998
and 1997, 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, 1998 and 1997.
Year Ended September 30,
------------------------
1998 1997
---- ----
(in thousands)
Balance, beginning of year
(commercial mortgage loans only).............. $ 88,816 $21,798
New loans...................................... 337,087 71,720
Additions to existing loans.................... 6,181 1,860
Provision for possible losses.................. (505) (400)
Accretion of discount.......................... 6,520 4,124
Collections of principal....................... (76,915) (517)
Cost of loans sold............................. (172,533) (9,769)
-------- -------
Balance, end of year
(commercial mortgage loans only).............. 188,651 88,816
Investments in
residential mortgage loans
(less an allowance for possible losses
of $286)..................................... 13,399 -
-------- -------
Balance, end of year (all real estate loans)... $202,050 $88,816
======== =======
A summary of activity in the Company's allowance for possible losses
related to real estate loans for the years ended September 30, 1998 and 1997 are
as follows:
1998 1997
---- ----
Balance, beginning of year..................... $400 $ -
Provision for possible losses.................. 791 400
Writeoffs...................................... - -
------ ----
Balance, end of year........................... $1,191 $400
====== ====
86
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-INVESTMENT IN LEASES AND NOTES RECEIVABLE
Components of the net investment in direct financing leases and notes
receivable as of September 30, 1998 and 1997, as well as future minimum lease
payments receivable, including residual values, are as follows:
September 30,
--------------------
1998 1997
---- ----
(in thousands)
Total minimum lease payments receivable............. $10,011 $4,186
Initial direct costs, net of amortization........... 153 75
Unguaranteed residual............................... 6,338 310
Unearned lease income............................... (4,061) (932)
------- -----
Net investment in direct financing leases........... 12,441 3,639
Notes receivable.................................... 14,138 4,761
Allowance for possible losses....................... (1,602) (248)
------- ------
Investment in leases and notes receivable........... $24,977 $8,152
======= ======
At September 30, 1998, minimum lease payments for each of the five
succeeding fiscal years are as follows (in thousands): 1999 - $3,549; 2000 -
$3,009; 2001- $1,806; 2002 - $993; and 2003 - $654.
The amount of unguaranteed residual value actually realized at contract
termination will depend on the then 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 (see Note 2).
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.
A summary of activity in the Company's allowance for possible losses
related to direct financing leases and notes receivable for the years ended
September 30, 1998 and 1997 are as follows:
Year Ended September 30,
------------------------
1998 1997
---- ----
(in thousands)
Balance, beginning of year....................... $ 248 $ 7
Provision for possible losses.................... 1,422 253
Write offs....................................... (68) (12)
------ ----
Balance, end of year............................. $1,602 $248
====== ====
87
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6-LONG-TERM DEBT AND OTHER BORROWINGS
Long-term debt consists of the following:
September 30,
-------------
1998 1997
---- ----
(in thousands)
12% senior unsecured notes payable, interest due semi-
annually, principal due August 2004......................... $104,400 $115,000
Term loan payable to bank, secured by certain oil and gas
properties; quarterly payments of $350 plus interest at
LIBOR plus 1.5% (7.09% at September 30, 1998) due
September, 2003............................................. 7,000 -
Revolving credit loans, secured by certain oil and gas
properties; interest ranging from 7.06% to 9.0% due June
1999, April 2003 and September 2003......................... 24,975 -
Other....................................................... 3,905 4,494
-------- --------
140,280 119,494
Less current maturities..................................... 7,264 708
-------- --------
$133,016 $118,786
======== ========
As of September 30, 1998, long-term debt maturing over the next five
fiscal years is as follows (in thousands): 1999 - $7,264; 2000 - $1,818; 2001 -
$1,835; 2002 - $1,834; and 2003 - $21,753.
In July 1997, the Company issued $115.0 million of 12% Senior Notes
(the "12% Notes") due August 2004 in a private placement. Provisions of the 12%
Notes limit dividend payments, mergers and indebtedness, place restrictions on
liens and guarantees and require the maintenance of certain financial ratios. At
September 30, 1998, the Company was in compliance with such provisions. In
November 1997, the Company exchanged the privately placed 12% Notes with a like
amount of 12% Notes which were registered under the Securities Act of 1933.
Oil and Gas Credit Facilities.
Prior to its acquisition by the Company, The Atlas Group, Inc.
("Atlas") maintained a $40.0 million credit facility (with $27.0 million of
permitted draws) at PNC Bank ("PNC"). This line has been continued by the
Company. The credit facility is divided into two principal parts: a revolving
credit facility and a term loan facility. The resolving credit facility has
$20.0 million of permitted draws, with a term ending in 2001 and with draws
bearing interest at one of two rates (elected at borrower's option) which
increase as the amount outstanding under the facility increases: (i) PNC prime
rate plus between 0 to 50 basis points, or (ii) LIBOR plus between 137.5 to
212.5 basis points. The term loan facility has $7.0 million of permitted draws,
with a term ending in 2003, and with draws bearing interest at one of two rates
(elected at borrower's option), which increase as the amount outstanding under
the facility increases: (i) PNC prime rate plus between 12.5 to 62.5 basis
points, or (ii) LIBOR plus between 150 to 225 basis points. The credit facility
contains certain financial covenants
88
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of Atlas, including maintaining a current ratio of .75 to 1.0, a ratio of fixed
charges to earnings of 2.0 to 1.0 and a leverage ratio (essentially a ratio of
debt to equity) of not less than 3.75 to 1.0, reducing to 3.50 to 1.0 in January
1999, 3.25 to 1.0 in October 1999 and 3.0 to 1.0 in March 2000. The credit
facility also imposes the following limits: (a) Atlas' exploration expense can
be no more than 20% of capital expenditures plus exploration expense, without
PNC's consent; (b) sales, leases or transfers of property by Atlas are limited
to $1.0 million without PNC's consent; and (c) Atlas cannot incur debt in excess
of $2.0 million to lenders other than PNC without PNC's consent. As of September
30, 1998, there was $20.0 million outstanding under the revolving credit
facility and $7.0 million outstanding under the term loan facility.
The Company also maintains a $5.0 million credit facility with 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 which terminates on June 30, 1999, contains
certain financial covenants with which the Company believes it has substantially
complied at September 30, 1998. As of September 30, 1998, the Company had $5.0
million outstanding under this line.
Other borrowings consist of the following:
Commercial Mortgage Loan Credit Facility. In March 1998, the Company,
through certain operating subsidiaries, established an $18.0 million revolving
credit facility (with current credit availability of $5.0 million) 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. Credit availability is based upon the
amount of assets pledged as security for the facility and is subject to approval
by Jefferson Bank of additional collateral. The facility expires on April 1,
1999. As of September 30, 1998 there were no borrowings under this facility.
Lease Financing Credit Facility. The Company's equipment leasing
subsidiary, Fidelity Leasing, Inc. ("FLI"), maintains a $20.0 million revolving
credit facility with term loan availability with First Union National Bank and
European American Bank. The facility has, in addition to customary covenants,
the following principal terms: (i) no single advance may exceed the lesser of
(a) 95% of the cost of the leases being financed or (b) $500,000 or, in the case
of leases to investment grade lessees, $1,000,000; (ii) revolving credit loans
bear interest, at FLI's election, at (a) an adjusted LIBOR rate plus 150 basis
points or (b) the rate for one month U.S. dollar deposits as reported by
Telerate (London) plus 150 basis points, while term loans bear interest at the
adjusted LIBOR rate plus 150 basis points; (iii) term loans must be for not less
than $2.0 million per loan; (iv) 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); (v)
revolving credit loans may be converted to term loans and paid in accordance
with applicable amortization schedules; (vi) adjustable rate term loans may, at
the option of FLI, be converted into fixed rate term loans at then quoted rates;
89
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and (vii) FLI will be required to maintain a debt (excluding non-recourse debt)
to "worth" ratio of 5.5 to 1.0 or less, a minimum tangible net worth equal to
$8.0 million plus 75% of FLI's net income, and a ratio of cash flow (income
before taxes, depreciation, amortization and extraordinary items, plus interest
expense) to the sum of interest expense, mandatory principal payments and 25% of
outstanding obligations under the revolving line of credit, of 1.5 to 1.0. The
facility expires on March 31, 2000 but may be renewed for additional 18 month
periods by the lenders. In fiscal 1998, there was an aggregate of $33.8 million
in borrowings under this line, all of which were repaid prior to September 30,
1998.
In October 1997, the Company's residential mortgage subsidiary,
established a $15.0 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 was collateralized
by a first lien interest in the loans being financed by facility draws. The
facility expired in November 1998. As of September 30, 1998, $5.2 million was
outstanding under this line. It was repaid on November 30, 1998.
NOTE 7-INCOME TAXES
The following table details the components of the Company's income tax
expense for the fiscal years 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Provision for federal income tax:
Current...................................
Federal.................................. $14,871 $6,186 $1,147
State.................................... 345 - -
Deferred.................................. (1,736) (2,206) 1,059
------- ------ ------
$13,480 $3,980 $2,206
======= ====== ======
</TABLE>
A reconciliation between the statutory federal income tax rate and the
Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate................................ 35% 34% 34%
Statutory depletion............................... - (2) (4)
Non-conventional fuel and low-income
housing credits................................. (2) (3) -
Tax-exempt interest............................... (1) (2) -
State income tax.................................. 1
--- --- ---
33% 27% 30%
=== === ===
</TABLE>
90
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
September 30,
---------------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Deferred tax assets:
Tax credit carryforwards............................ $ 507 $ 507
Alternative minimum tax credit
carryforwards...................................... 1,555 --
Statutory depletion................................. 187 --
Interest receivable................................. 1,952 1,490
Net operating loss carryforwards.................... 988 357
Provision for losses................................ 1,233 220
Less valuation allowance............................ (1,618) --
-------- ------
$ 4,804 $2,574
-------- ------
Deferred tax liabilities:
Fixed asset basis difference........................ (6,470) (2,290)
ESOP benefits....................................... (98) (120)
Other items, net..................................... -- (164)
-------- ------
(6,568) (2,574)
-------- ------
Net deferred tax liability......................... ($1,764) $ --
======== =======
</TABLE>
SFAS No. 109 requires that deferred tax assets be reduced by a
valuation allowance if it is more likely than not that some portion or all of
the deferred tax asset will not be realized. Tax rules impose limitations on the
use of tax carryforwards following certain changes in ownership. Due to mergers
(see Note 11), there will be limitations on the amount of net operating loss and
alternative minimum tax credit carryforwards that can be utilized in any given
year to reduce further taxes.
NOTE 8-STOCKHOLDERS' EQUITY
In April 1998, the Company completed a public offering of 5.9 million
shares of its Common Stock. The Company received net proceeds (after
underwriting discounts and commissions) of $120.1 million before offering
expenses of $917,000.
In March 1998, the Company's stockholders authorized an amendment to
the Certificate of Incorporation of the Company to increase the total authorized
capital stock to 50.0 million shares, of which 49.0 million shares were Common
Stock and 1.0 million shares were Preferred Stock.
91
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 1997, the Company issued 2.9 million 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. The Company realized
proceeds of $3.66 million from the exercise of the warrants. The 2.9 million
shares were subsequently sold by the holder in a separate private placement to a
small group of institutional investors.
In December 1996, the Company completed a public offering of 5.0
million shares of its Common Stock. The Company received net proceeds of $20
million, before offering expenses of $515,000, from the offering.
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 and
May 12, 1998, the Board of Directors authorized a five-for-two stock split
effected in the form of a 150% stock dividend and a three-for-one stock split
effected in the form of a 200% stock dividend, respectively. These stock
dividends resulted in the issuance of 14.6 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.
In prior years the ESOP borrowed funds to purchase shares from the Company,
which in turn borrowed the funds for the ESOP loan from a bank. The loan from
the bank to the Company is payable in semiannual installments through February
1, 2003. The loan from the Company to the ESOP was fully repaid in August 1996.
Both the loan obligation and the unearned benefits expense (a reduction in
shareholders' equity) will be reduced by the amount of any loan principal
payments made by the Company. On September 28, 1998, the Company loaned $1.3
million to the ESOP, which the ESOP used to acquire 105,000 shares of the
Company's Common Stock.
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, 1998, there were 271,000 shares
allocated to participants which constitute substantially all shares prior to the
105,000 shares acquired on September 28, 1998. Compensation expense related to
the plan amounted to $50,400, $50,400 and $50,300 for the years ended September
30, 1998, 1997 and 1996, respectively.
92
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $305,600, $131,900 and $44,700 for the Company's contributions for the years
ended September 30, 1998, 1997 and 1996, respectively.
Stock Options
The Company has three employee stock option plans, those of 1984, 1989
and 1997. The 1984 and 1989 plans authorize the granting of up to 168,540 and
1,769,670 (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
825,000 shares were reserved, provides for the issuance of ISO's and
non-qualified stock options. In fiscal 1998 and 1997, options for 669,115 and
75,000 shares were issued under this plan, respectively.
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.
Transactions for all three stock option plans are as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------- -------------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 685,959 $ 3.85 1,044,948 $ 2.07 606,744 $ .96
Granted 669,115 $22.21 75,000 $13.17 606,744 $2.86
Exercised (33,708) $ 2.73 (433,989) $ 1.17 (84,270) $ .92
Cancelled - - - (84,270) $ .92
--------- --------- ---------
Outstanding - end of year 1,321,366 $13.18 685,959 $ 3.85 1,044,948 $2.07
========= ========= =========
Exercisable, at end of year 292,629 $ 3.22 190,662 $ 2.35 328,653 $ .97
========= ========= =========
Available for grant 80,885 750,000 -
========= ========= =========
Weighted average fair
value per share of options
granted during the year $ 19.41 $11.98 $2.17
======= ====== =====
</TABLE>
93
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<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>
$.92 50,562 4.56 $ .92 50.562 $ .92
$2.73-3.00 526,689 4.66 $ 2.88 223,317 $ 2.91
$13.17 75,000 8.91 $ 13.17 18,750 $13.17
$15.08-15.58 135,615 9.21 $ 15.55 - $15.55
$22.67-$27.81 533,500 4.79 $ 23.91 - $23.91
--------- -------
1,321,366 292,629
========= =======
</TABLE>
On October 20, 1998, the options granted under the 1997 Stock Option
Plan were cancelled. These options were replaced with an identical number of new
options with an exercise price of $8.08 per share, which amount represents the
market value of the Company's Common Stock at that date. The new options will
vest 25% per year commencing October 20, 1999.
In connection with the acquisition of Atlas (see Note 11), the Company
issued 120,213 options at $.11 per share to certain employees of Atlas who held
options of Atlas prior to its acquisition by the Company.
In addition, a key employee of FLI, a wholly owned subsidiary of the
Company, has received options to purchase 10% of the common stock of FLI (1.0
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 FLI key employee vest 25% per year and will
be fully vested in March 2000; they will 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, 1998,
options for 416,000 shares had been issued to certain employees.
94
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Transactions for both FLI stock option plans are as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------------------------
1998 1997 1996
---------------------- ------------------------ -----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of year 1,393,000 $ .22 1,000,000 $.22 - $ -
Granted 23,000 $1.07 393,000 $.22 1,000,000 $.22
Exercised - $ - - $ - - $ -
Cancelled - $ - - $ - - $ -
--------- --------- ---------
Outstanding - end of year 1,416,000 $ .23 1,393,000 $.22 1,000,000 $.22
========= ========= =========
Exercisable, at end of year 598,300 $ .22 250,000 $.22 - $ -
========= ========= =========
Available for grant 84,000 107,000 500,000
========= ========= =========
Weighted average fair
value per share of options
granted during the year $ .50 $ .11 $ .10
========== ========== ==========
Outstanding Exercisable
-------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Range of Contractual Average Average
Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price
- - --------------- ------ ----------- -------------- ------ --------------
$.22 - $1.07 1,416,000 7.52 $.23 598,300 $.22
========= =======
</TABLE>
Fidelity Mortgage Funding, Inc. ("FMF"), another wholly-owned
subsidiary of the Company (and in which the Company owns 25.5 million shares of
common stock), has established an option plan pursuant to which 4.5 million
shares of FMF's common stock (representing 18% of FMF's common stock on a
fully-diluted basis) have been reserved for options which may be issued to key
employees. These amounts reflect a three-for-two stock split effected in the
form of a 150% stock dividend declared by the Board of Directors in October
1997. Under the program, a director and officer of the Company who is also the
Chairman of FMF has received options to purchase 3.0 million shares
(representing 12% of FMF's common stock on a fully-diluted basis) at an
aggregate price of $236,000 ($.079 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, 1998, FMF had granted options to (i) its President and
Chief Operating Officer to purchase 1.2 million shares at an aggregate price of
$94,000 ($.079 per share) (representing 5% of FMF's common stock on a
fully-diluted basis), and (ii) to certain other of its employees to purchase
185,000 shares at an aggregate price of $23,000 ($.125 per share), leaving
115,000 shares reserved for issuance of options under the plan at September 30,
1998.
95
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Transactions for the FMF stock option plan are as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------
1998 1997
----------------------------- ------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding - beginning of year 4,345,000 $ .08 - $ -
Granted 80,000 $ .12 4,345,000 $.08
Exercised - $ - - $ -
Cancelled (40,000) $(.12) - $ -
--------- ---------
Outstanding - end of year 4,385,000 $ .08 4,345,000 $.08
========= =========
Exercisable, at end of year 1,076,300 $.08 - $ -
========= =========
Available for grant 115,000 155,000
========= =========
Weighted average fair
value per share of options
granted during the year $ .06 $ .06
========= =========
Outstanding Exercisable
-------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Range of Contractual Average Average
Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price
- - --------------- ------ ----------- -------------- ------ --------------
$.079 - $.12 4,385,000 8.57 $.08 1,076,300 $.08
========= =========
</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, 99%, 96% and 87% in 1998, 1997 and 1996,
respectively; risk free interest rate, 5.8%, 6.6% and 6.0% in 1998, 1997 and
1996, 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 $26.2 million ($1.52 per share) and $10.5 million ($.80 per
share) in fiscal 1998 and 1997, respectively.
96
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 75,000
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 1998, 15,000 shares were granted under the Director Plan
to each of the Company's four non-employee directors. The fair value of the
grants ($24.25 per share, $363,800 in total) is being charged to operations over
the five-year vesting period.
The tax benefit associated with the exercise of non-statutory stock
options and disqualifying dispositions by employees of shares issued reduced
taxes payable by $405,000 in fiscal 1998. Such benefits are reflected as
additional paid-in capital.
NOTE 10-COMMITMENTS AND CONTINGENCIES
The Company leases office space under leases with varying expiration
dates through 2002 (see Note 3). Rental expense was $749,800, $238,600 and
$188,900 for the years ended September 30, 1998, 1997 and 1996, respectively. At
September 30, 1998, future minimum rental commitments for the next five fiscal
years were as follows:
1999...................... $1,645,800
2000...................... 1,292,800
2001...................... 975,900
2002...................... 848,300
2003...................... 772,800
As of September 30, 1998, the Company had outstanding commitments to
fund the purchase of equipment which it intends to lease, with an aggregate cost
of $13.2 million. The Company believes, based on its past experience, that
approximately $9.5 million will be funded.
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 fiscal 1998 and 1997,
operations were charged $204,000 and $240,000, respectively, with respect to
these commitments.
97
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Actions have been filed against the Company, its directors and
executive officers and the Company's independent auditors by certain of the
Company's shareholders. The complaints seek unspecified damages. The complaints
seek unspecified damages. The Company believes that the complaints are without
merit and intends to defend itself vigorously.
The Company is also 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.
NOTE 11-ACQUISITIONS
On September 29, 1998, the Company acquired all the common stock of
Atlas in exchange for 2,063,496 shares of the Company's Common Stock and the
assumption of Atlas debt as described below. Atlas is a company primarily
involved in the energy finance business through the syndication of oil and gas
properties in the Appalachian Basin.
The Atlas acquisition was recorded under the purchase method of
accounting and accordingly the results of operations of Atlas are included in
the Company's consolidated financial statements commencing September 29, 1998.
The effect on the Company's operations for fiscal 1998 was nominal. The purchase
price has been allocated to assets acquired and liabilities assumed based on
their fair market values, at the date of acquisition as summarized below (in
thousands).
Estimated fair value of assets acquired $ 74,635
Liabilities assumed (45,968)
Amounts due seller (9,191)
Common Stock issued (29,534)
--------
Net cash acquired ($10,058)
========
98
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reflects unaudited pro forma combined results of
operations of the Company and Atlas presented as if that the acquisition had
taken place on October 1, 1996:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------
1998 1997
---- ----
(unaudited)
(in thousands, except per
share amounts)
<S> <C> <C>
Revenues $148,413 $96,958
Net income 29,874 14,140
Net income per common share-diluted $1.54 $ .93
Shares used in computation 19,451 15,257
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments to: (i) depletion, depreciation
and amortization expense attributable to allocation of the purchase price; (ii)
general and administrative expenses for certain cost reductions realized from
the combining of operations; and (iii) interest expense for additional
borrowings. They do not purport to be indicative of the results of operations
which actually would have resulted had the combination been consummated on
October 1, 1996, or of future results of operations of the consolidated
entities.
In April 1997, the Company acquired all the outstanding shares of Bryn
Mawr Resources, Inc. ("BMR") for 1,738,869 shares of Common Stock. BMR's only
asset was 1,768,869 shares of the Company's Common Stock held by subsidiaries of
BMR (excluding 11,421 shares of the Company's Common Stock attributable to
minority interests held by third parties in BMR's subsidiaries).
This acquisition was immaterial to the results of operations of the
Company, and therefore pro forma information is excluded.
On December 15, 1998, the Company entered into an agreement to acquire
JLA credit corporation ("JLA") for a combination of cash, including financing
to be arranged by the Company, and assumption of JLA debt. The Company believes
that the value of the transaction is approximately $350.0 million. Subject to a
financing contingency, the Company anticipates that the transaction will close
in January 1999.
NOTE 12-EXTRAORDINARY ITEM
During fiscal 1998 the Company acquired $10.6 million of its 12% Notes
at a discount. In addition the Company repaid another long-term borrowing at a
premium. These transactions resulted in a net extraordinary gain of $239,000 net
of taxes of $112,000.
99
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13-INDUSTRY SEGMENT INFORMATION AND MAJOR CUSTOMERS
The Company operates in three principal industry segments - real estate
finance, equipment leasing and energy. Segment data for the years ended
September 30, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Revenue:
Real estate finance $ 62,856 $ 19,144 $ 7,171
Equipment leasing 13,561 7,162 4,466
Energy 6,734 5,608 5,157
Corporate 4,316 1,031 204
-------- -------- -------
$ 87,467 $ 32,945 $16,998
======== ======== =======
Depreciation, Depletion and
Amortization:
Real estate finance $ 773 $ 36 $ 38
Equipment leasing 610 398 204
Energy 1,273 1,202 1,061
Corporate (15) (22) 65
-------- -------- -------
$ 2,641 $ 1,614 $ 1,368
======== ======== =======
Operating Profit (Loss):
Real estate finance $ 46,972 $ 16,546 $ 6,281
Equipment leasing 5,921 2,457 1,916
Energy 1,659 1,699 1,646
Corporate (13,812) (5,771) (2,490)
-------- -------- -------
$ 40,740 $ 14,931 $ 7,353
======== ======== =======
Identifiable Assets:
Real estate finance $211,251 $ 92,287 $22,087
Equipment leasing 29,608 10,647 3,019
Energy 90,408 15,016 12,675
Corporate 95,180 77,169 6,178
-------- -------- -------
$426,447 $195,119 $43,959
======== ======== =======
Capital Expenditures (excluding
assets acquired in business
acquisitions):
Real estate finance $ 1,141 $ 59 $ 17
Equipment leasing 891 585 531
Energy 2,095 640 501
Corporate - 507 48
-------- -------- -------
$ 4,127 $ 1,791 $ 1,097
======== ======== =======
</TABLE>
100
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998, 1997 and 1996, gas sales to two
purchasers accounted for 35% and 14%, 29% and 12%, and 29% and 13% of the
Company's total production revenues, respectively.
In commercial mortgage loan acquisition and resolution, no revenues
from a single borrower exceeded 10% of total revenues. In fiscal 1997, revenues
from a single borrower approximated 20% of total revenues, while for fiscal 1996
revenues from a (different) single borrower approximated 24% of total revenues.
NOTE 14-SUPPLEMENTAL OIL AND GAS INFORMATION
Results of operations for oil and gas producing activities:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Revenues................................. 4,682 $3,936 $3,421
Production costs......................... (2,022) (1,636) (1,421)
Exploration expenses..................... (503) (187) (161)
Depreciation, depletion, and
amortization.......................... (809) (712) (781)
Income taxes............................. (263) (197) (96)
------ ------ ------
Results of operations for
producing activities.................. $1,085 $1,204 $ 962
====== ====== ======
</TABLE>
101
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $20,000 in fiscal 1998,
$28,000 in fiscal 1997 and $22,000 in fiscal 1996), are as follows:
<TABLE>
<CAPTION>
September 30,
------------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Proved properties........................ $42,458 $23,254 $22,549
Unproved properties...................... 1,164 846 482
Pipelines, equipment and other
interests............................. 7,645 2,445 2,540
------- ------- -------
Total.................................... 51,267 26,545 25,571
Accumulated depreciation, depletion
and amortization....................... (15,611) (15,145) (14,306)
-------- ------- -------
Net capitalized costs................ $35,656 $11,400 $11,265
======= ======= =======
</TABLE>
Costs Incurred in Oil and Gas Producing Activities
The costs incurred by the Company in its oil and gas activities during
fiscal years 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Property acquisition costs:
Unproved properties....................... $ 378 $321 $ 2
Proved properties......................... 19,436 782 157
Exploration costs........................... 816 238 317
Development costs........................... 416 144 176
</TABLE>
Oil and Gas Reserve Information (unaudited)
The Company's estimates of net proved oil and gas reserves and the
present value thereof have been verified by Wright & Company, Inc. in fiscal
1998 and by E.E. Templeton & Associates, Inc. in fiscal 1997 and 1996. Both are
petroleum engineering firms. The Company did not estimate the value of its
proven undeveloped reserves in fiscal 1997 and 1996.
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
102
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
should not be construed as being exact. In addition, the standardized
measures of discounted future net cash flows may not represent the fair market
value of the Company's oil and gas reserves or the present value of future cash
flows of equivalent reserves, due to anticipated future changes in oil and gas
prices and in production and development costs and other factors for which
effects have not been provided.
The standardized measure of discounted future net cash flows is
information provided for the financial statement user as a common base for
comparing oil and gas reserves of enterprises in the industry.
<TABLE>
<CAPTION>
Gas Oil
(mcf) (bbls)
---------- -------
<S> <C> <C>
Balance at September 30, 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
Purchase of reserves in-place........................ 74,894,968 194,270
Current additions.................................... 217,508 41,406
Sales of reserves in-place........................... (53,320) (2,523)
Revision to previous estimates....................... 1,151,890 29,461
Production........................................... (1,485,008) (48,113)
---------- -------
Balance September 30, 1998........................... 89,883,573 572,514
========== =======
Proved developed reserves at
September 30, 1998................................. 49,868,113 572,514
September 30, 1997................................. 15,157,535 358,013
September 30, 1996................................. 12,852,274 310,020
</TABLE>
103
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Presented below is the standardized measure of discounted future net
cash flows and changes therein relating to proved 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 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,
-------------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Future cash inflows............................ $240,922 $42,634 $ 34,516
Future production and
development costs........................... (102,557) (21,585) (16,764)
Future income tax expense...................... (14,278) (2,740) (2,732)
--------- ------- --------
Future net cash flows.......................... 124,087 18,309 15,020
Less 10% annual discount for
estimated timing of cash flows............... (80,313) (8,186) (6,671)
---------- ------- --------
Standardized measure of discounted
future net cash flows........................ $ 43,774 $10,123 $ 8,349
======== ======= ========
</TABLE>
104
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the changes in the standardized measure
of discounted future net cash flows from estimated production of proved oil and
gas reserves after income taxes.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year...................... $10,123 $ 8,349 $7,810
Increase (decrease) in discounted
future net cash flows:
Sales and transfers of oil and gas
net of related costs.......................... (2,822) (2,411) (1,928)
Net changes in prices and production
costs......................................... 171 512 1,392
Revisions of previous quantity
estimates..................................... 597 2,483 697
Extensions, discoveries, and improved
recovery less related costs................... 194 10 145
Purchases of reserves in-place.................. 34,935 1,474 242
Sales of reserves in-place, net of
tax effect.................................... (30) (1) (26)
Accretion of discount........................... 1,012 997 851
Net change in future income taxes............... (3,770) (14) (924)
Other........................................... 3,364 (1,276) 90
------- ------- ------
Balance, end of year............................ $43,774 $10,123 $8,349
======= ======= ======
</TABLE>
105
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - QUARTERLY RESULTS (unaudited)
<TABLE>
<CAPTION>
Dec 31 March 31 June 30 Sept. 30
------ -------- ------- --------
(in thousands except per share data)
<S> <C> <C> <C> <C>
Year ended September 30, 1998:
Revenues $15,080 $21,305 $25,130 $25,952
Costs and Expenses 9,354 12,111 13,013 12,249
-------- -------- ------- -------
Income before taxes and extraordinary
item 5,726 9,194 12,117 13,703
Income taxes 1,775 2,875 3,750 4,968
-------- ------- ------- -------
Income before extraordinary item 3,951 6,319 8,367 8,735
Extraordinary item, gain on early extinguishment
of debt, net of taxes - - - 239
------- ------- ------- -------
Net income $ 3,951 $ 6,319 $ 8,367 $ 8,974
======== ======= ======= =======
Net income per common share-
Basic
Income before extraordinary item $0.28 $0.44 $ 0.46 $ 0.44
Extraordinary item - - - 0.01
----- ------ ----- ------
Net income per common share -
basic $0.28 $0.44 $ 0.46 $ 0.45
===== ===== ======= =======
Diluted
Income before extraordinary item $0.27 $0.43 $ 0.45 $ 0.42
Extraordinary item - - - 0.01
----- ------- ------- -------
Net income per common share -
diluted $0.27 $0.43 $ 0.45 $ 0.43
===== ======= ======= =======
Year ended September 30, 1997:
Revenues $ 5,932 $ 6,843 $ 7,828 $12,342
Costs and Expenses 3,072 3,534 3,754 7,654
------- ------- ------- -------
Income before taxes 2,860 3,309 4,074 4,688
Income taxes 575 775 1,144 1,486
------- ------- ------- -------
Net Income $ 2,285 $ 2,534 $ 2,930 $ 3,202
======= ======= ======= =======
Net income per common share -
Basic $ 0.30 $ 0.24 $ 0.27 $ 0.24
======= ======= ======= =======
Diluted $ 0.22 $ 0.18 $ 0.21 $ 0.22
======= ======= ======= =======
</TABLE>
106
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT
The information required by this item will be set forth in Company's
definitive proxy statement with respect to its 1999 annual meeting of
stockholders, to be filed on or before January 29, 1999 (the "Proxy Statement"),
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be set forth in the Proxy
Statement, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be in the Proxy Statement,
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be set forth in the Proxy
Statement, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. Financial Statements
Report of Independent Certified Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders'
Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
107
<PAGE>
2. Financial Statement Schedules
a. Inapplicable
b. Schedule IV - Mortgage Loans on Real Estate
All other schedules are not applicable or are omitted
since either (i) the required information is not
material or (ii) the information required is included
in the consolidated financial statements and the
Notes thereto.
<TABLE>
<CAPTION>
<S> <C> <C>
3. Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger among Tri-Star Financial Services, Inc., Frank Pellegrini,
Resource Tri-Star Acquisition Corp. and the Registrant(1)
2.2 Agreement and Plan of Merger among Registrant, Atlas America, Inc., The Atlas Group, Inc.
and certain shareholders of The Atlas Group, Inc.(2)
3.1 Restated Certificate of Incorporation of the Registrant.(3)
3.2 Bylaws of the Registrant, as amended.(3)
4.1 Indenture with respect to 12% Senior Notes due 2004 (including form of note).(4)
10.1 1984 Key Employee Stock Option Plan, as amended.(5)
10.2 1989 Key Employee Stock Option Plan, as amended.(5)
10.3 Employee Stock Ownership Plan.(6)
10.4 1997 Key Employee Stock Option Plan.(7)
10.5 1997 Stock Option Plan for Directors.(7)
10.6 1997 Non-Employee Director Deferred Stock and Defined Compensation Plan.(7)
10.7 Employment Agreement between Edward E. Cohen and Registrant(8)
10.8 Contribution Agreement between Resource Leasing, Inc. and Abraham Bernstein.(3)
10.9 Employment Agreement between Fidelity Leasing, Inc. and Abraham Bernstein.(3)
10.10 Employment Agreement between Fidelity Mortgage Funding, Inc. and Daniel G. Cohen.(8)
</TABLE>
108
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.11 Loan Agreement between Registrant and KeyBank, N.A.(9)
10.12 Loan Agreement between Atlas and PNC Bank.
10.13 Loan Agreement between Fidelity Leasing, Inc. and First Union National Bank, as Agent.
11 Calculation of Basic and Diluted Earnings per Share.
12 Computation of Ratios
21 List of Subsidiaries.
23.1 Consent of Wright & Company, Inc.
23.2 Consent of E. E. Templeton & Associates, Inc.
27 Financial Data Schedule.
(1) Filed previously as an Exhibit to the Company's Annual Report in Form 10-K for the year ended September 30, 1997.
(2) Filed previously as an Exhibit to the Company's Current Report on Form 8-K for September 29, 1998.
(3) 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.
(4) 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.
(5) Filed previously as an Exhibit to the Company's Registration Statement on Form S-8 May 2, 1996 and by this reference
incorporated herein.
(6) Filed previously as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1989 and by this
reference incorporated herein.
(7) Filed previously as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and by
this reference incorporated herein.
(8) Filed previously as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and by
this reference incorporated herein.
(9) Filed previously as an Exhibit to the Company's Annual report on Form 10-K for the year ended September 30, 1997 and by this
reference incorporated herein.
</TABLE>
109
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RESOURCE AMERICA, INC. (Registrant)
December ___, 1998 By: /s/ Edward E. Cohen
--------------------------------------------
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of December ___, 1998.
/s/ Edward E. Cohen Chairman of the Board and Chief Executive
- - ------------------------- Officer
EDWARD E. COHEN
/s/ Daniel G. Cohen
- - ------------------------- President, Chief Operating Officer and Director
DANIEL G. COHEN
/s/ Scott F. Schaeffer
- - ------------------------- Vice Chairman of the Board and Executive Vice
SCOTT F. SCHAEFFER President
/s/ Michael L. Staines
- - ------------------------- Senior Vice President and Director
MICHAEL L. STAINES
/s/ Carlos C. Campbell
- - ------------------------- Director
CARLOS C. CAMPBELL
/s/ Andrew M. Lubin
- - ------------------------- Director
ANDREW M. LUBIN
/s/ P. Sherrill Neff
- - ------------------------- Director
P. SHERRILL NEFF
/s/ Alan D. Schrieber
- - ------------------------- Director
ALAN D. SCHRIEBER
/s/ John S. White
- - ------------------------- Director
JOHN S. WHITE
/s/ Steven J. Kessler
- - ------------------------- Senior Vice President and Chief Financial
STEVEN J. KESSLER Officer
/s/ Nancy J. McGurk
- - ------------------------- Vice President-Finance and Chief Accounting
NANCY J. McGURK Officer
110
<PAGE>
INDEX EXHIBIT
<TABLE>
<CAPTION>
<S> <C> <C>
3. Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger among Tri-Star Financial Services, Inc., Frank Pellegrini,
Resource Tri-Star Acquisition Corp. and the Registrant(1)
2.2 Agreement and Plan of Merger among Registrant, Atlas America, Inc., The Atlas Group, Inc.
and certain shareholders of The Atlas Group, Inc.(2)
3.1 Restated Certificate of Incorporation of the Registrant.(3)
3.2 Bylaws of the Registrant, as amended.(3)
4.1 Indenture with respect to 12% Senior Notes due 2004 (including form of note).(4)
10.1 1984 Key Employee Stock Option Plan, as amended.(5)
10.2 1989 Key Employee Stock Option Plan, as amended.(5)
10.3 Employee Stock Ownership Plan.(6)
10.4 1997 Key Employee Stock Option Plan.(7)
10.5 1997 Stock Option Plan for Directors.(7)
10.6 1997 Non-Employee Director Deferred Stock and Defined Compensation Plan.(7)
10.7 Employment Agreement between Edward E. Cohen and Registrant(8)
10.8 Contribution Agreement between Resource Leasing, Inc. and Abraham Bernstein.(3)
10.9 Employment Agreement between Fidelity Leasing, Inc. and Abraham Bernstein.(3)
10.10 Employment Agreement between Fidelity Mortgage Funding, Inc. and Daniel G. Cohen.(8)
10.11 Loan Agreement between Registrant and KeyBank, N.A.(9)
10.12 Loan Agreement between Atlas and PNC Bank.
10.13 Loan Agreement between Fidelity Leasing, Inc. and First Union National Bank, as Agent.
11 Calculation of Basic and Diluted Earnings per Share.
12 Computation of Ratios
21 List of Subsidiaries.
23.1 Consent of Wright & Company, Inc.
23.2 Consent of E. E. Templeton & Associates, Inc.
27 Financial Data Schedule.
(1) Filed previously as an Exhibit to the Company's Annual Report in Form 10-K for the year ended September 30, 1997.
(2) Filed previously as an Exhibit to the Company's Current Report on Form 8-K for September 29, 1998.
(3) 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.
(4) 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.
(5) Filed previously as an Exhibit to the Company's Registration Statement on Form S-8 May 2, 1996 and by this reference
incorporated herein.
(6) Filed previously as an Exhibit to the Company's Annual Report on Form 10-K for the year ended September 30, 1989 and by this
reference incorporated herein.
(7) Filed previously as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and by
this reference incorporated herein.
(8) Filed previously as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and by
this reference incorporated herein.
(9) Filed previously as an Exhibit to the Company's Annual report on Form 10-K for the year ended September 30, 1997 and by this
reference incorporated herein.
</TABLE>
<PAGE>
SCHEDULE IV
<PAGE>
RESOURCE AMERICA, INC. & SUBSIDIARIES
MORTGAGE LOANS ON REAL ESTATE
September 30, 1998
(in thousands)
<TABLE>
<CAPTION>
FINAL PERIODIC
INTEREST MATURITY PAYMENT
DESCRIPTION RATE DATE TERMS
----------- ---- ---- -----
<S> <C> <C> <C>
FIRST MORTGAGES
Hotel/Commercial Office, GA Fixed interest rate of 14% 12/31/15 (a)
Hotel GA Fixed interest rate of 14% 12/1/02 (a)
Hotel, NE Fixed interest rate of 14.5% 9/30/02 (a)
Condominium units, NC Fixed interest rate of 8% 3/31/02 (a)
Apartment bldg. PA Fixed interest rate of 14% 10/1/02 (a)
Office bldg., PA Interest at 85% of Prime 9/30/14 (a)
Apartment bldg., IL, 3 loans Fixed interest rate of 7.5% 9/30/02 (a)
JUNIOR LIEN LOANS
Apartment bldg., FL Fixed interest rate of 13% 7/1/00 (a)
Office bldg., NC Fixed interest rate of 11.5% 12/31/11 (a)
Apartment bldg. NJ, 2 loans Fixed interest rates of 11.25% 9/1/05 (a)
and Prime plus 1%
Apartment bldg., CN Fixed interest rate of 10.85% 9/1/05 (a)
Apartment bldg., PA Fixed interest rate of 14.5% 12/31/02 (a)
Apartment bldg., NJ Fixed interest rate of 9% 1/1/03 (a)
Apartment bldg., NJ, 2 loans Fixed rates of 8% and 24% 10/31/08 (a)
Apartment bldg., IL Fixed interest rate of 7.5% 4/30/03 (a)
Office bldg. PA Federal Funds rate plus 2.875% 10/01/03 (a)
Office bldg., PA 3 loans Fixed rates ranging from 6.85% 8/1/08
to 12%
Office bldg., PA Fixed interest rate of 10.6% 2/07/01 (a)
Office bldg., DC Interest rate of Prime plus 3% 6/1/00 (a)
Office bldg., NJ, 3 loans Fixed interest rate of 9.75%% 2/7/01 (a)
Office bldg., PA, 3 loans Rate ranging from 12% to 85% of 9/30/03 (a)
the rate for $100,000 CD's
Office bldg., PA 3 loans Fixed interest rate of 8% 1/1/02 (a)
Apartment bldg. CN Fixed interest rate of 7.5% 7/1/03 (a)
Apartment bldg., M Fixed interest rate of 10% 6/30/08 (a)
Apartment bldg., PA, 2 loans Interest rates of 7% and 15% 12/17/02 (a)
Apartment bldg., PA Fixed interest rate of 9% 12/31/02 (a)
Apartment bldg., PA 31 loans Fixed interest rate of 12% 7/1/16 (a)
Apartment bldg., PA 85% of 30 day $100,000 rate CD 10/31/98
plus 2.75%
Apartment bldg., PA Fixed interest rate of 9.28% 11/1/22
Condominium Units, NC Fixed interest rate of 8.0% 3/31/02 (a)
Office bldg., Washington, DC, Fixed interest rate of 12% and Two 11/30/98 (a)
2 loans thirds of the 30 day Treasury Rate
Office bldg., PA Fixed interest rate of 9% 9/25/02 (a)
Industrial bldg., Pasadena, CA 2.75% over the average cost of 5/1/01 (a)
funds to FSLIC-insured savings and
loan institutions
Office bldg., Washington, DC Fixed interest rate of 15% 8/1/08 (a)
Retail bldg., VA, 2 loans Fixed rates of 9.25% and 14.8% 12/1/02 (a)
Retail bldg., VA Fixed interest rate of 9% 2/1/21 (a)
Retail bldg., MN Fixed interest rate of 10% 12/31/14 (a)
Retail bldg., WVA Fixed interest rate of 12% 12/31/16 (a)
Retail bldg., CA Fixed interest rate of 9% 12/1/00 (a)
Office/Retail bldg., PA Interest rate of 5% plus 90% of 7/1/02 (a)
Prime
Office Bldg., WVA Fixed interest rate of 8.5% 12/31/00 (a)
Single family residential Fixed interest rates ranging from Various
housing 304 loans 7.74% to 16.75%
Note Receivable Fixed interest rate of 7.5% 12/31/27
</TABLE>
<PAGE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
FACE CARRYING SUBJECT TO
PRIOR AMOUNT OF AMOUNT OF DELINQUENT
DESCRIPTION LIENS MORTGAGES MORTGAGES INTEREST
----------- ----- --------- --------- --------
<S> <C> <C> <C> <C>
FIRST MORTGAGES
Hotel/Commercial Office, GA $ -- $5,800 $6,284 --
Hotel GA -- 3,625 1,453 --
Hotel, NE -- 6,005 4,082 --
Condominium units, NC -- 1,670 1,724 49
Apartment bldg. PA -- 400 402 --
Office bldg., PA -- 6,000 3,754 --
Apartment bldg., IL, 3 loans -- 17,460 17,333 --
JUNIOR LIEN LOANS
Apartment bldg., FL 2,096 4,100 1,214 --
Office bldg., NC 1,750 3,500 1,800 --
Apartment bldg. NJ, 2 loans 5,962 11,615 4,500 --
Apartment bldg., CN 1,800 7,520 3,918 --
Apartment bldg., PA 2,570 4,500 2,633 --
Apartment bldg., NJ 625 1,798 735 93
Apartment bldg., NJ, 2 loans 2,136 3,375 1,200 --
Apartment bldg., IL 10,000 24,083 10,580 --
Office bldg. PA 60,000 31,000 35,082 --
Office bldg., PA 3 loans 43,925 44,000 16,378 --
Office bldg., PA 840 5,400 817 --
Office bldg., DC 685 900 749 --
Office bldg., NJ, 3 loans 2,387 4,800 2,244 --
Office bldg., PA, 3 loans 2,213 3,116 1,312 --
Office bldg., PA 3 loans 17,784 40,644 13,576 --
Apartment bldg. CN 11,942 14,500 6,600 --
Apartment bldg., M 16,000 1,300 1,374 --
Apartment bldg., PA, 2 loans 1,000 1,454 880 --
Apartment bldg., PA 2,997 5,000 1,760 --
Apartment bldg., PA 31 loans 2,860 -- 1,081 --
Apartment bldg., PA 3,113 3,205 982 --
Apartment bldg., PA 2,478 3,155 809 --
Condominium Units, NC -- 3,550 3,564 13
Office bldg., Washington, DC, 6,548 13,283 6,889 --
2 loans
Office bldg., PA 1,750 1,150 570 --
Industrial bldg., Pasadena, CA 2,000 3,000 338 --
Office bldg., Washington, DC 80,684 100,971 20,041 --
Retail bldg., VA, 2 loans 34,960 45,000 8,358 --
Retail bldg., VA 1,413 3,961 671 --
Retail bldg., MN 2,088 1,776 602 --
Retail bldg., WVA 994 1,400 488 --
Retail bldg., CA 1,969 2,271 942 --
Office/Retail bldg., PA 2,611 3,400 1,299 --
Office Bldg., WVA 2,400 6,398 538 --
-------- -------- -------- ----
332,580 446,085 189,556 155
Single family residential
housing, 304 loans (d) 12,114 12,235 --
Note Receivable (d) 8,267 1,450 --
-------- -------- -------- ----
Balance at September 30, 1998 $332,580 $466,466 $203,241(c) $155
======== ======== ======== ====
Reconciliation of the total carrying amount of real estate loans for the year follow:
Balance at October 1, 1997 $ 89,216
Additions during the period:
New mortgage loans $337,087
Accretion of discount 6,520
Additions of residential
mortgage loans 13,685
Additions of existing loans 6,181 363,473
-------------------------
Deductions during the period:
Collections of principal ( 76,915)
Cost of mortgage old (172,533) (249,448)
-------------------------
Balance at September 30, 1998 $203,241(c)
========
(a) All net cash flows from the property
(b) Cost for Federal Income tax purposes equals $212,303
(c) Reconciliation shown without allowance for possible losses.
(d) Not practical to determine.
</TABLE>
<PAGE>
NINTH AMENDED AND RESTATED LOAN AGREEMENT
Dated as of September 28, 1998
By and Among
THE ATLAS GROUP, INC.,
ATLAS ENERGY CORPORATION,
ATLAS RESOURCES, INC.,
TRANSATCO CORPORATION,
ATLAS GAS MARKETING, INC.,
PENNSYLVANIA INDUSTRIAL ENERGY, INC.,
AIC, INC.,
ATLAS ENERGY GROUP, INC.,
MERCER GAS GATHERING, INC.,
AED INVESTMENTS, INC.,
And
ARD INVESTMENTS, INC.,
as the Borrowers
And
PNC BANK, NATIONAL ASSOCIATION,
as Agent
And
THE BANKS SIGNATORY HERETO
<PAGE>
NINTH AMENDED AND RESTATED LOAN AGREEMENT
-----------------------------------------
TABLE OF CONTENTS
-----------------
Page
----
SECTION 1. LOANS .......................................................... 2
1.1 REVOLVING CREDIT LOANS ........................................... 2
1.2 TERM LOAN ........................................................ 4
1.3 SEVEN-YEAR TERM LOAN ............................................. 5
1.4 DISCOUNTED FUTURE NET INCOME ..................................... 6
1.5 MANDATORY PREPAYMENTS ............................................ 7
1.6 INTEREST RATE OPTIONS, INTEREST PAYMENTS AND CERTAIN RELATED
PAYMENTS PERTAINING TO THE LOANS ................................. 8
1.7 CAPITAL ADEQUACY REQUIREMENTS ....................................15
1.8 TIME, PLACE AND MANNER OF PAYMENTS ...............................16
1.9 LOAN ACCOUNT .....................................................16
1.10 LETTER OF CREDIT SUBFACILITY .....................................16
1.11 DEFINITIONS; CONSTRUCTION ........................................21
SECTION 2. REPRESENTATIONS AND WARRANTIES .................................28
2.1 EXISTENCE AND AUTHORITY
2.2 STOCK OWNERSHIP AND SUBSIDIARIES .................................28
2.3 RIGHTS, TITLES AND INTERESTS .....................................29
2.4 FINANCIAL STATEMENTS .............................................29
2.5 LITIGATION .......................................................30
2.6 VALIDITY OF AGREEMENT, NOTES, MORTGAGE, SECURITY AGREEMENT
(PARTNERSHIPS), SECURITY AGREEMENT (NOTE), PLEDGE AGREEMENT,
FINANCING STATEMENTS AND OTHER LOAN DOCUMENTS ....................30
2.7 PERMITS ..........................................................30
2.8 OPERATION OF WELLS AND THE PIPELINE ..............................31
2.9 PUBLIC UTILITY HOLDING COMPANY ...................................31
2.10 ERISA ............................................................31
2.11 REGULATION U .....................................................31
2.12 COMPLIANCE WITH LAW ..............................................31
2.13 TAXES ............................................................31
2.14 RELATIONSHIP OF BORROWER .........................................31
2.15 STATUS AS PRODUCERS OF GAS .......................................32
2.16 Year 2000 ........................................................32
2.17 ENVIRONMENTAL MATTERS ............................................32
2.18 INVESTMENT COMPANY ACT ...........................................32
SECTION 3. SECURITY. ......................................................32
3.1 MORTGAGE, SECURITY AGREEMENT (PARTNERSHIPS), SECURITY AGREEMENT
(NOTE) AND PLEDGE AGREEMENT ......................................32
3.2 SET-OFF ..........................................................33
3.3 ADDITIONAL SECURITY ..............................................34
3.4 OPERATING ACCOUNTS ...............................................34
-i-
<PAGE>
SECTION 4. AFFIRMATIVE COVENANTS ..........................................34
4.1 FIRST LIEN UNDERTAKINGS ..........................................34
4.2 PROTECTION OF RIGHTS, TITLES AND INTERESTS .......................34
4.3 OPERATION AND MAINTENANCE ........................................34
4.4 PERMITS ..........................................................35
4.5 COMPLIANCE WITH LAW ..............................................35
4.6 STATUS AS PRODUCERS OF GAS .......................................35
4.7 EXISTENCE AND OWNERSHIP ..........................................35
4.8 REPORTS, CERTIFICATIONS AND OTHER INFORMATION ....................35
4.9 RECORDS AND ACCESS ...............................................36
4.10 PAYMENT OF TAXES AND MECHANICS' CLAIMS ...........................36
4.11 INSURANCE ........................................................37
4.12 DUTY TO PLUG .....................................................37
4.13 EXPENSES, FEES AND DISBURSEMENTS .................................37
4.14 ASSIGNED PAYMENTS ................................................37
4.15 NOTIFICATION .....................................................38
4.16 CURRENT RATIO ....................................................38
4.17 DEBT To EBITDA ...................................................38
4.18 FIXED CHARGE COVERAGE RATIO ......................................39
4.19 ADDITIONAL DOCUMENTS .............................................39
4.20 ENVIRONMENTAL MATTERS ............................................39
SECTION 5. NEGATIVE COVENANTS .............................................41
5.1 ALIENATION .......................................................41
5.2 ENCUMBRANCES .....................................................41
5.3 GUARANTY .........................................................42
5.4 DEBT .............................................................42
5.5 LOANS; INVESTMENTS ...............................................42
5.6 BUSINESS ACTIVITIES ..............................................42
5.7 CONSOLIDATION OR MERGER; CHANGE OF CONTROL .......................43
5.8 ACQUISITIONS .....................................................43
5.9 REDEMPTION .......................................................43
5.10 DISTRIBUTIONS ....................................................43
5.11 LEASES ...........................................................43
5.12 CAPITAL EXPENDITURES .............................................44
5.13 NEGATIVE PLEDGES .................................................44
SECTION 6. BORROWING REQUIREMENTS .........................................44
6.1 CONDITIONS To BORROWING ..........................................44
SECTION 7. DISBURSEMENT ...................................................45
7.1 PROCEDURE ........................................................45
7.2 USE OF PROCEEDS ..................................................46
7.3 CHARGING ACCOUNT .................................................46
SECTION 8. DEFAULTS .......................................................46
SECTION 9. REMEDIES .......................................................49
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<PAGE>
SECTION 10. MISCELLANEOUS .................................................49
10.1 WAIVER AND MODIFICATION ..........................................49
10.2 NOTICES ..........................................................49
10.3 CERTAIN TAXES ....................................................50
10.4 RIGHT TO CURE ....................................................50
10.5 VENUE AND JURISDICTION; WAIVER OF JURY TRIAL .....................50
10.6 APPLICABLE LAW ...................................................51
10.7 SEVERABILITY .....................................................51
10.8 SUCCESSORS AND ASSIGNS ...........................................51
10.9 NATURE AND SURVIVAL OF REPRESENTATIONS ...........................52
10.10 NUMBER AND GENDER ................................................52
10.11 JOINT AND SEVERAL LIABILITY ......................................52
10.12 TAX WITHHOLDING ..................................................53
10.13 HEADINGS .........................................................53
10.14 CONFIDENTIALITY ..................................................53
SECTION 11. AGREEMENT AMONG BANKS .........................................54
11.1 APPOINTMENT AND GRANT OF AUTHORITY ...............................54
11.2 RELIANCE By AGENT ON BANKS FOR FUNDING ...........................54
11.3 NON-RELIANCE ON AGENT ............................................54
11.4 RESPONSIBILITY OF AGENT AND OTHER MATTERS ........................55
11.5 ACTION ON INSTRUCTIONS ...........................................55
11.6 REQUIRED BANKS ...................................................56
11.7 ACTION UPON OCCURRENCE OF AN EVENT OF DEFAULT ....................56
11.8 INDEMNIFICATION ..................................................56
11.9 AGENT's RIGHTS AS A BANK .........................................56
11.10 PAYMENT To BANKS .................................................56
11.11 PRO RATA SHARING .................................................57
11.12 SUCCESSOR AGENT ..................................................57
11.13 AMENDMENTS AND WAIVERS ...........................................57
11.14 AGENT's FEES .....................................................58
11.15 FUNDING By BRANCH, SUBSIDIARY OR AFFILIATE .......................58
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<PAGE>
LIST OF EXHIBITS
----------------
EXHIBIT A - REVOLVING CREDIT NOTE
EXHIBIT B - TERM NOTE
EXHIBIT C - Seven-Year Term Note
EXHIBIT D - Mortgages
EXHIBIT E - Security Agreement (Partnership)
EXHIBIT F - Security Agreement (Note)
EXHIBIT G - Pledge Agreement
EXHIBIT H - Compliance Certificate of Financial Statement
EXHIBIT I - Assignment and Assumption Agreement
LIST OF SCHEDULES
-----------------
SCHEDULE 2.2 - Ownership/Subsidiaries
SCHEDULE 2.5 - Litigation
ANNEX I - Interest Rate Margins
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<PAGE>
NINTH AMENDED AND RESTATED LOAN AGREEMENT
-----------------------------------------
This Agreement dated as of this 28th day of September, 1998, and made and
entered into by and among ATLAS ENERGY GROUP, INC., an Ohio corporation ("AEG"),
ATLAS RESOURCES, INC., a Pennsylvania corporation ("ARI"), TRANSATCO
CORPORATION, an Ohio corporation, ATLAS ENERGY CORPORATION, an Ohio corporation,
MERCER GAS GATHERING, INC., a Pennsylvania corporation, ATLAS GAS MARKETING,
INC., a Pennsylvania corporation, PENNSYLVANIA INDUSTRIAL ENERGY, INC., a
Pennsylvania corporation, THE ATLAS GROUP, INC. (f/k/a "AEG Holdings, Inc."), a
Pennsylvania corporation, AED INVESTMENTS, INC., a Delaware corporation, ARD
INVESTMENTS, INC., a Delaware corporation, and AIC, INC., a Delaware
corporation, having offices and places of business at 311 Rouser Road,
Coraopolis, Allegheny County, Pennsylvania 15108 (hereinafter sometimes referred
to collectively and individually as the "Borrower") and PNC BANK, NATIONAL
ASSOCIATION, a national banking association having an office at One PNC Plaza,
249 Fifth Avenue, Pittsburgh, Allegheny County, Pennsylvania 15222 ("PNC") in
its capacity as the initial bank hereunder (together with any other financial
institutions that hereafter become a Bank hereunder in accordance with Section
10.8 below, the "Banks", and each individually, a "Bank" and PNC BANK, NATIONAL
ASSOCIATION, in its capacity as agent for the Banks (in such capacity, the
"Agent").
WITNESSETH:
WHEREAS, pursuant to an Eighth Amended and Restated Loan Agreement dated as
of July 31, 1995 (the Eighth Amended and Restated Loan Agreement is hereinafter
referred to as the "Original Loan Agreement"), as amended by an Amendment dated
as of December 1, 1997, and certain letter agreements among Borrower and PNC
(the Original Loan Agreement, as amended, the "Existing Loan Agreement") PNC
agreed to lend to Borrower certain amounts; and
WHEREAS, the Borrower and PNC, as the initial Bank hereunder, wish to,
inter alia, (i) continue the loans made pursuant to the Existing Loan Agreement,
(ii) provide for the joinder of additional "Banks" as lenders with respect to
such loans, and (iii) appoint PNC as Agent for such Banks now or hereafter party
hereto; and
WHEREAS, the Borrower, the Banks and the Agent desire to amend and restate
the Existing Loan Agreement as herein set forth.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
and with the intent to be legally bound hereby, the parties hereto hereby agree
that the Existing Loan Agreement is hereby amended and restated as follows:
<PAGE>
SECTION 1. LOANS.
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1.1 Revolving Credit Loans.
(a) Credit. Subject to the terms and conditions hereof (including but not
limited to the conditions contained in Section 7.1 hereof), and relying on the
representations and warranties herein contained, the Banks agree to, and shall
be obligated to, lend to Borrower, from time to time and upon request of
Borrower as provided in Section 7.1, during the period (the "Revolving Credit
Period") commencing on the date hereof and ending on September 28, 2001 (the
"Termination Date"), an amount or amounts (the "Revolving Credit") not exceeding
in the aggregate at any one time outstanding the lesser of (i) FORTY MILLION
($40,000,000) DOLLARS or (ii) the then current Collateral Value (as such term is
defined in Section 1.5 hereof), less in each case the sum of (x) the aggregate
Stated Amounts of outstanding Letters of Credit, (y) the aggregate amount of
unreimbursed Draws under the Letters of Credit and (z) the aggregate outstanding
principal amounts of the Term Notes; provided, however, that notwithstanding the
foregoing provisions, the aggregate principal amount of advances outstanding
under the Revolving Credit shall not exceed TWENTY MILLION ($20,000,000) DOLLARS
at any time from the date of this Agreement until the next redetermination of
the Collateral Value by Agent pursuant to Section 1.5(iii) below.
Each Bank agrees, for itself only, and subject to the terms and
conditions of this Agreement, to make revolving credit loans to the Borrower
from time to time not to exceed an aggregate principal amount at any one time
outstanding equal to the amount of its Commitment Percentage of the Revolving
Credit. For the purposes of this Agreement, the term "Commitment Percentage(s)"
shall mean, with respect to each Bank, its percentage commitment of the
Revolving Credit, the Term Credit and the Seven-Year Term Credit which shall be
the percentage initially set forth opposite its name on the signature page
hereto signed by such Bank, and thereafter as shown on the most recent
Assignment and Assumption Agreement. The term "Ratable Share" shall mean the
proportion that a Bank's Commitment Percentage of the Revolving Credit bears to
the total Revolving Credit.
The obligation of the Borrower to repay the aggregate unpaid principal
amount of the advances to the Borrower under the Revolving Credit (each such
advance under the Revolving Credit, a "Revolving Credit Loan" and collectively
the "Revolving Credit Loans") by each Bank, together with interest thereon,
shall be evidenced by one or more revolving credit notes executed in favor of
each Bank in the maximum amount of that Bank's Commitment Percentage of the
Revolving Credit and substantially in the form of Exhibit "A" attached hereto
and made a part hereof with appropriate insertions (each, a "Revolving Credit
Note" and collectively, the "Revolving Credit Notes"). Notwithstanding the
aggregate principal amount of the Revolving Credit Notes as stated on the faces
thereof in the amount of FORTY MILLION ($40,000,000) DOLLARS, the actual
principal amount due from the Borrower to each Bank on account of such Bank's
Revolving Credit Note, as of any date of computation, shall be the sum of all
advances then and theretofore made on account thereof by such Bank less all
payments of principal actually received by such Bank in collected funds during
the same period all as shown on such Bank's Loan Account established pursuant to
Section 1.9 hereof.
During the Revolving Credit Period, Borrower may borrow, repay and
reborrow funds under the Revolving Credit, provided, however, that at no time
shall the aggregate unpaid principal balance outstanding under the Revolving
Credit Notes exceed the lesser of (i) FORTY MILLION ($40,000,000) DOLLARS or
(ii) the Collateral Value, less in each
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case the sum of (x) the aggregate Stated Amounts of outstanding Letters of
Credit, (y) the aggregate amount of unreimbursed Draws under the Letters of
Credit and (z) the aggregate outstanding principal amounts of the Term Notes.
The Borrower may from time to time repay the Revolving Credit Loans outstanding
upon compliance with the terms of this Subsection 1.1 (a) and Subsection 1.6(f)
hereof. The Borrower shall not be permitted to repay any Euro-Rate Portion of
the Revolving Credit Loans other than at the end of the relevant Euro-Rate
Interest Period, unless such payment is accompanied by the prepayment premium
provided for in Subsection 1.6(f). Except as set forth in the preceding sentence
and so long as each repayment is in a minimum amount of FIFTY THOUSAND ($50,000)
DOLLARS or the outstanding principal balances of, and unpaid and accrued
interest on, the Revolving Credit Notes, whichever is less, the Borrower, upon
proper notice as provided in Subsection 1.6(f), may repay, without premium or
penalty, (i) any Base Rate Portion of the Revolving Credit Loans at any time,
and (ii) any Euro-Rate Portion of the Revolving Credit Loans at the end of the
Euro-Rate Interest Period therefor.
(b) Interest. The principal balance outstanding under each Revolving
Credit Note shall bear interest, on the actual unpaid principal amount thereof
from time to time outstanding, from the date thereof until payment in full, at
the rates of interest set forth in Section 1.6. The Borrower shall pay accrued
interest on the unpaid principal balance of each Revolving Credit Note in
arrears (i) with respect to each Base Rate Portion, at the Adjusted Base Rate
(A) on the last Business Day of each March, June, September and December during
the Revolving Credit Period, (B) at maturity, whether by acceleration or
otherwise, of such Revolving Credit Note, and (C) after maturity, on demand
until paid in full, and (ii) with respect to each Euro-Rate Portion, at the
Adjusted Euro-Rate (A) on the last day of each Euro-Rate Interest Period
(provided, however, if the Euro-Rate Interest Period chosen for a Euro-Rate
Portion exceeds three (3) months, interest on that Euro-Rate Portion shall be
due and payable every three (3) months during such Euro-Rate Interest Period and
on the last day of such Euro-Rate Interest Period), (B) at maturity, whether by
acceleration or otherwise, of such Revolving Credit Note, and (C) after
maturity, on demand until paid in full.
(c) Repayment. The entire principal balance outstanding under the
Revolving Credit Notes, and all unpaid and accrued interest thereon on the
Termination Date, shall be due and payable on such date.
(d) Commitment Fee; Voluntary Reductions. During and for the Revolving
Credit Period, Borrower shall pay to the Agent for the ratable account of each
Bank a commitment fee ("Commitment Fee") computed on the actual number of days
elapsed on the basis of a 360 day year and at the Commitment Fee Rate per annum
on the average daily difference between (i) the lesser of (x) Forty Million
($40,000,000) Dollars and (y) the then Current Collateral Value and (ii) the sum
of (w) the aggregate principal balances outstanding under the Revolving Credit
Notes plus (x) the aggregate Stated Amount of Letters of Credit outstanding plus
(y) the aggregate amount of unreimbursed Draws under the Letters of Credit plus
(z) the aggregate principal balances outstanding under the Term Notes. The
Commitment Fee shall be due and payable quarter-annually beginning on the last
Business Day of September, 1998 and on the last Business Day of each December,
March, June and September thereafter and on the Termination Date. For the
purposes of this section, the term "Commitment Fee Rate" shall mean a rate per
annurn equal to (i) thirty-seven and five-tenths (37.5) basis points (.375%) if
the then current Utilization Rate is less than 55%, and (ii) fifty (50) basis
points (.5%) if the then current Utilization Rate is equal to or greater than
55%; provided, however, that in the event the Term Loans are repaid in full by
the Borrower on or before the
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<PAGE>
sixtieth (60th) day from the date of this Agreement, the Commitment Fee Rate
shall thereafter equal thirty-seven and five-tenths (37.5) basis points (.375%),
notwithstanding the foregoing provisions.
To the extent that the Borrower has availability under the Revolving
Credit, as it may be reduced pursuant to Section 1.1(a), the Borrower may, by
written notice to the Agent at least ten (10) Business Days prior to the date on
which such reduction is to become effective, notify the Agent that the Borrower
desires to reduce permanently all or a portion of the Revolving Credit available
to it [provided, however, such reduction shall be in the amount of One Million
($1,000,000) Dollars or an integral multiple thereof] and thereafter the Banks
shall have no obligation whatsoever to advance any funds (or to issue any
Letters of Credit) hereunder to Borrower for the portion of the Revolving Credit
that has been terminated; further, the Commitment Fee for that terminated
portion shall not be payable for any period of time after such termination
becomes effective.
1.2 Term Loan.
(a) Term Credit. Subject to the terms and conditions hereof (including but
not limited to the conditions contained in Section 7.1 hereof), and relying on
the representations and warranties herein contained, the Banks agree to make
term loans to the Borrower in an aggregate principal amount equal to SEVEN
MILLION ($7,000,000) DOLLARS (the "Term Credit"); provided, that each Bank's
obligation to advance loans hereunder shall not exceed such Bank's Commitment
Percentage of the Term Credit. The loans (each, a "Term Loan" and collectively,
the "Term Loans") under the Term Credit shall be evidenced by one or more term
notes executed in favor of each Bank in the maximum amount of that Bank's
Commitment Percentage of the Term Credit and substantially in the form of
Exhibit "B" attached hereto and made a part hereof with appropriate insertions
(each, a "Term Note" and collectively, the "Term Notes").
(b) Interest. The principal balance under each Term Note shall bear
interest, on the actual unpaid principal amount thereof from time to time
outstanding, from the date thereof until payment in full, at the rates of
interest set forth in Section 1.6. The Borrower shall pay accrued interest on
the unpaid principal balance of each Term Note in arrears (i) with respect to
each Base Rate Portion, at the Adjusted Base Rate (A) on the last Business Day
of each March, June, September and December during the term thereof, (B) at
maturity, whether by acceleration or otherwise, of such Term Note, and (C) after
maturity, on demand until paid in full, and (ii) with respect to each Euro-Rate
Portion, at the Adjusted Euro-Rate (A) on the last day of each Euro-Rate
Interest Period (provided, however, if the Euro-Rate Interest Period chosen for
a Euro-Rate Portion exceeds three (3) months, interest on that Euro-Rate Portion
shall be due and payable every three (3) months during such Euro-Rate Interest
Period and on the last day of such Euro-Rate Interest Period), (B) at maturity,
whether by acceleration or otherwise, of such Term Note, and (C) after maturity,
on demand until paid in full.
(c) Repayment. The aggregate principal balances outstanding under the Term
Notes, and all unpaid and accrued interest thereon, is to be repaid in twenty
(20) consecutive quarterly installments, in an amount equal to all unpaid and
accrued interest plus $350,000, beginning on the last day of December, 1998, and
thereafter on the last day of each December, March, June and September until
repaid in full; provided, however, that notwithstanding anything to the contrary
herein contained, the entire principal balance
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<PAGE>
outstanding under the Term Notes, and all unpaid and accrued interest thereon,
on September 30, 2003 shall be due and payable on such date.
(d) Prepayment. The Borrower may from time to time prepay the Term Loan
outstanding upon compliance with the terms of this Subsection 1.2(d) and
Subsection 1.6(f) hereof. The Borrower shall not be permitted to repay any
Euro-Rate Portion of the Term Loan other than at the end of the relevant
Euro-Rate Interest Period, unless such prepayment is accompanied by the
prepayment premium provided for in Subsection 1.6(f). Except as set forth in the
preceding sentence and so long as each prepayment is in a minimum amount of
FIFTY THOUSAND ($50,000) DOLLARS or the aggregate outstanding principal balances
of the Term Notes, whichever is less, plus the accrued and unpaid interest on
the principal amounts prepaid, accrued to the prepayment date, the Borrower,
upon proper notice as provided in Subsection 1.6(f), may prepay, without premium
or penalty, (i) any Base Rate Portion of the Term Loan at any time, and (ii) any
Euro-Rate Portion of the Term Loan at the end of the Euro-Rate Interest Period
therefor. Each partial prepayment on the Term Loan shall be applied in payment
of (x) the Portions of the Term Loan as the Borrower may select, and (y) the
last amounts of principal to be paid under the Term Notes.
1.3 Seven-Year Term Loan.
(a) Seven-Year Term Credit. Subject to the terms and conditions hereof
(including but not limited to the conditions contained in Section 7.1 hereof),
and relying on the representations and warranties herein contained, the Banks
agree to continue to have on loan to Borrower SEVEN HUNDRED TWENTY SEVEN
THOUSAND THREE HUNDRED EIGHTY and 97/100 ($727,380.97) DOLLARS (the "Seven-Year
Term Credit"). The loan (the "Seven-Year Term Loan") under the Seven-Year Term
Credit, which was in the original principal amount of $1,300,000, shall be
evidenced by one or more notes executed in favor of each Bank in the maximum
amount of that Bank's Commitment Percentage of the Seven-Year Term Credit and
substantially in the form of Exhibit "C" attached hereto and made a part hereof
(each, a "Seven-Year Term Note" and collectively, the "Seven-Year Term Notes").
(b) Interest. The principal balance under each Seven-Year Term Note has
borne, and will continue to bear interest, on the actual unpaid principal amount
thereof from time to time outstanding, from the date thereof until payment in
full, at the rates of interest set forth in Section 1.6. The Borrower shall pay
accrued interest on the unpaid principal balance of each Seven-Year Term Note in
arrears (i) with respect to each Base Rate Portion, at the Adjusted Base Rate
(A) on the last Business Day of each month during the term thereof, (B) at
maturity, whether by acceleration or otherwise, of such Seven-Year Term Note,
and (C) after maturity, on demand until paid in full, and (ii) with respect to
each Euro-Rate Portion, at the Adjusted Euro-Rate (A) on the last day of each
Euro-Rate Interest Period (provided, however, if the Euro-Rate Interest Period
chosen for a Euro-Rate Portion exceeds three (3) months, interest on that
Euro-Rate Portion shall be due and payable every three (3) months during such
Euro-Rate Interest Period and on the last day of such Euro-Rate Interest
Period), (B) at maturity, whether by acceleration or otherwise, of such
Seven-Year Term Note, and (C) after maturity, on demand until paid in full.
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<PAGE>
In the event that Borrower elects to have the Seven-year Term Loan bear interest
at a Fixed Rate Option as provided in Subsection 1.6(e) below, the Borrower
shall pay accrued interest on the unpaid principal balance of each Seven-Year
Term Note in arrears at the applicable Fixed Rate (A) on the last Business Day
of each month during the remaining term thereof, (B) at maturity, whether by
acceleration or otherwise, of such Seven-Year Term Note, and (C) after maturity,
on demand until paid in full.
(c) Repayment. (i) The aggregate principal balances outstanding under the
Seven-Year Term Notes, and all unpaid and accrued interest thereon, was to be
repaid in eighty-four (84) consecutive monthly installments in amounts equal to
all unpaid and accrued interest plus the Seven-Year Term Loan Payment Amount [as
such term is defined in clause (ii) below], the first such payment having been
due on the first day of September, 1995 and thereafter on the first day each
month until repaid in full; provided, however, that notwithstanding anything to
the contrary herein contained, the entire aggregate principal balances
outstanding under the Seven-Year Term Notes, and all unpaid and accrued interest
thereon, on the first day of August, 2002 shall be due and payable on such date.
(ii) For the purposes of this Section 1.3(c), the term "Seven-Year Term
Loan Payment Amount" shall mean (a) FIFTEEN THOUSAND FOUR HUNDRED SEVENTY-SIX
AND 19/100 ($15,476.19) DOLLARS prior to the Fixed Rate Effective Date [as such
term is defined in Subsection 1.6(e) below] with respect to any election by
Borrower to have the Seven-Year Term Loan bear interest at the Adjusted
Amortization Fixed Rate, and (b) thereafter, an amount equal to the quotient
(rounded to the nearest dollar) of (x) the outstanding principal balance of the
Seven-Year Term Loan as of such Fixed Rate Effective Date divided by (y) the
number of months included in the period from and including the month after such
Fixed Rate Effective Date to and including August, 2005.
(d) Prepayment. The Borrower may from time to time prepay the Seven-Year
Term Loan outstanding upon compliance with the terms of this Subsection 1.3(d)
and Subsection 1.6(f) hereof. The Borrower shall not be permitted to repay any
Euro-Rate Portion of the Seven-Year Term Loan other than at the end of the
relevant Euro-Rate Interest Period, or to repay any Fixed Rate Portion of the
Seven-Year Term Loan other than at the maturity thereof, unless such prepayment
is accompanied by the prepayment premium provided for in Subsection 1.6(f).
Except as set forth in the preceding sentence with respect to prepayments of any
Euro-Rate Portion of the Seven-Year Term Loan, and so long as each prepayment is
in a minimum amount of FIFTY THOUSAND ($50,000) DOLLARS or the aggregate
outstanding principal balances of the Seven-Year Term Notes, whichever is less,
plus the accrued and unpaid interest on the principal amounts prepaid, accrued
to the prepayment date, the Borrower, upon proper notice as provided in
Subsection 11.6(f) may prepay, without premium or penalty, (i) any Base Rate
Portion of the Seven-Year Term Loan at any time, and (ii) any Euro-Rate Portion
of the Seven-Year Term Loan at the end of the Euro-Rate Interest Period
therefor. Each partial prepayment on the Seven-Year Term Loan shall be applied
in payment of (x) the Portion of the Seven-Year Term Loan as the Borrower may
select, and (y) the last amounts of principal to be paid under the Seven-Year
Term Notes.
1.4 Discounted Future Net Income.
Promptly after September 30, 1998 and September 30 of each year thereafter,
and in any event prior to the thirty-first (31st) day of December of each year,
the Borrower shall furnish to the Agent such information as the Agent may
request in order to enable the Agent to prepare, or cause to be prepared, at
Borrower's sole cost and expense, reports in form and substance and based upon
assumptions satisfactory to the Agent, which reports shall be dated as of
January of such year and shall set forth (i) the remaining proven and producing
gas and oil (as defined in Section 1.11 hereof) reserves attributable to each
of the wells (the "Wells") in which the Borrower now or hereafter has an
interest, whether directly or indirectly, as an owner of a working interest,
royalty or overriding royalty, as a general or limited partner of a
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<PAGE>
partnership, as a co-venturer of a joint venture or otherwise, and a projection
of the rate of gas and oil production from the Wells as well as a projection of
the total future net operating income payable to the Borrower with respect
thereto for a thirty (30) year period ("Future Net Income") and (ii) projected
fees, revenues and proceeds payable to Borrower and derived from, in connection
with and/or relating to (x) the transportation, compression and/or sale of gas
transported through pipeline in which the Borrower now or hereafter has an
interest, (y) the operation by Borrower of gas and oil wells and (z) the
management and administration by Borrower of any partnerships, in each case as
of such dates. In addition, at any time and from time to time upon request of
Agent, the Borrower shall furnish to the Agent such information as the Agent may
request in order to enable the Agent to prepare, or cause to be prepared, at
Borrowers sole cost and expense if requested by Agent after the occurrence of a
default under Section 8 hereof, interim reports in form and substance and based
upon assumptions satisfactory to the Bank, which reports shall be dated as of
the last day of the month preceding the month in which Agent makes the request
and shall set forth the remaining proven and producing gas and oil reserves
attributable to the Wells, and a projection of the rate of gas and oil
production from the Wells as well as a projection of the Future Net Income
therefrom, as of such dates. After the preparation of such report(s)
[Engineering Report(s)], the Agent shall make a determination, as set forth in
the following paragraph, of the Discounted Future Net Income as of such dates.
For the purpose of this Agreement, the "Discounted Future Net Income" shall
be (i) an amount based upon the remaining proven and producing gas and oil
reserves attributable to the Wells and the Partnerships (as such term is defined
below in this paragraph) in which the Bank has valid and perfected first liens
and security interests free and clear of all other encumbrances and
improvements, as set forth in the Engineering Reports and determined by Agent in
accordance with its usual and customary engineering practices and methods and
economic parameters plus (ii) an amount determined by Agent in its sole
discretion and based upon the actual and/or expected fees, revenues and proceeds
in which the Agent has valid and perfected first liens and security interests,
paid and payable to Borrower and derived from, in connection with and/or
relating to (x) the transportation, compression and/or sale of gas transported
through the gathering lines (herein referred to collectively and individually as
the "Pipeline") described in the Mortgage (as such term is defined in Section
3.1 hereof), (y) the operation by Borrower of gas and oil wells and (z) the
management and administration by Borrower of any partnerships. The Agent shall
determine in its sole discretion whether any oil and gas reserves, revenues and
proceeds are encumbered or impaired in favor of others and the Agent may
conclude that oil and gas reserves in which the Borrower does not have a direct
interest as the owner of a working interest, royalty or overriding royalty are
encumbered or impaired even though such oil and gas reserves are not subject to
any liens or security interests; as an example, and without limiting the Agent's
right to make such a determination in other instances, the Agent may conclude
that oil and gas reserves owned by a partnership or joint venture (hereinafter
referred to individually as a "Partnership" and collectively as "Partnerships")
in which the Borrower is a partner or co-venturer are impaired if such
Partnership suffers any loss or incurs any liability other than reasonable
charges of trade creditors incurred and paid in the normal course of business.
1.5 (i) Mandatory Prepayments. In the event that the total of the aggregate
principal balances outstanding under the Revolving Credit Notes plus the
aggregate principal balances outstanding under the Term Notes plus the aggregate
Stated Amounts of the Letters of Credit outstanding (the total of such amounts
is herein referred to as the "Aggregate Outstandings"), shall, at any time, be
in excess of the then current Collateral Value (as such
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<PAGE>
term is defined in clause (ii) below) (the difference between such amounts shall
be referred to herein as the "Deficiency Amount"), the Borrower shall (x) within
ninety (90) days after such occurrence, make a payment first on the Term Notes
[such payment to be applied in the manner set forth in Section 1.2(d)], and then
on the Revolving Credit Notes, in an aggregate amount equal to at least one-half
(1/2) of the Deficiency Amount (plus interest on such amount accrued to the date
of payment) and (y) within one hundred eighty (180) days after such occurrence,
make a payment first on the Term Notes [such payment to be applied in the manner
set forth in Section 1.2(d)], and then on the Revolving Credit Notes, in an
aggregate amount equal to the remaining amount of the Deficiency Amount (plus
interest on such amount accrued to the date of payment) such that, after giving
effect to such payment, the Aggregate Outstandings shall not exceed the
Collateral Value.
(ii) "Collateral Value" Definition. For the purposes of this Agreement, the
term "Collateral Value" shall mean the amount of indebtedness for borrowed money
that the Agent shall determine in its reasonable judgment and in accordance with
its customary standards can be supported by the Discounted Future Net Income, as
such amount is determined pursuant to Section 1.4 above; provided, that from the
date hereof until the next determination of the Collateral Value pursuant to
clause (iii) below, the Collateral Value shall be Twenty-Seven Million
($27,000,000) Dollars.
(iii) "Collateral Value" Redetermination. The Agent shall redetermine the
Collateral Value annually based upon the Discounted Future Net Income
determination made pursuant to Section 1.4 above; provided, however, that (x)
the Agent shall also redetermine the Collateral Value upon the request of
Borrower one additional time per year thereafter (in addition to the annual
redetermination provided for above), (y) the Agent may, at its option, make one
additional redetermination of the Collateral Value each year and (z) the Agent
may redetermine the Collateral Value at any time after the occurrence of a
default under Section 8 hereof.
1.6 Interest Rate Options, Interest Payments and Certain Related Payments
Pertaining to the Loans.
(a) Interest. Each of the Revolving Credit Notes, the Seven-Year Term Notes
and the Term Notes (hereinafter referred to collectively as the "Notes" and
individually as a "Note") shall bear interest, on the actual unpaid principal
amount thereof from time to time outstanding, from the date thereof until
payment in full, at the rates of interest set forth in this Section 1.6. The
Borrower may call the Agent to receive an indication of the rates then in
effect, but it is acknowledged that any such projection shall not be binding on
the Banks nor affect the rate of interest which thereafter is actually in effect
when the election is made. The Borrower shall pay accrued interest on the unpaid
principal balance of each Note in arrears as set forth in Subsection 1.1(b),
Subsection 1.2(b) or Subsection 1.3(b), as the case maybe. If at any time the
designated rate applicable to the Revolving Credit Loans, the Seven-Year Term
Loan, or the Term Loan, as the case may be, made by any Bank exceeds such Bank's
highest lawful rate, the rate of interest on the Revolving Credit Loans, the
Seven-Year Term Loan or the Term Loan, as the case may be, shall be limited to
such Bank's highest lawful rate.
(b) Interest Rate Options. The unpaid principal amount of the Revolving
Credit Loans, the Seven-Year Term Loan or the Term Loan then outstanding shall
bear interest, for each day until due, at one or more rates selected, at any
time or from time to time, by the Borrower from among the Options set forth
below subject to the provisions of Subsections
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1.6(c), 1.6(d) and 1.6(e) below; it being understood that, subject to the
provisions of this Agreement, the Borrower may select different Options, subject
to the provisions of Subsections 1.6(c), 1.6(d) and 1.6(e) below, to apply
simultaneously to different Portions of the Revolving Credit Loans, the
Seven-Year Term Loan or the Term Loan, as the case may be, and may select
different Euro-Rate Interest Periods to apply simultaneously to different
Portions of the Euro-Rate Portions of the Revolving Credit Loans, the Seven-Year
Term Loan or the Term Loan, as the case may be.
(i) Base Rate Option: A fluctuating rate per annum (computed upon the
basis of a year of 365/366 days, and the actual number of days elapsed) equal to
(A) the sum of (I) the Base Rate, plus (II) the Applicable Base Rate Margin,
with respect to the Revolving Credit Loans outstanding, (B) the sum of (I) the
Base Rate, plus (II) the Applicable Base Rate Margin, plus (III) twelve and
five-tenths (12.5) basis points (.125%) per annum, with respect to the Term
Loan outstanding, and (C) the sum of (I) the Base Rate, plus (II) fifty (50)
basis points (.5%) per annum, with respect to the Seven-Year Term Loan
outstanding. The foregoing rate shall be adjusted automatically from time to
time upon each change in the Base Rate.
(ii) Euro-Rate Option: A rate per annum (computed upon the basis of a
year of 360 days and the actual number of days elapsed) equal to (A) the sum of
(I) the Euro-Rate, plus (II) the Applicable Euro-Rate Margin, with respect to
the Revolving Credit Loans outstanding, (B) the sum of (I) the Euro-Rate, plus
(II) the applicable Euro-Rate Margin, plus (III) twelve and five-tenths (12.5)
basis points (.125%) per annum with respect to the Term Loan outstanding. and
(C) the sum of (I) the Euro-Rate, plus (II) two hundred twenty-five (225) basis
points (2.25%) per annum with respect to the Seven-Year Term Loan outstanding.
(iii) Fixed Rate Option. The rate of interest (computed upon the basis
of a year of 360 days and the actual number of days elapsed) on all amounts
borrowed and outstanding under the Seven-Year Term Loan under this Option shall
be an amount equal to the sum of (a) the Banks' fully-absorbed cost of funds (as
determined by the Banks in accordance with their respective customary practices,
which determination shall be conclusive and binding on the Borrower) plus (b)
the Applicable Fixed Rate Margin as specified by Borrower in accordance with
Subsection 1.6(e) below.
(c) Euro-Rate Interest Periods, Limitations on Elections. At any time when
the Borrower shall select, convert to or renew the Euro-Rate Option to apply to
all or any Portion of the outstanding Revolving Credit Loans, the Seven-Year
Term Loan or the Term Loan, as the case may be, it shall fix one or more periods
during which such Option shall apply, such periods to be (x) one (1) month if
the Borrower selects the Euro-Rate Option during the Syndications Period and
(ii) one (1), two (2), three (3), or six (6) months if the Borrower selects the
Euro-Rate Option after the Syndications Period has ended, in each case
commencing on the borrowing, conversion or renewal date. All of the foregoing,
however, is subject to the following:
(i) any Euro-Rate Interest Period which would otherwise end on a day
which is not a Business Day shall be extended to the next Business Day
unless such Business Day falls in the succeeding calendar month in which
case such Euro-Rate Interest Period shall end on the next preceding
Business Day;
(ii) any Euro-Rate Interest Period which begins on the last day of a
calendar month or on a day for which there is no numerically corresponding
day in the subsequent calendar month during which such Euro-Rate Interest
Period is to end shall end on the last Business Day of such subsequent
month; and
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(iii) in the case of the renewal of a Euro-Rate Option at the end of a
Euro-Rate Interest Period, the first day of the new Euro-Rate Interest
Period shall be the last day of the preceding Euro-Rate Interest Period,
without duplication in payment of interest for such day.
Elections by the Borrower of the Euro-Rate Option shall be subject to
the following further limitations:
(i) The Euro-Rate Portion for each Euro-Rate Interest Period shall be
in an aggregate principal amount of $500,000 or more; provided, however,
that each incremental unit in excess of $500,000 shall be $100,000 or an
integral multiple thereof;
(ii) No Euro-Rate Interest Period may be elected with regard to amounts
outstanding under the Revolving Credit Note which Interest Period would end
after the Termination Date;
(iii) No Euro-Rate Interest Period may be elected with regard to
amounts outstanding under the Term Note or the Seven-Year Term Note which
Euro-Rate Interest Period would end after the then last scheduled principal
payment of the Term Loan or the Seven-Year Term Note (as the case may be);
(iv) The Borrower shall maintain a Base Rate Portion, or must schedule
the expiration of Euro-Rate Interest Periods with sufficient principal
portions, or must cause the existence of a combination of a Base Rate
Portion plus expirations of Euro-Rate Interest Periods with sufficient
principal portions, equal to the next scheduled principal payment of the
Term Loan and the Seven-Year Term Loan;
(v) Upon the occurrence of a default set forth in items A or B of
Section 8 hereof, or upon the declaration of default pursuant to items C
through and including L of Section 8 hereof, the ability of the Borrower to
elect the Euro-Rate Option shall cease; and
(vi) At no time may there be more than ten (10) Euro-Rate Interest
Periods in effect.
(d) Election, Conversion or Renewal of Euro-Rate and Base Rate Interest
Rate Options. Elections of or conversions to the Base Rate Option shall continue
in effect until converted as hereinafter provided. Elections of, conversions to
or renewals of the Euro-Rate Option shall expire as to each Euro-Rate Portion at
the expiration of the applicable Euro-Rate Interest Period.
At any time with respect to the Base Rate Portion or at the expiration
of the applicable Euro-Rate Interest Period with respect to any Euro-Rate
Portion, the Borrower, subject to Subsection 1.6(c), may cause all or any part
of the principal amount of such Portion to be converted to and/or (in the case
of a Euro-Rate Portion) to be renewed under the
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Euro-Rate Option by notice to the Agent as hereinafter provided. Such notice (i)
shall be oral or in writing and if oral immediately confirmed in writing to the
Agent, (ii) shall be irrevocable, (iii) shall be given not later than 11:00
A.M., Pittsburgh, Pennsylvania time not less than two (2) Business Days prior to
the proposed effective date for conversion to or renewal of, either in whole or
in part, the Euro-Rate Option and (iv) shall set forth:
(A) the effective date, which shall be a Business Day;
(B) the new Euro-Rate Interest Period(s) selected; and
(C) with respect to each such Euro-Rate Interest Period, the aggregate
principal amount of the corresponding Euro-Rate Portion.
At the expiration of each Euro-Rate Interest Period, any part
(including the whole) of the principal amount of the corresponding Euro-Rate
Portion, as to which no notice of conversion or renewal has been received as
provided above, shall automatically be converted to the Base Rate Option. The
Agent shall promptly notify the Borrower and the Banks of any such automatic
conversion.
(e) Election of Fixed Rate Option. The Borrower shall have the option
once during the term of this Agreement with respect to the Seven-Year Term Loan
to elect to have the entire principal balance outstanding under the Seven-Year
Term Loan, on the effective date of such election (the "Fixed Rate Effective
Date"), bear interest for the remaining term thereof at a Fixed Rate Option,
subject to the other provisions of this Agreement. It is understood that if the
Borrower makes such an election pursuant to this clause (e) of Subsection 1.6,
then from and after the Fixed Rate Effective Date the Seven-Year Term Loan shall
bear interest at the applicable Fixed Rate until paid in full, and the Borrower
shall have no further right to elect either the Base Rate Option or the
Euro-Rate Option hereunder with respect to any Portion of the Seven-Year Term
Loan. Notice of the Borrower's election of the Fixed Rate Option shall be made
to the Agent in writing at least three (3) Business Days prior to the proposed
Fixed Rate Effective Date; such notice shall set forth the Fixed Rate Effective
Date and the Applicable Fixed Rate Margin elected by Borrower and such notice of
election and choice of Applicable Fixed Rate Margin shall be irrevocable and
shall commit the Borrower to the election of the Fixed Rate Option hereunder.
(f) Repayments and Prepayments. The Borrower, upon (i) one (1) Business
Day's oral or written notice to the Agent, in the case of Revolving Credit
Loans, the Seven-Year Term Loan or the Term Loan, as the case may be, bearing
interest at the Adjusted Base Rate or (ii) three (3) Business Days' oral or
written notice to the Agent, in the case of Revolving Credit Loans, the
Seven-Year Term Loan or the Term Loan, as the case may be, bearing interest at
the Adjusted Euro-Rate, followed immediately thereafter by the Borrower's
written confirmation to the Agent of any oral notice, may repay, or prepay, as
the case may be, the outstanding amount of the Revolving Credit Loans, the
Seven-Year Term Loan or the Term Loan, as the case may be, in whole or in part
with accrued interest, fees and other amounts then due and payable on the amount
repaid or prepaid, as the case may be, to the date of such repayment or
prepayment, as the case may be, all as set forth below.
The Borrower may repay, or prepay, as the case may be, a Portion of the
Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case
may be, bearing interest at the Adjusted Base Rate without premium or penalty.
If the Borrower shall
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repay, or prepay, as the case may be, a Portion of the Revolving Credit Loans,
the Seven-Year Term Loan or the Term Loan, as the case may be, bearing interest
at the Adjusted Euro-Rate prior to the end of the Euro-Rate Interest Period
relating to such Euro-Rate, the Borrower shall pay (in addition to principal and
interest) such additional amounts as may be necessary to compensate each Bank
for any loss and any direct or indirect costs, including the cost of
reemployment of funds so prepaid at rates lower than the cost to such Bank of
such funds. Such losses and costs shall be specified in writing (setting forth
the manner of calculation) to the Borrower by such Bank and, absent manifest
error in computation, shall be binding and conclusive on the Borrower. If the
Borrower shall prepay any portion of the Seven-Year Term Loan bearing interest
at the Fixed Rate, the Borrower shall pay within thirty (30) days from the date
of such prepayment a Fixed Rate Prepayment Premium (as defined below) on the
amount of such prepayment.
For the purposes of this Subsection 1.6(f), the term "Fixed Rate
Prepayment Premium" shall mean an amount equal to the present value, if
positive, of the product of (i) the difference between (x) the yield of a
security issued by the United States Treasury and selected by the Agent in its
sole discretion (including bonds, notes and bills), available to the public at
the time the Borrower elected to convert the Seven-Year Term Loan into a Fixed
Rate Option, and maturing on or about the final maturity date of the Seven-Year
Term Loan and (y) the yield of a similar type of security issued by the United
States Treasury and selected by the Agent in its sole discretion (including
bonds, notes and bills), available to the public at the time of the prepayment,
and maturing on or about the final maturity date of the Seven-Year Term Loan and
(ii) the principal amount of such prepayment to be applied to the reduction of
the Seven-Year Term Loan and (iii) the number of years computed on the actual
number of days on the basis of a 360-day year (including any fractional year)
from the time of the prepayment to the final maturity date of the Seven-Year
Term Loan.
Such losses and costs shall be specified in writing (setting forth the
manner of calculation) to the Borrower by the Agent and, absent manifest error
in computation, shall be binding and conclusive on the Borrower.
(g) Yield Protection. If any Governmental Rule or the interpretation or
application thereof by any court or by any Governmental Person charged with the
administration thereof:
(i) subjects any Bank to any tax, levy, impost, charge, fee, deduction
or withholding of any kind hereunder (other than a tax imposed or based
upon the income of such Bank) or changes the basis of taxation of any Bank
with respect to the payments by the Borrower of principal or interest due
hereunder (other than any change which affects, and to the extent that it
affects, the taxation of the total net income of such Bank); or
(ii) imposes, modifies or deems applicable any reserve, special deposit
or similar requirements against assets held by any Bank; or
(iii) imposes upon any Bank any other condition with respect to this
Agreement,
such Bank shall notify the Agent in writing as soon as practicable after such
Bank becomes aware thereof; and if the result of any of the foregoing is to
increase the cost to such Bank,
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reduce the income receivable by such Bank or impose any expense upon such Bank,
with regard to all or any portion of the Revolving Credit Loans, the Seven-Year
Term Loan or the Term Loan, as the case may be, bearing interest at either the
Adjusted Euro-Rate or the Fixed Rate, by an amount determined by such Bank in
good faith and which such Bank in good faith deems material, such Bank shall
notify, from time to time, the Agent and the Borrower of the amount determined
by such Bank (which determination, absent manifest error in computation, shall
be conclusive) to be necessary to compensate it (on an after-tax basis) for such
increase in cost, reduction in income or additional expense, setting forth the
calculations and the reasons therefor. The Borrower shall pay such amount to
such Bank, as additional consideration hereunder, within ten (10) days of the
Borrower's receipt of such notice.
(h) Euro-Rate Unascertainable.
(i) If on any date on which a Euro-Rate would otherwise be determined,
the Agent shall have determined (which determination shall be final and
conclusive) that:
(a) adequate and reasonable means do not exist for ascertaining
such Euro-Rate, or
(b) a contingency has occurred which materially and adversely
affects the London interbank market relating to the Euro-Rate, or
(ii) if at any time any Bank shall have determined (which determination
shall be final and conclusive) that:
(a) the making, maintenance or funding of the Portion of the
Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the
case may be, to which a Euro-Rate Option applies has been made
impracticable or unlawful by compliance by such Bank in good faith with any
Governmental Rule or any interpretation or application thereof by any
Governmental Person or with any request or directive of any such
Governmental Person (whether or not having the force of law), or
(b) such Euro-Rate Option will not adequately and fairly reflect
the cost to such Bank of the establishment or maintenance of the Portions
of the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan,
as the case may be, to which a Euro-Rate Option applies or
(c) after making all reasonable efforts that deposits of the
relevant amount in Dollars for the relevant Euro-Rate Interest Period for
the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as
the case may be, to which a Euro-Rate Option applies, respectively, are not
available to such Bank at the effective cost of funding a proposed
Euro-Rate Interest Period, in the London interbank market,
then, in the case of any event specified in part (a) above, the Agent shall
promptly so notify the Borrower and the other Banks thereof; and in the case of
any event specified in part (b) above, the affected Bank shall promptly so
notify the Agent thereof, and the Agent shall send a copy of such notice to the
Borrower and the other Banks. Upon such date as shall be specified in such
notice (which shall not be earlier than the date such notice is given) the
obligation of the Banks
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to allow the Borrower to select, convert to or renew a Euro-Rate Option shall be
suspended until the Agent or such Bank (as the case may be) shall have later
notified the Borrower of the Bank's determination (which determination shall be
final and conclusive) that the circumstances giving rise to such previous
determination no longer exist. If at any time the Agent or any Bank makes a
determination under parts (a) or (b) of this Subsection 1.6(h) and the Borrower
has previously notified the Agent of the Borrower's selection of, conversion to
or renewal of a Euro-Rate Option and such Option has not yet gone into effect,
such notification shall be deemed to provide for selection of, conversion to or
renewal of the Base Rate Option otherwise available with respect to the Portion
of the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the
case may be. On the date of the occurrence of any event described in item (i) of
part (b), the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan,
as the case may be, bearing interest at the Adjusted Euro-Rate then outstanding
shall be automatically converted to the Base Rate Option and the Borrower shall
pay to the Banks the accrued and unpaid interest on the Revolving Credit Loans,
the Seven-Year Term Loan or the Term Loan, as the case may be, to (but not
including) the date of such conversion.
The Borrower shall pay each Bank any additional amounts determined by
such Bank in good faith to be reasonably necessary to compensate such Bank for
any costs incurred by such Bank as a result of any conversion pursuant to item
(i) of part (b) above on a day other than the last day of the relevant Euro-Rate
Interest Period, including, but not limited to, any interest or fees payable by
such Bank to lenders of funds obtained by it to loan or maintain the lending of
the Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the
case may be, so converted. The affected Bank shall furnish to the Borrower a
certificate as to the amount necessary to compensate such Bank for such costs
(which certificate shall set forth the calculation in reasonable detail, and,
absent manifest error in computation, shall be conclusive), and the Borrower
shall pay such amount to such Bank, as additional consideration hereunder,
within ten (10) days of the Borrower's receipt of such certificate.
(i) Indemnity. The Borrower shall indemnify the Agent and each Bank against
all liabilities, losses or expenses (including loss of margin, any loss or
expense incurred in liquidating or employing deposits from third parties and any
loss or expense incurred in connection with funds acquired by a Bank to fund or
maintain Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as
the case may be, subject to either the Fixed Rate Option or the Euro-Rate
Option) which any Bank sustains or incurs as a consequence of any
(a) payment, prepayment, conversion or renewal of the Revolving Credit
Loans, the Seven-Year Term Loan or the Term Loan, as the case may
be, to which the Euro-Rate Option applies on a day other than the
last day of the corresponding Euro-Rate Interest Period (whether
or not such payment or prepayment is mandatory, voluntary or
automatic and whether or not such payment or prepayment is then
due),
(b) attempt by the Borrower to revoke (expressly, by later
inconsistent notices or otherwise) in whole or part any notice
relating to the making, maintenance, renewal or conversion of the
Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan,
as the case may be, or the conversion of the Revolving Credit Loan
to the Term Loan, or any voluntary prepayments of the Revolving
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Credit Loans, the Seven-Year Term Loan or the Term Loan, as the
case may be, or
(c) default by the Borrower in the payment of any principal of, or
interest on, the Revolving Credit Loans, the Seven-Year Term Loan
or the Term Loan, as the case may be, when due (whether by
acceleration or otherwise).
If any Bank sustains or incurs any such loss or expense it shall from
time to time notify the Borrower and the Agent of the amount determined in good
faith by such Bank (which determination shall be final and conclusive and may
include such assumptions, allocations of costs and expenses and averaging or
attribution methods as such Bank shall deem reasonable) to be necessary to
indemnify such Bank for such loss or expense. Such notice shall set forth in
reasonable detail the basis for such determination. Such amount shall be due and
payable by the Borrower to such Bank ten (10) Business Days after such notice is
given. In no event shall the indemnity payment provided for in this Subsection
1.6(i) require any payment to any Bank for a specific liability, loss or expense
incurred by such Bank by the Borrower which duplicates the reimbursement of such
Bank for any loss suffered by such Bank upon a voluntary prepayment of the
Revolving Credit Loans, the Seven-Year Term Loan or the Term Loan, as the case
may be, for which the Borrower has paid the prepayment premium required by
Subsection 1.6(f) hereof.
(j) Interest After Default; Maturity. Upon the occurrence of and during the
continuance of an event of default under Section 8 hereof, and after the
principal amount of all or any part of the Revolving Credit Loan, the Term Loan
or the Seven-Year Term Loan shall have become due and payable, whether by
acceleration or otherwise, the Revolving Credit Loan, the Term Loan and the
Seven-Year Term Loan shall bear interest at a rate per annum which shall be two
hundred (200) basis points (2%) per annum above the rate otherwise in effect
under the Base Rate Option, such interest rate to change automatically from time
to time, effective as of the effective date of each change in the Base Rate.
1.7 Capital Adequacy Requirements. If any law or guideline or
interpretation or application thereof by any official body charged with the
interpretation or administration thereof or compliance with any request or
directive of any official body (whether or not having the force of law), now
existing or hereafter adopted or imposed, modifies or deems applicable any
capital adequacy, reserve requirements, special deposit or similar requirements
against assets (funded or contingent) of, or credits extended by or commitments
to extend credit by, any Bank and the result thereof is to have the effect of
reducing the rate of return on such Bank's capital as a consequence of its
obligations hereunder to make and continue the Revolving Credit Loan or to issue
or participate in any Letter of Credit to a level below that which such Bank
could have achieved but for such adoption, imposition or modification, taking
into consideration such Bank's policies with respect to capital adequacy or
reserve requirements or special deposit or similar requirements, by an amount
which such Bank deems to be material, such Bank shall notify the Borrower of
such events. After such Bank notifies Borrower of such events, such Bank shall
promptly deliver to the Borrower a statement of the amount necessary to
compensate such Bank for the reduction in the rate of return on its capital
attributable to such Bank's obligations hereunder to make and continue the
Revolving Credit Loan or to issue or participate in any Letter of Credit. Such
Bank shall determine the capital compensation amount in good faith, using
reasonable attribution and averaging methods. Such Bank shall from time to time
notify the Borrower of the amount so determined and such amount
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shall be due and payable by the Borrower to such Bank thirty (30) days after
such notice is given; provided, however, that if the Borrower pays the Revolving
Credit Loan in full (including principal and interest), and terminates the
Revolving Credit and the commitment hereunder to issue Letters of Credit, within
such thirty (30) day period, the Borrower shall not be liable to such Bank to
pay such amount determined pursuant to this Section 1.7. All amounts determined
in accordance with this Section 1.7 shall be effective from the date on which
such Bank first gave notice to the Borrower of a reduction in such Bank's rate
of return.
1.8 Time, Place and Manner of Payments. All payments and prepayments to be
made by the Borrower hereunder or under any Note in respect of any principal,
interest, or fee shall be made to the Agent for the ratable accounts of the
Banks at the principal office of Agent in Pittsburgh, Pennsylvania. Such
payments shall be made in immediately available funds no later than 12:00 noon
(Pittsburgh, Pennsylvania time) on the date such payment is due.
1.9 Loan Account. Each Bank shall open and maintain on its books a loan
account (each, a "Loan Account") in the name of the Borrower, with respect to
advances made, payments and prepayments of principal, and the computations and
payments of interest and all other amounts due and sums paid to such Bank
hereunder or under its Notes. Such Loan Account, absent manifest error, shall be
conclusive and binding on the Borrower as to the amount at any time due to such
Bank from the Borrower.
1.10 Letter of Credit Subfacility.
(a) Terms of Letter of Credit. The Agent shall issue, subject to the terms
and conditions hereof (including but not limited to the conditions contained in
Section 7.1 hereof) and at the request of the Borrower, Letters of Credit, all
as more fully set forth in this Section 1.10.
(i) No Letter of Credit shall be issued hereunder which has an expiry
date more than one (1) year from the date of issuance and shall in no event
expire later than five (5) Business Days prior to the Termination Date;
provided, however, that any Letter of Credit with a one (1) year maturity may
provide for the renewal thereof for an additional one (1) year period, which
shall in no event extend beyond five (5) Business Days prior to the Termination
Date.
(ii) Each Letter of Credit, whether now outstanding or hereafter issued
by the Agent upon written request received by the Agent not less than five (5)
Business Days prior to the proposed date of issuance pursuant to this Section
1.10, has been or shall be issued in accordance with the Agent's then current
practices relating to the issuance by the Agent of Letters of Credit, including
but not limited to the execution and delivery by the Borrower of an application
for and/or confirmation of standby letter of credit and the payment by the
Borrower of the customary processing fees. Each issuance or renewal of a Letter
of Credit hereunder shall be conditioned on (and be deemed to be a
representation and warranty by Borrower as to) the following: that at the time
of such issuance or renewal the representations and warranties contained in this
Agreement are true and correct and no default set forth in Section 8 hereof
shall have occurred and be continuing and no event which, with the giving of
notice or lapse of time or both would become such a default, shall have occurred
or shall have failed to occur and be continuing.
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(iii) In no event shall (x) the aggregate undrawn face amount of the
Letters of Credit exceed, at any one time, Two Million ($2,000,000) Dollars, or
(y) the sum of the aggregate outstanding principal balance of the Revolving
Credit Loans, the aggregate outstanding principal balance of the Term Loans, the
aggregate unpaid balance of any unreimbursed Draws under the Letters of Credit
and the aggregate Stated Amounts of the Letters of Credit exceed, at any one
time, the lesser of (x) Forty Million ($40,000,000) Dollars or (y) the then
current Collateral Value. The Stated Amount of each Letter of Credit, while the
same is issued and outstanding, and any unreimbursed Draws under the Letters of
Credit, shall reduce the maximum amount otherwise available under the Revolving
Credit as set forth in Section 1.1(a) hereof.
(b) Disbursements, Reimbursement.
(i) Immediately upon the issuance of each Letter of Credit, each Bank
shall be deemed to, and hereby irrevocably and unconditionally agrees to,
purchase from the Agent a participation in such Letter of Credit and each Draw
thereunder in an amount equal to such Bank's Ratable Share of the maximum amount
available to be drawn under such Letter of Credit and the amount of such Draw,
respectively.
(ii) In the event of any request for a Draw under a Letter of Credit by
the beneficiary or transferee thereof, the Agent will promptly notify the
Borrower. Provided that it shall have received such notice, the Borrower shall
reimburse (such obligation to reimburse the Agent shall sometimes be referred to
as a "Reimbursement Obligation") the Agent prior to 12:00 noon, Pittsburgh time
on each date that an amount is paid by the Agent under any Letter of Credit
(each such date, a "Drawing Date") in an amount equal to the amount so paid by
the Agent. In the event the Borrower fails to reimburse the Agent for the full
amount of any drawing under any Letter of Credit by 12:00 noon, Pittsburgh time,
on the Drawing Date, the Agent will promptly notify each Bank thereof, and the
Borrower shall be deemed to have requested that Revolving Credit Loans be made
by the Banks under the Base Rate Option to be disbursed on the Drawing Date
under such Letter of Credit, subject to the conditions set forth in Section 7
below, other than any notice requirements. Any notice given by the Agent
pursuant to this paragraph may be oral if immediately confirmed in writing
provided that the lack of such an immediate confirmation shall not affect the
conclusiveness or binding effect of such notice.
(iii) Each Bank shall upon any notice pursuant to paragraph (ii) above
make available to the Agent an amount in immediately available funds equal to
its Ratable Share of the amount of the drawing, whereupon the participating
Banks shall (subject to paragraph (iv) below) each be deemed to have made a
Revolving Credit Loan under the Base Rate Option to the Borrower in that amount.
If any Bank so notified fails to make available to the Agent for the account of
the Agent the amount of such Bank's Ratable Share of such amount by no later
than 2:00 p.m., Pittsburgh time on the Drawing Date, then interest shall accrue
on such Bank's obligation to make such payment, from the Drawing Date to the
date on which such Bank makes such payment, (i) at a rate per annum equal to the
Federal Funds Effective Rate in effect during the first three days following the
Drawing Date and (iii) at a rate per annum equal to the rate applicable to Loans
under the Base Rate Option on and after the fourth day following the Drawing
Date. The Agent will promptly give notice of the occurrence of the Drawing Date,
but failure of the Agent to give any such notice on the Drawing Date or in
sufficient time to enable any Bank to effect such payment on such date shall not
relieve such Bank from its obligation under this paragraph.
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(iv) With respect to any unreimbursed Draw that is not converted into
Revolving Credit Loans under the Base Rate Option to the Borrower in whole or in
part as contemplated by paragraph (ii) above, because of the Borrower's failure
to satisfy the conditions set forth in Section 7 below other than any notice
requirements or for any other reason, the Borrower shall be deemed to have
incurred from the Agent a Letter of Credit Borrowing in the amount of such Draw.
Such Letter of Credit Borrowing shall be due and payable on demand (together
with interest) and shall bear interest at the rate per annum applicable to the
Revolving Credit Loans under the Base Rate Option. Each Bank's payment to the
Agent pursuant to paragraph (iii) above, shall be deemed to be a payment in
respect of its participation in such Letter of Credit Borrowing and shall
constitute a Participation Advance from such Bank in satisfaction of its
participation obligation under this Section 1.10.
(c) Repayment of Participation Advances.
(i) Upon (and only upon) receipt by the Agent for its account of
immediately available funds from the Borrower (x) in reimbursement of any
payment made by the Agent under the Letter of Credit with respect to which any
Bank has made a Participation Advance to the Agent, or (y) in payment of
interest on such a payment made by the Agent under such a Letter of Credit, the
Agent will pay to each Bank, in the same funds as those received by the Agent,
the amount of such Bank's Ratable Share of such funds, except the Agent shall
retain the amount of the Ratable Share of such funds of any Bank that did not
make a Participation Advance in respect of such payment by Agent.
(ii) If the Agent is required at any time to return to Borrower, or to
a trustee, receiver, liquidator, custodian, or any official in any insolvency or
similar proceeding, any portion of the payments made by Borrower to the Agent
pursuant to paragraph (i) immediately above in reimbursement of a payment made
under the Letter of Credit or interest or fee thereon, each Bank shall, on
demand of the Agent, forthwith return to the Agent the amount of its Ratable
Share of any amounts so returned by the Agent plus interest thereon from the
date such demand is made to the date such amounts are returned by such Bank to
the Agent, at a rate per annum equal to the Federal Funds Rate in effect from
time to time.
(d) Documentation.
The Borrower agrees to be bound by the terms of the Agent's application
and agreement for letters of credit and the Agent's written regulations and
customary practices relating to letters of credit, though such interpretation
may be different from the Borrower's own. In the event of a conflict between
such application or agreement and this Agreement, this Agreement shall govern.
It is understood and agreed that, except in the case of gross negligence or
willful misconduct, the Agent shall not be liable for any error, negligence
and/or mistakes, whether of omission or commission, in following the Borrower's
instructions or those contained in the Letters of Credit or any modifications,
amendments or supplements thereto.
(e) Determinations to Honor Drawing Requests.
In determining whether to honor any request for drawing under any
Letter of Credit by the beneficiary thereof, the Agent shall be responsible only
to determine that the documents and certificates required to be delivered under
such Letter of Credit have been delivered and that they comply on their face
with the requirements of such Letter of Credit.
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(f) Nature of Participation and Reimbursement Obligations.
Each Bank's obligation in accordance with this Agreement to make the
Revolving Credit Loans or Participation Advances, as contemplated by Section
1.10(b), as a result of a drawing under a Letter of Credit, and the obligations
of the Borrower to reimburse the Agent upon a draw under a Letter of Credit,
shall be absolute, unconditional and irrevocable, and shall be performed
strictly in accordance with the terms of this Section 1.10 under all
circumstances, including the following circumstances:
(i) any set-off, counterclaim, recoupment, defense or other right which
such Bank may have against the Agent, the Borrower or any other Person for any
reason whatsoever;
(ii) the failure of Borrower or any other Person to comply, in
connection with a Letter of Credit Borrowing, with the conditions set forth in
Section 7.1 or as otherwise set forth in this Agreement for the making of a
Revolving Credit Loan, it being acknowledged that such conditions are not
required for the making of a Letter of Credit Borrowing and the obligation of
the Banks to make Participation Advances under Section 1.10(b);
(iii) any lack of validity or enforceability of any Letter of Credit;
(iv) the existence of any claim, set-off, defense or other right which
the Borrower or any Bank may have at any time against a beneficiary or any
transferee of any Letter of Credit (or any Persons for whom any such transferee
may be acting), the Agent or any Bank or any other Person or, whether in
connection with this Agreement, the transactions contemplated herein or any
unrelated transaction (including any underlying transaction between the Borrower
or any Subsidiary and the beneficiary for which any Letter of Credit was
procured);
(v) any draft, demand, certificate or other document presented under
any Letter of Credit proving to be forged, fraudulent, invalid or insufficient
in any respect or any statement therein being untrue or inaccurate in any
respect even if the Agent has been notified thereof;
(vi) payment by the Agent under any Letter of Credit against
presentation of a demand, draft or certificate or other document which does not
comply with the terms of such Letter of Credit;
(vii) any adverse change in the business, operations, properties,
assets, condition (financial or otherwise) or prospects of the Borrower or any
Subsidiary;
(viii) any breach of this Agreement or any other Loan Document by any
party thereto;
(ix) the occurrence or continuance of an insolvency or similar
proceeding with respect to the Borrower;
(x) the fact that a default or event of default under Section 8 hereof
shall have occurred and be continuing;
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(xi) the fact that the Termination Date shall have passed or this
Agreement or the commitments hereunder shall have been terminated; and
(xii) any other circumstance or happening whatsoever, whether or not
similar to any of the foregoing.
(g) Liability for Acts and Omissions.
As between the Borrower and the Agent, the Borrower assumes all risks
of the acts and omissions of, or misuse of the Letters of Credit by, the
respective beneficiaries of such Letters of Credit. In furtherance and not in
limitation of the foregoing, the Agent shall not be responsible for: (i) the
form, validity, sufficiency, accuracy, genuineness or legal effect of any
document submitted by any party in connection with the application for an
issuance of any such Letter of Credit, even if it should in fact prove to be in
any or all respects invalid, insufficient, inaccurate, fraudulent or forged
(even if the Agent shall have been notified thereof); (ii) the validity or
sufficiency of any instrument transferring or assigning or purporting to
transfer or assign any such Letter of Credit or the rights or benefits
thereunder or proceeds thereof, in whole or in part, which may prove to be
invalid or ineffective for any reason; (iii) the failure of the beneficiary of
any such Letter of Credit, or any other party to which such Letter of Credit may
be transferred, to comply fully with any conditions required in order to draw
upon such Letter of Credit or any other claim of the Borrower against any
beneficiary of such Letter of Credit, or any such transferee, or any dispute
between or among the Borrower and any beneficiary of any Letter of Credit or any
such transferee; (iv) errors, omissions, interruptions or delays in transmission
or delivery of any messages, by mail, cable, telegraph, telex or otherwise,
whether or not they be in cipher; (v) errors in interpretation of technical
terms; (vi) any loss or delay in the transmission or otherwise of any document
required in order to make a drawing under any such Letter of Credit or of the
proceeds thereof; (vii) the misapplication by the beneficiary of any such Letter
of Credit of the proceeds of any drawing under such Letter of Credit; or (viii)
any consequences arising from causes beyond the control of the Agent, including
any action of any Governmental Person, and none of the above shall affect or
impair, or prevent the vesting of, any of the Agent's rights or powers
hereunder. Nothing in the preceding sentence shall relieve the Agent from
liability for the Agent's gross negligence or willful misconduct in connection
with actions or omissions described in such clauses(i) through (viii) of such
sentence.
In furtherance and extension and not in limitation of the specific
provisions set forth above, any action taken or omitted by the Agent under or in
connection with the Letters of Credit issued by it or any documents and
certificates delivered thereunder, if taken or omitted in good faith, shall not
put the Agent under any resulting liability to the Borrower or any Bank.
(h) Reimbursement for Charges and Fees. The Borrower agrees to pay or cause
to be paid to the Agent on demand, all normal and customary transaction charges
that the Agent may charge (i) for drawings under the Letters of Credit, (ii) for
transfers of each respective Letter of Credit in accordance with its terms and
(iii) for amendments of the Letters of Credit, payable without any requirement
of notice or demand by the Agent on the day of such drawing, transfer or
amendment.
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(i) Letter of Credit Fees. The Borrower shall pay to the Agent for the
ratable account of the Banks quarterly in arrears, on the last day of each
September, December, March and June, a commission equal to the Applicable
Euro-Rate Margin on the average daily aggregate Stated Amount of Letters of
Credit outstanding during the three month period ending on such date; provided,
however, that upon the occurrence of and during the continuance of an event of
default under Section 8 hereof, the foregoing fee shall automatically be
increased by two hundred (200) basis points (2%) per annum above the rate
otherwise in effect.
1.11 Definitions: Construction.
(a) Certain Definitions. For purposes of this Agreement, the following
terms shall have the following meanings:
"Accounts" shall have the meaning ascribed to it in Section 7.1.
"Adjusted Amortization Fixed Rate" means the Fixed Rate Option elected
by Borrower to incorporate an Applicable Fixed Rate Margin of three hundred
(300) basis points (3%).
"Agent" shall mean PNC Bank, National Association, and its successors
and assigns.
"Adjusted Base Rate" means the interest rate relating to the Base Rate
Option as described in item (i) of Subsection 1.6(b).
"Adjusted Euro-Rate" means the interest rate relating to the Euro-Rate
Option as described in item (ii) of Subsection 1.6(b).
"Applicable Base Rate Margin" shall mean that rate per annum shown in
the appropriate place on Annex I, attached hereto and made a part hereof.
"Applicable Euro-Rate Margin" shall mean that rate per annum shown in
the appropriate place on Annex I, attached hereto and made a part hereof.
"Applicable Fixed Rate Margin" means a rate per annum equal to either
(i) two hundred eighty (280) basis points (2.8%) or (ii) three hundred (300)
basis points (3%), as irrevocably specified by the Borrower in the notice of
election of the Fixed Rate Option delivered pursuant to Section 1.6(e) hereof.
"Authority" shall have the meaning ascribed to it in Section 4.20.
"Bank" means initially PNC Bank, National Association, a national
banking association, and any other financial institution from time to time a
party hereto as "Bank."
"Base Rate" means a rate per annum equal to the higher of (i) the Prime
Rate and (ii) the sum of (x) the Federal Funds Rate plus (y) fifty (50) basis
points (1/2 of 1%). The Base Rate shall be adjusted automatically from time to
time upon each change in the Prime Rate or the Federal Funds Rate, as
applicable.
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"Base Rate Option" means the interest rate option described in item (i)
of Subsection 1.6(b).
"Base Rate Portion" means a Revolving Credit Loan, the Seven-Year Term
Loan or the Term Loan, as the case may be, or a portion thereof which bears, or
is to bear, interest at the Adjusted Base Rate.
"Borrower" shall have the meaning ascribed to it in the first paragraph
of this Agreement.
"Borrower's Proceeds" shall mean (i) the Borrower's share [at least
equal to the share on which the Discounted Future Net Income is determined] of
the total gross proceeds generated in connection with the Wells and the Pipeline
payable to Borrower including but not limited to the Borrower's share of such
proceeds derived from, in connection with and/or relating to the production,
sale, transportation and/or compression of gas and oil produced from the Wells
and transported through the Pipeline and the Borrowers share (at least equal to
the share on which the Discounted Future Net Income is determined) of
reimbursements of all severance taxes relating thereto, less (ii) the share (no
greater than the share on which the Discounted Future Net Income is determined)
of the costs and expenses (including severance, real estate and windfall profits
taxes but not income or other taxes) paid by the Borrower to others for the
operation of the Wells and the Pipeline and the removal and sale of gas and oil
produced from the Wells and the share (no greater than the share on which the
Discounted Future Net Income is determined) of royalties and overriding
royalties paid by Borrower to others for the production of gas and oil from the
Wells, provided, however, that such costs and expenses (including royalties and
overriding royalties) shall not exceed those customarily paid by prudent gas and
oil operators, and prudent operators of pipelines, of established reputations in
the areas in which the Wells and the Pipeline are located.
"Business Day" means a day on which the Agent's principal office is
open for the conduct of normal commercial banking business.
"Collateral Value" shall have the meaning ascribed to it in Section
1.5.
"Commitment Fee" shall have the meaning ascribed to it in Subsection
1.1(d).
"Commitment Percentage" shall have the meaning ascribed to it in
Subsection 1.1(a).
"Discounted Future Net Income" shall have the meaning ascribed to it in
Section 1.4.
"Dollar(s)" or "$" means the legal tender of the United States of
America.
"Draw" shall mean a payment of funds by the Banks pursuant to a request
by the beneficiary of any Letter of Credit for funds in accordance with the
terms of such Letter of Credit.
"ERISA" shall have the meaning ascribed to it in Section 2.10.
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"Euro-Rate" means for any day, as used herein, for each segment of the
Euro-Rate Portion corresponding to a proposed or existing Euro-Rate Interest
Period, the interest rate per annum determined by the Agent by dividing (the
resulting quotient to be rounded upward to the nearest 1/16 of 1%) (i) the rate
of interest (which shall be the same for each day in such Euro-Rate Interest
Period) determined in good faith by the Agent in accordance with its usual
procedures (which determination shall be conclusive absent manifest error) to be
the "offered" eurodollar rate as quoted by Exco-Noonan Incorporated (or
appropriate successor or, if Exco-Noonan Incorporated or its successor cease to
provide such quotes, a comparable replacement as determined by Agent) as
evidenced on Dow Jones Markets Service display page 4756 (or any replacement
display page) two (2) Business Days prior to the first day of such Euro-Rate
Interest Period for an amount comparable to the Euro-Rate Portion for such
Euro-Rate Interest Period and having a borrowing date and a maturity comparable
to such Euro-Rate Interest Period by (ii) a number equal to 1.00 minus the
Euro-Rate Reserve Percentage.
The "Euro-Rate" may also be expressed by the following formula:
[ Dow Jones Markets Service as quoted by Exco- ]
Euro-Rate = [ Noonan Incorporated or appropriate successor ]
------------------------------------------------
[ 1.00 - Euro-Rate Reserve Percentage ]
The Euro-Rate shall be adjusted automatically with respect to any Euro-Rate
Portion outstanding on the effective date of any change in the Euro-Rate Reserve
Percentage, as of such effective date.
"Euro-Rate Interest Period(s)" means any individual period of one (1),
two (2), three (3) or six (6) months selected by the Borrower commencing on the
borrowing, conversion date or renewal date of a Euro-Rate Portion to which such
period shall apply.
"Euro-Rate Option" means the interest rate option described in item
(ii) of Subsection 1.6(b).
"Euro-Rate Portion(s)" means a Revolving Credit Loan, the Seven-Year
Term Loan or the Term Loan, as the case may be, or portion thereof which bears,
or is to bear, interest at the Euro-Rate.
"Euro-Rate Reserve Percentage" means the maximum effective percentage
(expressed as a decimal, rounded upward to the nearest 1/100 of 1%), as
determined in good faith by the Agent (which determination shall be conclusive),
which is in effect on such day as prescribed by the Board of Governors of the
Federal Reserve System (or any successor) for determining the reserve
requirements (including, without limitation, supplemental, marginal and
emergency reserve requirements) with respect to eurocurrency funding (currently
referred to as "Eurocurrency liabilities").
"Existing Loan Agreement" shall have the meaning ascribed to it in the
first "Whereas" clause to this Agreement.
"Federal Funds Rate" shall mean, for any day, (i) the interest rate
(rounded upward, if necessary, to the nearest 1/100 of 1%) determined by the
Agent (such determination shall be conclusive absent manifest error) to be equal
to the weighted average of
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rates on federal funds transactions among members of the Federal Reserve System
arranged by Federal funds brokers at or about 9:00 am (Pittsburgh, Pennsylvania
time) on such day; provided, however, that if such day is not a Business Day,
the Federal Funds Rate for such day shall be such rate for such transactions on
the immediately preceding Business Day or (ii) if no such rate shall be quoted
by Federal funds brokers at such time, such other rate as determined by the
Agent in accordance with its usual procedures (such determination shall be
conclusive absent manifest error).
"Financing Statements" shall have the meaning ascribed to it in item E.
of Section 3.1.
"Fixed Rate" means the interest rate relating to the Fixed Rate Option
as described in item (iii) of Subsection 1.6(b).
"Fixed Rate Option" shall mean the interest rate option described in
item (iii) of Subsection 1.6(b).
"Fixed Rate Portion" means the Seven-Year Term Loan which bears, or is
to bear, interest at the Fixed Rate in accordance with Subsection 1.6(e).
"Future Net Income" shall have the meaning ascribed to it in Section
1.4.
"Gas and oil" or "oil and gas" shall mean gas, oil, casinghead gas,
drip gasoline, natural gasoline and all other liquid and gaseous hydrocarbons.
"Governmental Person" means the government of the United States or the
government of any state or locality therein, any political subdivision or any
governmental, quasi-governmental, judicial, public or statutory
instrumentality, authority, body or entity, or other regulatory bureau,
authority, body or entity of the United States or any state or locality therein,
including the Federal Deposit Insurance Company, the Comptroller of the Currency
or the Board of Governors of the Federal Reserve System, any central bank or any
comparable authority.
"Governmental Rule" means any law, statute, rule, regulation,
ordinance, order, judgment, guideline or decision of any Governmental Person.
"Hazardous Substances" shall have the meaning ascribed to it in Section
2.17.
"Indebtedness" shall have the meaning ascribed to it in Section 3.
"Letter(s) of Credit" means any standby letter(s) of credit as to which
the account party, the issuing Bank and the beneficiary contemplate that the
beneficiary will receive a direct payment from the account party and that the
beneficiary shall draw upon the Letter of Credit only if the account party fails
to honor its obligation to the beneficiary, including, but not limited to,
standby letters of credit issued by the Agent in accordance with Section 1.10
hereof.
"Letter of Credit Borrowing" shall mean an extension of credit
resulting from a drawing under any Letter of Credit which shall not have been
reimbursed on the date
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when made and shall not have been converted into a Revolving Credit Loan under
Section 1.10.
"Letter of Credit Fee" shall mean that fee described in Section 1.10(i)
hereof.
"Loan" shall mean any of the Revolving Credit Loans, the Term Loan or
the Seven-Year Term Loan.
"Loan Documents" shall have the meaning ascribed to it in Section 2.6.
"Mortgage" shall have the meaning ascribed to it in item A. of Section
3.1.
"Note" and "Notes" shall have the meanings ascribed to each in
Subsection 1.6(a).
"Option(s)" means any one or more of the Base Rate Option, the
Euro-Rate Option or the Fixed Rate Option.
"Original Loan Agreement" shall have the meaning ascribed to it in the
first "Whereas" clause to this Agreement.
"Participation Advance" shall mean, with respect to any Bank, such
Bank's payment in respect of its participation in a Letter of Credit Borrowing
according to its Ratable Share pursuant to Section 1.10.
"Partnership" and "Partnerships" shall have the meaning ascribed to
each in Section 1.4.
"Partnership Wells" shall have the meaning ascribed to it in Section
2.7.
"PBGC" shall have the meaning ascribed to it in Section 2.10.
"Pipeline" shall have the meaning ascribed to it in Section 1.3.
"Plan" shall have the meaning ascribed to it in Section 2.10.
"Pledge Agreement" shall have the meaning ascribed to it in item D. of
Section 3.1.
"Portion(s)" means any Base Rate Portion, Euro-Rate Portion, or Fixed
Rate Portion, as the case may be or all three taken collectively.
"Prime Rate" means the interest rate per annum announced from time to
time by the Agent as its prime rate, which rate may not be the lowest rate of
interest then being charged by the Agent.
"Property" shall have the meaning ascribed to it in Section 2.3.
"Quarterly Reports" shall have the meaning ascribed to it in Section
4.8.
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"Ratable Share" shall have the meaning ascribed to it in Subsection
1.1(a).
"Revolving Credit" shall have the meaning ascribed to it in Subsection
1.1(a).
"Revolving Credit Loan" and "Revolving Credit Loans" shall have the
meanings ascribed to each in Subsection 1.1 (a).
"Revolving Credit Note" shall have the meaning ascribed to it in
Subsection 1.1(a).
"Revolving Credit Period" shall have the meaning ascribed to it in
Subsection 1.1(a).
"Security Agreement (Note)" shall have the meaning ascribed to it in
item C. of Section 3.1.
"Security Agreement (Partnerships)" shall have the meaning ascribed to
it in item B. of Section 3.1.
"Senior Indebtedness" shall have the meaning ascribed to it in Section
4.18.
"Seven-Year Term Credit" shall have the meaning ascribed to it in
Subsection 1.3(a).
"Seven-Year Term Loan" shall have the meaning ascribed to it in
Subsection 1.3(a).
"Seven-Year Term Note" shall have the meaning ascribed to it in
Subsection 1.3(a).
"Stated Amount" shall mean the amount available to the beneficiaries of
the Letters of Credit for one or more drawings thereunder as such amount is
reduced and reinstated from time to time in accordance with the provisions of
the Letters of Credit.
"Stockholders" shall have the meaning ascribed to it in Section 2.2.
"Subsidiary" and "Subsidiaries" shall have the meaning ascribed to each
in Subsection 2.2(e).
"Syndications Period" shall mean the period between the date of this
Agreement and the earlier of the following dates: (a) the date on which PNC
Bank, National Association has reduced its Commitment Percentage below 100%, or
(b) the date which is one hundred twenty (120) days after the date of this
Agreement.
"Term Credit" shall have the meaning ascribed to it in Subsection
1.2(a).
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<PAGE>
"Term Loan" shall have the meaning ascribed to it in Subsection 1.2(a).
"Term Note" shall have the meaning ascribed to it in Subsection 1.2(a).
"Termination Date" shall have the meaning ascribed to it in Subsection
1.1(a).
"Utilization Rate" means, at the time of determination by Bank, the
quotient (expressed as a percentage) determined by dividing (i) the sum of (w)
the aggregate principal balances outstanding under the Revolving Credit Notes
plus (x) the aggregate Stated Amounts of Letters of Credit outstanding plus (y)
the aggregate amount of unreimbursed Draws under the Letters of Credit plus (z)
the aggregate principal balances outstanding under the Term Notes by (ii) the
then current Collateral Value.
"Wells" shall have the meaning ascribed to it in Section 1.4.
(b) Construction. (i) Unless the context of this Agreement otherwise
clearly requires, references to the plural include the singular, the singular
the plural and the part the whole, "or" has the inclusive meaning represented by
the phrase "and/or," and "including" has the meaning represented by the phrase
"including without limitation." References in this Agreement to "determination"
of or by the Agent or the Banks shall be deemed to include reasonable good faith
estimates by the Agent or the Banks (in the case of quantitative determinations)
and reasonable and good faith beliefs by the Agent or the Banks (in the case of
qualitative determinations). Whenever the Agent or the Banks are granted the
right herein to act in its or their sole discretion or to grant or withhold
consent such right shall be exercised reasonably and in good faith. The words
"hereof," "herein," "hereunder" and similar terms in this Agreement refer to
this Agreement as a whole and not to any particular provision of this Agreement.
The article, section and other headings contained in this Agreement are for
reference purposes only and shall not control or affect the construction of this
Agreement or the interpretation thereof in any respect. Article, Section,
schedule and exhibit references are to this Agreement unless otherwise
specified. Except as otherwise specified in this Agreement, all references in
this Agreement (i) to any Person, other than the Borrower, shall be deemed to
include such Person's successors and assigns, and (ii) to any Governmental Rule,
agreement or contract specifically defined or referred to in Agreement shall be
deemed references to such Governmental Rule, agreement or contract as the same
may be amended, supplemented, modified, extended, waived, consolidated, replaced
or renewed from time to time, but only to the extent permitted by, and effected
in accordance with, the terms thereof.
(ii) For purposes of this Agreement, all terms used in Article 9 of the
UCC and not specifically defined in this Agreement shall herein have the
meanings assigned to such terms in the UCC as from time to time in effect in the
Commonwealth of Pennsylvania.
(iii) References to "Writing" include printing, typing, lithography and
other means of reproducing words in a tangible visible form. References to
"written" include "printed", "typed", "lithographed" and other adjectives
relating to words reproduced in a tangible visible form consistent with the
preceding sentence and also include electronic images and images stored on
computer disks, magnetic tape and like media.
(c) Accounting Principles. Except as otherwise provided in this Agreement,
all computations and determinations as to accounting or financial matters and
all financial statements
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to be delivered pursuant to this Agreement shall be made and prepared in
accordance with GAAP (including principles of consolidation where appropriate),
and all accounting or financial terms shall have the meanings ascribed to such
terms by GAAP.
SECTION 2. REPRESENTATIONS AND WARRANTIES.
- - ------------------------------------------
To induce the Banks to enter into this Agreement and to make and
continue the loans and to issue and renew the Letters of Credit, each as herein
provided for, Borrower represents and warrants to the Banks that:
2.1 Existence and Authority. Borrower and the Subsidiaries are
corporations or limited liability company duly organized, validly existing and
in good standing under the laws of the states of their formation, and are duly
qualified to do business, and are in good standing as foreign corporations, in
all jurisdictions wherein their ownership of property or the nature of their
businesses requires such qualification and have the right, power and authority
to own, and hold under lease, their properties and to carry on their businesses
as now being conducted.
2.2 Stock Ownership and Subsidiaries. (a) The authorized securities of
The Atlas Group, Inc. consist of two million (2,000,000) shares of common stock
and all issued and outstanding shares of such stock are owned by and issued to
the persons shown on Schedule 2.2 attached hereto and made a part hereof.
(b) The authorized securities of AIC, Inc. consist of one thousand
(1,000) shares of common stock and all issued and outstanding shares of such
stock are owned by and issued to The Atlas Group, Inc.
(c) The authorized securities of AED Investments, Inc. consist of one
thousand (1,000) shares of common stock and all issued and outstanding shares of
such stock are owned by and issued to Atlas Energy Group, Inc.
(d) The authorized securities of ARD Investments, Inc. consist of one
thousand (1,000) shares of common stock and all issued and outstanding shares of
such stock are owned by and issued to Atlas Resources, Inc.
(e) AIC, Inc. is the legal and beneficial owner of all of the issued
and outstanding securities of Atlas Energy Corporation, an Ohio corporation,
Atlas Resources, Inc., a Pennsylvania corporation, Transatco Corporation, an
Ohio corporation, Pennsylvania Industrial Energy, Inc., a Pennsylvania
corporation, Atlas Information Management, LLC, a Pennsylvania Limited Liability
Company, Atlas Energy Group, Inc., an Ohio corporation, Atlas Gas Marketing,
Inc., a Pennsylvania corporation and Mercer Gas Gathering, Inc., a Pennsylvania
corporation, and Atlas Information Management, LLC is the legal and beneficial
owner of forty-nine (49%) percent of the issued and outstanding shares of each
of Record Imaging, Ltd. and fifty (50%) percent of Atlas Technologies, LLC.
[hereinafter referred to collectively as the "Subsidiaries" and individually as
the "Subsidiary"; as used herein the terms Subsidiaries and Subsidiary shall
also include any corporation with respect to which any Borrower owns directly or
indirectly more than twenty-five (25%) percent of the outstanding stock issued
by such corporation]; Borrower presently does not own directly or indirectly
more than twenty-five (25%) percent of the outstanding stock issued by any other
corporation. AIC, Inc. has good and marketable title to all the securities of
the Subsidiaries issued to it, free and
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clear of all liens and encumbrances, and all such securities have been duly and
validly issued and are fully paid and nonassessable. The authorized securities
of the Subsidiaries and the ownership thereof are as shown on Schedule 2.2
attached hereto and made a part hereof.
2.3 Rights, Titles and Interests. Borrower and the Subsidiaries have,
and will have, good and marketable rights, titles and interests in and to all of
their properties including all the property (the "Property") described in the
Mortgage and the Security Agreement (as such terms are defined in Section 3.1
hereof) free and clear of all liens and encumbrances, except such liens and
encumbrances, if any, set forth in writings heretofore delivered to, and
acknowledged in writing to have been received by, the Banks, and which are
acknowledged in writing to be acceptable to the Banks; as defined herein the
term Property shall include but shall not be limited to the additional security
provided by Borrower pursuant to Section 1.5 and Section 3.3 hereof. Borrower
warrants that at its expense it will, and will cause the Subsidiaries to, defend
generally their properties including the Property, and the rights, titles and
interests of the Banks therein and thereto, against the claims and demands of
all persons, corporations and any other entities whatsoever. No defaults have
occurred under any of the documents or instruments pursuant to which, or
establishing that, Borrower and the Subsidiaries acquired interests in their
properties including the Property which have not been cured or waived and such
documents and instruments are in full force and effect and they have not been
modified or amended.
2.4 Financial Statements. The financial statements described below in
this Section 2.4, together with the notes and reports thereto, (copies of which
have been furnished to the Agent), are complete and correct, have been prepared
in accordance with generally accepted accounting principles, practices and
procedures consistently applied and present fairly the financial positions of
the Borrower and the Subsidiaries as at the dates set forth below and the
results of their operations for the periods set forth below, subject only to
ordinary and usual year end audit adjustments in the case of the statements
described in clause (ii) below:
(i) Balance sheet as of July 31, 1997 and the related statements of
income, changes in stockholders equity and changes in financial
position for the fiscal year ended on such date, prepared and
certified by McLaughlin & Courson, independent certified public
accountants; and
(ii) Balance sheet as of June 30, 1998 and the related statements of
income, changes in stockholders equity and changes in financial
position for the eleven (11) month period ended on such date,
prepared by the chief financial officer of Borrower.
Except as reflected or referred to in the above described financial
statements, neither the Borrower nor any of the Subsidiaries has any contingent
or disputed liabilities or unrealized or anticipated losses or commitments which
in the aggregate are material. Since June 30, 1998 there has been no change in
the condition, business or prospects, financial or otherwise, of the Borrower or
the Subsidiaries as shown on the balance sheet as of such date and no change in
the aggregate value of the property owned by the Borrower and the Subsidiaries,
including the Property, except changes in the ordinary course of business.
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2.5 Litigation. Except as set forth on Schedule 2.5 attached hereto,
there is no material litigation or proceeding of any kind whatsoever pending,
nor to the knowledge of Borrower threatened, nor any judgment, order, writ,
injunction, decree or award outstanding, which could adversely affect Borrower
or the Subsidiaries or the operation of any of their businesses, or their
properties including the Property, nor does the Borrower know or have reasonable
grounds to know of any basis for any such action or any governmental
investigation or any claim relating to the Borrower or the Subsidiaries or the
operation of any of their businesses, or their properties including the
Property. Except as set forth on Schedule 2.5 attached hereto, the Borrower and
the Subsidiaries have each complied with all material provisions of all
agreements to which they are parties or by which they are bound and are not in
default under any of them or in the payment of any of their obligations.
2.6 Validity of Agreement, Notes, Mortgage, Security Agreement
(Partnerships), Security Agreement (Note), Pledge Agreement, Financing
Statements and Other Loan Documents. The execution and delivery of this
Agreement, the Notes, the Mortgage, the Security Agreement (Partnerships), the
Pledge Agreement, the Security Agreement (Note) and the Financing Statements (as
such terms are defined in Section 3.1 hereof) and the documents and instruments
referred to herein and therein to be executed and/or delivered by Borrower, as
one or more may be amended, modified or supplemented (the "Loan Documents"), the
borrowings under the Loan Documents, the performance by the Borrower of its
obligations under the Loan Documents and the assignment of, and the grant of the
liens on and security interests in, the Borrower's various rights, titles and
interests, to the Agent (for the benefit of the Banks) by the Loan Documents, do
not, and will not, contravene any provision of law, or of the articles of
incorporation or by-laws of Borrower or any Subsidiary, or of any agreement,
instrument or other document or of any judicial, arbitration or local, state or
federal governmental requirement or restriction to which Borrower or any
Subsidiary is a party or by which it is bound, or result in the creation or
imposition of any lien or other encumbrance on any of the property of the
Borrower or any Subsidiary including the Property except the liens and security
interests granted by the Loan Documents; and any and all consents or approvals
of any kind whatsoever, including approvals and consents of any local, state or
federal governmental unit, commission, authority, agency or other body, required
to be obtained in connection therewith have been obtained and are in full force
and effect. This Agreement constitutes, and the other Loan Documents when duly
executed will constitute, legal, valid and binding obligations of Borrower
enforceable in accordance with their respective terms. Borrower is duly
authorized to execute and deliver this Agreement and the other Loan Documents;
all action necessary and proper to authorize the execution and delivery of the
Loan Documents has occurred; and Borrower is, and will continue to be, duly
authorized, and has, and shall continue to have, the right, power and authority,
to execute and deliver the Loan Documents and to make the assignment and grant
the liens and security interests pursuant to the Loan Documents as well as to
borrow under the Loan Documents and to perform all of the other terms and
conditions of the Loan Documents.
2.7 Permits. Borrower has obtained, or caused to be obtained, all
permissions, licenses, easements, rights-of-way, leasehold and fee interests and
all local, state and federal governmental approvals, authorizations, consents
and permits as well as all other rights, titles and interests necessary to the
ownership, development and operation of the properties of the Borrower and the
Subsidiaries (including the Property) and the gas and oil wells (the
"Partnership Wells") in which the Partnerships (as such term is defined in
Section 1.4 hereof) have ownership interests, and the conduct of their
businesses, all of which are in full force and effect.
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2.8 Operation of Wells and the Pipeline. The statements relating to the
transportation of gas and oil through the Pipeline and the production of gas and
oil from the Wells for the period ending January 1, 1998 heretofore furnished by
Borrower to Bank are accurate; since January 1, 1998 there has been no damage,
destruction or loss to the Pipeline or to any of the Wells; the Pipeline is
currently in operation and the monthly transportation of gas and oil through the
Pipeline has not materially changed; and except for temporary, involuntary
shut-ins, all of the Wells are currently in production and the monthly
production from each of the Wells has not materially changed.
2.9 Public Utility Holding Company. Neither the Borrower, nor any
Subsidiary of the Borrower, is a holding company or a subsidiary of a holding
company or a public utility company as such terms are defined in the Public
Utility Holding Company Act of 1935.
2.10 ERISA. The Pension Benefit Guaranty Corporation ("PBGC") has not
made a determination that, with respect to any Plan (as hereinafter defined) of
the Borrower, or any Subsidiary or other affiliate of the Borrower, an event or
condition has occurred which constitutes grounds under the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") for the termination of, or for
the appointment of a trustee to administer, any such Plan. As used herein,
"Plan" shall be defined as any employee benefit plan or other plan maintained
for employees of the Borrower, or any Subsidiary or other affiliate of the
Borrower, covered by ERISA.
2.11 Regulation G, U, T and X. Neither the Borrower nor any Subsidiary
is engaged in the business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulation G, U, T or X of the
Board of Governors of the Federal Reserve System), and no part of the proceeds
of any advance under the Loan Documents will be used to purchase or carry any
margin stock or to extend credit to others for the purpose of purchasing or
carrying any margin stock.
2.12 Compliance with Law. Borrower and the Subsidiaries have each
complied with, and are in compliance with, all applicable local, state and
federal laws, rules and regulations relating to all of their activities
including, but not limited to, the operation of the Wells and the Pipeline and
the offer and sale of securities.
2.13 Taxes. All tax returns and reports of the Borrower and the
Subsidiaries required by law to be filed have been duly filed, and all taxes,
assessments, fees and other governmental charges upon the Borrower and the
Subsidiaries or upon any of the property of the Borrower and the Subsidiaries
including the Property and upon any of the other assets, income or franchises of
the Borrower and the Subsidiaries which are due and payable have been paid,
except taxes, assessments, fees and other governmental charges being contested
in good faith as set forth in Section 4.10 hereof unless required to be paid as
set forth in such Section and subject to the reserve requirements set forth in
Section 4.10 hereof.
2.14 Relationship of Borrower. The Borrowers are operated as part of
one consolidated business entity and each Borrower is directly dependent upon
each other Borrower for and in connection with their business activities and
their financial resources; and each Borrower will receive a direct economic and
financial benefit from the borrowings made under this Agreement, and such
borrowings are in the best interests of each Borrower.
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2.15 Status as Producers of Gas. Atlas Energy Group, Inc., Atlas Energy
Corporation and Atlas Resources, Inc. are producers of oil and/or natural gas;
none of the Subsidiaries (other than Atlas Resources, Inc., Atlas Energy Group,
Inc. and Atlas Energy Corporation) is a producer of oil and/or natural gas.
2.16 Year 2000. The Borrower and its Subsidiaries have reviewed the
areas within their business and operations which could be adversely affected by,
and have developed or are developing a program to address on a timely basis, the
risk that certain computer applications used by the Borrower or its Subsidiaries
(or any of their respective material suppliers, customers or vendors) may be
unable to recognize and perform properly date-sensitive functions involving
dates prior to and after December 31, 1999 (the "Year 2000 Problem"). The Year
2000 Problem will not result in any material adverse change in the business,
properties, assets, financial condition, results of operations or prospects of
the Borrower or its Subsidiaries, or impair materially the ability of the
Borrower or its Subsidiaries to duly and punctually pay or perform the
Indebtedness.
2.17 Environmental Matters. To the best of the Borrower's knowledge,
(i) the Property is and has been in compliance, in all material respects, with
all applicable local, state and federal environmental laws, rules and
regulations, (ii) there have been no releases of any chemical, material,
substance or waste which is a threat to the public health, safety or welfare or
the environment or the health of living organisms, or any hazardous, toxic,
contaminating or polluting substance as defined by any environmental law, rule
or regulation (individually and collectively "Hazardous Substances") and (iii)
there is no basis for the imposition of environmental liability against the
Property or for the imposition of any environmental liability against any
former, present or future owner or operator of the Property.
2.18 Investment Company Act. The Borrower is not an "investment
company" registered or required to be registered under the Investment Company
Act of 1940, as amended from time to time, or a company under the "control" of
an "investment company", as those terms are defined in such Act, and shall not
become such an "investment company" or under such "control".
SECTION 3. SECURITY.
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To secure the payment of principal of, and interest on, the Notes, all
reimbursement and other obligations relating to the Letters of Credit, and all
fees, costs, expenses and other charges to be paid or reimbursed by Borrower
under the Loan Documents and all other indebtedness and other obligations of the
Borrower to the Agent and the Banks under the Loan Documents (collectively, the
"Indebtedness") and the performance of the terms of the Loan Documents and all
other instruments and documents executed by Borrower in favor of, or for the
benefit of, the Agent and the Banks with respect thereto:
3.1 Mortgage, Security Agreement (Partnerships), Security Agreement
(Note) and Pledge Agreement. Borrower has executed and delivered, and hereby
agrees to execute and deliver, or cause to be executed and delivered, to the
Agent, on behalf of the Banks, the following:
A. One or more mortgages and security agreements (and/or amendments
thereto) substantially in the form of Exhibit "D" attached hereto and made a
part hereof, as one or more may be amended, modified or supplemented from time
to time (herein referred to
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collectively and individually as the "Mortgage"), which shall assign to Agent,
and grant to Agent, on behalf of the Banks, a lien on and security interest in,
all the property of Borrower described in the Mortgage including the Wells, the
Pipeline and the premises known as 311 Rouser Road, Coraopolis, Pennsylvania.
B. One or more security agreements substantially in the form of Exhibit
"E" attached hereto and made a part hereof, as one or more may be amended,
modified or supplemented from time to time [herein referred to collectively and
individually as the "Security Agreement (Partnerships)"], which shall assign to
Agent, and grant to Agent, on behalf of the Banks, a security interest in, all
the property of Borrower described in the Security Agreement including all
rights, titles and interests of the Borrower in and to the Partnerships.
C. One or more security agreements substantially in the form of Exhibit
"F" attached hereto and made a part hereof, as one or more may be amended,
modified or supplemented from time to time [herein referred to collectively and
individually as the "Security Agreement (Note)"], which shall assign to Agent,
and grant to Agent, on behalf of the Banks, a security interest in, all the
property of Borrower described in the Security Agreement (Note) including all
rights, titles and interests of the Borrower in and to certain intercompany
notes.
D. One or more pledge agreements substantially in the form of Exhibit
"G" attached hereto and made a part hereof, as one or more may be amended,
modified or supplemented from time to time (herein referred to collectively and
individually as the "Pledge Agreement"), which assign to Agent, and grant to
Agent, on behalf of the Banks, a lien on and security interest in, all the
property of Borrower described in the Pledge Agreement including all of
Borrower's rights, titles and interest in and to the stock of Transatco
Corporation.
E. All financing statements and all amendments and modifications
thereof and all supplements thereto (herein referred to collectively and
individually as the "Financing Statements") required by Agent in connection with
the liens and security interests granted pursuant to the Mortgage, the Security
Agreement (Partnerships), the Security Agreement (Note) and the Pledge
Agreement.
3.2 Set-Off. Borrower hereby gives to each Bank a lien on, and security
interest in, any and all property, credits, securities, monies and claims of
Borrower which may at any time be delivered to, or be in the possession of, or
owed to Borrower by, such Bank in any capacity whatsoever including the balances
of any and all accounts maintained by Borrower with such Bank. Borrower
authorizes each Bank in case of a default as defined in Section 8 hereof, at
such Banks option, at any time and from time to time, to apply to the payment of
the Indebtedness any such property, credits, securities, monies and claims. In
the event that in the exercise of the rights set forth in this Section 3.2 any
Bank applies to the payment of the Indebtedness any property, credits,
securities, monies or claims which belong to a person, corporation or entity
other than Borrower, such Bank shall promptly deliver such property, credits,
securities, monies or claims (or at the option of such Bank, an amount of cash
equivalent to the value thereof at the time such Bank makes such application) to
the persons, corporations or other entities entitled thereto, or at the option
of such Bank to the Borrower, upon being furnished with evidence satisfactory to
such Bank of such property, credits, securities, monies or claims and the
identity of the persons, corporations or other entities entitled thereto.
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3.3 Additional Security. In the event that Borrower is to provide
additional security for the payment of the Indebtedness and the performance of
the Loan Documents, such additional security shall be of such kind, in such form
and have such value as Agent shall in its sole discretion require and shall be
otherwise acceptable to Agent. Borrower shall execute and deliver to Agent, on
behalf of the Banks, such new or amended mortgage and/or security agreement
and/or pledge agreement relating to such additional collateral, as well as such
other instruments, papers and other documents, and take such further action in
connection therewith, as the Agent shall in its sole discretion require
[including but not limited to providing reports and opinions relating to matters
concerning title to such additional security and concerning the priority of the
lien(s) and security interest(s) granted by such new or amended mortgage and/or
security agreement and/or pledge agreement].
3.4 Operating Accounts. The Borrower agrees to maintain, or cause to be
maintained, all of the Borrower's principal operating accounts at the Agent and
agrees to deposit, or cause to be deposited, in such accounts substantially all
of its funds.
SECTION 4. AFFIRMATIVE COVENANTS.
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For so long as any Indebtedness remains unpaid, unless the Agent
otherwise consents in writing, Borrower agrees that:
4.1 First Lien Undertakings. Borrower shall obtain and deliver, or
cause to be obtained and delivered, to the Agent such legal opinions, title
reports, representations, letters, acknowledgments, attornment agreements,
releases, disclaimers, subordinations of prior liens and security interests,
non-disturbance agreements, certificates of non-interference with easements,
rights-of-way or coal operations and such other documents as may be requested by
Agent from time to time, and shall take, or cause to be taken, all steps, to
satisfy all requirements of Agent that Borrower and the Subsidiaries and the
Partnerships have, and will have, good and marketable rights, titles and
interests in and to all of their properties including the Property and the
Partnership Wells and that the liens and security interests described in Section
3 hereof are valid and perfected first liens and security interests, free and
clear of all liens and encumbrances.
4.2 Protection of Rights, Titles and Interests. Borrower will take, or
cause to be taken, all steps necessary and proper (i) to protect and enforce its
and the Subsidiaries' rights, titles and interests in and to all their
properties including the Property and in connection with their businesses and
(ii) to comply with all duties, terms and conditions undertaken or assumed by
Borrower and the Subsidiaries in connection with their properties including the
Property and their businesses.
4.3 Operation and Maintenance. Borrower will continuously operate, or
cause to be operated, its and the Subsidiaries' properties (including the
Property) and the Partnership Wells in a good and workmanlike manner and in
accordance with sound and approved practices and shall use its best efforts
consistent with good business practices to generate, or cause to be generated,
the greatest amount of revenue in connection with its and the Subsidiaries'
properties (including the Property) and the Partnership Wells. Borrower shall
maintain, or cause to be maintained, all of its and the Subsidiaries' properties
(including the Property) and the Partnership Wells in good condition and, shall
make, or cause to be made, all necessary renewals, repairs, replacements,
additions, betterments and improvements thereto.
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4.4 Permits. Borrower will obtain and keep in full force and effect, or
shall cause to be obtained and kept in full force and effect, all permissions,
licenses, easements, rights-of-way, leasehold and fee interests and all local,
state and federal governmental approvals, authorizations, consents and permits
as well as all other rights, titles and interests necessary to the ownership,
development and operation of its and the Subsidiaries' properties (including the
Property) and the Partnership Wells and to the conduct of their businesses.
4.5 Compliance with Law. Borrower will comply with, or cause to be
complied with, all applicable local, state and federal laws, rules and
regulations relating to all of its and the Subsidiaries' activities including,
but not limited to, the operation of its and the Subsidiaries' properties
(including the Property) and the Partnership Wells and the offer and sale of
securities.
4.6 Status as Producers of Gas. Atlas Energy Group, Inc., Atlas Energy
Corporation and Atlas Resources, Inc. shall each continue to be a producer of
oil and/or natural gas.
4.7 Existence and Ownership. Borrower shall do, or cause to be done,
all things necessary to preserve and keep in full force and effect its and the
Subsidiaries' existences as corporations, their good standing under the laws of
the states of their incorporation and their qualification to do business, and
their good standing as foreign corporations, in all jurisdictions wherein their
ownership of property or the nature of their businesses requires such
qualification. Borrower shall continue to be the legal and beneficial owner of
at least the percentages of the issued and outstanding securities of the
Subsidiaries which it owns currently plus all additional percentages of such
securities which it may acquire hereafter.
4.8 Reports, Certifications and Other Information. Upon request of
Agent, Borrower shall deliver, or cause to be delivered, to Agent, within sixty
(60) days after the end of each fiscal quarter (and if a default as set forth in
Section 8 hereof shall have occurred and be continuing, within thirty (30) days
after the end of each calendar month), a report of operating, management and
administration fees paid to Borrower during such month together with statements
setting forth the quantity of gas and oil produced from the Wells and
transported through the Pipeline during such month, the price paid or to be paid
for such gas and oil and the transportation and compression thereof, the
Borrower's Proceeds (showing in detail the computation whereby the Borrower's
Proceeds are determined) and such other information as Agent may request which
may include but not be limited to a report prepared by Borrower showing the
performance of each Well on a quarterly or monthly, as the case may be, basis
and on a cumulative basis as well as such information as is customarily set
forth in a meter statement.
Within sixty (60) days after the end of each fiscal quarter of each
fiscal year of the Borrower and the Subsidiaries, the Borrower shall furnish to
Agent such unaudited financial statements of the Borrower and the Subsidiaries
("Quarterly Reports") as Agent shall request (consisting of at least a balance
sheet as of the close of such quarter and a profit and loss statement and a
statement of cash flow for such quarter and for the period from the beginning of
the fiscal year to the close of such quarter), which statements shall be in such
detail as Agent shall require, shall show the Borrower's and the Subsidiaries'
financial conditions at the close of such fiscal quarter and the results of
their operations for the period
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then ended and shall be prepared by the chief financial officer of Borrower and
the Subsidiaries in accordance with generally accepted accounting principles,
practices and procedures consistently applied and certified by such officer,
subject only to ordinary and usual year end audit adjustments.
Within one hundred twenty (120) days after the end of each fiscal
year of the Borrower and the Subsidiaries, Borrower shall furnish to Agent a
copy of the annual audited financial statements of the Borrower and the
Subsidiaries prepared in conformity with generally accepted accounting
principles, practices and procedures consistently applied by McLaughlin &
Courson, or other certified public accountants satisfactory to Agent and
certified without qualification as to scope.
The Borrower shall deliver to the Agent, together with each
delivery of financial statements required by this Section 4.8, a certificate
substantially in the form of Exhibit "H" hereto, appropriately completed, (A)
stating that the signer has reviewed the terms of this Agreement and of the
other Loan Documents and has made, or caused to be made under his supervision, a
review of the transactions and condition of the Borrower during the accounting
period covered by such financial statements and that such review has not
disclosed the existence during such accounting period, and that the signer does
not have knowledge of the existence, as at the date of such certificate, of any
condition or event which constitutes a default under Section 8 hereunder with
respect to the covenants set forth in Sections 4.16, 4.17, 4.18, and 5.12
hereof, or which, after notice or lapse of time or both, would constitute a
default with respect to the covenants set forth in Sections 4.16, 4.17, 4.18,
and 5.12 hereof, or, if any such condition or event existed or exists,
specifying the nature and period of existence thereof and what action the
Borrower has taken or is taking or proposes to take with respect thereto, (B)
demonstrating in reasonable detail compliance as at the end of such accounting
period with the restrictions contained in Sections 4.16, 4.17, 4.18, and 5.12
hereof and (C) setting forth in reasonable detail (i) any advances or payments
made with respect to intercompany notes or accounts during the accounting period
covered by such financial statements together with the closing balance of each
such note and account and the interest accrued thereon and (ii) the amount of
any management fees or similar advances made during the applicable accounting
period.
At any time and from time to time, Borrower will submit, or cause
to be submitted, to Agent promptly, in such form as Agent shall require, such
other information relating to the financial affairs of the Borrower and the
Subsidiaries, to the properties of the Borrower and the Subsidiaries including
the Property, to the businesses of the Borrower and the Subsidiaries or
otherwise as Agent shall reasonably request.
4.9 Records and Access. Borrower shall keep, or cause to be kept, full
and complete books and records in which correct and accurate entries will be
made of all of its and the Subsidiaries business transactions and their
properties including the Property and at any time and from time to time shall
give, or cause to be given, to the Agent or the Banks or their representatives
full access during normal business hours to examine and copy all of the
Borrower's and the Subsidiaries' properties including the Property and their
books, contracts and records.
4.10 Payment of Taxes and Mechanics' Claims. Borrower will pay, or
cause to be paid, all taxes, assessments, license fees and other governmental
charges and all claims of mechanics and materialmen to which it or any of the
Subsidiaries or any of their properties
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including the Property shall be subject, and all other charges on or relating to
any of their properties including the Property, before such charges and claims
become delinquent, except that no such charge or claim need be paid for so long
as its validity or amount shall be contested in good faith by appropriate
proceedings duly prosecuted and Borrower and the Subsidiaries shall have set up
in their books such reserves with respect thereto as shall be dictated by sound
accounting practices; provided, however, that all such charges and claims shall
be paid, subject to refund proceedings, if failure to pay would adversely affect
the rights or titles of Borrower or any of the Subsidiaries to any of their
properties including the Property.
4.11 Insurance. Borrower will keep, or cause to be kept, with
financially sound and reputable insurers, such insurance with respect to its and
the Subsidiaries' businesses and properties including the Property, in such
amounts and insuring against such risks, casualties and contingencies of such
types (including but not limited to insurance for loss or damage by fire and
other hazards and insurance for liability for damage to persons and property in
connection with their properties including the Property and the activities
conducted thereon or relating thereto) as is customary for persons, corporations
and other entities of established reputations engaged in the same or similar
businesses as the Borrower and the Subsidiaries and similarly situated, naming
Agent (for the benefit of the Banks) as mortgagee or lender loss payee or
additional insured as its interests may appear, and will keep, or cause to be
kept, such insurance as required by any applicable workmen's compensation laws,
and will furnish, or cause to be furnished, certificates of all such insurance
to Agent upon the execution hereof and within one hundred twenty (120) days
after the end of each of its fiscal years. All policies shall provide that they
may not be altered or cancelled except on thirty (30) days' prior written notice
to Agent.
4.12 Duty to Plug. If and when any of the Wells ceases producing gas
and oil in paying quantities or is of no further use, or Borrower or any other
person, corporation or other entity is required to do so under any agreement or
law, Borrower will plug and abandon, or cause to be plugged and abandoned, any
and all such Wells in accordance with the local, state and/or federal laws and
regulations then in force and regulating the plugging of gas and oil wells.
Borrower further consents and agrees that it will save harmless Agent, and the
Banks, and the respective successors and assigns, of and from any loss, damage
and penalty through failure, if any, to plug, or cause to be plugged, such Well
or Wells as herein provided.
4.13 Expenses, Fees and Disbursements. Borrower shall pay, or cause to
be paid, all expenses, fees and disbursements incurred in connection with the
recordation, filing, continuation, satisfaction and termination of the Mortgage,
the Financing Statements and any other Loan Documents and any other instruments
or documents relating thereto and the fees, expenses and disbursements of
Agent's counsel in connection with this Agreement and the other Loan Documents,
and any other instruments or documents relating thereto, their preparation,
administration and enforcement as well as the fees, expenses and disbursements
of the Agent and its counsel, and others (including but not limited to
geologists and engineers) engaged by Agent to provide information and advice in
connection with this Agreement and the other Loan Documents and any other
instruments or documents relating thereto, their preparation, administration and
enforcement.
4.14 Assigned Payments. In connection with any amounts due to Borrower
which are assigned to Agent (for the benefit of the Banks) pursuant to the
Mortgage, the Security Agreement and/or any other Loan Document, upon notice to
the payor thereof by Agent, such payments shall be made directly by the payor
thereof to Agent. Agent is, and/or its
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duly authorized agents are, hereby authorized by Borrower to endorse for and on
Borrower's behalf and deposit all drafts and checks payable to Borrower, and
such authority shall continue while any Indebtedness is outstanding. In the
event that any such assigned amounts paid to Agent consist of amounts belonging
in whole or in part to any person, corporation or entity other than Borrower,
the Agent shall promptly deliver such amounts or parts thereof to such persons,
corporations or entities, or at the option of Agent to the Borrower, upon being
furnished with evidence satisfactory to the Agent of such amounts or parts
thereof and the identity of such persons, corporations or other entities.
4.15 Notification. Within ten (10) days after Borrower or any
Subsidiary receives notice of any litigation or any judicial or administrative
proceeding pending or threatened against it which might result in Borrower or
such Subsidiary being liable for the payment or performance of obligations in
excess of Two Hundred Fifty Thousand ($250,000) Dollars with respect to any
single such litigation or proceeding, or in excess of One Million ($1,000,000)
Dollars in the aggregate with respect to all such litigations or proceedings,
Borrower shall notify the Agent, or cause the Agent to be notified, in writing
of such litigation or proceeding.
4.16 Current Ratio. The current assets of the Borrower on a
consolidated basis (as determined by Agent in accordance with generally accepted
accounting principles) divided by the positive difference between (i) the
current liabilities of the Borrower on a consolidated basis (as determined by
Agent in accordance with generally accepted accounting principles) and (ii) the
product of (x) the advance payments received by Borrower for the drilling and
completion of oil and gas wells which are classified as current liabilities
times (y) fifteen (15%) percent, shall at all times exceed the ratio of 0.75 to
1.00.
For the purposes of this Section 4.16 alone, (i) the principal
balance outstanding under the Revolving Credit Notes shall be deemed not to be a
current liability and (ii) the unused availability under the Revolving Credit
shall be deemed to be a current asset.
4.17 Debt to EBITDA. The Total Indebtedness of the Borrower on a
consolidated basis divided by the EBITDA of Borrower on a consolidated basis
(calculated for the four most recently completed fiscal quarters) shall at all
times be less than the following ratios for the fiscal periods ending on the
following dates (inclusive):
Fiscal Period Ending Maximum Ratio:
-------------------- --------------
6/30/98 through 12/31/98 3.75 to 1.00
3/31/99 through 9/30/99 3.50 to 1.00
12/31/99 through 3/31/00 3.25 to 1.00
6/30/00 and each fiscal 3.00 to 1.00
period ending thereafter
For the purposes of this Section 4.17 and of Section 4.18, (i) the
term "Total Indebtedness" shall mean total indebtedness of Borrower, including
all indebtedness for money borrowed or credit advanced, purchase price
obligations, obligations evidenced by bonds, notes or similar indentures,
capitalized lease obligations, guaranties, obligations with respect to letters
of credit, obligations under any interest or currency swap, future, option or
other similar agreement (except where any such swap, future, option or other
similar agreement is matched to an offsetting asset as in the case of hedging
with respect to the physical
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production and sale of oil and gas), and any liability in the nature of any of
the foregoing in its capacity as a general partner, and (ii) the term "EBITDA"
shall mean the sum of the Borrower's net income plus interest expense plus tax
expense plus depreciation plus amortization plus other noncash charges to income
minus noncash credits to income (as determined by Agent in accordance with
generally accepted accounting principles).
4.18 Fixed Charge Coverage Ratio. The EBITDA of the Borrower on a
consolidated basis (calculated for the four most recently completed fiscal
quarters) divided by the sum of (i) interest expense of Borrower on a
consolidated basis (calculated for the four most recently completed fiscal
quarters) plus (ii) Current Maturities of Long Term Debt of Borrower on a
consolidated basis, must not be less than 2.0 to 1.0 at any time.
For the purposes of this Section 4.18, the term "Current Maturities
of Long Term Debt" (as reasonably determined by Agent in accordance with its
customary practices) shall mean that portion of the Borrowers' total
indebtedness for money borrowed or credit advanced (other than (i) trade credit
incurred in the ordinary course of business and (ii) indebtedness to the Banks
under the Revolving Credit), however evidenced, which had a scheduled maturity
during the preceding four fiscal quarters.
4.19 Additional Documents. From time to time, at the Agent's request,
whether before or after any borrowings hereunder, the Borrower at its expense
will execute and deliver, or cause to be executed and delivered, to Agent such
instruments, papers and other documents and take, or cause to be taken, such
further action as Agent reasonably may require in connection with the
transactions contemplated hereby including the enforcement of the Loan
Documents.
4.20 Environmental Matters. (a) Borrower will ensure that the Property
remains in compliance, in all material respects, with all local, state and
federal environmental laws, rules and regulations, and that it will not place or
permit to be placed on the Property any Hazardous Substances, except as not
prohibited by applicable environmental laws, rules or regulations, or in such
quantities as to not constitute a hazard to the environment or subject the
Borrower to prosecution or liability in connection therewith.
(b) Borrower will employ, or cause to be employed, in connection with
the use of the Property appropriate technology as the Borrower determines
reasonably necessary to maintain compliance with any applicable environmental
law, rule or regulation and dispose, or cause to be disposed, of any and all
Hazardous Substances generated at the Property only at facilities and with
carriers that maintain valid permits under applicable environmental laws, rules
and regulations.
(c) In the event the Borrower obtains, gives or receives notice of any
release or threat of release of a reportable quantity of any Hazardous
Substances at the Property or receives any notice of violation, request for
information or notification that it is potentially responsible for investigation
or cleanup of environmental conditions at the Property, or any demand letter,
complaint, order, citation or other written notice with regard to any Hazardous
Substances or violation of any environmental law, rule or regulation, affecting
the Property from any person or entity, including any state agency responsible
in whole or in part for environmental matters in the state in which the Property
is located or the United States Environmental Protection Agency (any such person
or entity is hereinafter referred to as the "Authority") which might result in
the Borrower being liable for the payment or performance of
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obligations in excess of Ten Thousand ($10,000) Dollars with respect to any such
event or in excess of One Hundred Thousand ($100,000) Dollars in the aggregate
with respect to all such events, then the Borrower shall, within five (5) days,
give written notice of same to the Agent detailing non-privileged and
non-confidential facts and circumstances of which the Borrower is aware in
connection therewith. Such information is to be provided to allow Agent to
protect its security interest in the Property and is not intended to create any
obligation upon the Agent or the Banks with respect thereto.
(d) Borrower shall promptly forward to the Agent copies of any request
for information, notification of potential liability, demand letter for
information, notification of potential liability, demand letter relating to
potential responsibility with respect to the investigation or cleanup of
Hazardous Substances at the Property and shall continue to forward to the Agent
copies of correspondence between the Borrower and the Authority regarding such
claims until the claims are settled. The Borrower shall promptly forward to the
Agent copies of all documents and reports concerning Hazardous Substances at the
Property that the Borrower is required to file under any environmental law, rule
or regulation. Such information is to be provided to allow the Agent to protect
its security interest in the Property and is not intended to create any
obligation upon the Agent or the Banks with respect thereto.
(e) If the Borrower shall fail to comply, or cause to be complied, with
any of the requirements of any environmental law, rule or regulation, the Agent
may, at its election, but without the obligation to do so, for the sole purpose
of protecting its security interest in the Property, enter onto the Property (or
authorize third parties to enter onto the Property) and take such actions as the
Agent (or such third parties as directed by the Agent) deems reasonably
necessary or advisable, after consultation with the Borrower, to comply with the
requirements of such environmental laws, rules and regulations including but not
limited to cleaning up, removing, mitigating or otherwise dealing with any
release of Hazardous Substances. All reasonable costs and expenses incurred by
the Agent (or such third parties) in the exercise of any such rights, including
any sums paid in connection with any judicial or administrative investigation or
proceedings, fines and penalties, together with interest thereon from the date
expended at the highest lawful rate then payable under the Note then
outstanding, shall be paid upon demand by the Borrower.
(f) Promptly upon the written request of the Agent from time to time,
which written request may be made by the Agent only in the event of notice to
the Agent of discovery or occurrence of a release of Hazardous Substances at the
Property, the Borrower shall provide, or cause to be provided, to Agent, at the
Borrower's expense, with an environmental site assessment or environmental audit
report prepared by an environmental engineering firm acceptable to the Agent in
its reasonable opinion, to assess with a reasonable degree of certainty the
existence of a release of Hazardous Substances and the potential costs in
connection with the abatement, cleanup and removal of any Hazardous Substances
found on, under, or within the Property. Any report or investigation of such
release of Hazardous Substances proposed and acceptable to an appropriate
Authority that is charged to oversee the cleanup of such release of Hazardous
Substances shall be acceptable to the Agent. If such estimates, individually or
in the aggregate, exceed FIFTY THOUSAND DOLLARS ($50,000), the Agent shall have
the right to require the Borrower to post a bond, letter of credit or other
security reasonably satisfactory to the Agent to secure payment of these costs
and expenses.
(g) Borrower shall defend and indemnify the Agent and the Banks and
hold the Agent and the Banks harmless from and against all loss, liability,
damage and expense,
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claims, costs, fines and penalties, including attorney's fees, suffered or
incurred by the Agent, whether as a mortgagee in possession, or as
successor-in-interest to the Borrower, or otherwise, under or on account of any
environmental law, rule or regulation, including the assertion of any lien
thereunder, with respect to any release of Hazardous Substances, the presence of
any Hazardous Substances affecting the Property, whether or not the same
originates or emanates from the Property or any contiguous real estate,
including any loss of value of the Property as a result of the foregoing so long
as no such loss, liability, damage and expense is attributable to any release of
Hazardous Substances resulting from actions on the part of the Agent. The
Borrower's obligations under this Section 4.20 shall arise upon the discovery of
the presence of any Hazardous Substances at the Property, whether or not any
Authority has taken or threatened any action in connection with the presence of
any Hazardous Substances. The Borrower's obligation and the indemnification
hereunder shall survive the payment in full of the indebtedness secured hereby
and the satisfaction in full of the other obligations secured hereby.
SECTION 5. NEGATIVE COVENANTS.
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For so long as any Indebtedness remains unpaid, Borrower agrees that it
will not, without the prior written consent of the Agent:
5.1 Alienation. Sell, lease, transfer or otherwise dispose of or
alienate any of its property including the Property, or permit the sale, lease,
transfer or other disposition or alienation of any of the property of any
Subsidiary, except the sale in the ordinary course of business of gas and oil
transported through the Pipeline and gas and oil produced from the Wells and
except the sale, lease, transfer or other disposition or alienation for fair
consideration in the ordinary course of business of its and the Subsidiaries'
properties other than the Property and except the sale, lease, transfer or other
disposition or alienation for fair consideration other than in the ordinary
course of business of its and the Subsidiaries' properties other than the
Property having a fair market value not to exceed One Million ($1,000,000)
Dollars in the aggregate.
5.2 Encumbrances. Permit, create, assume or incur any mortgage, pledge,
charge, security interest, lien or encumbrance of any kind upon any of its or
the Subsidiaries' properties (whether now owned or hereafter acquired) including
the Property, or commit any act or make any election which will require it or
any of the Subsidiaries to reassign any of their properties including the
Property, except encumbrances (i) created and granted in this Agreement, the
Mortgage, the Security Agreement (Partnerships), the Security Agreement (Note)
and the Pledge Agreement or otherwise created or granted in favor of the Banks,
(ii) relating to current taxes, assessments, license fees and other governmental
charges and claims of mechanics and materialmen not delinquent, or if delinquent
being contested in good faith as set forth in Section 4.10 hereof unless
required to be paid as set forth in such Section and subject to the reserve
requirements set forth in such Section, (iii) imposed in the normal course of
the oil and gas business of the Borrower and the Subsidiaries in connection with
obtaining surety bonds and (iv) imposed in the normal course of business of the
Borrower and the Subsidiaries, other than in favor of the Banks, on properties
of the Borrower and the Subsidiaries hereafter acquired by them, provided that
such liens and encumbrances are imposed in connection with the financing of the
acquisition of such properties and are imposed only on the properties acquired.
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5.3 Guaranty. Become or be, or permit any Subsidiary to become or be, a
guarantor or endorser of, or surety for, or responsible in any manner whatsoever
with respect to, the payment or performance of any indebtedness, obligation or
undertaking of any other person, corporation or other entity, except in favor of
the Banks in connection with the payment and/or performance of any such
indebtedness, obligation or undertaking, except by the endorsement of negotiable
instruments for deposit or collection in the ordinary course of business, except
guarantees by the Borrower of the performance by the Subsidiaries which are
engaged in the oil and gas business of obligations incurred by such Subsidiaries
to provide goods and services in such business and except as permitted in
accordance with Section 5.6 hereof.
5.4 Debt. Create, assume, incur or permit to exist, any indebtedness or
obligation for the payment or repayment of money, whether borrowed by, or
advanced to or for the benefit of, Borrower or any Subsidiary, or otherwise,
except (i) the borrowings under the Loan Documents and any other indebtedness or
obligation of Borrower or any Subsidiary to the Banks thereunder, (ii)
indebtedness with respect to the intercompany advances described in Subsection
5.5(vii) hereof, provided, however, that Bank shall at all times have a first
perfected lien on any instrument evidencing such indebtedness, and (iii) with
respect to the Borrowers other than AIC, Inc., AED Investments, Inc. and ARD
Investments, Inc., other indebtedness, other than in favor of the Banks, not
exceeding Two Million ($2,000,000) Dollars in the aggregate at any one time
outstanding.
5.5 Loans; Investments. Make, or permit any Subsidiary to make, any
loan or advance to any person, corporation or other entity, or purchase or
otherwise acquire, or permit any such Subsidiary to purchase or otherwise
acquire, any capital stock, assets, obligations or other securities of, make any
capital contribution to, or otherwise invest in, or acquire any interest in, any
person, corporation or other entity, except: (i) direct obligations of the
United States of America or any agency thereof with maturities of one year or
less from the date of acquisition; (ii) commercial paper of a domestic issuer
rated at least "A-1" by Standard & Poor's Corporation or "P-1" by Moody's
Investors Service, Inc.; (iii) certificates of deposit with maturities of one
year or less from the date of acquisition issued by any Bank or any commercial
bank operating within the United States of America having capital and surplus in
excess of $50,000,000; (iv) for stock, obligations or securities received in
settlement of debts (created in the ordinary course of business) owing to the
Borrower or any such Subsidiary; (v) loans from Transatco Corporation to TOPICO,
a partnership, not exceeding One Million Twenty Thousand ($1,020,000) Dollars in
the aggregate at any one time outstanding; (vi) loans from a Borrower to another
Borrower's pursuant to one or more intercompany notes as described in, and
subject to, the Security Agreement (Note), (vii) the stock held by a Borrower on
the date hereof as described in Section 2.2 hereof, (viii) with respect to the
Borrowers other than AIC, Inc., AED Investments, Inc. and ARD Investments, Inc.,
other loans not exceeding One Million One Hundred Thousand ($1,100,000) Dollars
in the aggregate at any one time outstanding; (ix) loans not to exceed $250,000
in the aggregate to Atlas Technologies, LLC; and (x) loans not to exceed
$250,000 in the aggregate to Record Imaging, Ltd.
5.6 Business Activities. (a) Subject to the provisions of paragraph (b)
below, engage in, or permit any Subsidiary to engage in, any business other than
the business which it now conducts.
(b) Notwithstanding anything to the contrary contained in this
Agreement, The Atlas Group, Inc., AIC, Inc., AED Investments, Inc. and ARD
Investments, Inc. shall not be
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permitted to engage in any business or conduct any activity except (i) make the
advances permitted in Subsection 5.5(vi) hereof, (ii) hold the stock held by
such Borrower on the date hereof as described in Section 2.2 hereof, (iii) the
ownership, maintenance and management of intangible investments (which includes,
without limitation, investments in the types of assets listed in Section 5.5
(i), (ii) and (iii) hereof), patents, patent applications, trademarks, trade
names and similar types of intangible assets), and the collection and
distribution of income from such investments and (iv) with respect to The Atlas
Group, Inc. only, perform certain administrative and management services on
behalf of the other Borrowers in exchange for a fee.
5.7 Consolidation or Merger, Change of Control. (a) Consolidate with or
merge into, or permit any Subsidiary to consolidate with or merge into, any
person, corporation or other entity or permit any person, corporation or other
entity to consolidate with or merge into Borrower or any Subsidiary, except for
(i) the merger of The Atlas Group, Inc. with and into Atlas America, Inc.
("Atlas America") so long as, at the time of such merger, Atlas America is
engaged in no business other than owning the stock of The Atlas Group, Inc. and
Resource Energy, Inc. ("Resource Energy") and (ii) the merger of Atlas America
(as successor by merger to The Atlas Group, Inc.) with Resource Energy (the
"Permitted Merger"), so long as (x) prior to the effective date of the Permitted
Merger, the Agent and the Banks shall have received from the Borrower (A) such
information and documentation regarding Resource Energy as they may reasonably
request and (B) pro forma financial statements reflecting the Permitted Merger,
and such information, documentation and financial statements are satisfactory to
the Banks in all material respects, (y) the consummation of the Permitted Merger
shall not cause or result in any event of default under Section 8 hereof, and
(z) Resource Energy, the Permitted Merger and all documentation relating thereto
shall be otherwise satisfactory in all material respects to the Banks.
(b) Permit any Change in Control, except for the acquisition of 100% of
the issued and outstanding shares of The Atlas Group, Inc. by Resource America,
Inc. or Atlas America (the "Permitted Acquisition"). For the purposes of this
Agreement, the term "Change in Control" shall mean any change in the ownership
of the shares of stock of any Borrower.
5.8 Acquisitions. Purchase or otherwise acquire, or permit any
Subsidiary to purchase or acquire, any obligations or stock of, or any other
interest in, or all or substantially all of the assets of, any person,
corporation or other entity whatsoever.
5.9 Redemption. Directly or indirectly, purchase or redeem any of the
stock issued by Borrower or permit any Subsidiary to purchase or redeem any of
the stock issued by such Subsidiary; except the purchase of 131,425 shares of
The Atlas Group, Inc. from Charles T. Koval and Joseph R. Sadowski for an
aggregate purchase price of up to $12,000,000 in contemplation of the Permitted
Acquisition described in Section 5.7 (b) above.
5.10 Distributions. Directly or indirectly, declare or make, or incur
any liability to make, any dividend or other distribution on the stock of such
Borrower or otherwise to the stockholders of The Atlas Group, Inc. (or its
successor), except stock options to be issued to employees of The Atlas Group,
Inc.
5.11 Leases. Become, or permit any Subsidiary to become, lessee under
any lease of any real or personal property, except gas and oil leases in the
ordinary courses of their businesses and except such other leases entered into
in the ordinary courses of their
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businesses so long as the aggregate payments to be made by the Borrower and the
Subsidiaries in connection with such other leases in any fiscal year of the
Borrower do not exceed One Million ($1,000,000) Dollars and except equipment
leases from any Bank or any affiliate thereof) to Borrower or any Subsidiary.
5.12 Capital Expenditures. Make or permit during any fiscal year the
aggregate amount of Borrower's exploration expenses to exceed an amount equal to
twenty (20%) percent of the Borrower's total capital expenditures (on a
consolidated basis) during such fiscal year. For the purposes of this section,
exploration expenses shall be included within the calculation of Borrower's
total capital expenditures.
5.13 Negative Pledges. Directly or indirectly enter into or assume any
agreement (other than this agreement) prohibiting the creation or assumption of
any lien or encumbrance upon any of the Borrower's properties (including without
limitation the Property), whether now owned or hereafter created or acquired, or
otherwise prohibiting or restricting any transaction contemplated hereby.
SECTION 6. BORROWING REQUIREMENTS.
- - ----------------------------------
6.1 Conditions to Borrowing. Unless otherwise agreed to by Agent and
subject to the performance by Borrower of its other obligations under the Loan
Documents, the Banks shall have no obligation to advance any funds to Borrower,
to issue or renew any Letter of Credit or to continue any loans outstanding
under the Existing Loan Agreement until all legal matters incident to the
transactions contemplated by the Loan Documents are resolved in a manner
satisfactory to Agent and its counsel and until Borrower shall have provided
Agent with the following:
A. The Notes, Mortgage, Security Agreement (Partnerships), Security
Agreement (Note), Pledge Agreement, Financing Statements and other Loan
Documents duly executed and all in form and substance satisfactory to Agent.
B. Evidence satisfactory to Agent authorizing the execution and
delivery by Borrower of this Agreement, the Notes, the Mortgage, the Security
Agreement (Partnerships), Security Agreement (Note), the Pledge Agreement, the
Financing Statements and the other Loan Documents.
C. Opinions of counsel for Borrower, addressed to Agent and the Banks,
satisfactory to Agent's counsel, relating to such matters as the Agent may
reasonably require, including opinions that on the dates of delivery of such
opinions and at the times the funds to be lent pursuant to this Agreement are
advanced (a) the representations set forth in Sections 2.1, 2.2 and 2.6 hereof
(which representations shall be repeated at length in such opinions) are
accurate, (b) to the best of the knowledge of Borrower's counsel, the
representations set forth in Sections 2.5, 2.9, 2.10, 2.11, 2.12 and 2.13 hereof
(which representations shall be repeated at length in such opinions) are
accurate, and (c) the interest rate options applicable to the Notes, the
Commitment Fee or any other Fee provided for herein, the maintenance of the
Borrower's principal accounts as required by Section 3.4 hereof and the
depositing therein of substantially all of Borrower's funds, and the payment of
all other amounts to be paid by Borrower pursuant to this Agreement and the
other Loan Documents do not violate any usury
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or other law of the State of Ohio or the Commonwealth of Pennsylvania relating
to interest payments.
D. Opinions, addressed to the Agent and the Banks, of Borrower's
counsel or such other counsel satisfactory to Agent, in form and substance
satisfactory to Agent's counsel, that on the dates of delivery of such opinions
and at the times the funds to be lent pursuant to this Agreement are advanced
(a) Borrower and the Partnerships have good and marketable rights, titles and
interests in and to all the Property and the Partnership Wells, (b) all
documents or instruments pursuant to which, or establishing that, Borrower and
the Partnerships acquired interests in the Property and the Partnership Wells
are valid and subsisting and have not been modified or amended, (c) the extent
of Borrowers and the Partnerships' interests in the Property and the Partnership
Wells are as described in the documents and instruments pursuant to which, or
establishing that, Borrower and the Partnerships acquired their interests in the
Property and the Partnership Wells and (d) the Property and the Partnership
Wells are free and clear of all liens and encumbrances except such liens and
encumbrances as shall be acceptable to Agent in its sole discretion.
E. Certificates executed by Borrower stating that no defaults have
occurred which are unremedied or unwaived under any agreement, lease, assignment
or other document or instrument by or through which Borrower has any rights,
titles or interests in connection with the Property.
F. Evidence satisfactory to Agent that there has been recorded in the
appropriate offices documents and instruments establishing that Borrower and the
Partnerships have good and marketable rights, titles and interests in and to the
Property and the Partnership Wells and delivery to Agent of copies of all the
documents and instruments pursuant to which, or establishing that, Borrower and
the Partnerships acquired such rights, titles and interests.
G. Evidence satisfactory to Agent of the recordation and filing of the
Mortgage, the Financing Statements and any other Loan Document.
H. A current certificate of good standing of the each Borrower and a
certificate of incumbency for each Borrower.
I. A mortgagee title insurance policy issued in favor of Bank with
respect to the premises located at 311 Rouser Road, Coraopolis, Pennsylvania, in
form and substance acceptable to Agent and its counsel.
J. Payment of the Fees provided for in the side letter among Borrower
and Agent relating thereto.
K. Such other documents and instruments, and evidence of the
performance by Borrower of such other obligations, as Agent may reasonably
request.
SECTION 7. DISBURSEMENT.
- - ------------------------
7.1 Procedure. Except as otherwise provided herein, Borrower may
request Revolving Credit Loans by delivering to the Agent, not later than 11:00
A.M. (Pittsburgh, Pennsylvania time) on the proposed borrowing date a written
notice requesting, and specifying
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the date (if other than the date of such request), the amount and the manner of,
each borrowing and reborrowing hereunder. Subject to Section 11.2 hereof, the
Agent shall promptly notify the Banks of each request for a borrowing or
reborrowing on the same day on which the Agent receives such a request, and each
Bank shall make its Commitment Percentage of the requested borrowing or
reborrowing available to the Borrower, in immediately available funds at the
principal office of the Agent, prior to 2:00 P.M. (Pittsburgh, Pennsylvania
time) on the date specified by Borrower in its request, and upon availability of
such funds Agent shall credit one or more of the accounts of deposit (the
"Accounts") maintained by Borrower at the Agent in the amount to be borrowed or
reborrowed. Each borrowing or reborrowing by Borrower or issuance or renewal of
any Letter of Credit hereunder issuance or renewal shall be conditioned on the
following: that at the time of such borrowing, reborrowing issuance or renewal
the representations and warranties contained in this Agreement are true and
correct and no default set forth in Section 8 hereof shall have occurred and be
continuing and no event which, with giving of notice or lapse of time or both
would become such a default, shall have occurred or shall have failed to occur
and be continuing; and each such borrowing, reborrowing issuance or renewal
shall be deemed to be a representation and warranty by the Borrower that the
foregoing conditions exist and upon the request of Agent the Borrower shall
execute and deliver to the Agent a certificate as to the existence of the
foregoing conditions.
7.2 Use of Proceeds. Borrower represents, warrants and agrees that all
funds lent or advanced pursuant to this Agreement or any other Loan Document
have been, and shall be, used only for the purpose of (i) financing oil or
natural gas drilling, producing, gathering and associated activities and
facilities by the Borrower, (ii) the prepayment in full of the indebtedness
evidenced by those certain Promissory Notes each dated November 14, 1990 and
executed in favor of Charles Koval and Joseph Sadowski and the purchasing of the
shares of The Atlas Group, Inc. from Charles Koval and Joseph Sadowski in
accordance with Section 5.9 above and (iii) for the purpose of funding other
general corporate activities of the Borrower.
7.3 Charging Account. Borrower agrees that each Bank and the Agent may
charge and is hereby authorized to charge any demand deposit account of the
Borrower maintained with the Agent or the Banks (including without limitation
the Accounts) for payment of principal of, or interest on, the Notes when due
and payable, reimbursement of Draws under the Letters of Credit and all other
charges set forth in the Loan Documents when due and payable including but not
limited to the Commitment Fee, the Fees provided for in the side letter among
Borrower and Agent, any Letter of Credit Fee and the charges set forth in
Sections 4.13 and 10.3 hereof.
SECTION 8. DEFAULTS.
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If one or more of the following events occur:
A. Borrower or any Subsidiary or any Partnership makes an assignment
for the benefit of its creditors, becomes insolvent or admits in writing its
inability to pay its debts as they become due; or Borrower or any Subsidiary or
any Partnership files a voluntary petition in bankruptcy or files a petition or
answer seeking for itself any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present or
future statute, law or regulation; or Borrower or any Subsidiary or any
Partnership files an answer admitting or not contesting the material allegations
of any petition filed in any action commenced against the Borrower or such
Subsidiary or such Partnership in bankruptcy or
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seeking the relief described above in this Subsection 8.A, or any such action
shall not have been dismissed within thirty (30) days after it is commenced; or
the Borrower or any Subsidiary, or any of its officers, directors or
shareholders, or any Partnership, or any of its partners, takes any action
looking to the dissolution or liquidation of Borrower or such Subsidiary or such
Partnership; or the Borrower or any Subsidiary or any Partnership applies for,
consents to, or acquiesces in the appointment of a trustee, receiver or
liquidator for itself or for any of its property or in the absence of such
application, consent or acquiescence such a trustee, receiver or liquidator is
appointed and is not discharged within thirty (30) days after being appointed;
or
B. Any garnishment proceeding by attachment, levy or otherwise is
instituted against any deposit balance maintained, or any property deposited,
with the Bank by the Borrower:
then this Agreement and the other Loan Documents shall immediately and
automatically be in default, any obligation of the Banks or the Agent under the
Loan Documents or otherwise to make any further advances to or for the benefit
of Borrower shall immediately and automatically terminate and the principal of,
and interest on, the Notes and all other indebtedness of Borrower and the
Subsidiaries to Bank including but not limited to all other Indebtedness shall
immediately be due and payable without necessity of demand, presentment,
protest, notice of dishonor, notice of default or any other notice whatsoever,
all of which are hereby expressly waived by Borrower.
If one or more of the following events occur:
C. Default by Borrower in the payment of principal of, or interest on,
the Notes, in the payment of any reimbursement or other obligation with respect
to any Letter of Credit, or in the payment of the Commitment Fee, the Fees
provided for in the side letter among Borrower and the Agent, the Letter of
Credit Fee or in the payment of items of expense or other charges to be paid by
the Borrower pursuant to the Loan Documents, including but not limited to the
times set forth in Section 4.13 or 10.3 hereof, when due and payable, and
continuance thereof for ten (10) days thereafter or for ten (10) days after
bills therefor are sent to Borrower, whichever last occurs.
D. One or more courts shall render a final judgment or judgments
against Borrower or any Subsidiary or any Partnership in an aggregate amount
greater than Ten Thousand ($10,000) Dollars in excess of any insurance
protecting against the liability on which such judgment or judgments are based
and such judgment or judgments shall not be satisfactorily stayed, discharged,
vacated or set aside within thirty (30) days after the entry thereof, or, except
as set forth in Subsection 8.13 hereof, one or more properties of Borrower or
any Subsidiary or any Partnership shall be liened or attached under a claim or
claims in an aggregate amount greater than Ten Thousand ($10,000) Dollars in
excess of any insurance protecting against the liability on which such lien or
attachment is based and such lien or attachment shall not be released or
provided for to the satisfaction of Bank within thirty (30) days after the
property is liened or attached;
E. Borrower or any Subsidiary shall fail to take, or cause to be taken,
corrective measures reasonably satisfactory to Agent within thirty (30) days
after notice to Borrower or such Subsidiary with respect to any litigation or
any judicial or administrative proceedings pending or threatened against
Borrower or such Subsidiary or any Partnership or
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the Property or any Partnership Well, the outcome of which, in the reasonable
judgment of Bank, would materially and adversely affect the financial condition
of Borrower or such Subsidiary or such Partnership or the Property or the
Partnership Wells;
F. The PBGC shall make a determination that there has occurred an event
or condition which constitutes grounds under ERISA for the termination of, or
for the appointment of a trustee to administer, any Plan;
G. Default in the performance or observance of any agreement, covenant
or obligation of Borrower set forth in this Agreement or any other Loan
Document, including but not limited to the Mortgage, the Security Agreement
(Partnerships), the Security Agreement (Note), the Pledge Agreement and the
Notes, which default does not constitute a specific default set forth in this
Section 8, and continuance thereof for thirty (30) days;
H. Default in the performance or observance of any agreement, covenant
or obligation of Borrower or any Subsidiary or any Partnership in any agreement
between Bank and Borrower and/or such Subsidiary and/or such Partnership in
addition to any Loan Document, or the existence of any misrepresentation in
connection therewith or related thereto, and continuance thereof for more than
the permitted period of grace, if any;
I. Except as set forth in Subsections 8.C, 8.G and 8.H hereof, default
in the payment or performance of any obligation for borrowed money for which the
Borrower or any Subsidiary or any Partnership is liable (directly, by
assumption, as guarantor, or otherwise) or in the payment or performance of any
obligation secured by any mortgage, pledge, charge, security interest or other
encumbrance with respect to any property of the Borrower or any Subsidiary or
any Partnership, and continuance thereof for more than the permitted period of
grace, if any;
J. Any representation or warranty made by Borrower herein or in any
other Loan Document is untrue in any material respect or any certificate,
schedule, statement, report, notice or writing furnished or made to Agent or any
Bank in connection with the transactions contemplated by the Loan Documents is
untrue in any material respect on the date as of which the facts set forth
therein are stated or certified;
K. Any Change in Control, except for the Permitted Acquisition
contemplated in Section 5.7 above.
L. If James R. O'Mara [or any other person(s) acceptable to Agent as
set forth in this Subsection 8.L] does not, regardless of the reason therefor,
continue to act as the chief executive officer of the Borrower and to devote his
entire time and attention to the business and affairs of the Borrower; provided,
however, that if such default occurs, Borrower may cure such default by
engaging, within sixty (60) days after such occurrence, as the chief executive
officer of the Borrower or such other person(s) as shall be reasonably
acceptable to Agent:
then the Agent, at its option, may immediately declare this Agreement and/or the
other Loan Documents in default, may terminate any obligations of the Agent or
the Banks under the Loan Documents or otherwise to make any further advances to
or for the benefit of Borrower and/or may declare the principal of, and interest
on, the Notes and/or all other indebtedness of Borrower and the Subsidiaries to
the Banks including but not limited to all other Indebtedness
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immediately due and payable, whereupon all such indebtedness including but not
limited to the Indebtedness shall immediately become due and payable without
necessity of demand, presentment, protest, notice of dishonor, notice of default
or any other notice whatsoever, all of which are hereby expressly waived by
Borrower.
Notwithstanding anything to the contrary contained in this Section 8,
for purposes of this Section 8, neither this Agreement nor any other Loan
Document shall be, or be declared to be, in default upon the occurrence of any
of the events set forth above unless (i) any such event relates to a person,
corporation or other entity other than, or in addition to, any Partnership, or
(ii) any such event relates only to one or more Partnerships and the occurrence
of such event, together with all other such events occurring theretofore or
thereafter, does, or might, impair the collateral value of the Property in an
amount equal to at least Five Hundred Thousand ($500,000) Dollars as determined
by Bank in its sole discretion; provided, however, that this paragraph shall in
no way affect the calculation of the Collateral Value hereunder or the
Borrower's obligation to make mandatory prepayments under Section 1.4 above.
SECTION 9. REMEDIES.
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The Agent (on behalf of the Banks) shall be entitled at its option to
exercise each and every remedy accorded it by law and/or specifically set forth
in the Loan Documents, including in that limitation the Mortgage, the Security
Agreement (Partnerships), the Security Agreement (Note), the Pledge Agreement
and the Notes, which remedies are specifically incorporated herein by reference.
Such remedies may be asserted concurrently, cumulatively, successively or
independently from time to time so long as any part of the Indebtedness remains
unpaid.
SECTION 10. MISCELLANEOUS.
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10.1 Waiver and Modification. No waiver by Agent or the Banks of any
default shall operate as a waiver of any other default or of the same default on
a future occasion. No failure to exercise, and no delay in exercising, on the
part of Agent or the Banks, any power, remedy or right shall operate as a waiver
thereof, nor shall any single or partial exercise of any power, remedy or right
preclude other or further exercise thereof or the exercise of any other power,
remedy or right. This Agreement and the other Loan Documents, including the
Notes, the Mortgage, the Security Agreement (Partnerships), the Security
Agreement (Note) and the Pledge Agreement, contain the entire agreement of the
parties with respect to their subject matter and the terms, conditions and
covenants of this Agreement and the other Loan Documents, including the Notes,
the Mortgage, the Security Agreement (Partnerships), the Security Agreement
(Note) and the Pledge Agreement, may only be modified or waived by a written
document executed by Borrower and Bank.
10.2 Notices. All notices or other correspondence required or made
necessary by the terms of this Agreement and the other Loan Documents shall be
in writing and shall be considered as having been given to each party if served
personally or if mailed by registered or certified mail, postage prepaid, to the
respective addresses as follows:
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(a) To Borrower:
c/o The Atlas Group, Inc.
311 Rouser Road
Coraopolis, Pennsylvania 15108
Attention: James R. O'Mara
Chief Executive Officer
(b) To Agent:
PNC Bank, National Association
One PNC Plaza
249 Fifth Avenue
Pittsburgh, PA 15222
Attention: Energy, Metals & Mining
(c) To Banks:
All notices to Banks shall be sent to the notice
address of each Bank as set forth on such Bank's
signature page to its Assignment and Assumption
Agreement.
Each party shall have the right to change its address at any time, and from time
to time, by giving written notice thereof to the other party.
10.3 Certain Taxes. Borrower agrees to pay, and save Agent and the
Banks harmless from, all liability for any federal or state documentary stamp or
other tax liability, together with any interest or penalty, which is payable or
determined to be payable with respect to the execution or delivery of this
Agreement or any other Loan Document including the Notes, the Mortgage, the
Security Agreement (Partnerships), the Security Agreement (Note), the Pledge
Agreement and the Financing Statements, which obligation of the Borrower shall
survive the termination of this Agreement.
10.4 Right to Cure. In the event that Borrower shall fail for any
reason to pay any fee, cost, expense or other charge to be paid or reimbursed by
Borrower, Agent shall have the right but not the duty to make such payment and
if Agent makes such payment the amount thereof shall be added to the balance of
the indebtedness secured by the Mortgage, the Security Agreement (Partnerships),
the Security Agreement (Note) and the Pledge Agreement, shall be payable on
demand and shall bear interest at the highest lawful rate of interest then
payable under the Note then outstanding until paid.
10.5 Venue and Jurisdiction: Waiver of Jury Trial. THE PARTIES HERETO
AGREE THAT ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT SHALL BE COMMENCED IN THE COURT OF
COMMON PLEAS OF ALLEGHENY COUNTY, PENNSYLVANIA AND EACH PARTY AGREES THAT A
SUMMONS AND COMPLAINT COMMENCING AN ACTION OR PROCEEDING IN SUCH COURT SHALL BE
PROPERLY SERVED AND SHALL CONFER PERSONAL JURISDICTION IF SERVED PERSONALLY OR
BY CERTIFIED MAIL TO IT AT ITS ADDRESS DESIGNATED PURSUANT HERETO, OR AS
OTHERWISE PROVIDED UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. THE
PARTIES
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this is it!
HERETO WAIVE ANY CLAIM THAT PITTSBURGH, PENNSYLVANIA IS AN INCONVENIENT FORUM
AND ANY CLAIM THAT ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT IN THE AFOREMENTIONED COURT LACKS
PROPER VENUE AND/OR JURISDICTION. EACH BORROWER, THE AGENT AND THE BANKS HEREBY
WAIVE TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND
ARISING OUT OF OR RELATED TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE
COLLATERAL PROVIDED IN CONNECTION HEREWITH TO THE FULL EXTENT PERMITTED BY LAW.
10.6 Applicable Law. THIS AGREEMENT SHALL BE A CONTRACT MADE UNDER AND
GOVERNED BY THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA.
10.7 Severability. In the event that any term or provision of this
Agreement or any other Loan Document including the Notes, the Mortgage, the
Security Agreement (Partnerships), the Security Agreement (Note) and the Pledge
Agreement is lawfully held or declared to be invalid, illegal or unenforceable,
it shall be deemed deleted to the extent necessary under the applicable law and
the validity of the other terms and provisions shall not be affected thereby.
10.8 Successors and Assigns. (a) This Agreement and the other Loan
Documents shall be binding upon the Borrower, the Agent and the Banks and their
respective successors and assigns, and shall inure to the benefit of Borrower,
the Agent and the Banks and the successors and assigns of the Agent and the
Banks (except that Borrower shall have no right to assign, voluntarily or by
operation of law, any of its rights hereunder or under any other Loan Document
without Agent's prior written consent, and provided further that nothing herein
is intended by any party hereto to confer any rights upon any third party as a
beneficiary hereof).
(b) Subject to the remaining provisions of this Section 10.8, any Bank
(the "Transferor Bank") may at any time, in the ordinary course of its
commercial lending business, in accordance with applicable law, sell to one or
more financial institutions (each, a "Purchasing Bank") (which Purchasing Bank
may be an affiliate of the Transferor Bank), a portion of its rights and
obligations under this Agreement and the Notes then held by it, pursuant to an
Assignment and Assumption Agreement substantially in the form of Exhibit "I" and
satisfactory to the Agent, executed by the Transferor Bank, such Purchasing
Bank, the Agent and the Borrower; provided, however, that the Borrower and the
Agent must each give its prior consent to any such assignment (other than an
assignment made by a Bank to an affiliate of such Bank), which consent shall not
be unreasonably withheld.
Upon the execution, delivery, acceptance and recording of any such
Assignment and Assumption Agreement, from and after the "Transfer Effective
Date," as defined and determined pursuant to such Assignment and Assumption
Agreement, and the payment by Purchasing Bank to Agent of an assignment service
fee of $3,000, (i) the Purchasing Bank thereunder shall be a party hereto as a
Bank and, to the extent provided in such Assignment and Assumption Agreement,
shall have the rights and obligations of a Bank hereunder with a Commitment
Percentage as set forth therein, and (ii) the Transferor Bank thereunder shall,
to the extent provided in such Assignment and Assumption Agreement, be released
from its obligations under this Agreement as a Bank. Such Assignment and
Assumption Agreement shall be deemed to amend this Agreement to the extent, and
only to the extent, necessary to reflect the addition of such Purchasing Bank as
a Bank and the
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resulting adjustment of Commitment Percentage and Ratable Share arising from the
purchase by such Purchasing Bank of all or a portion of the rights and
obligations of such Transferor Bank under this Agreement and the Notes. On or
prior to the Transfer Effective Date, the Borrower shall execute and deliver to
the Agent, in exchange for the surrendered Notes held by the Transferor Bank,
new Notes to the order of such Purchasing Bank in an amount equal to the
Commitment Percentage of the Revolving Credit, the Revolving Credit Loans, the
Term Loan and the Seven-Year Term Loan assumed by it and purchased by it
pursuant to such Assignment and Assumption Agreement, and new Notes to the order
of the Transferor Bank in an amount equal to the Commitment Percentage of the
Revolving Credit, the Revolving Credit Loans, the Term Loan and the Seven-Year
Term Loan retained by it hereunder.
(c) The Agent shall maintain at its address referred to in Section 10.2
a copy of each Assignment and Assumption Agreement delivered to it and a
register (the "Register") for the recordation of the names and addresses of the
Banks and the amount of the Loans owing to each Bank from time to time. The
entries in the Register shall be conclusive, in the absence of manifest error,
and the Borrower, the Agent and the Banks may treat each person whose name is
recorded in the Register as the owner of the Loans recorded therein for all
purposes of this Agreement. The Register shall be available at the office of the
Agent for inspection by the Borrower or any Bank at any reasonable time and from
time to time upon reasonable prior notice.
(d) Notwithstanding any other provision in this Agreement, any Bank may
at any time pledge or grant a security interest in all or any portion of its
rights under this Agreement, its Notes and the other Loan Documents to any
Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury
Regulation 31 CFR Section 203.14 without notice to or consent of the Borrower or
the Agent. No such pledge or grant of a security interest shall release the
transferor Bank of its obligations hereunder or under any other Loan Document.
10.9 Nature and Survival of Representations. All statements contained
in any certificate or other document or instrument of any kind whatsoever
delivered by or on behalf of Borrower pursuant hereto or any other Loan
Document, or in connection with the transactions contemplated hereby or thereby,
shall be deemed representations and warranties made by the Borrower in this
Agreement or other Loan Document, or pursuant hereto or thereto, and, together
with all representations and warranties contained herein or in any other Loan
Document, shall survive the execution and delivery thereof and of this Agreement
and any other Loan Document, the making of any loans under the Loan Documents,
and the making of any investigation made at any time by or on behalf of Agent
and/or the Banks.
10.10 Number and Gender. Whenever required by the context of this
Agreement or any other Loan Document the singular shall include the plural, and
vice-versa; and the neuter gender shall include the masculine and feminine
genders, and vice-versa.
10.11 Joint and Several Liability. Each Borrower is, and shall be,
jointly and severally bound by, and responsible for the making and performance
of, all of the representations, warranties, covenants, provisions, terms,
conditions and agreements made and to be performed by the Borrower under and
pursuant to this Agreement and the other Loan Documents including the Notes, the
Mortgage, the Security Agreement (Partnerships), the Security Agreement (Note)
and the Pledge Agreement.
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10.12 Tax Withholding. At least five (5) business days prior to the
first date on which interest or fees are payable hereunder for the account of
any Bank, each such Bank that is not incorporated under the laws of the United
States of America or a state thereof agrees that it will deliver to the Agent
and the Borrower two (2) duly completed copies of either (i) United States
Internal Revenue Service Form W-9, 1001 or 4224 or such other applicable form
prescribed by the Internal Revenue Service of the United States, certifying in
each case that such Bank is entitled to receive payments under this Agreement or
the Notes without deduction or withholding of United States federal income
taxes, or is subject to such tax at a reduced rate under an applicable tax
treaty or (ii) Form W-8 or such other applicable form prescribed by the Internal
Revenue Service of the United States or a certificate of such Bank indicating
that no such exemption or reduced rate of taxation is allowable with respect to
such payments. Each Bank which delivers a Form W-8, W-9, 4224 or 1001 further
undertakes to deliver to the Agent and the Borrower two (2) additional copies of
such form (or any successor form) on or before that form expires or becomes
obsolete or after the occurrence of any event requiring a change in the most
recent form so delivered by it, and such amendments thereto or extensions or
renewals thereof as may be reasonably requested by the Borrower or the Agent,
either certifying that such Bank is entitled to receive payments under this
Agreement or its Note without deduction or withholding of any United States
federal income taxes or is subject to such tax at a reduced rate under an
applicable tax treaty or stating that no such exemption or reduced rate is
allowable. The Agent shall be entitled to withhold United States federal income
taxes at the full withholding rate unless each such Bank establishes an
exemption or at the applicable reduced rate established pursuant to the above
provisions.
10.13 Headings. The headings of the Sections of this Agreement are
inserted for convenience only and shall not be deemed to constitute a part
hereof.
10.14 Confidentiality.
(a) General. The Agent and the Banks each agree to keep confidential
all information obtained from Borrower or its Subsidiaries which is nonpublic
and confidential or proprietary in nature (including any information the
Borrower specifically designates as confidential), except as provided below, and
to use such information only in connection with their respective capacities
under this Agreement and for the purposes contemplated hereby. The Agent and the
Banks shall be permitted to disclose such information (i) to outside legal
counsel, accountants and other professional advisors who need to know such
information in connection with the administration and enforcement of this
Agreement, subject to agreement of such Persons to maintain the confidentiality,
(ii) to assignees and participants as contemplated by Section 10.8, (iii) to the
extent requested by any bank regulatory authority or, with notice to the
Borrower, as otherwise required by applicable Governmental Rule or by any
subpoena or similar legal process, or in connection with any investigation or
proceeding arising out of the transactions contemplated by this Agreement, (iv)
if it becomes publicly available other than as a result of a breach of this
Agreement or becomes available from a source not known to be subject to
confidentiality restrictions, or (v) if the Borrower shall have consented to
such disclosure.
(b) Sharing Information With Affiliates of the Banks. Each Borrower
acknowledges that from time to time financial advisory, investment banking and
other services may be offered or provided to the Borrower or one or more of its
affiliates (in connection with this Agreement or otherwise) by any Bank or by
one or more Subsidiaries or affiliates of such Bank and each of the Borrowers
hereby authorizes each Bank to share any information
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delivered to such Bank by such Borrower and its Subsidiaries pursuant to this
Agreement, or in connection with the decision of such Bank to enter into this
Agreement, to any such Subsidiary or affiliate of such Bank, it being understood
that any such Subsidiary or affiliate of any Bank receiving such information
shall be bound by the provisions of Section 10.15 as if it were a Bank
hereunder. Such authorization shall survive the repayment of the Loans and other
Indebtedness and the termination of any commitment to lend or to issue Letters
of Credit hereunder.
SECTION 11. AGREEMENT AMONG BANKS
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11.1 Appointment and Grant of Authority. The Banks hereby appoint PNC,
and PNC hereby agrees to act as, Agent under this Agreement, the other Loan
Documents, and Agent under the Mortgage, the Guaranty and Financing Statements
for the benefit of the Banks. The Agent shall have and may exercise such powers
under this Agreement as are specifically delegated to it by the terms hereof or
of the other Loan Documents, together with such other powers as are incidental
thereto. Without limiting the foregoing, the Agent, on behalf of the Banks, is
authorized to execute all of the Loan Documents (other than this Agreement) and
to accept all of the Loan Documents and all other agreements, documents or
instruments reasonably required to carry out the intent of the parties to this
Agreement. Without limiting the foregoing, the Agent, on behalf of the Banks as
secured parties, is authorized to execute and/or accept the Mortgage, any
Financing Statements, any other Loan Documents and all other agreements,
documents or instruments reasonably required to carry out the intent of the
parties to this Agreement.
11.2 Reliance by Agent on Banks for Funding. Unless the Agent shall
have received notice from a Bank prior to a funding date that such Bank will not
make available to the Agent such Bank's portion of net disbursements of
Revolving Credit Loans, the Agent may assume that such Bank has made such
portion available to the Agent in accordance with Section 7.1 above and the
Agent may, in reliance upon such assumption, make Revolving Credit Loans to the
Borrower. If and to the extent that such Bank has not made such portion
available to the Agent on or prior to any funding date, such Bank and the
Borrower severally agree to repay to the Agent immediately upon demand, in
immediately available funds, such unpaid amount, together with interest thereon
at the Federal Funds Rate for each day from the applicable funding date until
such amount is repaid to the Agent. If such Bank shall repay to the Agent such
corresponding amount, such amount shall constitute a Revolving Credit Loan made
by such Bank for purposes of this Agreement. The failure by any Bank to pay its
portion of a Revolving Credit Loan made by the Agent shall not relieve any other
Bank of its obligation to pay its portion of net disbursements of Revolving
Credit Loans, but no Bank shall be responsible for the failure of any other Bank
to make its net share of Revolving Credit Loans to be made by such other Bank on
such funding date.
11.3 Non-Reliance on Agent. Each Bank agrees that it has, independently
and without reliance on the Agent, and based on such documents and information
as it has deemed appropriate, made its own credit analysis of the Borrower and
decision to enter into this Agreement and that it will, independently and
without reliance upon the Agent, and based on such documents and information as
it shall deem appropriate at the time, continue to make its own analysis and
decisions in taking or not taking action under this Agreement. Except as
otherwise provided herein, the Agent shall have no duty to keep the Banks
informed as to the performance or observance by the Borrower of this Agreement
or any other document referred
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to or provided for herein or to inspect the properties or books of the Borrower.
The Agent, in the absence of gross negligence or willful misconduct, shall not
be liable to any Bank for its failure to relay or furnish to the Bank any
information. The preceding provisions of this Section 11. 3 to the contrary
notwithstanding, the Agent shall notify each of the Banks as soon as practicable
after it receives notice of the occurrence of any default hereunder or under any
other Loan Document.
11.4 Responsibility of Agent and Other Matters.
(a) Ministerial Nature of Duties. As between the Banks and itself, the
Agent shall not have any duties or responsibilities except those expressly set
forth in this Agreement or in the other Loan Documents, and those duties and
responsibilities shall be subject to the limitations and qualifications set
forth in this Section 11. The duties of the Agent shall be ministerial and
administrative in nature.
(b) Limitation of Liability. As between the Banks and itself, neither
the Agent nor any of its respective directors, officers, employees or agents
shall be liable, except for gross negligence or willful misconduct, for any
action taken or omitted (whether or not such action taken or omitted is within
or without the Agent's responsibilities and duties expressly set forth in this
Agreement) under or in connection with this Agreement or any other instrument or
document in connection herewith. Without limiting the foregoing, neither the
Agent nor any of its directors, officers or employees, shall be responsible for,
or have any duty to examine (i) the genuineness, execution, validity,
effectiveness, enforceability, value or sufficiency of (A) this Agreement or any
of the other Loan Documents or (B) any other document or instrument furnished
pursuant to or in connection with this Agreement, (ii) the collectibility of any
amounts owed by the Borrower to the Banks, (iii) the truthfulness of any
recitals or statements or representations or warranties made to the Agent or the
Banks in connection with this Agreement, (iv) any failure of any party to this
Agreement to receive any communication sent, including any telegram, telex,
teletype, telecopy, bank wire, cable, radiogram or telephone message or any
writing, application, notice, report, statement, certificate, resolution,
request, order, consent, letter or other instrument or paper or communication
entrusted to the mails or to a delivery service, or (v) the assets or
liabilities or financial condition or results of operations or business or
creditworthiness of the Borrower.
(c) Reliance. The Agent shall be entitled to act, and shall be fully
protected in acting upon, any telegram, telex, teletype, telecopy, bank wire,
cable or radiogram or any writing, application, notice, report, statement,
certificate, resolution, request, order, consent, letter or other instrument or
paper or communication believed by the Agent in good faith to be genuine and
correct and to have been signed or sent or made by a proper person. The Agent
may consult counsel and shall be entitled to act, and shall be fully protected
in any action taken in good faith, in accordance with advice given by counsel.
The Agent may employ agents and attorneys-in-fact and shall not be liable for
the default or misconduct of any such agents or attorneys-in-fact selected by
the Agent with reasonable care. The Agent shall not be bound to ascertain or
inquire as to the performance or observance of any of the terms, provisions or
conditions of this Agreement or any of the other Loan Documents on the part of
the Borrower or any other party thereto.
11.5 Action on Instructions. The Agent shall be entitled to act or
refrain from acting, and shall be fully protected in acting or refraining from
acting, under this Agreement, the other Loan Documents or any other instrument
or document in connection herewith or
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therewith, in accordance with the instructions of the Required Banks (as such
term is defined in Section 11.6 below) or, in the case of the matters set forth
in items (i) through (viii) of Section 11.13, from all of the Banks.
11.6 Required Banks. For the purposes of this Agreement, the term
"Required Banks" shall mean Banks with aggregate Commitment Percentages equal to
at least 66-2/3% of all Commitment Percentages.
11.7 Action Upon Occurrence of an Event of Default. If an event of
default set forth in Section 8 hereof has occurred, the Banks shall immediately
consult with one another in an attempt to agree upon a mutually acceptable
course of conduct. Failing agreement upon a course of conduct and if the
Required Banks wish to declare an event of default and/or exercise their rights
hereunder, the Agent will exercise the rights of the Banks hereunder as directed
by the Required Banks.
11.8 Indemnification. To the extent the Borrower does not reimburse and
save harmless the Agent according to the terms hereof for and from all costs,
expenses and disbursements in connection herewith, such costs, expenses and
disbursements, shall be borne by the Banks ratably in accordance with their
respective Commitment Percentages. Each Bank hereby agrees on such basis (i) to
reimburse the Agent for such Bank's pro rata share of all such reasonable costs,
expenses and disbursements on request and (ii) to the extent of each such Bank's
pro rata share, to indemnify and save harmless the Agent against and from any
and all losses, obligations, penalties, actions, judgments and suits and other
costs, expenses and disbursements of any kind or nature whatsoever which may be
imposed on, incurred by or asserted against the Agent, other than as a
consequence of gross negligence or willful misconduct on the part of the Agent,
arising out of or in connection with this Agreement, the other Loan Documents or
any other agreement, instrument or document in connection herewith or therewith,
or any request of the Required Banks, including without limitation the
reasonable costs, expenses and disbursements in connection with defending itself
against any claim or liability related to the exercise or performance of any of
its powers or duties under this Agreement, the other Loan Documents, or any of
the other agreements, instruments or documents delivered in connection herewith
or the taking of any action under or in connection with any of the foregoing.
11.9 Agent's Rights as a Bank. With respect to the commitments of the
Agent as a Bank hereunder, and any loans of the Agent to Borrower under this
Agreement, the other Loan Documents and any other agreements, instruments and
documents delivered pursuant hereto, the Agent shall have the same rights and
powers, duties and obligations under this Agreement, the other Loan Documents or
other agreement, instrument or document as any Bank and may exercise such rights
and powers and shall perform such duties and fulfill such obligations as though
it were not the Agent. The Agent may accept deposits from, lend money to, and
generally engage, and continue to engage, in any kind of business with the
Borrower as if it were not the Agent.
11.10 Payment to Banks. Promptly after receipt from the Borrower of
any principal repayment of any Loan, any interest due thereunder, and any other
interest or fees or other amounts due under any of the Loan Documents, the Agent
shall distribute to each Bank in immediately available funds that Bank's
Commitment Percentage of the funds so received, provided that in the event
payments are received by 11:00 a.m., Pittsburgh time, by the Agent with respect
to the Loans and such payments are not distributed to the Banks on the same day
-56-
<PAGE>
received by the Agent, the Agent shall pay the Banks the Federal Funds Rate with
respect to the amount of such payments for each day held by the Agent and not
distributed to the Banks.
11.11 Pro Rata Sharing. All interest and principal payments on the
Notes and all Commitment Fees are to be divided pro rata among the Banks in
accordance with their respective Ratable Share. Any sums obtained from the
Borrower by any Bank by reason of the exercise of its rights of setoff or
banker's lien shall be shared pro rata among the Banks. Nothing in this Section
11.11 shall be deemed to require the sharing among the Banks of collections
specifically relating to any other indebtedness of the Borrower to any Bank.
11.12 Successor Agent. The Agent may resign as Agent upon ninety (90)
days' notice to the Banks and the Borrower. If such notice shall be given, the
Banks shall appoint a successor agent for the Banks, during such ninety (90) day
period, which successor agent shall be reasonably satisfactory to the Borrower,
to serve as agent hereunder and under the several documents. If at the end of
such ninety (90) day period the Banks have not appointed such a successor, the
Agent shall procure a successor reasonably satisfactory to the Banks and the
Borrower, to serve as agent for the Banks hereunder and under the several
documents. Any such successor agent shall succeed to the rights, powers and
duties of the Agent. Upon the appointment of such successor agent or upon the
expiration of such ninety (90) day period (or any longer period to which the
Agent has agreed), the former Agent's rights, powers and duties as Agent shall
be terminated, without any other or further act or deed on the part of such
former Agent or any of the parties to this Agreement. After any retiring Agent's
resignation hereunder as Agent, the provisions of this Article XI shall inure to
the benefit of such retiring Agent as to any actions taken or omitted to be
taken by it while it was Agent under this Agreement.
11.13 Amendments and Waivers. The Required Banks, or the Agent with the
consent in writing of the Required Banks, and the Borrower may, subject to the
provisions of this Section 11.13, from time to time enter into written
supplemental agreements to this Agreement and the other Loan Documents for the
purpose of adding or deleting any provisions or otherwise changing, varying or
waiving in any manner the rights of the Banks, the Agent or the obligor
thereunder or the conditions, provisions or terms thereof or waiving any event
of default thereunder or consenting to an action of the Borrower, but only to
the extent specified in such written agreements; provided, however, that no such
supplemental agreement shall, without the consent of all the Banks:
(i) waive any event of default by the Borrower in any payment of
principal and/or interest due hereunder and under any of the Notes or any
Reimbursement Obligation or other amount due with respect to the Letters of
Credit;
(ii) decrease any interest rate provided for herein;
(iii) change the Termination Date or otherwise extend the maturity of
any obligation hereunder;
(iv) release any guarantor of the Indebtedness, any of the Property
from the Mortgage, any Security Agreement and/or any Financing Statement or any
other collateral described in any Loan Document except in the case of incidental
sales of the Property in the ordinary course of the business of the Borrower;
-57-
<PAGE>
(v) reduce the Commitment Fee;
(vi) increase the maximum principal amount of the Revolving Credit;
(vii) permit the Borrower to assign its rights or duties hereunder or
under any of the other Loan Documents; or
(viii) amend or waive the provisions of this Section 11.13;
Any such supplemental agreement shall apply equally to each of the Banks and
shall be binding upon the Borrower, the Banks, the Agent and all future holders
of the Notes. In the case of any waiver, the Borrower, the Banks and the Agent
shall be restored to their former positions and rights, and any event of default
hereunder or under the other Loan Documents waived shall be deemed to be cured
and not continuing, but no such waiver shall extend to any subsequent or other
event of default hereunder or under the other Loan Documents, or impair any
right consequent thereon.
11.14 Agent's Fees. The Borrower shall pay to the Agent certain fees
(the "Fees") under the terms of a letter among the Borrower and Agent, as
amended from time to time.
11.15 Funding by Branch, Subsidiary or Affiliate.
(a) Notional Funding. Each Bank shall have the right from time to time,
without notice to the Borrower, to deem any branch, subsidiary or affiliate
(which for the purposes of this Section 11.15 shall mean any corporation or
association which is directly or indirectly controlled by or is under direct or
indirect common control with any corporation or association which directly or
indirectly controls such Bank) of such Bank to have made, maintained or funded
any Loan to which the Euro-Rate Option applies at any time, provided that
immediately following (on the assumption that a payment were then due from the
Borrower to such other office), and as a result of such change, the Borrower
would not be under any greater financial obligation pursuant to Section 1.6(i)
than it would have been in the absence of such change. Notional funding offices
may be selected by each Bank without regard to such Bank's actual methods of
making, maintaining or funding the Loans or any sources of funding actually used
by or available to such Bank.
(b) Actual Funding. Each Bank shall have the right from time to time to
make or maintain any Loan by arranging for a branch, subsidiary or affiliate of
such Bank to make or maintain such Loan subject to the last sentence of this
Section 11.15(b). If any Bank causes a branch, subsidiary or affiliate to make
or maintain any part of the Loans hereunder, all terms and conditions of this
Agreement shall, except where the context clearly requires otherwise, be
applicable to such part of the Loans to the same extent as if such Loans were
made or maintained by such Bank, but in no event shall any Bank's use of such a
branch, subsidiary or affiliate to make or maintain any part of the Loans
hereunder cause such Bank or such branch, subsidiary or affiliate to incur any
cost or expenses payable by the Borrower hereunder or require the Borrower to
pay any other compensation to any Bank (including any expenses incurred or
payable pursuant to Section 1.6(i)) which would otherwise not be incurred.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-58-
<PAGE>
WITNESS the due execution hereof the day and year first above written.
WITNESS: ATLAS ENERGY GROUP, INC., an Ohio
corporation
/s/ Bruce M. Wolf By /s/ J.R. O'Mara
- - ------------------------------- --------------------------------
Name: J.R. O'Mara
Title: President and C.E.O.
WITNESS: ATLAS RESOURCES, INC., a
Pennsylvania corporation
/s/ Bruce M. Wolf By /s/ J.R. O'Mara
- - ------------------------------- --------------------------------
Name: J.R. O'Mara
Title: President and C.E.O.
WITNESS: TRANSATCO CORPORATION, an Ohio
corporation
/s/ Bruce M. Wolf By /s/ J.R. O'Mara
- - ------------------------------- --------------------------------
Name: J.R. O'Mara
Title: President and C.E.O.
WITNESS: ATLAS ENERGY CORPORATION, an Ohio
corporation
/s/ Bruce M. Wolf By /s/ J.R. O'Mara
- - ------------------------------- --------------------------------
Name: J.R. O'Mara
Title: President and C.E.O.
[SIGNATURES CONTINUED ON NEXT PAGE]
-59-
<PAGE>
[CONTINUATION OF SIGNATURES TO NINTH AMENDED
AND RESTATED LOAN AGREEMENT]
WITNESS: MERCER GAS GATHERING, INC., a
Pennsylvania corporation
/s/ Bruce M. Wolf By /s/ J.R. O'Mara
- - ------------------------------- --------------------------------
Name: J.R. O'Mara
Title: President and C.E.O.
WITNESS: ATLAS GAS MARKETING, INC., a
Pennsylvania corporation
/s/ XXXXXXXXXX By /s/ Bruce M. Wolf
- - ------------------------------- --------------------------------
Name: Bruce M. Wolf
Title: President
WITNESS: PENNSYLVANIA INDUSTRIAL ENERGY,
INC., a Pennsylvania corporation
/s/ Bruce M. Wolf By /s/ J.R. O'Mara
- - ------------------------------- --------------------------------
Name: J.R. O'Mara
Title: President and C.E.O.
WITNESS: THE ATLAS GROUP, INC. (f/k/a "AEG
HOLDINGS, INC."), a Pennsylvania
corporation
/s/ Bruce M. Wolf By /s/ J.R. O'Mara
- - ------------------------------- --------------------------------
Name: J.R. O'Mara
Title: President and C.E.O.
[SIGNATURES CONTINUED ON NEXT PAGE]
-60-
<PAGE>
[CONTINUATION OF SIGNATURES TO NINTH AMENDED
AND RESTATED LOAN AGREEMENT]
WITNESS: AED INVESTMENTS, INC., a Delaware
corporation
/s/ XXXXXXXXXX By /s/ Bruce M. Wolf
- - ------------------------------- --------------------------------
Name: Bruce M. Wolf
Title: President
WITNESS: ARD INVESTMENTS, INC., a Delaware
corporation
/s/ XXXXXXXXXX By /s/ Bruce M. Wolf
- - ------------------------------- --------------------------------
Name: Bruce M. Wolf
Title: President
WITNESS: AIC, INC., a Delaware corporation
/s/ XXXXXXXXXX By /s/ Bruce M. Wolf
- - ------------------------------- --------------------------------
Name: Bruce M. Wolf
Title: President
WITNESS: BANK:
PNC BANK, NATIONAL ASSOCIATION, as
Agent and as Initial Bank
/s/ XXXXXXXXXX By /s/ Thomas Majeski
- - ------------------------------- --------------------------------
Name: Thomas Majeski
Title: Vice President
Initial Commitment Percentage: 100%
-61-
<PAGE>
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
Fidelity Leasing, Inc.
with
First Union National Bank, as Agent
and
Each of the Financial Institutions Now or Hereafter
Shown on the Signature Pages hereof as Lenders
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 1. DEFINITIONS AND INTERPRETATION........................................................................2
1.1 Terms Defined...............................................................................2
1.2 Accounting Principles......................................................................12
SECTION 2. THE LOANS............................................................................................12
2.1 Credit Facility - Description..............................................................12
2.2 Advances, Conversions and Payments.........................................................15
2.3 Preconditions to Advances and Assignment of Leases and Leased Property.....................17
2.4 Credit Facility Interest...................................................................19
2.5 Additional Interest Provisions.............................................................23
2.6 Fees.......................................................................................24
2.7 Prepayments................................................................................25
2.8 Use of Proceeds............................................................................27
2.9 Capital Adequacy...........................................................................27
SECTION 3. COLLATERAL...........................................................................................27
3.1 Description................................................................................27
3.2 Lien Documents.............................................................................27
3.3 Other Actions..............................................................................28
3.4 Searches...................................................................................28
3.5 Filing Security Agreement..................................................................29
3.6 Power of Attorney..........................................................................29
SECTION 4. CLOSING AND CONDITIONS PRECEDENT TO ADVANCES.........................................................29
4.1 Resolutions, Opinions, and Other Documents.................................................30
4.2 Absence of Certain Events..................................................................31
4.3 Warranties and Representations at Closing..................................................31
4.4 Compliance with this Agreement.............................................................31
4.5 Officers' Certificate......................................................................32
4.6 Closing....................................................................................32
4.7 Non-Waiver of Rights.......................................................................32
SECTION 5. REPRESENTATIONS AND WARRANTIES.......................................................................32
5.1 Corporate Organization and Validity........................................................32
5.2 Places of Business.........................................................................33
5.3 Pending Litigation.........................................................................33
5.4 Title to Collateral........................................................................34
5.5 Governmental Consent.......................................................................34
5.6 Taxes......................................................................................34
5.7 Financial Statements.......................................................................34
5.8 Full Disclosure............................................................................35
5.9 Subsidiaries...............................................................................35
5.10 Guarantees.................................................................................35
5.11 Government Regulations, etc................................................................35
5.12 Names......................................................................................36
5.13 Other Associations.........................................................................37
5.14 Environmental Matters......................................................................37
5.15 Capital Stock..............................................................................37
5.16 Solvency...................................................................................38
5.17 Leases and Leased Property.................................................................38
SECTION 6. BORROWER'S AFFIRMATIVE COVENANTS.....................................................................42
6.1 Payment of Taxes and Claims................................................................42
6.2 Maintenance of Properties and Corporate Existence..........................................42
6.3 Business Conducted.........................................................................44
6.4 Litigation.................................................................................44
6.5 Taxes......................................................................................44
6.6 Bank Accounts..............................................................................44
6.7 Warranties for Future Advances.............................................................44
6.8 Financial Covenants........................................................................45
6.9 Change of Ownership Interests..............................................................45
6.10 Financial and Business Information.........................................................46
6.11 Officers' Certificates.....................................................................47
6.12 Inspection.................................................................................48
6.13 Tax Returns and Reports....................................................................48
6.14 Material Adverse Developments..............................................................48
6.15 Places of Business.........................................................................48
6.16 Sale of Collateral.........................................................................48
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PAGE
SECTION 7. BORROWER'S NEGATIVE COVENANTS:.......................................................................49
7.1 Merger, Consolidation, Dissolution or Liquidation..........................................49
7.2 Liens and Encumbrances.....................................................................49
7.3 Negative Pledge............................................................................49
7.4 Transactions With Affiliates or Subsidiaries...............................................50
7.5 Guarantees.................................................................................50
7.6 Indebtedness...............................................................................50
7.7 Use of Lenders' Name.......................................................................50
SECTION 8. DEFAULT..............................................................................................51
8.1 Events of Default..........................................................................51
8.2 Cure.......................................................................................53
8.3 Rights and Remedies on Default.............................................................54
8.4 Nature of Remedies.........................................................................55
8.5 Set-Off....................................................................................55
9.1 Appointment and Authorization..............................................................56
9.2 General Immunity...........................................................................56
9.3 Consultation with Counsel..................................................................56
9.4 Documents..................................................................................56
9.5 Rights as a Bank...........................................................................57
9.6 Responsibility of Agent....................................................................57
9.7 Collections and Disbursements..............................................................58
9.8 Indemnification............................................................................59
9.9 Expenses...................................................................................59
9.10 No Reliance................................................................................60
9.11 Reporting..................................................................................60
9.12 Removal of Agent...........................................................................60
9.13 Action on Instructions of Lenders..........................................................61
9.14 Several Obligations........................................................................61
9.15 Consent of Banks...........................................................................61
9.16 Participations and Assignments.............................................................63
SECTION 10. MISCELLANEOUS.......................................................................................64
10.1 GOVERNING LAW..............................................................................64
10.2 Integrated Agreement.......................................................................64
10.3 Waiver.....................................................................................64
10.4 Time.......................................................................................65
10.5 Expenses of Agent..........................................................................65
10.6 Brokerage..................................................................................65
10.7 Notices....................................................................................65
10.8 Headings...................................................................................66
10.9 Survival...................................................................................66
10.10 Successors and Assigns.....................................................................67
10.11 Counterparts...............................................................................67
10.12 Modification...............................................................................67
10.13 Signatories................................................................................67
10.14 Third Parties..............................................................................67
10.15 Discharge of Taxes, Borrower's Obligations, Etc............................................67
10.16 Most Favored Lenders.......................................................................68
10.17 Consent to Jurisdiction....................................................................68
10.18 Waiver of Jury Trial.......................................................................68
10.19 Information to Participant.................................................................68
</TABLE>
<PAGE>
EXHIBIT LIST
Exhibit 2.1(b) -- Form of Revolving Credit Note
Exhibit 2.1(c) -- Form of Term Note
Exhibit 2.1(e) -- Form of Borrowing Base Certificate
Exhibit 2.3(b)(ii) -- Form of Assignment Agreement
Exhibit 5.1 -- Borrower's States of Qualifications
Exhibit 5.2 -- Places of Business
Exhibit 5.3 -- Judgments, Proceedings, Litigation and
Orders
Exhibit 5.9 -- Subsidiaries and Affiliates
Exhibit 5.10 -- Existing Guaranties, Investments and
Borrowings, Leases and Employment Agreements
Exhibit 5.12(a) -- Schedule of Names
Exhibit 5.12(b) -- Trademarks, Patents and Copyrights
Exhibit 5.13 -- Other Associations
Exhibit 5.14 -- Environmental Matters
Exhibit 5.15 -- Capital Stock
Exhibit 5.17 -- Form of Lease
Exhibit 6.11 -- Officers' Certificates
<PAGE>
SCHEDULES
Schedule A -- Schedule and Addresses of Lenders
<PAGE>
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
This Amended and Restated Loan and Security Agreement ("Agreement") is
dated this ____ day of September, 1998, by and among Fidelity Leasing, Inc., a
Pennsylvania corporation ("Borrower"), First Union National Bank, a national
banking association in its capacity as agent ("Agent") and as lender, and the
financial institutions listed on Schedule A attached hereto and made a part of
this Agreement (as such Schedule may be amended, modified or replaced from time
to time), in their capacity as lenders (singly, each is a "Lender" and
collectively, all are "Lenders").
BACKGROUND
A. On December 24, 1996, Borrower entered into a certain Loan and
Security Agreement among Borrower, CoreStates Bank, N.A. ("CoreStates"), as
agent and as a lender and First Union National Bank ("First Union") as co-agent
and as a lender, as amended from time to time ("Existing Loan Agreement") and
certain other instruments, documents and agreements related thereto, all as
amended from time to time (collectively with the Existing Loan Agreement,
"Existing Loan Documents") pursuant to which certain credit facilities were
extended by CoreStates and First Union to Borrower as set forth therein.
B. CoreStates has merged with First Union with First Union being the
surviving entity and the owner of all of the right, title and interest of the
lenders under the Existing Loan Documents.
C. First Union has agreed to assign to European American Bank a portion
of its interest in the Loans outstanding under the Existing Loan Documents as
well as a portion of its Pro Rata Percentage of the Credit Facility established
thereunder.
D. Borrower wishes, and Agent and Lenders agree, to hereby amend and
restate the Existing Loan Agreement. Lenders are willing to make loans and grant
extensions of credit to Borrower under the terms and provisions hereinafter set
forth.
<PAGE>
- 7 -
E. The parties desire to define the terms and conditions of their
relationship to writing.
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
SECTION 1. DEFINITIONS AND INTERPRETATION
1.1 Terms Defined: As used in this Agreement, the following terms have
the following respective meanings:
Account - Any right to payment for goods sold or leased or for
services rendered which is not evidenced by an instrument or chattel paper,
whether or not it has been earned by performance.
Adjusted Debt to Tangible Net Worth Ratio - At any time means
the ratio of (i) total Liabilities less Nonrecourse Debt to (ii) Borrower's
Tangible Net Worth less an amount equal to fifty percent (50%) of all restricted
cash, restricted receivables and other collateral pledged or sold in connection
with Securitization Transaction(s) (it being understood that for the purposes
hereof, the asset identified on Borrower's balance sheet as of June 30, 1998 as
$14,000,000 in notes secured by equipment leases shall not be considered
restricted receivables provided no additional assets shall be included therein).
Adjusted LIBOR Rate - As applied to a LIBOR Based Rate Loan,
for any LIBOR Interest Period, the rate per annum (rounded upwards, if
necessary, to the next 1/16 of 1%) determined pursuant to the following formula:
Adjusted LIBOR Rate = LIBOR Rate
(1 - Reserve Percentage)
<PAGE>
For purposes hereof, "LIBOR Rate" shall mean the arithmetic average of the rates
of interest per annum (rounded upwards, if necessary to the next 1/16 of 1%) at
which the Agent is offered deposits of United States dollars in the London
Interbank market on or about eleven o'clock (11:00) a.m. London time two (2)
Business Days prior to the commencement of such LIBOR Interest Period on amounts
substantially equal to such LIBOR Based Rate Loan as to which the Borrower may
elect the LIBOR Based Rate to be applicable with a maturity of comparable
duration to the LIBOR Interest Period selected by the Borrower for such LIBOR
Based Rate Loan.
Administration Fee - Section 2.6(b).
Advance(s) - Any monies advanced or credit extended to
Borrower by any Lender under the Credit Facility.
Affiliate - As to any Person, each other Person that directly,
or indirectly, through one or more intermediaries, controls or is controlled by,
or is under common control with, the Person in question.
Agreement - This Amended and Restated Loan and Security
Agreement, as it may hereafter be amended, supplemented or replaced from time to
time.
Assignment Agreement - Section 2.3(b)(ii).
Authorized Officer - Any officer or partner of Borrower
authorized by specific resolution of Borrower to request Advances as set forth
in the incumbency certificate referred to in Section 4.1(d) of this Agreement.
Base Rate - On any date of determination, a per annum rate of
interest which is 225 basis points (in the case of Term Loans) or 175 basis
points (in the case of Revolving Credit Loans) in excess of the CD Rate, on such
date.
Base Rate Loans - Any portion of Loans on which interest
accrues at the Base Rate.
Books and Records - All of Borrower's original ledger cards,
payment schedules, credit applications, Contract Rights, liens, security
instruments, guarantees and other General Intangibles relating in any way to the
Leases or Leased Property.
<PAGE>
Borrowing Base - As of any date of determination, an amount
equal to the lesser of:
(i) the Maximum Credit Limit, and
(ii) 80% of the sum of the gross Lease Receivable balance
corresponding to each Eligible Lease (net of any deposits or other advance cash
receipts).
Business Day - Any day that is not a Saturday or Sunday or day
on which Agent or any Lender is required or permitted to close.
CD Rate - On any date of determination, that rate quoted in
the Money Rate Section of The Wall Street Journal on such date, as the average
of top rates given by major New York banks on primary new issues of certificates
of deposit with a maturity of six (6) months. If for any reason The Wall Street
Journal is unavailable, a CD Rate shall be as quoted in another publication of
comparable standing.
Closing - Section 4.6.
Closing Date - Section 4.6.
Collateral - All now or hereafter existing Leases and Leased
Property, Books and Records and all cash and noncash proceeds, thereof,
including insurance proceeds.
Contract Rights - All rights under contracts not yet earned by
performance.
Credit Facility - Section 2.1(a).
Current Term - The Initial Term during the period of the
Initial Term, and any renewal or extended term during the term thereof, if
Lenders elect, in their sole discretion, to renew or extend the Credit Facility.
<PAGE>
Defaulted Lease - Any Lease where the Lease or Leased Property
associated therewith fails, at any time, to comply with all of the
representations and warranties set forth in Section 5.17 below.
Defaulting Lender - Section 2.2(b)(iii)(C).
Default Rate - Section 2.5(b).
Distribution -
(1) Dividends or other distributions on capital stock of
Borrower; and
(2) The redemption, repurchase or acquisition of such stock or
of warrants, rights or other options to purchase such stock.
<PAGE>
Eligible Lease(s) - Each Lease which meets all of the
following specifications: (1) is not subject to any Lien, security interest or
prior assignment other than Agent's security interest for the benefit of Lenders
and the rights of the Lessees thereunder; (2) is a valid and enforceable Lease,
representing the undisputed obligation of the Lessee, with rentals due
thereunder not more than 61 days contractually past due; (3) is not subject to
any defense, set off, counterclaim, deduction, or allowance or adjustment; (4)
unless otherwise agreed to in writing by Agent, provides for the lease of Leased
Property with an aggregate invoice price of less than $1,000,000 except in the
case of Leases to Investment Grade Lessees which may provide for the lease of
Leased Property with an aggregate invoice price of up to $1,500,000; (5)
provides for the lease of Leased Property which has not been returned, rejected,
lost or damaged; (6) arose in the ordinary course of Borrower's business; (7)
Borrower has not received notice of bankruptcy, receivership, reorganization,
insolvency or material adverse change in the financial condition of the Lessee;
(8) the Lessee is not a Subsidiary or Affiliate of Borrower; (9) is not a
Defaulted Lease and complies with all general warranties set forth in Section
5.17 hereof; (10) does not have an initial stated term in excess of sixty (60)
months, provided, however, that lease(s) with an initial stated term of up to 72
months may be considered Eligible Leases so long as the aggregate Lease
Receivable(s) of all such Lease(s) shall, at no time, exceed an amount which is
ten (10%) percent of the outstanding principal balance of the Loans; (11) has
not, in the case of Revolving Credit Loans, been pledged to Agent and/or Lenders
for a period of more than twelve (12) months; (12) contains a provision whereby
the Lessee agrees not to assert any claim or reduction, counterclaim, setoff,
recoupment, or any other claim, allowance or adjustment against any assignee of
Borrower; and(13) is a Lease with a Lease Receivable, which together with all
other Lease Receivables owed by the same Lessee, does not exceed $1,000,000 in
the aggregate.
Equipment - The meaning ascribed thereto in the Pennsylvania
Uniform Commercial Code.
ERISA - The Employee Retirement Income Security Act of 1974,
as the same may be amended, from time to time.
Event of Default - Section 8.1.
Expenses - Section 10.5.
Federal Funds Rate - means on any day, the effective rate of
interest charged by the Federal Reserve Bank of Philadelphia for overnight
Federal Funds in Philadelphia as reported by the Federal Reserve Bank in
Philadelphia for such day.
Financial Statements - The financial statements of Borrower
prepared in accordance with GAAP.
Fixed Charge Coverage Ratio - The ratio of Borrower's
operating cash flow (income before taxes, depreciation, amortization and
extraordinary items, plus interest expense) to the sum of (i) interest expense;
(ii) mandatory principal payments and (iii) an amount equal to twenty-five (25%)
percent of the average daily outstanding principal balance of the Revolving
Credit Loans.
GAAP - Generally accepted accounting principles as in effect
on the Closing Date, as may be amended from time to time.
<PAGE>
General Intangibles - The meaning ascribed thereto in the
Pennsylvania Uniform Commercial Code and shall include, but not be limited to,
all contract rights (including without limitation, all rights under remarketing
agreements), chattel paper, documents, instruments, books, records, ledgers,
journals, check books, print outs, blue prints, designs, computer programs,
computer tapes, punch cards, formulae, drawings, customer lists, choses in
action, claims, goodwill, designs and plans, licenses, license agreements, tax
and all other types of refunds, returned and unearned insurance premiums, rights
and claims under insurance policies, patents, patent application, trademarks,
trade names, trade styles, trademark applications and copyrights.
Good Business Day - Any Business Day when banks in
Philadelphia, Pennsylvania and London, England are open for business.
Guarantors - Resource America, Inc., Resource Leasing, Inc.,
FL Partnership Management, Inc. and FL Financial Services, Inc.
Guaranty - Section 4.1(l).
Hazardous Substance - Section 5.14.
Initial Term - Section 2.1(d).
Inventory - The meaning ascribed thereto in the Pennsylvania
Uniform Commercial Code and shall include all additions, improvements,
accessions, attachments, upgrades, replacements and substitutions thereto or
therefor.
Investment Grade Lessee - A Lessee with a public debt rating
from Moody's Investor Service, Inc. of at least Baa or from Standard & Poor's
Rating Services of at least BBB or an equivalent rating as approved by Agent.
<PAGE>
Lease(s) - All of Borrower's Accounts, Documents, General
Intangibles, Instruments and Chattel Paper arising in connection with each and
every equipment lease (whether a "true lease" or a lease intended as security)
and/or schedule to a master lease agreement, assigned to Lenders and/or Agent
for the benefit of Lenders, or now or hereafter designated on any schedule as
being assigned to Lenders and/or Agent for the benefit of Lenders. The term
"Lease" includes (i) all payments to be made thereunder, (ii) all rights of
Borrower therein, and (iii) any and all amendments, renewals, extensions or
guarantees thereof.
Lease Receivable(s) - With respect to each Lease, the gross
value of the contractual firm term lease payments plus the absolute and
unconditional obligation, if any, of the corresponding Lessee to make a
payment(s) at the end of the stated Lease term.
Leased Property - Any personal property leased or to be leased
or financed by Borrower pursuant to a Lease; the term "Leased Property" includes
all of Borrower's Inventory or Equipment so leased and any and all additions,
improvements, accessions, attachments, upgrades, replacements and substitutions
thereto and therefor.
Lessee - The lessee(s) or obligor(s) responsible for payment
and/or performance under a Lease.
Liabilities - All liabilities of every kind of Borrower and
its Subsidiaries as would be shown on a consolidated financial statement of
Borrower prepared in accordance with GAAP, and all contingent and unmatured
obligations of Borrower and its Subsidiaries pursuant to any and all guarantee,
surety or similar type agreements relating to the debts of Persons outside of
the consolidated group.
LIBOR Based Rate - A rate of interest determined by reference
to the Adjusted LIBOR Rate.
LIBOR Based Rate Loan - Any portion of the Revolving Credit
Loans or any Term Loan on which interest accrues at the LIBOR Based Rate.
LIBOR Based Revolving Loan Rate - The Adjusted LIBOR Rate plus
150 basis points.
<PAGE>
LIBOR Market Index Rate - For any day, is the rate (rounded to
the next higher 1/100 of 1%) for one (1) month U.S. dollar deposits as reported
on Telerate page 3750 as of 11:00 a.m. London time, for such day, provided if
such day is not a Good Business Day, the immediately preceding Good Business Day
(or if not so reported, then as determined by Agent from another recognized
source or interbank quotation plus 150 basis points).
LIBOR Market Index Rate Loan - Any portion of the Revolving
Credit Loans or any Term Loan on which interest accrues at the LIBOR Market
Index Rate.
LIBOR Based Term Loan Rate - The Adjusted LIBOR Rate plus 225
basis points.
LIBOR Interest Period - Section 2.4(c)(i).
Lien - Any interest of any kind or nature in property securing
an obligation owed to, or a claim of any kind or nature in property by, a Person
other than the owner of the Property, whether such interest is based on the
common law, statute, regulation or contract, and including, but not limited to,
a security interest or lien arising from a mortgage, encumbrance, pledge,
conditional sale or trust receipt, a lease, consignment or bailment for security
purposes, a trust, or an assignment.
Loans - All Revolving Credit Loans and Term Loans.
Loan Documents - This Agreement, the Revolving Credit Notes,
the Term Notes, the Guaranty and all agreements, instruments and documents
executed and/or delivered from time to time in connection therewith, as amended
or replaced from time to time.
Majority Lenders - At any time, Lenders holding Pro Rata
Percentages aggregating at least fifty-one (51%) percent of the aggregate amount
outstanding under the Credit Facility at such time; provided, however, that if
there is no outstanding amount under the Credit Facility, the Majority Lenders
shall be determined by those Lenders holding fifty-one(51%) percent of the
Maximum Credit Limit.
<PAGE>
Maturity Date - The later of (i) March 31, 2000 or (ii) the
last day of the then Current Term.
Maximum Credit Limit - The sum of the Pro Rata Shares which at
the time of Closing equals Twenty Million Dollars ($20,000,000).
Net Income - The consolidated net income after taxes of
Borrower as such would appear on Borrower's consolidated statement of income,
prepared in accordance with GAAP.
Net Worth - At any time means the amount of stockholders
equity on a consolidated basis plus Borrower's Subordinated Indebtedness.
Nonrecourse Debt - All Liabilities of Borrower which are
non-recourse in nature and treated as non-recourse obligations on Borrower's
Financial Statements. Non-recourse Debt shall not include any Liabilities which
are partially recourse and may be off balance sheet.
Obligations - All existing and future liabilities and
obligations of every kind or nature at any time owing by Borrower to Lenders (or
any of them)and/or to Agent, whether joint or several, related or unrelated,
primary or secondary, matured or contingent, due or to become due, and whether
principal, interest, fees or Expenses, including, without limitation,
obligations in respect of the Revolving Credit Loans and Term Loans and any
extensions, modifications, substitutions, increases and renewals thereof, and
the payment of all reasonable amounts advanced by Agent (or any Lender after the
occurrence of an Event of Default) to preserve, protect and enforce rights
hereunder and in the Collateral and all Expenses incurred by Agent (or any
Lender after the occurrence of an Event of Default) in connection therewith.
Pennsylvania Uniform Commercial Code or UCC - The Uniform
Commercial Code as enacted in Pennsylvania, as the same shall be amended from
time to time.
<PAGE>
Person - An individual, partnership, corporation, limited
liability corporation, trust, unincorporated association or organization, joint
venture or any other entity.
Present Value - The value, from time to time, as of the date
of determination, of the remaining Lease Receivables due under a Lease,
discounted using the applicable interest rate as set forth herein.
Pro Rata Percentage - Section 2.1(a)(iii).
Pro Rata Share - Section 2.1(a)(iii).
Property - Any interest of Borrower in any kind of property or
asset, whether real, personal or mixed, or tangible or intangible.
Regulation D - Regulation D of the Board of Governors of the
Federal Reserve System, comprising Part 204 of Title 12, Code of Federal
Regulations, as amended, and any successor thereto.
Reserve Percentage - For a Lender, on any day, that percentage
(expressed as a decimal) which is in effect on such day, prescribed by the Board
of Governors of the Federal Reserve System (or any successor or any other
banking authority to which a Lender is subject, including any board or
governmental or administrative agency of the United States or any other
jurisdiction to which a Lender is subject), for determining the maximum reserve
requirement (including without limitation any basic, supplemental, marginal or
emergency reserves) for (a) deposits of United States dollars or (b)
Eurocurrency liabilities as defined in Regulation D, in each case used to fund a
LIBOR Based Rate Loan subject to a LIBOR Based Rate. The Adjusted LIBOR Rate
shall be adjusted automatically on and as of the effective day of any change in
the Reserve Percentage.
Revolving Credit Loans - Section 2.1(a).
Revolving Credit Notes - Section 2.1(b).
<PAGE>
Securitization Transaction - Any transaction for which Agent
has received 30 days prior written notice, using, in part, leases or leased
property to secure notes issued by Borrower or a special purpose subsidiary of
Borrower and in connection with which, Borrower will be subject to no recourse
or limited recourse arising out of a servicing agreement.
Stock Pledge Agreements - Section 4.1(m).
Subordinated Indebtedness - All indebtedness which is
subordinate in all respects to the Obligations pursuant to a subordination
agreement acceptable to Agent in its sole discretion.
Subordination Agreement - Section 4.1(n).
Subsidiary - Any corporation more than fifty percent (50%) of
whose voting stock is legally and beneficially owned by Borrower or owned by a
corporation more than fifty percent (50%) of whose voting stock is legally and
beneficially owned by Borrower.
SuperMajority Lenders - At any time, Lenders holding Pro Rata
Percentages aggregating at least sixty-six and two-thirds (66-2/3%) percent of
the aggregate amount outstanding under the Credit Facility at such time;
provided, however, that if there is no outstanding amount under the Credit
Facility, the SuperMajority Lenders shall be determined by those Lenders holding
sixty-six and two-thirds (66-2/3%) percent of the Maximum Credit Limit.
Tangible Net Worth - Borrower's Net Worth less assets which
would be classified as intangible on a balance sheet prepared in accordance with
GAAP including, without limitation, trademarks, goodwill, deferred closing
costs, loans to shareholders and Affiliates and "start-up" costs except Borrower
may include up to $300,000 worth of intangible assets representing certain
organizational costs and deferred taxes paid for by Borrower prior to September
30, 1996.
Term Loan - Section 2.1(a).
<PAGE>
Term Notes - Section 2.1(c).
Unmatured Event of Default - An event or condition which, with
the passage of time, the giving of notice, or both, would become an Event of
Default.
Unused Line Fee - Section 2.6(a).
1.2 Accounting Principles: Where the character or amount of any asset
or liability or item of income or expense is required to be determined or any
consolidation or other accounting computation is required to be made for the
purposes of this Agreement, this shall be done in accordance with GAAP, to the
extent applicable, except as otherwise expressly provided in this Agreement.
SECTION 2. THE LOANS
2.1 Credit Facility - Description:
<PAGE>
(a) (i) Subject to the terms and conditions of this Agreement,
each Lender, severally, hereby establishes for the benefit of Borrower, a credit
facility (collectively referred to as "Credit Facility") which shall include
Advances extended by Lenders to or for the benefit of Borrower from time to time
hereunder in the form of revolving credit loans ("Revolving Credit Loans") or
term loans ("Term Loans"). The aggregate outstanding principal amount of all
Loans, at any time, shall not exceed the Borrowing Base. Subject to such
limitation, the outstanding balance of all Revolving Credit Loans may fluctuate
from time to time, to be reduced by repayments made by Borrower and to be
increased by future Revolving Credit Loans which may be made by Lenders. If the
aggregate outstanding amount of all Loans at any time exceeds the Maximum Credit
Limit, Borrower shall immediately repay such excess in full in accordance with
Section 2.7. If the aggregate outstanding amount of all Loans exceeds the
Borrowing Base, Borrower shall within ten (10) days of such occurrence, either
(x) repay such excess in full or (y) pledge additional Eligible Leases in
accordance with the terms hereof. The obligations of Borrower under the Credit
Facility and this Agreement shall at all times be absolute and unconditional.
Advances hereunder shall not exceed the lesser of (x) 95% of the original
invoice amount (net of "soft costs") for the Leased Property being financed with
the proceeds of the applicable Advance or (y) $500,000 or, in the case of
Advances to finance Leases to Investment Grade Lessees, $1,000,000.
(ii) Subject to the terms and conditions of this
Agreement, and provided that no Event of Default or Unmatured Event of Default
has occurred hereunder, Borrower shall have the option to have any Advance under
the Credit Facility initially be a Revolving Credit Loan or a Term Loan and
Borrower may at any time, in accordance with the terms hereof, convert a
Revolving Credit Loan to a Term Loan. In no event shall the initial principal
amount of any Term Loan be less than $2,000,000 or any Revolving Credit Loan be
less than $500,000. At no time shall Borrower have more than five (5) Term Loans
outstanding.
(iii) Subject to the terms and conditions of this
Agreement, each Lender severally
agrees to lend to Borrower an amount equal to such Lender's respective
percentage (as to each Lender, the percentage of the Credit Facility set forth
opposite its name on Schedule "A" attached hereto and made a part hereof and
referred to as its "Pro Rata Percentage") of the Advance requested by Borrower.
The aggregate outstanding Loans by each Lender shall not exceed the respective
amounts ("Pro Rata Shares") set forth opposite such Lender's name on Schedule
"A".
<PAGE>
(b) At Closing, Borrower shall execute and deliver its
promissory note to each Lender for the total principal amount of such Lender's
Pro Rata Share (collectively as may be amended, modified or replaced from time
to time, the "Revolving Credit Notes"). The Revolving Credit Notes shall
evidence Borrower's absolute and unconditional obligation to repay such
Lender(s) for all Revolving Credit Loans made by such Lender(s) under the Credit
Facility, with interest as herein and therein provided. Each and every Revolving
Credit Loan under the Credit Facility shall be deemed evidenced by the Revolving
Credit Notes, which are deemed incorporated herein by reference and made a part
hereof. All Revolving Credit Notes shall be substantially in the form set forth
in Exhibit "2.1(b)" attached hereto and made a part hereof.
(c) In the event Borrower requests any Advance to initially be
a Term Loan, or at any time a Revolving Credit Loan is converted to a Term Loan,
Borrower shall execute and deliver its promissory note to each Lender for the
total principal amount of such Lender's Pro Rata Percentage of such Term Loan
(collectively as may be amended, modified or replaced from time to time, the
"Term Notes"). The Term Notes shall evidence Borrower's absolute and
unconditional obligation to repay such Lender for the Term Loan made by such
Lender under the Credit Facility, with interest as herein and therein provided.
Each and every Term Loan under the Credit Facility shall be evidenced by
separate Term Notes, which shall be deemed incorporated herein by reference and
made a part hereof. All Term Notes shall be substantially in the form set forth
in Exhibit "2.1(c)" attached hereto and made a part hereof.
(d) The term ("Initial Term") of the Credit Facility shall
expire on March 31, 2000. The Credit Facility may, nonetheless, be renewed at
the end of the then Current Term in Lenders' sole discretion, for additional
eighteen(18) month periods. Borrower's request for such renewal must be made at
least six (6) months prior to the expiration of the then Current Term. After the
Maturity Date, no further Advances shall be available from Lenders.
(e) Borrower shall deliver, at least monthly on the first
Business Day of each month, and with each borrowing request, unless Agent
requests more frequent delivery, a Borrowing Base Certificate in the form of
Exhibit 2.1(e) attached hereto and made a part hereof, executed by an Authorized
Officer, evidencing the availability under the Borrowing Base and compliance
with the respective sublimits.
<PAGE>
(f) Borrower hereby confirms and acknowledges that, as of
September 28, 1998, the outstanding principal balance of all Loans, advances and
extensions of credit made by the Bank under the Existing Loan Documents is $0
($0 for Revolving Credit Loans and $0 for Term Loans) and such amount is owing
without defense, setoff, counterclaim, discount, recoupment or charge of any
kind by Borrower and shall be considered as Loans for all purposes hereunder as
though such Loans, advances and extensions of credit had been originally made
under this Agreement.
2.2 Advances, Conversions and Payments:
(a) Except to the extent otherwise set forth in this
Agreement, all payments of principal and of interest on the Credit Facility, the
Unused Line Fee, the Administration Fee, the Expenses, and all other charges and
any other Obligations of Borrower hereunder, shall be made to Agent at its main
Philadelphia banking office First Union National Bank, 1339 Chestnut Street,
Philadelphia, Pennsylvania, in United States dollars, in immediately available
funds. Agent, on behalf of all Lenders, shall have the unconditional right and
discretion to make an Advance under the Credit Facility in the form of a
Revolving Credit Loan (subject to availability existing under the Borrowing
Base) to pay, and/or to charge Borrower's operating account with Agent for all
of Borrower's Obligations as they become due from time to time under this
Agreement including, without limitation, interest, principal, fees and
reimbursement of Expenses.
(b) (i) Advances which may be made by Lenders from time to
time under the Credit Facility shall be made available by crediting such
proceeds to Borrower's operating account with Agent.
(ii) All Advances requested by Borrower and all requests
by Borrower to convert Revolving Credit Loans to Term Loans must be requested by
11:00 A.M. Eastern time, three (3) Business Days prior to the date of such
requested Advance or conversion. All requests or confirmation of requests for an
Advance or conversion are to be in writing and may be sent by telecopy or
facsimile transmission provided that Agent shall have the right to require that
receipt of such request not be effective unless confirmed via telephone with
Agent.
<PAGE>
(iii) A. Upon receiving a request for an Advance or
conversion in accordance with subparagraph (ii) above, as soon as reasonably
practical thereafter, Agent shall notify all Lenders of the request. Each Lender
shall advance its applicable Pro Rata Percentage of the requested Advance to
Agent by remitting federal funds, immediately available, to Agent pursuant to
Agent's instructions prior to 11:00 A.M. Eastern Time on the scheduled date of
the Advance. Subject to satisfaction of the terms and conditions hereof, Agent
shall make the requested Advance available to Borrower by crediting such amount
to Borrower's operating account with Agent as soon as is reasonably practical
thereafter on the day the requested Advance is to be made. In lieu of the
foregoing, Agent may, in its discretion, fund the Pro Rata Percentage of such
Advance on behalf of any one or more Lenders (unconditionally and absolutely
obligating such affected Lender(s) to reimburse Agent in full without deduction
or setoffs for its portion of such Advance) with a settlement of the pro rata
percentages of such Advances of each Lender on the following Business Day under
such procedures as Agent may establish.
B. Neither Agent nor any other Lender shall be
obligated, for any reason whatsoever, to advance the share of any other Lender.
If such corresponding amount is not made available to Agent by such Lender on
the date the Advance is made and Agent elects (at its discretion, without any
obligation to do so) to make such Lender's Pro Rata Percentage of the Advance,
Agent shall be entitled to recover such amount on demand from such Lender
together with interest at the per annum rate equal to the Federal Funds Rate in
respect of the first two days and at the Base Rate in respect of each day
thereafter during the period commencing 2:00 P.M. Eastern Time on the date of
such Advance and ending on (but excluding) the date Agent recovers such amount.
Agent shall also be entitled to recover any and all losses and damages
(including, without limitation, attorneys' fees and costs) from any Lender
failing to so advance upon demand of Agent. Agent may set off the obligations of
a Lender under this paragraph against any distributions or payments of the
Obligations which Agent would otherwise make available to such Lender.
<PAGE>
C. To the extent and during the time period in which
any Lender fails to provide or delays providing its respective payment to Agent
pursuant to subsections A or B above (any such Lender being referred to, during
such period, as a "Defaulting Lender"), such Lender's percentage of all payments
of the Obligations (but not its Pro Rata Percentage of future Advances required
to be funded by such Lender) shall decrease to reflect the actual percentage
which its actual outstanding Loans bear to the total outstanding Loans of all
Lenders. In addition, notwithstanding any definition or other provision of this
Agreement to the contrary, during any period in which a Lender is a Defaulting
Lender, all calculations for voting purposes among the Lenders shall be made as
if the Defaulting Lender were not a Lender and not a party to this Agreement.
2.3 Preconditions to Advances and Assignment of Leases and Leased
Property
(a) Before Lenders will make any Advance:
(i) Borrower will deliver to Agent the following (dated
and signed) in form and substance satisfactory to Agent and its counsel:
A. A borrowing request setting forth the requested
date of the Advance (but no sooner than three (3) Business Days after Agent
receives the request), the requested advance amount, the applicable interest
rate and whether the request is for a Term Loan or a Revolving Credit Loan, a
Borrowing Base Certificate in the form attached hereto as Exhibit "2.1(e)"
setting forth the availability under the Borrowing Base, any information
required by this Agreement and such other information as Agent shall reasonably
request. A borrowing request may be made orally, provided that Borrower confirms
the request in writing within two (2) days thereafter, provided further however,
that Lenders need not make any Advances until Agent receives actual written
confirmation and a Borrowing Base Certificate,
B. Such financial information concerning any of the
Leases, Borrower or any Lessee as Lenders may reasonably request, and
<PAGE>
C. Such other instruments, agreements and documents
as Agent reasonably requests to carry out the intent of the parties to this
Agreement.
(ii) No Event of Default or Unmatured Event of
Default shall have occurred
hereunder.
(b) In order to increase the Borrowing Base, Borrower shall
deliver to Agent for the benefit of Lenders the following items:
(i) A description of the collateral package, which
shall include, identification of the Lessee, a description of the Leased
Property, the net cost of the Leased Property, the net remaining principal
balance under the Lease(s), and the terms of and rentals owed under each Lease,
and such other information which Agent or Lenders shall reasonably request,
(ii) An Assignment Agreement signed by Borrower
assigning Borrower's right, title and interest in and to the Leased Property and
Leases to Agent for the benefit of Lenders, in the form attached hereto as
Exhibit "2.3(b)(ii)" ("Assignment Agreement"),
(iii) Invoices showing the true cost of the Leased
Property net of any servicing or maintenance charges, brokers' fees or similar
types of "soft costs",
(iv) If requested by Agent, additional Uniform
Commercial Code ("UCC") financing statements covering, inter alia, the Leased
Property and the Leases listing Agent for the benefit of Lenders, as secured
party and Borrower as debtor, to be filed in locations reasonably required by
Agent,
(v) Copies of all UCC-1 financing statements filed by
Borrower against Lessee(s) and any acknowledgment copies or recording
information Borrower has received back from the recording offices, provided,
however, that Borrower shall not be required to furnish evidence of the filing
of UCC-1 financing statements covering Leased Property leased pursuant to
Lease(s) having an outstanding Lease Receivable value of under $16,000.
<PAGE>
(vi) The sole original of each Lease along with all
schedules duly assigned to Agent for the benefit of Lenders,
(vii) For each item of Leased Property with a Lease
Receivable in excess of $20,000, evidence that such item of Leased Property is
insured against such risks, in such amounts, with such insurance, and on such
terms and conditions as shall be satisfactory to Lenders ("Insurance Coverage"),
(viii) A certificate of acceptance or other document
evidencing, or other evidence of oral confirmation, that the Lessee has received
and accepted the Leased Property,
(ix) Where the initial cost of the Leased Property is
in excess of $100,000 and such Leased Property is to be affixed to real estate
in such a manner as, under applicable law, to become a fixture, a landlord or
mortgagee waiver from all persons having an interest in the real estate on which
the Leased Property will be located, and
(x) An undated notice signed by the Borrower
directing each Lessee to pay all sums due or to become due under each Lease
directly to Agent for the benefit of Lenders ("Lessee Notice") to be used only
following the occurrence of an Event of Default. Agent will hold the Lessee
Notices in escrow and will not release them, unless and until an Event of
Default shall have occurred.
2.4 Credit Facility Interest:
(a) Revolving Credit Loans: The unpaid principal balance of
all or a portion of the Revolving Credit Loans shall bear interest at either the
LIBOR Based Revolving Loan Rate or the LIBOR Market Index Rate. Interest on all
Revolving Credit Loans shall be due and payable monthly in arrears on the first
day of each month and on the last day of the applicable LIBOR Interest Period
with respect to LIBOR Based Rate Loans.
<PAGE>
(b) Term Loans: The unpaid principal balance of all or a
portion of the Term Loans shall bear interest at the LIBOR Based Term Loan Rate.
In addition Borrower may request that a Term Loan be converted to a fixed rate
loan for the remaining term of such Term Loan at a rate quoted at the time of
request by Agent and Co-Agent and acceptable to all Lenders. Interest on all
Term Loans shall be due and payable monthly in arrears on the first day of each
month.
(c) (i) LIBOR Based Rate Loans: LIBOR Based Rate Loans shall
be selected for a period of either one (1), two (2), or three (3) months'
duration, as Borrower may elect, during which a LIBOR Based Rate is applicable
("LIBOR Interest Period"); provided, however, that (a) if the LIBOR Interest
Period would otherwise end on a day which shall not be a Good Business Day, such
LIBOR Interest Period shall be extended to the next succeeding Good Business
Day, unless such Good Business Day falls in another calendar month, in which
case such LIBOR Interest Period shall end on the next preceding Good Business
Day subject to clause (c) below; (b) interest shall accrue from and including
the first day of each LIBOR Interest Period to, but excluding, the day on which
any LIBOR Interest Period expires; and (c) with respect to any LIBOR Interest
Period which begins on the last Good Business Day of a calendar month (or on a
day for which there is no numerically corresponding day in the calendar month at
the end of such LIBOR Interest Period), the LIBOR Interest Period shall end on
the last Good Business Day of a calendar month. All accrued and unpaid interest
on a LIBOR Based Rate Loan must be paid in full on the day the applicable LIBOR
Interest Period expires. No LIBOR Interest Period may end after the Maturity
Date. Subject to all of the terms and conditions applicable to a request that a
new Advance be a LIBOR Based Rate Loan, Borrower may extend LIBOR Based Rate
Loans as of the last day of the applicable LIBOR Interest Period to a new LIBOR
Based Rate Loan. If Borrower does not notify Agent of its desire to extend a
LIBOR Based Rate Loan or repay such Advance prior to the expiration of the
applicable LIBOR Interest Period, such Advance shall automatically be converted
to a LIBOR Market Index Rate Loan.
<PAGE>
(ii) The Adjusted LIBOR Rate may be automatically
adjusted by Agent on a prospective basis to take into account the additional or
increased cost of maintaining any necessary reserves for Eurodollar deposits or
increased costs due to changes in applicable law or regulation or the
interpretation thereof occurring subsequent to the commencement of the then
applicable LIBOR Interest Period, including but not limited to changes in tax
laws and changes in the reserve requirements imposed by the Board of Governors
of the Federal Reserve System (or any successor), excluding any such changes
that have resulted in a payment pursuant to Section 2.9 hereof, that increase
the cost to Lenders of funding the LIBOR Based Rate Loan. Agent shall promptly
give the Borrower and each Lender notice of such a determination and adjustment,
which determination shall be conclusive, absent manifest error, as to the
correctness of the fact and the amount of such adjustment. Agent shall furnish
to Borrower a statement setting forth the basis for adjusting such LIBOR Based
Rate and the method for determining the amount of such adjustment.
(iii) In the event that Agent shall have reasonably
determined that Eurodollar deposits equal to the amount of the principal of the
requested LIBOR Based Rate Loan and for the LIBOR Interest Period specified are
unavailable, impractical or unlawful, or a LIBOR Based Rate or a LIBOR Market
Index Rate will not adequately and fairly reflect the cost of making or
maintaining the principal amount of the requested LIBOR Based Rate Loan or LIBOR
Market Index Rate Loan specified by Borrower, or that by reason of circumstances
affecting Eurodollar markets, adequate and reasonable means do not exist for
ascertaining the rate based on the Adjusted LIBOR Rate or the LIBOR Market Index
Rate, Agent shall promptly give notice of such determination to the Borrower
that rates based on the Adjusted LIBOR Rate or the LIBOR Market Index Rate are
not available. A determination by Agent hereunder shall be prima facie evidence
of the correctness of the fact and amount of such additional costs or
unavailability. Upon such a determination, (i) the right of Borrower to select,
convert to, or maintain a LIBOR Based Rate Loan at the rate based on the
Adjusted LIBOR Rate or a LIBOR Market Index Rate Loan at the rate based on the
LIBOR Market Index Rate shall be suspended until Agent shall have notified the
Borrower that such conditions shall have ceased to exist, and (ii) the LIBOR
Based Rate Loans and LIBOR Market Index Rate Loans shall accrue interest at the
Base Rate.
<PAGE>
(iv) In the event that, as a result of any changes in
applicable law or regulation or the interpretation thereof, it becomes unlawful
for a Lender to maintain Eurodollar liabilities sufficient to fund any LIBOR
Based Rate Loan subject to the LIBOR Based Rate, then such Lender shall
immediately notify Agent who shall immediately notify the other Lenders and
Borrower thereof, and such Lender's obligation to make, convert to, or maintain
a LIBOR Based Rate Loan at a LIBOR Based Rate shall be suspended until such time
as such Lender may again cause the LIBOR Based Rate to be applicable to its
share of any LIBOR Based Rate Loans and such Lender's share of the Loans subject
to the LIBOR Based Rate shall accrue interest at the Base Rate. If it becomes
unlawful for a Lender to maintain a LIBOR Based Rate Loan, such Lender may
require that Borrower immediately prepay such Lender's LIBOR Based Rate Loans or
convert such Loans to Base Rate Loans or LIBOR Market Index Rate Loans. Promptly
after becoming aware that it is no longer unlawful for such Lender to maintain
such Eurodollar liabilities, such Lender shall notify Agent who will notify
Borrower thereof and such suspension shall cease to exist. In the event it
becomes unlawful for a Lender to maintain Eurodollar liabilities, Borrower may
seek to have such Lender replaced with a lender for whom maintenance of
Eurodollar liabilities is not unlawful so long as such replacement lender is
satisfactory to Agent and the SuperMajority Lenders (without giving effect to
the potentially replaced Lender), in their sole and absolute discretion.
<PAGE>
(v) In the event Borrower prepays (voluntarily or
involuntarily) or converts a LIBOR Based Rate Loan prior to the last day of the
applicable Interest Period, Borrower shall also pay to Agent for the account of
Lenders, on demand, the additional amount, as specified by Agent in a
certificate setting forth the basis of such computation, equal to the amount of
any reasonable fees, costs, expenses or other charges, plus the present value of
an amount which is the difference (if a positive number) between (y) the
aggregate interest which would have been payable to the last day of such
Interest Period on such prepaid amount, and (z) the aggregate interest the
Lenders could expect to earn on such prepaid amount if such amount were invested
for the period from the date of such prepayment to the last day of such Interest
Period in United States Treasury obligations maturing on or closest to the last
day of such Interest Period. Such certificate shall be conclusive except for
manifest error.
(d) LIBOR Market Index Rate Loan: Up to $5,000,000 in
aggregate principal amount of Revolving Credit Loans and Term Loans may bear
interest from time to time at the LIBOR Market Index Rate provided that no
Revolving Credit Loan or portion of any Term Loan shall bear interest at the
LIBOR Market Index Rate for a period of more than 21 days. Upon or prior to the
expiration of such 21-day period, and subject to all the terms and conditions
applicable to the making of LIBOR Based Rate Loans hereunder, Borrower shall
cause any such Loan(s) to be converted to LIBOR Based Rate Loan(s). If Borrower
does not notify Agent of its desire to extend the applicable LIBOR Market Index
Rate Loan as a LIBOR Based Rate Loan, Borrower will repay such Loan prior to the
expiration of such 21-day period, or such Loan shall automatically be converted
to a LIBOR Based Rate Loan with a one month LIBOR Interest Period (unless such
LIBOR Interest Period would extend beyond the Maturity Date, in which case, the
LIBOR Market Index Rate Loan shall be continued as a LIBOR Market Index Rate
Loan until the Maturity Date). Interest on all LIBOR Market Index Rate Loans
shall be payable monthly, in arrears, on the first day of each calendar month.
The calculation and determination of the LIBOR Market Index Rate shall be made
daily by the Agent and such determination shall, absent manifest error, be
final, conclusive and binding upon all parties hereto. Changes in the LIBOR
Market Index Rate shall become effective on the same day as the Agent determines
a change in such LIBOR Market Index Rate has occurred.
2.5 Additional Interest Provisions.
(a) Calculation of Interest: Interest on the Loans, regardless
of the applicable interest rate, shall be based on a three hundred sixty (360)
day year and charged for the actual number of days elapsed.
<PAGE>
(b) Default Rate: After the occurrence and during the
continuance of an Event of Default hereunder and following notice from Agent to
Borrower of the Lenders' intention to apply the Default Rate to the Loans, the
per annum effective rate of interest on all Loans outstanding under the Credit
Facility shall be increased to a per annum rate equal to two (2%) percentage
points in excess of the applicable interest rate ("Default Rate").
(c) Continuation of Interest Charges: All contractual rates of
interest chargeable on outstanding Loans, regardless of the then applicable
interest rate, shall continue to accrue and be paid even after default,
maturity, acceleration, judgment, bankruptcy, insolvency proceedings of any kind
or the happening of any event or occurrence similar or dissimilar.
(d) Applicable Interest Limitations: In no contingency or
event whatsoever shall the aggregate of all amounts deemed interest hereunder
and charged or collected pursuant to the terms of this Agreement exceed the
highest rate permissible under any law which a court of competent jurisdiction
shall, in a final determination, deem applicable hereto. In the event that such
court determines Lenders have charged or received interest hereunder in excess
of the highest applicable rate, Agent, on behalf of Lenders, shall in its sole
discretion, apply and set off such excess interest received by Lenders against
other Obligations due or to become due and such rate shall automatically be
reduced to the maximum rate permitted by such law.
(e) Limitation on LIBOR Based Rate Loans and LIBOR Market
Index Rate Loans: Upon the occurrence of an Event of Default, and following
written notice from Agent to Borrower, Agent may in its sole discretion, or upon
the instructions of Supermajority Lenders Agent shall, eliminate the
availability of LIBOR Based Rate Loans and LIBOR Market Index Rate Loans.
<PAGE>
2.6 Fees:
(a) Unused Line Fee: So long as the Credit Facility is
outstanding and has not been terminated, Borrower shall unconditionally pay to
Agent, for the benefit of Lenders in accordance with their respective Pro Rata
Percentages, a non-refundable fee ("Unused Line Fee") equal to one-quarter of
one percent (1/4%) per annum of the average daily unused portion of the Credit
Facility (which shall be calculated as the Maximum Credit Limit minus the
average daily outstanding balance of all Loans during the quarter for which such
calculation is made). The Unused Line Fee shall be computed and paid on a
quarterly basis, in arrears, on the first day of each January, April, July and
October for the previous quarter for which such computation is made by Agent,
beginning on the first day of October, 1998.
(b) Administration Fee: So long as the Credit Facility is
outstanding and has not been terminated, Borrower shall unconditionally pay to
Agent, for Agent's account, a non-refundable fee ("Administration Fee") equal to
three eighths of one percent (3/8%) per annum of the average daily outstanding
principal balance of all Loans during the quarter for which such calculation is
made). The Administration Fee shall be computed and paid on a quarterly basis,
in arrears, on the first day of each January, April, July and October for the
previous quarter for which such computation is made by Agent, beginning on the
first day of October, 1998.
2.7 Prepayments:
(a) (i) Base Rate Loans and LIBOR Market Index Rate Loans:
Base Rate Loans and LIBOR Market Index Rate Loans may be prepaid at any time and
from time to time, in whole or in part, without premium or penalty upon no less
than two (2) Business Day's notice to Agent. All partial prepayments shall be
applied first to accrued and unpaid interest, fees and Expenses related to such
prepaid Loan and then to the outstanding principal balance of the Loan so
prepaid.
<PAGE>
(ii) LIBOR Based Rate Loans: LIBOR Based Rate Loans
may not be prepaid on any date other than the last day of the selected Interest
Period unless Borrower gives Agent written notice of such intention prior to
1:00 p.m. on a Business Day which is no less than two (2) Business Days prior to
the date it intends to make such prepayment (unless such prepayment must be
immediate because of the illegality of LIBOR Based Rate Loans as set forth in
Section 2.4(c)(iv) hereof, in which case Borrower shall not be required to
provide such notice) and pays a prepayment fee in accordance with Section
2.4(c)(v) above. All such prepayments must be of the full amount of the
applicable LIBOR Based Rate Loan plus all accrued but unpaid interest, fees and
Expenses related to such prepaid Loan. Borrower agrees that this fee is an
estimate of Lender's damages and not a penalty.
(iii) Fixed Rate Term Loans: Term Loans bearing
interest at a fixed rate pursuant to Section 2.4(b) hereof may not be prepaid
unless Borrower pays a prepayment fee equal to (the amount of any applicable
fees, costs, Expenses or other charges, plus the present value of an amount
which is the difference (if a positive number) between (y) the aggregate
interest which would have been payable to the last day of such Term Loan on such
prepaid amount, and (z) the aggregate interest Lenders could expect to earn on
such prepaid amount if such amount were invested for the period from the date of
such prepayment to the maturity date of the Term Loan in United States Treasury
obligations maturing on or closest to such maturity date. Borrower agrees that
this fee is our estimate of Lenders' damages and not a penalty. All such
prepayments shall be applied to the prepaid Term Loan, first against all accrued
and unpaid interest, fees and Expenses related to such prepaid Term Loan and
then to installments of the outstanding principal balance of the Term Loan so
prepaid in the inverse order of maturity.
(b) Proceeds of Collateral: Prior to the occurrence of an
Event of Default, proceeds from Collateral comprising a portion of the Borrowing
Base, to the extent that the aggregate outstanding amount of all Loans exceeds
the Borrowing Base, shall promptly be paid to Agent for the benefit of Lenders
and be first applied to accrued but unpaid interest, fees, costs and Expenses
related to the Credit Facility, and then to the outstanding balance of the
Revolving Credit Loans, the Term Loan and then to Borrower's other Obligations
in such order as Agent may elect in its sole discretion. Following the
occurrence of an Event of Default, all proceeds from the Collateral shall be
immediately delivered to Agent and Agent may apply such proceeds to any of
Borrower's Obligations in such order as Lenders may decide in their sole
discretion.
<PAGE>
(c) Mandatory Prepayment: In the event the aggregate
outstanding amount of all Loans at any time exceeds the Maximum Credit Limit,
Borrower shall immediately repay such excess in full and if the aggregate
outstanding amount of all Revolving Credit Loans exceeds the Borrowing Base,
Borrower shall within ten (10) days either (i) repay such excess in full or (ii)
pledge additional Eligible Leases in accordance with the terms hereof. Any such
payments shall first be applied to accrued but unpaid interest, fees, costs and
Expenses related to the Credit Facility, and then to the outstanding balance of
the Revolving Credit Loans, the Term Loans and then to Borrower's other
Obligations in such order as Agent may elect in its sole discretion. Prepayments
of the Term Loans shall be applied against the remaining principal installments
in the inverse order of maturity.
2.8 Use of Proceeds: The extensions of credit under and proceeds of the
Credit Facility shall be used to enable Borrower to purchase Leased Property and
finance Leases associated with such Leased Property.
2.9 Capital Adequacy: If any present or future law, governmental rule,
regulation, policy, guideline, directive or similar requirement (whether or not
having the force of law) imposes, modifies, or deems applicable any capital
adequacy, capital maintenance or similar requirement which affects the manner in
which Commercial banks generally allocate capital resources to their commitments
(including any commitments hereunder), and as a result thereof, in the opinion
of a Lender, the rate of return on such Lender's capital with regard to the
Loans is reduced to a level below that which such Lender could have achieved but
for such circumstances, then in such case and upon notice from Agent and/or such
Lender to Borrower, from time to time, Borrower shall pay such Lender such
additional amount or amounts as shall compensate such Lender for such reduction
in its rate of return. Such notice shall contain the statement of such Lender
with regard to any such amount or amounts which shall, in the absence of
manifest error, be binding upon Borrower. In determining such amount, such
Lender may use any reasonable method of averaging and attribution that it deems
applicable.
SECTION 3. COLLATERAL
<PAGE>
3.1 Description: As security for the payment of the Obligations, and
satisfaction by Borrower of all covenants and undertakings contained in this
Agreement and the other Loan Documents, Borrower hereby grants to Agent, for the
benefit of Lenders, a continuing first lien on and security interest in, upon
and to the Collateral.
3.2 Lien Documents: At Closing and thereafter as Agent deems necessary,
Borrower shall execute and deliver to Agent, or have executed and delivered (all
in form and substance reasonably satisfactory to Agent):
(a) Financing Statements - Financing statements pursuant to
the UCC, which Agent, on behalf of Lenders, may file in any jurisdiction where
any Collateral is or may be located and where Borrower maintains its chief
executive office; and
(b) Other Agreements - Any other agreements, documents,
instruments and writings, including, without limitation, security agreements and
Assignment Agreements, reasonably required by Agent to evidence, perfect or
protect Agent's and/or Lenders' liens and security interest in the Collateral or
as Agent may reasonably request from time to time.
3.3 Other Actions: In addition to the foregoing, Borrower shall do
anything further that may be lawfully and reasonably required by Agent to secure
Lenders and effectuate the intentions and objects of this Agreement, including,
but not limited to, the execution and delivery of lockbox agreements,
continuation statements, amendments to financing statements, security
agreements, contracts and any other documents required hereunder. Borrower shall
also immediately deliver (with execution by Borrower of all necessary documents
or forms to reflect Agent's Lien for the benefit of Lenders thereon) to Agent as
bailee for Lenders, all items for which Agent and/or Lenders must or may receive
possession to obtain a perfected security interest, including without
limitation, all Leases, notes, certificates and documents of title, chattel
paper, warehouse receipts, instruments, and any other similar instruments
constituting Collateral.
<PAGE>
3.4 Searches: Agent shall, prior to or at Closing, and thereafter as
Agent may determine from time to time, at Borrower's sole expense, obtain the
following searches (the results of which are to be consistent with the
warranties made by Borrower in this Agreement):
(a) UCC Searches: UCC searches with the Secretary of State and
local filing office of each state where Borrower maintains its executive office,
a place of business, or assets;
(b) Judgments, Etc.: Judgment, federal tax lien and corporate
tax lien searches, in all applicable filing offices of each state searched under
subparagraph (a) above.
Borrower shall, prior to or at Closing and at its expense,
obtain and deliver to Agent good standing certificates showing Borrower to be in
good standing in its state of incorporation and in each other state or foreign
country in which it is doing and presently intends to do business for which
Borrower's failure to be so qualified might have material adverse effect on
Borrower's business, financial condition, Property or Agent's and/or Lenders'
rights hereunder.
3.5 Filing Security Agreement: A carbon, photographic or other
reproduction or other copy of this Agreement or of a financing statement is
sufficient as and may be filed in lieu of a financing statement.
<PAGE>
3.6 Power of Attorney: Each of the officers of Agent is hereby
irrevocably made, constituted and appointed (such appointment being coupled with
an interest) the true and lawful attorney for Borrower (without requiring any of
them to act as such) with full power of substitution to do the following: (1)
endorse the name of Borrower upon any and all checks, drafts, money orders and
other instruments for the payment of monies that are payable to Borrower and
constitute collections on the Collateral; (2) execute in the name of Borrower
any financing statements, schedules, assignments, instruments, documents and
statements that Borrower is obligated to give Agent hereunder or is necessary to
perfect Agent's and/or Lenders' security interest or Lien in the Collateral,
including without limitation, execute in its own name or in the name of
Borrower, all documentation necessary to have Agent's Lien for the benefit of
Lenders noted on all vehicle titles, to prepare and sign any and all
applications for vehicle titles relating to Leased Property and any registration
documentation with respect to such Leased Property; (3) to verify validity,
amount or any other matter relating to the Collateral by mail, telephone,
telecopy or otherwise; and (4) upon the occurrence of an Event of Default, do
such other and further acts and deeds in the name of Borrower that Agent may
reasonably deem necessary or desirable to enforce any Account or perfect its
liens on, or to protect its interest in, any other Collateral.
SECTION 4. CLOSING AND CONDITIONS PRECEDENT TO ADVANCES
Closing under this Agreement is subject to the following conditions
precedent (all documents to be in form and substance satisfactory to Agent and
its counsel):
4.1 Resolutions, Opinions, and Other Documents: Borrower shall have
delivered to Agent the following:
(a) this Agreement and the Revolving Credit Notes all properly
executed;
(b) each document and agreement required to be executed under
any provision of this Agreement or any related agreement;
(c) certified copies of (i) resolutions of Borrower's board of
directors authorizing the execution of this Agreement, the Revolving Credit
Notes and the Term Notes to be issued hereunder and each document, instrument
and agreement required to be delivered by any Section hereof and resolutions of
each Guarantor's board of directors authorizing the execution and delivery of
the Guaranty and (ii) Borrower's and each Guarantor's Articles of Incorporation
and By-laws;
(d) an incumbency certificate identifying all Authorized
Officers of Borrower and each signatory of the Guaranty on behalf of each
Guarantor authorizing the execution and delivery of the Guaranty, with specimen
signatures;
<PAGE>
(e) a written opinion of Borrower's and each Guarantor's
independent counsel addressed to Agent for the benefit of all Lenders;
(f) certification by Borrower's chief financial officer that
there has not occurred any material adverse change in the operations and
condition (financial or otherwise) of Borrower since June 30, 1998;
(g) payment by Borrower of all Expenses associated with the
Credit Facility incurred to the Closing Date;
(h) Uniform Commercial Code, judgment, federal and state tax
lien searches against Borrower, at Borrower's expense, showing that the
Collateral is not subject to any Liens, together with Good Standing and
Corporate Tax Lien Search Certificates showing no tax Liens on Borrower's
Property and showing Borrower to be in good standing in each jurisdiction where
the failure to so qualify might have a material adverse affect on Borrower's
business, financial condition, Property or Agent's and/or Lenders' rights
hereunder;
(j) An initial borrowing base certificate dated the Closing
Date evidencing Borrower's minimum borrowing availability under the Borrowing
Base as of the Closing Date;
(k) UCC-1 Financing Statements naming Borrower as debtor and
Agent as secured party, to be filed in all locations satisfactory to Agent;
(l) A Guaranty Agreement executed by each of the Guarantors
("Guaranty");
(m) Stock Pledge Agreements for the shares of Borrower and
Resource Leasing, Inc. executed by Resource Leasing, Inc. and Resource America,
Inc. respectively (collectively "Stock Pledge Agreements); and
<PAGE>
(n) A subordination agreement ("Subordination Agreement")
among Resource Leasing, Inc., Agent and Borrower whereby Resource Leasing, Inc.
agrees to subordinate all indebtedness owing from Borrower to Resource Leasing,
Inc., on terms and conditions satisfactory to Agent.
4.2 Absence of Certain Events: At the Closing Date, no Event of Default
or Unmatured Event of Default hereunder shall have occurred and be continuing.
4.3 Warranties and Representations at Closing: The warranties and
representations contained in Section 5 as well as any other Section of this
Agreement and any other Loan Document shall be true and correct in all material
respects on the Closing Date with the same effect as though made on and as of
that date. Borrower shall not have taken any action or permitted any condition
to exist which would have been prohibited by any Section hereof.
4.4 Compliance with this Agreement: Borrower shall have performed and
complied with all agreements, covenants and conditions contained herein
including, without limitation, the provisions of Sections 6 and 7 hereof, and
any other Loan Document, which are required to be performed or complied with by
Borrower before or at the Closing Date.
4.5 Officers' Certificate: Agent shall have received a certificate
dated the Closing Date and signed by an Authorized Officer of Borrower
certifying that all of the conditions specified in this Section have been
fulfilled.
4.6 Closing: Subject to the conditions of this Section 4, the Credit
Facility shall be made available on the date ("Closing Date") this Agreement is
executed and all of the conditions contained in Section 4.1 hereof are completed
(the "Closing").
<PAGE>
4.7 Non-Waiver of Rights: By completing the Closing hereunder, or by
making advances hereunder, Agent and Lenders do not thereby waive a breach of
any warranty, representation or covenant made by Borrower hereunder or any
agreement, document, or instrument delivered to Agent or otherwise referred to
herein, including without limitation, the Existing Loan Documents, and any
claims and rights of Agent and/or Lenders resulting from any breach or
misrepresentation by Borrower are specifically reserved by Agent for the benefit
of Lenders.
SECTION 5. REPRESENTATIONS AND WARRANTIES
To induce Lenders to complete the Closing and make the initial Advances
under the Credit Facility to Borrower, Borrower warrants and represents to Agent
and Lenders that:
5.1 Corporate Organization and Validity:
(a) Borrower is a corporation duly organized and validly
existing under the laws of its state of incorporation, is duly qualified, is
validly existing and in good standing and has lawful power and authority to
engage in the business it conducts in each state and other jurisdiction where
the nature and extent of its business requires qualification, except where the
failure to so qualify would not have a material adverse effect on Borrower's
business, financial condition, Property or prospects. A list of all states and
other jurisdictions where Borrower is qualified to do business is attached
hereto as Exhibit "5.1" and made a part hereof.
(b) The making and performance of this Agreement and related
agreements, and each document required by any Section hereof will not violate
any law, government rule or regulation, or the charter, minutes or bylaw
provisions of Borrower or violate or result in a default (immediately or with
the passage of time) under any contract, agreement or instrument to which
Borrower is a party, or by which it is bound. Borrower is not in violation of,
nor has knowingly caused any Person to violate, any term of any agreement or
instrument to which it or such Person is a party or by which it may be bound or
of its charter, minutes or bylaws which violation could have a material adverse
effect on Borrower's business, financial condition, Property or prospects.
<PAGE>
(c) Borrower has all requisite corporate power and authority
to enter into and perform this Agreement and to incur the obligations herein
provided for, and has taken all proper and necessary corporate action to
authorize the execution, delivery and performance of this Agreement, and the
documents and related agreements required hereby.
(d) This Agreement, the Revolving Credit Notes and the Term
Notes to be issued hereunder, and all related agreements and documents required
to be executed and delivered by Borrower hereunder, when delivered, will be
valid and binding upon Borrower and enforceable in accordance with their
respective terms.
5.2 Places of Business: The only places of business of Borrower, and
the places where it keeps and intends to keep copies of the Leases and its Books
and Records concerning the Collateral, are at the addresses listed in Exhibit
"5.2" attached hereto and made a part hereof. The name of the record owner of
each property is also set forth on Exhibit "5.2".
5.3 Pending Litigation: There are no judgments or judicial or
administrative orders, proceedings or investigations (civil or criminal)
pending, or to the knowledge of Borrower, threatened, against Borrower in any
court or before any governmental authority or arbitration board or tribunal
except as shown in Exhibit "5.3" attached hereto and made a part hereof, none of
which may materially and adversely affect the business, financial condition,
Property or prospects of Borrower, or the ability of Borrower to perform under
this Agreement. Borrower is not in default with respect to any order of any
court, governmental authority, regulatory agency or arbitration board or
tribunal, the effect of which would materially and adversely affect the
business, financial condition, Property or prospects of Borrower. No shareholder
or executive officer of Borrower has been indicted or convicted in connection
with or is engaging in any criminal conduct, or is currently subject to any
lawsuit or proceeding or under investigation in connection with any
anti-racketeering or other conduct or activity.
<PAGE>
5.4 Title to Collateral: Borrower has good and marketable title in fee
simple (or its equivalent under applicable law) to all the Collateral it
respectively purports to own, free from Liens, except those of Agent for the
benefit of Lenders and free from the claims of any other Person other than the
leasehold interests of the Lessees.
5.5 Governmental Consent: Neither the nature of Borrower or of its
business or Property, nor any relationship between Borrower and any other
Person, nor any circumstance affecting Borrower in connection with the issuance
or delivery of the Revolving Credit Notes or the Term Notes, is such as to
require a consent, approval or authorization of, or filing, registration or
qualification with, any governmental authority on the part of Borrower in
connection with the execution and delivery of this Agreement or the issuance or
delivery of the Revolving Credit Notes or the Term Notes or other documents
contemplated hereby.
5.6 Taxes: All tax returns required to be filed by Borrower in any
jurisdiction have in fact been filed, and all taxes, assessments, fees and other
governmental charges upon Borrower, or upon any of its Property, income or
franchises, which are shown to be due and payable on such returns have been
paid, except for those taxes being contested in good faith with due diligence by
appropriate proceedings for which appropriate reserves have been maintained
under GAAP.
5.7 Financial Statements: Borrower's annual consolidated audited
balance sheet as of September 30, 1997 and its quarterly consolidated balance
sheet as of March 31, 1998 and the related income statements and statements of
cash flows as of such dates, all accompanied by reports thereon from Borrower's
independent certified public accountants with respect to the annual statements
(complete copies of which have been delivered to Agent), have been prepared in
accordance with GAAP and present fairly, accurately and completely the financial
position of the Borrower as of such dates and the results of its operations for
such periods. The fiscal year for Borrower currently ends on September 30.
Borrower's federal tax identification number is 23-2842671.
<PAGE>
5.8 Full Disclosure: Neither the financial statements referred to in
Section 5.7, nor this Agreement or related agreements and documents or any
written statement furnished by Borrower to Agent in connection with the
negotiation of the Credit Facility and contained in any financial statements or
documents relating to Borrower contain any untrue statement of a material fact
or omit a material fact necessary to make the statements contained therein or
herein not misleading.
5.9 Subsidiaries: Borrower has no Subsidiaries or Affiliates, except as
listed on Exhibit "5.9" attached hereto and made a part hereof.
5.10 Guarantees:
Borrower does not own nor hold equity or long term debt
investments in, has any outstanding advances to, or serves as guarantor, surety
or accommodation maker for the obligations of, or has any outstanding borrowings
from, any Person except as described in Exhibit "5.10", attached hereto and a
made part hereof.
5.11 Government Regulations, etc.:
(a) The use of the proceeds of and Borrower's issuance of the
Revolving Credit Notes and the Term Notes will not directly or indirectly
violate or result in a violation of Section 7 of the Securities Exchange Act of
1934, as amended or Regulations U, T or X of the Board of Governors of the
Federal Reserve System, 12 C.F.R., Chapter II. Borrower does not own or intend
to carry or purchase any "margin stock" within the meaning of said Regulation U.
(b) Borrower has obtained all licenses, permits, franchises or
other governmental authorizations necessary for the ownership of its Property
and for the conduct of its business, where the failure to obtain would have a
material adverse effect on the business, financial condition, Property or
prospects of Borrower or Agent's and/or Lenders' rights with respect to the
Collateral.
<PAGE>
(c) Borrower is not in violation of, has not received written
notice that it is in violation of, or has knowingly caused any Person to
violate, any applicable statute, regulation or ordinance of the United States of
America, or of any state, city, town, municipality, county or of any other
jurisdiction, or of any agency, or department thereof, (including without
limitation, environmental laws and regulations), which may materially and
adversely affect its business, financial condition, Property or prospects or
Agent's and/or Lenders' rights with respect to the Collateral.
(d) Borrower is current with all reports and documents
required to be filed with any state or federal securities commission or similar
agency and is in full compliance in all material respects with all applicable
rules and regulations of such commissions.
5.12 Names:
(a) Within five (5) years prior to the Closing Date, Borrower
has not conducted business under or used any other name (whether corporate or
assumed) except for the names shown on Exhibit "5.12(a)", attached hereto and
made a part hereof. Borrower is the sole owner of all names listed on such
Exhibit "5.12(a)" and any and all business done and all invoices issued in such
trade names are Borrower's sales, leases, business and invoices. Each trade name
of Borrower represents a division or trading style of Borrower and not a
separate corporate subsidiary or affiliate or independent entity.
(b) All trademarks, patents or copyrights which Borrower uses,
plans to use or has a right to use are listed on Exhibit "5.12(b) attached
hereto and made a part hereof. Borrower is the sole owner of such Property
except to the extent any other Person has claims or rights in such Property, as
such claims and rights are described on such Exhibit "5.12(b)." To the best of
Borrower's knowledge, Borrower is not in violation of any rights of any other
Person with respect to such Property.
5.13 Other Associations: Borrower is not engaged and has no interest in
any joint venture or partnership with any other Person except as described on
Exhibit "5.13" hereto and made a part hereof.
<PAGE>
5.14 Environmental Matters: Except as disclosed on Exhibit "5.14"
attached hereto and made a part hereof, Borrower has no knowledge:
(a) of the presence of any Hazardous Substances on any of the
real property where Borrower conducts operations or has its personal property,
or
(b) of any on-site spills, releases, discharges, disposal or
storage of Hazardous Substances that have occurred or are presently occurring on
any of such real property or where any Collateral is located, or
(c) of any spills, releases, discharges or disposal of
Hazardous Substances that have occurred, are presently occurring on any other
real property as a result of the conduct, action or activities of Borrower.
As used herein, the term "Hazardous Substances" means any substances defined or
designated as hazardous or toxic waste, hazardous or toxic material, hazardous
or toxic substance or similar term, by any environmental statute, rule or
regulation of any governmental entity presently in effect and applicable to such
real property.
<PAGE>
5.15 Capital Stock: The authorized and outstanding shares of capital
stock of Borrower is as set forth on Exhibit "5.15" attached hereto and made a
part hereof. All of the capital stock of Borrower has been duly and validly
authorized and issued and is fully paid and non-assessable and has been sold and
delivered to the holders thereof in compliance with, or under valid exemption
from, all Federal and state laws and the rules and regulations of all regulatory
bodies thereof governing the sale and delivery of securities. Except for the
rights and obligations set forth in Exhibit "5.15", there are no subscriptions,
warrants, options, calls, commitments, rights or agreements by which Borrower or
any of the shareholders of Borrower is bound relating to the issuance, transfer,
voting or redemption of shares of its capital stock or any pre-emptive rights
held by any Person with respect to the shares of capital stock of Borrower.
Except as set forth in Exhibit "5.15", Borrower has not issued any securities
convertible into or exchangeable for shares of its capital stock or any options,
warrants or other rights to acquire such shares or securities convertible into
or exchangeable for such shares.
5.16 Solvency: Borrower is solvent, able to pay its debts as they
become due, and has capital sufficient to carry on its business and all business
in which it is about to engage, and now owns Property having a value both at
fair valuation and at present fair salable value greater than the amount
required to pay its debts. Borrower will not be rendered insolvent by the
execution and delivery of this Agreement or any of the other documents executed
in connection with this Agreement or by the transactions contemplated hereunder
or thereunder.
5.17 Leases and Leased Property: Each Lease reported to Agent and
Lenders as an Eligible Lease and the Leased Property associated therewith shall,
at all times when such Leases are included in the Borrowing Base calculation, be
in compliance with all of the following representations:
(a) Each Lease is in substantially the same form as that
attached as Exhibit 5.17 hereto or has been otherwise approved by Agent in its
reasonable discretion and is genuine, based on contracts that are enforceable in
accordance with its terms against the Lessee and the Leased Property named and
referenced therein, constitutes the entire agreement for the leasing of the
Leased Property thereby covered, has not been altered or amended, except as set
forth in the related schedules, and Borrower's Books and Records relating
thereto are accurate, complete and genuine;
(b) The sole original of each Lease has been delivered to
Agent, and all other counterparts of each Lease shall contain a legend stating
that the Lease has been assigned to First Union National Bank, As Agent,
pursuant to that certain Amended and Restated Loan and Security Agreement dated
September 30, 1998, or contain similar language specifying that such counterpart
is not an original for "chattel paper" purposes under the UCC;
<PAGE>
(c) Where the Lease consists of a Master Lease Agreement and
specific schedules which describe the terms of any specific items to be leased
pursuant to such schedule, the sole original schedule shall constitute the sole
original Lease, provided that the terms of the Master Lease Agreement and the
schedule make it clear that the sole original schedule is a separate lease for
"Chattel Paper" purposes under the UCC and that possession of such schedule
constitutes possession of "Chattel Paper" under the UCC;
(d) Except as otherwise consented to by Agent in writing, the
aggregate amount of Leases with the same Lessee (or its Affiliates) is not in
excess of $250,000;
(e) The original amount and unpaid balance of each Lease shown
on Borrower's Books and Records and on any statement or schedule delivered to
Agent in connection therewith is the true and correct amount actually owed to
Borrower, no portion of which, except as specifically provided for in the Lease,
has been prepaid;
(f) The amount due under each Lease is not subject to, and the
terms of the Lease provide that the Lessee may not assert, any claim or
reduction, counterclaim, setoff, recoupment, or any other claim, allowance or
adjustment and no Lease has been re-negotiated, restructured or compromised
except as renewed in the ordinary course of business;
(g) All security agreements, title retention instruments and
other documents and instruments which are security for any Lease, and/or each
Lease, contain a correct and sufficient description of the Leased Property
covered thereby and all security interests granted therein to Borrower (either
directly or as assignee), if applicable, have been properly perfected and
assigned to Agent for the benefit of Lenders;
(h) Borrower has not and will not enter into any agreement
with a Lessee of any Leased Property which provides, directly or indirectly, for
the crediting of any obligation or liability of Borrower to such Lessee against
future rentals accruing under the Lease;
<PAGE>
(i) Each item of Leased Property has been delivered to and, in
all instances, accepted by the Lessee and is in good condition, ordinary wear
and tear excepted, has not been returned, rejected, lost, stolen, destroyed or
damaged and has not been removed from service;
(j) Each Lease has been duly executed by Borrower and each
Lessee, is a valid, legal and binding obligation of Borrower, and such Lessee,
and is enforceable against Borrower and such Lessee in accordance with its
terms. Borrower is the sole owner of each of the Leases and has the authority to
assign all of its right, title and interest therein upon the terms herein set
forth;
(k) Each of the Leases and all Leased Property which is the
subject matter thereof at the time of its assignment to Agent for the benefit of
Lenders and at all times thereafter, will be free and clear of any and all
assignments, options, rights, or other Liens whatsoever except Lenders' and/or
Agent's and residual sharing arrangements;
(l) Borrower has made its usual credit investigation of each
Lessee and has determined that the credit is satisfactory;
(m) All costs, fees, and expenses incurred in making and
closing each of the Leases has been paid and each Lease is and will be current
at the time of the assignment thereof to Lenders. No default exists or event
exists which with the giving of notice or the passage of time or both, will
result in the occurrence of a default of any obligation, as expressed in any
Lease;
<PAGE>
(n) All rentals, fees, costs, expenses and charges paid or
payable by the Lessee under any Lease, including without limitation, any
brokerage and other fees paid to Borrower do not violate any laws relating to
the maximum fees, costs, expenses or charges that can be charged in any state in
which any Leased Property is located or in which the corresponding Lessee is
located, or in which a transaction was consummated, or in any other state which
may have jurisdiction with respect to any such Leased Property, Lease or Lessee;
(o) Agent, for the benefit of Lenders, has a first perfected
lien and security interest in the Collateral (including without limitation each
Lease and the Leased Property) subject to no other Lien. Borrower has taken and
in the future, shall take all steps necessary to maintain Agent's first
perfected lien and security interest in the Collateral, including, if required,
perfecting Borrower's security interest (in the event the Lease is not a "true
lease") through filing financing statements, amendments thereto, or assignments
and/or continuations thereof and recording of the documentation necessary to
perfect Borrower's lien;
(p) For each Lease, with a Lease Receivable in excess of
$16,000, Borrower has either (i) listed Agent for the benefit of Lenders, as
assignee on the UCC-1 Financing Statement so filed, or (ii) after Borrower has
received acknowledgment copies of UCC-1s, deliver to Agent executed UCC-3
Financing Statements naming Agent for the benefit of Lenders as assignee of
Borrower's security interest. Agent agrees not to file the UCC-3 Financing
Statements until such time as an Event of Default or Unmatured Event of Default
occurs under this Agreement, and Agent will return such UCC-3 Financing
Statements to Borrower if such Leases are ultimately sold or refinanced on a
permanent basis with another lender;
(q) Each Lease is valid and enforceable and presents the
undisputed obligation of the Lessee named therein and is not more than sixty-one
(61) days contractually past due;
(r) Each item of Leased Property leased pursuant to a Lease
with a Lease Receivable in excess of 20,000 has been insured in the ordinary
course of Borrower's or the corresponding Lessee's business;
(s) Borrower has not received notice of a bankruptcy,
receivership, reorganization or insolvency of any Lessee;
<PAGE>
(t) No Lessee is a Subsidiary or Affiliate of Borrower, or is
an officer or employee of Borrower;
(u) Each Lease contains a provision whereby the Lessee agrees
not to assert any claim or reduction, counterclaim, setoff, recoupment or any
other claim, allowance or adjustment against any assignee of Borrower; and
(v) The Lessee is not otherwise in default under the
corresponding Lease.
SECTION 6. BORROWER'S AFFIRMATIVE COVENANTS
Borrower covenants that until all of Borrower's Obligations under or in
connection with this Agreement to Lenders and Agent are paid and satisfied in
full and the Revolving Credit has been terminated:
6.1 Payment of Taxes and Claims: Borrower shall pay, before they become
delinquent, all taxes, assessments and governmental charges or levies imposed
upon it or upon Borrower's Property, except for those taxes being contested in
good faith with due diligence by appropriate proceedings for which appropriate
reserves have been maintained pursuant to GAAP.
6.2 Maintenance of Properties and Corporate Existence:
<PAGE>
(a) Property Insurance - Borrower shall maintain or caused to
be maintained insurance on the Collateral against fire, flood, casualty and such
other hazards in such amounts, with such deductibles and with such insurers as
are customarily used by companies operating in the same industry as Borrower or
the corresponding Lessee. At or prior to Closing, Borrower shall furnish Agent
with copies of original insurance binders certified as true and correct and
being in full force and effect as of the Closing Date or such other evidence of
insurance as Agent may require. In the event Borrower fails to procure or cause
to be procured any such insurance or to timely pay or cause to be paid the
premium(s) on any such insurance, Agent (on behalf of Lenders) may do so for
Borrower, but Borrower shall continue to be liable for the same. The policies of
all such casualty insurance shall contain standard Lender's Loss Payable Clauses
issued in favor of Agent (on behalf of Lenders) under which all losses
thereunder shall be paid to Agent (on behalf of Lenders) as Agent's interest may
appear. Such policies shall expressly provide that the requisite insurance
cannot be altered or canceled without thirty (30) days prior written notice to
Agent and shall insure Lenders notwithstanding the act or neglect of Borrower.
Borrower hereby appoints Agent as Borrower's attorney-in-fact, exercisable at
Agent's option to endorse any check which may be payable to Borrower in order to
collect the proceeds of such insurance and any amount or amounts collected by
Agent pursuant to the provisions of this paragraph may be applied by Agent to
Borrower's Obligations. Borrower further covenants that all insurance premiums
owing under its current casualty policy have been paid. Borrower also agrees to
notify Agent, promptly, upon Borrower's receipt of a notice of termination,
cancellation, or non-renewal from its insurance company of any such policy.
(b) Public and Products Liability Insurance - Borrower shall
maintain, and shall deliver to Agent upon Agent's request evidence of, public
liability, products liability and business interruption insurance in such
amounts as is customary for companies in the same or similar businesses located
in the same or similar area.
(c) Financial Records - Borrower shall keep current and
accurate books of records and accounts in which full and correct entries will be
made of all of its business transactions, and will reflect in its financial
statements adequate accruals and appropriations to reserves, all in accordance
with GAAP. Borrower shall not change its respective fiscal year end date without
the prior written consent of Agent.
(d) Corporate Existence and Rights - Borrower shall do (or
cause to be done) all things necessary to preserve and keep in full force and
effect its existence, good standing, rights and franchises.
<PAGE>
(e) Compliance with Laws - Borrower shall be in compliance
with any and all laws, ordinances, governmental rules and regulations, and court
or administrative orders or decrees to which it is subject, whether federal,
state or local, (including without limitation environmental or
environmental-related laws, statutes, ordinances, rules, regulations and notices
and all applicable consumer sale and/or leasing laws and regulations), and shall
obtain and maintain any and all licenses, permits, franchises or other
governmental authorizations necessary to the ownership of its Property or to the
conduct of its businesses, which violation or failure to obtain may materially
adversely affect the business, Property, financial conditions or prospects of
Borrower.
6.3 Business Conducted: Borrower shall continue in the business
presently operated by it using its best efforts to maintain its customers and
goodwill. Borrower shall not engage, directly or indirectly, in any material
respect in any line of business substantially different from the businesses
conducted by it immediately prior to the Closing Date, unless such line of
business is reasonably related to such business so conducted prior to the
Closing Date.
6.4 Litigation: Borrower shall give prompt notice to Agent of any
litigation claiming in excess of $100,000 from Borrower, or which may otherwise
have a material adverse effect on the business, financial condition, Property or
prospects of Borrower.
6.5 Taxes:
(a) Borrower shall pay all taxes (other than taxes based upon
or measured by any Lender's income or revenues), if any, in connection with the
Loans and/or the recording of any Lien Documents. The obligations of Borrower
under this section shall survive the payment of Borrower's Obligations under
this Agreement and the termination of this Agreement. Borrower shall cause to be
paid all taxes incurred in connection with any of the Leases or the acquisition,
sale or lease of any of the Leased Property.
<PAGE>
6.6 Bank Accounts: Borrower shall maintain its major depository and
disbursement account(s) with Agent.
6.7 Warranties for Future Advances: Each request by Borrower for an
Advance under the Credit Facility in any form following the Closing Date shall
constitute an automatic representation and warranty by Borrower to the effect
that:
(a) There has been no material adverse change in Borrower's
operations or condition (financial or otherwise) since the date of delivery of
Borrower's most recent Financial Statements.
(b) No Event of Default which has not been cured or waived, or
Unmatured Event of Default, then exists;
(c) Each Advance is within and complies with the terms and
conditions of this Agreement including without limitation the notice provisions
contained in Section 2.3 hereof;
(d) No Lien, including, without limitation, any federal tax
Lien, has been imposed on Borrower which may, in any way, take priority over
Agent's and/or Lenders' security interests in or Liens on any Collateral; and
(e) Each representation and warranty set forth in Section 5 of
this Agreement is then true and correct in all material respects.
6.8 Financial Covenants: Borrower shall maintain and comply with the
following financial covenants as reflected on and computed from their Financial
Statements:
(a) Adjusted Debt to Tangible Net Worth Ratio: Borrower shall
have and maintain at all times an Adjusted Debt to Tangible Net Worth Ratio on a
consolidated basis, measured quarterly as of the last day of each fiscal quarter
during each fiscal year, of not more than 5.5 to 1.
<PAGE>
(b) Tangible Net Worth: Borrower shall have and maintain a
Tangible Net Worth of not less than $8,000,000 as of June 30, 1998. As of the
last day of each fiscal quarter thereafter, Borrower shall have a Tangible Net
Worth of not less than the amount required hereby for the immediately preceding
fiscal quarter plus an amount equal to 75% of the Borrower's Net Income for the
immediately preceding fiscal quarter (for the purposes of such step-up, Net
Income shall never be less than zero). The amount of Tangible Net Worth required
to be maintained by Borrower pursuant to this Section 6.8(b) shall be adjusted
upon receipt by Borrower of the net proceeds of any capital contribution by an
amount to be agreed upon by Borrower and Agent.
(c) Fixed Charge Coverage Ratio: Borrower shall have and
maintain as of the end of each fiscal quarter, based on financial information
for the twelve-month period ending as of the end of such fiscal quarter, on a
consolidated basis, a Fixed Charge Coverage Ratio of not less than 1.50 to 1.
6.9 Change of Ownership Interests/Management: Resource America, Inc.
and/or Abraham Bernstein shall at all times own 51% of the aggregate voting
interests of all classes of capital stock of Borrower entitled to vote generally
and Abraham Bernstein shall at all times remain as Chief Executive Officer of
Borrower and have a substantial equity interest (including options) in Borrower.
6.10 Financial and Business Information: Borrower shall deliver to
Agent and each Lender the following:
(a) Financial Statements and Collateral Reports: such data,
reports, statements and information, financial or otherwise, as Agent may
reasonably request, including, without limitation:
<PAGE>
(i) within one hundred twenty (120) days after the
end of each fiscal year of Borrower, Financial Statements of Borrower for such
year including the balance sheet of Borrower as at the end of such fiscal year
and a statement of cash flows and income statement for such fiscal year, all on
a consolidated and consolidating basis, setting forth in the consolidated
statements in comparative form, the corresponding figures as at the end of and
for the previous fiscal year, all in reasonable detail, including all supporting
schedules, and audited and certified by independent public accountants of
recognized standing, selected by Borrower and satisfactory to the Agent (Grant
Thornton being deemed satisfactory to Agent), to have been prepared in
accordance with GAAP, and such independent public accountants shall also provide
an unqualified opinion that the Financial Statements present fairly the
Borrower's financial condition. Such independent accountants shall also provide
a statement certifying that nothing has come to their attention to cause them to
believe that calculations contained in the compliance certificate are
inaccurate.
(ii) within fifteen (15) days of the end of each
calendar month, Borrower's Lease receivables aging report, covenant compliance
certificate and such other reports as Agent reasonably deems necessary,
certified by Borrower's chief financial officer or other officer acceptable to
Agent as true and correct, all in form and substance satisfactory to Agent;
(iii) within fifteen (15) days after the end of each
month, Borrower's internally prepared monthly consolidated and consolidating
Financial Statements, including balance sheet, income statement and statements
of cash flows.
(b) Notice of Event of Default - promptly upon becoming aware
of the existence of any condition or event which constitutes a default or an
Event of Default or Unmatured Event of Default under this Agreement, a written
notice specifying the nature and period of existence thereof and what action
Borrower is taking (and proposes to take) with respect thereto;
(c) Notice of Claimed Default - promptly upon receipt by
Borrower, notice of default, oral or written, given to Borrower by any creditor
for borrowed money in excess of $50,000;
(d) Securities and Other Reports - if Borrower or any
Affiliate shall be required to file reports with the Securities and Exchange
Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, promptly upon its becoming available, one copy of each
financial statement, report, notice or proxy statement sent by Borrower or such
Affiliate to stockholders generally, and, a copy of each regular or periodic
report, and any registration statement, or prospectus in respect thereof, filed
by Borrower with any securities exchange or with federal or state securities and
exchange commissions or any successor agency.
<PAGE>
6.11 Officers' Certificates: Along with the set of Financial Statements
delivered to Agent and each Lender at the end of each fiscal quarter and fiscal
year pursuant to Section 6.9(a) hereof, deliver to Agent and each Lender a
certificate (in the form of Exhibit "6.11" attached hereto and made a part
hereof) from the chief financial officer or other officer of Borrower acceptable
to Agent (and as to certificates accompanying the annual statements of Borrower,
also certified by Borrower's independent certified public accountant) setting
forth:
(a) Covenant Compliance - the information (including detailed
calculations) required in order to establish whether Borrower is in compliance
with the requirements of Sections 6.8 as of the end of the period covered by the
financial statements then being furnished (and any exhibits appended thereto)
under Section 6.10; and
(b) Event of Default - that the signer, in his capacity as an
officer of Borrower, has reviewed the relevant terms of this Agreement, and has
made (or caused to be made under his supervision) a review of the transactions
and conditions of Borrower from the beginning of the accounting period covered
by the Financial Statements being delivered therewith to the date of the
certificate, and that such review has not disclosed the existence during such
period of any condition or event which constitutes an Event of Default or
Unmatured Event of Default or if any such condition or event existed or exists,
specifying the nature and period of existence thereof and what action Borrower
has taken or proposes to take with respect thereto.
6.12 Inspection: Borrower will permit any of Agent's officers or other
representatives to visit and inspect any of Borrower's locations or where any
Collateral is kept during regular business hours, to examine and audit all of
Borrower's books of account, records, reports and other papers, to make copies
and extracts therefrom and to discuss its affairs, finances and accounts with
its officers, employees and independent certified public accountants. Agent will
notify Lenders within a reasonable time of each scheduled field examination and
to the extent reasonably practicable, representatives of each Lender may
accompany Agent during each such field examination. Prior to the occurrence of
an Event of Default, up to two (2) such (and after the occurrence of an Event of
Default, all such) examinations shall be at Borrower's expense at the standard
rates charged by the Agent or an outside firm engaged to perform such services,
for such activities (plus the Agent's or such outside firm's out-of-pocket
expenses).
<PAGE>
6.13 Tax Returns and Reports: At Agent's or any Lender's request from
time to time, Borrower shall promptly furnish Agent and each Lender with copies
of the annual federal and state income tax returns of Borrower.
6.14 Material Adverse Developments: Borrower agrees that immediately
upon becoming aware of any development or other information which would
reasonably be expected to materially and adversely affect its businesses,
financial condition, Property, prospects or its ability to perform under this
Agreement, it shall give to Agent telephonic or telegraphic notice specifying
the nature of such development or information and such anticipated effect. In
addition, such verbal communication shall be confirmed by written notice thereof
to Agent on the next business day after such verbal notice is given.
6.15 Places of Business: Borrower shall give thirty (30) days prior
written notice to Agent of any changes in the location of any of its respective
places of business, of the places where Books and Records are kept, or the
establishment of any new, or the discontinuance of any existing place of
business.
6.16 Sale of Collateral: Borrower shall mark its Books and Records to
indicate Agent's security interest in the Collateral for the benefit of Lenders,
including the Leases and Leased Property and, unless Agent consents otherwise in
writing, Borrower shall retain title at all times to the Leased Property;
provided however, that so long as no Event of Default or Unmatured Event of
Default has occurred, Borrower may, subject to the prepayment provisions set
forth herein, sell (i) Leases and Leased Property pursuant to Securitization
Transactions or other Nonrecourse Financing of Borrower. So long as no Event of
Default or Unmatured Event of Default has occurred, upon receipt of the proceeds
(if required) from the sale of such Leases and/or Leased Property, Agent shall
execute such documentation as is reasonably necessary to release its security
interest in such Leases and/or Leased Property.
SECTION 7. BORROWER'S NEGATIVE COVENANTS:
Borrower covenants that until all of Borrower's Obligations under or in
connection with this Agreement to Lenders are paid and satisfied in full and the
Credit Facility has been terminated, that:
<PAGE>
7.1 Merger, Consolidation, Dissolution or Liquidation:
(a) Borrower shall not sell, lease, license, transfer or
otherwise dispose of more than 10% of Borrower's aggregate assets during any 12
consecutive month period except in the ordinary course or ordinary operation of
Borrower's business and in Securitization Transactions or other non-recourse
financing.
(b) Borrower shall not enter into any merger, consolidation,
reorganization or recapitalization or acquire all or substantially all of the
assets of any other Person or entity except for a merger, consolidation or
acquisition in which properties and assets of Borrower are transferred to or
combined with, as a single entity, any one Person, so long as (A) no Event of
Default or Unmatured Event of Default has occurred hereunder and that after
giving effect to such merger, consolidation or acquisition, no Event of Default
or Unmatured Event of Default shall have occurred, and (B) Borrower shall be the
surviving corporation.
7.2 Liens and Encumbrances: Borrower shall not: (i) execute a negative
pledge agreement with any Person covering any of the Collateral, or (ii) cause
or permit or agree or consent to cause or permit in the future (upon the
happening of a contingency or otherwise) the Collateral, whether now owned or
hereafter acquired, to be subject to a Lien;
7.3 Negative Pledge: Borrower shall not pledge, grant or permit any
Lien to exist on the common stock of its Subsidiaries nor on any Leases or
Leased Property (except those liens and assignments granted to Agent for the
benefit of Lenders).
7.4 Transactions With Affiliates or Subsidiaries:
<PAGE>
(a) Borrower shall not enter into any transaction with any
Subsidiary or other Affiliate including, without limitation, the purchase, sale,
lease or exchange of Property, or the loaning or giving of funds to any
Affiliate or any Subsidiary (other than a sale to a special purpose Subsidiary
in connection with a Securitization Transaction or other non-recourse sale),
unless (i) such Subsidiary or Affiliate is engaged in a business substantially
related to the business conducted by Borrower and the transaction is in the
ordinary course of and pursuant to the reasonable requirements of Borrower's
business and upon terms substantially the same and no less favorable to Borrower
as it would obtain in a comparable arm's-length transactions with any Person not
an Affiliate or a Subsidiary, and (ii) so long as such transaction is not
otherwise prohibited hereunder.
(b) Subject in any event to the limitations of Section 7.4(a)
above, Borrower shall not create or acquire any Subsidiary unless such
Subsidiary engages in a business substantially related to the business of
Borrower as conducted immediately prior to the Closing Date.
7.5 Guarantees: Excepting the endorsement in the ordinary course of
business of negotiable instruments for deposit or collection, Borrower shall not
become or be liable, directly or indirectly, primary or secondary, matured or
contingent, in any manner, whether as guarantor, surety, accommodation maker, or
otherwise, for the existing or future indebtedness of any kind of any Person.
7.6 Indebtedness: Borrower shall not incur or assume any indebtedness
for money borrowed or become a surety, guarantor of, or otherwise responsible or
liable in any manner with respect to, directly or indirectly, the indebtedness
of any Person except for: (i) Subordinated Indebtedness; (ii) trade debt
incurred in the ordinary course of Borrower's business; (iii) Non-Recourse Debt;
and (iv) unsecured intercompany Indebtedness to Affiliates to the extent the
outstanding principal balance thereof is at all times less than three (3) times
the then outstanding principal amount of Borrower's Subordinated Indebtedness.
7.7 Use of Lenders' Name: Borrower shall not use any Lender's name (or
the name of any of any Lender's Affiliates) or Agent's name in connection with
any of its business operations except to identify the existence of the Credit
Facility and the names of the Lenders and Agent in the ordinary course of
Borrower's business. Nothing herein contained is intended to permit or authorize
Borrower to make any contract on behalf of any Lender or Agent.
<PAGE>
SECTION 8. DEFAULT
8.1 Events of Default: Each of the following events shall constitute an
event of default ("Event of Default") and Agent shall thereupon have the option,
and the SuperMajority Lenders shall have the right to cause Agent, to declare
the Obligations immediately due and payable, all without demand, notice,
presentment or protest or further action of any kind (it also being understood
that the occurrence of any of the events or conditions set forth in
subparagraphs (j), (k) or (l) shall automatically cause an acceleration of the
Obligations):
(a) Payments - if Borrower fails to make any payment of
principal or interest under the Credit Facility within two days after Agent has
given notice that such payment was due; or
(b) Other Charges - if Borrower fails to pay any other
charges, fees, Expenses or other monetary obligations owing to any Lender or
Agent arising out of or incurred in connection with this Agreement within two
days after Agent has given notice that such payment is due and payable; or
(c) Particular Covenant Defaults - if Borrower fails to
perform, comply with or observe any covenant or undertaking contained in this
Agreement, provided, however, that in the case of Borrower's failure to perform,
comply with or observe the covenants contained in Sections 6.1, 6.2, 6.5, 6.10
or 6.11 ("Curable Covenant"), Borrower shall have five (5) days from the date on
which Borrower became aware or should have become aware of its failure to
perform, comply with or observe any such Curable Covenant to cure such
nonperformance or compliance to the satisfaction of Agent; or
(d) Financial Information - if any statement, report,
financial statement, or certificate made or delivered by Borrower or any of its
officers, employees or agents, to Agent or any Lender, is not true and correct,
in all material respects, when made; or
(e) Uninsured Loss - if there shall occur any uninsured damage
to or loss, theft, or destruction in excess of $100,000 with respect to any
portion of any Collateral; or
(f) Warranties or Representations - if any warranty,
representation or other statement by or on behalf of Borrower or any Guarantor
or pledgor contained in or pursuant to this Agreement, or in any document,
agreement or instrument furnished in compliance with, relating to, or in
reference to this Agreement, is false, erroneous, or misleading in any material
respect when made; or
<PAGE>
(g) Agreements with Others - if Borrower shall default beyond
any grace period under any agreement with any creditor for borrowed money or in
connection with any Securitization Transaction, each in an amount equal to or
greater than $250,000 and (i) such default consists of the failure to pay any
principal, premium or interest with respect to such indebtedness or (ii) such
default consists of the failure to perform any covenant or agreement with
respect to such indebtedness, if the effect of such default is to cause
Borrower's obligations which are the subject thereof to become due prior to its
maturity date or prior to its regularly scheduled date of payment or would
entitle such creditor to accelerate such obligations; or
(h) Other Agreements with Lenders - if Borrower breaches or
violates the terms of, or if a default or an Event of Default, occurs under, any
other existing or future agreement (related or unrelated) between or among
Borrower and Agent or any Lender or all Lenders, except with respect to
Non-Recourse Debt; or
(i) Judgments - if any final judgment for the payment of money
in excess of $250,000 which is not fully and unconditionally covered by
insurance shall be rendered; or
(j) Assignment for Benefit of Creditors, etc. - if Borrower
makes or proposes an assignment for the benefit of creditors generally, offers a
composition or extension to creditors, or makes or sends notice of an intended
bulk sale of any business or assets now or hereafter owned or conducted by
Borrower which might materially and adversely affect Borrower; or
(k) Bankruptcy, Dissolution, etc. - upon the commencement of
any action for the dissolution or liquidation of Borrower, or the commencement
of any proceeding to avoid any transaction entered into by Borrower, or the
commencement of any case or proceeding for reorganization or liquidation of
Borrower's debts under the Bankruptcy Code or any other state or federal law,
now or hereafter enacted for the relief of debtors, whether instituted by or
against Borrower; provided, however, that Borrower shall have sixty (60) days to
obtain the dismissal or discharge of involuntary proceedings filed against it,
it being understood that during such sixty (60) day period, no Lender shall be
obligated to make Advances hereunder and Agent may seek adequate protection in
any bankruptcy proceeding; or
<PAGE>
(l) Receiver - upon the appointment of a receiver, liquidator,
custodian, trustee or similar official or fiduciary for Borrower or for any of
Borrower's Property; or
(m) Execution Process, Seizure, etc. - the issuance of any
execution or distraint process against Borrower, or any Property of Borrower is
seized by any governmental entity, federal, state or local; or
(n) Termination of Business - if Borrower ceases any material
portion of its business operations as presently conducted; or
(o) Pension Benefits, etc. - if Borrower fails to comply with
ERISA, so that grounds exist to permit the appointment of a Trustee under ERISA
to administer Borrower's employee plans or to allow the pension benefit
guarantee corporation to institute a proceeding to appoint a trustee to
administer such plan(s), or to permit the entry of a Lien to secure any
deficiency or claim; or
(p) Investigations - any indication or evidence received by
Agent or any Lender that reasonably leads it to believe Borrower may have
directly or indirectly been engaged in any type of activity which, would be
reasonably likely to result in the forfeiture of any Property of Borrower to any
governmental entity, federal, state or local; or
(q) Guarantor Default - Any Guarantor shall default under,
terminate, or disclaim liability under its Guaranty Agreement; or
(r) Stock Pledgor Default - Resource Leasing, Inc. or Resource
America, Inc. shall, default under their respective Stock Pledge Agreement; or
(s) Default under Subordination Agreement - Resource Leasing,
Inc. or Borrower shall default under the terms of the Subordination Agreement.
8.2 Cure - Nothing contained in this Agreement or the Loan Documents
shall be deemed to compel Agent and/or Lenders to accept a cure of any Event of
Default hereunder.
<PAGE>
8.3 Rights and Remedies on Default:
(a) In addition to all other rights, options and remedies
granted or available to Agent or Lenders under this Agreement or the Loan
Documents, or otherwise available at law or in equity, upon or at any time after
the occurrence and during the continuance of an Event of Default or Unmatured
Event of Default, Agent may, in its discretion, and the SuperMajority Lenders
shall have the right to cause Agent to, withhold or cease making Advances under
the Credit Facility.
(b) In addition to all other rights, options and remedies
granted or available to Agent under this Agreement or the Loan Documents (each
of which is also then exercisable by Agent), Agent may, in its discretion, and
the SuperMajority Lenders shall have the right to cause Agent to, upon or at any
time after the occurrence and during the continuance of an Event of Default,
terminate the Credit Facility.
(c) In addition to all other rights, options and remedies
granted or available to Agent under this Agreement or the Loan Documents (each
of which is also then exercisable by Agent), Agent may, upon or at any time
after the occurrence of an Event of Default, exercise all rights under the UCC
and any other applicable law or in equity, and under all Loan Documents
permitted to be exercised after the occurrence of an Event of Default, including
the following rights and remedies (which list is given by way of example and is
not intended to be an exhaustive list of all such rights and remedies):
(i) The right to take possession of, and notify all
Lessees of the Agent's and Lenders' security interest in the Collateral and
require payment under the Leases to be made directly to Agent for the benefit of
Lenders and Agent may, in its own name or in the name of Borrower, exercise all
rights of lessor under the Leases and collect, sue for and receive payment on
all Leases, and settle, compromise and adjust the same on any terms as may be
satisfactory to Agent, in its sole and absolute discretion for any reason or
without reason and Agent may do all of the foregoing with or without judicial
process (including without limitation notifying the United States postal
authorities to redirect mail addressed to Borrower to an address designated by
Agent); or
<PAGE>
(ii) By its own means or with judicial assistance, subject
to the rights of the Lessees, enter Borrower's premises or location of
Collateral and take possession of the Collateral, or render it unusable, or
dispose of the Collateral on such premises in compliance with subsection (e)
below, without any liability for rent, storage, utilities or other sums, and
Borrower shall not resist or interfere with such action; or
(iii) Require Borrower, at Borrower's sole expense,
subject to the rights of the Lessees, to assemble all or any part of the
Collateral and make it available to Agent at any place designated by Agent; or
(iv) The right to reduce or modify the Maximum Credit
Limit, Borrowing Base or any portion thereof or the advance rates or to modify
the terms and conditions upon which Agent, on behalf of Lenders, may be willing
to consider making Advances under the Credit Facility or to take additional
reserves in the Borrowing Base for any reason.
(e) Borrower hereby agrees that a notice received by it at
least five (5) days before the time of any intended public sale or of the time
after which any private sale or other disposition of the Collateral is to be
made, shall be deemed to be reasonable notice of such sale or other disposition.
If permitted by applicable law, any Collateral which threatens to speedily
decline in value or which is sold on a recognized market may be sold immediately
by Agent without prior notice to Borrower. Borrower covenants and agrees not to
interfere with or impose any obstacle to Agent's exercise of its rights and
remedies with respect to the Collateral, after the occurrence of an Event of
Default hereunder.
8.4 Nature of Remedies: All rights and remedies granted Agent or
Lenders hereunder and under the Loan Documents, or otherwise available at law or
in equity, shall be deemed concurrent and cumulative, and not alternative
remedies, and Agent may proceed with any number of remedies at the same time
until all Obligations under or in connection with this Agreement are satisfied
in full. The exercise of any one right or remedy shall not be deemed a waiver or
release of any other right or remedy, and Agent, upon or at any time after the
occurrence of an Event of Default, may proceed against Borrower, at any time,
under any agreement, with any available remedy and in any order.
<PAGE>
8.5 Set-Off: If any bank account of Borrower with Agent or any Lender
or any participant is attached or otherwise liened or levied upon by any third
party, Agent or such Lender, as applicable, (and such participant) as agent for
Lenders shall have and be deemed to have, without notice to Borrower, the
immediate right of set-off and may apply the funds or amount thus set-off
against any of Borrower's Obligations hereunder.
SECTION 9. AGENT
As between the Agent, on one hand, and the Lenders, on the other hand,
the Agent and each of the Lenders, who are now or shall become parties to this
Agreement, agree as follows (with the consent and approval of Borrower):
9.1 Appointment and Authorization. Each Lender, and each subsequent
holder of any of the Revolving Credit Notes or Term Notes by its acceptance
thereof, hereby irrevocably appoints and authorizes the Agent to take such
action on its behalf and to exercise such powers under this Agreement as are
delegated to the Agent by the terms hereof, together with such powers as are
reasonably incidental thereto. Except as may be otherwise expressly provided
herein, Borrower is hereby authorized by the Lenders to deal solely with the
Agent in all transactions which affect the Lenders under this Agreement and the
Loan Documents. Provided, however, nothing herein shall prohibit any Lender from
communicating directly with Borrower concerning any matters related to the Loans
or Loan Documents. The rights, privileges and remedies accorded to the Agent
hereunder shall be exercised by the Agent on behalf of all of the Lenders.
9.2 General Immunity. Subject to the provisions of this Agreement, the
Agent will handle all transactions relating to the Loans and all other
Obligations, including, without limitation, all transactions with respect to
this Agreement, the Loan Documents and all related documents in accordance with
their usual banking practices. In performing its duties as Agent hereunder, the
Agent will take the same care as it takes in connection with loans in which it
alone is interested. However, neither the Agent nor any of its directors,
officers, agents or employees shall be liable for any action taken or omitted to
be taken by it or them hereunder or in connection herewith except for its or
their own gross negligence or willful misconduct.
<PAGE>
9.3 Consultation with Counsel. The Agent may consult with legal counsel
and any other professional advisors or consultants deemed necessary or
appropriate and selected by Agent and shall not be liable for any action taken
or suffered in good faith by it in accordance with the advice of such counsel.
9.4 Documents. The Agent shall not be under a duty to examine into or
pass upon the effectiveness, genuineness or validity of this Agreement or any of
the Revolving Credit Notes, Term Notes, or any other instrument or document
furnished pursuant hereto or in connection herewith, and the Agent shall be
entitled to assume that the same are valid, effective and genuine and what they
purport to be. In addition, the Agent shall not be liable for failing to make
any inquiry concerning the accuracy, performance or observance of any of the
terms, provisions or conditions of such instrument or document.
9.5 Rights as a Bank. With respect to its applicable Pro Rata
Percentage of the Credit Facility, the Agent shall have the same rights and
powers hereunder as any other Lender and may exercise the same as though it were
not the Agent, and the term "Lender" or "Lenders" shall, unless the context
otherwise indicates, include the Agent in its individual capacity. Subject to
the provisions of this Agreement, the Agent may accept deposits from, lend money
to, and generally engage in any kind of banking or trust business with Borrower
and its Affiliates as if it were not the Agent.
<PAGE>
9.6 Responsibility of Agent. It is expressly understood and agreed that
the obligations of the Agent hereunder are only those expressly set forth in
this Agreement and that the Agent shall be entitled to assume that no Event of
Default and no Unmatured Event of Default has occurred and is continuing, unless
the Agent has actual knowledge of such fact. Except to the extent Agent is
required by the Lenders pursuant to the express terms hereof to take a specific
action, the Agent shall be entitled to use its discretion with respect to
exercising or refraining from exercising any rights which may be vested in it
by, or with respect to taking or refraining from taking any action or actions
that it may be able to take under or in respect of, this Agreement and the Loan
Documents. The Agent shall not incur any liability under or in respect of this
Agreement and the Loan Documents by acting upon any notice, consent,
certificate, warranty or other paper or instrument believed by it to be genuine
or authentic or to be signed by the proper party or parties, or with respect to
anything that either of them may do or refrain from doing in the reasonable
exercise of its judgment, or that may seem to them to be necessary or desirable
under the circumstances. It is agreed among the Agent and the Lenders that the
Agent shall not have any responsibility to carry out field examinations or
otherwise examine the books and records or properties of Borrower, except as the
Agent, in its sole discretion, deems appropriate. The relationship between the
Agent and each Lender is and shall be that of agent and principal only and
nothing herein shall be construed to constitute the Agent a joint venturer with
any Lender, a trustee or fiduciary for any of the Lenders or for the holder of a
participation therein nor impose on the Agent duties and obligations other than
those set forth herein.
9.7 Collections and Disbursements.
(a) The Agent will have the right to collect and receive all
payments of the Obligations, together with all fees, charges and other amounts
due under this Agreement and the Loan Documents, and the Agent will remit to
each Lender according to applicable Pro Rata Percentages all such payments
actually received by Agent (subject to any required clearance procedures) on the
same Business Day of receipt thereof (but if such payments shall not have been
received by the Agent prior to 12:00 noon Eastern Time on such Business Day
then, on the next Business Day).
(b) On the Business Day for which notice is given Lenders by
Agent with respect to requested Advances (which notice shall state the date and
amount of such payment), each Lender shall remit to the Agent its Pro Rata
Percentage of the payment in respect to such Advance. The obligations of Lenders
hereunder are unconditional, not subject to set-off, and irrevocable and may not
be terminated at any time.
(c) If any such payment received by the Agent is rescinded,
determined to be unenforceable or invalid or is otherwise required to be
returned for any reason at any time, whether before or after termination of this
Agreement and the Loan Documents, each Lender will, upon written notice from the
Agent, promptly pay over to the Agent its Pro Rata Percentage of the amount so
rescinded, held unenforceable or invalid or required to be returned, together
with interest and other fees thereon if also required to be rescinded or
returned.
<PAGE>
(d) All payments by the Agent and the Lenders to each other
hereunder shall be in immediately available funds. The Agent will at all times
maintain proper books of account and records reflecting the interest of each
Lender in the Credit Facility, in a manner customary to the Agent's keeping of
such records, which books and records shall be available for inspection by each
Lender at reasonable times during normal business hours, at such Lender's sole
expense. In the event that any Lender shall receive any payments in reduction of
the Obligations in an amount greater than its applicable Pro Rata Percentage in
respect of indebtedness to the Lenders evidenced hereby (including, without
limitation amounts obtained by reason of setoffs), such Lender shall hold such
excess in trust for Agent (on behalf of all other Lenders) and shall promptly
remit to the Agent such excess amount so that the amounts received by each
Lender hereunder shall at all times be in accordance with its applicable Pro
Rata Percentage. To the extent necessary for each Lender's actual percentage of
all outstanding Loans to equal its applicable Pro Rata Percentage, the Lender
having a greater share of any payment(s) than its applicable Pro Rata Percentage
shall acquire a participation in the applicable outstanding balances of the Pro
Rata Shares of the other Lenders as determined by Agent.
<PAGE>
9.8 Indemnification. The Lenders hereby each indemnify the Agent
ratably according to their respective Pro Rata Percentages, from and against any
and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind or nature
whatsoever that may be imposed on, incurred by or asserted against the Agent in
any way relating to or arising out of this Agreement or any other Loan Document
or any action taken or omitted by the Agent under or related to this Agreement
or the other Loan Documents or the Loans, provided that no Lender shall be
liable to Agent for any portion of such liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
resulting solely from the Agent's gross negligence or willful misconduct. Agent
shall have the right to deduct, from any amounts to be paid by Agent to any
Lender hereunder, any amounts owing to Agent by such Lender by virtue of this
paragraph. Provided all of the Obligations have been satisfied in full, if Agent
shall have received any sums from any of the Lenders pursuant to the terms of
this Section and the indemnified Agent receives additional payments from the
Collateral or elsewhere which could be used by such party pursuant to the terms
of this Agreement, the other Loan Documents, at law or in equity to satisfy the
liability, for which such party was indemnified, such additional payments shall
be applied against the liabilities for which such party was reimbursed and an
equal amount shall be reimbursed to the Lenders on a pro-rata basis based on the
respective amounts of their payments to the Agent made under this Section.
9.9 Expenses.
(a) All out-of-pocket costs and out-of-pocket expenses
incurred by Agent and not reimbursed on demand by Borrower, in connection with
the creation, amendment, administration, termination and enforcement of the
Loans (including, without limitation, field examination expenses, reasonable
counsel fees and expenditures to protect, preserve and defend Agent's and any
Lender's rights and interest under the Loan Documents) shall be shared and paid
on demand by Lenders pro rata, based on their applicable Pro Rata Percentage.
(b) Agent may deduct from payments or distributions to be made
to Lenders such funds as may be necessary to pay or reimburse Agent for such
costs or expenses.
9.10 No Reliance. By execution of or joining in this Agreement, each
Lender acknowledges that it has entered into this Agreement and the Loan
Documents solely upon its own independent investigation and is not relying upon
any information supplied by or any representations made by Agent. Each Lender
shall continue to make its own analysis and evaluation of Borrower. Agent makes
no representation or warranty nor assumes any responsibility with respect to the
financial condition or Property of Borrower, any Lessee or any Collateral; the
accuracy, sufficiency or currency of any information concerning the financial
condition, prospects or results of operations of Borrower; or for sufficiency,
authenticity, legal effect, validity or enforceability of the Loan Documents.
Agent assumes no responsibility or liability with respect to the collectibility
of the Obligations or the performance by Borrower of any obligation under the
Loan Documents.
<PAGE>
9.11 Reporting. During the term of this Agreement, Agent will promptly
furnish each Lender such financial statements and reports as any Lender may
reasonably request. Agent will notify Lenders within a reasonable period of time
(not to exceed ten (10) Business Days) after it receives actual knowledge of any
Event of Default under the Loan Documents.
9.12 Removal of Agent. The Agent may resign at any time upon giving
thirty (30) days prior written notice thereof to Lenders and Borrower. The Agent
may be removed as Agent hereunder upon the written direction of all Lenders
exclusive of the Agent upon the following: (i) willful misconduct in the
performance of Agent's duties or responsibilities under this Agreement; or (ii)
if a receiver, trustee or conservator is appointed for Agent or any state or
federal regulatory authority assumes management or control of Agent or if, under
applicable law, the administrative or discretionary duties and responsibilities
of Agent hereunder become controlled by or subject to the approval of any state
or federal regulatory authority. Upon any resignation or permitted removal of
Agent, the Lenders shall have the right to appoint a successor Agent by majority
vote of the other Lenders (based upon the percentages of the total Pro Rata
Shares of the Lenders other than the Lender which is the Agent). Upon the
acceptance of the appointment as a successor Agent hereunder by such successor
Agent, such successor Agent shall thereupon succeed to and become vested with
all rights, powers, obligations and duties of the retiring Agent and the
retiring Agent shall be discharged from its duties and obligations hereunder.
9.13 Action on Instructions of Lenders. With respect to any provision
of this Agreement, or any issue arising thereunder, concerning which the Agent
is authorized to act or withhold action by direction of one or more Lenders, the
Agent shall in all cases be fully protected in so acting, or in so refraining
from acting, hereunder in accordance with written instructions signed by the
requisite Lenders. Such instructions and any action taken or failure to act
pursuant thereto shall be binding on all Lenders and on all holders of the
Revolving Credit Notes and Term Notes.
9.14 Several Obligations. The obligation of each Lender is several, and
neither the Agent nor any other Lender shall be responsible for any obligation
or commitment hereunder of any other Lender.
9.15 Consent of Banks.
<PAGE>
(a) Subject to this Section 9.15, Agent shall have the sole
and exclusive right to service, administer and monitor the Loans and the Loan
Documents, including without limitation, the right to exercise all rights,
remedies, privileges and options under the Loan Documents.
(b) Notwithstanding anything to the contrary contained in
subparagraph (a) above, Agent shall not, without the prior written consent of
all Lenders: (i) extend or renew the Current Term or, any payment date under the
Credit Facility, (ii) decrease any interest rate on the Credit Facility, (iii)
compromise or settle all or a portion of the Obligations, (iv) release any
obligor from the Obligations except in connection with termination of the Credit
Facility and full payment and satisfaction of all Obligations, (v) increase the
Borrowing Base advance rate, (vi) modify Section 9.15(b) or (c), or (vii)
increase the Maximum Credit Limit; provided however that Agent may increase the
Maximum Credit Limit by first offering the amount of any such increase to each
of the Lenders in accordance with their respective Pro Rata Percentage. To the
extent any Lender(s) may choose not to increase its/their respective Pro Rata
Shares by the amount attributable to its/their Pro Rata Percentage of such
increase, such amount will be offered to the other Lenders on such sharing basis
as Agent may reasonably establish. After each Lender choosing to increase its
Pro Rata Share has agreed to do so, and in conjunction with the modification of
this Agreement to reflect such increase executed by those Lenders sharing in the
increase of the Credit Facility, the Lenders' Pro Rata Percentages will be
adjusted accordingly and all Lenders (whether or not sharing in such increase)
shall be bound by such modification.
(c) Notwithstanding anything to the contrary contained in
subparagraph (a) above and subject to the terms of subparagraph (b) above, Agent
shall not, without the prior written consent of all Lenders: (i) enter into any
written amendment to any of the Loan Documents; (ii) waive Borrower's compliance
with the terms and conditions of the Loan Documents or any Event of Default
hereunder or thereunder; (iii) consent to Borrower taking any action which, if
taken, would constitute an Event of Default under this Agreement or under any of
the Loan Documents; or (iv) release any Collateral other than Collateral which
Borrower seeks to have released from the Agent's lien (for the benefit of
Lenders) in the ordinary course of Borrower's business.
<PAGE>
(d) After an acceleration of the Obligations, Agent shall have
the sole and exclusive right, with communication (to the extent reasonably
practicable under the circumstances) with all Lenders, to exercise or refrain
from exercising any and all rights, remedies, privileges and options under the
Loan Documents and available at law or in equity to protect and enforce the
rights of the Lenders and collect the Obligations, including, without
limitation, instituting and pursuing all legal actions against Borrower or to
collect the Obligations, or defending any and all actions brought by Borrower or
other Person; or incurring Expenses or otherwise making expenditures to protect
the Loans, the Collateral or Lenders' rights or remedies.
(e) To the extent Agent is required to obtain or otherwise
elects to seek the consent of the other or Lenders to an action Agent desires to
take, if Agent or any Lender fails to notify such Person, in writing, of its
consent or dissent to any request of Agent hereunder within seven (7) Business
Days of such Person's actual receipt of such request, the Person whose consent
is sought, shall be deemed to have given its consent thereto.
(f) No provision in Section 9 of this Agreement may be amended
without Agent's prior written consent.
9.16 Participations and Assignments: Borrower hereby acknowledges and
agrees that a Lender may at any time:
<PAGE>
(a) grant participations in up to forty-nine percent (49%) (up
to 100% to an Affiliate of such Lender) of its Pro Rata Percentage and Pro Rata
Share or of its right, title and interest therein or in or to this Agreement
(collectively, "Participations") or to any other bank, lending institution or
other entity which the granting Lender reasonably determines has the requisite
sophistication to evaluate the merits and risks of investments in participations
("Participants"); provided, however, that: (i) all amounts payable by the
Borrower to each Lender hereunder shall be determined as if such Lender had not
granted such Participation; and (ii) any agreement pursuant to which any Lender
may grant a Participation: (A) shall provide that such Lender shall retain the
sole right and responsibility to enforce the obligations of the Borrower
hereunder including, without limitation, the right to approve any amendment,
modification or waiver of any provisions of this Agreement; (B) such
participation agreement may provide that such Lender will not agree to any
modification, amendment or waiver of this Agreement without the consent of the
Participant if such amendment, modification or waiver would reduce the principal
of or rate of interest on the Loans, increase the amount of the Maximum Credit
Limit, postpone the date fixed for any scheduled payment of principal of or
interest on the Loans or release Collateral for the Loans, subject to Section
9.15 hereof; and (C) shall not relieve such Lender from its obligations, which
shall remain absolute, to make Advances hereunder; and
(b) assign all or any portion of its Pro Rata Share (together
with its rights and obligations with respect thereto), and its right, title and
interest therein or in and to this Agreement and the other Loan Documents to a
Lender or any affiliate of a Lender; or to any other bank or financial
institution, in each case with thirty (30) days prior written notice to Agent
and subject to the prior written consent of the Agent which consent shall not be
unreasonably withheld; provided however that (i) such assignment shall not
result in either the assigning or acquiring Lender having a Pro Rata Share of
less than $5,000,000 and (ii) the parties to such assignment shall execute such
assignment or other documents reasonably requested by Agent and Borrower shall
execute such replacement Revolving Credit Notes as may be requested by Agent,
and (iii) the parties to the assignment shall pay Agent a processing fee of
$2,500 in conjunction with such assignment. All Participations and assignments
hereunder shall be of the Pro Rata Percentage or Pro Rata Share of the Lender
making the assignment or granting the Participation. Notwithstanding the
foregoing or anything else contained in this Agreement or any of the other Loan
Documents, any Lender may assign or pledge all or any portion of its Pro Rata
Share (including, without limitation, its rights with respect thereto), and its
right, title and interest therein or in and to this Agreement and the other Loan
Documents to a Federal Reserve Bank in support of borrowings made by such Lender
from such Federal Reserve Bank.
<PAGE>
SECTION 10. MISCELLANEOUS
10.1 GOVERNING LAW: THIS AGREEMENT, AND ALL RELATED AGREEMENTS AND
DOCUMENTS, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE
LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. THE PROVISIONS OF THIS AGREEMENT, THE
OTHER LOAN DOCUMENTS AND ALL OTHER AGREEMENTS AND DOCUMENTS REFERRED TO HEREIN
ARE TO BE DEEMED SEVERABLE, AND THE INVALIDITY OR UNENFORCEABILITY OF ANY
PROVISION SHALL NOT AFFECT OR IMPAIR THE REMAINING PROVISIONS WHICH SHALL
CONTINUE IN FULL FORCE AND EFFECT.
10.2 Integrated Agreement: The Revolving Credit Notes, the Term Notes,
the other Loan Documents, all related agreements, and this Agreement shall be
construed as integrated and complementary of each other, and as augmenting and
not restricting Lenders' and Agent's rights and remedies. If, after applying the
foregoing, an inconsistency still exists, the provisions of this Agreement shall
constitute an amendment thereto and shall control.
10.3 Waiver:
(a) No omission or delay by Agent or Lenders in exercising any
right or power under this Agreement or any related agreements and documents will
impair such right or power or be construed to be a waiver of any default, or
Event of Default or an acquiescence therein, and any single or partial exercise
of any such right or power will not preclude other or further exercise thereof
or the exercise of any other right, and as to Borrower no waiver will be valid
unless in writing and signed by Agent and then only to the extent specified.
<PAGE>
(b) Borrower releases and shall indemnify, defend and hold
harmless Agent and Lenders, and their respective officers, employees and agents,
of and from any claims, demands, liabilities, obligations, judgments, injuries,
losses, damages and costs and expenses (including, without limitation,
reasonable legal fees) resulting from (i) acts or conduct of Borrower or under,
pursuant or related to this Agreement and the other Loan Documents, (ii)
Borrower's breach or violation of any representation, warranty, covenant or
undertaking contained in this Agreement or the other Loan Documents, and (iii)
Borrower's failure to comply with any or all laws, statutes, ordinances,
governmental rules, regulations or standards, whether federal, state or local,
or court or administrative orders or decrees, (including without limitation
environmental laws, etc.) and all costs, expenses, fines, penalties or other
damages resulting therefrom, unless resulting solely from acts or conduct of
Lenders constituting wilful misconduct or gross negligence.
10.4 Time: Whenever Borrower shall be required to make any payment, or
perform any act, on a day which is not a Business Day, such payment may be made,
or such act may be performed, on the next succeeding Business Day. Time is of
the essence in Borrower's performance under all provisions of this Agreement and
all related agreements and documents.
10.5 Expenses of Agent and Lenders: At Closing and from time to time
thereafter, Borrower will pay all reasonable expenses of Agent (and after the
occurrence of an Event of Default, all expenses of Lenders and Agent, or any of
them) on demand (including, without limitation, search costs, audit fees,
appraisal fees, environmental fees and the fees and expenses of legal counsel
for Agent and Lender(s), if applicable) relating to this Agreement, and all
related agreements and documents, including, without limitation, expenses
incurred in the analysis, negotiation, preparation, closing, administration and
enforcement of this Agreement and the other Loan Documents, the enforcement,
protection and defense of the rights of Agent and Lenders in and to the Loans
and Collateral or otherwise hereunder, and any expenses relating to extensions,
amendments, waivers or consents pursuant to the provisions hereof, or any
related agreements and documents or relating to agreements with other creditors,
or termination of this Agreement (collectively, the "Expenses").
10.6 Brokerage: This transaction was brought about and entered into by
Agent, Lenders and Borrower acting as principals and without any brokers, agents
or finders being the effective procuring cause hereof. Borrower represents that
it has not committed Agent or any Lender to the payment of any brokerage fee,
commission or charge in connection with this transaction.
<PAGE>
10.7 Notices:
(a) Any notices or consents required or permitted by this
Agreement shall be in writing and shall be deemed given if delivered in person
or if sent by telecopy or by nationally recognized overnight courier, or via
first class, Certified or Registered mail, postage prepaid, as follows, unless
such address is changed by written notice hereunder:
If to Agent to: First Union National Bank
1339 Chestnut Street
Philadelphia, PA 19107
Attn: Grainne Pergolini
Vice President
Telecopy No.: 215/786-7704
With copies to: Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, PA 19103
Attn: Lawrence F. Flick, II, Esquire
Telecopy No.: 215/569-5522
If to Borrower to: Fidelity Leasing, Inc.
7 E. Skippack Pike
Ambler, PA 19002
Attn: Abraham Bernstein
Telecopy No.: 215/619-2830
With copies to: Richard Abt, Esquire
Ledgwood Law Firm, P.C.
1521 Locust Street, 4th Floor
Philadelphia, PA 19102
Telecopy No.: 215/735-2513
If to Lenders: to the addresses set forth on Schedule A
(b) Any notice sent by Agent, any Lender or Borrower by any of
the above methods shall be deemed to be given when so received.
(c) Agent shall be fully entitled to rely upon any facsimile
transmission or other writing purported to be sent by any Authorized Officer
(whether requesting an Advance or otherwise) as being genuine and authorized.
10.8 Headings: The headings of any paragraph or Section of this
Agreement are for convenience only and shall not be used to interpret any
provision of this Agreement.
<PAGE>
10.9 Survival: All warranties, representations, and covenants made by
Borrower herein, or in any agreement referred to herein or on any certificate,
document or other instrument delivered by it or on its behalf under this
Agreement, shall be considered to have been relied upon by Agent and Lenders,
and shall survive the delivery to Lenders of the Notes, regardless of any
investigation made by Lenders or on their behalf. All statements in any such
certificate or other instrument prepared and/or delivered for the benefit of
Agent and any and all Lenders shall constitute warranties and representations by
Borrower hereunder. Except as otherwise expressly provided herein, all covenants
made by Borrower hereunder or under any other Loan Document shall be deemed
continuing until all Obligations under or in connection with this Agreement are
satisfied in full.
10.10 Successors and Assigns: This Agreement shall inure to the benefit
of and be binding upon the successors and assigns of each of the parties.
Borrower may not transfer, assign or delegate any of its duties or obligations
hereunder.
10.11 Counterparts: Two or more duplicate originals of this Agreement
may be signed by the parties, each of which shall constitute an original but all
of which together shall constitute one and the same instrument. This Agreement
may be executed in counterparts, all of which counterparts taken together shall
constitute one completed fully executed document.
10.12 Modification: No modification hereof or any agreement referred to
herein shall be binding or enforceable unless in writing and signed by Borrower,
Agent and the Lenders and except as provided in Section 9 hereof. Any
modification in accordance with the terms hereof shall be binding on all parties
hereto, whether or not each is a signatory thereto.
10.13 Signatories: Each individual signatory hereto represents and
warrants that he is duly authorized to execute this Agreement on behalf of his
principal and that he executes the Agreement in such capacity and not as a
party.
10.14 Third Parties: No rights are intended to be created hereunder, or
under any related agreements or documents for the benefit of any third party
donee, creditor or incidental beneficiary of Borrower. Nothing contained in this
Agreement shall be construed as a delegation to Agent or any Lender of
Borrower's duty of performance, including, without limitation, Borrower's duties
under any Lease, account or contract with any other Person.
<PAGE>
10.15 Discharge of Taxes, Borrower's Obligations, Etc.: Agent, in its
sole discretion, shall have the right at any time, and from time to time, with
prior notice to Borrower, if Borrower fails to do so five (5) Business Days
after requested in writing to do so by Agent, to: (a) pay for the performance of
any of Borrower's obligations hereunder, and (b) discharge taxes or Liens, at
any time levied or placed on any of Borrower's Property in violation of this
Agreement unless Borrower is in good faith with due diligence by appropriate
proceedings contesting such taxes or Liens and maintaining proper reserves
therefor in accordance with GAAP. Expenses and advances shall be added to the
Revolving Credit, bear interest at the same rate applied to the Revolving
Credit, until reimbursed to Agent. Such payments and advances made by Agent
shall not be construed as a waiver by Agent or Lenders of an Event of Default
under this Agreement.
10.16 Most Favored Lenders: Borrower agrees to promptly notify Agent in
writing if any agreement for borrowed money to which Borrower is a party,
contains or is amended to contain, financial or performance covenants more
restrictive than those contained herein and upon Agent's request, Borrower
agrees to amend this Agreement accordingly so that covenants contained herein
are substantially the same as those contained in such other agreements for
borrowed money so long as such covenants remain applicable to Borrower pursuant
to such other agreements.
10.17 Consent to Jurisdiction: Borrower and each Lender hereby
irrevocably consents to the jurisdiction of the Courts of Common Pleas of
Philadelphia, Commonwealth of Pennsylvania or the United States District Court
for the Eastern District of Pennsylvania in any and all actions and proceedings
whether arising hereunder or under any other agreement or undertaking and
irrevocably agree to service of process by certified mail, return receipt
requested to the address of the appropriate party set forth herein.
10.18 Waiver of Jury Trial: EACH OF BORROWER, LENDERS AND AGENT HEREBY
WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO A JURY TRIAL IN CONNECTION WITH ANY
LITIGATION COMMENCED BY OR AGAINST AGENT OR ANY LENDER OR LENDERS WITH RESPECT
TO RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO OR UNDER THE LOAN DOCUMENTS.
<PAGE>
10.19 Information to Participant: Agent and each Lender may divulge to
any participant, co-lender or assignee or prospective participant, co-lender or
assignee it may obtain in the Credit Facility, or any portion thereof, all
information, and furnish to such Person copies of any reports, financial
statements, certificates, and documents obtained under any provision of this
Agreement, or related agreements and documents; provided, however that any
potential participant, co-lender or assignee agrees to hold in confidence all
confidential or proprietary information provided to them by Borrower, Agent or
such Lender except (a) to the extent that the production of such information is
required pursuant to any statute, ordinance, regulation, rule or order or any
subpoena or any governmental inquiry or by reason of any bank regulation in
connection with any bank examination, and (b) such potential participant,
co-lender or assignee shall not be prohibited from disclosing any such
information to any of their agents, officers, employees, attorneys, accountants
or consultants who shall be informed of this provision.
IN WITNESS WHEREOF, the undersigned parties have executed this
Agreement the day and year first above written.
FIDELITY LEASING, INC.
By:________________________________
Title:
Attest:____________________________
(Corporate Seal)
FIRST UNION NATIONAL BANK, as Agent
and Lender
By:________________________________
Title:
EUROPEAN AMERICAN BANK, as Lender
By:________________________________
Title:
<PAGE>
SCHEDULE A
Pro Rata
Lenders Pro Rata Share Percentage
European American Bank $7,500,000 37.5%
400 Oak Street
Garden City, NY 11530
Attn: Christopher Czaja, Vice President
Telecopy No.: (516) 364-3307
First Union National Bank $12,500,000 62.5%
1339 Chestnut Street
Philadelphia, PA 19101
Attn: Ms. Grainne Pergolini
Vice President
Telecopy No.: 215/786-7704
<PAGE>
Exhibit 2.3(b)(ii)
ASSIGNMENT AGREEMENT
Fidelity Leasing, Inc. (hereinafter "Assignor"), does hereby assign to
FIRST UNION NATIONAL BANK, as Agent, for the benefit of the Lenders (as defined
below) (hereinafter "Assignee"), its successors and assigns, all of the right,
title and interest of Assignor in and to (i) the Leases, as identified on the
Schedule "A" attached hereto and made a part hereof, the Leased Property which
is the subject matter of such Leases, and all proceeds thereof; and (ii) all of
the interest of Assignor as loss payee or beneficiary under any insurance
policies issued in connection with any Lease or any Leased Property which is the
subject matter of any Lease.
This Assignment is entered into and delivered in accordance with and is
subject to that certain Loan and Security Agreement dated July __, 1998 among
Assignor, Assignee and the lenders now or hereafter shown on the signature pages
thereof (collectively "Lenders") (hereinafter "Agreement"). Assignee shall have
the right to sue for, collect, and receive all payments due or to become due
under the Leases, in accordance with the Agreement, with power to enforce in its
own name or in Assignor's name any and all rights given to Assignor thereunder.
All capitalized terms not otherwise defined herein shall have the meaning set
forth in the Agreement.
This Assignment and the subject matter hereof, is hereby given as
security for all of Assignor's Obligations.
Delivered herewith are the sole originals of all Leases referred to on
Schedule "A" attached hereto and made a part hereof.
Assignor agrees that Assignee shall not assume any of Assignor's
obligations or liabilities to the lessee/renter under any Leases.
All of the representations and warranties contained in the Agreement
with respect to Assignor, the Leases and the Leased Property are true, correct
and complete as of the date of this Assignment and no Event of Default has
occurred under the Agreement.
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused these presents to be
executed by its duly authorized officer this _____ day of _____________________,
19___.
FIDELITY LEASING, INC.
Attest:_____________________ By:___________________________
Title:________________________
<PAGE>
Exhibit 2.1(e)
First Union National Bank, as Agent
Computation of Borrowing Base Availability
for the ________________, 19___ for
Fidelity Leasing, Inc.
- - --------------------------------------------------------------------------------
1. Total Eligible Lease Receivables
Currently Pledged to Agent $___________________
2. Additional Eligible Lease
Receivables Pledged to Agent
$________ Date:__________
$________ Date:__________ $___________________
3. Aggregate Sales Of Eligible
Lease Receivables To Date
During This Month
$________ Date:__________
$________ Date:__________ $___________________
4. Total Eligible Lease Receivables
Pledged To Agent (Line 1,
plus line 2, minus 3) $___________________
5. 80% of the sum of the gross
Lease Receivables balance
corresponding to Eligible Leases
pledged to Agent. $___________________
6. Aggregate Revolving Credit $___________________
Note Balances
7. Excess Of Total Eligible Lease
Receivables Over Revolving Credit
Note Balances (Line 5,
minus line 6) $___________________
<PAGE>
8. Maximum Availability $ 10,000,000
9. Availability Under Facility
(lesser of (i) line 8, minus
line 6 or (ii) line 7) $___________________
10. Amount Of Borrowing Request $___________________
11. Net Availability (Line 9, minus
line 10) $___________________
Borrower submits this computation pursuant to a certain Loan and Security
Agreement dated September 30, 1998 among Borrower, Agent and the Lenders now or
hereafter identified on the signature pages thereof, as amended from time to
time ("Loan Agreement") and certifies that all information contained herein and
representations and warranties made in the Loan Agreement are true and correct
as of the date hereof.
FIDELITY LEASING, INC.
DATE:_______________ BY:__________________________________
<PAGE>
EXHIBIT 11
CALCULATION OF BASIC AND FULLY
DILUTED EARNINGS PER SHARE
(in thousands except per share data)
<TABLE>
<CAPTION>
BASIC EARNINGS PER SHARE
1998 1997 1996
<S> <C> <C> <C>
Net income $27,611 $10,951 $5,147
Weighted average number of shares outstanding 16,703 10,434 5,670
------- ------- ------
Net income per share - Basic $ 1.65 $ 1.05 $ 0.91
======= ======= ======
DILUTED EARNINGS PER SHARE
1998 1997 1996
Net income $27,611 $10,951 $5,147
Add-interest on short-term debt, net of tax effect, on application
of assumed proceeds from exercise of options and warrants in excess
of 20% limitation 0 0 0
------- ------- ------
Net income, as adjusted $27,611 $10,951 $5,192
Additional adjustment to weighted average number of shares
outstanding:
Weighted average number of shares outstanding 16,703 10,434 5,670
Add-Dilutive effect of outstanding options and warrants (as
determined by the application of the treasury stock method) 565 2,640 2,601
------- ------- ------
Weighted average number of shares outstanding 17,268 13,074 8,271
Net income per share - diluted $ 1.60 $ 0.84 $ 0.62
======= ======= ======
</TABLE>
<PAGE>
EXHIBIT 12
COMPUTATION OF RATIOS
(in thousands)
<TABLE>
<CAPTION>
September 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income from continuing operations before income taxes $40,740 $14,931 $ 7,353
Fixed charges 17,464 5,273 872
------ ------ ------
Total $58,204 $20,204 $ 8,225
Earnings to fixed charges(1) 3.33 3.83 9.43
</TABLE>
(1) 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.
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
Entity State of Incorporation
- - ------ ----------------------
Resource Energy, Inc. Delaware
DAC Acquisition Corporation Delaware
REI-NY, Inc. Delaware
Resource Well Services, Inc. Delaware
St. Julien III Corporation Pennsylvania
Atlas America, Inc. Pennsylvania
AIC, Inc. Delaware
Anthem Securities, Inc. Pennsylvania
Atlas Energy Corporation Ohio
Transatco, Inc. Ohio
Atlas Gas Marketing, Inc. Pennsylvania
PA Industrial Energy, Inc. Pennsylvania
Mercer Gas Gathering, Inc. Pennsylvania
Atlas Information Management, L.L.C. Pennsylvania
Atlas Energy Group, Inc. Ohio
AED Resources, Inc. Delaware
Atlas Resources, Inc. Pennsylvania
ARD Investments, Inc. Delaware
Resource Leasing, Inc. Delaware
Fidelity Leasing, Inc. Pennsylvania
Fidelity Leasing SPC I, Inc. Delaware
FL Partnership Management, Inc. Delaware
FL Financial Services, Inc. Delaware
Resource Properties, Inc. Delaware
Resource Properties II, Inc. Delaware
Resource Properties III, Inc. Delaware
Resource Properties IV, Inc. Delaware
Resource Properties V, Inc. Delaware
Resource Properties VI, Inc. Delaware
Resource Properties VII, Inc. Delaware
Resource Properties VIII, Inc. Delaware
Resource Properties IX, Inc. Delaware
Resource Properties X, Inc. Delaware
Resource Properties XI, Inc. Delaware
Resource Properties XII, Inc. Delaware
Resource Properties XIII, Inc. Delaware
Resource Properties XIV, Inc. Delaware
Resource Properties XV, Inc. Delaware
Resource Properties XVI, Inc. Delaware
Resource Properties XVII, Inc. Delaware
Resource Properties XVIII, Inc. Delaware
Resource Properties XIX, Inc. Delaware
Resource Properties XX, Inc. Delaware
Resource Properties XXI, Inc. Delaware
Resource Properties XXII, Inc. Delaware
<PAGE>
Entity State of Incorporation
- - ------ ----------------------
Resource Properties XXIII, Inc. Delaware
Resource Properties XXIV, Inc. Delaware
Resource Properties XXV, Inc. Delaware
Resource Properties XXVI, Inc. Delaware
Resource Properties XXVII, Inc. Delaware
Resource Properties XXVIII, Inc. Delaware
Resource Properties XXIX, Inc. Delaware
Resource Properties XXX, Inc. Delaware
Resource Properties XXXI, Inc. Delaware
Resource Properties XXXII, Inc. Delaware
Resource Properties XXXIII, Inc. Delaware
Resource Properties XXXIV, Inc. Delaware
Resource Properties XXXV, Inc. Delaware
Resource Properties XXXVI, Inc. Delaware
Resource Properties XXXVII, Inc. Delaware
Resource Properties XXXVIII, Inc. Delaware
Resource Properties XXXIX, Inc. Delaware
Resource Properties XL, Inc. Delaware
Resource Properties XLI, Inc. Delaware
Resource Properties XLII, Inc. Delaware
Resource Properties XLIII, Inc. Delaware
Resource Properties XLIV, Inc. Delaware
Resource Properties XLV, Inc. Delaware
Resource Properties XLVI, Inc. Delaware
Resource Properties XLVII, Inc. Delaware
Resource Properties XLVIII, Inc. Delaware
Resource Properties XLIX, Inc. Delaware
Resource Properties 50, Inc. Delaware
Resource Properties 51, Inc. Delaware
Resource Properties 52, Inc. Delaware
Resource Properties 53, Inc. Delaware
RAI Financial Services, Inc. Delaware
10 Melrose Avenue, Inc. Delaware
RPI Mortgage Funding, Inc. Delaware
Rancho Investments, Inc. Delaware
Resource Commercial Mortgages, Inc. Delaware
Resource Financial Services, Inc. Delaware
Resource Programs, Inc. Delaware
WS Mortgage Acquisition Corporation Delaware
Resource Funding, Inc. Delaware
Resource Housing Investors I, Inc. Delaware
Resource Housing Investors II, Inc. Delaware
Resource Housing Investors III, Inc. Delaware
Resource Housing Investors IV, Inc. Delaware
Abb Associates I, Inc. Delaware
Abb Associates II, Inc. Delaware
Oseb GP, Inc. Delaware
Resource Brokerage, Inc. Delaware
<PAGE>
Entity State of Incorporation
- - ------ ----------------------
Fidelity Mortgage Funding, Inc. Delaware
Bryn Mawr Resources, Inc. Delaware
BMR Holdings, Inc. Delaware
Bryn Mawr Energy Company Pennsylvania
Bryn Mawr Properties Advisors, Inc. Pennsylvania
<PAGE>
EXHIBIT 23.1
Wright & Company, Inc.
December 23, 1998
Mr. Jeffrey C. Simmons
Executive Vice President
Resource Energy, Inc.
2876 S. Arlington Road
Akron, OH 44312
Gentlemen:
Wright & Company, Inc. (Wright) hereby consent to the use of our report
dated November 24, 1998, on oil and gas reserves owned by Resource Energy, Inc.
and Atlas America, Inc., wholly owned subsidiaries of Resource America, Inc., in
Resource America, Inc.'s Annual Report on Form 10-K for the fiscal year ending
September 30, 1998.
Very truly yours,
Wright & Company, Inc.
By: /s/ D. Randall Wright
-------------------------
D. Randall Wright
President
- - --------------------------------------------------------------------------------
5200 Maryland Way o Suite 100 2929 Briarpark Drive o Suite 138
Brentwood, Tennessee 37027 Houston, Texas 77042
(615) 730-0755 Fax (615) 370-0756 (713) 977-7655 Fax (713) 789-3591
E-mail: [email protected]
<PAGE>
EXHIBIT 23.2
E.E. Templeton & Associates, Inc.
407 1/2 Second Street
Marietta, Ohio 45750
(614) 373-5046
November 1998
Resource Energy, Inc.
Attention: Mr. Jeffrey C. Simmons
2876 S. Arlington Road
Akron, Ohio 44312
Gentlemen:
We hereby consent to the use of our audit reports dated October 15, 1996 and
October 23, 1997 on reserves and revenue as of September 30, 1996, and September
30, 1997, respectively, from certain properties owned by Resource Energy, Inc. a
wholly-owned subsidiary of Resource America, Inc., in Resource America, Inc.'s
Annual Report for the fiscal year ending September 30, 1998.
Very truly yours,
/s/E.E. Templeton
- - ---------------------------------
E.E. Templeton & Associates, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 78,080
<SECURITIES> 11,912
<RECEIVABLES> 9,461
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 90,650
<PP&E> 60,400
<DEPRECIATION> 16,915
<TOTAL-ASSETS> 426,447
<CURRENT-LIABILITIES> 52,410
<BONDS> 133,016
0
0
<COMMON> 230
<OTHER-SE> 236,248
<TOTAL-LIABILITY-AND-EQUITY> 4,682
<SALES> 87,467
<TOTAL-REVENUES> 2,525
<CGS> 20,036
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,213
<LOSS-PROVISION> 17,464
<INTEREST-EXPENSE> 40,740
<INCOME-PRETAX> 13,368
<INCOME-TAX> 27,372
<INCOME-CONTINUING> 0
<DISCONTINUED> 239
<EXTRAORDINARY> 0
<CHANGES> 27,611
<NET-INCOME> 0
<EPS-PRIMARY> 1.65
<EPS-DILUTED> 1.60
</TABLE>
